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Research and Analysis Project

Oxford Brookes University

An Analysis and Evaluation of Business and

Financial Performance of Nestle Pakistan
Limited between 1 January 2014 and 31
December 2016

WORD COUNT: 7,466

ACCA REGISTRATION: 2272065

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Research and Analysis Project

Contents
Report OBJECTIVE and Overall Research Approach.......................................................................................
Introduction ................................................................................................................................................
....................................................................................................................................................................
Why I chose food sector ............................................................................................................................
Why I choose Nestle...................................................................................................................................
Why I choose Unilever as competitor, Study Points ..................................................................................
Report Motive .............................................................................................................................................
Research Approach .....................................................................................................................................
Data collection/ Models Applied ................................................................................................................
Data source ................................................................................................................................................
Data Collection: ...........................................................................................................................................
Difficulties in gaining data ..........................................................................................................................
....................................................................................................................................................................
Financial and Non Financial models applied ..............................................................................................
Ratio Analysis: ........................................................................................................................................
Limitations of Ratio Analysis: ..................................................................................................................
SWOT Analysis:.......................................................................................................................................
Limitations of SWOT Analysis:................................................................................................................
Porter’s Five Forces ................................................................................................................................
Limitations of Porter’s Five Forces: ........................................................................................................
Results, Analysis, Conclusions and Recommendations..................................................................................
Industry Profile:...........................................................................................................................................
NESTLE PAKISTAN....................................................................................................................................
UNILEVER PAKISTAN ...............................................................................................................................
. Ratio Analysis: ...........................................................................................................................................
. Sales Revenue: ......................................................................................................................................
Gross Profit Margin: ................................................................................................................................
Net Profit Margin: ...................................................................................................................................
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Research and Analysis Project

Return on Capital Employed: .................................................................................................................

. Current Ratio: ........................................................................................................................................
Receivable Days: ....................................................................................................................................
. Payable Days: ........................................................................................................................................
Inventory days:.......................................................................................................................................
Debt to Equity Ratio: ...............................................................................................................................
. Interest Cover Ratio: .............................................................................................................................
Earnings per Share: .................................................................................................................................
Business Analysis: .......................................................................................................................................
Porter’s Five Forces: ...............................................................................................................................
SWOT Analysis:.......................................................................................................................................
Conclusion: .................................................................................................................................................
Recommendations: .....................................................................................................................................
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Research and Analysis Project

1. PROJECT OBJECTIVES and Overall Research Approach

Introduction
The report assesses and evaluates the financial statements of Nestle for the past five years. The report
comprehensively studies financial ratios and other business indicators to analyze the company’s
financial and business aspects.

Why I choose Food sector

As we had to choose any sector from the PSX I preferred to choose food because all of us
consume food but all of us do not directly relate to chemicals or information technology. So I
wanted to choose a large blue chip corporation which has competitors so I can make a
competitor analysis as in food industry there are a few top competing companies similar to each
other that enables the analyst to produce a good competitive analysis report.

Why I choose Nestle

Analysis and Presentation becomes interesting when the subject company is a company that everyone
knows about and is a customer of and it is related to the lives of all of us so it is always fascinating to
study such a company. That is why I have chosen NESTLE which is indeed among the 20 largest
corporations in Pakistan with a market cap of 4 million usd in 2013 and gross profit of 90 Billion Rs in
2014.

Why I choose UNILEVER as competitor

When you think of NESTLE the first competitor company that comes to mind is UNILEVER.
There is a similarity in the merchandise and business model of both these corporations. You
compare apple to apple and not apple to oranges so the best competitive analysis of NESTLE I
believe should be with UNILEVER.

Report Motives
The motives of this report as we are required by our mentor is to assess the financial performance
and position of the company and its performance evaluation in respect of shareholders point of
view. I will use financial tools like ratio analysis to analyze financial position and performance and
some non financial indicators like SWOT five forces to asses if the internal and external environment
of the company is favourable or not which is offcourse important for shareholders for future
decision making.

Study Points
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Research and Analysis Project

1. Have the profitability and liquidity ratios improved or worsened during last five years
2. Fluctuation in profitability ratios?
3. If the ratios are inline with competitors or is NESTLE having different position and
performance?
4. The strategic implications of NESTLE
5. Did the subject company do better than its counterpart?

Research Approach
The motive is to comprehensively research and prepare a performance report that shows the
financial position and performance of NESTLE as compared to UNILEVER. We will use tools
and models that are financial and non financial in nature such as ratios and swot and five
forces.
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Research and Analysis Project

Data collection / Models Applied

Data source
Primary Sources

Primary sources include direct data that comes from direct sources and is absolute. The direct
sources include journals research papers and newspaper etcetera. There are some other
sources which may not be regarded as primary and are indirect means of information
sometimes called secondary sources and are subject to being interpret. (Kaueper & Beaumont,
n.d.).

Data collection:
When doing the research the first thing you do is to gain information. In this report we have
gained the data from the financial statements and Ceo and directors statements as this is the
audited data from company sources and is the most authentic form of data that can be gained .
Electronic and print media have been used in search of the information such as Dawn news,
Tribune, Express news, the Nation, Business Recorder etc.

Difficulties in collection of information

As its almost impossible to collect articles published in the press and journals for the past five
years and very difficult to authenticate them then. And as I did not have any access and
resources to meet and interview the management of the company the major source of
information I had was annual reports.

Financial and Non Financial models applied:

Ratio Analysis:
Ratio is a tool used to produce comparative information. Its calculation is done in percentage
terms and not absolute terms so it enables the user to compare subject company with its peers
and counterparts or the industry as a whole or even corporations in different sectors. It also
helps to compare the results of current period with past periods.

SWOT Analysis:
SWOT is Strengths Weaknesses Opportunities and Threats . It allows us to look for our own
strengths and weaknesses and how can we use our strengths to take advantage of the
opportunities and mitigate the threats and how can we overcome weaknesses. It uses both
internal and external information internal is strength and weakness and external is opportunity
and threat. We define our course of action by looking at our internal means and then deciding
how to respond to the external scenario to hold a good position in the market and compete and
beat the competition.
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Research and Analysis Project

Porter’s Five Forces

Five Forces model is a micro analysis model aimed at the industry analysis. Michael e porter
created this model. Five forces focuses on five key areas that allow the user to assess the
health and profitability of a specific industry. It can be applied to a corporation operating in a
specific industry.

It covers almost every aspect that has a direct effect on the company pertaining to its sales and
cost of sales and market share. This model looks at the bargaining power of buyer which is the
customer of the company if customer’s power is high he may negotiate the product price lower
and if his power is low then company may be able to charge a good price. Likewise the model
includes bargaining power of Supplier, Threat of Substitute product, Threat of New entrant and
competitive rivalry.

. Limitations of Porter’s Five Forces:

This model can only be used to asses the environment for the very short term and not the long
term. Availability and authenticity of the information required for this model to function
adequately is also a problem many times. It only looks at the external aspects and not the
internal aspects and as now we live in a different world which is rapidly changing the validity of
this model comes into question. Today in the era of globalization we need much more
sophisticated and extensive information only then this model will produce a meaningful result .

This is a microeconomics model and measures only five aspects that a corporation is subject to
so it can only be used in simpler and smaller companies and industries and also requires
another macro model to be used along to provide the true picture of the environment company
is operating in and also it provides very brief information. For large and complex data and
markets you need a more sophisticated model.
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Research and Analysis Project

Company and Industry Analysis

Industry Profile:
As the GDP of Pakistan has increased in the last five years so has the food industry and as our
economy is undocumented we cannot be sure of any figures such as our gdp figure and share
of food industry in our gdp all the figures that we have come from formal economy and imformal
economy in Pakistan has a major share in the total economy having said that we can only use
the data at Pakistan bureau of statistics website to do any research. Almost half of the income a
Pakistani spends on food spending on food is lower in developed countries as compared to
emerging countries. Food sector contributes 17% to national GDP. (Afzal, 2014)

NESTLE PAKISTAN
Nestle Pakistan is one of the largest food processing corporation in Pakistan. It manufactures
and sells various products within the country. It produces and sells Milk and Nutrition products
which are comprised of milk based products. It produces beverages which includes juices and
water and various products like breakfast and dairy products etc (Reuters, n.d.)

Nestle Pakistan is a subsidiary of the Swiss Nestle and first came to Pakistan in 1988 with its
top brand named Milkpak. (Business Recorder, 2015)

Nestle Pakistan produces products of milk, baby milk, beverages, coffee and chocolates.

UNILEVER PAKISTAN
Rafhan Foods changed its name to Unilever in the year 2007. This company was founded in
1948 in Karachi. The company offers a range of products which includes margarine, soups,
shampoos, corn, flour, corn oil, ice cream, hair conditioners, hair care, toothpaste etc. It sells its
products under the names of Rafhan. Knorr, Energile, Lipton, Cornetto, Surf Excel, Dove, Fair &
lovely etc (Bloomberg, n.d.). Unilever Pakistan was known as Lever Brothers Pakistan Limited
earlier. Its basic merchandise is consumer goods and is one of the largest multinational
corporation in Pakistan..Its product range is around 400.

Ratio Analysis:
. Sales:

In FY 2014 to 2015, there seem boost in sales revenue by 6.77% and it showed an increase of
9.13% from FY 2015 to FY 2016. From 2016 to 2017 sales increased by 8.73% and then from
2017 to 2017 sales increased by 1.92%.
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Research and Analysis Project

In 2014 to 2015 Unilever enjoyed 10.07 percent sales growth and in 2015 to 2016 unilever
enjoyed 10.45% sales growth in 2016 to 2017 they saw 13.5% growth and in 2017 to 2018 they
saw 10.73% sales growth.

The increase in sales of Nestle was due to the low input costs of company, higher sales volume
and most importantly the stability of currency (Jamal, 2015).

Though the country was facing energy crisis but Nestle maintained its position by increase in
revenue by Rs 2.9 billion (Tribune, 2015).

The growth in turnover is because of UHT due to actions of PFA

While comparing Nestle with Unilever, Unilever saw sales growth by 10.07% (Unilever, 2015)
which is higher than the growth of Nestle that was 6.77%

In comparison with 2015, sales revenue of Nestle in 2016 is 112 billion that boosted annual
profits to reach 35% in PAT. Turnover is 9.13 % in 2016 that is higher from 2015.

In 2016, sales revenue was 9.27 % more than 2015. This increase was due to increase in
exports of the product. The total revenue was almost RS 7.2 billion (Ahmed, 2016).

In 2016, Nestle turnover grew 2.1% and this growth is due to the rise in prices of milk. Nestle
increased the price of milk by Rs 5 per half liter and Rs 10 per liter. Nestle also launched some
new products which includes new flavors of juices that is White grapes and Lychee and Nestle
everyday double creamy (Business Recorder, 2017).

In 2016, turnover growth is about 112 billion that is higher from 2015. PAT was 32.5% higher.

In 2016, Unilever was able to grow the turnover to 10.45 % and once more it performed better
than nestle.

Both the counterparts saw an adequate sales growth in the last five years but unilever
performed slightly better than nestle.
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Research and Analysis Project

Gross Profit Margin:

Gross Profit margin of both companies Nestle and Unilever grew in 2014-2015 at 19% and
14.05% in 2015-16 14% and 9.65% in 2016-17 12% and 15.02% in 2017-18 (8%) and 10.88%
respectively.

Oil prices fell from 100$ a barrel to 40$ a barrel in 2015 which helped Nestle increase its profit
margin in the year.

In 2015 because of the decline in oil prices Nestle GP margin increased by 4.81%

In 2016, growth in GP margin had a component related to growth in exports and it amounts to
2.5% compared with 2015 and Nestle exported 3.6 Billion worth of merchandise in 2016.

Growth in GP margins was pretty much good in the past five years for both companies despite a
negative year in case of Nestle but Unilever performed better in this regard.
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Research and Analysis Project

Net Profit Margin:

Growth in net profit margin of Nestle and Unilever in the year 2014-15 is 10% and 5.15% in
2015-16 it is 26% and 3.57% in 2016-17 it is 19% and 6.24% in 2017-18 it is (22%) and 27.73%
respectively.

policy reshuffle was seen in Nestle as they spent higher amounts on promotion and advertising
in 2015 (Express Tribune, 2015)

. Return on Capital Employed:

Roce has remained excellent in the past five years for Nestle. Roce in 2014 for Nestle was 55%
in 2015 it was 61% in 2016 it was 122% in 2017 153% and in 2018 129% it fell in 2018 like the
net profit and gross profit margin. The reason for the humungous increase in Roce is the
soaring sales revenue and profits as the GP rose from 27234M in 2014 to 44756M in 2017
which is about a 65% surge hence the ROCE rose from 55% in 2014 to 153 in 2017.

. Current Ratio:
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Research and Analysis Project

The current ratio for nestle is 0.66, 0.72, 0.59, 0.6 and 0.69 in the years 2014, 2015, 2016, 2017
and 2018 respectively.

The current ratio for unilever is 0.61, 0.90, 0.94, 0.86 and 0.92 in the years 2014, 2015, 2016,
2017 and 2018.

The ratio decreased from 0.72:1 to 0.59:1 due to the increase of 9% in current assets while
there was 31% increase in the current liabilities.

In 2016, investments worth 4.1 billion were made in different projects (Anon., 2017) so because
of short term borrowing and surge in payables by 49%. For the purpose of delaying the
payments to the creditors and increasing payable days, they kept investing in new launches to
increase creditors in 2016.

Considering unilever In 2016, liquidity soared to 0.94:1 from 0.90:1 and it was because of surge
in current assets by 8% and surge in current liabilities by 3%. There was remarkable increase in
current assets which includes stores and spares, loan, advances, cash and cash equivalents
and short term borrowing was completely repaid. Current ratio of unilever is not 1 but it has
surged on year on year basis. (Annual Reports 2015,2016)
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Research and Analysis Project

Receivable Days:

Nestle Receivables days are 1.03, 1.12, 1.83, 1.77 and 1.98 in the years 2014, 2015, 2016,
2017 and 2018 respectively.

Unilever Receivables days are 9.58, 8.90, 11.64, 10.87 and 11.16 in the years 2014, 2015,
2016 , 2017 and 2018 respectively.

Nestle receivable days are much much less than unilever which means nestle is making sales
mainly on cash and very less on credit which is efficient working capital management and risk of
bad debts is also reduced by this means. But this should be relaxed as customers and dealers
view credit facility as a positive thing and may boost sales with a slightly relaxed credit policy.
Nestle has been successful in this respect against unilever and has succeeded in making cash
sales instead of credit like unilever.

Payable Days:

Nestle payable days are 75.83, 88.80, 125.27, 117.11 and 133.56 in the years 2014, 2015,
2016, 2017 and 2018 respectively.

Unilever payable days are 207.67, 180.89, 168.10, 176.34 and 159.87 in the years 2014. 2015,
2016, 2017 and 2018 respectively.

More payable days means we pay later and is a sign of good working capital management as
we can see here unilever payable days are more than nestle but another thing that can be
observed is that unilever payable days is in downtrend their suppliers might have forced them to
decrease it and nestle payable days is in uptrend so we can speculate that nestle is trying to do
better in terms of working capital management.

As both companies have very low receivable days and very high payable days both are doing
excellent in terms of working capital management and are using the money of their suppliers as
theirs. But one thing should be considered that if payables are paid early it might result in
discounted prices or good relations with reliable suppliers and assured supplies.

Inventory days:

Nestle inventory days are 51.55, 50.22, 56.34, 59.12 and 54.67 in the years 2014, 2015, 2016,
2017 and 2018.
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Research and Analysis Project

Unilever inventory days are 70, 73.89, 66.43, 71.09 and 76.17 in the years 2014, 2015, 2016,
2017 and 2018.

Nestle has inventory days are almost the same in every year in the range of 50-60 so no
comparison can be drawn in nestle in subsequent years. Unilever inventory days are higher
than nestle so nestle is doing better in this regard and is doing efficient working capital
management. Nestle has very low receivable days and high inventory days which means
inventory is produced and kept in warehouses and is not sold for many days nestle is doing well
in receivable days and also payable days as payable days is almost twice as much than the
receivable days and inventory days combined. Nestle should work to bring inventory days down.

. Debt to Equity Ratio:

The Debt to equity ratio of Nestle is 55.05%, 63.30%, 63.97%, 48.52% and 45.92% for the year
2014, 2015, 2016, 2017 and 2018.

In 2015, the debt to equity ratio surged to 63.30% from 55.05% . This increment was due to the
rise in long term finances of company and introducing some new products in the market which
included nestle milkpack 200 ml, nestle lacto grow 3, nestle fruita vitals Kinnow etc (Nestle
Annual Report 2015).

In 2016, equity percentage declined by 30.27% and long-term finances of 30%. Nestle paid the
loans of banks which declined the long term finances. (Nestle 2015)

In FY 2016, Nestle paid more dividends than profits which caused the profits to decrease which
decreased equity. In FY 2015 & 2016, equity ratio and debts of Nestle increased which were
stable in FY 2014. This increase made the company geared highly and this increment was due
to the investment plans of 2016 (Customs Today, 2016).

Unilever had zero debts as compared to Nestle in the past five years, they did not get into any
long term liability.

Interest Cover Ratio:

Interest cover for Nestle is 6.11, 9.47, 18.75, 14.76 and 22.59 in the year 2014, 15, 16, 17 and
18 respectively.
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Research and Analysis Project

Interest cover for Unilever is 34.94, 47.15, 52.28, 49 and 58.65 in the years 2014, 15, 16, 17,
and 18 respectively.

In 2014, interest cover ratio is 6.11 times and in 2015, it raised to 9.47 times. This change was
due to increase in profits and decline in FC. The PBIT increased in 2015 by 6%

In 2015There was a decline in finance cost of 31% due to decrease in interest rates. The
increase in sales helped in increase of profits. In 2016, the decrease in the financial costs was
due to decline in long term finances and decrease in interest rate.

In comparison to Nestle, its competitors’ interest cover ratio increased in 2015 to 47.15 times
which were 34.94 times in 2014. In 2015, the PBIT decreased by 2%, there was a decrease in
finance cost of 28% due to the decrease in interest rates. Finance cost is due to short term
liabilities

In 2016, there was an increment of 6% in PBIT and a decline of 4% in the financial costs due in
the decrease in interest rates.

. Earnings per Share:

Nestle EPS is 175, 193.069, 260.86, 323.033 and 257.14 in the years 2014, 2015, 2016, 2017
and 2018 respectively. Nestle saw eps growth in the first 4 years and then its eps fell in 2018
due to a sharp decline in its sales and profit margins.

Unilever EPS is RS 190.29, 200.09, 207.24, 308.52 and 398.16 in the years 2014, 2015, 2016,
2017, 2018 respectively.
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Research and Analysis Project

In 2014 and 15 there is not much difference between the eps of both the companies in 2016
nestle was almost 27% above in terms of eps then in 2017 its only a difference of 15 rupees but
in 2018 there is a huge difference as nestle eps is 257 as compared to 323 in the previous year
and unilever has an eps of 398 in the same period which is almost 60% higher than Nestle.
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Research and Analysis Project

Business Analysis:
Porter’s Five Forces:
Threat of New Entrants:

The gdp of the country is growing and so is the population growing. Pakistan has above 50
percent of young population which drives growth so new entrants will be tempted to enter the
market. On the other side there are a few concerns which the new entrant might consider such
as inflation purchasing power not growing, high interest rates, currency fluctuation and energy
crises and law and order situation in Pakistan.

Threats of Substitute:

Nestle produces processed and packaged milk a real threat is loose milk which costs very less
and is pure milk and in Pakistan some people prefer to buy fresh and pure milk without
preservatives instead of processed milk. Govt has cracked down on loose milk sellers as
hygiene is sometimes not maintained in it and its sale has substantially plunged moreover
availability of the loose milk in Urban areas is also a problem so it might not be a big risk to
Nestle and all the other range like baby milk and powder milk is produced by Nestle.

Bargaining Power of Supplier:

Bargaining power of supplier is not very high as Nestle collects milk from several small dairy
farms across the country and is the only big buyer and farmers feel honored to deal with Nestle
and there are no signs of farmers negotiating a high price at the moment.

Bargaining Power of Customers:

The trust of customers can be seen by the increase in its sales from2.1 billion to 18.1 billion and
Nestle has a competitive market price and study of customer behavior has never shown that
customers have any objection regarding price.

Pakistan already has more customers of Nestle products than India and China and Nestle
turnover in Pakistan is almost twice as much as it is in the neighbouring countries.

Rivalry among the Competitors

There are a number of companies operating in the same sector such as engro foods shakar
ganj shezan but the product range of Nestle is wider than these companies Nestle’s turnover is
more than them and Nestle’s marketing policies look much better than them and a customer
preference can clearly be seen for Nestle products.
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Research and Analysis Project

. SWOT Analysis:
Strengths:

Nestle has some strong brands like Nesfruita Nescafe Milk pak Nestle mineral water and kitkat.
Nestle has established itself since long in Pakistan infact when there weren’t any serious
corporate competitors and till date Nestle enjoys the perks of brand recognition that it gained
many years ago.

Weakness:

We have seen the inflation soar in the past few years but nestle couldn’t raise prices with the
same ratio because customer’s purchasing power is low but the cost of production is soaring
day after day this is a threat to profit margins Nestle is not able to raise prices or cut costs.

Opportunities:

Anything Nestle produces will sell because of the brand goodwill nestle has nestle can diversify
in related or unrelated industries and will surely see a lot of success. As it is a food company it
can enter the frozen meat markets including chicken fish and beef.

Threats:

Competition is getting fierce and looks like Nestle existing products have already reached the
point of saturation Nestle cannot grow further with the same products but may lose its sales to
competition and new player entering the market. Nestle enjoys a good brand name and can
diversify to increase sales.
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Research and Analysis Project

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Research and Analysis Project

Conclusion:
Nestle is one of the largest food corporation of Pakistan and is positioned third largest
corporation among the 35 largest ones in Pakistan. During last five years its revenue and profit
increased year on year and it was able to maintain its market share in the market. Its marketing
expenditure is much higher than its counterparts and its policy towards its distributors and
retailers allows it to enjoy the best shelf display when compared with its peers. It has always
managed to stay ahead of the curve but during past five years we can see a decline in its GP
margin as compared with UNILEVER and this decline can be attributed to the increase in cost of
sales.

The liquidity ratio of Nestle has increased in FY 2015 but it declined in FY 2016 because of the
decline in the CA and CL and after that it remained pretty much unchanged but condition will
become worse if it declines in the current year.

Nestle became successful in maintaining its efficiency due to decrease in its receivable days
which shows that the sales were cash based and payable days have also decreased as
payables are paid early which allows for discounted prices and good relations with payables.

The sale is surging in all past five years and if we go into the breakup of it we know that this is
due to the selling of more number of merchandise units and is not related to the increase in
product price since prices are more or less unchanged in the past 5 years so this increase is not
due to price increase but is a result of more units being sold each year which represents a
growing market share and customer development and loyalty.

The gearing of Nestle is in the trendd of increasee and it is a highly geared corporation non
current liabilities plunged inn 2o16. But the ratio did not improve because some previous debts
were paid off.
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Research and Analysis Project

. Recommendations:
Nestle should change its policies towards the receivable terms and credit terms and have a
relaxed credit policy. Relaxed credit policy will encourage the retail store owners to buy in more
and more merchandise from Nestle and replace the other products in their stores with Nestle
due to the credit facility they have from Nestle as in Pakistan it is a luxury their working capital
will be free for investment elsewhere so they will be tempted to shift to Nestle and leave others.

Nestle is importing raw materials it should invest in Research and Development to find
substitute raw materials or try to mine the raw materials locally as it is expected to cost much
less.

Govt is establishing special economic zones and industrial estates in Pakistan that provide
cheap energy and a few years of tax holiday. Nestle should consider investing there to attract
interest free loans and enjoy a tax holiday.

Nestle has a higher number of inventory days compared with its peers Nestle should adopt
efficient procedures such as JIT and plan the whole supply chain more efficiently to bring the
inventory days lower.

Nestle has established itself very well in the Urban centers but lacks focus and brand and
product recognition in rural areas of the country. In a country with 50% rural population it’s a
major setback lets agree to the fact that population there has a relatively lower purchasing
power but Nestle should try to capture that market with its efficient advertising and marketing
campaigns. Nestle has a long way to go Nestle should diversify and focus on product
development and add to its product base. Easy additions can be biscuits, chips, flavored milk,
tea and it can also diversify into consumer products.
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Research and Analysis Project

Assignment 4 Part 1 and Part 2

The three components in cashflow statement are cashflows from financing activities, operating
activities and investing activities. Operating activities are the day to day business activities such
as buying and selling of goods, invessting activities are the investments made by an entity such
as real estate or commodity or equity investments or bank deposits or bonds and the cash
inflow or outflow arising from these activities is cashflow from investing and cashflow from
financing is the cashflow that company generates from its investors either they invest in debt or
in equity. Cashflow statement is prepared on cash basis and not accruals basis. Cash
generated from operations is the net cash inflow or outflow that company made during the year
and it arises because of the trading activities in case of nestle it is always positive in the past
five years it was 14,846,883 in 2013 and 20,945,785 in 2014 and it rose significantly that was because
of the increase in sales revenue from the year 2013 to 14. Then it was almost the same in the next year
2015 it was 21,106,707 and it again rose dramatically in 2016 and stood at 29,534,835 this also
happened due to the increased revenue in 2016 in 2017 this figure fell to 21,925,820 which was the old
level in 2014 and 2015 but this was not because of the drop in sales but due to other reasons and cash
was spent elsewhere as sales grew between these two years. Then it further fell in 2018 because of
revenue decline. This is the main item in cashflow from operations in all years which is the most
significant figure within this sections. Then there is income tax paid but tax is a complex issue in
accounting cashflow statement only considers how much tax was actually paid during the year
technically tax should increase in this scenario as profits are increasing year on year but that is not the
case because of deferred tax and under/over payment issues and because in accounting we use
accruals. There is not much difference between tax figures and in each year its 10% more or less than
previous year only exception is 2015 and 2016 in 2016 tax paid rose from 2,880,807 to 5,622,752
partially because of the huge increase in profits in 2016. Other items in operating activities are workers
welfare fund and profit participation fund etcetera as the company puts money in these funds on behalf
of the worker and this outflow ranges from 437,176 in 2013 to 895,145 in 2016 and then it fell because
of internal policies. Finance cost paid is also an item of operations and relates to the borrowed finances
that are used for operating activities this is also an item which is purely of outflow in nature finance cost
paid was (2,039,147 in 2013 and then did not fluctuate much till 2016 and then it significantly
fluctuated because interest rates were lowered very much and as you can see in debt to equity ratio
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Research and Analysis Project

company had retired a lot of its debt which drove the finance cost lower. Then we have sales tax
refundable and In all five years resulted in a cash inflow ranging from 802,381 in 2014 to 896,977 in
2016 and it fluctuated in all years as this is the sales tax reclaimed after making the sale but cashflow
only deals the amount that has been paid and in Pakistan institutions do not always pay on time so we
can see a lot of fluctuation which is only because on the timing of payments. There are some customer
security deposits which are interest free and have varied in lot in these 5 years from as low as 348 in
2015 to as high as 38,980 in 2014 the difference is because each year the deposits varied and the
pattern of these deposits is not same in each year. Customer deposit is the advance amount of money
that the customer paid the company but the goods are not yet delivered to the customer against that
deposit as it is interest free deposit so there is no head for the interest paid on these deposits.

Cashflow from operating activities always increased except in 2017 from 2013 to 2016 it increased from
9,037,209 in 2013 to 22,755,024 in 2016 and fell to 16,000,698 in 2017.

Cashflow from investing activities in all 5 years only includes two items fixed capital expenditure and
sale of property plant and equipment. Sale always results in cashinflow as an asset is sold and cash is
received and is substantially different in all these years as there is different kind of PPE sold in all these
five years.

Cash flow from investing activities is negative in all these years and the outflow on fixed capital
expenditure heavily exceeds the inflow from sale of PPE. This means company is making long
term investments every year so there is cash outflow and return from those investments is yet to
come and is using cashflow from operations for provide for the inflow from investing activities.

Then is cashflow from financing activities which includes dividends paid which is always an
outflow of cash as dividend is paid to the share holders out of the accumulated profits. Dividend
increased from 7,032,581 in 2014 to 18,587,733 in 2017 as profits were rising steadily and so were
dividend payments and then it plunged a little in 2018 because the profits declined a little in 2018. Then
cashflow from financing activities includes the long term and short term borrowings and is sometimes
an outflow and sometimes an inflow of cash depending upon the nature of activity if company has taken
a further loan it would be an inflow of cash if it has paid off a previous loan it would be an outflow and
these figure have varied in the past 5 years depending upon the circumstances and terms and policies of
the debt already owed. Cashflow in financing activities in the past five years is negative in each year
partly because of the dividend and interest payments that are always an inflow and because if you study
the debt to equity ratio you will find out that company has been trying since the past 5 years to lower it
long and short term debts by paying them off and not taking any new debts. Negative cashflows from
financing and investing activities are financed by the positive cash inflows that came from operating
activities.