Ratio Analysis

Introduction• Nestlé Pakistan Ltd is a subsidiary of

Nestlé S.A. – – a company of Swiss origin

headquartered in Vevey, Switzerland. • Operating in Pakistan since 1988• Food processing company• Headquarter is in Lahore• Operates the biggest milk collection

operation in Pakistan.

History• 1979

– MILKPAK Ltd. was founded by Syed Babar Ali• 1988

– Nestlé SA acquired 40 percent shares in MILKPAK Ltd.• 1992

– Nestlé took over the running of the company• 1996

– MILKPAK Ltd. was renamed Nestlé MILKPAK Ltd.• 2005

– Nestlé MILKPAK Ltd was renamed Nestlé Pakistan Ltd.

Nestle Pakistan• It operates four production

factories. • In Sheikhupura and Kabirwala

– multi product factories• And in Islamabad and Karachi

– produce water.

Products of Nestle Pakistan

•

Ratios Analysis

Ratios analysis is important for :• Analyzing Financial Statements• Judging Efficiency• Locating Weakness• Formulating Plans• Comparing Performance

Liquidity Ratios• Tell about short term debt paying

capacities• Three types

– Current Ratio– Quick Ratio– Absolute liquid Ratio

Current Ratio(working capital Ratio )

Current assets

Current liabilities

Current Ratios

•primary measure liquidity•Relates current assets to current liabilities•2:1 or higher is satisfactory

Current Ratio

2012

=Current assets / Current liabilities

=16905484/20003414

=0.84: 1

2011

=Current assets / Current liabilities

=13395017/16788455

=0.79:1

Quick Ratio(Liquid Ratio)

Liquid assets

Current liabilities

Quick Ratios

=Current Assets - inventory - prepaid

•more reliable test of short-term solvency• 1:1 is satisfactory•measures the ability to use liquid assets to pay current liabilities

•inventories may take long period of time to be converted into cash

•prepaid expenses cannot be used to pay current liabilities.

Quick Ratio

2012

=Liquid assets/ current liabilities

=8784023/20003413

=0.44:1

2011

=Liquid assets/ current liabilities

=6232720/16788455

=0.37:1

Absolute Liquid Ratio

Absolute liquid assets

Current liabilities

Absolute liquid Ratio

Absolute liquid assets =Which are in the hands of the business at the point

Cash + Bank+ Marketable securities

•0.5:1 is satisfactory•Elimination of account receivables , doubt about quick collection

Absolute Liquid Ratio

2012

=absolute liquid assets/current liabilities

=760831/20003413

=0.03:1

2011

=absolute liquid assets/current liabilities

=702025/16788455

=0.04:1

Activity Ratio “Measures the Efficiency of the Business”

• Inventory Turnover Ratio• Debtor Turnover Ratio• Creditors Turnover Ratio• Working Capital Turnover Ratio

Inventory Turnover Ratio

Cost of Goods sold

Cost of Average Stock

480990465833095

8.2 times

575642657544912

7.6 times

2011 2012

Inventory Conversion Period

Days In YearInventory Turnover

Ratio

2011

3608.2

44 Days

2012

3607.6

47 Days

Debtors Turnover Ratio

Net Credit Sales

2011648243644042634

16 times

Average Receivable

2012790876966208184

12.8 times

Debtors Conversion Period

Days In Year

Average Receivable Turnover

Ratio

2011

36016

23 Days

2012

36012.8

28 Days

Creditors Turnover Ratio

Net Credit Purchases Average payable

2011

514621357343507

7 times

2012

623618359743576

6.4 times

Creditors Conversion Period

Days In YearCreditors

Turnover Ratio

2012

3606.4

56 Days

2011

3607

51 Days

Working Capital Turnover Ratio

Cost of Goods Sold

2011

48099046-3393438

-14.17 times

Average Working Capital

2012

57564265-3097929

-18.58 times

Solvency Ratios• Solvency ratios tells……..

• Some major solvency ratios are:-

• 1) Debt Equity Ratio• 2) Interest Coverage Ratio• 3) Proprietary Ratio• 4) Fixed Asset Ratio

1) Debt Equity Ratio:-• It is a relation between two

variables, debt and equity.

• If this ratio is decreasing…….

• And if it is increasing……..

Debt equity Ratio:-• Description………

• Dimension 1:-

Long term debt Equity Debt equity

ratio= share capital +

reserves + net profit

Debt Equity Ratio:-

• Dimension 2:-

Total Debts

Equity

Debt Equity Ratio

=Short term debts + long term debts

Debt Equity Ratio:-• Dimension 3 :-

Long Term Debts

Long Term funds

Debt equity ratio

Equity +Long term

liabilities=

Debt Equity Ratio Dimension:

2011: 2012:

1:- 10778988/(453496+280000+4524771)= 2.04

19309040/(453496+280000+5761831)= 2.97

2:- (16788455+10778988)/(453496+280000+4524771)= 5.24

(20003414+19309040)/(453496+280000+5761831)= 6.04

3:- 10778988/(10778988+453496+280000+4524771)= .67

19309040/(19309040+453496+280000+5761831)= .74

2) Fixed Asset Ratio:-• It means …………..

• Higher the ratio……...

• If it is decreasing ……..

Fixed Asset Ratio:-

Fixed assets

Long Term Funds

Fixed asset Ratio

Equity +Long term liabilities=

Fixed Asset Ratio:-

• As described below in comparison ………

2011 2012

21784842/(10778988+280000+453496+4524771)= 1.35

33967233/(19309040+453496+280000+5761831)= 1.31

3) Proprietary Ratio:-• This ratio tells us about……………

• If this ratio is increasing then it is better condition ,

• If this ratio is decreasing then it is

not better condition

Proprietary Ratio:-

equity

Total fundsProprietary

Ratio

Current assets +

fixed assets=

Proprietary Ratio:-• Comparison over 2 years:-

2011: 2012:

(6158267/35179859)*100= 14.94%

(6495327/50872717)*100= 12.76%

4) Interest coverage ratio:-• This ratio tells us about the

efficiency……

• If it is increasing then it is good for business ,

• If it is decreasing then it is not good for business

Interest coverage ratio:--

EBIT interestInterest

coverage ratio

Interest coverage ratio:-• Comparison over 2 years:-

2011: 2012:

6502864/196345= 33.1

7977974/128334= 62.1

PROFITABILITY RATIOS

• 1 Gross Profit Ratio• 2 Net Profit Ratio• 3 Operating Ratio• 4 Operating Profit Ratio• 5 Expense Ratio

GROSS PROFIT RATIO

“Ratio of gross profit to Net sales”

Formula=(Gross Profit / Net sales) *100

Net sales= Sales –Returns

Inward

Gross Profit Ratio

2011

16725318/64824364 =26%

2012 21523431/79087696

=27.2%

(G.P/ Net Sales )*100

Net Profit Ratio

“Express relationship b/w N.P after TAX and Net Sales”

Formula:(Net Profit After Tax/ Net Sales) *100

Indicates what

portion of net sales is

left for owner

Net Profit Ratio

2012 5761831/79087696

=7.28%

(N.P/ Net

Sales)*100

20114524771/64824364=

6.98%

Operating Ratio“Determined by comparing C.G.S & other Operating expenses with Net Sales”

Formula=[(C.G.S+ Operating exp)

/ Net Sales]*100

Indicates efficiency of

the Management

in their business

operation

Operating Ratio

2011 (48099046+1064233)/64824364

=76%

2012 (57564265+1320319)/79087696

=74.45 %

[(C.G.S+ Operating

exp)/ Net

Sales]*100

Operating Profit Ratio

“Calculated by dividing the Operating Net Profit by Sales”

Formula:(Operating Profit/Net sales)*100

Determined the Ability Of

the Management

in Running the Business

Operating Profit Ratio

2011 8457907/64824364

=13%

2012 10966120/79087696

=14%

(Operating

Profit/Net

Sales)*100

Expenses ratio

=(expenses/net sales)*

100

=(10381999/64824364)*100 =16%

=(13705599/79087696)*100

=17%

2011

2012

EARNING PER SHARE

Definition:“This ratio tells us about earning on “1” share”.

No of share outstanding

=share capital/

face value per share

=453496000/10=45349600

=453496000/10=45349600

2011

2012

EARNING PER SHARE

= 4668357000/45349600=102.94

=5864511000/45349600=129.32

2011

2012

=Profit after tax\

no. of share

outstanding

Definition of 'Price-Earnings Ratio - P/E Ratio'

A valuation ratio of a company's current share price compared to its per-share earnings.

PRICE EARNING RATIO

=Market price per

share\ earning

per share

=3597/102.94=35times

=4733/129.32=36times

2011

2012

Definition Return of capital employed

• A ratio that indicates the efficiency and profitability of a company's capital investments.

A ratio that indicates the efficiency and profitability of

a company's capital investments.

Definition of capital employed

1. The total amount of capital used for the acquisition of profits.

2. The value of all the assets employed in a business.

3. Fixed assets plus working capital.

4. Total assets less current liabilities

Capital employed

=current asset-current

liability + fixed asset-

non operating expenses

=13395017-16788455+21784842-1827969

=16563708

=16905484-20003413+21784842-1050355

=29818949

2011

2012

RETURN ON CAPITAL EMPLOYED

=(EBIT\ Capital

employed)*100

=6502864/18391404=35%

2011

2012 =7977974/30869304=26%

Return On Shareholder Equity

“Desired to work out the profitability of the company”

Formula: (Profit After Tax/Share Holder’s Fund)*100

Return On Shareholder Equity2011

4668357/733496*100 = 6.36%

2012 5864511/733496*100

=8%

(Profit After

Tax/Share

Holder’s

Fund)*100