Financial Analysis for Nestle

Income Statement Nestle S. A. | Consolidated income statement| for the year ended 31 December 2008-2010| In million of CHF|  | 2010| 2009| 2008| |  |  |  |  |  | Sales|  |  | 109,722| 107,618| 109,908| Cost of goods sold|  | 45,849| 45,208| 47,339| Gross profit|  | 63,873| 62,410| 62,569| Selling, general, and admin. expense| 45,798| 45,140| 44,916| Research and development costs| 1,881| 2,021| 1,977| EBIT Earnings Before Interest, Taxes, restructuring and impairment| 16,194| 15,699| 15,676| Other income|  | 24,741| 509| 9,426| Other expenses|  | 2,115| 1,238| 2,124|

Profit before interest and taxes| 38,820| 14,970| 22,978| Interest income|  | 94| 179| 102| Interest expense|  | 847| 794| 1,247| Net interest expense|  | 753| 615| 1,145| Profit before taxes and associates| 38,067| 14,355| 21,833| Taxes|  |  | 3,693| 3,362| 3,787| Share of result of associates| 1,010| 800| 1,005| Profit for the year|  | 35,384| 11,793| 19,051| of which attributable to non-controlling interests| 1,151| 1,365| 1,012| of which attributable to shareholders of the parent (Net profit)| 34,233| 10,428| 18,039|  |  |  |  |  |  | As percentages of sales|  |  |  |

EBIT Earnings Before Interest, Taxes, restructuring and impairment| 14. 80%| 14. 60%| 14. 30%| Profit for the year attributable to shareholders of the parent (Net profit)| 31. 20%| 9. 70%| 16. 40%|  |  |  |  |  |  | Earnings per share (in CHF)|  |  |  | Basic earnings per share| 10. 16| 2. 92| 4. 87| Fully diluted earnings per share| 10. 12| 2. 91| 4. 84| |  |  |  |  |  | Kraft Foods Inc. | Consolidated Statements of earnings| for the years ended 31 December 2010| In million of dollars|  |  |  |  | Sales|  |  |  | 49,207|  | Cost of goods sold|  |  | 31,305|  |

Gross profit|  |  | 17,902|  | Selling, general and admin. Expense| 12,001|  | Asset impairment and exit costs|  | 18|  | Net losses on divestitures|  | 6|  | Amortization of intangibles|  | 211|  | EBIT Operating income |  | 5,666|  | Net interest and other expense|  | 2,024|  | Earnings for continuing operations before income taxes| 3,642|  | Provision for income taxes|  | 1,147|  | Earnings for continuing operations | 2,495|  | |  |  |  |  |  | Earnings and gain from discontinued operation, net of income taxes| 1,644|  | Net earnings|  |  | 4,139|  | Non-controlling interest|  | 25|  |

Net earnings attributable to Kraft Foods| 4,114|  | |  |  |  |  |  | Earnings per share|  |  |  | Basic earnings per share|  | 2. 4|  | Fully diluted earnings per share|  | 2. 39|  | Common-Sized Income Statement Analysis Common-Sized Income Statement|  | |  |  |  | Nestle| Kraft Foods| Line items as a percentage of sales| 2010| 2009| 2008| 2010| | Sales|  |  |  | 100%| 100%| 100%| 100%| | Cost of goods sold|  |  | -41. 79%| -42. 01%| -43. 07%| -63. 62%| | Gross profit|  |  | 58. 21%| 57. 99%| 56. 93%| 36. 38%| | Selling, general, and admin. expense| -41. 74%| -41. 94%| -40. 87%| -24. 9%| | EBIT|  |  |  | 14. 76%| 14. 59%| 14. 26%| 11. 51%| | Net interest expense|  |  | -0. 69%| -0. 57%| -1. 04%| -4. 11%| | Income taxes|  |  | -3. 37%| -3. 12%| -3. 45%| -2. 33%| | Net income|  |  | 31. 20%| 9. 70%| 16. 40%| 8. 36%| | | | | | | | | | | Explanation: We use common-sized income statement to compare trends of income statement of the company overtime and also to compare its income statement with other firms. During 2008-2010, Nestle can reduce its cost of goods sold steadily because the company is trying to pursue low cost strategy to be able to compete in the market.

Comparing to its competitor, Nestle had lower cost of goods sold as a percentage of sales. Consequently, Nestle earned higher gross margin than Kraft Foods. Nestle spent relatively the same porting of selling and administrative expense (as percentage of sales) between 2008 to 2010 and it was higher than Kraft Foods about 2 times. This can be explained by intensive differentiated strategy to build brand image and gain recognition in the market. Net interest expenses of Nestle kept changing during this period, however it was lower than Kraft Foods.

In addition, Tax expense of Nestle didn’t change significantly during 2008-2010. Kraft Foods’s taxes as a percentage of sales were lower than Nestle because their pretax profit was lower. Net income of Nestle increased dramatically from 9. 70% to 31. 20% in 2010, this influenced by the profit on disposal of Alcon (another business of Nestle which was closed the sale in August 2010). This profit was added to other income in income statement. In conclusion, Nestle’s net income was higher than those of Kraft Foods, generally because it was better in controlling cost of goods sold.

In addition, although Kraft Foods spent less on SG&A expense, the company can earn much on other income in 2010 and this contributed a great portion to net income in 2010. Higher net income can imply higher value of its shareholders. Financial Ratio Analysis Liquidity Analysis Internal Liquidity |  |  |  | Nestle| Kraft Foods| Internal liquidity risk|  |  | 2010| 2009| 2008| 2010| 1. Current ratio| =| CA/CL| 1. 29| 1. 10| 0. 98| 1. 04| | | | | | | | | 2. Quick ratio| =| (CA-Inventories-other CA)/CL| 1. 03| 0. 89| 0. 70| 0. 63| | | | | | | | | 3. Cash ratio| =| (Cash + marketable securities)/CL| 0. 4| 0. 15| 0. 21| 0. 15| | | | | | | | | 4. Operating cash flow ratio| =| Cash flow from operation/CL| 0. 45| 0. 50| 0. 32| 0. 24| In this section, we’re trying to measure the firm’s ability to repay its short-term liabilities. Nestle had improvement in liquidity situation overtime, shows in currency ratio, quick ratio and cash ratio. Only operating cash flow ratio that declined from 0. 50 to 0. 45 in 2010 due to decrease in operating cash flow in 2010. However, the company’s ratios were higher than its competitor, which means it has higher ability to meet short-term obligations and lower liquidity risk.

Operating Performance Operating Efficiency | | | | | Nestle| | Kraft Foods| Operating efficiency| | | 2010| 2009| 2008| 2010| 1. Fixed asset turnover| =| Sales/FA| 1. 51| 1. 51| 1. 50| 0. 62| | | | | | | | | 2. Total asset turnover| =| Sales/TA| 0. 98| 0. 97| 1. 03| 0. 52| | | | | | | | | 3. Equity turnover| =| Sales/TE| 1. 75| 0. 97| 1. 03| 1. 37| | | | | | | | | To measure operating efficiency, we concern about asset and funds utilization. Nestle can maintain its ability in utilizing fixes asset to generate sale and it was better when compare to Kraft Foods.

It also did the same for total asset turnover. However, the firm has lower ability to utilize its total equity in generating sales in 2009 but it was improved in 2010 due to an increase in sales. Overall, Nestle operated more efficiently than Kraft Foods. Operating Profitability | | | | | Nestle| | Kraft Foods| Operating Profitability| | | | 2010| 2009| 2008| 2010| 1. Gross profit margin (GPM)| =| Gross profit/Sales| 58. 21%| 57. 99%| 56. 93%| 36. 38%| | | | | | | | | 2. Operating profit margin (OPM)| =| EBIT/Sales| 14. 76%| 14. 59%| 14. 26%| 11. 51%| | | | | | | | | . Net profit margin (NPM)| =| NI/Sales| 31. 20%| 9. 69%| 16. 41%| 8. 36%| | | | | | | | | 4. Return on assets (ROA)| =| NI/TA| 30. 66%| 9. 40%| 16. 98%| 4. 32%| | | | | | | | | 5. Return on Equity (ROE)| =| NI/TE| 54. 69%| 19. 44%| 32. 85%| 11. 45%| | | | | | | | | 6. Equity Multiplier (EMUL)| =| TA/TE| 1. 78| 2. 07| 1. 93| 2. 65| Nestle’s GPM has been increasing gradually since 2008, indicating that the company can increase its sales while reducing cost of goods sold over the years and Nestle did better than Kraft Foods. In 2010, the firm can generate about 1. dollars in operating profits for each dollar sale, this number had been increasing since 2008. An increase in operating profits due to the firm can control cost of goods sold and operating expense and also better than Kraft Foods. The firm’s NPM increased dramatically in 2010. It has higher ability to keep profit to each dollar of sale and higher ability to control overall costs. From ROA ratio, in 2010, Nestle can use its asset very effectively in generating income and much effectively than Kraft Foods. ROE ratio, the indicator of how well managers use funds invested by shareholder’s to generate returns.

In 2010, the firm significantly increased returns to the shareholders and it much higher than its competitors. Nestle increased debt financing from 2008 to 2009 but it can rise more funds from investors in 2010. For its competitor, Kraft Foods used more debt financing its operations in 2010. Higher debt financing made Kraft Foods imposed higher financial risk than Nestle. DuPont Analysis Nestle’s ROE 2010 ROE| =| Profitability| ? | Efficiency| ? | Financial leverage| | | | | | | | | | | | =| NPM| ? | TA turnover| ? | Equity Multiplier (EMUL)| | | | | | | | | | =| NI/Sales| ? | Sales/Asset| ? | TA/TE| | | | | | | | | | | | 54. 69%| =| 31. 20%| ? | 0. 98| ? | 1. 78| | | To measure the firm’s overall performance, we will focus on ROE ratio, which is composed of the firm’s profitability, efficiency and financial leverage. The firm’s profitability, measured by Net Profit Margin ratio. It indicates that the firm can made considerably profits during 2010. From the smaller equity multiplier ratio, it indicates that, in 2010, Nestle uses more equities than debt financing to operate its business.

This helps the firm to be in a better financial position because with the lower financial leverage, the firm had lower debt, less distress to meet the term of interest payment, lower default risk and so decreases a chance of insolvency. Financial risk can be lessened. In conclusion, Nestle performed very well in 2010. It significantly increase returns to shareholders, mainly driven by profitability it made during the year. Financial Management Financial Leverage Financial Leverage|  |  |  | Nestle|  | Kraft Foods| | | | | 2010| 2009| 2008| 2010| 1. Debt Ratio | =| TL/TA| 43. 93%| 51. 65%| 48. 0%| 62. 28%| | | | | | | | | 2. Debt to equity ratio| =| TL/TE| 0. 78| 1. 09| 0. 93| 1. 65| | | | | | | |  | 3. Debt to capital ratio| =| TL/TC| 0. 44| 0. 52| 0. 48| 0. 62| | | | | | | | | 4. Interest coverage| =| EBIT/ Interest exp. | 21. 51| 25. 53| 13. 69| 2. 80| The firm has lower debt ratio in 2010 which means it uses less debt financing but more owners’ equity to finance its operations. Therefore, the firm faces lower risk while Kraft foods, which used high debt financing so the company was at high financial risk, the risk to meet interest payment and principal payment in a specific period.

Nestle’s Interest coverage ratio of 21. 51 in 2010 means that every 21. 51 dollars of operating profit earned is available for each dollar of required interest payment. The greater of the ratio when comparing to Kraft Foods (2. 80) indicating that Nestle is more comfortable to meet interest obligations. Growth Analysis |  |  |  |  |  | Nestle|  | Kraft Foods| | | | | | 2010| 2009| 2008| 2010| Sustainable growth rate (g)| =| ROE * Retention rate| 45. 99%| 10. 03%| 24. 52%| 5. 39%| | | | | | | | | | Retention rate (b)| =| (1 – Dividend payout ratio)| 0. 84| 0. 52| 0. 75| 0. 7| | | | | | | | | | Dividend payout ratio | =| Cash dividends paid/net income| 0. 16| 0. 48| 0. 25| 0. 53| | | | | | | | | | Return on Equity (ROE)| =| NI/TE| | 54. 69%| 19. 44%| 32. 85%| 11. 45%| In 2010, Nestle had higher ROE and lower dividend pay out ratio than Kraft Foods, leading to much higher sustainable growth rate. This implies that it can grow much faster than Kraft Foods. Valuation Determine the value of the firm, value of equity and value of equity per share. -Give the recommendations about its strategies and how to increase the company’s value based on the current situation.