This is a corporate financial analysis of Nestlé. Throughout various application tests, quantitative as well as qualitative, investigations on Nestlé’s financial performance will be applied. Detailed information regarding the structure can be extracted from the table of contents. As of 2018, Nestlé is present in 189 countries, operates 413 factories in 85 counties and employs around 323.000 employees. The company is operating through the following operating segments: Zone Americas, Zone Europe, Middle East and North Africa, Zone Asia, Oceania and sub-Saharan Africa, Nestle Waters, Nestle Nutrition and other businesses. For the year 2017, ending on 31 December 2017, the Nestles total sales were stated CHF 89.8 billion. Nestlé shares are enlisted on the SIX Swiss Exchange in Switzerland. At 31 December 2017, the market capitalization was CHF 25,223,000,000.
The 1866 founded transnational Swiss company Nestlé S.A. operates as a nutrition, health and wellness company, headquartered in Vevey, Vaus, Switzerland. By providing over 2000 brands Nestlé is considered the world’s largest food and beverage company measured by revenues and further metrics.
Table of Contents
- 1 Introduction
- 1.1 Nestlé's Company Profile
- 1.2 Structure of Paper
- 2 Application Test 1: Who's on Board?
- 2.1 Nestlé's Board of Directors
- 2.1.1 The Constitution of the Board
- 2.1.2 Independence of the Board
- 2.2 The ISS Governance Score
- 3 Application Test 2: Who is the Marginal Investor of Nestlé?
- 3.1 Top Shareholders
- 4 Application Test 3: Estimating Nestlé's Market Risk Premium
- 4.1 The Risk-Free Rate of the CHF
- 4.2 The Equity Risk Premium
- 5 Application Test 4: Analyzing the Risk Regression
- 5.1 Estimating Historical Risk Parameters (Top Down Betas)
- 6 Application Test 5: Estimating a Bottom-up Beta
- 6.1 Unlevered Beta: based on Historical Beta
- 6.2 Unlevered Beta: based on Sector Betas
- 6.3 Choosing between Betas
- 7 Application Test 6: Estimating the Cost of Debt
- 7.1 Bond Rating of Nestlé
- 7.2 Company Rating of Nestlé
- 7.3 Synthetic Rating of Nestlé
- 7.4 Pre-tax and After-tax Cost of Debt of Nestlé
- 8 Application Test 7: Estimating Market Value
- 8.1 Estimating Market Value and Book Value of Equity
- 8.1.1 Market Value of Equity
- 8.1.2 Book Value of Equity
- 8.1.3 Book Value of Debt
- 8.1.4 Market Value of Debt
- 8.2 Weights for Equity and Debt
- 8.2.1 Based upon Market Value
- 8.2.2 Based upon Book Value
- 9 Application Test 8: Estimating Cost of Capital
- 9.1 Bottom-Up Levered Beta
- 9.2 Cost of Equity
- 9.3 Cost of Capital
- 10 Application Test 9: Assessing Investment Quality
- 10.1 Computation of Return on Capital (ROC)
- 10.2 Computation of Return Spread
- 10.3 Computation of Economic Added Value (EVA)
- 11 Application Test 10: Would you expect your Firm to gain or lose from using a lot of debt?
- 11.1 Tax Benefit
- 11.2 Added Discipline of Debt
- 11.3 Bankruptcy Risk
- 11.4 Agency Costs
- 11.5 Future Flexibility
- 11.6 Qualitative Judgment
- 12 Application Test 11: The optimal Financing Mix of Nestlé
- 12.1 Financing Mix at Nestlé
- 12.1.1 Nestlé's optimal Debt Ratio
- 12.1.2 Nestlé's new Cost of Capital
- 12.1.3 The effect on the Firm Value
- 12.1.4 The effect on the Stock Price
- 12.2 Mechanics to get to the Optimum
- 13 Application Test 12: Getting to the Optimum
- 13.1 Mapping out Nestlé's Path
- 14 Application Test 13: Choosing your Financing Type
- 14.1 Duration
- 14.2 Currency
- 14.3 Fixed or Floating Rate
- 14.4 Straight or Convertible
- 15 Application Test 14: Estimating Nestlé's FCFE
- 15.1 Nestlé's FCFE
- 15.2 Comparing Nestlé's FCFE to Dividend Policy
- 16 Application Test 15: Assessing Nestlé's Dividend Policy
- 16.1 FCFE and Dividend Measure for the past Five Years
Objectives and Key Themes
This corporate financial analysis aims to comprehensively evaluate Nestlé's financial performance through a series of application tests, incorporating both quantitative and qualitative assessments. The analysis delves into various aspects of the company's financial health, offering a detailed view of its current situation and potential future trajectories.
- Assessment of Nestlé's Board of Directors and corporate governance.
- Determination of Nestlé's market risk premium and cost of capital.
- Evaluation of Nestlé's investment quality and financial performance indicators.
- Analysis of Nestlé's optimal financing mix and debt policy.
- Estimation of Nestlé's free cash flow to equity (FCFE) and dividend policy.
Chapter Summaries
1 Introduction: This introductory chapter provides a company profile of Nestlé, highlighting its global presence, diverse product portfolio, and significant market position as a leading food and beverage company. It also outlines the structure of the subsequent financial analysis, which will utilize various application tests to examine Nestlé's financial performance. The chapter sets the stage for the in-depth analysis that follows, providing crucial background information on the company itself.
2 Application Test 1: Who's on Board?: This chapter focuses on the composition and structure of Nestlé's Board of Directors, examining its constitution and the independence of its members. The analysis likely assesses the effectiveness of the board in overseeing the company's management and strategic direction. This is a critical element of corporate governance and risk management. The information presented is key to understanding the overall health of the company and the effectiveness of its decision-making structure.
3 Application Test 2: Who is the Marginal Investor of Nestlé?: This section identifies Nestlé's key shareholders, providing insights into the ownership structure and the influence of major investors on the company's strategic decisions. Understanding the marginal investor is crucial for assessing the company's market valuation and its susceptibility to market pressures. This chapter helps contextualize financial decisions within the framework of who holds the most significant stake in the company's success.
4 Application Test 3: Estimating Nestlé's Market Risk Premium: This chapter focuses on determining Nestlé's market risk premium, a critical component in calculating the company's cost of equity. The analysis probably involves examining historical data, market conditions, and relevant economic factors to derive a suitable estimate. This estimate is foundational for subsequent financial valuations and investment decisions.
5 Application Test 4: Analyzing the Risk Regression: This chapter delves into the statistical analysis of risk parameters, likely utilizing regression techniques to estimate historical risk and betas. The goal is to gain a precise quantitative understanding of the company's risk profile, which is integral to investment decisions and financial planning.
6 Application Test 5: Estimating a Bottom-up Beta: This chapter estimates Nestlé's beta using a bottom-up approach, analyzing the individual business units and their respective risks to arrive at a comprehensive assessment of company-wide risk. This approach complements the top-down analysis, offering a more nuanced and detailed understanding of Nestlé's overall risk exposure. Comparing this to historical and sector betas provides a more robust measure of systematic risk.
7 Application Test 6: Estimating the Cost of Debt: This section focuses on calculating Nestlé's cost of debt, a crucial component in determining the company's weighted average cost of capital (WACC). It explores various methods for estimating the cost of debt, factoring in the company's credit rating and market conditions. The accuracy of this calculation is vital for accurate financial modeling and investment decisions.
8 Application Test 7: Estimating Market Value: This chapter examines Nestlé's market and book values, including equity and debt. It delves into the methods for estimating these values and analyzes the implications for the company's capital structure. The accurate determination of market and book values forms the basis for many financial analyses and investment valuations.
9 Application Test 8: Estimating Cost of Capital: This chapter culminates in calculating Nestlé's weighted average cost of capital (WACC), a critical metric reflecting the overall cost of financing the company's operations. The WACC is a crucial input for evaluating investment opportunities and making strategic capital budgeting decisions.
10 Application Test 9: Assessing Investment Quality: This section assesses Nestlé's investment quality using metrics such as Return on Capital (ROC), Return Spread, and Economic Added Value (EVA). These measures help evaluate the profitability and efficiency of Nestlé's investments, providing insights into the company's overall financial health and performance.
11 Application Test 10: Would you expect your Firm to gain or lose from using a lot of debt?: This chapter analyzes the potential benefits and drawbacks of high debt levels for Nestlé, considering factors such as tax benefits, financial discipline, bankruptcy risk, agency costs, and future flexibility. A qualitative judgment is incorporated, offering a well-rounded perspective on the optimal debt level. This section explores the trade-offs involved in leveraging Nestlé's capital structure.
12 Application Test 11: The optimal Financing Mix of Nestlé: This chapter determines Nestlé's optimal financing mix, considering the impact of different debt ratios on firm value and stock price. It provides practical steps for achieving the optimal capital structure, ensuring both financial stability and growth. This section combines theoretical calculations with practical implementation strategies.
13 Application Test 12: Getting to the Optimum: This chapter maps out a strategic plan for Nestlé to achieve its optimal financing mix, offering a practical roadmap for implementing the recommendations outlined in the previous chapters. This provides a tangible path towards achieving the financial goals set earlier in the analysis.
14 Application Test 13: Choosing your Financing Type: This chapter delves into the specifics of financing options, focusing on factors such as duration, currency, interest rate type (fixed or floating), and security type (straight or convertible). The goal is to advise on the most appropriate financing strategies for Nestlé, aligning them with the company's long-term objectives. This addresses the practical choices in securing financing.
15 Application Test 14: Estimating Nestlé's FCFE: This chapter estimates Nestlé's free cash flow to equity (FCFE), a crucial metric for valuing the company and understanding its cash generating capabilities. It provides a detailed explanation of the estimation process, incorporating relevant accounting data and financial adjustments. The accurate calculation of FCFE is pivotal for investment decisions and valuation.
16 Application Test 15: Assessing Nestlé's Dividend Policy: This final substantive chapter compares Nestlé's FCFE to its dividend policy, analyzing the company's approach to returning value to shareholders. It provides a thorough assessment of the consistency and effectiveness of Nestlé's dividend payout policy. This section connects the cash flow analysis to the practical implications for shareholder returns.
Keywords
Nestlé, corporate finance, financial analysis, cost of capital, weighted average cost of capital (WACC), market risk premium, beta, cost of debt, market value, book value, capital structure, debt ratio, free cash flow to equity (FCFE), dividend policy, corporate governance, board of directors, risk management, investment quality, return on capital (ROC), economic added value (EVA).
Nestlé Corporate Financial Analysis: Frequently Asked Questions
What is the purpose of this corporate financial analysis?
This analysis comprehensively evaluates Nestlé's financial performance using a series of application tests. It combines quantitative and qualitative assessments to provide a detailed view of Nestlé's current financial health and potential future trajectories.
What key themes are covered in the analysis?
The analysis covers several key areas, including assessment of Nestlé's Board of Directors and corporate governance; determination of Nestlé's market risk premium and cost of capital; evaluation of Nestlé's investment quality and financial performance indicators; analysis of Nestlé's optimal financing mix and debt policy; and estimation of Nestlé's free cash flow to equity (FCFE) and dividend policy.
How is Nestlé's Board of Directors assessed?
The analysis examines the composition and structure of Nestlé's Board of Directors, focusing on its constitution and the independence of its members. This assessment evaluates the effectiveness of the board in overseeing management and strategic direction.
How is Nestlé's cost of capital determined?
The analysis calculates Nestlé's weighted average cost of capital (WACC), a critical metric for evaluating investment opportunities. This involves determining the market risk premium, cost of equity, and cost of debt, using various methods and data sources.
How is Nestlé's investment quality assessed?
Nestlé's investment quality is assessed using key performance indicators (KPIs) such as Return on Capital (ROC), Return Spread, and Economic Added Value (EVA). These metrics help evaluate the profitability and efficiency of Nestlé's investments.
What is the analysis's approach to Nestlé's optimal financing mix?
The analysis determines Nestlé's optimal debt ratio and financing mix, considering the impact on firm value and stock price. It explores the benefits and drawbacks of different debt levels, including tax benefits, financial discipline, bankruptcy risk, and agency costs.
How does the analysis assess Nestlé's dividend policy?
The analysis estimates Nestlé's free cash flow to equity (FCFE) and compares it to its dividend policy over the past five years. This assessment evaluates the consistency and effectiveness of Nestlé's approach to returning value to shareholders.
What specific financial metrics are used in the analysis?
The analysis utilizes a wide range of financial metrics, including beta, cost of debt, market value, book value, debt ratio, FCFE, ROC, EVA, and WACC. These metrics are used to provide a comprehensive and detailed evaluation of Nestlé's financial performance.
What is the structure of the analysis?
The analysis is structured around a series of application tests, each focusing on a specific aspect of Nestlé's financial performance. The report includes an introduction, chapter summaries, and a list of key terms.
What are the key findings of the analysis (without specific numerical results)?
The analysis provides a thorough assessment of Nestlé's financial health, including an evaluation of its corporate governance, capital structure, investment quality, and dividend policy. Specific recommendations regarding optimal financing and capital allocation are also provided.
- Quote paper
- Viktoria Schwarz (Author), 2018, Nestlé. A Corporate Financial Analysis of a Multi Million Dollar Company, Munich, GRIN Verlag, https://www.grin.com/document/441417
