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Below are presented consolidated financial statements for Nestlé, a Swiss transnational company and the world ´s food and beverage leader. The company ´s headquarter is set in Vevey, Vaud, Switzerland. Nestlé prepares its financial statements under IFRS.
Identify (calculate) and critically analyse key relevant financial ratios using data provided in the statements for the two-year period. Try to include at least one ratio from each category of financial analysis: liquidity, activity, profitability, coverage. Make sure to provide formulas for calculations. In this ratio analysis, discuss also their importance and barriers.
Based on different online/printed sources, financial statements, reports etc. perform a company/business and industry analyses of the Nestlé company. Please, apply SWOT Analysis and Porter ´s Five Forces Analysis in your discussions.
Senior managers of a German company specializing on atypic glass windows and doors are currently considering company ´s expansion. Its main trading partners are France, Switzerland and other neighbouring countries and trading currency Euro. The company would like to expand to some non- European countries as well (such as USA but also Asian countries). This wouldrequire a large investment that company cannot finance from its own sources. Short term funds, of up to six months, are available from a German bank at a cost of 5% per annum.The company also needs to take into account different cultural specifics of local demand in selected countries in order to consider the change in product offer which would require (among other things) to double the number of employees (especially blue-collar workers, but also product and project managers, engineers, sales specialist etc.).
Explain how (using what technics) the company could identify its main risks and critically evaluate at least three of the various types of business risk the company is facing.
With reference to the risks identified in the previous question, critically evaluate some of the various methods the company has available to it in order to moderate the risks.
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Financial ratio analysis
1. Cash Ratio
This is a tool used by the company to measure its liquidity, especially total cash equivalent to current obligations (i.e. ability of the company to pay back its immediateobligation with the cash resources or quickly cash converted assets available like marketable securities. It is agauge of the company’s value to know if it is doing worse financial wise.
Liquidity cash ratio is given as:
Cash Ratio = Cash and cash Equivalent / Current liabilities
7,938 / 36,054 = 0.22 4,500 / 43,030 = 0.11
The Nestle Company will be in a position to pay back itsimmediateobligations, but it is not attractive to creditors of the company and other interested parties since the ratio dropped down by 11%.
2. Total asset Turnover
This ratio helps the company in measuring the value of its revenues or sales in relation to the value of its assets. It’s is an efficiency indicator of the company in using its assets to generating its revenue.
As per Finstanon.com, calculation of activity ratio will be given as net sales divided by average total assets:
Total Assets Turnover = Net Sales / Average Total Assets
89,791 / 130,380 = 0.69 or 69% 91,439 / 133,698 = 0.68 or 68%
The company had 69% of total asset turnover in the year 2017 which was a fair percentage which shows that assets were properly utilized in bringing in sales. Unlike 2018 where the percentage went down by 1% which triggers the company revenues.
3. Gross Profit Ratio:
This is a ratio measured to get the relationship between gross profit and the net sales.
It is calculated as: (Gross Profit/Net Sales) x 100
(13233/89791) x 100 = 14.7% (13789/91439) x 100 = 15%
The Nestle Company is generating profits whereby it generated more in the year 2018 which gives an indication that it is more financially stable as compared to previous year 2017.
4. Equity Ratio:
It measures the association between shareholders and the total assets of the company.
Under Myaccountingcourse.com the article explains the meaning of coverage ratio which is calculated as shareholders’ funds divided by total assets.
Therefore, Equity Ratio = Shareholders’ Funds / Total Assets
61,504 / 130,380 = 0.47 57,363 / 137,015 = 0.42
That means, the Nestle Company is making enough money to pay interest and taxes it has. When ratio is greater, the flexible the company it becomes to pay off its taxes and interests.
Importance and barriers of each ratio
Cash Ratio: The importance of this ratio is that, it usually measures company’s liquidity. For example if it is forced to clear all current liabilities by way of repayment with immediate effect, the ratio will show the ability of the company to do so without selling and/or liquidate any assets. However, it has a barrier to the company because, it is not accurate for the company to keepextreme level of cash to cover current liabilities. It can be understood to be a poor utilization of assets for a company to hold large amounts of cash since the money will be refunded to shareholders or any other investments to createmore income.
Gross Profit Ratio:The ratio is a measure showing the firm to what extent selling price per unit of goods may decrease minus subjecting the firm into serious losses. Hence, the ratio reflects the firm in producing its products.Therefore, when the GP ratio is higher the better results. However, the barrier which must be kept in mind is that profits performance must be seen in relation to capital investment and not only the sales.
Asset Turnover Ratio: Since this ratio is calculated every end of the year, tends to measure performance of assets to sales. If the ratio is higher the better performance of the company which implies that it is generating more from the assets and tends to be higher in sectors that are similar or same. However, the barrier to this ratio is that since the ratio differs from one sector to another, comparison becomes very unproductive unless they fall in the same sector.
Equity Ratio:the ratio represents the relationship that exist between owners’ funds and the total assets. Higher rates indicates the better long-term solvency of the company.
The SWOT Analysis
Nestle SWOT Analysis can be summarized as follows as per article in Marketing91.com
- Strengths: Its well-known globally which may be seen in eachfamily; open to all market places, numerousproducts in a multiple nature since it has over 8,000 makes; huge human resources; continuouslyimproving and upto date market, investigation and expansion centers; robustmake by 2016 and ranked highest.
- Weaknesses: Risky activities that are in one of its brands.
- Opportunities: Engaging in robustnutrition and makes since many individualshave turnedtowellbeingnutrition; Have robust ability to enter other markets particularly in medium sized towns; Commitment as well as partnerships with other makes in the market for example Coca-Cola; Increased emphasis and taking time to study and expand.
- Threats: The most obvious risk to everyfirm is usually rivalry and remaining up to date with advancement; Price increase is another threat as well as increased price of material and commodities in the market; consumers who are not Nestle brand dependent difficult time get convinced to get attracted to Nestle products.
Porter’s Five Force Model
MIA put a presentation on Porter’s Five Forces model as it was applicable to Nestle Company as per Slidesshare.net.
1. Threats of New Market Entrants:Nestle company has been around in this market fora long period of time, it’s not easy for a new competitor to enter and compete since most of them depends Nestle in order to survive.
2. Supplier’s Bargaining Power: The strength of Nestle rest onlong lasting relationship through suppliers. Nestles strengths does allow stable relationship with suppliers.
3. Buyers Bargaining Power: Even if Nestle is considered to be dominating the market, consumers still modifies their needs upon modifyingtheir objectives. Many individualshave turned tonutritiousfoodstuffs where Nestle is among the first firms to think through their makes. This makes Nestle to be steady and robust with purchasers and customers.
4. Threat of Substitute Products: Since market rivalry is very high, trend changes with customer needs as same as buyer bargaining power. Research and development centers responsible in ensuring that sustainable and top market is reached.
5. Intensity of Rivalry among competitors: As Nestle being a dominant company in the market, these rivalry competitors need very huge market investment in order to turn down Nestle. Also, customerstrustthe company and they can’t easily convince them to change.
From the above analysis for both SWOT analysis and Porter’s five forces model, we have found that the company issteady in its market. Also, from study we have found that it is constantly on top of the market and update wherever new entrants and existing competitors suffers from overriding its market, more especially when they are Nestle dependent.
The collected works supports this studies using the SWOT and Porter’s Five Forces model and attempts to specify differences in analysis depend on the size (Barboza and Rojo, 2015). They use SWOT to analysesthe company position in the market. This was also witnessed by Zhu et al (2014), analyzing industry bymixing of SWOT analysis with Porter’s Diamond Model on the competitiveness of the company. Other studies on the other hand have shown that the SWOT factors applicable to the company market to show how it competes in the global market and meets its needs (Arslan and Turan, 2009). Therefore, it will be well thought-outthat theoretical and hands-on by taking into account the components of which analysis shall be independent from each other.
Business risk has nowadays become an integral and unavoidable part of the human commercial activity which has led business risk management to become a serious activity that the management of any business type need to take into consideration since what it takes to be stable today, tomorrow may change or be different. In the past years, many researchers have paid special attention to this field (Jordan, 2013, Woolfson 2007, and Molak, 1997). They argue that managing business risk is part and partially of the daily activities of every company in today’s business world. However, both top management and staff not sufficiently comprehend modern techniques of risk assessment. The main reasons for this occurrence is luck of information since risk management is a new area of movement especially those companies entering to new markets. Chances of losses are unknown to such business that are operating on uncertain environment (Molak, 1997). So, risk has to be forecasted a head of occurrences through identifying, assessing, evaluating, controlling and monitoring as well. It has to be well thought-outfor both trade and inspectionthreats. In corporatethreat, severalforms involved such as country risks, strategic risks, political risks, financial risks, compliance risks, supply chain risks, and operational risks among others (Blackman (2014). However, the company is faced with the following three major risks.
1. Country Risks
Although this is an overall risk in the countries the company is targeting where an unexpected state of affairs would prevent the company from gaining the market or accomplishing the deliverables ofthe business (Mun, 2006).The worst thing might happen include loss of assets or company staff members being stranded in that country especially in an ongoing political instability.
Various sub categories of country risks
a) Political risk: Changes occurring in policies or change government regimes may negatively impact how the company will do business in that country.
b) Economic risk: Selling and getting paid for the services or product them sale in a global market.
c) Social risk: This is a socio-economic factor which impacts the company’s business like culture and corruption.
d) Legal risk: Services that are governed by policy and law of specific country the company is entering to carry out its business(Molak, 1997). It is important that the company to understand the laws that regulate the industry they are venturing in, potential legislative changes and how that will affect their future business.
e) Environmental risk: Most companies have to care for the nature of the environment especially where the company want to enter new market may bedisposed tounusualhappenings such as volcanic activity, overflowing,environment changewhich willmess upwith supply chain of the company.
Therefore in risks management the company depends on strategy/vision whichdrives thebusiness to the future success(Mun, 2006). However, we all recognize that business environment dovary every dayand the companyneedto believeon the unforeseen to circumventharm and possiblybusiness letdown. The company has to be keen and predictthe whole thingwhich is well thought-out and be aware it might return in the future using the mentioned tools (Blackman (2014).
2. Political risks:
For the company to venture its business in a global market, changes in politics of these global markets affects their profits and their business as well (Blackman (2014). These risks can be either country specific or geo-political risks(Mun, 2006). They will greatly affect the company because they will be operating in a specific market. However, the main risks that the company will face politically include:
a) Legal and regulatory changes: Where the company will find itself in a situation where the government of the country they have entered mayalter the laws of commitmentto their ownpleasure which eventually affect the operations of the company at large.
b) Import and export restrictions: The country the company will engage in may impose controls over their import/export for the benefit of their domestic economy hence impacts the company’s business negatively. For example, countries like USA has import controls on textile and agricultural produce as well.
c) Currency transfers: The country where the company will operate, the government of the day may enactconstraints of exchangetransmissions majorly well-known as conversion threats. Due to currency fluctuations inhibits customers from paying or money may end up being frozen in these countries for unidentified time period (Blackman (2014).
d) Government breaching the agreement: There are many risks posed when dealing with international government such as where the government is corrupt may refuse to pay, illegal agreement termination, government being overthrown, and unilateral price or quality change of agreement.
e) Asset expropriation: In given situations, government can seize the company’s assets which will affects company’s operations and lack of ability to recover their assets out of the country.
f) Political violence: There are nations which are in publicfighting such as revolution, war, and even terrorism may halt operations will affect their staff and assets as well.
Therefore, in political obedience risk, leadership and management in those countries in terms of laws and some other dramatic point it changes the way business operates (Mun, 2006). It requires predicting and consideringpotential threats which may arise and get ready to deal with it then remain obedient.
3. Financial risk:
The company wants to expend its market operations internationally in an effort to create new income(Mun, 2006). However, global markets will expose the company into new financial risks like currency variations, long payment terms and international financial instruments as well as systems that the company is unfamiliar with. Some of the common types of risks which are financial that the company will suffer from include:
a) Contracts/agreements risks: The Company will have to ensure that they have instituted a strong agreement since it is very crucial to global business success. However, if things goes wrong with the delivery or payment failure, a solid agreement will be a lifesaver for the company (Molak, 1997). They will be risking to making agreements which sometimes will be turned down and course the company financial stress.
b) Getting paid risks: Payment depends how well the company knows the international customers they will be dealing with and their financial stability, their payment history, their payment terms to enable the company to meet their financial obligations especially where the company is dealing with credit customers or credit terms (Keegan, 2004). It will be very tricky for the company to launch an investigation for their customers to know their faith and credit worthiness.
c) Foreign exchange risk: This being a major risk to companies which are planning to international business, volatility occurs in exchange rates which translates the difference between profits and loss(Mun, 2006). This will make the company face a very big challenge as far as foreign exchange is concern.
d) Bonding/Guarantees risks: Many customers who operate in an international market do not do business with the company unless it posts a performance bond from the bank which they need to accomplish or achieve the contract commitments (Keegan, 2004). This kind of bonds generally takes the system of standby letter of credit from the bank in which sometimes required to make a security of 100% of each transaction or business they do especially on supply chain process.
In other words, financial risks or sometimes considered as operational risks, where they happens every day, anything may happenwhich may alter or endthe operations and endanger the company financially (Blackman (2014). If there is no operation, there is no business and hence there is no revenue which is a financial dependence of the company. Suchoperating issues might be something from technical problems to system break-downs within the business(Mun, 2006). For example, most companiesdo update their customers with important information to circumvent the risk occurrence.
Various Methods of Moderation
The company has many chances of employing various methods to mitigate this risks. The company can opt to use the following methods:
1. Statistical methods: The Company need to participate towardssympathetic and follow-up steps of emergency threat. This helps the company in coming up with reference points to alert departments concerned for decision making earlier enough to avoid any interferences that may arise as a result of the risk(Molak, 1997). Every company need to identify its allowable or tolerance risks (depending on their nature of operations) and the degree to which this kind of risk becomes a threat to the company. Most common methods used, probability, regression, correlation and standard deviation among others. The company need to depend onstandard deviation from average historical (past) results as a degree of financial threat (Khan, 2003; Guikema, 2008). The method evaluates the cost of threat now and in future periods to come depending on historical events and their degree of occurrences.
2. Analytical methods: Where the company need not to rely on predictions on what might happen or occur in the future but, need to focus on what the company will gain or lose in a particularcondition (Keegan, 2004). For example, using this method will help the company to forecaston increase or decrease of sales or amount of money given on particular circumstances.
3. Scenario Method: Where the company need to use an assumption (or a guess) about behaviors of the market through a sequences of "what if questions" and as a result, it will display each guess on what is likely to be won or lost depending on the scenario chosen by the company (Schwalbe, 2005). So, the depth of the scenario will be known in light of the expected size of investment and return.
4. Personal scales method: The Company will need to rely on sensitization, expertise and experimentation only when the questions of risk estimation flops. This methods can be used in conjunction with measureable metrics to come up with a combined structure of determining such risks (Keegan, 2004).
5. Encountering risks: This is a risk-control technique which enables the company to come up with priorities needed to put emphasis on, based on serious life-threatening threats, those that are less embarrassment or not pose a clear threat to the company directly (Schwalbe, 2005, p. 158). The company will use this method as a tool to understand and participate to its supports in the categorizing of threats in light to the significance of each threat and evaluate accordingly.
Dealing with Risks:
The company need to make sure that it uses all the managerial and procedural approaches to moderate or avoid some likely adverse effects. Approaches can differ in terms of value and amount depending on what the company does as well as the sector in which the company is operating in (R. Williams et al., 2006; Culp, 2004). The company can deal with risks in three different ways:
1. Risk Termination - that is by avoiding activities that related to risk which will effect negatively and reduce likelihood of happening.
2. Risk transfer - where a company need to evade risk by means ofpushing it to other party to achieve related action.
3. Risk Toleration - Knowing the boundaries of the recognized risk the company can withstandwith by scrutinizingpast records and company policies.
4. Risk Treat - Either by reducing, avoiding or introducing some measures and techniques to deal with threats as they occur.
In conclusion, lack of knowledge in methods of measuring and evaluating threats are normally related to lack of ability or capacity to prioritize threats and applications of ambiguous key performance indicators (KPI). Risks need to be evaluated and measured depending on personal criteria, either lack of historical data or lack of knowledge in using measureableways and means(Culp, 2004). Also, the company may lack procedural idea which definesway of managing the threat before and after the event. The application of key performance indicators (KPI) helps to prepare the company any possible upcoming risks. It separates the budget to help avoiding and managing the threat and need not worry of any unpredicted variationsthat may happen(Keegan, 2004). In situations where there backup systems, their transactions are usually functional.
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