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RATIO ANALYSIS OF NESTLE LANKA PLC

LIQUIDITY RATIOS
o Current ratio

current _ ratio

2014
2013
2012
2011
2010

current _ assets(CA)
curren _ liabilities (CL )

CA
5356129
5719972
3739135
4319757
3702988

CL
5527426
5385435
4079847
5017792
3488095

Current Ratio
0.96
1.06
0.91
0.86
1.06

The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its shortterm liabilities with its current assets. Normally a ratio should be 2:1. So the company is not in a
good position in that status throughout the years. 2014 ratio is higher compare to 2012 & 2012 but
less than 2013. So it reduction of current ratio can be seen.

o Quick ratio
Quick _ assets
Current _ Liabilities
CA Inventories
Quick _ ratio
CL
Quick _ ratio

2014
2013
2012
2011
2010

CA
5356129
5719972
3739135
4319757
3702988

CL
5527426
5385435
4079847
5017792
3488095

Inventories
2952545
2603655
1872334
2340914
2131493

Quick Ratio
0.43
1.06
0.92
0.86
1.06

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to pay its
current liabilities when they come due with only quick assets. Normally the ratio should be 1:1. So
when data was analysed from 2010 to 2014 ratio is varied from 1.06 to 0.43. 2010 and 2013 ratios
are closed to 1 compare to other years. In 2014 there is less ability to the company to pay their dues
with their quick assets.
Reduction for ratio can be caused the increased of inventories compare to other years. Also there is a
reduction in current assets as well in 2014. In 2013 current assets have the highest value from 2000
to 2014. Also in that year inventories was also rather in lower side. In 2013 it has the highest ratio

compare to 2014.
So increasing inventories will be benefitted the companys future plans. But taking a wrong decision
will affect the future plans of the company.

CAPITALIZATION RATIOS
o Debt / Equity Ratio
Total Liability
6683138
6314455
4874266
5612505
4010831

2014
2013
2012
2011
2010

Equity
4087928
4215858
3769023
3343308
2567065

Ratio
1.63
1.50
1.29
1.68
1.56

The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its
total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and
obligors have committed to the company versus what the shareholders have committed.
For a company debt/equity ratio should be in a safe side when it is 1.5:1. Increase of the ratio will be
affects the companys financial ability. So company doesnt show any profit loss. So it will be safer
side

in

2014

as

well.

But

2013,

2012

were

much

safer

years.

o Debt / Total Assets Ratio

2014
2013
2012
2011
2010
Compare

Total Debt Total Assets


6683138
10771065
6314455
10530113
4874266
8643289
5612505
8955813
4010831
6577896
to 2010 increment of total

Ratio
62.05%
59.97%
56.39%
62.67%
60.97%
debts can be seen in 2014. But ratio percentage doesnt show

any significance difference throughout years. So it is better if the company can reduce the percentage
as much as possible.

o Equity ratio
current _ ratio

current _ assets (CA)


curren _ liabilities(CL)

Net Credit Sales Average Debtors Ratio


2014 32902885
1958553
16.80
2013 30913413
1677105
18.43
Reduction of equity means increasing of
2012 28571488
1215314
23.50
Equity
Assets
Ratio
debts. So from 2012 to 2014 gradual drop of
2011 25575780
1019201
25.09
2014 4087928 10771065 37.95%
2013 4215858 10530113 40.04% equity ratio can be seen. So it wont do any good for the
2012 3769023 8643289 43.61% company. Company should try to increase the ratio as
2011 3343308 8955813 37.33% much as possible.
2010 2567065 6577896 39.03%

o Earnings before Interest and Tax / Interest Change

2014
2013
2012
2011
2010

Earnings
4765797
4083211
3506814
3444267
2827877

Expenses
978904
766466
529146
814497
926762

Ratio
4.87
5.33
6.63
4.23
3.05

The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage ratio that
measures the proportionate amount of income that can be used to cover interest expenses in the
future.
If the ratio is higher than 1 it is in good shape. Then the company has the ability pay their debts
Or interest. 2012 was the best year for company that provided the best ratio. But when comes to 2014
it has gradually reduced.

ASSET MANAGEMENT OR ACTIVITY RATIOS


o Debtors Turnover Ratio
Debtors _ turnover _ ratio( DTR)

Net _ credit _ sales


Average _ debtors

Indicates the velocity of a company's debt collection, the number of times average receivables are
turned over during a year. This ratio determines how quickly a company collects outstanding cash
balances from its customers during an accounting period.
Higher the ratio better to company. So throughout years company performance are lowered. So
company might be needed to increase the ratio as soon as possible. Because ratio is going down from
25.09 to 16.80 since 2011.

o Average Collection Period


Average _ collection _ period

2014
2013
2012
2011
2010

360
Debtors _ turnover _ ratio

Debtors Turnover Ratio


18.11
14.71
22.79
21.72
24.89

Period
19.88
24.47
15.80
16.57
14.46

The numerator of the average collection period formula shown at the top of the page is 365 days. For
many situations, an annual review of the average collection period is considered. However, if the
receivables turnover is evaluated for a different time period, then the numerator should reflect this
same time period.
Compare to 2013, 2014 has a good value. But from 2010 to 2012 the values are in better shape than
the 2014. 2013 was the worst year.

o Average Payment Period


Average payment period

2014
2013
2012
2011

Average creditors
360
Purchases

Average Creditors
3369803
2633601
2714662
2554143

Purchases
20767394
20251656
19131496
17211025

Ratio
58.41
46.81
51.08
53.42

Average payment period means the average period taken by the company in making payments to its
creditors. So longer the time taken means company cash is within the company. So in 2014 ratio is
better compare to 2013. 2013 had the lowest ratio.

o Inventory Turn Over Ratio


Inventory _ turnover

cos t _ of goods _ sold


average _ inventory

Cost of Good
20767394
20251656
19131496
17211025

2014
2013
2012
2011

Inventory
2778100
2237994
2106624
2340914

Turnover
7.47
9.04
9.08
7.35

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed
by comparing cost of goods sold with average inventory for a period. This ratio is important because
total turnover depends on two main components of performance. The first component is stock
purchasing. If larger amounts of inventory are purchased during the year, the company will have to
sell greater amounts of inventory to improve its turnover. If the company can't sell these greater
amounts of inventory, it will incur storage costs and other holding costs.
The company had a good run in 2013 & 2012. 2011 & 2014 have a lower ratio compare to other
years. Slight increment of sales in 2014 may cause the lower ratio. Also inventory is higher than
2013 as well.

PROFITABILITY OR EFFICENCY RATIOS


o Gross profit margin and net profit margin ratios
Gross _ profit _ m arg in

2014
2013
2012
2011
2010

Gross _ profit
Sales

Gross Profit
12135491
10661757
9439992
8364755
7381641

Sales
32902885
30913413
28571488
25575780
21439008

Margin
36.88%
34.49%
33.04%
32.71%
34.43%

What remains from sales after a company pays out the cost of goods sold. To obtain gross
profit margin, divide gross profit by sales. Gross profit margin is expressed as a percentage.
Gross profit margin has slightly increased from 2011 to 2014. So Nestle is a company with a good
gross profit margin. Without this company cannot pay out other expenses. Company is in a stable
stage

with

Net _ profit _ m arg in

2014
2013
2012
2011
2010

this

profit

margin.

Net _ profit
Sales

Net Income
3786893
3316745
2977668
2629770
1901115

Net Sales
32902885
30913413
28571488
25575780
21439008

Margin
11.51%
10.73%
10.42%
10.28%
8.87%

Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes
and preferred stock dividends (but not common stock dividends) have been deducted from a
company's total revenue. Throughout the years slight increment can be seen.

o Profits in relation to asset


Asset _ turnover _ ratio

2014
2013
2012
2011

Sales
Average _ assets

Sales
32902885
30913413
28571488
25575780

Average Assets
10650589
9586701
8799551
7766854

Turnover Ratio
3.09
3.22
3.25
3.29

The ratio of the value of a companys sales or revenues generated relative to the value of its assets.
The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is
deploying

its

assets

in

generating

revenue.

Generally speaking, the higher the asset turnover ratio, the better the company is performing, since
higher ratios imply that the company is generating more revenue per dollar of assets. Turnover ratio
is gradually reducing since 2011. It is a not a good sign for the company. Nestle is have a low profit
margin. It is the reason for the higher assets turn over ration compare to other companies.

o Earning Power
Earning _ power

2014
2013
2012
2011

Earnings _ before _ i & t


Average _ total _ assets

Earning
4765797
4083211
3506814
3444267

Average Assets
10650589
9586701
8799551
7766854

Earning Power
45%
43%
40%
44%

A business's ability to generate profit from conducting its operations. Earnings power is used to
analyse stocks to assess whether the underlying company is worthy of investment. Possessing greater
long-term earnings power is one indication that a stock may be a good investment. 2012 report the
lowest earning power value. Also in 2014 earning power is in slightly higher value compare to 2014.
So

company

is

in

good

shape

currently

regarding

earning

power.

o Return On Equity
Re turn _ on _ equity

2014
2013
2012
2011

Net _ income
Average _ equity

Net Income
3786893
3316745
2977668
2629770

Average Equity
4151893
3992440
3556165
2955186

Earning Power
91.21%
83.08%
83.73%
88.99%

The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with the
money shareholders have invested.
This ratio is important for shareholders for taking decisions about the company. Companys growth is
good from 2011 to 2014. Because value of 2014 is 91.21% it means for 100 it returns 91.21.

MARKET TEST RATIOS


o Earnings per share

2014
2013
2012
2011
2010

Net Income After Tax


3786893
3316745
2977668
2629770
1901115

Shares
53725.5
53725.5
53725.5
53725.5
53725.5

Earnings Per share


70.5
61.7
55.4
48.9
35.4

Earnings per share =

Net Profit

after tax / Number of issued


ordinary shares

Earnings per share ratio measures the amount of net income earned per share. It is an indicator of
companys profitability. Higher earnings per share are always better than the lower earnings per share
ratios. Because this means company is more profitable and the company has more profit to distribute
among their shareholders. The company; nestle has shown a significant growth of earnings per share
during past 5 years from 35.4 to 70.5. Thus much more investors are getting attracted and pay more
attention about nestle. This consistent improvement in the earnings per share value year after year is
a better indication of continuous improvement in the earning power of the nestle company.

o Dividends per share


Dividends per share = Dividends / Number of issued ordinary shares

2014
2013
2012
2011
2010

Dividents
3,852,993
2,890,243
2,540,638
1,843,887
1,124,374

Shares
53725.5
53725.5
53725.5
53725.5
53725.5

Dividents Per Share


71.7
53.8
47.3
34.3
20.9

Dividend per share is a significant factor which is used to determine companys profitability and
current economic value. It indicates the amount of cash return to its shareholders. Increasing of
dividend per share is favourable for company. Nestle was declared 71.7% of dividends per share in
2014 and when compared with other years it was a huge achievement and also it is gradually
increased during the last 5 years. Maintaining a higher value of DPS will increase the trust on
organization and they tend reinvest in the organization in hope of getting more profits of the future
benefiting organization, thus the more investors will be attracted. But the key problem is that the
ratio lacks a sensible context, because how much the shareholders paid for the shares is not indicated.
In case of higher dividends per share, there might be a risk with the future cash flow due to lack of
cash for future needs of company. NESTs international investor base accounts for 94% of
company shares, thus having higher dividends payments might be the strategy of the company being
transferring its profits to international shareholders by minimizing the tax.

o Dividend pay out ratio

Dividend payout ratio = (Dividends per share/Earnings per share)*100%

2014
2013
2012
2011
2010

Earnings Per share


7.05
6.17
5.54
4.89
3.54

Dividents Per Share


7.17
5.38
4.73
3.43
2.09

Payout Ratio
101.70%
87.20%
85.38%
70.14%
59.04%

The dividend payout ratio measures the percentage of earnings paid out to shareholders. In other
words the ratio shows the portions profits the company decides to retain to fund the operations. This
ratio is used to determine the ability of business entity to pay dividends, as well as its reliability in
doing so. Maintaining a consistent ratio is important than a high or low ratio.
Nestle has shown a significant growth of dividend payout ratio and in 2014 it passes 100%. Thus the
company shows a forward trend of payout and it has being fulfilled the investors concerns. But
when the ratio is greater than 100% then the company is dipping into its cash reserves to pay
dividends. This situation is not sustainable for the company and it may result in the eventual
termination of all dividends or financial decline of the business. In 2014 the company has not
retained cash for future operations. Thus the reliability of their dividend payment is not sustained.
But when we considered Nestle as a mature company it is okay to pay higher dividends because it is
enough to keep a little amount of profit for growth. Thus the best way of using profits is paying
higher dividend. Maintaining a considerable level of dividend ratio is better than increasing it
drastically.

o Price Earnings Ratio


Price Earnings ratio = Market price per share/Earnings per share

2014
2013
2012
2011
2010

Earnings Per share


7.05
6.17
5.54
4.89
3.54

Market Price Per Share


2105
1978
1154
764
611

Ratio
298.58
320.58
208.30
156.24
172.60

Price earnings ratio is a tool which is used for P/E ratios indicated positive future performance and
investors are willing to pay more for this company share. Lower ratios indicated poor current and
future performance of a company. It could prove to be a poor investment. P/E ratios of nestle are
shown a significant growth during last 5 years except 2011. But they have managed that poor
circumstance and achieved a huge progress from 2011 to 2014. Thus the investors are willing to pay
more for nestle and it shows a positive current status and future performance. Clearly the P/E ratios
of Nestle proved that the investing amount per earning has getting increased during last 3 years. It
conclude that nestle has a better current and future achievement.