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Cargills (Ceylon) PLC & Nestle Lanka PLC financial position and the performance

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Chapter 1
1.1. Earnings per Share
1.2. Dividend per Share…
1.3. Market Value…
1.4. Cash Flow
1.5. Profitability Ratios
1.6. Net Asset per Share
1.7. Solvency Ratios
1.8. Liquidity Position
2. Chapter 2
2.1. Nestle Lanka
2.1.1. The level of the corporate governance and legal procedure of the company
2.1.2. Compliance for legal procedure
2.1.3. Employee relations and relationship with shareholders
2.1.4. Social Responsibilities of the organization
2.1.5. Share information
2.1.6. Market share Percentage
2.2. Cargills (Ceylon) PLC
2.2.1. The level of the corporate governance and legal procedure of the company
2.2.2. Compliance for legal procedure
2.2.3. Employee relations and relationship with shareholders
2.2.4. Social Responsibilities of the organization
2.2.5. Share information
2.2.6. Market share Percentage
Chapter 3

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Cargills (Ceylon) PLC & Nestle Lanka PLC financial position and the performance

  1. 1. Page | 1 Cargills (Ceylon) PLC & Nestle Lanka PLC Assignment 01 Group 03 February 2015 ACC 2210: Accounting Theory and Practice Corse Coordinator: Dr.T.M.A.Tennakoon Department of Accounting and Finance Faculty of management and finance University of Ruhuna
  2. 2. Page | 2 Certification We hereby certify that the material presented in this report is original and no other persons’ work or ideas have been used without acknowledgement. Submission Date: 25/02/2015
  3. 3. Page | 3 Acknowledgement This assignment report is on comparison of the financial position and the performance of two main companies of the food and beverage sector in Sri Lanka. In order to succeed our assignment many people helped us in many ways. First of all we would like to thank our lecturer of Accounting Theory and Practice ACC2210 Dr.T.M.A.Tennakoon for giving us the knowledge, guidance and encouragement in finishing this course. And finally, we would like to thank our parents and family for helping us in every step in our way of this assignment.
  4. 4. Page | 4 Table of Content 1. Chapter 1……………………………………………………………………...…..5 1.1. Earnings per Share…………………………………………………………………....6 1.2.Dividend per Share… ………………………………………………………………....6 1.3. Market Value………………………………………………………………………….6 1.4. Cash Flow……………………………………………………………………………..7 1.5. Profitability Ratios…………………………………………………………………….7 1.6. Net Asset per Share……………………………………………………………………8 1.7. Solvency Ratios………………………………………………………………………..8 1.8. Liquidity Position……………………………………………………………………...9 2. Chapter 2………………………………………………………………………….10 2.1. Nestle Lanka 2.1.1.The level of the corporate governance and legal procedure of the company…...10 2.1.2.Compliance for legal procedure………………………………………………....10 2.1.3.Employee relations and relationship with shareholders…………………….…...10 2.1.4.Social Responsibilities of the organization ………………………………….….11 2.1.5.Share information………………………………………………………………..12 2.1.6.Market share Percentage…………………………………………………….…...12 2.2. Cargills (Ceylon) PLC 2.2.1.The level of the corporate governance and legal procedure of the company…....12 2.2.2.Compliance for legal procedure………………………………………………….12 2.2.3.Employee relations and relationship with shareholders…………………….…....13 2.2.4.Social Responsibilities of the organization…………………………………...….13 2.2.5.Share information……………………………………………………………...…13 2.2.6. Market share Percentage………………...…………………………..….13 3. Chapter 3…………………………………………………………………………..14
  5. 5. Page | 5 Chapter 1: Information Reported Could Help Investors to Predict Future Earnings and Cash Flows One of the functions of a (good) annual report is to assist the user in gauging the future profitability of a company. Through the disclosure of information about the future prospects for the company’s business, the report gives users some idea of the level of value creation to expect within the business. This type of narrative provides forward-looking information about the company’s business, which is aimed at various types of annual report user. Cash flow prediction is an important task since it is involved in various economic decisions. Investors, for example, need information about future cash flows, because the value of their investment is the present value of the future cash flows to them, through investing in a company. In the same way, the ability of a company to generate cash flows is reflected in the value of its shares. Research done in Nestle Lanka and Cargills PLC are suggested that cash flows have value relevance to stock prices in the stock market. Thus predicting future cash flows allows investors to predict stock prices. In addition, the Financial Accounting Standard Board suggested that financial reporting can help users assess future cash flows. Cash flow plays a pivotal role in all of these issues. Financial information is an important source of data for investment decisions. Previous researchers have found that investors value the quality of accounting information as a whole. In addition, it has been found that cash flow statements are useful for the investor. These are some indicators that will help investors to predict future predict future earnings and cash flows Net Revenue Sale of Goods Revenue from the sale of goods is measured at fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated cost and possible return of goods can be estimated reliably and there is no continuing management involvement with goods. Transfer of risks and rewards vary depending on the individual terms of the contract of sale. This concept is helped to investors to make their decision about invest. Year 2011 (%) 2012 (%) 2013(%) Cargill’s 32.14 12.89 36.41 Nestle 13 12 13 When analyzing the Cargill’s Ceylon PLC, we can understand changing of their net revenue. In 2011, their net revenue percentage is 32.14%. Then their net revenue is decreased from 32.14% to 12.89%. But in 2013, the net revenue percentage is increased again to 36.41%. And also, we look at financial reports of Nestle Company, we can see percentage of net revenue gets 13%, 12%, and 13% in our assessment years of 2011, 2012 & 2013. To using this information, the investors can decide about investment. NEST recorded revenue of
  6. 6. Page | 6 LKR30.913mn in 2013, implying growth of 1%, due largely to a sizeable boost from its export products, primarily Maggi coconut milk powder. Earnings per Share Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Year 2011 (%) 2012 (%) 2013(%) Cargill’s 114.51 72.80 69.27 Nestle 62.23 70.51 61.51 Dividend per Share This is helped to investors to buy or not shares of the company because this provides earning of share. Comparing this between companies, the investors can identify best one to investing. Year 2011 (Rs) 2012 (Rs) 2013(Rs) Cargill’s 1.50 2 2 Nestle 47.50 54 60 When analyzing dividend per share, the investors can decide the best company which provide higher dividend per share. Then investors select the company after considering dividends. But they should consider if the particular company follows their dividend policies. In 2011, Cargill’s had paid Rs.1.50 dividend per share because their highest market value is Rs.253. In both 2012 & 2013, they had paid Rs.2 dividend per share. And also, Nestle had paid Rs.47.50 dividend per share in 2011 because their market value is higher than market value of Cargills. In this three assessment years, Dividend per share has increased year by year. Market Value Market value means value which selling value of a share in the market. Market Value 2011 2012 2013 Cargill’s Nestle Cargill’s Nestle Cargill’s Nestle Highest 253 1000 240 1700 180 2550 Lowest 70 631 117 870 125 1500 Last Traded 228.30 877 174 1593 151.8 2100 When analyzing this, the investors can decide best one company of the share market to invest because the highest market values give a good knowledge about which is the highest profitable company. In 2011, Cargill’s has 253, 70,228.30 & Nestle has 1000, 631, 877 respectively highest, lowest and last traded. In 2012, all values of the shares are increased. In 2013, both values are highest market value & Last traded market values of Cargill’s are decreased. But, lowest value is increased from 117 to 125. And also, in Nestle all market values are increased.
  7. 7. Page | 7 Cash Flow Cash flows show how to inflow & outflow money from the company. Below table is shown how to change cash flow of Cargill’s & Nestle respectively in 2011, 2012 & 2013. These cash flows include operating activities, investing activities & finance activities. NestleLanka Cargills CASH FLOW STATEMENT 2011 2012 2013 2011 2012 2013 (For the year ended 31 December) Net cash flow from operating activities 3,530 3,145 3,823 2088 3446 821 Net cash flow from investing activities (2,131) (797) (455) (4845) (3848) (6517) Net cash flow from financing activities (1,844) (2,541) (2,890) 1489 (1304) 5916 Net increase/(decrease) in cash and cash equivalents (446) (192) 479 (1267) (1706) 220 According to above table, net cash generated from operating activities are low in 2011 in Cargill’s. But net cash from finance activities have increased. In 2012 all values are increased in Cargill’s except for investing. Thus in 2013 company has decreased both operating and investing activities. Using these details, Investors can select best company to invest because cash flow shows liquidity of the company. Therefore investors can understand feasibility of the company by using above details cash flow statement. Profitability Ratios NestleLanka Cargills KEY RATIOS 2011 2012 2013 2011 2012 2013 EBIT margin (%) 13.5 12.6 13.4 4.9 4.6 4.1 EBT margin (%) 13.5 12.1 13.2 3.8 3.2 3.9 ROE (%) 89.0 82.6 82.8 17.0 14.4 13.7 Net profit margin (%) 10.3 10.3 10.7 2.9 2.2 2.9 P/E (x) 17.9 29.1 34.2 46.7 36.7 20.9 We forecast the Cargills EBIT margin to remain relatively flat over the next period, as revenue growth struggles to offset persistent operating cost pressures. CARG’s operating costs mainly consist of electricity and fuel expenses. NEST posted an EBIT margin of 13.4% in 2013, which is higher than in 2012. We believe the wider margin is attributable to NEST’s double-digit top-line growth as well as keeping its cost base increase in check. Return of Equity shows the return that is provided for the equity investors. Both companies have been able to maintain a two digits return on equity every year over the last three years. Nestle Lanka has provided superior return for the investors than Cargills, which is evidence by the above figures.
  8. 8. Page | 8 This return on equity is achieved because of two reasons; 1. Cost efficiencies ( Net profit margin) 2. Asset utilization efficiencies (Net Asset per Ratio) When analyzing the cost efficiencies and profitability in business sector, the net profit margin ratio can be calculated. For a business, the main income source is the net income. Out of total income, if the remaining profit figure is high (expressed as a %) that shows greater cost efficiencies. The net profit margins of Cargills are very low which may be lead to cash flow problems in the future because it seems like their expenditures are really high. Net Assets per Share A net asset per share is calculated dividing net assists by all shares. Year 2011 (%) 2012 (%) 2013(%) Cargill’s 70.75 87.07 90.51 Nestle 62.23 70.15 78.47 When analyzing above details, we can identify the net assets per share has increased year by year in both companies. The investors can select the best one of the companies for investing Solvency Ratios Solvency ratios show a company’s ability to meet its long-term obligations. The following ratios can be calculated to measure a company’s solvency However, Nestle Lanka has reduced their debt-to-equity ratio over the years when Cargills increasing their debt-to-equity ratio. Increasing the Debt-to-Equity ratio is increasing the financial risk for a company. Therefore, we can conclude that the Nestle Lanka is improving their financial solvency than Cargills. When comparing the ability to pay interest to the customers, for the last three years, Nestle Lanka has higher interest cover ratio than Cargills, showing that Nestle Lanka is at a better position than Cargills to pay their creditors’ interest payment on timely manner. Nestle Lanka Cargills 2011 2012 2013 2011 2012 2013 Debt/Capital 14.0 12.3 7.7 49.2 50.5 54.0 Interest cover 138.6 21.1 51.5 5.0 3.6 1.8
  9. 9. Page | 9 Liquidity Position – Current Ratio Liquidity is the ability to settle short-term obligations of a company. A company should have sufficient liquidity to pay its creditors debt, when the creditors requested back their money. One of the best ratios that describe the liquidity position of a company is the Current Ratio, which shows how many times that we can pay off our short-term liabilities using our current assets. Nestle Lanka Cargills 2011 2012 2013 2011 2012 2013 Current ratio 0.9 0.9 1.1 0.5 0.5 0.5 The current ratio of Nestle Lanka has remained same in 2011 and 2012, however, there is an increase in the current ratio in 2013. Cargills current ratio had been the same for the last three years. In 2013, and when comparing the current conditions of the current ratio Nestle Lanka has a better current ratio. This indicated the liquidity position of Nestle Lanka, currently stronger than Cargills.
  10. 10. Page | 10 Chapter 2: Other Information Might an Investor Find Useful To Predict Future Earnings and Cash Flows Nestle (Lanka) PLC The level of the corporate governance and legal procedure of the company. The meaning of the governance is the framework of rules and practice by which a board of directors ensure accountability fairness and transparency in a company’s relationship with its stakeholders. According to annual report of this company they have showed their clarity by disclosing their framework of rules and practices for stakeholders. As an example when the company follows the corporate governance reporting they should discloser regarding the board of director, remuneration and remuneration committee and audit committee. According to annual report of Nestle Lanka PLC in 2011, 2012 and also 2013 respectively they comply with the all rules of corporate governance except 7.10.4, 7.10.5 (a), 7.10.6. (a) & (c). (Regarding with page no. 14, 15 of annual report 2011) Nestle Lana Plc has maintained high standards of integrity their business for that, they have held and internal controls, risk management system except the external to give more reliable information to potential investor and other stakeholders thought whole three year (2011, 2012, and 2013) Compliance for legal procedure Nestle Lanka Plc has prepared and published their annual reports within whole three years by compiling with the provisions of No. 07 of 2007 company act. The audit report LPMG has ensured about the compliance of the company within their audit report in page 26 of annual report 2011 The company secretary is qualified to act per the provisions of the companies act no 07 of 2007 and also functions as the legal advisor to the company within three years. On the other hand Nestle Lanka Plc has followed the provisions of acts related employees and tax paying in year of 2011, 2012, and 2013.As example,  Nestle Lanka plc has gave retirement benefit obligation under the payment of gratuity act No 12 of 1983.This company has paid tax, EPF and ETF according to the provision of law. This company has held annual meetings throughout all three years and reveals all information and decision which are taken in those meetings to the stakeholders. According to the annual reports of Nestle Lanka PLC in 2011, 2012, 2013, they have reviewed their corporate information like registration number, auditors. Employee relations and relationship with shareholders Employee relationship and shareholder relationship are the one of the importance factors which is used by the potential investors to decide their investment. They have held a good relationship with the employees for discussion and involving to solve problems of them. It is mentioned in the page number13th of annual report of 2011 of Nestle Lanka (PLC) and also annual reports of 2012 and 2013.On the other hand in the annual reports, the Nestle Lanka
  11. 11. Page | 11 (PLC) has presented both financial and nonfinancial information according to the annual reports of whole three years. It is mentioned in under the title of corporate governance in the annual reports. Social Responsibilities of the organization According to the annual reports, the Nestle Lanka (PLC) has joined social responsibilities within whole 2011.2102 and 2103, as examples, 1) The company continued its contribution to the rural economy by expanding its local procurement of fresh milk coconut rice etc.; and the rate of its contribution has been going high year by year. 2011 2012 2013 Amount of formers 15000 18000 18000 Contribution to the livelihoods 2.1 4 4.8 2). In addition to above responsibility in 2012 and,2103, this company has engaged with school sports sponsorship (mid),clean drinking water projects in school, hospital & places of worship 23 sanitation facilities in rural school and provisions of those are increased year by year. 2012 2013 Clean drinking water 18000 18500 Healthy kids programme 5000 7500 3).As well as company has contributed to green economy and protection of environment according to annual report 2103 for 2008-2013years.  Saving energy by 29%  Saving water by 38%  Decreasing greenhouse gas emission by 22% According to annual report Nestle Lanka (PLC) has achieved several awards for their enhancing the quality of life in local communities. 2011 2012 2013 The Best Corporate Citizen SLIM Nielsen People Top 10 Most Valuable Brand Women in Management The National Green Achievers Award Therefore engaging with social responsibility activities become reasons for the increasing goodwill of the company. It is importance to take future investment decision and select one company to invest.
  12. 12. Page | 12 Share information No: of shareholders (both resident & nonresident) has been decreased throughout whole three years according to the analysis of shareholders. Resident Non- Resident Total 2011 (Annual Report) 5634 99 5733 2012 (Annual Report) 5552 97 5649 2013 (Annual Report) 5422 93 5515 It is very important details for potential investors. Therefore they can decide the level of attraction for the company of shareholders. Market share Percentage According to Nestle Lanka (PLC) is one of the benchmark company in the food & beverage industry. It continues to innovate and renovate existing products in keeping with their direction of nutrition health & wellness. By using those strategies they have been capable of achieving broad market share within whole three years.  2103-nagrow, Maggi devilled xtrarange, nestum and Nescate.  2012-Deviiled chicken, kottu and chili chicken flavors, Nescafe ice coffee ready to drink, rice based noodles product etc. Cargills (Ceylon) PLC The level of the corporate governance and legal procedure of the company. According to the annual reports of Cargills (Ceylon) PLC they have complied with corporate governance rules to disclose their clarity and trust for their stake holders. As an example of it, In 2011, this company has followed the all corporate governance rules excepted rule number7.10.1.(c), part of the 7.10.5.(a) part of 7.10.6.(a),7.10.6.(C)(VII),(XI),(XII),(XIV) (regarding with page number 12,13,14,15,16, of annual report of the 2011) Cargills (Ceylon) PLC has maintained a good risk management system and internal controls with the purpose of the giving more reliable and true information to the potential investors. On the other hand whole corporate governance information of the company are more descriptive than the information of Nestle Lanka (plc).Among them regulatory and potential environment, interest rate risk, credit risk etc.; are more important to the potential investors. Compliance for the legal procedure All three years (2022, 2012, 2013) the cargills (Ceylon) PLC has prepared and published their annual and financial reports according to the provisions and recommendations of no 07 of 2007 company act, and accounting and auditing committee of the CA Sri Lanka. Cargills (Ceylon) PLC has calculated their payment of gratuity according to the act no; 12 of1983. As well as they have comply with the provision for employees provident and employee trust funds according to the rules and regulations of the government of Sri Lanka.
  13. 13. Page | 13 On the other hand, this company has calculated their tax obligation according to the corporate tax rules of the Sri Lanka and they have done provisions for EPF and ETF according to the Sri Lankan law. As well as Cargills (Ceylon) PLC complies with the requirements of company act for assigning the company secretary and holding annual shareholder meetings. This company has followed the every corporate rules and requirements and discoursing information like Company registration number, legal form in 2011, 2012, and 2013 annual reports. Social Responsibilities of the Company Cargills (Ceylon) PLC has engaged with the social welfare works for giving benefits for society. According to the sustainability report of this company, they follow some important strategies to protect the sustainably of the company. The cargills (Ceylon) PLC has fulfilled the responsibilities to the planet by green business, energy management, biodiversity, Emissions, effluents and waste, responsibility to the customer, responsibility to community to increase their goodwill with relevant to the annual reports  E.g.; Promoting national nutrition and wellness in2103 potential investors like to invest in companies which have goodwill and recognition of the community. Share Information Number of the shareholders is decreasing year by year since 2011 to 2103. Resident Non- Resident Total Annual Report (2011) 1908 96 2004 Annual Report (2012) 1939 99 2038 Annual Report (2013) 2148 87 2235 Market Share Cargills (Ceylon) PLC continues their innovations in every years. Because of it, their market share is going high year by year according to the annual report of the company. In 2013: Pocom rice, Kentucky Grilled Children, As well as this company consists with the good combination of the subsidiary business according to the page No: 99 of annual report 2013 under corporate information.
  14. 14. Page | 14 Chapter 3: Suppose That You Are an Investor, Which Company Would You Choose To Invest Food and Beverage sector is a significant part of a country’s economic and financial system. Also it is a good industry to invest in as an equity investor. If some person is looking for invest in some company, the main giants in the public company sector will come to that persons mind. Cargills and the Nestle Lanka are the biggest names of this Food and beverage industry which provides great opportunity to invest. Cargills (Ceylon) PLC (CARG) is the largest organized food retailer by market capitalization listed on the Colombo Stock Exchange (CSE), and also manufactures a range of fast-moving consumer goods (FMCG) and operates a fast-food chain. The company is majority owned by its parent company CT Holdings PLC (CTHR), itself one of the largest traded conglomerates on the CSE. Nestlé Lanka PLC (NEST) is the Sri Lankan subsidiary of the global fast moving consumer goods (FMCG) giant Nestlé S.A. It is the third-largest company listed on the Colombo Stock Exchange (CSE) by market capitalization. NEST manufactures and distributes a range of culinary, dairy and beverage products. First I would like to examine the non-historic cost financial positives and negatives of investing in both of these companies before making an investment decision. Nestle Lanka is a Globally recognized brand name and they have a reputation for product customization to suit local tastes and needs as well as robust R&D initiatives which drive innovation of products. But as a drawback of investing in Nestle I would say the exposure to the dairy sector increases risk in terms of changing regulations with regard to price control. If we take Cargills PLC the positive side of investing in it are their backing from parent company CTHR and also Cargills is one of the most valuable and recognized brands in the country right now. Cargills has the first-mover advantage in Sri Lanka with most of its new outlet openings resulting total no of 292 stores. Cargills also has a comprehensive distribution network – more extensive than competitors (e.g. Keells super). As per the negative side they have a High level of debt, which may temper further investments over the short term and may lead to liquidity problems and will have an adverse effect on gearing ratio. Cargills also has generated negative FCF annually since 2010 even though they have a positive net cash movement in 2013 the final cash flow is negative due to negative opening balance. By examining these factors I would say Nestle Lanka is in a better position than Cargills because of the cash problems they are having which will lead to working capital problems. But before taking a decision we should also consider the financial information of the company NestleLanka Cargills KEY RATIOS 2011 2012 2013 2011 2012 2013 EBIT margin (%) 13.5 12.6 13.4 4.9 4.6 4.1 EBT margin (%) 13.5 12.1 13.2 3.8 3.2 3.9 ROE (%) 89.0 82.6 82.8 17.0 14.4 13.7 Net profit margin (%) 10.3 10.3 10.7 2.9 2.2 2.9 P/E (x) 17.9 29.1 34.2 46.7 36.7 20.9
  15. 15. Page | 15 By comparing the key ratios of the company clearly we can see that Nestle Lanka in a better financial position that Cargills PLC. Almost every ratio except for the P/E ratios in 2011 and 2012 of Cargills, Nestle Lanka is in the lead. But we can ignore the P/E ratio because it seems like P/E ratio of Cargills is declining and Nestle Lanka P/E ratio is increasing which is more important than the absolute amount. CARG’s net debt position of 2013 is higher compared with Nestle Here is a chart of Cargills and Nestle Lanka’s debt levels. We can see the debt of Cargills has a huge difference with Nestle Lanka which has a very low debt level. We believe this considerable level of debt may weigh on CARG’s ability to make further acquisitions or additional large investments until some part of the debt is paid down and the company’s liquidity position improves. High level of debt and negative cash flow generation could restrict investing in the near term. Better Company Net Revenue Cargills Dividend per Share Nestle Lanka Earnings per Share Cargills Return to an Equity Nestle Lanka Cost Efficiencies Nestle Lanka Asset Utilizing Efficiencies Nestle Lanka Solvency Nestle Lanka Interest Cover Nestle Lanka Liquidity Position Nestle Lanka So by comparing and analysing these companies I think overall financial position and the performance of Nestle Lanka PLC is a better than Cargills PLC. Therefore, investing in Nestle Lanka PLC is the better choice rather than investing in Cargills PLC. -15000 -10000 -5000 0 Cargills Nestle Lanka
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