Finance assignment depicting the ratio analysis of Nestle and Unilever and comparing which one is better than the other.

Question

Task: Can you analyze the consolidated financial statements of Nestle and Unileverusing different ratios in your finance assignment?

Answer

Backgroundof the present finance assignment
A finance assignmenthas been prepared for 2 of the public companies in the same industry. The companies selected for analysis are Nestle and Unilever both of which belongs to the FMCG industry. The performance and financial position of the companies have been analysed and compared for the period of 2018 – 2020 in this finance assignment. The finance assignmenthas been divided into 4 parts namely ratio analysis, Du Pont analysis, working capital analysis and lastly the financing of the business.

Discussion and Analysis
Ratio Analysis
The results of ratio analysis along with formulas for the period of 2018-2020 has been shown below in this finance assignment:

Unilever > Ratios Analysis

2 Profitability ratios in the finance assignment: The return on equity shows the profit earned on the capital investment in the company and the same has dropped for Unilever from 80.78% in 2018 to 38.51% in 2020. One of the major reasons has been one-time profits on account of disposal of spreads business in 2018 amounting to €4,331 million. On the other hand, the equity holding has also increased over the years thereby decreasing the overall returns. On similar lines, the net profit margin has also decreased from 19.20% in 2018 to 11.97% in 2020(Annual Report, 2020). For Nestle, the returns on equity has risen sharply from 17.92% in 2018 to 24.90% in 2020 due to increase in net profits and decrease in equity capital driven by the movement of treasury shares across the years. The net profit margin as per the finance assignmenthas also increased from 11.45% in 2018 to 14.67% in 2020, mainly driven by increase in other operating income and decrease in other operating expenses. One of the important factors to be noted in the finance assignmentis that for Unilever, the sales has almost been consistent for 3 years with small degrowth in 2020 due to COVID impact however the decline was substantial in case of Nestle in 2020.

1 Efficiency ratios: The efficiency ratios shows how effectively the assets are being used to generate revenue/business. In case trade receivables turnover ratio is analysed in this finance assignment, the same increased from 7.87 times in 2018 to 10.27 times in 2020 thereby showing efficiency in collection which will help in improving working capital cycle. On the other hand, for Nestle, the receivables turnover ratio has decreased from 8.19 times in 2018 to 7.85 times to 2020 due to sharp decrease in sales in 2020 without corresponding decrease in receivables balance(Annual Report, 2020).

2 Liquidity ratios: These ratios shows the ability of the company to pay off the short term liabilities on time with the help of the current and liquid assets. The current ratio as well as the liquid ratio as per the finance assignmenthas improved marginally by 1 bps and 2 bps respectively for Unilever. One of the major highlights in current assets of Unilever is increase in cash and cash equivalents and decrease in receivables over years. However, the company needs to improve the current ratio as it is in the range of 0.7-0.8 times only as compared to the industry standard of 2 times(Goldmann, 2016). On the other hand, for Nestle, the current ratio has decreased from 0.95 times in 2018 to 0.86 times in 2020. Similarly the liquid ratio has also decreased sharply from 0.74 times in 2018 to 0.60 times in 2020 as per the finance assignment. One of the major reasons for deterioration of liquidity ratios for Nestle is decrease in assets held for sale and cash and cash equivalents whereas the current liabilities hasn’t decreased much.

1 Financial gearing ratios: This shows the proportion of debt and equity in the overall capital of the company. For Unilever, the debt equity ratio from 4.04 times in 2018 to 2.83 times in 2020 which is positive sign, mainly due to the increase in the equity balance in 2020 driven by gain from acquisition of Horlicks business(Annual Report, 2018). On the other hand, for Nestle, the debt equity ratio has risen from 1.35 times in 2018 to 1.67 times in 2020 mainly due to decrease in equity capital driven by movement of treasury shares(Kew & Stredwick, 2017).

Based on the overall assessment of 2 companies based on ratios mentioned in this finance assignment, it can be said that Nestle is better placed that Unilever is most of the aspects – liquidity, gearing, profitability, most of which have been on improving trend for Nestle. On the other hand, most of the ratios have been adversely affected for Unilever due to Covid impact but the same can be expected in years to come considering the strong fundamentals of the business, diversity in portfolio and coverage across the world.

Du Pont Analysis:
This analysis in the finance assignmentis known for a framework which bifurcates the return on equity into various components to understand the strengths and weaknesses of the company. In the 3 step model of Du Pont analysis, the below mentioned equation states that if company net profit margin, asset turnover and financial leverage are multiplied, we would be able to get return on equity of the company. Here in the finance assignmentit has been computed for the year 2020(Vieira, et al., 2017).

The components that influence the return on equity are as follows:
1. Net Profit Margin: This is higher for Nestle at 14.67% vs 11.97% for Unilever on account of lower operational expenses.
2. Asset turnover: Unilever has a better asset turnover of 0.77 times vs 0.67 times for Nestle as per the finance assignment. This shows that the efficiency in terms of asset utilization for generating sales is better for Unilever.
3. Financial Leverage Ratio: This shows the extent of leverage each company is using. This is calculated as ratio of average assets to average equity. This is again better for Unilever at 4.20 times whereas it is 2.54 times for Nestle. However, the disadvantage of over-leveraging is that the Unilever is at higher risk of repayment to debt holders.
Overall, most of the factors are in favour of Unilever here and hence the return on equity for Unilever is higher at 38.51% vs 24.90% for Nestle(Annual Report, 2018).

Working Capital Analysis
A. In terms of liquidity, Unilever has had quite stable current and liquid ratios at 0.78 times and 0.57 times respectively. This is lower vs the ideal ratio of 2 times and 1 times respectively. In addition to this, the cash flow ratio has improved from 0.36 times in 2018 to 0.44 times in 2020. This shows that the operating cash flows have improved in comparison to increase in current liabilities which is a positive sign. This is mainly attributable to the improvement in working capital, majorly collection from receivables(Alexander, 2016). For Nestle, on the contrary, even though the liquidity ratios are better than Unilever but the same has deteriorated over the years. The current ratio as mentioned in the finance assignmenthas declined from 0.95 times in 2018 to 0.86 times in 2020 and the liquid ratio has declined from 0.74 times in 2018 to 0.60 times in 2020. One of the major reasons for deterioration of liquidity ratios for Nestle as per the finance assignmentis decrease in assets held for sale and cash and cash equivalents whereas the current liabilities hasn’t decreased much. The cash flow ratio has remained constant at 0.36 times. Overall the liquidity ratio are better for Nestle vs Unilever but Nestle has a declining trend, which is a cause of worry.

B. The operating cash cycle for Unilever as well as Nestle has been computed below:

Financing a business
The sourcing of finance for both the companies as per the finance assignmenthas been shown below and further bifurcated into long term and short terms and internal and external funding to understand the choicing of sources of finance by the management of each companies(Heminway, 2017).

Sources of Finance

From the above table preset in the finance assignment, it can be seen that for Unilever, almost 26% sourcing is from internal capital and rest all is external capital and hence it is dependent a lot on the external debt capital and is leveraging a lot. On the other hand, Nestle is slightly less dependent on external sourcing which constitutes nearly 62.5% of overall capital requirement. The debt equity ratio is more favorable for Nestle vs Unilever(Choy, 2018).

On the other hand, in case bifurcation is seen from long term and short term perspective then both are companies are almost same. Both Nestle and Unilever as per the finance assignmenthas almost 30% of short term financing and rest 70% is from long terms sources.

In case the constituents of the changes in equity are analysed in this finance assignment, we can say most of the items are almost same like profit/loss for the year, comprehensive income for the year, dividend paid for the year, changes in non-controlling interests, reduction in share capital, Movements in treasury shares and other movements in equity/retained earnings.

However, there are some differing items as well which can be found in Statement on changes in equity – some of which are movement of treasury shares in case of Nestle, Issue of PLC ordinary shares as part of Unification in case of Unilever, Cancellation of NV ordinary shares as part of Unification in case of Unilever, Other effects of Unification in case of Unilever. One of the main reason for these line items as mentioned in the finance assignmentis one off items for Unification in case of Unilever, which is not there in case of Nestle(Visinescu, et al., 2017).

In terms of the share price movements for both the companies over the period of 3 years, it can be seen the prices has increased in 2019 vs 2018 due to growth in business and profits however the share prices of 2020 have taken a hit slightly on account of negative sentiments in markets due to arrival of COVID and bad results for both the companies(Linden & Freeman, 2017).

From the overall assessment conducted in this finance assignment it can be concluded that for both the companies, strong form efficiency is what can be seen to reflected in the share prices meaning securities and stock prices reveal the overall information in the market, be it public or private. The stock prices follow the efficient market hypothesis and is dependent on the demand and supply factors as per the findings of this finance assignment.

References
Alexander, F., 2016. The Changing Face of Accountability in the finance assignment. The Journal of Higher Education, 71(4), pp. 411-431.
Annual Report, N., 2018. Annual Report, Nestle. pp. 1-130.
Annual Report, N., 2020. Annual Report, Nestle. pp. 1-140.
Annual Report, U., 2018. Annual Report, Unilever. pp. 1-200.
Annual Report, U., 2020. Annual Report, Unilever. pp. 1-209.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous
Worldviewfinance assignment Analysis. Ecological Economics, 3(1), p. 145.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. 2nd ed. London: Chartered Institute of Personnel and Development.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems in finance assignment.SAGE Journals, 30(1), pp. 23-48.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.