Financial Analysis of Hershey and Nestles Activities - Example

Financial Analysis

Part I

In the heart of every company is a good financial statement that indicates proper book keeping. Financial analysis is done with the sole aim of ascertaining the liquidity position of a given company over a particular period. The statements of accounts therefore show an in depth view of the firm's strategies and their liquidity position. Elsewhere, a pro forma financial statement is used to project the company's future using the current statements as the base year. It indicates a "picture" of how the enterprise financials will look like in the near future and are based on mere assumptions on the historical performance of the company. In order for a firm to create a full analysis of its statements, the majority uses financial ratios to expound on the profitability of the company. The current and the future performance of a firm is correlated to its strategies which are over and above those used by competitors. Recording a good profit in the statements of accounts solely relies on the competitive advantage a particular firm has over its rivals in the same industry. Assessing a company’s future financials is made easy with the help of a nine step assessment criterion set out in the company’s future financial health . Through the paper, we shall utilize step two and four that explains on the investments of assets and economic performance respectively. The significance of assessing the future financial health of a firm is to design proper goals and strategies for profitability. This paper will prepare and analyze comprehensive pro forma financial statements for Hershey and Nestle.

Nestle is considered to be one of the best nutritious and healthy food producers in the world. To enhance their competitiveness, the company is required to increase their focus on their core nutrition business. Strengthening the leadership position in the nutrition business is the corporate strategy of the company. To achieve this goal and as a part of its long term expansion strategy, the company has also established a new global business unit under the name of Nestle Nutrition. The company should keep in mind while designing investing in this business unit that consumers of this industry purchase the products solely on the basis of its nutritional contents.

While keeping in mind the importance of its nutritional business and to obtain the competitive advantage in this industry, the company has made Nestle Nutritions as an autonomous body having three subunits namely Infant Nutrition, Performance Nutrition, and Healthcare Nutrition. Nestle Nutrition works with the objective to deliver the high quality, science based, and nutritionally rich products aimed to gain the consumers trust.

Being a global organization, the company should increase its focus on foreign direct investments in food and dairy industry. The company's products demand is high in developing countries of Asia, where the growth potential is low, but the associated risk is also low. On the other hand, potentially high growth markets of Latin America and African regions are associated with high risk. Nestle should evaluate the profitability potentials in high risk countries but should not take the unnecessary risk for steady growth. Hence, hedging risk with profitability will keep the stakeholders satisfied and will also enhance the future financial prospects of the company.

On the other hand, Hershey Company’s primary strategy is based on advertisement and marketing and the company is well aware of the fact that confectionary industry is highly elastic to advertising. The company is of the view that advertisement is one of their most powerful growth levers. Making advertisement its primary competitive tool, the company has increased its advertising campaigns expenditures by 7% in 2015. Furthermore, keeping in view the increasing trend of social media and mobile technology, the company has allocated 40% of its advertisement budget to a mobile advertisement. On the other hand, Nestle has also decided to increase their advertisement budgets up to 10% of the revenue by the end of 2017.

Together with an advertisement, Hershey should also focus on complimentary products such as snack and beverages. Such strategy would help the company in increasing the market share and as well as gaining the competitive edge over its direct competitors .

As far as he global growth is concerned, Hershey is well behind the Nestle and is ranked in 2015 on number sixth in terms of revenue, while the Nestle retains the fourth position. Management of the company believes that the major factor behind weak international market share is the increased dependence of the company on the North American market. The international revenue contribution of the company is limited to only 30% of its total revenue. To internationally grow the market share, the company has thus set a goal to increase its global footprint to up to 50% of total revenue, by the end of 2017.

Nestle

2017

2018

2019

2020

2021

2022

Current ratio

0.883

0.892

0.902

0.911

0.921

0.931

Current assets

29,426.000

31,220.500

33,127.364

35,153.745

37,307.384

39,596.386

current liabilities

33,320.000

34,986.000

36,735.310

38,572.070

40,500.677

42,525.708

Net profit margin

0.143

0.146

0.150

0.153

0.156

0.159

Net Profit

12,703.100

13,773.326

14,923.168

16,158.172

17,484.261

18,907.744

Sales

88,790.000

94,117.400

99,764.444

105,750.311

112,095.329

118,821.049

Inventory turnover

10.894

10.998

11.103

11.209

11.315

11.423

Sales

88,790.000

94,117.400

99,764.444

105,750.311

112,095.329

118,821.049

Inventory

8,150.000

8,557.500

8,985.380

9,434.640

9,906.380

10,401.690

Return on Assets

0.105

0.106

0.106

0.107

0.108

0.108

net profit

12,703.100

13,773.326

14,923.168

16,158.172

17,484.261

18,907.744

Total Assets

121,485.000

130,496.950

140,243.594

150,789.335

162,204.628

174,566.383

Hershey

2017

2018

2019

2020

2021

2022

Current ratio

0.834

0.872

0.888

0.903

0.918

0.934

Current assets

1,849.000

1,992.880

2,091.722

2,195.794

2,305.379

2,420.775

current liabilities

2,218.000

2,285.000

2,356.400

2,431.370

2,510.089

2,592.743

Net profit margin

0.204

0.213

0.221

0.229

0.237

0.244

Net Profit

1,508.500

1,696.592

1,903.125

2,129.726

2,378.182

2,650.442

Sales

7,390.000

7,981.200

8,619.696

9,309.272

10,054.013

10,858.334

Inventory turnover

9.840

10.121

10.411

10.708

11.014

11.329

Sales

7,390.000

7,981.200

8,619.696

9,309.272

10,054.013

10,858.334

Inventory

751.000

788.550

827.978

869.376

912.845

958.487

Return on Assets

0.282

0.283

0.296

0.309

0.322

0.334

net profit

1,508.500

1,696.592

1,903.125

2,129.726

2,378.182

2,650.442

Total Assets

5,344.000

5,997.845

6,426.803

6,891.110

7,393.919

7,938.682

Based on the financial strategies and future growth prospects of both the companies, the forecasted financial statements are prepared, and the above ratios are calculated on the basis of those financial statements.

The current ratio analysis shows that both the companies have an almost same performance with a clearly trivial difference. Both the companies have an average five year current ratio of approximately 0.9. This ratio is considered to be the good in food and confectionary industry. However, it is important to note that the companies must maintain the ratio of 0.9 if they are to get success in their future expansion plans. The reason is that both the companies plan to increase their advertisement expenditures up to 10% of revenue by 2018. The increase in such revenue expenditures would require them to have sufficient cash in hand in order to pay off their short term obligations on the timely manner.

Net profit margin is heavily dependent on the revenue growth of the company. Past analysis shows that Nestlé’s revenue grew with the compound growth rate of 0.86% during 2011-2015. While on the other hand, Hershey showed a revenue growth of 5.5% in the same period. Due to an aggressive performance of the company in increasing revenue, its net margin forecasts are higher than Nestle. Secondly, Hershey’s expansion plans in China are also expected to bring fruitful results in near future and the forecast therefore also includes the impact of company’s performance in this regard.

Return assets of Hershey is average 0.30 as compared to 0.105 average of Nestle. This indicates that Hershey utilizes its assets in the highly efficient manner as compared to Nestle . However, the other possible reason for the low ratio of Nestle is its aggressive investments in assets and expansion plans. Since these assets are new and have not generated any income yet, the ratio tends to remain lower than the industry average.

Part II

NESTLE

PRO FORMA COMPREHENSIVE INCOME STATEMENT

FOR A FIVE YEAR PERIOD

YEAR

2017

2018

2019

2020

2021

2022

Revenue

$88,790.00

$94,117.40

$99,764.44

$105,750.31

$112,095.33

$118,821.05

COGS

$45,282.90

$47,999.87

$50,879.87

$53,932.66

$57,168.62

$60,598.74

Gross Income

$43,507.10

$46,117.53

$48,884.58

$51,817.65

$54,926.71

$58,222.31

SG &A Expenses

$30,320.00

$31,836.00

$33,427.80

$35,099.19

$36,854.15

$38,696.86

R&D

$1,680.00

$1,764.00

$1,852.20

$1,944.81

$2,042.05

$2,144.15

other SG & A

$27,273.00

$28,091.19

$28,933.93

$29,801.94

$30,696.00

$31,616.88

Other Operating Expenses

$337.00

$353.85

$371.54

$390.12

$409.63

$430.11

Unusual expenses

$1,030.00

$1,081.50

$1,135.58

$1,192.35

$1,251.97

$1,314.57

EBIT after unusual expenses

$13,187.10

$14,281.53

$15,456.78

$16,718.46

$18,072.56

$19,525.45

Non-operating income

$730.00

$766.50

$804.83

$845.07

$887.32

$931.69

Interest income

$517.00

$542.85

$569.99

$598.49

$628.42

$659.84

pretax income

$1,178.00

$1,236.90

$1,298.75

$1,363.68

$1,431.87

$1,503.46

Income tax

$3,310.00

$3,475.50

$3,649.28

$3,831.74

$4,023.33

$4,224.49

Consolidated net income

$12,302.10

$13,352.28

$14,481.07

$15,693.96

$16,996.84

$18,395.95

Minority

$401.00

$421.05

$442.10

$464.21

$487.42

$511.79

Net income

$12,703.10

$13,773.33

$14,923.17

$16,158.17

$17,484.26

$18,907.74

NESTLE

PRO FORMA STATEMENT OF FINANCIAL POSITION

FOR A FIVE YEAR PERIOD

YEAR

2017

2018

2019

2020

2021

2022

NON CURRENT ASSESTS

Net property plant &equipment

$25,970.00

$29,883.00

$34,253.10

$39,129.30

$44,565.66

$50,621.84

PPE gross

$52,290.00

$57,519.00

$63,270.90

$69,597.99

$76,557.79

$84,213.57

Accumulated depreciation

$26,320.00

$27,636.00

$29,017.80

$30,468.69

$31,992.12

$33,591.73

investments and advance

$14,090.00

$14,794.50

$15,534.23

$16,310.94

$17,126.48

$17,982.81

other long term investment

$5,420.00

$5,691.00

$5,975.55

$6,274.33

$6,588.04

$6,917.45

long term note receivable

$128.00

$134.40

$141.12

$148.18

$155.58

$163.36

intangible asset

$52,010.00

$54,610.50

$57,341.03

$60,208.08

$63,218.48

$66,379.40

net goodwill

$32,770.00

$34,408.50

$36,128.93

$37,935.37

$39,832.14

$41,823.75

net other intangible

$19,240.00

$20,202.00

$21,212.10

$22,272.71

$23,386.34

$24,555.66

other assets

$109.00

$114.45

$120.17

$126.18

$132.49

$139.11

CURRENT ASSETS

$29,426.00

$31,220.50

$33,127.36

$35,153.74

$37,307.38

$39,596.39

Cash & short term investments

$6,140.00

$6,569.80

$7,029.69

$7,521.76

$8,048.29

$8,611.67

Cash only

$4,880.00

$5,221.60

$5,587.11

$5,978.21

$6,396.68

$6,844.45

short term investments

$1,260.00

$1,348.20

$1,442.57

$1,543.55

$1,651.60

$1,767.22

Accounts receivable

$13,126.00

$13,982.70

$14,896.27

$15,870.51

$16,909.55

$18,017.70

Accounts receivable net

$9,696.00

$10,381.20

$11,114.69

$11,899.86

$12,740.36

$13,640.05

Accounts receivable gross

$10,020.00

$10,721.40

$11,471.90

$12,274.93

$13,134.18

$14,053.57

Bad debts

($324.00)

($340.20)

($357.21)

($375.07)

($393.82)

($413.52)

Other receivable

$3,430.00

$3,601.50

$3,781.58

$3,970.65

$4,169.19

$4,377.65

Inventory

$8,150.00

$8,557.50

$8,985.38

$9,434.64

$9,906.38

$10,401.69

Finished goods

$5,010.00

$5,260.50

$5,523.53

$5,799.70

$6,089.69

$6,394.17

Raw material

$3,390.00

$3,559.50

$3,737.48

$3,924.35

$4,120.57

$4,326.59

Progress payment

($248.00)

($260.40)

($273.42)

($287.09)

($301.45)

($316.52)

other current assets

$2,010.00

$2,110.50

$2,216.03

$2,326.83

$2,443.17

$2,565.33

miscellaneous current assets

$2,010.00

$2,110.50

$2,216.03

$2,326.83

$2,443.17

$2,565.33

Total Assets

$121,485.00

$130,496.95

$140,243.59

$150,789.33

$162,204.63

$174,566.38

LIABILITIES & EQUITY

CURRENT LIABILITIES

$33,320.00

$34,986.00

$36,735.31

$38,572.07

$40,500.68

$42,525.71

ST Debts & current portion

$9,630.00

$10,111.50

$10,617.08

$11,147.93

$11,705.33

$12,290.59

short term debt

$9,590.00

$10,069.50

$10,572.98

$11,101.62

$11,656.70

$12,239.54

current portion debt

$42.00

$44.10

$46.31

$48.62

$51.05

$53.60

Accounts payable

$17,040.00

$17,892.00

$18,786.60

$19,725.93

$20,712.23

$21,747.84

Income tax payable

$1,120.00

$1,176.00

$1,234.80

$1,296.54

$1,361.37

$1,429.44

other current liabilities

$5,530.00

$5,806.50

$6,096.83

$6,401.67

$6,721.75

$7,057.84

Miscellaneous current assets

$5,530.00

$5,806.50

$6,096.83

$6,401.67

$6,721.75

$7,057.84

LONG TERM LIABILITIES

Long term debt

$1,160.00

$1,218.00

$1,278.90

$1,342.85

$1,409.99

$1,480.49

long term debt capitalized leases

$11,470.00

$12,043.50

$12,645.68

$13,277.96

$13,941.86

$14,638.95

non-convertible debts

$1,147.00

$1,204.35

$1,264.57

$1,327.80

$1,394.19

$1,463.89

Capitalized leases

$136.00

$142.80

$149.94

$157.44

$165.31

$173.57

Provision for risks

$10,029.00

$1,080.45

$1,134.47

$1,191.20

$1,250.76

$1,313.29

Deferred taxes

$1,420.00

$1,491.00

$1,565.55

$1,643.83

$1,726.02

$1,812.32

Deferred taxes credit

$3,060.00

$3,213.00

$3,373.65

$3,542.33

$3,719.45

$3,905.42

Deferred taxes debit

$1,640.00

$1,722.00

$1,808.10

$1,898.51

$1,993.43

$2,093.10

other liabilities

$1,730.00

$1,816.50

$1,907.33

$2,002.69

$2,102.83

$2,207.97

other liabilities (deferred income)

$1,730.00

$1,816.50

$1,907.33

$2,002.69

$2,102.83

$2,207.97

Total liabilities

$58,105.00

$61,591.30

$65,286.78

$69,203.98

$73,356.22

$77,757.60

EQUITY

Common equity

$62,340.00

$65,457.00

$68,729.85

$72,166.34

$75,774.66

$79,563.39

common stock

$319.00

$334.95

$351.70

$369.28

$387.75

$407.13

retained earnings

$9,068.00

$9,521.40

$9,997.47

$10,497.34

$11,022.21

$11,573.32

unrealized exchange gain

($21,130.00)

($22,186.50)

($23,295.83)

($24,460.62)

($25,683.65)

($26,967.83)

treasury stock

$7,490.00

$7,864.50

$8,257.73

$8,670.61

$9,104.14

$9,559.35

Total shareholders' equity

$63,380.00

$68,905.65

$74,956.82

$81,585.35

$88,848.40

$96,808.79

accumulated minority interest

$1,650.00

$1,732.50

$1,819.13

$1,910.08

$2,005.59

$2,105.86

Total Equity

$61,730.00

$67,173.15

$73,137.69

$79,675.27

$86,842.81

$94,702.93

Total liabilities and equity

$121,485.00

$130,496.95

$140,243.59

$150,789.33

$162,204.63

$174,566.38

Column1

Column2

Column3

Column4

Column5

Column6

Column7

HERSHEY

PRO FORMA COMPREHENSIVE INCOME STATEMENT

FOR A FIVE YEAR PERIOD

YEAR

2017

2018

2019

2020

2021

2022

Revenue

$7,390.00

$7,981.20

$8,619.70

$9,309.27

$10,054.01

$10,858.33

COGS

$3,621.10

$3,910.79

$4,223.65

$4,561.54

$4,926.47

$5,320.58

Gross Income

$3,768.90

$4,070.41

$4,396.04

$4,747.73

$5,127.55

$5,537.75

SG &A Expenses

$1,940.00

$2,037.00

$2,138.85

$2,245.79

$2,358.08

$2,475.99

R&D

$50.00

$51,497.60

$53,814.99

$56,236.67

$58,767.32

$61,411.85

other SG & A

$1,890.00

$1,975.05

$2,063.93

$2,156.80

$2,253.86

$2,355.28

Other Operating Expenses

$491.62

$513.74

$536.86

$561.02

$586.27

$612.65

Unusual expenses

$928.39

$970.17

$1,013.83

$1,059.45

$1,107.12

$1,156.94

EBIT after unusual expenses

$1,828.90

$2,033.41

$2,257.19

$2,501.94

$2,769.46

$3,061.76

Non-operating income

$3.54

$3.70

$3.87

$4.04

$4.22

$4.41

Interest income

$76.06

$79.48

$83.06

$86.80

$90.70

$94.78

pretax income

$88.60

$92.59

$96.75

$101.11

$105.66

$110.41

Income tax

$400.00

$420.00

$441.00

$463.05

$486.20

$510.51

Consolidated net income

$1,508.50

$1,696.59

$1,903.12

$2,129.73

$2,378.18

$2,650.44

Minority

$ -

$ -

$ -

$ -

$ -

$ -

Net income

$1,508.50

$1,696.59

$1,903.12

$2,129.73

$2,378.18

$2,650.44

HERSHEY

PRO FORMA STATEMENT OF FINANCIAL POSITION

FOR A FIVE YEAR PERIOD

YEAR

2017

2018

2019

2020

2021

2022

Assets

Current assets

Cash

Cash and cash equivalents

$ 347.00

$ 364.35

$ 382.57

$ 401.70

$ 421.78

$ 442.87

Short-term investments

$ 50.00

$ 50.00

$ 50.00

$ 50.00

$ 50.00

Total cash

$ 347.00

$ 414.35

$ 432.57

$ 451.70

$ 471.78

$ 492.87

Receivables

$ 599.00

$ 634.94

$ 673.04

$ 713.42

$ 756.22

$ 801.60

Inventories

$ 751.00

$ 788.55

$ 827.98

$ 869.38

$ 912.85

$ 958.49

Deferred income taxes

Prepaid expenses

$ 152.00

$ 155.04

$ 158.14

$ 161.30

$ 164.53

$ 167.82

Total current assets

$ 1,849.00

$ 1,992.88

$ 2,091.72

$ 2,195.79

$ 2,305.38

$ 2,420.77

Non-current assets

Property, plant and equipment

Gross property, plant and equipment

$ 4,517.00

$ 4,968.70

$ 5,465.57

$ 6,012.13

$ 6,613.34

$ 7,274.67

Accumulated Depreciation

$ (2,277.00)

$ 2,235.92

$ 2,459.51

$ 2,705.46

$ 2,976.00

$ 3,273.60

Net property, plant and equipment

$ 2,240.00

$ 2,732.79

$ 3,006.06

$ 3,306.67

$ 3,637.34

$ 4,001.07

Goodwill

$ 684.00

$ 718.20

$ 754.11

$ 791.82

$ 831.41

$ 872.98

Intangible assets

$ 379.00

$ 397.95

$ 417.85

$ 438.74

$ 460.68

$ 483.71

Deferred income taxes

$ 36.00

Prepaid pension benefit

Other long-term assets

$ 155.00

$ 156.03

$ 157.06

$ 158.09

$ 159.12

$ 160.15

Total non-current assets

$ 3,496.00

$ 4,004.97

$ 4,335.08

$ 4,695.32

$ 5,088.54

$ 5,517.91

Total assets

$ 5,344.00

$ 5,997.85

$ 6,426.80

$ 6,891.11

$ 7,393.92

$ 7,938.68

Liabilities and stockholders' equity

Liabilities

Current liabilities

Short-term debt

$ 863.00

$ 906.15

$ 951.46

$ 999.03

$ 1,048.98

$ 1,101.43

Accounts payable

$ 474.00

$ 497.70

$ 522.59

$ 548.71

$ 576.15

$ 604.96

Taxes payable

$ 23.00

$ 24.15

$ 25.36

$ 26.63

$ 27.96

$ 29.35

Accrued liabilities

$ 785.00

$ 785.00

$ 785.00

$ 785.00

$ 785.00

$ 785.00

Other current liabilities

$ 72.00

$ 72.00

$ 72.00

$ 72.00

$ 72.00

$ 72.00

Total current liabilities

$ 2,218.00

$ 2,285.00

$ 2,356.40

$ 2,431.37

$ 2,510.09

$ 2,592.74

Non-current liabilities

Long-term debt

$ 1,557.00

$ 1,712.70

$ 1,883.97

$ 2,072.37

$ 2,279.60

$ 2,507.56

Deferred taxes liabilities

$ 53.00

$ 58.30

$ 64.13

$ 70.54

$ 77.60

$ 85.36

Pensions and other benefits

$ 354.00

$ 389.40

$ 428.34

$ 471.17

$ 518.29

$ 570.12

Minority interest

$ 49.00

$ 53.90

$ 59.29

$ 65.22

$ 71.74

$ 78.91

Other long-term liabilities

$ 115.00

$ 126.50

$ 139.15

$ 153.07

$ 168.37

$ 185.21

Total non-current liabilities

$ 2,128.00

$ 2,340.80

$ 2,574.88

$ 2,832.37

$ 3,115.60

$ 3,427.17

Total liabilities

$ 4,346.00

$ 4,625.80

$ 4,931.28

$ 5,263.74

$ 5,625.69

$ 6,019.91

Stockholders' equity

Common stock

$ 360.00

$ 360.00

$ 360.00

$ 360.00

$ 360.00

$ 360.00

Additional paid-in capital

$ 784.00

$ 1,157.05

$ 1,280.52

$ 1,412.37

$ 1,679.23

$ 1,829.77

Retained earnings

$ 5,898.00

$ 5,898.00

$ 5,898.00

$ 5,898.00

$ 6,100.00

$ 6,100.00

Treasury stock

$ (5,672.00)

$ (5,672.00)

$ (5,672.00)

$ (5,672.00)

$ (6,000.00)

$ (6,000.00)

Accumulated other comprehensive income

$ (371.00)

$ (371.00)

$ (371.00)

$ (371.00)

$ (371.00)

$ (371.00)

Total stockholders' equity

$ 998.00

$ 1,372.05

$ 1,495.52

$ 1,627.37

$ 1,768.23

$ 1,918.77

Total liabilities and stockholders' equity

$ 5,344.00

$ 5,997.85

$ 6,426.80

$ 6,891.11

$ 7,393.92

$ 7,938.68

568.045

The Hershey is a leading confectionary brand in US market in terms of capital expenditure that has been continuously rising since 2012. The capital expenditure ratio of the company was 4.7% of its revenue in 2014. While Nestle, on the other hand, had the capital expenditure to sales ratio of 4.4%.

The past capital expenditure analysis of Hershey shows that its expenditures are primarily focused on capacity expansion, cost saving, and innovative changes. Furthermore, the company has also purchased software’s in order to upgrade its information system. The capital productivity of the company is also better which can be seen from its return on capital employed of 26.6%. While Nestle had a return on capital employed of 18.9% in 2014.

In order to finance their long term investment plan and to achieve the profitability goals, both the company would need an increase in equity as can be seen in their respective pro-forma balance sheet. In the case of Hershey, 70% of its liabilities are constituted of long term debts. The company borrows long term liabilities at an average rate of 4.5%. On the other hand, Nestlé’s major financing is done the through equity financing which is safer but increases the cost of capital. Therefore, Nestle should increase the use of long term debts in future since debt financing would help the company in lowering its cost of capital and the company would be able to generate higher returns for their equity shareholders.

Analysis of forecasted financial statements reveals that Nestle should obtain long term debts for the period minimum of ten years to support the growth in its Healthcare, Infant, and Skincare business units. It will not only provide the company with sufficient time to work on its long term growth strategy, but will also lower its cost of capital since debt financing is cheaper as compared to equity financing. It could be seen in the case of Hershey’s that due to relying on debt financing, the company was able to earn industry highest return on equity of 55% in 2014, as compared to Nestlé’s 21.8%.

Finally, Nestle should also consider the stock split to attract the individual investors. By splitting the stocks, the company would become more accessible to potential investors . Furthermore, a better strategy would be to split stock simultaneously with the announcement of stock dividends which will be termed as the positive signal by the investors and other stakeholders. By announcing and allocating stock dividends instead of cash dividends, the company can retain its major portion of cash which could then be used to finance the major capital expenditure plans made for the growth and expansion of the company.