The Financial Performance of Nestle Company and Hershey - Essay Example

Finance and Accounting P Topic: Finance and Accounting Accounting November 29, 2007 Finance and Accounting P 2 Introduction The purpose of this paper is to examine the financial performance of Nestle Company and Hershey Co. by way of analyzing the financial results for the year ended December 31, 2005 and December 31, 2006. The comparison of the two companies is to be based on the information available which was based on the references. The analysis will be based on the annual reports for both companies for the year ended December 31, 2005 and December 31, 2006. Comparative Analysis of both Nestle Company & Hershey Company The financial statements of Nestle Company and Hershey Company provide the accounting picture in terms of the financial position known as the balance sheets and usually taken as the snapshots at a point in time including the operations of Nestle and Hershey Company known as the income statement serving as the movie over a time period. The ratios as computed showed that these are the financial indicators distilling the relevant information with regards to the entity of business by quantifying the relationship among the selected items appearing on the financial statement. The ratios of the entity may also be compared with the different ratios of a different period and to the industry's ratios. These comparative analyses shown below were able to identify the trends that may be very significant with the investors, the lenders and at the same time other parties who are very interested. The profitability ratios of both companies are for purposes of measuring the income in relation to some base and the more general is due to profit wherein these are the results of many factors such as the operating decisions, the leverage and the other considerations necessary for both companies. The liquidity ratio or simply the solvency Finance and Accounting P 3 ratios of both companies are the indication of the firm's ability for meeting the obligations of the companies. The companies are both capable of meeting the obligations of both companies. Nestle Company Year on Year Profitability Ratios year ended 31 Dec 2006 year ended 31 Dec 2005 000's 000's Return on Capital Employed EBIT/ Shareholders funds + LT Liabilities EBIT $ 13,302 $ 11,876 Capital employed $ 69,326 $ 66,864 ROCE = 19% 18% Net Margin Net Income/ Net Sales Net Income $ 9,197 $ 8,081 Net Sales $ 98,458 $ 91,115 Net Margin 9% 9% Gross Margin Gross Profit / Net Sales Gross Profit $ 57,745 $ 53,198 Gross margin = 58.6% 58.4% Finance and Accounting P 4 Overheads as % of Turnover Distribution & Admin (Excl amortization of Goodwill) Distribution $ 8,244 $ 7,402 Marketing & Admin $ 34,465 $ 32,421 Total Overheads $ 42,709 $ 39,823 Turnover $ 101,805 $ 102,718 Overheads as % of Turnover 42% 39% Distribution as % of Turnover 8% 7% Marketing & Admin as % Turnover 34% 32% Turnover / Capital Employed 1.47 1.54 Turnover / Fixed Assets Fixed assets $ 20,230 $ 18,990 Turnover / Fixed Assets 5.03 5.41 Turnover / Net current Assets Net Current Assets $ 35,305 $ 41,765 Turnover / Net current Assets 2.88 2.46 Turnover / Stock $ 5,926 $ 5,926 stock Finance and Accounting P 5 Turnover / Stock 17.18 17.33 Current Ratio Current Assets $ 35,305 $ 41,765 Current Liabilities $ 32,479 $ 35,854 Current Ratio 1.09 1.16 Acid Test current assets less stock/ c liabilities 0.82 0.90 Fixed Charge Capital / Capital Employed year ended 31 Dec 2006 year ended 31 Dec 2005 20,230 / 69,326 18,990/ 66,864 29% 28% Finance and Accounting P 6 Hershey Co. Year on Year Profitability Ratios year ended 31 Dec 2006 year ended 31 Dec 2005 $ 000's $ 000's Return on Capital Employed EBIT/ Shareholders funds + LT Liabilities EBIT $ 994,240 $ 862,411 Capital employed $ 1,931,551 $ 1,963,831 ROCE = 51% 44% Net Margin Net Income / Net Sales Net Income $ 559,061 $ 493,244 Net Sales $ 4,944,230 $ 4,835,974 Net Margin 11% 10% Gross Margin Gross Profit / Net Sales Gross Profit $ 1,867,512 $ 1,870,434 Gross margin = 38% 39% Overheads as % of Turnover Selling Gen. & Non Recurring Selling Gen. & Admin $ 860,378 $ 912,986 Non Recurring $ 14,576 $ 96,537 Total overheads $ 874,954 $ 1,009,523 Turnover $ 4,226,400.50 $ 4,046,383.50 Finance and Accounting P 7 Overheads as % of Turnover 20% 25% Selling Gen. & Admin as % of Turnover 20% 22% Non Recurring as % Turnover 0.3% 2.4% Turnover / Capital Employed 2.18 2.06 Turnover / Fixed Assets Fixed assets $ 1,651,300 $ 1,659,138 Turnover / Fixed Assets 2.56 2.44 Turnover / Net current Assets Net Current Assets $ 1,417,812 $ 1,408,940 Turnover / Net current Assets 2.98 2.87 Turnover / Stock stock $ 4,325,316 $ 4,006,080 Turnover / Stock 0.97 1.01 Finance and Accounting P 8 Current Ratio Current Assets $ 1,417,812 $ 1,408,940 Current Liabilities $ 1,453,538 $ 1,518,223 Current Ratio 0.98 1.01 Acid Test current assets less inventories 0.53 0.53 Fixed Charge Capital / Capital Employed year ended 31 Dec 2006 year ended 31 Dec 2005 1,651,300 / 1,931,551 1,408,940/ 1,963,831 0.85% 0.71% Both companies have shown that they are good indicators in terms of current ratio because as compared with the last year's performance, both companies are doing very well. These ratios are designed for the purpose of highlighting the relationships considered to be meaningful between those financial data. These analyses of ratios are absolutely useful to compare the industry's norms like for instance the rules of thumb that may evolve and the benchmarking may be done that is against the competitors or the leaders of both industries. Finance and Accounting P 9 Conclusion The various users of financial statements may use these ratio analyses of financial statements by the managers, lenders and investors. The managers may evaluate the operations that include the control, planning and budgeting as well as anticipating the future needs and the problems. For lenders, these are for purposes of evaluating the creditworthiness and for most investors these are for predicting the future earnings and the cash flow as well as the prediction of the potentiality of most company. There are also limitations with these analyses such as the dissimilar units of businesses may make such difficulties in analyses, the inflation may cause the items of balance sheet which is not comparable that includes the manipulation of management in terms of ratios and the occurrences. The choice of the different generally accepted accounting principles in the United States may also affect the ratios wherein the comparability is a result of harm and the generalizations are truly difficult to be made. These ratios may also use the data in accounting in order to be accurate in terms of information from the balance sheet like for instance the fixed assets. Another consideration is the net profit margin wherein these may measure the bottom line that is the net income per dollar of sales because the said ratio may vary from one industry to another. This ratio is also the measurement with absorption of ability for the increase in cost or the decline in sales of the company. Nestle and Hershey Company are both having good results in terms of the net profit margin and both of the figures are very comparable. Both companies are profitable which are positive signs that both companies may have longer life in the field of businesses or industries. Finance and Accounting P 10 References "Financial Statements of Hershey Company". From the Internet Explorer Web site. 29 November 2007.< http://finance.yahoo.com/q/iss=HSY&annual > "Financial Statements of Nestle Company". From the Internet Explorer Web site. 29 November 2007. < http://www.nestle.com.my/NR/rdonlyres/B17CCCF3-9CCB-4D4C- B90A-49B3391A4175/100524/12KLSEreporting2006finaltransmission.pdf > Read More