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ANALYSIS OF FINANCIAL STATEMENTS

Financial analysis is the process of identifying the financial strengths and weaknesses of a firm by
analyzing the relationships between the items in the financial statements. Because it gives a more
complete understanding about a firms financial performance, position and cash flows. Because for
decision making, more summarized, standardize and comparative information is more helpful. And
also the type of analysis varies according to the specific interests of the intended party.

For example, shareholders are interested in knowing the present and expected future earnings and
the stability of these earnings because the probability of getting a higher return lies on the profit
earned by the company. But the management of the organization would be interested in every
aspect of the financial analysis. Because it is their overall responsibility to see that the resources of
the firm are used most effectively and efficiently and that the firms financial condition is sound.

When carrying out this task of analyzing financial statements, there are various methods that can be
used in. Among them financial Ratio analysis is the most common tool used by many organizations.
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Ratio analysis is a powerful tool of financial analysis. It can be interpreted as the systematic use of
ratios to interpret financial statements so that the existing strengths and weaknesses of a firm as
well as its historical performance and current financial condition can be determined. It is designed
to eliminate size differences across firms and over time, thus allowing for more meaningful
comparisons. However financial ratios in itself means very little information. The skill in analysis is
important here to identify that what the ratio ought to be, or the significance of a difference from
one year to another, or from firm to another.

Therefor there are several objectives of applying ratios in analyzing financial statements.

To identify industry benchmarks.

Company can compare its performance with the other players in the same industry in order
to identify their relative position and also to identify what areas need further
improvements.
To standardize financial statements.
Because ratios control the effect of size differences and allows cross sectional comparisons
over time and between companies.
To measure relationships.
We can measure relationships by relating inputs (cost) with outputs (benefits).
To act as summary statistics
Small set of ratios can replace the information given by complex detailed financial
statements. This enables the users to screen information quickly and simplifies
understanding crucial aspects of a firms performance.

01. Company Performance

The CCS Company posted revenues of Rs. 9,768 million, representing a growth of 10 per cent over the
previous financial year. The recurring profit increased by 53 per cent during the same period where the
previous years results included a one off gain of Rs. 366 million on lease rights forgone and a gain of Rs. 72
million on change in the fair value of investment property. After excluding the aforementioned impacts, the
profit after tax for the year increased by 43% per cent.

The Nestle in 2014 proved to be yet another challenging year, with market conditions posing significant
uncertainties along the way. The challenges your Company encountered were faced with great
perseverance and determination, to ensure that the business remained sound, delivering greater value for
consumers and for you, our shareholders. It gives me great pleasure, to announce that your Company was
able to deliver a growth of 6.4% and a revenue of Rs. 32.9 billion. Supported by efficient portfolio

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management and value chain optimization, your Company was successful in improving margins to achieve
a profit of Rs. 3.7 billion, representing an increase of 14.2%.

1.1 Inventory turnover ratio

Inventory turnover = Sales / Inventory

CCS Nestle

Sales 47 700 146 (20,767,394)

Inventory 10 965 046 2 952 545

= 4.3 = (7.3)

When considering CCS the ratios here, it is obvious that they have achieved positive ratios.
It shows how frequently their stocks get turnover. But Nestle not achieve positive ratio.

1.2 Non-current asset turnover

No Non-current asset turnover = Revenue / Property, Plant & Equipment

CCS Nestle

Revenue 89 255 700 30 902 885

PPE 47 535 667 5 208 556

= 89 255 700 / 47 535 667 = 30 902 885 / 5 208 556

= 1.8777 = 5.9

When considering the ratios, it shows an efficient utilization of fixed assets in generating
revenue. When comparing the two companies it shows an increase in the ratio companies in
2014 due to the increase in revenue. And it can be named as a good improvement in the
company.

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 1.3 Gross profit ratio

Gross profit ratio = Gross profit / Sales x100

CCS Nestle

Gross profit 24 603 960 12 135 491

Sales 47 700 146 (20 767 394)
= 51% = - 58%

The ratio shows the proportion of gross profit compared to the sales of the Group. When
considering the CCS ratios it shows an increase in year 2014. This means the company has earned a
good gross profit through their sales.But nestle has a problem.Because their Gross profit ratio is
lower.

02. Sources of long term finance

Nestle

long term liabilities to

1 total assets long term debts 1155712 0.1073
total assets 10,771,066

long debts to total

2 equdity long term debts 1155712 0.28271
4,087,928
total equdity

3 total debts to total assets total debts 6683138 0.62047

total assets 10,771,066

profit befor inter. 4763075 187.051

4 interest coverage Interest 25,464

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 CCS

long term liabilities to total 0.08359609

1 assets long term debts 1,064,121 3
12,729,31
total assets 5

0.10200186
2 long debts to total equdity long term debts 1,064,121 6
10,432,36
total equdity 8

0.09328129
3 total debts to total assets total debts 1,187,407 6
12,729,31
total assets 5

25.6531988
profit befor inter. 1437477 9
4 interest coverage interest 56035

03. Working capital management

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2 Liquidity ratios

This type of ratios measures the ability of a firm to meet its current obligations. To calculate
these ratios, information gained from the cash flow statement and the cash budget is
necessary. A firm should ensure that it does not suffer from lack of liquidity and also that it
is not too much high liquidity. A very high degree of liquidity is bad since idle assets earn
nothing. Therefor it is necessary to maintain a proper balance between liquidity and lack of
liquidity.

2.1 3.1 Current ratio

It compares a companys total current assets with its liabilities.

Current ratio = Current assets / Current liabilities

Nestle -2014 CCS- 2014

0.9690
2,151,166 1.7449 5,356,129 1
1,232,826 5,527,426

It is preferred to have a ratio between in nestle 1.7 and 2. For example a ratio of 1.7 means
that the firm has Rs. 1.7 of current assets for every Rs. 1 of current liability. In CCS a ratio
below 1 suggests cash flow problems and a ratio that is too high indicates poor use of
money.

3.2 Quick ratio

To calculate this ratio we use only the most liquid current assets of the firm. It is also
known as the acid test ratio. It indicates what a company could do to pay off its short-
term debts immediately. Companies prefer to have a ratio of 1 to 1.

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 Quick ratio = (Current assets Inventory) / Current liabilities

Nestle -2014 CCS-2014

(2151166-528,676) 2.1511 (5356129-2,952,545) 0.4348

1,232,826 5,527,426

CCS has a quick ratio of 0.4. It indicates that the company cannot currently fully pay back
its current liabilities.NestleInfotech Ltd has a quick ratio of 2.1. It generally indicates good
short-term financial strength.

04.Risk Management

The process of identification, analysis and either acceptance or mitigation of uncertainty in

investment decision-making. Essentially, risk management occurs anytime an investor or fund
manager analyzes and attempts to quantify the potential for losses in an investment and then takes
the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate
risk management can result in severe consequences for companies as well as individuals. For
example, the recession that began in 2008 was largely caused by the loose credit risk management
of financial firms.

During the year 2014, the business environment was volatile and your Company remained focused
on its strategy to drive short term performance, while ensuring that the right decisions were made to
sustain long term growth. Nestl Lanka PLC continued to make steady progress and delivered a
growth of 6.4%. Your Company also took strategic steps to move towards its ambition of becoming
the recognized leading Nutrition, Health and Wellness Company trusted by all stakeholders.

These results demonstrate the determination that your Company has to grow in a profitable and
sustainable manner and that is complemented by improvements in the trading operating profit

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margin and earnings per share. This performance is also a testament to the unwavering commitment
of the employees to ensure profitable growth for your Company. I am confident that the creativity,
dynamism and drive of our people who are aligned with your Companys priorities will enable us to
win even in difficult environments.

In 2014 Nestls organic growth was 4.5%, composed of 2.3% real internal growth and 2.2%
pricing. Sales were CHF 91.6 billion, down 0.6%, impacted by negative foreign exchange of -5.5%.
Acquisitions, net of divestitures, added 0.4% to sales.

In the course of its business, the Company is exposed to a number of financial risks: credit risk,
liquidity risk, market risk (including foreign currency risk and interest rate risk) and price risk. The
Board of Directors has the overall responsibility for the establishment and oversight of the
Companys risk management framework. The Companys risk management procedures are
established to identify and analyse the risks faced by the Company, set appropriate risk limits and to
control and monitor risks to ensure adherence. a) Credit Risk Credit risk arises when the counter
party may fail to perform its obligation. The major risk in this regard arises from trade receivables,
which are subject to credit limits and control and approval procedures to minimise the extent of the
Companys financial exposure. Bank guarantees are also obtained to minimise the risk further. The
Company limits its exposure to credit risk by investing only in short term liquid assets and only
with counter parties that have an existing business relationship at a global level with Nestl S.A or
locally with entities classified by Investment Grade

Ceylon Cold Stores PLC (CCS) being a part of the John Keells Group believes that Enterprise Risk
Management (ERM) is intrinsically interwoven with Sustainability and CSR. Risk Management at
CCS therefore considers more than the specific operational and financial risks faced by the
organisation by including potential risks related to the environment, community, value chain and
employees. CCS is exposed to various forms of industrial, operational, environmental and financial
risks arising from the environment within which it operates in and its own operations and
transactions.

The objective of the Risk Management Strategy of the Company is to identify, manage and mitigate
risk, adapt to changing environment and harness Enterprise Risk Management opportunities which
will ensure that the Company adopts long-term and short-term strategies which are aligned with the
overall triple bottom-line objectives of the business and the John Keells Group. At the Group level,
the risk management process, lies with the Enterprise Risk Management Division of the John Keells
Group which acts as a process coordinator, facilitating the effective and timely identification,
mitigation and monitoring of risk as an integral component of the Groups Corporate Governance
System.

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 The Division is also responsible for the dissemination of best practices, continuous improvement
and updating of the Risk Management framework, working closely with the Sustainability, CSR
and Internal Audit functions of the Group. The annual Risk Management cycle at CCS begins with
a detailed discussion and identification of risks, impacts and preventive, detective and corrective
mitigation plans in conjunction with the JKH ERM Division, which constitute the bottom-up
approach. The Risk Management process and information flow adopted by the John Keells Group is
depicted below.

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 References

http://www.elephanthouse.lk/annualreport/CCS-Annual-Report-2014-15-Final.pdf

file:///C:/Users/Nirupa/Downloads/nestle-annual-report-2014.pdf

http://www.isaca.org/Info/certificationlanding/crisc/crisc.html?cid=sem

https://technet.microsoft.com/en-us/library/cc535304.aspx

http://www.investopedia.com/articles/investing/100313/financial-analysis-solvency-vs-liquidity-
ratios.asp

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