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1.

0 INTRODUCTION
Nestlé (Malaysia), a part of Nestlé Group, is engaged in the manufacturing, marketing and
sale of food, confectionery and dairy products in Malaysia. Nestlé's commitment to providing
quality products to Malaysians dates back almost 100 years ago. Since 1962, with its first factory
in Petaling Jaya, Nestlé Malaysia now manufactures its products in 7 factories and operates from
its head office in Mutiara Damansara. Today, the company employs more than 5000 people and
manufactures as well as markets more than 300 Halal products in Malaysia (permissible to use as
per Muslim religion) products, reflecting Malaysia’s Muslim religious beliefs, and its exports are
certified Halal by JAKIM (Jabatan Kemajuan Islam Malaysia) or the Department of Islamic
Development of Malaysia. The company’s products are categorized into coffee and beverages;
culinary aids/prepared foods, milks, liquid drinks, junior foods, breakfast cereals, chilled dairy, ice
cream, chocolate and confectionery, healthcare nutrition, performance nutrition, and Nestlé
professional. Its major food products brands include MILO, NESCAFE, MAGGI, NESPRAY,
LACTOGEN and KIT KAT.
A critical analysis is conducted using the annual report of the company as at 2013, 2014,
2015, 2016 and 2017. During the analysis, the values from 2013 to 2017 Annual Reports are
compared to each of the ratios from each respective year. The ratios used are liquidity ratios, capital
structure ratios, asset management efficiency ratios, profitability ratios and market value ratios.

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2.0 COMPANY BACKGROUND

Nestlé (Malaysia) was established by Nestlé Group (Nestlé) in 1912 as the Anglo-Swiss
Condensed Milk Company, based in Penang. By 1939, growth and expansion made a move to
Kuala Lumpur necessary. In October 2009, the company moved its headquarters to Surian Tower
in Mutiara Damansara. The Company was publicly listed on the KLSE now known as Bursa
Malaysia Berhad on 13 December 1989. It was ranked as No. 64 on the Fortune Global 500 in
2017 and No. 33 on the 2016 edition of the Forbes Global 2000 list of largest public companies.
Nestlé has 447 factories, operates in 189 countries, and employs around 339,000 people. Nestlé's
products include baby food, medical food, bottled water, breakfast cereals, coffee and tea,
confectionery, dairy products, ice cream, frozen food, snacks including Nespresso, Nescafé, Kit
Kat, Smarties, Stouffer's, Vittel, and Maggi.
The company's key products and brands include the following:

(Source: Nestlé Internal Records – Competing Brands and Position, 1999-2000)

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3.0 FINANCIAL RATIO ANALYSIS (2013 – 2017)

Financial ratios are mathematical comparisons of financial statement accounts or


categories. These relationships between the financial statement accounts help investors, creditors,
and internal company management understand how well a business is performing and areas of
needing improvement. Financial ratios are the most common and widespread tools used to analyse
a business' financial standing. Ratios are easy to understand and simple to compute. They can also
be used to compare different companies in different industries. Since a ratio is simply a
mathematically comparison based on proportions, big and small companies can be use ratios to
compare their financial information. In a sense, financial ratios don't take into consideration the
size of a company or the industry. Ratios are just a raw computation of financial position and
performance. Ratios allow us to compare companies across industries, big and small, to identify
their strengths and weaknesses. Financial ratios are often divided up into five main categories:
liquidity, capital structure, asset management, profitability and market value.

a. Liquidity Ratios

Table 1.1: Current Ratio and Acid-Test Ratio (%)


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0.87
0.9
0.8 0.68 0.67 0.65 0.66
0.7
0.6 0.49
0.5 0.4 0.39 0.36 0.37
0.4
0.3
0.2
0.1
0
2013 2014 2015 2016 2017
Current Ratio 0.87 0.68 0.67 0.65 0.66
Acid-Test Ratio 0.49 0.4 0.39 0.36 0.37

Current Ratio Acid-Test Ratio

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Table 1.2: Average Collection Period (Days)

40.3 38.28

38
39.24

43.9

2013 2014 2015 2016 2017

Table 1.3: Accounts Receivable Turnover & Inventory


Turnover (Times)
12
9.53 9.53 9.3 9.06
10 8.4 8.31
7.56 7.18 7.13
8 6.73
6
4
2
0
2013 2014 2015 2016 2017

Accounts Receivable Turnover Inventory Turnover

b. Capital Structure Ratios

Table 1.4: Debt Ratio (%)


90%
80% 72% 74% 75%
70% 66%
61%
60%
50%
40%
30%
20%
10%
0%
2013 2014 2015 2016 2017

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Table 1.5: Times Interest Earned (%)
40
33.9
35
30 28.18
23.61 23.55
25 22.11
20
15
10
5
0
2013 2014 2015 2016 2017

c. Asset Management Efficiency Ratios

Table 1.6: Total Asset Turnover and Fixed Asset


Turnover (Times)
5
4.58
4 3.83
3.72 3.53 3.74
3
2.3 2.09
2 1.94 2.03 2.06

0
2013 2014 2015 2016 2017

Total Asset Turnover Fixed Asset Turnover

d. Profitability Ratios

Table 1.7

2013 2014 2015 2016 2017


98%
91%
88%
69.70%
65.90%
35.20%
31.50%
39%
39%
37%
36%
35%

33%
32%
31%
15.30%

10.60%
16%
16%
16%
15%

13%
12%

12%
11%

GROSS OPERATING NET PROFIT OPERATING RETURN ON


PROFIT PROFIT MARGIN RETURN ON EQUITY
MARGIN MARGIN ASSETS

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e. Market Value Ratios

Table 1.8: Price-Earnings Ratio (Times)


40 37.47

35
28.4 29.18 29.14 28.78
30
25
20
15
10
5
0
2013 2014 2015 2016 2017

4.0 COMPANY VALUATION

a. Current Ratio
By looking the current ratio for Nestlé in 2013, Nestlé has borderline liquidity. Starting from 2013
to 2017, their current ratios are 0.87, 0.68, 0.67, 0.65 and 0.66. It means that each RM of the current
debt, Nestlé only has RM0.87 for returning the debt. Since each of the ratio is below 1, Nestlé has
high risk in bankruptcy because they will not able to meet their short-term obligation.

b. Quick Ratio
Nestlé’s quick ratio for those respective five years are 0.49, 0.40, 0.39, 0.36 and 0.37. This
company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities
in the short term, while other company having a quick ratio higher than 1 can instantly get rid of
its current liabilities. For instance, a quick ratio of 0.49 indicates that the company has RM 0.49
of liquid assets available to cover each RM1 of its current liabilities. If Nestlé did not do anything
to the current liability, Nestlé will be easily come into bankruptcy.

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c. Debt Ratio
Nestlé had a quite high debt ratio of 61% for the year 2013 and subsequently increase to 66% the
following year and increases again up to 75% at 2017. The high level of debt indicates high risk
that the investor will take. Therefore, the investors will ask for higher return/dividend for each
share invested in Nestlé. Nestlé have debt ratio lower than 100%, so Nestlé is still using the equity
in financing the company. Investors might find lower risk in the investment in the company since
the company still in low-leverage firm. For instance, in 2017, the company has RM1,917,058 of
total liabilities compares to RM2,556,986 of total assets. This means that for every RM of assets
the company has 75 cents worth of liabilities.

d. Total Asset Turnover


The total asset turnover ratio measures the ability of an organization to efficiently produce sales.
The ratio does so by comparing the sales of a company to its asset base. It is founded that in the
five consecutive years, the ratio shows 2.3, 2.09, 1.94, 2.03, and 2.06 times. The ratio from 2013
to 2015 period has been decreasing but it finally starts an incremental increase again on 2016 and
2017. Nestlé can operate with fewer assets than a less efficient competitor, and so requires less
debt and equity to operate. The result should be a comparatively greater return to its shareholders.
The measurement is typically used by third parties to evaluate the operations of Nestlé.

e. Fixed Asset Turnover


The fixed asset turnover ratio is the ratio of net sales to net fixed assets. The concept of the fixed
asset turnover ratio is most useful to an outside observer, who wants to know how well a business
is employing its assets to generate sales. In year 2013 shows a high ratio and it indicates that Nestlé
doing an effective job of generating sales with a relatively small amount of fixed assets,
outsourcing work to avoid investing in fixed assets and selling off excess fixed asset capacity.
While in year 2014 until 2015, it shows that low ratio. It can be summarised that Nestlé is
overinvested in fixed asset and need to issue new product to revive its sales. It also has made a
large investment in fixed assets, with a time delay before the new assets start generating revenues
and has invested in areas that do not increase the capacity of the bottleneck operation, resulting in
no additional throughput. But it rises on 2016 and 2017 by 3.74 times to 3.83 times.

f. Gross Profit Margin


Analysts use gross profit margin to compare business models with competitors. More efficient or
higher premium companies see higher profit margins. The gross profit ratio shows the proportion
of profits generated by the sale of products or services, before selling and administrative expenses.
The ratio reveals the ability of a Nestlé to create sellable products in a cost-effective manner. Based
on the year 2013 until 2017 period (36%, 35, 39, 39, 37%), Nestlé maintained around in average
of 37.2% of gross profit margin for the five consecutive years. Nestlé can continue to provide
products to the marketplace for which customers are willing to pay a reasonable price.

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g. Net Profit Margin
Net profit margin is equal to net income or profits divided by total revenue and represents how
much profit each dollar of sales generates. Net profit margin is the ratio of net profits or net income
to revenues for a company, business segment or product. The net profit margin is intended to be a
measure of the overall success of a business. In year 2015, 13% was higher compared from other
years. This indicate that in the year 2009, pricing its products correctly and exercising good cost
control has given the company an advantage. It is useful for comparing the results of businesses
within the same industry, since they are all subject to the same business environment and customer
base and may have approximately the same cost structures. A 13% net profit margin indicates the
company earns 13 cents in profit for every RM it collects.

h. Return On Equity
The return on equity ratio or ROE is a profitability ratio that measures the ability of Nestlé to
generate profits from its shareholders investments in the company. In other words, the return on
equity ratio shows how much profit each RM of common stockholders' equity generates. In other
words, this ratio calculates how much money is made based on the investors' investment in the
company, not the company's investment in assets or anything else. Investors wants to see a high
return on equity ratio because this indicates that the Nestlé is using its investors' funds effectively.
The ratios from the year 2013 to 2017 period (69.7%, 65.9%, 91%, 88%, 98%) shows that the
ROE of the company has its ups and down but from its latest financial report on year 2017 has the
currently the highest percentage of ROE which is 98%. The company is getting high returns from
its investments.

i. Price Earnings Ratio


The P/E Ratio indicates how much investors are willing to pay per RM of current earnings. As
such, high P/E Ratios are associated with growth stocks. The price to earnings ratio indicates the
expected price of a share based on its earnings. As a company’s earnings per share being to rise,
so does their market value per share. A company with a high P/E ratio usually indicated positive
future performance and investors are willing to pay more for this company’s shares. Based on the
Price-Earnings ratio for the five consecutive years (28.4, 29.18, 29.24, 28.78, 37.47) times, it is
shown that the ratios are steady for four years but once it reached 2017, the number went
skyrocketed as it is shown from 2016 to 2017 for 28.78 times to 37.47 times which currently the
highest compared to all years. This means that investors are willing to pay RM37.47 for every RM
of earnings.

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5.0 INVESTMENT DECISION

During the year 2013 to 2017, there is a decrease in value of current ratio between those
years. This shows that the company is not that liquid because its current ratio is decreasing by each
year. The firm had RM0.66 in current assets for every RM1 it owed in short-term debt. Based on
acid-test ratio, it appears that 0.49 times is higher, and more liquid compared to all the other years
which has decreased from 2014 to 2016 but rises back a little bit to 0.37 times which is still lower
than 2013 to 2015. This shows that the company’s inventory might not be very liquid at all.
In capital structure point of view, the debt ratio has an incremental increase starting from
2013 to 2017 which starts from 61% to 75%. On the year 2017, the company financed 75% of its
assets with debts and it exceeded the maximum limit of 50%. Based on asset management
efficiency ratio as in total asset turnover, it appears that Nestlé (Malaysia) Bhd. is using its assets
more efficiently in 2013 compared to all other years, It went decrease but starts climbing back at
2016 and 2017. This means in 2017 the company is generating more sales per RM of assets.
Moreover, in profitability ratios for gross profit margin, the company has a steady statistic
for five years. This shows the company’s management control its expenses which then determines
the firm’s profit margin is very good. Next is net profit margin. The company has steady net profit
margin same as gross profit margin. Other than that, for return on equity it is not very steady but
has reached the highest ROE on the final year which is 2017 for 98%. It may be caused by its
efficient use of assets to generate sales or the use of more debt financing, which helps the firm earn
higher rates of return on the common stockholder’s investment only if the company is able to earn
a higher rate of return on the borrowed money than it costs in interest to borrow it. It even has high
return on equity value on 2017.
In conclusion, Nestlé (Malaysia) Berhad shows a potential and decent financial
profitability ratio and stability ratio in their investment. Nestlé has a stabile position in revenues.
This indicates that Nestlé is stable and strong. Even though Nestlé is strong enough, they must use
the long-term debt for their finance, so that shareholders will not be burden. Hence, it is wise to
invest in Nestlé (Malaysia) Berhad as an investor because why not take risk in exchange for
higher returns even though the liquidity is not that great, but our conducted research shows that it
has great returns on profitability and the financial status of the company is stable. Nestlé is a very
strong and stabilize company who can compete with other multinationals company within the same
industry, even with low liquidity and high leverage. Nestlé also has better and stronger position in
the market. Therefore, investors might consider investing in Nestlé with the consideration of its
financial analysis and its strong position in the market.

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6.0 REFERENCES

Financial ratio analysis. (n.d.). Retrieved May 16, 2018, from Accounting Tools:
https://www.accountingtools.com/articles/financial-ratio-analysis.html

Hayes, A. (n.d.). Ratio Analysis: Using Financial Ratios. Retrieved November 15, 2018, from
Investopedia: https://www.investopedia.com/university/ratio-analysis/using-ratios.asp

Investment Decisions in Financial Management. (n.d.). Retrieved November 16, 2018, from
Accounting Notes: http://www.accountingnotes.net/financial-management/investment-
decisions-in-financial-management/6438

Nestlé (Malaysia) Berhad [S] (4707). (n.d.). Retrieved October 25, 2018, from Bursa Malaysia:
http://www.bursamalaysia.com/market/listed-companies/list-of-companies/plc-
profile.html?stock_code=4707

Nestlé Malaysia. (n.d.). Retrieved November 14, 2018, from Nestlé:


https://www.Nestlé.com.my/

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7.0 APPENDICES

Statements of Financial Position as at 31 December 2013

11
Statements of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2013

12
Statements Of Financial Position as at 31 December 2014

13
Statements of Profit or Loss and Other Comprehensive Income
for the year Ended 31 December 2014

14
Statements of Financial Position as at 31 December 2015

15
Statements of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2015

16
Statements Of Financial Position as at 31 December 2016

17
Statements of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2016

18
Statements of Financial Position as at 31 December 2017

19
Statements of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2017

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