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Final Project
Analysis of Financial Statement
NESTLE’ PAKISTAN

Submitted By:
Um e Laila
MBA 1

May 9th, 2020

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Table of Contents
Income statement of Nestle............................................................................................................. 5
Common size analysis: ............................................................................................................... 5
Trend analysis: ............................................................................................................................ 6
Balance sheet analysis of Nestle ..................................................................................................... 7
Trend analysis. ............................................................................................................................ 7
Common size analysis of balance sheet .................................................................................... 10
ASSET .................................................................................................................................. 10
Liabilities .............................................................................................................................. 11
Equity .................................................................................................................................... 11
Ratio Analysis: .............................................................................................................................. 12
Net Profit Margin: ................................................................................................................. 12
Operating profit margin ........................................................................................................ 13
................................................................................................................................................... 13
Gross profit margin ............................................................................................................... 13
CGS/SALES ......................................................................................................................... 14
EBT MARGIN ...................................................................................................................... 15
Selling expense/ sales; Marketing & Administration expense/ sales.................................... 15
Selling Expense/ operating expenses; Marketing and Administration expenses / operating
expenses; R&D expense/ operating expenses ....................................................................... 16
Balance sheet ratio analysis .......................................................................................................... 17
Current ratio: ......................................................................................................................... 17
Quick ratio ............................................................................................................................ 17
Total debt equity ratio ........................................................................................................... 18
Cash-turnover:....................................................................................................................... 18
Account Receivable turnover ................................................................................................ 19
Inventory turnover ratio ........................................................................................................ 19
Networking Capital turnover ................................................................................................ 20
Networking Capital ............................................................................................................... 20
ROIC= Return on Invested capital ................................................................................................ 21
2016-2017 ................................................................................................................................. 21
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RNOA ................................................................................................................................... 21
ROCE .................................................................................................................................... 21
2015-2016 ................................................................................................................................. 23
RNOA ................................................................................................................................... 23
ROCE .................................................................................................................................... 23
2017-2018 ................................................................................................................................. 24
RONA ................................................................................................................................... 24
ROCE .................................................................................................................................... 25
Summarized .......................................................................................................................... 26
Credibility analysis ....................................................................................................................... 28
Liquidity analysis ...................................................................................................................... 28
Net working capital ............................................................................................................... 28
Current ratio .......................................................................................................................... 28
Cash to Current liability ........................................................................................................ 28
Acid test ratio ........................................................................................................................ 28
Operating Activity analysis ratio .............................................................................................. 29
Account receivable turnover ................................................................................................. 29
Day’s sales in receivable ....................................................................................................... 29
Inventory Turnover ............................................................................................................... 29
Days Sales in inventory ........................................................................................................ 29
Operating cycle ..................................................................................................................... 29
Days purchase in account payable ........................................................................................ 29
Net trade cycle ...................................................................................................................... 29
Cash flow measures .................................................................................................................. 30
Cash flow ratio ...................................................................................................................... 30
Time Interest ratio ................................................................................................................. 30
Market measure ......................................................................................................................... 30
Solvency analysis ...................................................................................................................... 31
Total Debt Ratio .................................................................................................................... 31
Total Debt to equity capital................................................................................................... 31
Long term debt to equity ratio .............................................................................................. 31
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Appendix ....................................................................................................................................... 32
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Income statement of Nestle

Common size analysis:

Looking at the common size analysis (what proportion of sale is capture any account) we can
make following inferences:

 Cost of goods sold/sale is decreasing from 2014 to 2018;

 Net profit/ sale= net profit margin is just 11.45 % in 2018. Only 11.5 % is earn as profit
else is consumed in overcoming expenses
 Throughout these years maximum portion of revenue earned as sales goes to covering
expenses of the cost of goods sold, which is on average 50% of the total sales revenue
earned.
 After CGS, 2nd most cost consuming expenditure of the company is marketing and
advertisement, which expenses 22% of total revenue earned as sales.
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Trend analysis:

Trend analysis of Nestle income statement has been shown above; we make following inferences
from this analysis:

 Sales is going through ups and down during this period of five year. But recently
sales are constantly improving from 2015 to 2018
 This is huge increase in operating profit (EBIT) even there is a decrease in other
revenue, major reason for this increase could be 1: decrease in operating expenses,
2: cost of goods sold has reduced as well,
 Net income is increasing from 2015 to 2018, an one prominent reason is 1: increase
in net sales

60.00%
40.00%
20.00%
0.00%
2018 2017 2016 2015 2014
-20.00%
-40.00% net income
-60.00%

 Ups and down in the net income from 2014 to 2018 can be better seen in the graph
below.
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 2014 to 2015: Major drop in net profit could be possibly because of

1. operating income has been reduced, operating expenses has been
increased, net sales has been reduced, still profit before tax is still high
in 2015 compare to 2014 so a major reason can be seen is income from
joint ventures has been reduced drastically in 2015 hence net income of
2015 has been reduced resultantly.

Balance sheet analysis of Nestle

Trend analysis.
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Total asset
140000

135000

130000

125000

120000

115000
2018 2017 2016 2015 2014

 There is increase overall increase in the assets from 2016 to 2018: main reasons were the
increase in total current asset was high enough that the decrease in non-current asset was
overcome by it. Overall there was increase in total current assets.

non-current asset
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00% 2018 2017 2016 2015 2014
-4.00%
-6.00%
-8.00%

Total current asset

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00% 2018 2017 2016 2015 2014
-10.00%
-15.00%
-20.00%
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 2018-2017, Total liabilities are increasing mainly because of increase in current liabilities
even though there is decrease in non-current liabilities.

Inferences that can be made:

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 2018-2017: there is decrease in treasury share. Nestle called back its shares issued to
public.
 2018-2017: increase in retain earning, nestle re-invested more in 2018 from its profit
compared to 2017

Common size analysis of balance sheet

ASSET

 Ration of current asset to total assets is being increased from 2014 to 2018, with ups and
downs in between
 Major portion out of total asset is of non-current assets.
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Liabilities

 Company owe major of its assets to trade creditors’ current liabilities than to its non-trade
creditors’ non-current liabilities.
 For each 1 rupee of Asset Company owe maximum to financial debt outstanding and to
payables outstanding.
 For every 100 rupee of assets company has on average 21 rupee outstanding as non-
current liabilities and this ratio increases from 2014-2018

Equity
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 2016-2018: Percentage of equity of investors out of total assets increases.

 On average for every 100 rupee of assets 48 rupee is invested by inventors rest is credited
by creditors

Ratio Analysis:
Excel sheet

Net Profit Margin:

For every 1 unit of sales how much the firm is earning as net-income is known as net profit
margin.

Net profit margin

20.00%

15.00%

10.00%

5.00%

0.00%
2018 2017 2016 2015 2014
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 2017-2018: An increase in Net profit margin can be due to decrease in CGS/sales.

Selling price of goods has been increase therefore sales increase more than CGS.
 Change in inventory method is also a possibility: in case of inflation FIFO method would
give less value of CGS, they may have underestimate the CGS resultantly net-income
have increased and so is the net-profit margin
 2014-2016: Margin has been decreasing possible reasons are- taxes has increased and
other income has reduced
Operating profit margin
For each 100 rupee of sale how much you are earning as operating profit,

Operating profit margin

20.00%

15.00%

10.00%

5.00%

0.00%
2018 2017 2016 2015 2014

 2014-2016: operating profit margin has increased reasons can be other revenue has
increased hence Gross profit has increased, else CGS/SALES has reduced - ( Change in
inventory method, selling price of goods inflated caused sales to be increased )
 2016-2017: Decrease in this margin: other operating expenses has decreased way much,
gross profit margin has reduced, CGS/ sales has increased( Change in inventory method,
unit price of sales has reduced)
 2017-2018: Increase in margin can possibly because of drop in CGS/sales ( Sales volume
or price of goods has been increased)

Gross profit margin

This is revenues minus the cost of goods sold, divided by revenues. It indicates the amount of
money earned from the sale of goods and services, before selling and administrative charges are
considered. In essence, it reveals the ability of an organization to earn a reasonable return on its
offerings.
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Gross profit margin

52.00%
51.00%
50.00%
49.00%
48.00%
47.00%
2018 2017 2016 2015 2014

 2014-2016: Gross profit per unit sale has increase linearly. Since as can been seen in
CGS/SALES has decreased during this period resultantly more portion of sales is earned
as gross profit and less goes in covering cost of goods sold
 2016-2017: A decrease in this margin can be due to increase in CGS/sales ( may be LIFO
method was used and there is inflation)
 2017-2018: Increase in margin- sales has increased more than CGS incurred , Price of
goods has inflated

CGS/SALES
For each 1 rupee earned how much is paid as cost of goods sold

CGS/SALES
52.50%
52.00%
51.50%
51.00%
50.50%
50.00%
49.50%
49.00%
48.50%
48.00%
2018 2017 2016 2015 2014

 Change in Inventory method can result a change in this ratio.

 2014-2016: CGS/SALES has reduced, selling price of goods has been increased so sales
has increased more than CGS. OR Raw material cost has decreased
 2016-2017: Margin has increased: may be Inflation caused LIFO method to be
overestimated
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 2017-2018: Margin has reduced again: sales are increasing more than CGS; selling price
has increased of goods sold.

EBT MARGIN
For each 100 rupee of sales revenue how much is earned as EBT (Earning before Tax)

EBT Margin
16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2018 2017 2016 2015 2014

 2014-2016: Increasing trend is seen as with all other profits, a significant reason is
CGS/SALES being reduced,
 2017-2016: Increase EBT, possibly because of operating expenses has reduced,
CGS/SALES has reduced (sales increased more than CGS possibly selling price has
increased.
 2017-2018: Increased in margin, CGS/sales has dropped down( selling price of goods
has inflated), other operating income has increased largely

Selling expense/ sales; Marketing & Administration expense/ sales

How much for each100 rupee of sales earned is paid as selling expense (or marketing &
administration expenses.)
0.00%
2018 2017 2016 2015 2014
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
-30.00%

selling expenses/sales Marketing& Adminstration/sales

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 Major sales of nestle Pakistan is consumed in covering its marketing and administration
expenses than its selling expenses
 Almost throughout these years almost a fixed portion of sales is consumed in covering
these expenses

Selling Expense/ operating expenses; Marketing and Administration expenses /

operating expenses; R&D expense/ operating expenses
How much proportion of operating expenses is comprised of each of these expenses; selling,
marketing & administrative and operating expenses?

80.0%
60.0%
40.0%
20.0%
0.0%
2018 2017 2016 2015 2014

Marketing& Adminstration/operating exp

selling expesnes/operating exp
R&D expenses/operating expenses

 Marketing and administration expenses comprise of major portion of operating expenses

portion, almost 60% of it.
 2016-2017: marketing and administration expenses portion of total operating expenses
has reduced ; because other- operating expenses has increased
 And rest of operating expenses comprise of selling expenses, R&D expenses ,trading
expenses
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Balance sheet ratio analysis

Current ratio: The current ratio is a liquidity ratio that measures a company's ability to pay
short-term obligations or those due within one year.

Current ratio
1.5
1
0.5
0
2018 2017 2016 2015 2014

 2014-2018: Company asset is increasing less compared to increase in the liabilities

Quick ratio: The quick ratio is a measure of how well a company can meet its short-term
financial liabilities. Also known as the acid-test ratio, it can be calculated as follows: (Cash +
Marketable Securities + Accounts Receivable) / Current Liabilities

Quick Ratio
1
0
2018 2017 2016 2015 2014

Quick Ratio
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 2014-2018: Nestle Company is not doing well to fulfill its short-term financial liabilities,
its current liabilities are increasing more compared to its current asset

Total debt equity ratio: The debt-to-equity (D/E) ratio is calculated by dividing a
company's total liabilities by its shareholder equity.

Total Debt /Equity ratio

1.5

0.5

0
2018 2017 2016 2015 2014

 2014-2018:Company debt is increasing more compare to its owner equity

Cash-turnover:
The cash turnover ratio equals the sales revenue generated during a year divided by the average
cash and cash equivalents during the same year.

Cash trun-over
30
25
20
15
10
5
0
2018 2017 2016 2015 2014

 2014-2017: Sales revenue is less compared to the cash generated during that period,
probably reason was A/R are collected
 2017-2018: Sales were more but average cash generated compared to previous years were
less, hence Cash turnover increases
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Account Receivable turnover: The accounts receivable turnover ratio is an accounting measure
used to quantify a company's effectiveness in collecting its receivables

Account receivable turnover

15
10
5
0
2018 2017 2016 2015 2014

 2014-2015: company was not competent to get back its A/R from customers, hence ratio
dropped down.
 2014-2018: Ratio increases, A high accounts receivable turnover indicates that the
company enjoys a high-quality customer base that is able to pay their debts quickly

Inventory turnover ratio: The Inventory turnover is a measure of the number of times inventory is
sold or used in a time period such as a year.

Inventory turn over

30

20

10

0
2018 2017 2016 2015 2014

 2014-2018: Average inventory is increasing compared to sales, therefore ratio is being

decreased. Much of the sales revenue is not from the sale of inventories.
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Networking Capital turnover: The working capital turnover ratio is calculated by dividing net
annual sales by the average amount of working capital—current assets minus current liabilities—
during the same 12-month period

Networking capital Turn over

100

50

0
2018 2017 2016 2015 2014
-50

-100

 2014-2018: Nestle liabilities are increasing compare to its asset, hence its NWC turnover
ratio is dropping down

Networking Capital: Net working capital is the aggregate amount of all current assets and
current liabilities. It is used to measure the short-term liquidity of a business, and can also be
used to obtain a general impression of the ability of company management to utilize assets in an
efficient manner

NWC
5000

0
2018 2017 2016 2015 2014
-5000

-10000

 2014-2017: Current liabilities are more than company current assets, hence company isn’t
solvent enough during this time period and it cannot pay back its current liabilities using
its current assets.
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ROIC= Return on Invested capital

ROIC is a profitability or performance ratio that measures how much investors are earning on
the capital invested, ROIC can be calculated through many formulas; 3 formulas of RNOA and 3
formulas of ROCE.

2016-2017
RNOA
Return on Net operating Assets
1.
AVG NOA 85163

 Nestle RNOA is 8.4%, company earn net operating profit of 8.42 for every 100 rupee of
operating asset invested.
2.

3.

o Major contribution made in the RNOA of nestle is its operating liabilities,

company is managing its operating liabilities well. Company should improve its
net operating profit by increasing the sales or lessen their CGS.

ROCE
Return on common equity tell us about how much a company is earning from the investment
made by the owners in the company in form of common equity. Return on capital employed
or ROCE is a profitability ratio that measures how efficiently a company can generate profits
from its capital employed by comparing net operating profit to capital employed.
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 For every 100 rupee invested as common equity nestle is earning 11.7 rupee as adjusted
net income.

 Maximum contribution made to return nestle is earning on common equity invested is

made by equity multiplier. For every 1 rupee of common equity company is investing
2.06 to its total asset.
 Company should improve its profit margin by lowering down its expense and increasing
its Net-income.

3 ROCE RNOA+ (LEV* SPREAD)

0.084296963 + 0.016833717
0.10113068

 Nestle earn more return from its operations than from its other its non-operating
activities.
 Nestle Return on every 100 rupee of common equity invested in it, is 10.1.
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2015-2016
RNOA
1.

o For every 1 rupee of NOA company is earning net operating profit after tax of
0.101 rupee.

2.

 Most of the return company is earning from its asset turnover than from its net profit
margin.

3.

 Company is earning maximum return by properly handling its liabilities, properly

handled liabilities has a multiplier effect,

ROCE
1.

o Company is earning net adjusted profit of 0.128 for every 1 rupee of avg common
equity invested by the owners.
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2.

 Return on equity is mainly due to equity multiplier, company is using its equity to invest
in its total assets.
3.

 Company is earning more from its operating activities than from its non- operating
activities that is a good sign.

2017-2018
RONA

1.
 For every 1 rupee of NOA company is earning net operating profit after tax of 0.115
rupee.

2.

 Most of the return company is earning from its asset turnover than from its net profit
margin.
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3.

 Company is earning good amount of return on its investment by managing its operating
liabilities well, so well managed liabilities can be fruitful for company instead off bad
effects.

ROCE

 Company is earning net adjusted profit of 0.17355 for every 1 rupee of AVG common
equity invested by the owners.
2.

 Return on equity is mainly due to equity multiplier, company is using its equity to invest
in its total assets.
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3.

 Company is earning more from its operating activities than from its non- operating
activities that is a good sign.

Summarized
Table shows how the return nestle is earning varies from 2015- 2018

RNOA 2015-2016 2016-2017 2017-2018

RNOA= 8525.5/83494.5 7178.98 / 10111.5

NOPAT/AVG NOA =0.102109484 85163 /87202
=0.084296963 =0.115955446

SALES 0.095* 1.07 0.08 * 1.051 0.1105*1.0485

/AVG =0.102109484 = 0.08429 =0.11595
NOPAT/SALES * NOA
(1+AVG 0.095*0.73*1.46 0.0801 * 0.1105*0.698*1.500
SALES/AVG OL/AVG =0.1021 0.7071 =0.11595
NOPAT/SALES * OA * NOA) *1.487671
= 0.08429
ROCE

(NI-PREF DIV)/AVG COMMON EQUITY 8883/68932.5 7511/64105 10468/60316

=0.128865194 =0.11716 =0.1735

AVG 0.099 *0.662 * 0.0838 * 0.114 *0.6767*2.24

TA/AVG 1.96 0.6758*2.06 =0.1735
NI-PREF SALES/AVG COMMON = 0.128865 =0.11716
DIV/SALES * TA * EQUITY
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RNOA+ (LEV* SPREAD) 0.102 + 0.0181 0.0842 + 0.115 +0.039

=0.120 0.0168 =0.15502
= 0.101

 RNOA decreases from 2015-2016 to 2016-2017 & increase from 16-17 to 17-18
o There is decrease in NOPAT from 16 to 17 , CGS may have increase , expenses
may have increased, sales could have increased, tax expenses raised
o Increase RNOA 17-18, could be because of NOPAT have raised, sales have
increased, expenses have dropped. AVG NOA have decreased this company is
spending less on OA or OL have increased.
o Nestle has improved its operating leverage liabilities from 17 to 18 this has helped
it to improve its RNOA.
 ROCE decrease from 15-16 to 16-17 & increased from 16-17 to 17-18
o Net-income of the company has dropped from Y16 to Y17, its sales have dropped
so has its expenses have increased. So company is earning less adjusted net
income per AVG. Common equity. Even though its equity share have decreased
still its net income has dropped even further to cause overall decrease in ROCE
o Improved net income and less common equity has caused the ROCE of the
company to improved
o Company is earning more from it Non-operating income in year 2015-2016 than
from its operating income that’s not a good sign, but from 2016 onwards
company has start earning more from its Operating income.
o Company is spending large amount of its common equity to buy more assets as
you can see AVG TA/ AVG common Equity has increased. It shows that
company is investing to improve its asset for better operations.
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Credibility analysis
Credibility analysis is to determine how suitable and reliable a company is to lend money/ credit
to it. Whether the company be able to give back the borrowed money to its creditors.

Liquidity analysis
Analysis to determine whether a company is liquid enough to fulfill its short term obligations, to
pay off your non trade creditors/ suppliers

Net working capital

 Nestle total current liabilities has been excess of its total current asset from year 2015-
2018 that is not a good sign. It might gave to sell of its long term asset to pay off its short
obligations.

Current ratio
 Nestle current asset has been less compare to its current liabilities except for year 2014

Cash to Current liability

 Above Cash to CL ratio reveals against each dollar of Current liability a company owe to
pay how much cash and equivalent it has. Throughout these years company has less cash
than its current liabilities.

Acid test ratio

 2014-2017: Company has less Current asset after deducting inventory than its current
liability. But acidity of the company improved in 2018.
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Operating Activity analysis ratio

Account receivable turnover

 2016-2018 Nestle has less of credit sales out of it total sales
 There is an increase in credit sales of company from year 2014 to 2015

Day’s sales in receivable

 Company takes an average of 48 days to collect money from its credit customers
 2018: company has improved its collection by decreasing the number of days to 45 from
49 in 2017

Inventory Turnover
 Company on average earn 5 rupee as CGS per 1 rupee of AVG inventory.

Days Sales in inventory

 Company on average takes 68 to 70 days to sell of its inventory

Operating cycle
 Company on average takes 118 to 120 days to sell off is inventory and to collect money
from its customers

Days purchase in account payable

 Company on average take 140 days during year 2014-2018 to pay off its trade creditors

Net trade cycle

 Above mentioned figures reveal that the company takes more days to pay off to its
creditors than days to sell of its inventory and receive money from its customers
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Cash flow measures

Cash flow ratio

 Company on average generated 0.45 net cash flow from operating activities for each 1
rupee of current liabilities.
 2015-2018: company on average is generating 0.20 rupees as net cash flow from
operating activities for each 1 rupee of current liabilities.

Time Interest ratio

 Nestle is earning on average Net operating income of 14 to 15 rupee for every 1 rupee of
interest expenses.

Market measure

 Market measure of the company reveals the earnings of the share holders, share price and
data relating to equity
 Company share price has increased from year 2016 to 2018, investors has earned a
capital gain.
 Price to book: Share price to book value has increased during this time period share
were being solve at premium.
 EPS: Is increasing from year 2014 to 2013 excpet there is a drop in year 2017
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Solvency analysis
This analysis is used to determine whether a company is solvent enough to pay off its long term
obligations, to return money back to its non-trade creditors.

Total Debt Ratio

 Out of total capital owned by the company, how much is the total debt is outstanding
 For each 1 rupee of total capital owned by the company 0.50 rupee is the total debt the
company owe to its creditors.

Total Debt to equity capital

 2014: Against each rupee of total equity capital owned by investors company has 0.85
rupee as total debt outstanding.
 This ratio is increasing from 20104 to 2018

Long term debt to equity ratio

 On average against each rupee of total equity owned by Investors Company owe 0.39 to
0.60 rupee from year 2014 to 2018 to its creditors as Long term liabilities.
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Appendix
https://dps.psx.com.pk/company/NESTLE
http://www.scstrade.com/stockscreening/SS_CompanySnapShot.aspx?symbol=NESTLE
https://www.macrotrends.net/stocks/charts/NSRGY/nestle-sa/eps-earnings-per-share-diluted
http://www.scstrade.com/StockScreening/SS_CompanySnapShotHP.aspx?symbol=nestle
Book by Warren & Buffet.

https://www.nestle.com/sites/default/files/asset-
library/documents/library/documents/financial_statements/2013-financial-statements-en.pdf