Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
33
POKISTANDAGI ENGRO FOODS LIMITED VA NESTLE PAKISTAN LIMITED
KOMPANIYALARI BO'YICHA KORPORATIV MOLIYAVIY TAHLILLARI
Mardiyeva Ruxsora Istam qizi
Kimyo xalqaro universiteti
Annotatsiya.
Oziq-ovqat va ichimliklar sanoati atrof-muhit qoidalarini o'zgartiradi va
organik ishlab chiqarish bilan bog'liq noyob muammolarni hal qiladi, chunki u butun dunyo
bo'ylab asosiy sanoat va iqtisodiy kuchdir. Pokiston potensial ravishda rivojlanayotgan
bozorlarga ega bo'lgan keyingi 11 mamlakatdan biri bo'lishi mumkin, bu esa butun dunyo bo'ylab
iqtisodiyotning jadal o'sishiga olib keladi. Ushbu maqola Pokistonning ENGRO FOODS Limited va
NESTLE Pakistan Limited oziq-ovqat sanoatining asosiy moliyaviy o'yinchilari to'g'risidagi
ma'lumotlarga asoslangan.
Kalit
so’zlar:
rentabellik koeffitsientlari, likvidlik, aktivlardan foydalanish, fond bozori
faoliyati.
АНАЛИЗ КОРПОРАТИВНЫХ ФИНАНСОВ НА ПРИМЕРЕ КОМПАНИЙ ENGRO FOODS
LIMITED И NESTLE PAKISTAN LIMITED В ПАКИСТАНЕ
Рухсора Мардиева
Истамовна
Международный
университета Кимё
Аннотация.
Пищевая промышленность и производство напитков меняют
экологические нормы и решают уникальные проблемы, связанные с органическим
производством, поскольку оно является основной промышленной и экономической силой
во всем мире. Пакистан потенциально может стать одной из следующих 11 стран с
развивающимися рынками, которые приведут к бурному экономическому росту во всем
мире.
Данная статья основана на ключевых финансовых игроках пищевой
промышленности Пакистана, которыми являются ENGRO FOODS Limited и NESTLE
Pakistan Limited.
Ключевые слова:
коэффициенты прибыльности, ликвидности, использования
активов, заимствования, показатели фондового рынка.
CORPORATE FINANCE ANALYSIS THROUGH THE CASE OF ENGRO FOODS LIMITED
AND NESTLE PAKISTAN LIMITED COMPANIES IN PAKISTAN
Rukhsora Mardieva Istam kizi
Kimyo International University
Abstract.
The food and beverages industry is changing environmental regulations, and
handling the unique issues involved with organic production as it is major industrial and economic
forces worldwide. Pakistan has potentially become one of the Next 11 countries which has
emerging markets leading to booming economics of the globe. This article is based on the key
financial players of the food industry of Pakistan, which are ENGRO FOODS Limited and NESTLE
Pakistan Limited.
Keywords:
profitability ratios, liquidity, asset utilization, gearing, stock market
performance.
VIII SON - DEKABR, 2023
UO‘K:
336.64
33 - 40
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
34
Introduction.
Engro Foods Limited is one of the massive food companies due to its diverse offerings of
products to the consumers (
Engro Group, 2022, 2021)
. Engro Foods Limited is currently holds
71% share of the Food market as it is major contributor with its subsidiary products, deserts,
and drinks including worldwide brands such as Olper, Omore, Tarang, and Dairy Omung
(figure 1).
Figure 1.
Market Share of Engro Foods Limited
Nestle
Pakistan Limited is well - known as the third contributor towards Food industry of
Pakistan, a worldwide branded which everyone is acquainted with. Nestle Pakistan has been
operating since 1988 and become a leader with its diverse offerings of products by satisfying
everyone’s need
(Nestle Group, 2022, 2021). The main products of Nestle Pakistan are Mineral
Water, Dairy Products, Maggie Noodles, Nescafe and so many. It is crucial that all of these
products possess high quality. Nowadays, Nestle Pakistan Limited owns 4% share of the Food
Industry as provided in figure 2 below:
Figure 2. Market Share of Nestle Pakistan Limited
Economic burdens of war on India and Pakistan
Even though trade is not playing an important part in India-Pakistan relations,
Pakistan cannot afford to have a prolonged conflict with India because its economy is in
shambles. It is in urgent need for a bailout from the International Monetary Fund (IMF)
of around $12 billion. It needs more foreign aid and loans from other sources but its
credit rating by international agencies has fallen. Recently, Saudi Arabia and China have
given $2 billion each in loans to Pakistan (Coker, 2007).
Due to the war, Pakistan is currently struggling with high inflation, rising sovereign
and domestic debt, a falling currency (138.39 Pakistan rupee to a dollar) and a fiscal
deficit of 5.1 per cent. Therefore, it actually effects to the foods and dairy b usiness
namely Nestle and Engro Corporation profitability has decreased from last year owin g
71%
1%
2%
9%
4%
1%
12%
Market Share of Engro Foods Limited
Engro Foods Limited
Mitchells Fruit Farms Limited
Murree Brewery Company Limited
National Foods Limited
Nestle Pakistan Limited
Unilever Pakistan Foods Limited
Others
71%
1%
2%
9%
4%
1% 12%
Market Share of Nestle Pakistan Limited
Engro Foods Limited
Mitchells Fruit Farms Limited
Murree Brewery Company Limited
National Foods Limited
Nestle Pakistan Limited
Unilever Pakistan Foods Limited
Others
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
35
to continuous regulatory challenges arising primarily due to misalignment between
federal and provincial food laws, faced by the entire dairy sector. These issues created
an incorrect negative perception in the minds of consumers and, as a result, the da iry
industry witnessed a decline in overall volumes compared to the previous year. The
sharp increases in commodity costs, along with Rupee devaluation and, as rising interest
rates, have also put pressure on overall industry profitability.
Competitive Rivalry: The major competitors of food and beverages in Pakistan:
Haleeb Foods, Engro Foods, Shezan and Nestle Pakistan. For this purpose, Nestle
Pakistan applied strategies include Cost leadership, differentiation in products including
strong and intimate relationship with suppliers and customers. Whereas, Engro Foods
intends to achieve more market share as compared to other competitors by achieving it
applied the differential strategy in form of taste, quality, and availability of Engro Foods
products (Hossan, 2020).
Literature review.
Adler, H. expressed about the economy of Pakistan and its social effect as the process
whereby a public agency or private enterprise determines whether a project meets the
country's economic and social objectives and whether it meets these objectives efficiently
(Adler, 1987).
However, according to Akhtar, W revealed that Firms can finance their activities either by
issuing debt or equity but most prefers the mixture of these two called financing mix or capital
structure (Akhtar, 2023). Deciding on debt and equity level is a key role played by financial
managers, who always want to choose an optimal capital structure i.e. the one which maximizes
the value of a firm and minimizes its cost of capital.
Tax deductibility of interest payments has made firms to rely on debts as against equity
thereby causing an increase in debt to equity ratios and increase in bankruptcy risk, giving rise
to debt bias. Evidences have shown that all this creates inequities, economic distortions and put
in to threat the public revenues (Al-Yahyaee, 2021).
According to Ward and Price financial leverage refers to that proportion of capital which
is financed with debt. It represents the claim of the creditors on the assets of a firm in the events
of liquidation (Akhtar, 2023). The value of a firm as is shown by the share prices is all that the
management of a firm wants to maximize. The higher the market prices per share, the higher
the firm’s value
(Al-Yahyaee, 2021).
Capital structure is affected by interest rate changes. High interest rates make interest
payments on loans to be high (Al-Yahyaee, 2021). Joseph found that stock returns changes as a
result of changes in interest rates. Hyde states that with interest rate change, the interest
payments and principle amount of a loan changes. Atrill have also shown the effect of interest
on capital structure (Anderson & Houman, 2014).
Research methodology.
Stakeholder analysis of food industries in Pakistan
(A comparative study of Engro Foods and Nestle Pakistan)
Shareholders:
The main goal of
organisation is to maximise shareholder's value and
wealth. Satisfying them is serious as they contribute most of the assets. Shareholders will look
at the profitability and liquidity ratios to check on the sustainability and profitability of the
company.
The both groups earned for each $100 net sales slightly higher and favourable gross
margin of 29.78% (roughly 30%) in 2022 rather than 27.06% in 2021 for Engro Foods and gross
profit margin of Nestle indicates 49.61% in 2022 as compared in 2021, 49.13% which most
analysts agree that both companies contributes good profitability positions.
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
36
It seems, this can be because of a growth in sales from 128,592 (2021) to 171,568 (2022)
in Engro and from 89,590 (2021) to 91,439 (2022) in Nestle. By glancing at the ratio data
comparisons that Nestle is, earning twice more profit in both final years compared to Engro
Foods, the main reason might be due to the war between India and Pakistan.
Operating profit margin shows ratio between operation efficiency and company’s sales
(Atrill & McLane, 2013). Stable and greater margin indicates the firm’s success. In this case,
Engro Foods had slightly increased from 24.17 % (2021) up to 24.33% (2022) while Nestle
indicates 15.07 % in 2022 and 14.81 % in 2021 respectively. The foregoing results clearly
indicate that Engro’s managers were better at managing its cost of goods sold and operating
expenses than Nestle ’s managers were. Thus, increase in overall operating profit in 2018 went
to upward tendency.
The pre-tax profit margin is the profit before tax, which equals to 21.23% (2022) and
21.32% (2021) for Engro Foods, indicates how the company managed to increase its sales while
reducing expenses. Whereas Nestle shows 14.20% (2022) and 10.55% in 2021 respectively,
which means Engro Foods is more profitable due to the higher ratio compared to Nestle.
The post –tax profit to margin examines the real earnings’ percentage by a company for
each $1 (Hightower 2008). Both companies experienced a gradual increase, which shows 1.34%
difference between 2022 and 2021 in Engro Foods, while 3.06 % in Nestle mostly due to the
growth in sales of food and beverage products.
Table 1
Summary of Profitability Ratios
16
№
Profitability Ratios
Engro Foods
Nestle Pakistan
2022
(%)
2021
(%)
2022
(%)
2021
(%)
1
Gross profit margin
29.78
27.06
49.61
49.13
2
Operating profit margin
24.33
24.17
15.07
14.81
3
Pre-tax profit margin
21.23
21.32
14.20
10.55
4
Post-tax profit margin
14.06
12.72
11.44
8.38
Liquidity
In general, liquidity ratios show firm is ability to pay its day-to-day obligations and a ratio
of 1.0 indicates a reasonably liquid position.
In Engro Foods, the current ratios for both years were above one, which most analysts
agree that this indicated good liquidity positions. However, the current ratios for Nestle were
0.95 in 2022 and 0.83 in 2021. By comparison, results, Engro Foods had 1.95 times more current
assets than current liabilities in 2022, which shows the company, may pay off debts without
selling any long-term assets compared to Nestle. However, Engro Foods felt a slight drop in the
quick ratio from 1.80 to 1.73 in 2022 while in Nestle, the quick ratio increased from 0.59 to 0.74
in 2022 respectively. It was caused by a decrease in inventory of 52 rupee from 9177 rupee in
2021 to 9125 rupee in 2022. Inventory turnover days revealed in efficiency ratios were only 2
days difference for both companies in final years (see the asset utilization ratio 3.3.1). The quick
ratio of Engro Foods 1.73 (2022) is the proof of stable liquidity of the company whereas the
quick ratio of 0.74 implied that the Nestle had only 74 rupees of liquid assets to meet every
dollar of current liabilities when they become due for payment. It seems Nestle had a fall in
demand for its products due to the solid business strategy.
16
Source: Engro Group. Annual Reports 2022, 2021.
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
37
Table 2
Summary of Liquidity Ratios
№
Liquidity Ratios
Engro Foods
Nestle Pakistan
2022
(times)
2021
(times)
2022
(times)
2021
(times)
1
Current ratio
1.95
2.00
0.95
0.83
2
Quick (Acid-test) ratio
1.73
1.79
0.74
0.59
Asset Utilization
Efficiency ratios are performed to identify how efficiently assets of organization are used.
Better using can lead to better rate of return.
Inventory holding days measures the number of times the group sells its inventory within
a year (Hossan, 2020). Ratios of Nestle company has little bit improved from 73.02 days (2021)
to much effective 72.29 days (2022). This favorable improvement is due to considerably lower
cost of sales accompanied by a lower reduction in inventories as compared to Engro Foods, this
indicates 52.20 days (2022) and 50.85 days in 2021. However, Engro Foods still better uses
efficiently assets to generate profit rather than Nestle does.
Accounts Receivable Days for Engro Company was almost the same in both years 39.63
days and 38.72 days with almost 1-day difference. While the figure of Nestle shows almost 5-
day, difference 44.57 days in 2022 and 49.03 in 2021. Most analysts agree that this indicated
good position of credit collecting management so that for Engro it takes less than a month to
collect the credits that they provided. Over the year the accounts payable in days of Engro had
significantly increased for more than 11 days mostly due to decrease in cost of sales. This
tendency might be defined as positive from one side, because Engro paying out for creditors
slowly because they trust to Engro Foods, however on the other hand it may show Engro has
some financial problems to pay out on time.
Engro Foods had considerably slowed down its Working capital cash operating for 9 days
in 2022 (60.79 days) comparing to 2021 (51 days). While Nestle experienced an increase its
Working capital cycle for almost 5 days from 29.04 days (2021) up to 24.16 days (2022).
In 2021, Nestle earned for every $1 of sales 0.67 rupee and the rate declined to 0.66 rupee
in 2022, while in Engro this rate indicates 0.39 rupee in 2021 and 0.43 rupee in 2022, which
means nestle, is not using its assets efficiently and has invested to unnecessary assets.
Table 3
Summary Asset Utilization Ratios
№
Asset Utilization Ratios
Engro Foods
Nestle Pakistan
2022
(times)
2021
(times)
2022
(times)
2021
(times)
1
Inventory turnover
6.99
7.17
5.04
4.99
2
Accounts receivable turnover
9.20
9.42
8.18
7.44
3
Accounts payable turnover
2.39
2.58
2.58
2.41
4
Total asset turnover
0.43
0.39
0.66
0.67
№
Asset Utilization Ratios
2022
(days)
2021
(days)
2022
(days)
2021
(days)
1
Inventory holding days
52.20
50.85
72.29
73.02
2
Accounts receivable days
39.63
38.72
44.57
49.03
3
Accounts payable days
152.62
140.94
141.02
151.09
4
Working capital cycle
(60.79)
(51.37)
(24.16)
(29.04)
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
38
Gearing
Gearing ratio shows the relative proportion of shareholders’ equity and debt used to
finance a firm’s assets.
The low debt ratios describe lower risk owing to debt holders have less claims on the
company’s assets. The high debt ratios mean that a firm has been aggressive in financing growth
with debt and often results in volatile earnings.
Total liabilities to total assets ratio indicates deteriorated scenario in both companies
with slight unfavorable growth from 47.17% (2021) to riskier 52.79% (2022) for Engro and
almost 5% increase from 53.28% (2021) to 57.37% (2022) in Nestle.
In 2017 Engro’s 24 % assets were finan
ced by the non-current liabilities and it improved
by almost 7 % in 2022 and the percentage became around 31 % while Nestle felt slight increase
from 24.61% (2021) up to 25.96% (2022).
Total liabilities to equity ratio also be known as the financial risk ratio and expresses the
proportion of total liabilities and capital and reserves of the group (Rasa Subaciene,
2020). In
both companies, the ratio shows higher, unfavorable result 23% increase in Engro and almost
21% growth in Nestle. It seems the reason could be insignificant increase of equity together
with huge rise in total liabilities.
Equity to total asset ratio surveys long-term profitability and financial competitiveness of
an industry. This ratio illustrates whether the company’s equity (shares) i
s safe enough to
invest or not. Back to companies: Engro and Nestle, slight rise in shares along with assets
increase had not allowed the percentage of Equity asset ratios of both differ much from
previous year, 47.20% (2021) and 52.82% (2022) in Engro and 42.62% (2021), 46.71 % (2022)
in Nestle respectively.
I
nterest cover ratio supports to measure Company’s ability to pay on its debt on timely
basis. It illustrates firm’s ability to afford the interest on its debt. Interest cover ratio for Engro
was 6.05 in 2021 perhaps it was owing to low interest expense on debt and the rate increased
to 7.65 in 2022. Thus, Nestle definitely had more capacity for covering its interest expense than
Engro did: 13.64 times for Nestle (2022) versus 7.65 times for Engro (2022). It could be
expected that Nestlé’s higher interest c
overage be due to from using less debt than Engro.
However, this is not the case. Debt ratio of Engro was lower than Nestle
–
57 percent compared
to 53 percent. Hence, Nestle will be able to repay the debt principal in spite of its higher debt
ratio.
Table 4
Summary of Gearing Ratios
№
Gearing Ratios
Engro Foods
Nestle Pakistan
2022
(%)
2021
(%)
2022
(%)
2021
(%)
1
Total Liabilities to Total Assets
52.79
47.17
57.37
53.28
2
Non-Current Liabilities to Total Assets
30.80
24.19
25.96
24.61
3
Total Liabilities to Equity
111.84
89.30
134.60
114.06
4
Equity to Total Asset
47.20
52.82
42.62
46.71
5
Interest Cover (times)
7.65
6.05
13.64
11.97
Stock Market Performance
According to experts, the stock market performance or market value ratios indicate the
willingness of investors to value a firm in the marketplace relative to financial statement values
(Nwude, 2012). A company’s profitability, risk, quality management, and other factors are
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
39
revealed in its stock and security prices by the efficient financial markets resulting investor to
identify easily to buy a company’s security or not.
The returns on equity for Engro and Nestle were 12.73 percent and 17.92 percent,
respectively in 2022. It seems the owners of Engro were receiving a lower return on their equity
investment than the shareholders of Nestle. This can be because of Engro used less debt (more
equity) financing compared to Nestle
–
57 percent debt and 53 percent debt for Engro. The
more a debt company uses, the greater its return on equity will be, if the business is earning a
return on assets higher than the interest rate on its debt. Thus, Nestle has increased its return
for its shareholders by financing more debt, which most analysts agree that it is good news
however, the bad news
for Nestle’s
shareholders is the more debt contributes the greater the
firm’s financial risk and more risk for shareholders.
ROCE ratio examines with comparisons the firm profitability based on the amount of
capital it uses. Both companies’ ratios illust
rate favorable, very effective financial performance
with an increase from 17.47 % (2021) to 22.01% (2022) for Engro and 6 percent growth for
Nestle respectively. It can be due to the sharp increase in the shareholder’s equity with a growth
in income before provision for income taxes.
Table 5
Summary of Stock Market Performance
№
Stock Market Performance
Engro Foods
Nestle Pakistan
2022
2021
2022
2021
1
Return on Owner`s Equity
12.73%
9.52%
17.92%
12.06%
2
Return on Capital Employed
22.01%
17.47%
19.87%
13.75%
3
Return on Total Assets
10.61%
9.59%
10.06%
9.96%
4
Earnings per Share
Rs24.26
Rs17.96
Rs3.36
Rs2.31
5
Cash dividend declared per share
Rs4.90
Rs2.61
Rs2.45
Rs2.30
6
Dividend Yield
8%
7%
2.8%
2.7%
7
Dividend Cover
4.95 times 6.88 times 1.37 times
1.00 times
8
Dividend Payout
87%
117%
72.9%
101.7%
9
Net Asset backing per Share
Rs0.35
Rs0.32
Rs19.37
Rs20.12
10
Price Earning
2.52 times 2.07 times 25.74 times 37.40 times
Results and discussions.
The returns on equity for Engro and Nestle were 12.73 percent and 17.92 percent,
respectively in 2022. It seems the owners of Engro were receiving a lower return on their equity
investment than the shareholders of Nestle. This can be because of Engro used less debt (more
equity) financing compared to Nestle
–
57 percent debt and 53 percent debt for Engro. The
more a debt company uses, the greater its return on equity will be, if the business is earning a
return on assets higher than the interest rate on its debt. Thus, Nestle has increased its return
for its shareholders by financing more debt, which most analysts agree that it is good news
however, the bad news for Nestle’s shareholders is the more debt contributes the greater the
firm’s financial risk and
more risk for shareholders.
ROCE ratio examines with comparisons the firm profitability based on the amount of
capital
it uses. Both companies’ ratios illustrate favorable, very effective financial performance
with an increase from 17.47 % (2021) to 22.01% (2022) for Engro and 6 percent growth for
Nestle respectively. It can be due to the sharp increase in the shareholder
’s equity with a growth
in income before provision for income taxes.
Iqtisodiy taraqqiyot va tahlil, 2023-yil, dekabr
www.e-itt.uz
40
Market Perception
Earnings per share are the sum of the monetary value received during the period on behalf
of each outstanding share ordinary shares ( Al-Yahyaee, 2021). Both companies experienced a
growth from 17.96 rupee (2021) up to 24.26 rupee (2022) for Engro and 2.71 rupee to 3.36
rupee for Nestle. Price Earnings ratio of Nestle indicates that the investors were willing to pay
25.74 rupee for every dollar of earnings per share that Nestle produced, compared to the rate
of 2.52 for Engro in 2022.
Thus, investors were
willing to pay more for Nestlé’s earnings than shareholders of Engro
were. It might be for investors that Nestle have more growth potential and smaller risk
compared to Engro due to the better earnings.
Conclusions.
The examination of above it is plainly perceptible that Nestle had less fulfilling financial
year in 2022 compared to Engro Foods. It shows even with gainfulness proportions which
indicate general direct decrease but it may, for the potential financial specialist it ought not to
be a major dread. Nestle is one of the best profitable organizations on the world. In this case, it
is normal that offer costs will increment with the expansion of benefit of the organization. Based
on this information it is an ideal time to purchase customary offers of the organization.
References:
Adler, H. (1987). Economic Appraisal of Transport Projects. Baltimore: The Johns Hopkins
University
Press.
Available
at:
https://documents1.worldbank.org/curated/en/383421468767365929/pdf/multi-page.pdf
Akhtar, W. (2023). Effects of Debt on Value of a Firm. Journal of Accounting & Marketing,
https://www.hilarispublisher.com/open-access/effects-of-debt-on-value-
of-a-firm-2168-9601-1000202.pdf
Al-Yahyaee, K. H. (2021). The information content of cash dividend announcements in a
unique environment. Journal of Banking & Finance, 606-612. Available at:
https://ro.uow.edu.au/buspapers/1195/
Anderson, J. T& Houman B. Shadab (2014). The asset based loan facility.
В
The value of Debt
(pp.
95-100).
New
Jersey:
Wiley
and
Sons.
Available
at:
https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1454&context=jbl
Atrill, P. (2020). Financial Management for Decision Making (6
th
edition). Essex: Pearson
Education
Limited.
Available
at:
https://omidfa.ir/uploads/files/Peter_Atrill_-
financial_management_for_decision_makers_(2020).pdf
Atrill, P., & Mclaney, E. (2013). Accounting and Fianance for non specialists (8
th
edition).
London: Pearson Education Limited.
Coker, A. (2007). Ludwig's Applied Process Design for Chemical And Petrochemical Plants
(
Т
. 1). USA: Elsevier.
Engro Group, (2022, 2021). Annual Reports. [Online] Available at:
https://www.nestle.com/investors/annual-report
Hossan, F. (2020). Performance evaluation and ratio analysis of Pharmaceutical Company
in Bangladesh. University West, Department of Economic and Informatics, Bangladesh.
Nestle
Group,
(2022,
2021).
Annual
Reports.
[Online]
Available
at:
https://dps.psx.com.pk/download/document/127368.pdf
