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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

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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

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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.

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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

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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

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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.

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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.

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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

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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.

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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

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(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.

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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.

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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.

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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

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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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