MBSA 1453-02

FINANCIAL MANAGEMENT

FINANCIAL STATEMENT ANALYSIS

NESTLE MALAYSIA

SESSION 2018/2019

SEMESTER 2

NAME : LUKSHMAN RAO (MBS181073)

LECTURER : DR RAFIDAH BINTI OTHMAN

Table of Contents
Executive summary ....................................................................................................................... 2
Introduction ................................................................................................................................... 3
Mission of Nestle ........................................................................................................................ 3
Vision of Nestle .......................................................................................................................... 3
Nestle in Malaysia ......................................................................................................................... 4
Objectives ................................................................................................................................... 4
Scope ....................................................................................................................................... 4
Limitations ................................................................................................................................. 4
Company’s description ............................................................................................................. 5
Financial analysis .......................................................................................................................... 6
Financial Statement ...................................................................................................................... 7
1. Liquidity ratio........................................................................................................................ 8
2. Profitability Ratios .............................................................................................................. 10
3. Activity ratios....................................................................................................................... 11
4. Financial Leverage ratios ................................................................................................... 12
5. Market ratios ....................................................................................................................... 13
Competitor’s analysis ................................................................................................................. 14
SWOT analysis of Nestle Berhad............................................................................................... 15
Strengths .................................................................................................................................. 15
Weakness .................................................................................................................................. 15
Conclusion ................................................................................................................................... 16
References .................................................................................................................................... 17

1
Executive summary

In today’s business world, it is an important objective for Organizations to make customers

satisfied because they are the ones who keep the business running. In the past, organizations did
not take interest in managing customer needs, but the scenario has been changed financial
prospects are changed. Nestle is one of the leading corporations in the world. It has been working
for a long time in the Malaysia and one of the leading brands. Nestle Malaysia is providing halal
food to more than 40 Muslim countries. It is necessary for investment analyst to seek the financial
performance of the company to understand its growth in the market. This report has detailed
financial analysis of nestle Berhad for the consecutive five years. To view it financial condition
among its competitor. Detailed scenario analysis is done to better assess the future prospects.
Competitors analysis is done to show the company standing and comparison of ratios are also
done. Dividend policy of nestle in Malaysia is discussed in detail. There are various type of
information regarding dividend policy and shareholders’ wealth provided in this report.
Furthermore, this report also touches on objectives of earnings availed to shareholders. The beta
analysis is also done. Summarizations of results are done in the conclusion. All the calculations
are performed by the figures in the Nestle annual reports.

2
Introduction

Nestle is one of the world’s leading dairy business. Nestle is famous for its food and nutrition plan
in all around the world. Nestle is known for its quality oriented and diversified products. Nestle is
one of the successful largest food group with different diversification operated in more than 115
countries in all around the world. According to the recent company reports 2800 employees are
working worldwide. Nestlé’s headquarter is in Vevey, Switzerland. The famous brands of nestle
are Nescafe, Nespresso, Kit Kat, Haagen-Dazs and Movenpick.

Mission of Nestle
Nestlé’s mission, in the words of our founder Henri Nestlé, is to: “positively influence the social
environment in which we operate as responsible corporate citizens, with due regard for those
environmental standards and societal aspirations which improves quality of life.” Henri Nestlé,
1857.

Vision of Nestle
From 1857 to present date the company is much more focused and determined on it mission. The
vision of company reflects the management commitment for the customers to provide them with
the best quality food item. Nestle believes that they are responsible for the health of the people.
Well-developed research and development infrastructure are owned by the organization to achieve
the good nutrition results. Nestle believes in being socially responsible, Corporate social
responsibility means organizations engaged in activities that are socially adequate which shows
their concern for the whole society. Nestle quality products means the trust of consumers to
maintain the level of trust the management is highly interactive to monitor all operational activities.
Nestle ensure the nutritional requirements and maintain the standards for quality to satisfy the
customers. Innovation is the long-term vision of nestle food.

3
Nestle in Malaysia

The main aim of nestle Malaysia is to meet the nutritional needs. To fulfill the nutritional
requirements of the people by providing them quality food. The strategy of nestle Malaysia is to
go international but act local. In Malaysia nestle starts its first factory in 1962, in Petaling Jaya,
near Kuala Lumpur. Nestle the Anglo Swiss manufacturer start their trading in Malaysia in 1912
the Anglo-Swiss Condensed Milk Company. Malaysia is one of the wide market for nestle, their
business is expanding on continuous basis.
Objectives
This report basically measures the financial aspects of nestle Malaysia. The financial indicators
are calculated to show the financial position of nestles Malaysia. The basic objective of this report
is measure the financial ratio and compares these results with potential competitors.
The halal food is exported to the 50 Muslim countries from Malaysia production units. To expand
the production capabilities and meet the halal food requirements, Nestle Malaysia opens its eighth
factory Sri Muda in Selangor. In Asia nestle Malaysia is among the top five nestle markets and
amongst the twentieth in the world markets. (Hofbauer, 2015)
Scope
The scope of this report is to clarify the current scenario of Nestle Malaysia. It will generate the
result that are empirically provides evidences. It helps the investment analysts to gain brief and
clear information regarding the nestle Malaysia also its growing investment opportunities. This
report is helpful for the students also to know how actually the financial aspects are important to
make investment. Different financial ratios can help readers to provide the true investment
scenario.
Limitations
Every report has some limitation in this report there also exist some limitations. In calculating the
financial ratios or when the results are based on calculations. There should be some calculation
errors exist or may be vary from ones calculation to others. The other limitation of this report is
that it is not possible to mention all competitors of nestle Malaysia. It is not possible to present the
detailed competitor analysis.

4
Company’s description

The Company was publicly listed on the KLSE now known as Bursa Malaysia Berhad on 13
December, 1989. The nestle Malaysia Berhad operating as an investment holding company. Nestle
Malaysia institutional shareholders details are given below:

1. Employee provident fund shares are 21.38m, it hold 9.31 %( 3 March, 2016).
2. Permodalan Nasional Berhad shares are 10.50m, it hold 4.48%( 27 Feb,2015)
3. Kumpulan Wang Persaraan shares are 4.75m, it hold 2.03%( 27 Feb,2015)
4. Great Eastern Life Assurance Co. Ltd shares are 3.92m, it hold 1.67%( 27 Feb,2015)
5. Public Mutual Bhd shares are 2.53m, it hold 1.08 %( 27 Feb, 2015).
6. Social Security Organization shares are 1.36m, it hold 0.588%( 27 Feb,2015)
7. East spring Investments Bhd shares are 540.80k, it hold 0.23 %( 27 Feb, 2015).
8. Vontobel Asset Management, Inc. shares are 5.23.00k, it hold 0.22%( 30Oct,2015)
9. Dimensional Fund Advisors LP shares are 174.00k, it hold 0.07%( 31Dec,2015)
10. Hong Leong Asset Management Bhd shares are 109.60k, it hold 0.05%( 30 june,2015)

19.72% percent of shares are held by top shareholders, Data from 31 May 2015 - 04 Mar 2016.

Source: FactSet Research Systems Inc. © Thomson Reuters (Thomson, 2016)

Some important Fact about nestle Malaysia are shown in the table
Facts about Nestle Malaysia
1 Nestle headquarter in Malaysia Petaling Jaya.
Listed on Bursa Malaysia, formerly Kuala Lumpur Stock Exchange.
2 2012-2013 sales 4.6 billion Malaysian Ringgit (CHF 1.3 billion) 7.3% growth compared to previous year
3 Geographic existence 7factories (2014)
1 distribution centre.
1 R&D centre in Singapore.
4 No of employees 5000
5 No of halal products manufacturing in Malaysia More than 500, exported to more than 50 countries worldwide.
Halal centre of excellence for the Nestlé Group
6 New investments 150 million Malaysian Ringgit (about CHF 47 million)
7 Manufacturing products in Malaysia Milo, Nescafe, Nestlé Omega, Nestlé Low Fat Milk, Nestlé Full Cream

Source: www.nestleMalaysia.com

5
Financial analysis

Financial analysis is basically the selection, valuation and interpretation of organizations financial
data along with other important financial information. It helps the organization’s management to
view the investment opportunities as well as financial decision making. It helps the organizations
internally also; financial analysis is useful in evaluating the employee’s performance, operational
efficiencies, and the policies regarding credits. Externally financial analysis helps to estimate the
prospective investment opportunities and to better understand the borrower’s credit value
(Malaysia Investment Development Authority. 2012). Organizations done financial analysis on
quarterly basis to better view the financial resources and capabilities for long term decision
making. Several ratios are used to present the organizational financial performance.

The financial analyst needs to summarize the financial figures from firm’s financial data from
multiple sources. The prime source of data is firms annual report, the firm’s annual reports includes
the balance sheet, the income statement and the cash flow statement. Besides all this information
some important information’s are also required that is provided in the financial statements of firm.
It includes the information regarding firm’s stock, share price and the prices of market securities.
The other source of information is economic data it includes the gross domestic product, consumer
price indicators. It will result in assessing the present conditions and future projection of company.

Financial analysts used all this financial information in interpreting, summarize and present the
findings in an understandable manner (Mansfield, E. R 1982). It enables the investment managers
to judge the present and the future financial circumstances and the operating performance of the
company. In this report we introduce the financial ratios of nestle Malaysia, using the pertinent
information regarding nestle from its published annual and financial reports. Make comparison
with its previous years to present its current and previous financial standing in the market. These
results are also compared with its competitors.

6
Financial Statement

FINANCIAL 2017 2016 2015 2014 2013

POSITION LAST 5
YEARS RM’000 RM’000 RM’000 RM’000 RM’000

Turnover 5,260,490 5,063,506 4,837,957 4,808,933 4,787,92

Earnings / Cash Flow
Profit before tax 814,129 766,494 727,711 701,187 719,054
% of turnover 15.50% 15.10% 15.00% 14.60% 15.00%
Profit after tax and
45,795 637,127 590,733 550,384 561,701
minority interest
% of turnover 12.30% 12.60% 12.20% 11.40% 11.70%
Dividends paid &
644,875 633,150 609,700 551,075 551,075
proposed (net)
Depreciation of
133,099 138,040 125,845 112,210 108,971
fixed assets
Cash flow (net
profit + depreciation 778,894 775,167 716,578 662,594 670,672
+ amortisation)
% of turnover 14.80% 15.30% 14.80% 13.80% 14.00%
Capital expenditure 164,455 123,136 191,184 361,008 212,217

Employment of Assets
Fixed assets (net) 1,373,652 1,353,050 1,369,874 1,293,757 1,046,463
Associated
4,709 4,224 4,114 3,631 3,619
companies
Intangible assets 61,986 62,400 62,814 61,024 61,024
Deferred tax assets 19,244 20,155 11,068 27,958 25,775
Receivables,
deposits & 24,283 24,745 25,048 23,576 21,866
prepayments
Net current
-548,946 -546,807 -509,215 -412,734 -148,575
(liabilities)/assets
Total 934,928 917,767 963,703 997,212 1,016,872

Financed by
Share capital 267,500 234,500 234,500 234,500 234,500
Reserves 372,428 412,721 474,096 542,637 581,944
Total shareholders’
639,928 647,221 708,596 777,137 816,444
funds
Deferred Taxation 120,987 91,260 77,539 67,522 82,748
Retirement Benefit
89,749 86,140 81,117 62,486 25,377
Liabilities
Borrowings 84,264 93,146 96,451 90,067 92,343
Total 934,928 917,767 963,703 997,212 1,016,872

Per Share
Market price1 (RM) 103.2 78.2 73.4 68.5 68
Earnings (sen)
2
275.39 271.7 251.91 234.71 239.53
Price earnings ratio 37.47 28.78 29.14 29.18 28.39
Dividend (net) (sen) 275 270 260 235 235

7
 Dividend yield (%) 2.7 3.5 3.5 3.4 3.5
Dividend
1 1 1 1 1
cover2 (no.)
Shareholders’
2.73 2.76 3.02 3.31 3.48
funds (RM)
Net tangible
2.46 2.49 2.75 3.05 3.22
assets 3(RM)
Personnel (no.) 5,338 5,505 5,578 5,702 5,847
Factories (no.) 7 8 8 7 7

Financial ratio analysis includes the following ratios:

1. Liquidity ratio
2. Activity ratio
3. Financial leverage
4. Profitability ratio
5. Market ratio

1. Liquidity ratio
Liquidity ratios determine the company’s ability to meet its short-term obligations by using the
assets that more quickly converted into the cash. The assets that are quickly converted into the
cash are termed as liquid assets. They are shown as current assets in the financial statements.
Current assets are used for the daily base operations of companies known as the working capital
of the organization (Wyss, R. V. 2012). Net working capital is calculated as current assets exceed
the current liabilities.

Liquidity ratio calculations include:

Current ratio

It indicates the ratio of current assets to current liabilities: it indicates the company’s ability to
meet its current liabilities with current assets. 2:1 is the best indicator it means double the current
assets are taken as good financial indicator to meet its short term liabilities. We have calculated
the nestle Malaysia current ratio of five years, data has been taken from nestle annual report.

Formula: Current assets\Current liabilities

Years Ratio
2013 1.09
2014 1.11
2015 0.90
2016 0.87
2017 0.68
Nestle Malaysia

8
Operating cycle

The role of operating cycle is to estimate the time that has been taken to produce cash from the
investment in goods and services. The net operating cycle means the total time taken to produce
cash.

Formula

Operating cycle = no of days of inventory + no of days of receivables

Net operating cycle= operating cycle – no of days of receivables

Years Net operating cycle

2013 509
2014 582
2015 829
2016 664
2017 857

Quick ratio

It is basically calculations of the quick liquid assets to satisfy the current liabilities. It is also known
as asset test ratio

Formula

Quick ratio = current assets – inventory/current liabilities

Years Quick ratio

2013 0.56
2014 0.54
2015 0.46
2016 0.48
2017 0.40

Net working Capital

It indicates the ratio of current assets minus current liabilities to sales. It means that it shows the
firm liquidity in terms of sales.

Formula

Net working capital to sales ratio = Current Assets- current liabilities/sales

9
 Years Net working capital MYR
2013 63
2014 100
2015 -89
2016 -142
2017 -413

Results summarizes

The liquidity ratios of Nestle show the average results. The current ratio and quick ratio shows the
lower rates then their past years trends (Williams, A. S., & Shoesmith, F. 2010). These ratios
should be increasing because the short term obligations are based on the liquidity of the current
assets. Net working capital shows very bad trends from its past years it shows negative
calculations. The days of operating cycle is also increasing from the past years. The operating
cycle lower days are considered as good because it needs less current ratio margin. Lower
operating cycle increases the firms low risk financial condition.

2. Profitability Ratios
Profitability ratios indicates the profit of the organization against it sales and expenses. It express
the profit margins to show the how much is left after the cost of goods sales. It is very important
for the firm to know how much firm is capable of making new investment. Following ratios are
calculated to indicate the firm’s profitability ratios.

Gross profit margin

It indicates how much is left behind after cost of goods sales.

Formula

Gross profit margin = Gross income / Sales

Years Gross profit margin %

2013 33.4
2014 32.8
2015 34.1
2016 35.5
2017 35.3

Operating profit margin

Is the ratio of operating profits, indicates the how much is left after the operating expense

10
Formula

Operating profit margin = operating income / sales

Net profit margin- It is the ratio of total income to sales that how much is left after all expense

Formula

Net profit margin = Net income / Sales

Years Net profit margin MYR

2013 12.11
2014 12.33
2015 14.42
2016 15.34
2017 15.08

Result summarizes

Profitability ratios indicate the return money after the sale and meeting all expenses. These ratios
are very important for the investors and the shareholders to see the returns of company (Wet, J., &
Mpinda, M. 2013). The higher trends are considered as good indicators. From the past years net
profit margin and gross margin is increasing but from the years 2016 – 2017 are equal there is no
increase in the profitability of the Nestle. Overall it shows the good scenario of increasing trends.
Economic downturn has effect on the stock market may be the investments are the reasons in
average profitability ratios.

3. Activity ratios
Activity ratios measured that how well the assets are used. It indicates that how well firm is
utilizing its investment to work. The most common activity ratios are

Inventory turnover

It indicates the cost of goods sold to inventory

Formula

Inventory turnover = cost of goods sold/ inventory

Years Inventory turnover

2013 7.30
2014 7.03
2015 6.47
2016 7.54
2017 7.98

11
Asset turnover

It indicates the ratio of sales to the total assets

Formula

Total asset turnover = Sales / Total assets

Years Asset turnover

2013 2.31
2014 2.49
2015 2.33
2016 2.40
2017 2.19

Result summarizes

The activity ratios of nestle are not much improving from the last five years. Only the few points
of increase is shown which average in no is. The activity ratios indicate the how well the
investment in assets are generating the revenues (Trueman, B., Wong, M. H. F., & Zhang, X. J.
2003). The total asset turnover is not on much increasing trends it shows that the calculations of
2017 are less 2016. This indication is not satisfactory organization must see its asset turnover
reasons. Redirect its activity analysis to get good turnover.

4. Financial Leverage ratios

Financial leverage ratios are used to check the financial risk that company must own. How the
level of mix of debt and equity is utilized.

Following ratios are calculated the leverage ratios

Equity ratio = total debt / total shareholders’ equity

Years Debt/equity
2013 0.53
2014 0.53
2015 0.13
2016 0.11
2017 0.12

12
Result Summary

The financial leverage from the past five years shows the decreasing trend which shows the less
risk in debts. The latest year show the increase of one point.

5. Market ratios
It deals with the financial condition and performance of the organization; it provides useful
information for managers and creditors. It includes the following ratios

Earnings per share = net income to shareholders/ no of shares out standing

Years Debt/equity
2013 1.67
2014 1.95
2015 2.16
2016 2.40
2017 2.35
Result Summary

The earnings per share are very important for the mangers to estimate the financial conditions and
for the creditors also. The continuous increasing trends are summarized from the past five years.
There is significant increase is assumed from 2016 – 2017. This enhances the investor’s interest
for Malaysia. The people are waiting for the long-term investment, earnings per share is very
important source of information for them.

There are no exact rules and regulations for dividend payouts in Malaysia companies are free in
deciding the payout ratio. In food sector like nestle, unilever and Dutch lady milk. Basically, there
are two kinds of dividend policies that are followed by nestle Malaysia. Managed dividend policy
is positively followed in some quarters when it is believed that investors should return maximum
profits and increased in share price is related. Yet, residual dividend policy is implemented by firm
which payout left cash as dividend after attractive speculation ( Malkawi 2012). But as Dutch lady
milk changes its dividend payout ratios. Ultimately nestle follows the managed dividend policy

The dividend payouts are very attractive for the shareholders. As the trends shows in the above
table the dividend payout ratio is continuously increasing and people are more concentrated to
invest in the nestle Malaysia Berhad (Wahab et al., 2008). In the start of 2016, the payouts are
positive of starting 130 and earnings per share are good. In competition with Dutch lady milk
nestle follows the managed dividend policy and believes in increasing the wealth of investors

13
(Salim & Yadav, 2012). As a financial analyst it is suggested that the people who are interested in
investing shares nestle Malaysia shows the positive impacts in making long term investments.
Nestle Malaysia has shifted it concerns towards the maximization of shareholders wealth as this is
reported in the annual reports.

Competitor’s analysis

The major competitors of nestle Malaysia are Dutch lady milk and Kellogg’s. This competitor’s
analysis is helpful for the investors to compare the financial position and standing of the
companies. This is helpful in making investment decision. It will show the financial ratios analysis.
Malaysia is very emerging market in halal food and government policies are very supportive for
the companies to expand their business in ethical manner.

Current ratio Quick Net Gross Net Inventory Asset Financial EPS
ratio working profit profit turnover turnover Leverage
capital margin % margin Equity

Nestle Malaysia 0.68 0.40 -413 35.3 15.08 7.98 2.19 0.12 2.35
Dutch lady milk 1.44 0.92 79 32.8 14.8 6.53 2.63 2.2 1.72
Kellogg’s 0.56 0.28 -253 34.3 8.1 6.99 0.89 7.7 1.72

In comparison analysis the major strengths of nestle Malaysia should be improved. In halal food
Dutch lady milk and Kellogg’s are the biggest competitors of Nestle. Summarizes the results of
financial analysis comparing with Dutch lady milk and Kellogg’s overall the performance of nestle
is good. The current ratio is lower than both competitors. Quick ratio with 0.40 also shows lower
rate because these ratios are the indicator of liquidity in terms of short term obligation. Gross profit
margin and net profit margin has also shown the good calculation then the other two competitors.
Financial leverage shows the average calculations then the other two competitors it indicates the
Nestle is capable of taking any risk. Earnings per share indicate the good returns. The debt and
equity ratio is very well balanced by the nestle, that is why nestle investment opportunities are
higher than the other two competitors because it is very low in nos. But the liquidity ratios should
need financial mangers consideration to improve its calculations.

14
SWOT analysis of Nestle Berhad

Based on above comparison SWOT analysis is done to clarify the major strengths, weakness,
opportunities and threats.

Strengths
• The major financial strengths of Nestle are the dividend payouts and having good
production capabilities.
• In some of its products Nestle is becoming the market leader.
• Nestle Malaysia overall financial performance is capable of new investments.
• The financial team is very coordinating.
• New investment opportunities are offered to shareholders.
• New factor or production plant is added to increase the capacity for the manufacturing to
meeting the issues of delay.
Weakness
• The major weaknesses of nestle is that there liquidity is not managed from two years.
• There financial resources are mix of good and average.
• The financial analysts are not that much capable.
Opportunity
• Go for cheaper and quality oriented raw material.
• New capacity buildings are important investment.
• Take new investment risk its ratios show positive trends as well.
• New technology advancement is very important
• Increasing their just in time speculation
Threat
• New capacity building should be risky.
• Increased competition in the beverage and food industries
• The price of coffee beans could significantly rise due to major weather disasters
• The major threats are the growing competition local or international.
• Inflation is the biggest threat to satisfy shareholders, it is difficult to have continuous
increase in payouts
• As the digitization increases, there are several issues rising in food requirement available.

15
Conclusion
This report shows the results of the five-year financial ratios of the Nestle Berhad different ratio
show different indicators. Competitor analysis is also given to show how the company stands in
the competitor environment. Detailed dividend policy is explained to the dividend policy of the
nestle Berhad. Scenario analysis is also done to explain the expected future projections of the nestle
Malaysia Berhad.
The contemporary nestles issues affect the national and international policy in terms of resolving
the issues like increase in digitization, lack of strategic fit and funds. As the population increases,
competition regarding public and private organizations is also increasing. Consumers want the
quick response and compare the available healthcare products to. These issues are increasing day
by day; thus, the health care reforms are very important to be discussed.

To address these arising issues, it is important to consider the financial prospects. Management
concerns regarding investment facilities needs to be addressed. Increase in the population means
an expectation to increase the capacity of facilities. Training and monitoring for the financial
analyst staff should be organized on the continuous basis.

16
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