Account 4
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Nestle (Malaysia) Bhd is not recommended for investment based on ratio analysis of financial reports from 2012-2013. The ratio analysis showed declining profitability as return on equity decreased from 72% to 71.1%. Stability also decreased as debt levels increased and ability to pay liabilities and interest payments worsened. Additionally, the high price-to-earnings ratio of 28.25 exceeds the conservative threshold of 15, meaning investors would have to wait longer to recoup their initial investment. Therefore, based on the financial analysis, Nestle (Malaysia) Bhd is not considered a worthy investment.
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SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN (SABD)
Foundation in Natural and Built Environment (FNBE)
Basic Accounting [FNBE0145]
Assignment : Final Ratio Analysis
Group Members :
1) Hazim bin Abdul Aziz 0315733
2) Muhammad Hasif bin Alias 0316413
Lecturer : Chang Jau Ho
Submission Date : 30th
June 2014 (Week 16)](https://image.slidesharecdn.com/account4-140625200312-phpapp01/85/Account-4-1-320.jpg)
Account 4
- 1. 1 SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN (SABD) Foundation in Natural and Built Environment (FNBE) Basic Accounting [FNBE0145] Assignment : Final Ratio Analysis Group Members : 1) Hazim bin Abdul Aziz 0315733 2) Muhammad Hasif bin Alias 0316413 Lecturer : Chang Jau Ho Submission Date : 30th June 2014 (Week 16)
- 2. 2 Contents Company Background Recent Development Ratio Analysis Investment Recommendation Appendix References
- 3. 3 Company Background Nestlé was found in 1866 by Henri Nestlé, a German pharmacist in Switzerland. In 1867, the Nestlé founder, Henri launched his Farine lactée, a cumulation of cow’s milk, wheat flour and sugar, preserving the life of a neighbour’s child. Nutrition has been the cornerstone of the Nestlé company ever since. There was a fierce competition between Nestlé and the first European condensed milk factory, Anglo-Swiss Condensed Milk Company until 1905 which when they decided to merged together as Nestlé and Anglo-Swiss Milk Company. In Malaysia, Nestlé started in 1912 as the Anglo-Swiss Condensed Milk Company in Penang. After that, growth and expansion made a peregrinate to Kuala Lumpur compulsory in 1939. In 1962, the first Nestlé factory was opened. Later, the company was publicly listed on the Bursa Malaysia Berhad on 13 December, 1989. Today, Nestlé operate with 7 factories and markets over 300 Halal products in Malaysia including the popular and trusted brands like MILO®, NESCAFÉ®, MAGGI®, NESPRAY® and KIT KAT®.
- 4. 4 Recent Development In terms of health science, Nestle introduced a new liquid formula range with appealing taste which is specially designed for those who are malnourished or in jeopardy of malnutrition which are ISOSOURCE, RESOURCE and NOVASOURCE. Their products served as a replacement that gives support to medical conditions. Besides that, they had also developed a new a café-style latte, the NESCAFÉ Smoovlatté which is said to be as smooth as silk. It is a 100% pure NESCAFÉ black coffee that is later balanced with smooth and creamy milk. With a fairly comfortable bottle shape and design, the drinks are indulgent pick-me-up and easy-to-drink. Furthermore, Nestle did not just focus on bringing nutrition, health and wellness to human consumers, but also to consumer’s pets. Scientists at Nestle Research Centre in the United States are currently determine whether dietary intervention enhances the lives of middle-aged and older cats because the results from their studies showed that supplementing a diet with the right nutrients does enhance cats’ cognitive abilities. Lastly, Nestle opened a food safety research centre in Beijing in order to focus on their food safety. This will help China with their increasing demand for safe and healthy food. The centre served to provide the scientific foundation for food safety policies and standards along with promoting scientific communication by making collaboration with local universities and research facilities.
- 5. 5 Ratio Analysis Profitability (GROUP) The table below show the calculations and interpretations from the period 2012 and 2013. (in Ringgit Malaysia, RM’000) Profitability Ratios 2012 2013 Interpretations Return on Equity (ROE) %72 %100 701962.5 505352 %100 2751206)(652719 505352 = ×= × ÷+ %7.71 %100 783825 561701 %100 2816444)(751206 561701 = ×= × ÷+ During the period 2012 and 2013, the ROE has decreased from 72% to 71.1%. This means that the group is getting less returns from their investments. Net Profit Margin (NPM) %1.11 %100 4556423 505352 = × %7.11 %100 4787925 561701 = × During the period 2012 and 2013, the NPM has increased from 11.1% to 11.7%. This means that the business is getting better at controlling its overall expenses. Gross Profit Margin (GPM) %1.34 %100 4556423 1553184 = × %5.35 %100 4787925 1698017 = × During the period 2012 and 2013 period, the GPM has increase from 34.1% to 35.5%. This means that the business is getting better at controlling its Cost of Goods Sold. Selling Exp. Ratio (SER) %7.16 %100 4556423 758635 = × %2.17 %100 4787925 824,372 = × During the period 2012 and 2013 period, the SER increased from 16.7% to 17.2%. This means that the business is getting worst at controlling their selling expenses.
- 6. 6 General Exp. Ratio (GER) %1.3 %100 4556423 139663 = × %8.2 %100 4787925 136171 = × During the period 2012 and 2013 period, the GER decreased from 3.1% to 2.8%. This means that the business is getting better at controlling their selling expenses. Financial Exp. Ratio (FER) %4.0 %100 4556423 20131 = × %5.0 %100 4787925 21937 = × During the period 2012 and 2013 period, the FER increased from 0.4% to 0.5%. This means that the business is getting worst at controlling their financial expenses.
- 7. 7 Stability (GROUP) The table below show the calculations and interpretations from the period 2012 and 2013. (in Ringgit Malaysia, RM’000) Stability Ratios 2012 2013 Interpretations Working Capital (WCR) 1:9.0 929392 840703 = 1:87.0 1071862 929987 = During the period 2012 and 2013 period, the WCR decreased from 0.9:1 to 0.85:1. This means that the businesses ability to pay current liability with current asset is getting worse. Total Debt (TBR) %6.60 %100 1905169 1163963 = × %9.60 %100 2088734 1272290 = × During the period 2012 and 2013 period, the TBR increased from 60.6% to 60.9%. this means the business total debt have increased by 0.3%. however it is still over max limit of 50% Stock Turnover (STR) days days days 57 4.56 5.464371 3003239 365 = = ÷ days days days 49 4.48 409892 3089908 365 = = ÷ During the period 2012 and 2013 period, the STR decreased from 56.4days to 48.4days. this means that the business is selling its inventory faster. Debtor Turnover (DTR) days days days 61 9.60 211587168555 5.2278211 365 = = + ÷ days days days 54 4.53 181480168555 5.2393962 365 = = + ÷ During the period 2012 and 2013 period, the DTR decreased from 61 days to 54 days. This means that the business is collecting its debt faster.
- 8. 8 2.39 67.52 Interest Coverage (ICR) times1.6 99390 50535299390 = + times2.4 178169 561701178169 = + During the period 2012 and 2013 period, the ICR decreased from 6.1 times to 4.2 times. This means that the business’s ability to pay its interests are getting worse. Furthermore, it did not satisfies the minimum requirement of 5 times. Price (GROUP) Price/Earning or P/E Ratio = Current share price Earnings per share (in number of times) = = 28.25
- 9. 9 Investment Recommendation The Nestle (Malaysia) Bhd. are not worthy of investment. This is due to the high P/E Ratio of 28.25 which a conservative investor will customarily pay no more than P/E of 15 for a share that he relishes. The higher the P/E ratio, the more expensive a share is and the investor have to wait even longer to claim back his initial principal. In term of profitability, it is stated that the group obtained less returns from their investment as the ROE decreased by 1% and the business are getting worse at controlling two of their expenses which are selling and financial expenses. For stability, the business is getting worse because their debts are increasing and their ability to their current liability and interest are declining. That is why, I suggest that investor should not invest in Nestle Bhd. .
- 10. 10 Appendices
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- 18. 18 References
- 19. 19 1) http://www.nestle.com.my/ (part history) 2) http://www.malaysiastock.biz/Corporate-Infomation.aspx?type=A&value=N&securityCode=4707 3) Atrill, Peter. Accounting: An Introduction. 3rd ed. Frenchs Forest, N.S.W.: Pearson Education Australia, 2008. Print. 4) http://www.nestle.com.my/asset-library/documents/pdf/about %20us/nestle_financial_report_2012.pdf 5) http://www.nestle.com.my/asset-library/documents/pdf/about %20us/nestle_corporategovernance_financialreport_2013.pdf