Introduction
Nestle Pakistan Ltd. is a subsidiary of a Swiss food-and-drinks firm—Nestle S.A. The company launched its operations in Pakistan in 1998 “under a joint venture with Milk Pak Ltd. and took over management in 1992” (Nestle, n.d., para. 2). The aim of this paper is to analyze the company’s financial information over the last two years and assess its financial health.
Analysis
Nestle Pakistan Ltd.’s revenues from sales totaled ₹112, 392, 654 in 2016 and represented 8.3 percent increase of the company’s total revenue in 2015—₹102, 985, 916 (Nestle, 2016). The rapid rate of revenue growth shows that the company is quickly expanding. This trend is positive for Nestle Pakistan Ltd. because more revenue can translate into more working capital, thereby increasing the efficiency of the business.
In order to understand the company’s overall profitability, it is necessary to consider its net income, which for fiscal 2016 was ₹11, 846, 973 (Nestle, 2016). Nestle Pakistan Ltd.’s net income for the previous year was ₹8, 760, 930, which represents an impressive 35.2 percent increase (Nestle, 2016). Net income is a company’s total revenue without all expenses (Robinson, Henry, Pirie, & Broihahn, 2015). The fact that the firm shows double-digit growth of net income is positive and important for investors because it represents a critical dimension of the company’s financial health.
Profitability ratios measure a company’s ability to earn a meaningful return, and they are among the most important financial metrics. Gross profit margin, net profit margin, and return on assets will be calculated to better understand the company’s ability to use its investments to earn a profit.
Gross profit margin can be defined as “a company’s cost of sales, or cost of goods sold and represents the expense related to labor, raw materials and manufacturing overhead involved in its production process” (Loth, n.d., para. 9). By dividing the company’s gross profit by its revenues, it is possible to arrive at the gross profit margin. In 2015, the company’s gross profit margin was 35.3 percent, which is 2.2 percent higher than the figure for the previous year (Nestle, 2016). Both numbers represent a healthy gross profit. Also, the growing gross profit indicates that the company was capable of making more sales and lower its production costs in the period from 2015 to 2016.
Net profit margin is a financial metric that shows “the ratio of net profits to revenues for a company” (Loth, n.d., para. 7). Nestle Pakistan Ltd.’s profit margin in 2015 was 8.5 percent (Nestle, 2016). The company’s net profit margin in 2016 was 10.5 percent which constituted 2 percent increase from the previous year (Nestle, 2016). The increase in the net profit margin shows that Nestle Pakistan Ltd.’s current business practices are efficient.
Return on assets (ROA) is a metric that shows how much profit a company generates in relation to its total assets (Robinson et al., 2015). As of December 31, 2015, Nestle Pakistan Ltd. had a net income of â‚ą102, 985, 916 and average total assets of â‚ą49, 267, 464 (Nestle, 2016). By dividing the net income by the average total assets, it is possible to arrive at ROA of 209 percent. ROA for 2016 was even more impressive 221 percent. The increasing trend is positive for the company and shows that the company is efficient in converting its investment into profit.
Liquidity ratios are an important metric that helps to assess a company’s ability to honor its debt obligations as well as its margin of safety (Robinson et al., 2015). The current ratio and quick ratio will be calculated to better understand the company’s liquidity.
The current ratio is a “liquidity ratio that measures a company’s ability to pay short-term and long-term obligations” (Investopedia, n.d., para. 12). In 2016, the company’s current ratio was equal to that of the previous year—0.59. The ratio is under 1, which means that Nestle Pakistan Ltd. was not capable of paying off its obligations.
The quick ratio is a reliable indicator of a company’s ability to meet its short-term obligations (Robinson et al., 2015). In 2015, the company’s quick ratio was 1.3, whereas, in 2016, it was only 0.7, which means that its liquidity position substantially diminished over a period of one year. This is a negative trend for Nestle Pakistan Ltd. because it means that the company will not be able to meet its short-term obligations if the need arises.
Market ratios relation of a are valuable metrics for measuring a company’s financial health. Price to earnings and dividend yield will be assessed to understand whether Nestle Pakistan Ltd.’s current share price is undervalued or overvalued.
The price to Earnings or P/E ratio is a metric for assessing how one share of stock stacks up to the earnings of a company (Robinson et al., 2015). The company’s P/E ratio in 2016 was 34.27, which represented 26 percent growth from the previous year (Investing, 2017). The increasing trend is positive for the company and means that investors expected higher earnings in 2016 than they did in the previous year.
The dividend yield is a metric that shows the relation of a company’s dividends to its share prices and helps an investor to compare the merits of different investment opportunities. In 2015 and 2016, dividend yields were 1.9 percent and 2.2 percent, respectively (Trading Economics, 2017). The increasing trend is positive for the company and suggests that investors were more willing to add the company’s stock to their portfolio in 2016 than they were in the previous year.
Earnings per share can be defined as “the portion of a company’s profit allocated to each outstanding share of common stock” (Investopedia, 2017, para. 1). Nestle Pakistan Ltd.’s earnings per share in 2015 and 2016 were ₹193.18 and ₹261.23, respectively (Nestle, 2016). The growth of earnings per share is a positive trend for the company because it means that the company’s profitability substantially increased over the one-year period.
Debt measures are metrics for assessing a company’s amount of leverage. Long debt to equity for 2016 was 101.48 percent, which represented 23.12 percent decrease from 2015 (Standard Capital, 2017). Long debt to assets also decreased from 21.24 percent in 2015 to 17.61 percent in 2016 (Standard Capital, 2017). These are positive trends for the company that indicates that the company becomes less leveraged.
The debt to asset ratio is a metric for assessing the relation of a company’s amount of debt to its assets (Robinson et al., 2015). In 2016 and 2015, total debt to assets ratios were 0.82 and 0.91, respectively. These are high numbers that mean that the company has a low degree of financial flexibility.
Summary and Conclusion
Nestle Pakistan Ltd. had an excellent fiscal year. The company improved its ability to generate profit by an impressive 35.2 percent. Gross profit margin, net profit margin, and ROA have increased over the one-year period, which means that the company has started using its resources more efficiently. However, the company’s liquidity ratio is a weak aspect of its operations. Also, Nestle Pakistan Ltd. has a high degree of leverage. It can be concluded that despite the minor shortcomings, the future financial health of the company is going to improve.
References
Investing. (2017). Nestle Pakistan Ltd (MLKP). Web.
Investopedia. (2017). Earnings per share—EPS. Web.
Investopedia. (n.d.). Liquidity ratios. Web.
Loth, R. (n.d.). Profitability indicator ratios: Profit margin analysis. Web.
Nestle. (2016). Financial report 2016: Excellence through growth. Web.
Nestle. (n.d.). Nestle Pakistan. Web.
Robinson, T., Henry, E., Pirie, W., & Broihahn, M. (2015). International financial statement analysis. New York, NY: John Wiley & Sons.
Standard Capital. (2017). Company snapshot-overview.Web.
Trading Economics. (2017). Nestle Pakistan: Dividend yield. Web.