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Financial Statement Analysis Nestle vs Cadbury

Th e report main ly an alyzes an d compares two compan ies fin an cial reports between 2005 an d 2008. Th e two compan ies ch osen are CADBURY PLC an d NESTLE SA. Both of th em are ren own ed in con sumer busin ess an d are tran sn ation al en terprises. Th e differen ces between th em are NESTLE SA is a Swiss compan y an d listed in several stock exch an g es, wh ile th e CADBURY PLC orig in s from Un ited Kin g dom an d is listed in th e Lon don Security Exch an g e (LSE). Referrin g to th eir core busin esses, Nestle SA g roups prin cipal activities are to man ufacture, process an d sell food products, in cludin g diary, con fection ery an d culin ary products, coffee, beverag e an d drin kin g water, Besides th is, th ey also sell an cillary equipmen t. Similarly Cadbury g roup's prin cipal activity is also to man ufacture, distribute an d sell con fection ery products. Its products con sist of th ree categ ories: ch ocolate, g um an d can dy. Th us in th e overlap fields, th e competition between th em exists all th e time. Th e purpose of th is report is to evaluate th eir fin an cial performan ce in past four year sin ce 2005. Th e structure of th e report will be as follows. Th e first part will list th e reformulate fin an cial statemen ts, in cludin g balan ce sh eets an d in come statemen ts of th e two compan ies from 2005 to 2008, respectively. Th e secon d part will calculate relative ratios based on th e reformulated statemen ts; th en on basis of th ese ratios, an alyze th eir probability an d g rowth ; fin ally compare th em on th e common size, an d research th eir tren d durin g th e research period as well. Th e last part will discuss th e result an d make a con clusion . Reformulate fin an cial statemen t In th e followin g part, th e two firms reformulate balan ce sh eet an d in come statemen t will be exh ibited. Note: taxes are calculated at 30% accordin g to th e UK tax Note: th e taxes in cludes with h oldin g taxes on in come from foreig n sources, as well as Swiss taxes for wh ich adequate provision s h ave been establish ed. An alysis of profitability Th e key in dicator for profitability is ROCEReturn on Common Equity. ROCE reflects th e averag e earn in g s of common sh areh olders equity. Un der th e premise of maximize sh areh olders in terests, its a compreh en sive in dicator to evaluate th e production an d operation of an en terprise. It can be clearly seen from th e ch art th at th e ROCE of Cadbury in creased almost 100% from 2005 to 2006 followed by a sh arp decrease in 2007, an d th en kept steady in 2008. Specific ratios about profitability are as followin g : As we can seen from th e table above, th e Fin an cial Leverag e of Cadbury was decreasin g from 2005 to 2008. Opposite tren d can be seen in Net Borrowin g Costs wh ich in creased from 0.0345 to 0.515. Th e sig n ifican t in crease in ROCE in 2006 is main ly because th e sudden ly in crease of RNOA in th at year.

sudden ly in crease of RNOA in th at year. Th e Asset turn over was fluctuated slig h tly aroun d 1 durin g 2005 to 2008. Th e PM saw an in credible in crease in 2006 but fall sh arply in 2007. So th e PM is th e main cause for th e ch an g e of ROCE in Cadbury.

FLEV
FLEV = NFO/CSE Th e fin an cial leverag e of Cadbury was decreasin g . As we can seen from th e ch art, th e NFO is decreasin g g en erally wh ile th e CSE is relatively steady.

Third-level Breakdown: PM:

Gen erally speakin g , both sales PM an d oth er items PM are is an in creasin g tren d. It can be clearly seen th at Sales PM is th e main source of PM. Th e cause of th e sig n ifican t in crease in ROCE, RNOA, PM in 2006 is because th e oth er items PM in creased to an un usual level.

Sellin g , Gen eral& admin expen ses were steady for Cadbury wh ile th e Gross Marg in con tin uously in creased from 2005 to2008.

ATO:
Th e ATO drivers are sh own in th e followin g table:

Nestle
It can be clearly seen from th e lin e ch art th at th e ROCE of Nestle keeps a g ood tren d of in creasin g , especially in 2008. Th e ROCE of Nestle in 2008 was 0.15 more th an th at in 2007. Troug h th e table above, we can see th at th e RNOA of Nestle was in creasin g from 2005 to 2008.Th e NBC was fluctuated aroun d 0.05. Th e FLEV of Nestle h ad a in creasin g tren d alth oug h a slig h t decrease can be seen in 2008. It can be clearly seen in th e bar ch art th at both sales PM an d oth er items PM are very steady from 2005 to 2006, sig n ifican t in crease can be seen in both th e two kin d of PM. Th e compon en ts for sales PM of Nestle from 2005 to 2008 h ad n ot been ch an g ed much . All of th em were steady.

Comparison
It can be clearly seen from th e ch art th at th e ROCE of Nestle was in creasin g in th e past 4 years wh ile ROCE of Cadbury dropped about 80% from 2006 to 2008. In 2005, ROCE of Cadbury is h ig h er th an th at of Nestle. But after a 4-year in creasin g , th e ROCE of Nestle h ad catch up an d even 0.25 h ig h er th an ROCE of Cadbury in 2008. In terms of RNOA, it

is similar to th e situation of ROCE, th us th e profitability of operation al assets of Nestle is better th an th at of Cadbury. In terms of NBC, th ey are almost th e same, th at mean s th e expen ses th ey used on fin an cial oblig ation were almost th e same an d very steady. In terms of FLEV, th e FLEV of Cadbury is much larg er th an th at of Nestle, wh ich mean s Cadbury faced with more risk. Th e OLLEV of Cadbury is larg er th an Nestle too. It illustrates th at Cadbury relies more on liabilities both in operation an d g en eral. Th e PM an d ATO of Nestle are both larg er th an th ose of Cadbury. Th e larg er th e ATO is, th e better th e firms ability on sales is. Th at mean s th e ability on sales of Nestle is better th an Cadbury. In a n utsh ell, th e profitability of Nestle is g en erally better th an Cadbury accordin g to th e past 4 years data. An alysis of Growth It is a sen sible way to view g rowth in terms of g rowth in residual earn in g as a g rowth firm is on es th at can g row residual earn in g s. Ch an g es in residual earn in g s are driven by return on common equity (ROCE), th e amoun t of common sh areh older in vestmen t (CSE), an d th e cost of capital. We focus on th e an alysis of ch an g es in ROCE an d CSE.

Analysis of Growth in ROCE

Return on common equity (ROCE) is driven by operation s an d by th e fin an cin g of th e operation s. So th e ch an g e in ROCE is explain ed in two parts:

1. Analysis of Changes in Operations

Th ere are two kin ds of compon en ts in explain in g ch an g es in profitability (RNOA). On e is g en erated by repetitive busin ess called core in come, wh ile th e oth er is referred to as un usual items (UI) or tran sitory items, wh ich applies to a particular period, an d so are n on recurrin g . It is importan t to distin g uish core an d un usual compon en ts of RNOA in th e an alysis.Th e g reat volatility of RNOA in 2007 an d 2006 is larg ely caused by th e ch an g es in un usual items wh ich are n ot lastin g . It is proven in 2008 wh en RNOA ch an g es little with few UIs. Un usual item, asset turn over an d profit marg in play an importan t role in th e ch an g e of RNOA in 2006, 2007 an d 2008 respectively. In g en eral, un usual items con tribute to th e g rowth of RNOA less in Nestle th an in Cadbury. It seems th at Nestle is more likely to g en erate profits from sales..

2. Analysis of Changes in Financing

Ch an g es in RNOA partially explain ch an g es in ROCE. Th e explan ation is completed by an examin ation of fin an cin g . It can be separated in to th ree parts: ch an g es in operatin g profitability, ch an g es in spread an d ch an g es in leverag e. For Cadbury, th e ch an g es in ROCE in past four year are larg ely due to th e rise or drop of core operation s or spreads, rath er th an ch an g es in leverag e. For Nestle, th e situation is

quite similar expect in 2007. Th e g rowth of ROCE th at year was almost totally due to th e fin an cial leverag e. On th e wh ole, it can be con cluded th at th e ch an g e in ROCE is driven by core operation to a larg e exten t rath er th an by ch an g es in leverag e in th ese two compan ies.

Analysis of Growth in Equity Investment

Th e ch an g e in CSE can be explain ed by th ree compon en ts: ch an g e in sales at previous level of asset turn over plus ch an g e in asset turn over wh ile min us ch an g e in fin an cial leverag e. Cadbury sh ows a declin e tren d in CSE as th eir sales drop sh arply in past four years. Neverth eless, Nestle exh ibits a relatively smooth rise tren d in both CSE an d sales. It can be derived th at sales g rowth is th e primary driver of th e ch an g e in CSE but sales g rowth requires more in vestmen t in n et operatin g assets, wh ich is fin an ced by eith er n et debt or equity. An d in vestmen ts earn th roug h ROCE an d th e factors th at drive ROCE. Tog eth er, in vestmen t an d ROCE drive residual earn in g s an d abn ormal earn in g s g rowth . It h as been recog n ized th at th ere is a ten sion to g rowin g CSE. Equity in vestmen t can easily be in creased by issuin g n ew sh ares or reducin g dividen ds. But th e n ew equity mig h t n ot be used wisely. It could be in vested in projects with low RNOA or fin an cial assets with low return , reducin g ROCE, residual earn in g s, an d value. Common size an alysis Common size an alysis on balan ce sh eet Compare th e operatin g section of common -size Balan ce sh eets of th e two compan ies between 2005 an d 2008 respectively, th e result will be sh own in exh ibit 5. Take th e comparison in 2007 as an example. From exh ibit, we can kn ow clearly th e composition of operatin g assets for th e two firms. For both of th e two firms, th e most importan t part in th e operatin g assets is Oth er Assets, th e reason mig h t be th e in tan g ible assets take a h ug e amoun t in th e two compan ies. In Cadbury, oth er assets occupied up to 62.08%, much more th an th at in Nestle SA, wh ich is on ly 40.56%. Th e secon d most importan t part is Oth er In vestmen ts, occupied 21.59% in th e Operatin g Assets for Nestle SA an d 17.84% for Cadbury. Followin g th is, it is Receivables Net, 15.09% for Nestle SA, compared with 10.64% for Cadbury. Besides th is, In vestmen t in Un con sol Subsidiaries for Nestle SA is 8.74% but for Cadbury, it is on ly 0.30%. In oth er th ree years, th e composition is almost th e same. Refer to th e composition of Operatin g Liabilities for th e two compan ies. For Nestle SA, th e most importan t two parts are Accoun t Payable an d Provision for Risk an d Ch arg es, wh ich accoun t for 51.50% an d 30.81%, respectively. By con trast, th e most importan t parts of Operatin g Liabilities for Cadbury are Oth er Curren t Liabilities an d Deferred Taxed, wh ich take up for 35.89% an d 30.69%. Th e situation did n ot ch an g e too much in oth er research years, except in 2008, Deferred Taxed for Cadbury decreased h ug ely, from 30.69% to -2.15%. Th e h ug e ch an g e mig h t be caused by th e reassessmen t of capital losses an d th e tax basis of g oodwill on th e classification of Australia Beverag es as an asset h eld for sale in Cadbury.

Common size analysis on income statement

Exh ibit 6 compares th e reformulated in come statemen ts of Cadbury an d Nestle on th e basis of common -size. Given th e Operatin g expen se, th e two compan ies h ave similar cost structure. With h ig h er cost of sales (47.58%), Cadbury ch arg e approximately 10% less in Gen eral expen se th an Nestle wh ile th e differen ce between th e depreciation costs of th e two compan ies are small. However, wh en th e Nestle cost 0.24% in Oth er operatin g

two compan ies are small. However, wh en th e Nestle cost 0.24% in Oth er operatin g expen se per dollar of sales, Cadbury h as n o Oth er operation costs. In comparison with 10.09% Operatin g profit marg in from sales in Cadbury, th is marg in in Nestle is just a litter h ig h er with 10.57%, th e extraordin arily small differen ce is due to a h ig h er g ross in come an d also a h ig h er g en eral expen se in Nestle. However, due to th e sig n ifican t extraordin ary ch arg e in Cadbury, its profit reduced to on ly 6.62% wh ile th e Operatin g in come in creased a bit to 11.22% attributable to th e earn in g s from equity in terest. Comparin g with th e earn in g of a n et 5.09% per dollar of sales in Cadbury, Nestle earn s approximately 10%. Th e profits are correspon din g ly decreased by 1.51% an d 0.64% owin g to fin an cin g activities. Tren d an alysis In th is part, we will an alysis h ow fin an cial items h ave ch an g ed over time for th e two firms. For both of th e cases, th e in dex is 100 for th e base year of 2004. For Cadbury, Accoun ts Receivable, In ven tories an d Property, plan t an d equipmen t h ave g rown steadily in th e first th ree years, but decreased in 2008, wh ich resulted h ug e decreasin g in Operatin g Assets in 2008. Addition ally, th e Operatin g Liabilities fluctuated volatile from 2005 to 2008, con tributed to th e similar ch an g e to Net Operatin g Assets. Cadburys 2008 Net operatin g Assets decrease rate was 30.00%, compared with th e 50.00% decrease in Net Fin an cial Oblig ation s in th e same year. In 2008, Common Sh areh olders equity decreased by 20.00%, wh ich in dicated th at th e own ers in vestmen t was declin ed. Given th e in come, th e sales of Cadbury decreased a bit in 2005, followed by a con tin uous g row up in th e n ext two years with 110% an d 118% but drops dramatically by almost 20% in 2008. Th e expen se of sales in 2007 is h ig h er th an oth er years with 131 percen t wh ile it stays stably in oth er years. Because th e costs of sales h ave g rown quickly th an reven ue of sales, g ross in come g row up at a lower rate. Th e sales of Cadbury in 2005 decrease by n early 4 percen t an d g row at th e rate of 14.58% an d 7.2% in 2007 an d 2007 respectively, compared with a sig n ifican t declin e (32.45%) in 2008. Because of a low operatin g expen se in 2005, th e operatin g in come from sales in 2005 h as an 11% g rowth compared with th e 7% decrease in g ross marg in . At th e same time, th oug h th e compan y h as reduced th e expen se in 2008, th e in come from sales also lower th an 60%. Fin ally, th e compreh en sive in come g rows up to 177% in 2005, followed by a h ig h g rowth rate of 136.74% owin g to a g ain from asset sales. However, th is in come to common is on ly 93 an d 84 percen t of th at in 2004. For Nestle SA, th e steady g rowth in all of th e in dexes h appen ed in 2005, 2006 an d 2007, but th e tren d ch an g ed in 2008, decrease in th ese in dexes appeared, especially for th e Net fin an cial Oblig ation s, it decreased by a much h ug e amoun t, almost 50.00%, wh ich is discern ed in exh ibit 8. Th e reven ues from sales g row up stably over th e four years with 8.1%, 9.2% an d 2.42% g rowth rate. Correspon din g ly, th e compreh en sive in comes in crease bit by bit as well with 119%, 137%, 158% from 2005 to 2007 an d due to a larg e g ain from oth er in come, th e in come in 2008 is h ig h to 268%, wh ich presen ts a g reater g rowth tren d in comparison to th e Cadbury. Lookin g forward In comparison with th e stably g rowth in Nestle sin ce 2005, Cadbury suffers a sig n ifican t decrease up to 20% in sales. In 2008, Cadbury in crease its price, wh ich may be a importan t reason for th e declin e combin g with th e g lobal econ omic crisis. For Cadbury, in 2009 an d even th e n ext few years, it will in a difficult situation to ag ain st th e un expected g lobal econ omic outlook an d th e h ig h cocoa prices. On th e oth er h an d, th e

compan y of Nestle sh ows a brig h t prospect. Request th e removal of th is essay.