Financial and Business Risk Executive Summary 2022

Running head: FINANCIAL ANALYSIS AND BUSINESS RISK
FINANCIAL ANALYSIS AND BUSINESS RISK
Name of the Student
Name of the University
Author’s Note:

1FINANCIAL ANALYSIS AND BUSINESS RISK
Executive Summary
The aim of the report is to calculate the required financial ratio of Nestle, one of the world’s
largest food and beverage providing Company and to conduct an overview of different financial
ratios such as Profitability, Liquidity, efficiency and coverage ratio of the respective organization
for the last two the financial year 2017 & 2018. The study also discusses the importance and
drawbacks of the selected ratios. Moreover, the report focuses on a comprehensive analysis of
the brand through the SWOT approach and Porter’s five forces approach. In addition, the report
covers the area related to the given study specifying the different types of business risks and how
it can be identified including the methods to mitigate those risks.

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Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................5
Answer 1(a).................................................................................................................................5
Profitability ratio......................................................................................................................5
Liquidity ratio..........................................................................................................................7
Activity ratio............................................................................................................................8
Coverage ratio........................................................................................................................10
Importance of selected ratios.................................................................................................11
Barriers of selected ratios......................................................................................................13
Answer 1(b)...............................................................................................................................14
SWOT Analysis of Nestle.....................................................................................................14
Porter’s Five Forces Analysis................................................................................................17
Answer 2(a)...............................................................................................................................18
Techniques used in identifying risks.....................................................................................18
Types of business risk............................................................................................................19
Answer 2(b)...............................................................................................................................20
Methods to moderate risks.....................................................................................................20
Conclusion.....................................................................................................................................22

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References......................................................................................................................................23
Bibliography..................................................................................................................................25
Appendix........................................................................................................................................27

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Introduction
Nestle, incorporated in 1866, is one of the world’s largest food and beverage providing
brand whose headquarter is situated in Switzerland. In this report, different financial ratios such
as Profitability, Liquidity, efficiency and coverage ratio of the above-mentioned Company is
calculated for the last two financial year 2017 & 2018 taking the amounts from the annual report
of the Company. Ratios are crucial to make an idea about how an entity is performing are what
area need to be checked regarding improving its performance level. The importance and
drawbacks of the selected ratios have also been studied in the report and how they affect the
performance of the Company at a financial level. Moreover, the report focuses on a broad
analysis of the Nestle brand through SWOT approach and Porter’s five forces approach on the
basis of information availed from financial statement and reports of the Company. In addition,
the report deals with the area related to the given case study specifying the different types of
business risks and how the German Company can identify their main risk. Lastly, concerning
those identified risk different methods used by the organization to mitigate such risks are
evaluated in the report.

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Discussion
Answer 1(a)
Profitability ratio
This ratio basically analyzes the profit of a company by considering how an entity is
making its profit in terms of sales, cost of operating, assets of the Company and others (Xu
2019). It presents whether the business is performing well by earning income after the deduction
of relevant costs and other expenses and ultimately ensures the growth of business.

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Net profit margin of the Company was 8.0%, in 2017 showing its efficiency in making
profit relative to its costs. In addition, the ratio increased at 11.1% in 2018, making the Company
more effective in directing its profit and improving performance. Profitability of financial
performance of an entity is guarded using this ratio (Fahari, Andini and Oemar, 2017).
Return on stockholder’s equity of the Company was 11.7% in 2017 and 17.7% in 2018.
There is an improvement in the year 2018 stating that the brand has handled their money
efficiently. Hence, it depicts that the Company is earning a return on equity of shareholders at
11.7% in 2017 and 17.7% in 2018 respectively.

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Liquidity ratio
The ratio measures the overall health of a company and helps to make necessary
decisions regarding immediate action during some crisis which an organization may face
(Kajananthan and Velnampy 2018). It shows whether an entity is in a stage to pay its obligations
on a short-term basis and inspect the liquidity position of the performing entity. Comparing the
financial performance with the previous year, an entity come across its performance level.
Current ratio and Quick ratio comes under liquidity ratio (Priyar, Sowmya and Pavithra 2020).
The above chart shows that Current ratio of the Company is 0.893 in 2017 and 0.953 in
2018. The Company has shown improvement in 2018 to some extent as the current ratio is
improving. It is satisfactory for the Company that it is paying full attention towards payment of
short-term debts.

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Above graph showing the quick ratio of the Nestle brand where it stood for 0.642 in 2017
and 0.741 in 2018. This ratio measures short-term liabilities payment, including assets that are
converted into cash (Shrotriya 2018). The analysis shows the company asset is more convertible
in cash in 2018 as compared to the previous year 2017 since improvement is made.
Activity ratio
One of the efficiency ratios which present whether a company is executing its operation
properly by inspecting fixed assets, accounts receivable and inventories It includes accounts
receivable turnover, total asset turnover and inventory turnover. This ratio is a tool to know how
better a business runs and how swiftly it can convert its assets into a cash amount. Investors
prefer to rely on this ratio as the information gathered from it is based on numbers which ensure
accuracy. It does not only reflects the health of a business but also depicts the use of elements of
the balance sheet.

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Accounts receivable turnover ratio of the Company is 7.23 in 2017 and 7.75 in 2018,
which means that there is a stable collection of the organization. The Company is properly
collecting its sales that are made on credit and hence, its operation is continuing smoothly.
Total asset turnover ratio of Nestle is marked at 0.685 in 2017 which shows a decline of
0.684 in 2018. It shows that the Company is not paying serious attention towards its usage of
assets. The brand is not showing efficiency towards using its assets to make sales since it is
decreasing.

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Coverage ratio
Coverage ratio is important to know the capacity of business to pay financial obligations.
It aims at measuring liquidity position of business by giving reliable cash picture to pay current
liabilities. Interest coverage ratio, cash coverage ratio, asset coverage ratio and debt-service
coverage ratio is part of this ratio. It estimates the capability of remaining strong, which
ultimately prevent from borrowing from others.
2017 2018
15.00
15.50
16.00
16.50
17.00
17.50
18.00
18.50
16.34
18.07
Interest coverage rati o=Operati ng Income/
Interest expense
The interest coverage ratio of Company is 16.34 in 2017 and 18.07 in 2018, which
supports the fact that the business is performing well regarding payments of interest expenses on
its obligation relative to the operating income. The Interest coverage ratio of 1.5 is prefer to be
the acceptable ratio and below this number can make an entity risk defaulter.

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2017 2018
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00 12.82
5.91
Cash coverage rati o=Total cash/Interest expense
The cash coverage ratio of the Company is 12.82 in 2017 and 5.91 in 2018, showing the
ineffectiveness of the Company. In 2017, the Company had sufficient cash to pay off its current
liabilities which is reduced to 5.91 in 2018. Such a reduction is not acceptable as it impacts the
situation of the Company.
Importance of selected ratios
Profitability ratio includes different ratios such as net profit margin, gross profit margin,
return on capital employed and return on assets. Different ratio provides different information
about a company. This ratio if remains high then it suggests that there is an improvement in
profits or earnings of a company when compared to the previous year and if it lows it shows the
Company is earning low profit in the current year. Gross profit is a part of profitability ratio
showing earnings of an entity out of total sales made after subtraction of the cost of goods sold.
ROCE ratio talks about efficiency, which means how smoothly an entity is utilizing its assets in
the process of production.
Liquidity ratio is subjected to getting information about a company on how much it can
pay short-term debts. It specifies the stability of business in terms of measuring liquidity position
by establishing a relationship between current assets and current liabilities. It is useful to give an

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idea of about capacity of business to transform its assets into cash so that it can pay its current
liabilities if there is any requirement. Current ratio, quick ratio and cash ratio are included in this
ratio, and all of them reveal different concept towards paying off debts. Thus, it looks overall
health of a business.
Activity ratio is an efficiency ratio which presents whether a company is executing its
operation properly by inspecting fixed assets, accounts receivable and inventories. It does not
only reflects the health of a business but also depicts the use of elements of balance sheet. It
includes accounts receivable turnover, total asset turnover and inventory turnover. This ratio is a
benchmark of how skilfully a business is running and how swiftly it is converting its assets into a
cash amount. Investors prefer to rely on this ratio as the information gathered from it is based on
numbers which ensure accuracy. The data are presented in a simple format which ultimately
facilitates decision making.
Coverage ratio is important to know the capacity of business to pay financial obligations.
Interest coverage ratio, cash coverage ratio, asset coverage ratio and debt-service coverage ratio
is part of this ratio. It provides easy cash picture to pay current liabilities and thus measure the
liquidity position of a business. The ratio measures the capability of remaining strong which
ultimately prevent from borrowing from others. It also shows improvement and decline in the
financial position of a business.
Barriers of selected ratios
 Ratio analysis becomes useful for small firms than large ones. The reason behind this is
that the operation of different activities is done by many large firms in different
industries, where it is difficult to make a meaningful set of an average of the industry for
comparative purposes.

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 One another barrier of above-mentioned ratios is the Seasonal factors which can also
misstate ratio analysis. This problem arises in case of calculating turnover ratio, and it
can be reduced by using averages for inventory every month when calculating turnover
ratios.
 Inflation can impact the balance sheets as the values recorded there may differ from
original values. The charge of depreciation and cost of inventory gets affected due to
which profits are also affected. Hence, it is important to make ratio analysis and a
comparative analysis of different business carefully.
 Companies may change their accounting policies which can influence these ratios. There
are different practices of operating and accounting that can hamper comparisons from
other business. For instance, valuation of inventory and methods of depreciation can
impact the financial statements and hence comparisons among business gets distorted
using different accounting procedures.
 The Coverage ratio does not stand alone as it fails to provide a clear picture in which
Company higher cash is better or in which Company lower cash. In addition, the majority
of business have in their mind regarding usefulness of cash coverage ratio that is limited.
Without referring to the quick and current ratio, this ratio unable to give the assumption
of the use of the cash.

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Answer 1(b)
SWOT Analysis of Nestle
Strength of Nestle
 Brand name- Nestle is one of those brands which is famous all over the world and has
gained appreciated reputation in sector of food and beverage by offering products of
supreme-quality.
 Identified brand – The brand has created relative awareness by adopting effective
strategies of advertising and branding and established a strong brand image around the
world (Varma and Ravi 2017). It includes some of the recognized brands of the world
such as Kit Kat, Maggi and Nescafe.

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 Highly diversified Company – Nestle has occupied major markets in most of the
countries which are developed or developing to generate its sales. They aim to sell their
products in 189 countries, including its main markets such as the US, China, France, and
Brazil.
Weakness of Nestle
 Controversy of Water- In recent news, it has been depicted that Nestle was indicted for
driving lots of water in many countries illegally where locals were in need of drinking
water.
 Controversy of Noodles (Maggi) - In 2017, Nestle face a loss of 80% of the share of the
market in India, as locals boycotted the brand. The reason was that it declare no MSG is
added in the Noodles packets but it failed in clearing lab test in India where more lead
was found in their product.
 Social criticisms –Nestle has gathered the attention of media many times. Dispute for
making chocolate employing child labor, misleading in labeling and their claim against
privatizing water are some of the instances that have come under a scenario to weaken its
reputation in the market.
 Variation in price by retail giants- Sales of Nestlé’s grocery is attained by large retail
giants (Tesco, Kroger and Walmart), hence any kind of reduction or price increase by
these retail giants can impact its sales.
Opportunities of Nestle

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 Authoritative labeling- Nestle has chance to amend its practices giving reliable details
and authentic labeling its products since it has already been condemn for providing false
details of nutrition on its labels.
 Partnerships – Planned association with other big food and beverage companies are also a
great chance for the Company to increase its revenues and profits (Singh and Alazmi
2019).
 Online shopping platform– There is an opportunity to develop its online platforms to
build shopping experience enjoyable and amusing. Enlarging its online service in more
areas may render a profitable opportunity for the brand.
Threats of Nestle
 Scarcity of Water- The production process of the brand is largely dependent on usage of
water. It has become difficult for it to get clean water through sources that are less costly.
The reasons behind such scarcity involve a change in climatic condition, increase in
population & pollution, increasing demand for food and water, and overexploitation of
resources.
 Government prices and policies- Rules and policies of Government regulations create an
impact on the operational activity of Nestle. In addition, the Company is forced to
increase the price of their products due to increasing price determination by the
government. Thus, customers prefer other brands of low cost, which ultimately lead to
sales reduction (Djarum et al 2019).
 Increase in competition- There are some CPG companies such as Unilever and Mondelez,
which deals with offering identical food and beverage products. In such situation, it is

17FINANCIAL ANALYSIS AND BUSINESS RISK
hard for this brand to keep up with their existence where substitute products are available
easily.
Porter’s Five Forces Analysis
 Risk of entry by probable competitor- There are many food companies in the world
which ensures competition between them. The risk of entry by new entrants in the market
is one of the threats for many food companies. For competing in the market, new arriving
companies need to capture a part of Nestle’s market for its survival. The brand is famous
all over the world because of its quality product and satisfaction of customer accessing
the major amount of share market (Hasan 2019).
 Supplier’s bargaining power- Due to the existence of a large number of suppliers of food,
the supplier might not pose a big threat to the Company. If any supplier refuses to sell its
product, the Company can buy it from others. Nestle company build and maintain a

18FINANCIAL ANALYSIS AND BUSINESS RISK
healthy relationship with its suppliers and have a grip on purchasing power, including its
bargaining power. Such existing relationship assures products of great quality.
 Buyer’s bargaining power- The bargaining power of purchaser makes the Company
understand the needs, taste and preference of their clients. The brand has taken particular
steps towards meeting their needs, and as society is more concern about health, the brand
is including wellbeing in their products.
 Threat of substitute products- Nestle is enclosed with the threat of substitutes products as
there some substitutes in the market. The companies deal with offering identical food and
beverage products. Hence, it is hard for this brand to compete where substitute
products are available easily, so there exists responsibility for Nestle to make
improvement in its product to remain competitive (Greer 2018).
 Extreme Rivalry among competitor- Nowadays, food market remains highly competitive
where the brand makes approaches towards beating off their competitors by making low-
cost structure, providing good customer service and ensuring higher efficiency. However,
customers prefer to opt for improving goods and service at a low cost.
Answer 2(a)
Techniques used in identifying risks
The German Company can look upon the different methods and techniques to assess the
risk such as Flowchart method, SWOT analysis, brainstorming, questionnaires and survey related
to risk (Carroll 2016).
 Flowchart method- This method presents the operational activities graphically and
conclusively to identify subjected risks. Product analysis, site analysis, decision analysis
and critical path analysis are included in this method. The interdependency within the

19FINANCIAL ANALYSIS AND BUSINESS RISK
Company can be revealed using these techniques and thus can easily recognize the
barriers and can figure out an analytical path.
 Brainstorming - Brainstorming is one of the most popular approaches towards identifying
risk, which includes skills of leadership and trained personnel. The Company can use this
method to develop their list of risks if their goals are precisely stated and are understood
by participants. Getting different team experience from different history and mindset, this
method can be very helpful in analyzing risk.
 SWOT analysis- SWOT (Strengths-Weaknesses-Opportunities-Threats) analysis is a
world-wide approach which is used in the formulation of action. It specifies the strengths
and weaknesses of the Company and is internal such as structure and culture of
Company, including financial and human resources (Grafova et al. 2017). Moreover,
Opportunities and threats are outside variables of Company which are not under the
control of head management. To make risk identification effective, sufficient time and
effort are required to be spent on thinking about the weaknesses and threats of the
Company.
 Risk Questionnaires and Surveys- Another way used in identifying risk is responding to
risk questionnaire and risk surveys. Questionnaire includes a range of questions on both
internal and external facts that effectively help to recognize risks. In addition, Risk
Survey can also be conducted to assess the risk.
Types of business risk
The Company is facing various types of business risk which are discussed below:
1. Financial risk- The risk is associated with financing or can be say the risk of not able to pay
its debt taken from bank or any other institution (Bigio and d'Avernas 2019). The Company

20FINANCIAL ANALYSIS AND BUSINESS RISK
is not having an adequate amount of funds, and since it requires a large investment, there is a
need to get a loan from bank. However, if the business does not perform well and is unable to
repay the loan amount, it will become defaulter affecting the reputation of the Company
(Giglio 2016).
2. Cultural risk- This risk is subject to struggling with the operations of a business in a nation
because of the difference in language, customs, values and lifestyle (Schmidt, Heffernan and
Ward 2019). Here, as the German Company is trying to expand its market in non-European
countries, it may face difficulty in some areas related to lifestyles, taste and preference of
their customers.
3. Country risk- This type of risk arises where business need to inspect different factors related
to the country’s stability like its political scenario, rates of inflation, taxation policies and
economic health (Damodaran 2018). In this case, the German Company can get impacted by
the scandals or other false news and may withdraw its decision to expand production in other
non-European countries, which may be reliable.
4. Strategic risk- Several internal and factors may impact the potential of a business achieving
their goals. Inappropriate strategy and expansion of existing business come under this kind of
risk (Benischke, Marti and Glaser 2019). The European Company is trying to enlarge its
business in some other part of the world due to which this risk may arise. There may be some
issues related to staffing of human resource, equipment failure or relationship issues with the
supplier of raw materials which the Company may deal with in the coming future.

21FINANCIAL ANALYSIS AND BUSINESS RISK
Answer 2(b)
Methods to moderate risks
It becomes important for any business to manage its risk to perform continuity in its
operation. The different methods to moderate above-mentioned risks are illustrated below:
 Risk avoidance- If there is a possibility of causing major issue due to any risk, it is better
to avoid such risks. By doing so, one can remove the obstacle in earning profit, and a
different approach can be used to avoid it. Risk avoidance is one of the effective ways to
deal with arising risk in business (Keim 2018).
 Risk reduction- Sometimes, it is not possible to avoid all risk together, so in that case, it
is preferred to reduce the risk associated with it. The Company can take important steps
so that risk can be minimized or it can less likely to occur. This is one of the usually used
methods and is suitable for broad range of different risks. Plan of continuing business is
there, and it just lists out what business should do if certain event occurs (GBAJOBI
2018).
 Risk transfer- Insurance becomes important here as everyone is familiar with the concept
of insuring their business to be on safe side. Here, the risk is transfer from one party to
another, promising payment in return. If any uncertainty occurs in a business, insurance
company ensures bearing any loss if the subjected Company is insured under it and pays
premium (Štulec 2017). The Company can transfer its risk by insuring their property to
remain protected from legal action.
 Risk acceptance- Sometimes all the above-mentioned risk are not appropriate so in such
case where risk is minor, the best thing is to accept them (Keim 2018). As business is all
about risk and every day is a risk-taking challenge for them, it is good to take challenge

22FINANCIAL ANALYSIS AND BUSINESS RISK
and proof themselves. If risk is simple and creating a less impact, Company can opt for
solution of low cost to reduce it and continue its business as usual.
Moreover, there should be continuous monitoring and eye check on success of risk
management method. It helps to learn from mistakes and decide accordingly not to repeat the
same (Gatzert and Schmit 2016). Such review ensures that risks have been correctly recognized
and evaluated including proper controls.
Conclusion
Therefore it can be concluded from the discussion made above that the Nestle brand is
performing well in the food market and prove to be a strong competitor for the other firms. There
are some areas where it needs to manage its performance level to remain strong throughout their
existence. In addition, the report covers the importance and obstacles faced by some selected
ratios such as profitability, liquidity, activity and coverage ratio. In this report, industry analysis
of Nestle Company has been performed by applying SWOT analysis and Porter’s five forces
analysis. Some fields are still found where this renowned brand can improve to strengthen its
standing position in the market such as upgrading the online services, proposing innovation in its
offerings, building a good reputation by setting all the controversies and scandals away and
many more. In the second part of discussion, the report is about the different business risks such
as Financial, Cultural, Country and Strategic risk being associated with the ‘German company’
mentioned in the case study and how different techniques are useful in assessing those risks. The
techniques used for recognizing business risks such as flowchart approach, brainstorming,
SWOT analysis, risk questionnaire and risk survey have also been briefly discussed in the study.

23FINANCIAL ANALYSIS AND BUSINESS RISK
Lastly, the report presents the methods of moderating all the risks that have been associated with
the German Company.
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Appendix
Information taken from the Annual report of Nestle Company (2017) for calculating activity
ratio.