You are on page 1of 4

Ratio analyses:

A tool used by individuals to conduct a quantitative analysis of information in a company's financial


statements. Ratios are calculated from current year numbers and are then compared to previous years,
other companies, the industry, or even the economy to judge the performance of the company. Ratio
analysis is predominately used by proponents of fundamental analysis.

Liquidity ratios:

Current ratio= Current Assets/ Current Liabilities

Interpretation:

In 2009 the current ratio has increasing trend, and the nestle has the ability to pay 0.85 against 1 rupees
and in 2010 the company have same current ratio. In 2011 the current ratio decrease due to increase in
current liabilities as compare to current assets and the company have the ability to pay 0.80 against 1
rupees liability. But in 2012 the current ratio increase due to increase in the current assets as compare
to current liabilities.

Quick ratio:

Quick ratio = Current Assets –Inventory / Current Liabilities

Interpretation:

The quick ratio is decrease in 2009 because nestle increase in current liabilities as compare to the
current assets , and the company have the ability to pay current assets without relying on inventory . In
2010 the current ratio increase due to increase in current assets and in 2011 company have same
quick ratio. In 2012 Nestle increase the quick ratio and Nestle have the ability to pay current liability
without relying on inventory.

Net working capital:

Net working capital is also another measure of the liquidity of the company. Net working capital is the
difference between the current assets and current liabilities. It is just like the current ratio indicating
either the company has enough current assets to pay its current liabilities. If the current assets are more
than the current liabilities then company has strong liquidity position indicating it has the ability to
discharge it current liabilities. Net working capital is also going increase every year which means APL
have enough cash after payment of current liabilities. So the liquidity position is strong.

Cash ratio based on current liabilities

Cash and cash equivalents are current assets excluding inventory, prepayments and trade debts. The
above ratio shows variation due to inflow or outflow of cash in business. In 2010 the ratio is very high
but in 2012 ratio is very low as compared to other years which means in 2010 APL has more cash and
cash equivalents but in 2012 APL have low cash and cash equivalents to pay current liabilities.

Activity Analysis
Inventory Turnover

Inventory Turnover Ratio = Sales/Inventory

Interpretation:

In 2008 the inventory turnover ratio reduce due to increase in inventory and inventory
converted in to sale less as compare to 2008.In 2009 inventory turnover ratio increase means inventory
is more converted into sale as compare to 2008.But in 2010 inventory turnover is also increase. In 2011
reduce due to decrease in cost of goods sold. But also increase in 2012 as compare to 2011.

Days Sales Outstanding (DIO)

Days sales outstanding = Receivables/Average Sale per day

Interpretation:

In 2009 Nestle company Days outstanding ratio is low as compare to 2008 and company can
recover the sale receivables more quickly and in 2010 the ratio is more low as compare to 2009.In 2011
the ratio increase which show that the company sales receivable not converted into cash quickly as
compare to 2010, and this ratio also increase in 2012 .

Fixed Asset Turnover

Fixed Assets Turnover= Sales/Net Fixed Assets

Interpretation:

In 2009 the fixed assets turnover ratio is high as compare to 2008 means the company use more
fixed assets as compare to 2008 and also in to 2010.But in 2011 the ratio is reduce which show that the
company use less fixed assets to generate sales and in 2012 the ratio is reduce which is good because
company use generate more sale by using less fixed assets.

Cash and cash equivalents are current assets excluding inventory, prepayments and trade debts. The
above ratio shows variation due to inflow or outflow of cash in business. In 2010 the ratio is very high
but in 2012 ratio is very low as compared to other years which means in 2010 APL has more cash and
cash equivalents but in 2012 they have low cash and cash equivalents to pay current liabilities.

Total Asset Turnover

Total Assets Turnover= Sales/Total Assets

Interpretation:

The ratio show how mach total assets use to generate the sale. In 2009 the Total assets
turnover ratio is high compare to 2008 which show that the company use more fixed to generate the
sale , the ratio of 2010 is increase as compare to 2009. In 2011 the ratio reduce which show that the
company generate more sale by using less total assets and in 2012 the ratio reduce more compare to
2011.

Solvency Ratios:

Total Debt to Total Assets

Total Debt to Total Assets= (Total Debt/Total Assets)*100

Interpretation:

In 2009 the Total debt to total assets ratio is high as compare to 2008 which show that the
76.18% company assets are generated from the total debt . In 2010 the ratio reduce which show that
the generate more assets from less total debt compare to 2009.But high in 2011 and produce 78.68 %
total assets from total debt . In 2012 the ratio decrease from 2011 which is good for the nestle
company.

7. Financial Ratios Analysis

12.1 Liquidity Analysis

 Current Ratio

Current ratio tells us the short term solvency of the firm and tells the ability of the firm to repay its short
term obligations. In nestle the firm has 0.80 ability to repay against the $ 1 loan and Engro has 1.83 so
this implies that Engro food has more ability to repay its short term obligations.

 Quick Ratio

Quick ratio measures the firm’s ability to pay off short term obligations without relying on the sale of
inventory. Nestle has the quick ratio of 0.38 whereas Engro foods has 0.95 chances of paying off its short
term obligations without relying on the level or sales of inventory.

1. Profitability Analysis

 Return on Investment
How much a firm is returning to its stockholder only in the case if the firm is earning profit? Nestle have
return on investment ratio 0.13 or 13% whereas Engro foods has 0.05 or 5% means nestle is returning
more than Engro foods so it is better to invest in nestle.

 Net Profit Margin Ratio

Net profit margin is calculated by dividing the net profit after taxes by the sales means after paying the
taxes you are earning some of the profit it means firm is doing its business well. Nestle is earning 0.01 or
1% against $ 1 and Engro food is earning 0.03 or 3% it shows in the profitability ratios Nestle is earning
more than Engro foods.

 Gross Profit Margin Ratio

It tells that how much a firm will receive against $ 1 sales. Nestle has 0.26 gross profit margin ratio and
Engro has 0.22. So in this case nestle is earning more profit than Engro foods.

12.3Activity Analysis

 Asset Turnover Ratio

This ratio measures the turnover of the entire firm’s asset. It is calculated by dividing the sales by total
assets of the firm. If firm shouldn’t increase its sales so there is a possibility that a firm will sale its some
assets. There is 1.84 chances of asset turnover in nestle and 1.79 in Engro foods against every $ 1.

 Inventory Turnover Ratio

Inventory turnover is calculated by dividing the CGS by inventory. The inventory turnover of nestle is
6.83 times and of Engro foods is 7.62 times. Here the best ratio is of Engro foods that is much more than
nestle.