Assignment on Accountancy & Finance Module

ACCOUNTANCY &
FINANCE MODULE

TABLE OF CONTENTS
Table of Contents
INTRODUCTION...........................................................................................................................1
a. Background of the company ...................................................................................................1
b. Ratio analysis ..........................................................................................................................3
c. Reflecting the performance of an entity...................................................................................4
d. PESTLE analysis.....................................................................................................................7
e. Recommendations and conclusions ......................................................................................10
CONCLUSION .............................................................................................................................10
REFERENCES .............................................................................................................................11
Appendix........................................................................................................................................12

INTRODUCTION
Accountancy refers to the practice of entering, classifying, reporting the business
transactions for communicating the accurate results to the users that involves external and the
internal parties. It facilitates the feedback to the management in relation to the financial results
and the status of an enterprise. On other side, finance is been defined as managing the money and
involving the major activities such as borrowing, budgeting, lending, investing, forecasting,
saving the financial resources of the company in an efficient way. In other finance mainly deals
with money management and counted the process of procuring and utilising the funds for
generating larger returns. The present study is based on Nestle, a Swiss multinational firm that
deals in food and drinks processing corporation that is headquartered in Vaud, Switzerland.
Furthermore, the study includes the overview of the corporation and the financial analysis in
order to assess the financial performance. Moreover, it also includes the strategic analysis by
way of Pestle and appropriate recommendations are also been highlighted in the report.
a. Background of the company
Nestle is counted as the largest and the leading company that operates its business across
the world in respect of its revenues (Zolfani, Yazdani and Zavadskas, 2018). It is the Swiss
company that had been established in the year 1866, founded by Henri Nestle. It mainly deals in
foray that is food and the drinks, providing a wide range of the services that includes medical
food, coffee, baby food, dairy products, snacks, pet food, ice-cream, tea etc. The company
functions under a food processing industry having a large number of the employees that is
approximately 308000 during the year 2018 with revenue amounting to CHF 91.43 billion in
2018. Nestle formed in the year 1905 by merger of an Anglo-Swiss enterprise that has been set
up in 1866 by the brothers Charles page and George.
The corporation grows grows significantly by expanding its business beyond its
condensed milk and the instant products formula. The firm has been seen as facing several
controversies, criticisms in relation to its marketing of the baby formula as the alternative to the
breastfeeding in the developing countries. Nestle is stated as the biggest food corporate
worldwide having a market capitalization of approx CHF 231 billion that is greater than US$ 247
billion till 2015. It has a primary listing on SIX Swiss Exchange and is constituent of Swiss
Market Index and also had a secondary listing on the Euronext. Nestle is having over 2000
brands with large range of the products across the number of the markets including coffee,
1

beverages, breakfast, milkshakes, infant foods, healthcare nutrition, refrigerated food and the pet
food.
Nestle is reflected as the most renowned company in a world and it had developed
reputation within its food and the beverage sector by offering product with highest quality that
are been used by the consumers on a routine basis around the world. It sells its products in more
than 189 countries rather than sticking to few markets by capturing sizeable market in more of
the developing countries than the developed countries in order to earn most of the revenue.
In accordance to the Forbes Global, nestle is been indicated as the world's top valuable
corporate with regards to the highest revenue, market value, assets and the profits. The product
portfolio of Nestle is extensive as it renovated more than 8000 products considering facilitation
of the nutritional value to the consumers. It had created a well versed relationships with the other
brands such as Coca-Cola, Loreal, Colgate Palmolive etc. and comprises of popular brands
under it like Nestle, Gerber, Maggi, Milo and Kit-kat. The company owns an extensive and the
diversified distribution network in both urban and the rural regions. Nestle adopted for the local
method of distribution and the decentralized approaches for running its business effectively and
efficiently within the respective countries (Overview of Nestle, 2018). It has maintained stronger
relationships with retailers, distributors, suppliers and the vendors so that demand of the
customers could be met timely and efficiently.
Although Nestle faced many challenges that includes social criticism as it had become
the target of the media attention. There was a claim against the company relating to privatizing
the water, lawsuit for the chocolate making by using the slave and child labour and the
misleading labelling weakened the market reputation of the company. Nestle also failed in
clearing the laboratory test happened in India at the time of its Maggie controversy. This causes a
huge loss to the firm as 80% of its market share declines.
Nestle also gained many opportunities in relation to venturing the small start-ups in order
to grow the food items within its brand name. It had also collaborated with other popular brands
for promoting its brand name all over the world which in turn resulted as the great opportunity
for an enterprise. Company also had a remarkable opportunity for boosting its online and the e-
commerce websites as very few firms are been offering an online services for making their
shopping experience more pleasant and comfortable. Creating a strategic alliance with the other
giants that are dealing in food and the beverages is been seen as the great opportunity for Nestle
2

as for increasing its profits and the revenues. The company could take authentic labelling as an
opportunity in order to enhance its practices through facilitating trustworthy information and the
accurate labelling on its products.
On the other side, the major threat that the Nestle is facing is the rising competition as
there are many companies which are selling the similar beverage and the food product like
Unilever, Mondelez etc. However, Nestle gained a competitive edge against its rivalry by
providing unique quality to the consumers. Regulation of the government highly affected the
business operations of an entity. Along with it, increasing price of the commodities induces
Nestle in increasing the price of its products. This leads to the reduction in the sales as
consumers had switched to the other brands that are offering its substitute products at the low
cost.
b. Ratio analysis
3

4

5

6

c. Reflecting the performance of an entity
Profitability ratios – It refers to the ratio that comprises of the metrics which helps in
assessing the ability of the company in generating the revenue against their operating cost
(Annual report of Nestle, 2018). This ratio helps in depicting the financial performance of Nestle
in respect of generating profits and creating value for the shareholders.
Particulars Formula Amount
2017 2018
7

Profitability ratio
Gross profit ratio
Gross profit/net
sales*100 14.82% 15.04%
Net profit ratio
Net profit/net
sales*100 8.38% 11.45%
Interpretation- From the above analysis it has been interpreted that the performance of
Nestle is becoming more and more better over the years as its gross profit ratio is increasing
from one period to another that is 14.82% in the year 2017 and 15.104% in 2018. This means
that Nestle earned increased profits after making payment of all the cost that incurred relating to
sales (Ganesan and et.al., 2016). Similarly, net profit ratio of Nestle is also showing an
increasing trend which means that is from 8.38% to 11.45%. This clearly reflects that after
making payment of all its cost in relation to operating expense, taxes, interest expense etc.
company is earning a huge amount of profit as its sales over the years rises with the greater
value. This shows that the performance of Nestle is good and has full capability to achieve its
sales target with higher profitability.
Liquidity ratios- It means the ratio that determines ability of the debtors in paying off
their current obligations without any raising external capital (Wang, Martin and Rapp, 2016). It
is counted as the financial ratio which indicates that the current assets of an enterprise are
adequate in meeting the short term obligations as they get due (Alayemi, 2015). Liquidity ratio
are essential because it shows a way to an entity in paying off their short term liabilities by
making use of their current assets. It helps in emphasizing on managing liquidity for running the
routine operations of the business efficiently and effectively.
Liquidity ratio
2017 2018
Current ratio
Current
assets/current
liabilities 0.83 0.95
Quick ratio
Quick assets/current
liabilities 0.59 0.74
Interpretation- The above evaluation shows that the liquidity position of Nestle is sound
and better because its current ratio is showing an increasing trend that is during the year 2017 it
8

resulted as 0.83 and 0.95 in the year 2018. It has been stated that more the current ratio better it
is and it helps the company in maintaining its working capital in an effective way (Elnahas,
Hassan and Ismail, 2017). As the ratio is increasing, this means that the company is managing its
current assets efficiently against its current liabilities. On the other state, the quick ratio of Nestle
is also increasing which clearly indicates that its quick assets are increasing over the years over
its current liabilities. The quick ratio of Nestle in the year 2017 & 2018 equates as 0.59 & 0.74
which reflects that the firm is performing its current operations in a better way.
Efficiency ratios- It referred as the ratio that measures ability of an entity in using and
managing its assets and the liabilities efficiently in the short period of time. There are various
efficiency ratios that are included in it like asset turnover ratio, Debtors turnover ratio etc
(Kanapickienė and Grundienė, 2015). Asset turnover ratio is the financial measure that helps an
enterprise in measuring its ability in generating the revenues from the use of their assets.
Moreover, debtors turnover ratio reflects the way in which the company could collect their
credits and the debts actively.
Efficiency ratio
2017 2018
Asset turnover ratio
Net sales/ average
total assets 0.67 0.67
Debtors turnover
ratio
Net credit sales/
Average accounts
receivables 7.4 8.2
Interpretation- The above computation shows that asset turnover ratio of Nestle is
showing a stable performance in both the years as the ratio does not increases. The asset turnover
ratio in both the firms resulting as 0.67 which clearly states that its performance is stable. Higher
the ATR means that the management of the company is making use of its assets efficiently while
lower the ratio indicates that an entity is not making efficient use of its assets. Furthermore, the
accounts receivable turnover of Nestle is increasing which shows a better performance as higher
the DTR, favourable it is. This reflects that an entity is more efficient in comparison to its
competitors in context of collecting the accounts receivable.
Gearing ratio- It means a kind of the financial ratio which compares the debt of an
enterprise relating to the different financial metrics like total equity and total debts. This ratio
9

represents the leverage position of an enterprise that means the extent to which the funding has
been made from the borrowed funds against owners funds (Klieštik, Kočišová and Mišanková,
2015). These type of the ratio are been used for assessing the structure of the company and the
extent of risk involved within the structure. There are different gearing ratios which are used to
assess the leverage condition of the firm that includes Debt-equity ratio and the interest coverage
ratio.
Gearing ratio
2017 2018
Debt equity ratio
Total debt/total
equity 0.30 0.44
Interest coverage ratio EBIT/ Total interest 11.98 13.64
Interpretation- The above calculation is depicting that the debt equity ratio and the
interest coverage ratio of Nestle is increasing from one accounting period to another. D/E ratio in
year 2017 resulted as 0.30 and in 2018 it equates to 0.44, this reflects that Nestle has made more
and more creditors financing rather than investor financing which in turn indicates that company
might not be capable in generating adequate cash for satisfying its liabilities (Tamulevičienė,
2016). It has been highlighted that lower debt equity ratio means better position of the firm.
Although, the D/E ratio of Nestle is increasing but is not high so its gearing position is good but
it should take corrective steps for improving its ratio in a better way. Furthermore, the interest
coverage ratio shows capability of an enterprise in meeting their interest payments. The more the
ITR, better is the financial performance of the company. As ITR of Nestle is increasing, this
reflects better position of the company as it means that it is earning sufficient profits for meeting
its interest obligations effectively.
d. PESTLE analysis
Political- It involves the factors relating to wide regulation of the government, instability
of the government etc. Government had provided for expanded regulatory and the conceptual
framework across the globe in relation to each and every aspect of food industry. This involves
cleanliness in the commercial kitchens, standards relating to transporting and storing the
products and also meeting the requirements of the labours. On the positive state, this ensures that
the consumers will be provided with the quality nutrition food while complexities of the
regulation results in cutting down the revenue margins of the company' s business.
10

For example- As Nestle operates its business in around 190 countries worldwide, so any
of the variation in the government and its regulations might leads to create a massive impact on
its functioning. Brexit situation directly thrown a wrench in the plans of Nestle as the change
threatens livelihood of its production and the food workers. Europe had always been considered
as the most important market for the production and the profitability of Nestle and due to the
instability of the Brexit disrupted an entire market of UK dealing in food supply.
Many of the food companies under this industry such as Nestle is experiencing the
problems that are associated with the instability of the government in different countries. This
creates complexities for the industry as they are abide by changing regulations and the standards
regarding their food segment.
Economical- This factor involves the factors like disposable income, labour cost,
currency exchange rate etc. reflects a great impact on the smooth running of an industry.
Growing income of the people indicates a positive sign for the food processing industry as in
today's modern world people are more and more spending their money on the food items (Pestle
analysis of Nestle, 2019). This in turn increases overall revenue of the companies that are
working under food processing industry. On the other state, increase in the labour cost reduces
the profitability of an organization as the cost regarding hiring the workers increases. Change in
the exchange rate of the currency in different countries also has a great impact on the
profitability of an entity.
For instance- As Nestle is a multinational firm, foreign exchange swings highly impacts
as if the currency weakens it results in loss of the loss of profits on the basis of the location.
However, if a currency becomes strong it could lead to increase in profit. In the year 2018,
Nestle has accounted an upswing in its profit by greater than 40% that is from $ 7.6 billion to
$10 billion.
Social- The social environment involves an attributes, changing demographics, buying
behaviour highly affects the business. With evolving lifestyle, people are becoming more and
more conscious towards their health and their preferences are also changing with the change in
the trend so this highly influences the business of an enterprise. However, with changing culture,
people prefers to spent their money on the quality items, this reflects a positive effect on the
company's sales and in turn increases its revenues.
11

For example- Nestle deals in the food and beverage products which operates with an aim
to provide a healthy eating to the customers as now a days people desire for consuming low
calorie food products. Due to the social factor, Nestle also faced a criticism relating to its food
quality as it has got failed in the test as in case of its Maggie product, it had been found as
unhealthy or harmful for the people.
Thus, it has been analysed that this factor highly influences business operations of the
food industry and they should have to take necessary measures for the overcoming the health
related issues and in dealing with the cultural differences present in different countries across the
world.
Technological- This factor involves advancement in technology, setting up of the
techniques, developing automation within the business. Companies that are operating under food
industry has to Spend more on the research and development, social media, email marketing,
digital surveys and discounts. These technological advancements helps an industry to get connect
with the larger audiences which in turn helps in gaining a wider market with large customers
base for a corporate.
For example- Nestle could increase its production, quality of the food and availability of
its products to the consumers by using latest equipments. Company make use of the blockchain
technology for decreasing its production time and leads to faster delivery of the product to the
customers.
Legal- It includes the laws and the legislations that has to be followed by the food
processing industry in order to function its business ethically. The industry has to keep high
standards in relation to the safety measures. Particularly, health and safety legislation, food
safety rules etc. For instance- Nestle follows health and the safety rules with regards to their
customers and employees for the purpose of producing Hygienic products and delivery
nutritional value to the end users. The companies operating their business under the food
processing industry has to take utmost care or due diligence in respect of complying the legal
rules appropriately. In case if the companies do not follow the legal laws then it might have to go
through the lawsuits and has to pay for the penalties against the breach of the provisions
mentioned in the legislation.
Environmental- In order to maintain sustainability, industry has to focus on producing
the environment friendly products as in a contemporary world, people are becoming more
12

conscious towards keeping the environment clean and healthy. Different countries set up
different rules that are significant for an industry to follow and to increase acceptance of product
by targeted sector. For example- Nestle produces healthy products and recycle the wastage so
that it could deliver for an eco-friendly items to the society.
e. Recommendations and conclusions
From the financial and the strategic analysis it has been identified that Nestle can make
more improvements for strengthening their market standing that includes bringing innovation
within their product range and should opt for growing in the number of the start-ups in respect of
its food and the beverage industry. It should make its online services more updated in order to
create the unique competitive benefit in CPG market. It should also focus on making the
improvements in its production process and the operational procedures. Nestle should use
authentic raw material for avoiding outcry from the social and the environmental activists. It
should also emphasize on settle down the media scandals and the controversies for standing by
with the positive reputation. The company should participate in the CSR activities and should
seek for upholding their sustainability practices.
From the ratio analysis it has been analysed that the best ratio for the year 2017 was seen
as the gross profits ratio as 15% and in the year 2018, the most suitable ratio was net profit ratio
as 11.45% because it increases with high proportion. Overall it has been determined that 2018
was considered to be the best year for Nestle as it shows an improvement in its financial
performance in context of all the position that is profitability, efficiency, gearing and liquidity.
All the ratios over the years is showing an increasing trend which means that the
performance of Nestle has become better as the year passes.
CONCLUSION
By summing up the above report it has been summarized that financial analysis plays an
important role in providing useful information to the users in making an important decisions. Th
management of Nestle and the outsiders by making use of their financial analysis can formulate
an effective plans and the policies for the future. Moreover, pestle analysis act as the major
source in making the strategic analysis so that goals can be achieved in an effective way. Overall
it has been reflected that financial performance of Nestle is becoming more and more better over
the years with attaining competitive edge across the globe.
13

REFERENCES
Alayemi, S., 2015. Choice of accounting policy: Effects on analysis and interpretation of
financial statements. American Journal of Economics, Finance and Management. 1(3).
pp.190-194.
Elnahas, A. M., Hassan, M. K. and Ismail, G. M., 2017. Religion and ratio analysis: Towards an
Islamic corporate liquidity measure. Emerging Markets Review. 30. pp.42-65.
Ganesan, A. N. and et.al., 2016. The impact of atrial fibrillation type on the risk of
thromboembolism, mortality, and bleeding: a systematic review and meta-
analysis. European heart journal. 37(20). pp.1591-1602.
Kanapickienė, R. and Grundienė, Ž., 2015. The model of fraud detection in financial statements
by means of financial ratios. Procedia-Social and Behavioral Sciences, 213, pp.321-327.
Klieštik, T., Kočišová, K. and Mišanková, M., 2015. Logit and probit model used for prediction
of financial health of company. Procedia economics and finance. 23. pp.850-855.
Tamulevičienė, D., 2016. Methodology of complex analysis of companies’
profitability. Entrepreneurship and sustainability issues. 4. pp.53-63.
Wang, B., Martin, U. and Rapp, S., 2016. Vibration characteristic analysis of ballast with
different aspect ratios by means of the discrete element method. In Geo-China 2016 (pp.
16-23).
Zolfani, S. H., Yazdani, M. and Zavadskas, E. K., 2018. An extended stepwise weight
assessment ratio analysis (SWARA) method for improving criteria prioritization
process. Soft Computing, 22(22). pp.7399-7405.
Books and journals
Annual report of Nestle. 2018. [online]. Available through
:<https://www.nestle.com/sites/default/files/asset-library/documents/library/documents/
financial_statements/2018-financial-statements-en.pdf>
Overview of Nestle. 2018. [Online]. Available
through:<https://www.nestle.com/investors/overview>
Pestle analysis of Nestle. 2019. [Online]. Available through:<https://pestleanalysis.com/pest-
analysis-of-nestle/>
14

Appendix
Particulars Formula Amount
2017 2018
Profitability ratio
Gross profit 13277 13752
Net sales 89590 91439
Gross profit ratio
Gross profit/net
sales*100 14.82% 15.04%
Net profit 7511 10468
Net sales 89590 91439
Net profit ratio
Net profit/net
sales*100 8.38% 11.45%
Liquidity ratio
Current asset 31884 41003
Current liabilities 38189 43030
Current ratio
Current
assets/current
liabilities 0.83 0.95
Current assets 31884 41003
Inventories 9177 9125
Quick assets 22707 31878
Current liabilities 38189 43030
Quick ratio
Quick assets/current
liabilities 0.59 0.74
Efficiency ratio
Net sales 89590 91439
Average total assets 133210 137015
Asset turnover ratio
Net sales/ average
total assets 0.67 0.67
Net sales 89590 91439
Average accounts
receivables 12036 11167
Debtors turnover
ratio
Net credit sales/
Average accounts
receivables 7.4 8.2
Gearing ratio
Total debt 18566 25700
Total Equity 62229 58403
15

Debt equity ratio
Total debt/total
equity 0.30 0.44
Earning before interest
and tax 10156 13752
Total interest 848 1008
Interest coverage ratio EBIT/ Total interest 11.98 13.64
16