Nestle is a food and package multinational with its headquarters situated in Vevey, Switzerland. The company came into being in 1905, after a merger between Anglo-Swiss Milk Company and FarineLactee Henri Nestle Company. The company now has a strong presence worldwide and had an annual turnover of 87 billion Swiss francs in 2008.
Nestle is the world’s foremost Nutrition, Health and Wellness company. Nestle India Limited is the Indian arm of Nestle SA, which holds a 51% stake in the company. Nestle products have a wide range and encompass various market segments such as coffee, bottled water, chocolate, ice cream, infant foods, healthcare nutrition, seasonings, frozen and refrigerated foods, confectionery and pet food. FMCG Industry Fast Moving Consumer Goods segment is characterized by quick turnover and relatively low cost inventory. Nestle is third largest FMCG Company in India after HUL and ITC.
The main Competitors of Nestle in India are Cadbury, Amul and Britannia. FMCG sector has huge growth potential in India. Market Scenario In 2008, the whole industry was hit by tremendous uncertainties, characterized by high commodity prices and inflation. The market took a further hit with the unprecedented economic crisis which affected all the companies throughout the world. Despite these factors, Nestle India showed a strong growth potential and delivered good turnover and profits. It also has a distinctive advantage of having access to Nestle.
A’s extensive Research and Development and latest food technology. This has helped the company to establish itself as one of the leaders in food and package industry in India. SWOT analysis on Nestle Sales Distribution: Total revenue from operations increased by 23. 4% over previous year to Rs. 43,351 Million. Profit from operations for the year increased by 24. 1% to Rs. 7,822 Million and the Net Profit from operations increased by 29. 1% to Rs. 5,341 Million.
Analysis of Auditors report: The balance sheet of Nestle India Limited as at December 31, 2008, , chartered accounts. AFF is one of the leading firms of Chartered Accountants and Management Consultants in India. It has a provided high quality and specialized services in most areas of management consultancy for over 30 years.
The auditor’s have issued an unmodified opinion or “clean opinion”, implying that the financial statements are free of material misstatements and are in accordance with the accounting standards generally accepted in India. it must, however, be understood that the auditors are of the opinion that proper records have been maintained, but have not made any detailed examination of the records to determine if they are accurate or complete. The auditors also report that they had obtained all the information necessary for the purposes of audit and that proper books of account as required by law have been kept by the Company.
The auditor’s report that the balance sheet; the profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account and comply with the mandatory accounting standards followed in India. Annexure to the auditor’s report mentions that the management has physically verified most of the fixed assets of the Company using reasonable procedures. The discrepancies noticed on such verification were not material and have been properly dealt with in the books of account. Also, the Company has not disposed off a substantial part of its fixed assets during the year.
Annexure to the auditor’s report mentions that the Company has, during the year, not granted any loans, secured or unsecured to companies, firms or other parties nor taken any loans, secured or unsecured from companies, firms or other parties. It has also not made any preferential allotment of shares, issued any debentures or raised any money by way of public issue during the year. Annexure to the auditor’s report mentions that the Company has adequate internal control systems. It further observes that no major weakness in the internal control system has been noticed.
Annexure to the auditor’s report mentions that the Company has been regular in depositing undisputed statutory dues with the appropriate authorities. Annexure to the auditor’s report mentions that the disputed dues of the company include Sales Tax, Service Tax, Income Tax and Excise Duty to the tune of approx. 34 crore including 13 crore of Sales Tax amount which is disputed for the period ranging from 1992-2007.
The entire inventory mentioned can be assumed to be accurate. Since no preferential shares, debentures or public issues have been offered by the company, the share capital can be assumed to be same as that of last year. Since the company has no loans outstanding, nor has given any, the risks associated can be discounted. 3. Analysis of Directors’ report The Directors’ report for the year 2008 consists of classified financial results and operations followed by significant business events during the period.
It also lays emphasis on how various segments of the business performed well despite the economic slowdown and a detailed SWOT analysis of the company. The report concludes by touching upon a few points like awards, recognitions and socio economic contributions. Key Financial Results for the year 2008 w. r. t 2007: Revenue from operations is Rs. 43,351 Million (increased by 23. 4%) Profit from operations is Rs. 7,822 Million (increased by 24. 1%)
Net Profit from operations is Rs. 5,341 Million (increased by 29. 1%) Export sales generated Rs. ,384 Million (increased by 2. 6%) Total dividend payout of Rs. 4,794 Million (incl. the 2 interim payouts during the year) Thus dividends per share has increased from Rs. 42. 50 to Rs. 53 Total fixed assets increased by 18. 8% approximately Total shareholder’s funds increased by 12. 6% approximately. The Directors point out that the year 2008 had a lot of uncertainties. The first half of the year saw tremendous inflation which resulted in a great increase in commodity prices while the second half saw the world economies tumble down.
They claim that despite these conditions Nestle has tremendous growth potential this is evident from the strong turnover and profits that the company reported in 2008. The Directors elaborate the strategy of providing the customers with innovative products according to their needs. An example of which is the Nestle Kit-Kat. Consumers are increasingly seeking to balance indulgence with health and wellness while choosing products. Nestle has leveraged this insight and has become a leader in ‘lighter eating’ by being the market leader in light-wafer-chocolayer segment.
Key observations for the year 2008: Relatively small increase in the export sales has been attributed to a substantial reduction in imports by the traditional market of Russia. ‘Nestle Nutricorners’, a concept aimed to bring nutritional knowledge closer to the consumers has been rolled out extensively. The ‘Milk Products and Nutrition’ business continued to perform well despite the economic slowdown where as the chocolates and confectionary business remained buoyant. The ‘Coffee and Beverages’ business focused on strengthening consumer insights. Environment
Energy and water management practices are being continuously upgraded and specific water usage in manufacturing has been further reduced. In the last 10 years even as sales have increased substantially, the Company has reduced the generation of waste water by around 70%. The company utilises coconut shells, waste cashew shells and coffee husk as additional alternative fuel and processes waste to replace fuels with high sulphur content to reduce green house gases. Corporate Social Responsibility Nestle is creating direct and indirect employment and, continues to empower farmers and other indirect employees of the company.
Social initiatives include providing access to clean drinking water and sanitation facilities in village schools, enhancing awareness of scarce resources like water, and empowering village women. What Next: The year 2009 is more challenging and will require innovative thinking and speed in anticipating changes. The company will continue to bring out innovative products, control costs and improve penetration. Also the company has plans to try out other segments and new markets. The Director is very positive about the company’s future and is looking for great times ahead.
Influence of Directors’ report on financial statement analysis: It provides data for financial analysis tools like ratio analysis and trend analysis and helps in arriving at the key attributes of a firm like profitability and solvency. It provides an overview of the business objectives and nature of industry and helps in obtaining a broader picture of the organization besides the generated numbers. It provides the intangible assets of the company like: Goodwill due to Corporate Social Responsibility, Environment protection Research and Development. Product releases planned and market penetration planned.
Latest Revenue Recognition Policy The financial statements of Nestle India are prepared according to the mandatory accounting standards prescribed under the Companies of India (AS) Rules, 2006 and the relevant provisions of the Companies Act, 1956. Sales Sales are recognized at the point of dispatch to the customer which is in accordance with generally accepted market standards. The company also complies with ASI-14 standard issued by Institute of Chartered Accountants of India (ICAI). Excise duties are included in Goss sales and exclude in net sales in the Profit and Loss account. Inventories
Stores and spare parts are stated at cost. Stock-in-trade is valued at the lower of cost or net realizable value. The inventory cost for different categories is determined according to the following standard: Raw and packing materials : First-in-first out Stores and spare parts : Weighted average Work-in-progress and finished goods: Material cost plus appropriate share of production overheads and excise duty, wherever applicable. Depreciation/Amortization Straight-line method is used to provide for Depreciation as per the rates provided in Schedule XIV to the Companies Act, 1956.
Contingent Liabilities and Provisions Careful evaluation of the facts and legal aspects of the matter involved is done to arrive at the figure of contingent liabilities. This is in line with the provisions of Accounting Standard (AS) 29. Fixed Assets Fixed assets are stated at cost (net of CENVAT, wherever applicable) less accumulated depreciation. Cost is inclusive of levies, duties, freight and any directly attributable cost of bringing the assets to their working condition for intended use (for e. g. installation charges paid and initial upbringing charges).
An intangible asset is measured at cost and amortized so as to reflect the pattern in which the assets economic benefits are consumed. Investments Investments are classified into current and long-term investments. Current investments are stated at the lower of the cost or the fair value. Long-term investments are stated at cost. Foreign Exchange transactions Since export to Russia constitutes a major portion of revenue of Nestle, handling Foreign exchange properly plays a major role in the revenue recognition. Transactions in foreign currency are recorded on initial recognition at the exchange rate prevailing at the time of the transaction.
Monetary items denominated in foreign currency are reported using the closing exchange rate on each balance sheet date. Consistency of revenue recognition policies across recent years Revenue recognition policies of the company have been consistent for the period in consideration (2004-2009) according to the disclosures in its annual reports. The company complies with ASI-14 standard issued by ICAI by disclosing gross sales (including excise duty) and net sales (excluding excise duty) in the Profit and Loss account. The inventory valuation policy of the company has also been the same throughout the period in consideration.
Consistency of revenue recognition policies with business operations In order to observe the consistency of Nestle India’s revenue recognition policy with its business operations, reports of few other companies in FMCG sector like Dabur India, Cadbury’s limited and Britannia Industries have been taken into consideration. It has been observed that these companies follow similar revenue recognition policies which seem uniform across the industry.
Though there might be a few minor differences in accounting standards that are company specific, we can say that the revenue recognition policies are in ine with the way business is carried out on a day to day basis. How conservative Nestle’s policies of reported numbers seems to be over conservative in some areas (described below) but overall the policies are in line with what is stated in the rule book. The areas of concern are: Research done by EFRAG in 2007 for its PAAinE discussion paper reveals that Nestle doesn’t follow a continuous approach to recognize its revenue. This is important in a big industry like Nestle because of its vastness and scope of recognition of trivial revenues which will eventually add to a big amount.
Although other industries follows otherwise but this continuous recognition will best reflect the progress of contracts and will be more supply oriented rather than currently being customer oriented. The complexity involved is very high in continuous revenue recognition but Nestle being the leader should reduce its conservativeness of being more customer oriented in revenue recognition and change its typical balance sheet approach. IAS 18 & IAS 11 though ambiguous but can be very well adopted by Nestle for multiple revenue recognition rather than having a single one for its vast range of products.
Although consumer goods can follow single revenue recognition approach, other goods of Nestle should be taken care by IAS standards for the same. Sales revenue of Nestle is recognized after dispatch but being a big confident player in its segment, Nestle can very well recognize the same after the materials are converted to finished product given that every after production process including supply chain of Nestle is very Robust. The typical book rule is being followed by Nestle in this which is acceptable in small players of the industry.
Although fixed assets are stated at their cost (net of CENVAT) less accumulated depreciation, there is a provision for impairment of fixed asset in which the decreased value of the asset is recorded as an impaired loss. But there is no provision for reversal of the process. If the value of the asset is found to be more than book value no consideration is made to increases the stated cost. Regarding inventories, depreciation/amortization, inventories, taxation, liabilities and other areas company follows the regular specified rules but no where it is under conservative in its approach.
Accounting Policy for valuation of tangible and intangible assets Nestle states its tangible assets at cost (net of CENVAT, wherever applicable) less accumulated depreciation. Cost is inclusive of freight, duties, levies and any directly attributable cost of bringing the assets to their working condition for intended use. An intangible asset is measured at cost and amortized so as to reflect the pattern in which the asset’s economic benefits are consumed. The company does regular reviews to see if there is any indication of impairment of the carrying amount of the Company’s fixed assets.
The asset’s recoverable amount is estimated, if any such indication exists. If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized. The greater of the net selling price and value in use is the recoverable amount. The estimated future cash flows are discounted to their present value based on an appropriate discount factor to determine value in use. When there is an indication that the impairment losses recognized for the asset no longer exist or have decreased, reversal of impairment losses recognized in prior years is recorded.
However, the increase in carrying amount of an asset due to reversal of an impairment loss is recognized only to the extent it does not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. During the year ended December 31, 2008, the company evaluated future economic benefits from the use of various items of plant and machinery and brought the same down to their recoverable values. Impairment loss on fixed assets to the tune of Rs 3,084,000 has been charged to the Profit and Loss Account.
The company has indicated that the initial carrying amount of the fixed assets was more than the estimated value in use as the reason for impairment. 6. Depreciation Policy Nestle India depreciates its tangible assets as per the straight-line method at rates provided in Schedule XIV to the Companies Act, 1956, except for the following classes of fixed assets, where the useful life has been estimated as given: – In 2008 the company reported fixed assets with a gross value of Rs14 billion from which a total accumulated depreciation of Rs6. 5 billion was deducted. Of this the depreciation expenses mentioned for the year 2008 is Rs. 23,601,000.
It is to be noted that no depreciation was charged for freehold land and very high depreciation was charged for Information technology equipment and Vehicles as expected. Nestle India has been using the straight line method of depreciation with the useful life as mentioned above for all the years from 2004. Thus the company has been consistent with the depreciation policy it follows. The company is also very transparent on which asset is depreciated by how much. Throughout the years it can be noted that the depreciation expenses have been in proportionate to the fixed assets as expected.
The depreciation policy used by the company is in agreement with the business segment the company is in. Other companies in FMCG sector like ITC and HUL also use the straight line method. We confirmed this by going through the annual reports of these companies. When compared to the Reducing Balance Method, the Straight Line Method depreciates the asset more in the initial years. Thus we can conclude that the company is conservative as the depreciation policy is concerned just like the company is conservative in all the other accounting policies.
The company is also pretty conservative in the estimation of the life of the assets. A very fine example is information technology with a useful life of 3 years and vehicles with 5 years. 7. Inventory Valuation Policy Raw materials and purchased finished goods are valued at purchase cost. Work in progress and manufactured finished goods are valued at production cost. Production cost includes direct production costs and an appropriate proportion of production overheads and factory depreciation. Movements in raw materials inventories and purchased finished goods are accounted for using the FIFO (first in, first out) method.
The weighted average cost method is used for other inventories. A provision is established when the net realizable value of any inventory item is lower than the value calculated above. No the policy has not been consistent for Nestle in all the recent years. The above policy stated was adopted by Nestle during the quarter 30th June’2005 when it changed its method of raw and packing material valuation from quarterly weighted average to First-in-first-out ( FIFO) and has resulted in lower consumption value and higher profit for the quarter ( approx Rs 22 million and net tax of Rs 15 million).
On account of the change in the method of valuation of inventories to FIFO, a part of the increased prices of commodities have been offset by the favorable new valuation of inventories. Consistency with the way the company carries out its business The annual report of Nestle was compared with that of ITC and HUL. It was observed that the company recognizes gross sales including excise duty and net sales excluding excise duty. This is a common practice across the industry and provides a common base while comparing. Work in progress and manufactured finished goods are valued at production cost.
This is similar to the method followed by ITC and HUL. Effect of policies on reported numbers in terms of conservativeness A sale of goods is recognized at the time of dispatch of goods to the customer. This policy makes the reported numbers more conservative. However, according to norm, it is assumed that goods are dispatched only after receiving payments from the customer. Finished goods are reported at cost or net realizable value, whichever is lower. Since cost of the finished goods will be lower than the net realizable value, this will make the numbers more conservative.
The weighted average policy of valuating the inventory assigns lower value to inventory compared to other methods. This is a conservative policy. However, Nestle changed this policy from weighted average to FIFO, increasing the profits to 22 million per quarter. This will make the numbers less conservative. 8. Clause 49 of listing agreement Clause 49 of SEBI’s Listing Agreement requires every listed entity to reserve half the board for independent directors if the chairman is an executive director. SEBI issued Clause 49 in February ’00.
All GroupA companies had to comply with its provisions by March 31, ’01. Subsequently, on October 29, ’04, SEBI amended the original Clause 49 and issued a new Clause 49. The new Clause 49 lays down tighter qualification criteria for independent directors. The new clause disqualifies material suppliers and customers from being independent directors. It disallows a shareholder with more than 2 per cent stake in the company from being an independent director as well as a former executive who left the company less than three years ago.
Partners of current legal, audit and consulting firms, as well as partners of such firms that had worked in the company in the preceding three years, too, can’t be independent directors. Impact of Clause 49 on Nestle’ (Nestle’s Corporate Governance) Nestle has a 16 member board – 12 directors are external, the Chairman of Board and the CEO of the Company functions have been separated during the 2008.
Nestle also made some significant changes to the Company’s Articles of Association which effectively remove a previously existing ‘poison pill’ which precluded any investor from holding more than 3% of the voting rights and also required 75% majority for certain decisions; the change in the Articles of Association has been made as the ownership structure has shifted towards institutional ownership and also incorporates more North American investors.
Nestle is committed to the UN Global Compact sustainable business practices; as a result the group adopted a Supplier Code which promotes fair and sustainable business practices throughout the entire supply chain. Nestle has made significant efforts to manage risks related to environmental and human rights concerns such as bottled water, slave labour and improper use of baby formula in developing countries; the Company’s Chairman and former CEO, Peter Brabeck-Letmathe has consistently championed water sustainability issues.
The share capital may be increased in an amount not to exceed CHF 10,000,000 by issuing up to 100,000,000 registered shares with a nominal value of CHF 0. 10 each through the exercise of conversion rights and/or option rights granted in connection with the issuance by Nestle or one of its subsidiaries of newly or already issued convertible debentures, debentures with option rights or other financial market instruments. Thus the Board of Directors has at its disposal a flexible instrument enabling it, if necessary, to finance the activities of the Company through convertible debentures.
For a description of the group of beneficiaries and of the terms and conditions of the issue of conditionalCapital, refer to art. 3b is of the Articles of Association of Nestle S. A. The share capital was reduced three times in the last three financial years as a consequence of various share buy-back programmes launched by the Company; the resulting cancellations of shares were approved at the Annual General Meetings of 6 April 2006, 19 April 2007 and 10 April 2008. In 2006, the share capital was reduced by 2 784,300 shares from CHF 403,520,000 to CHF 400,735,700.
In 2007, the share capital was further reduced by 7,663,200 shares to CHF 393,072,500. Finally in 2008, the share capital was reduced by 10,072,500 shares to CHF 383,000,000. Additionally, the shareholders gave their assent at the last Annual General Meeting to a 1-for-10 share split and respective increase of the number of shares. As a consequence, the nominal value of the shares was reduced from CHF 1 to CHF 0. 10 on 30 June 2008 Nestle S. A. ’s capital is composed of registered shares only. The number of registered shares with a nominal value of CHF 0. 10 each, fully paid up was 3,830,000,000 at 31 December 2008.
According to art. 11 par. 1 of the Articles of Association, each share recorded in the share register as share with voting rights confers the right to one vote to its holder. Shareholders have the right to receive dividends. There are no participation certificates. Shareholders’ participation All voting rights restrictions, along with an indication of statutory group clauses and rules on granting exceptions, particularly in the case of institutional voting rights representatives. Only persons entered in the share register as shareholders with voting rights may exercise the voting rights or the other rights related thereto.
No person may exercise, directly or indirectly, voting rights, with respect to own shares or shares represented by proxy, in excess of 5% of the share capital as recorded in the commercial register. Legal entities that are linked to one another through capital, voting rights, management or in any other manner, as well as all natural persons or legal entities achieving an understanding or forming a syndicate. *Change of control and defence* measures Nestle S. A. does not have a provision on opting out or opting up in the Articles of association.
Thus, the provisions regarding the legally prescribed threshold of 331/3% of the voting rights for making a public takeover offer set out in art. 32 of the Swiss Stock Exchange Act are applicable. Auditors Duration of the mandate and term of office of the lead auditor On 22 May 1993, Klynveld Peat Marwick Goerdeler SA was first appointed as auditor of Nestle S. A. On 10 April 2008 at the 141st Annual General Meeting of Shareholders of Nestle S. A. , KPMG was reappointed as auditor of Nestle S. A. and of the Consolidated Financial Statements of the Nestle Group for a term of office of one year.
The audit report is signed jointly by two KPMG partners on behalf of KPMG. The first year that Mr M. Baillache, in his capacity as auditor in charge, signed the Nestle S. A. and the Consolidated Financial Statements of the Nestle Group was for the year ending 31 December 2006. KPMG presents to the Audit Committee an overview of issues found during the interim audit, a detailed report on the conduct of the 2008 financial statements audit, the findings on significant financial accounting and reporting issues together with the findings on the internal control system.
In 2008, KPMG participated in four Audit Committee meetings at the end of which they met with the Audit Committee without the Group’s management being present. The Group’s internal auditors met four times with the Audit Committee. In addition, the head of internal audit regularly met with the chairman of the Audit Committee for interim updates. The Board of Directors reviews annually the selection of the auditors in order to propose their appointment to the Annual General Meeting of Nestle S. A.
The Audit Committee assesses the effectiveness of the work of the auditors in accordance with Swiss law. The lead auditor is rotated every seven years in accordance with Swiss law. The Group and KPMG have agreed on clear guidelines as to professional services which it is appropriate for KPMG to provide. These services include due diligence on mergers, acquisitions and disposals and tax and business risk assurance. These guidelines ensure KPMG’s independence in their capacity as auditors to the Group.
As a result of Alcon’s listing on the NYSE, KPMG is required to maintain its independence from the Group in accordance with U. S. standards. KPMG monitors its independence throughout the year and confirms its independence to the Audit Committee annually. 9. Analysis of Balance Sheet Balance Sheet of Nestle (last four years) Trend Analysis {draw:frame} Cash and cash equivalent Nestle laid emphasis on cash generation and delivered strong operating cash flow during 2008. Surplus funds were prudently invested after ensuring that such investments satisfy the Company’s criteria of security and liquidity.
Sharp increase of 400% from 2007 to 2008 can be attributable to the prudent policy of the company that emphasized having high cash reserve in order to meet economic uncertainties which were prevailing during that time. A dip in cash and its equivalent occurred during 2007 because of high commodity prices which are crucial input in case of Nestle. Inventories Inventories of Nestle depicts its expansion strategy in the past. Company focused on the’ Bottom of the Pyramid’ with price-pointed products and small SKUs in existing brands because of which the contribution of low cost products increased from 21% of sales in 2003 to 27% in 2007.
This explains a sharp increase in Inventories in 2007. In 2007 price of raw material was increasing rapidly and this also prompted Nestle to build strong inventory. Milk, milk powder and coffee are some of the major raw materials for the company. Nestle’s raw material cost went up by 34% YoY in CY07. Increment in inventory during 2008 was relatively low because of higher input cost and higher base value of 2007. Account receivable Decrease in account receivable in last two years can be attributed to conservative and prudent approach taken by Nestle in order to minimize defaults and bad debts in uncertain and tough economic scenario.
Company’s account receivable has decreased from 2006 in spite of its expansion and growth of revenue. Property, plant and equipment Nestle has been investing steadily in property, plant and equipment during recent year. Company has stressed upon energy saving measures and effective utilization of resources by improving operations and overhauling machinery. Investment in IT infrastructure was a major component of this account. Total Assets: Total assets of Nestle India increased constantly and rapidly during the recent year.
This can be attributed to the strategic position of Nestle India in overall business of Nestle SA. Nestle India had tapped the growth opportunity in India’s booming economy effectively. Nestle followed aggressive expansion policy as the number of packaged food consumers increased in India. Total Current liabilities This account has steadily increased with time but with a higher increment in 2007 and 2008. This can be attributed to the aggressive expansion policy followed by Nestle India. It launched a lot of new brands and modified existing brand for low end customers during 2007-08.
During the course of expansion the number of business partners increased and hence the current liabilities. Long term debts This account has shown a constant and steep decrement in recent past. Nestle India has constantly tried to improve debt to equity ratio by leveraging its own reserve from high profit in the recent years and the reserve of its parent company. Preferred Shares Nestle India hasn’t done any preferential allotment of shares recently. Total Equity capital Share capital of Nestle India was intact during the last 4 years at Rs 96. 41 crores but total equity capital increased on account of reserves and surpluses.
Nestle was able to garner high reserves and surpluses because of high profit in recent year. Its customer base expanded constantly in India. Nestle foresees a consumer base of 200 million customers by 2010. Total Liability and Equity Total liability of Nestle India has increased because of combined additive effect of current liabilities and Equity capital. Strong growth and high profit were the two key factors behind that. Nestle was able to expand profitably its portfolio in India by leveraging strengths of its parent company and harnessing growth opportunity in India that was booming in 2007-2008.
The income taxes paid are proportional to the income for the duration and follows the Earnings before taxes trend line. Net income has seen a steady rise signifying increasing profits and a growing trend for the company. Net income closely follows trend in the cost of sales as they are almost 50% of net sales. Cost of sales has seen an increase over the years primarily because of highcommodity prices and other costs as a result of growing inflation.
Staggered price increases and cost optimisation initiatives contributed to offset steep increase in commodity prices like milk solids, green coffee, fuels and vegetable fat. Corrective action by the Government and the Reserve Bank of India managed to contain the inflationary spiral, keeping in check the price of various commodities. Other expenses such as manufacturing costs decreased due to improvement in technology and R. Depreciation expenses, wages, employee and impairment costs increased during this period.
The company had secured loans to the tune of Rs. 143,045,000 in 2005 which increased to 162,676,000 in 2006 before reducing to Rs. 8,177,000 in 2008. The interest paid on the loans has thus increased. It is however expected to reduce in the coming years. {draw:frame} Earnings before taxes has loosely followed the cost of sales trend lines as that accounts for almost 50% of gross sales. 11. Ratio Analysis Liquidity, Efficiency and Solvency Ratios Liquidity ratios attempt to measure a company’s ability to pay off its short-term debt obligations.
This is done by comparing a company’s most liquid assets (or, those that can be easily converted to cash), its short-term liabilities. In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.
The biggest difference between each ratio is the type of assets used in the calculation. While each ratio includes current assets, the more conservative ratios will exclude some current assets as they aren’t as easily converted to cash. Current Ratio The current ratio for Nestle India for the 4 years is as follows: We can observe from the current ratio that is remained constant from 2005 to 2008, which indicates that there has been no significant change in the Current Assets of the company.
Quick Ratio The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The quick ratio is calculated as: It is also known as the “acid-test ratio” or the “quick assets ratio”. Analysis: The quick ratio for Nestle India for the 4 years is as follows: Nestle India, being in FMCG industry has very large amount of inventory. So, the quick ratio is significantly lower than the current ratio.
