FINANCIAL ACCOUNTING RATIOS AS TOOLS FOR THE EVALUATION OF MANAGEMENT PERFORMANCE

(A CASE STUDY OF NESTLE FOOD NIGERIA PLC)

ABSTRACT

This research work was motivated by the need to unveil the task encountered by most uninformed and literate indigene and other African investors in various firm’s of their choices.

The research work listed 30 respondents from the Nestle Food Nigeria Plc coupled with its stakeholders.  The annual accounts and reports of five years, which span from 2000-2004 was used.

The research instrument employed in eliciting response from respondents is the personal inter view method.

This research work was able to make the following findings.

The capital structure of Nestle Food Nigeria Plc is devoid of preference share, which attract a fixed rate of dividend.

The firm continuously reviews its performance and set improved target that will ensure survival of the business in the interest f all the stakeholders.

It also recommend that Nestle Food Nigeria Plc should Endeavour to disclose certain vital investors financial statistics such as the market price per share of its highly sought after shares in the Nigerian Stock Exchange floor.

 CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Financial accounting informal ion contained in financial statement of business entities, is the bedrock for the computation of accounting ratios of business concern. This in turns form the: basic for the evaluation of both present and past business (operational) 1) Performances by users of financial information, which are also referred to as the stakeholders.

It is worthy of note to ascert that the information contained in financial statement are well organized m such a way that will enable its users to draw reasonable conclusion with respect to the financial position and performance (past, present and future) of the reportingentity. Ratio is one of the financial analytical tools used in assessing quantitative event (past, present and anticipated future financial position.

Financial accounting ratios to a proportion of fraction or percentage expressing the relationship between one iii a set of’ financial statement and another items in the same financial statement of the tools used in the analysis and interpretation of financial statement such as the cash flow statement and accounting ratios, the later has been proved to be the most powerful tool.

1.2   STATEMENT OF THE PROBLEM

Although, financial ratios analysis is the most powerful tool used in analyzing (lie financial and operating performances of firms, the technique suffer from some bottle necks which are also inherent in financial statement prepared and presented to the public.

A major draw back derived from the fact that facts and figuresmostly computed from historical accounts also suffer from same limitations which historical account have. For instance

i.      Financial ratio analysis drawn from historical information is of little use in assessing the future prospects of a firm.

ii.     Financial ratios are quantifiable information like the change in personnel level over-time.

iii.    Some financial ratios are not universally accepted as uniform parameter far financial analysis, such as the Return on capital employed (ROCE)

Closely allied to this is the fact that the figured of financial statement are not adjusted far changes in the price level, thus heady to unhealthy financial evaluation.

1.3   RESEARCH QUESTIONS

The following are research formulated in assessing the financial health of Nestle Food Nigeria Plc.

i.            To what extent have the firm been operating profitability in terms of its profit margin and assets utilization?

ii.          Is the firm consistent in theuseof its accounting policies?.

iii.        Can the firm sustain or improve its profitability and operating Performance given the strategic competitive advantages inthe industry?

iv.         Is the ratio of slow moving stock high in the current asset mix?

v.           How frequently and efficiently do, the firms convert its current asset into currentliabilities?

vi.         To what extent has the firm been able to efficiently managed its working capital?.

vii.       How efficiently has the firm been able to convert its current asset into liquid cash?

1.4   RESEARCH HYPOTHESES

The research work is aim at finding answer tocertain hypothesis that arecentral to the research work. These hypothesesinclude:

1.     HO:  Ratio analysis assists in evaluating and measuring both operating and financial performances of management. 
HA: Financial ration analysis does not assist in assessing and 
measuring both operating and financial performances of 
management.

2.     HO: The result of a well conducted financial ratios can be usedbasis for forecasting future performances and efficiencyof management.

HA: The result of a well conducted financial ratio analysis can be used as a basis for forecasting future performances and efficiency of management.

3.     HO: Financial ratio analysis is used as a basis for decision making by stakeholders

HA: Financial ratio analysis is not used for decision-making by shareholders.

1.5   PURPOSE OF THE STUDY

This research work is design primarily to justify and place more premiums on the use of financial ratios as veritable tools. For evaluation and measuring the performances and efficiencyof management.

The prime purpose of the study is to analyze by way of financial ratio, the financial statement of Nestle Food Nigeria Plc in order to determine.

i.            Theefficiency of the firm in the use of its assets

ii.          The profitability and productivity of the firm

iii.        Whether the firm is capable of meeting its current financial obligation as at when due.

iv.         The source of long-term funds employed by the firm.

v.           Whether the firm is measuring up in terms of the average industry ratio established.

vi.         How technique of financial ratio can be effectively employed by 
shareholder and stakeholders in analyzing the performance of the firm (s) of their choice.

1.6       SCOPE OF THESTUDY

It is discovered that most personnel of the firm, especially the top level managers areunwilling to provide required information relating to the study especially the average industry ratios. Hence most average industry ratios used in the study are based on past experience within the industry. Also, the accounting ratio under consideration is limited to a period of five years. From 2000 through year 2004.

1.7   SIGNIFICANCE OF THE STUDY

The prime objective of this study are:

i.            To investigate the extent at which financial statement serve as a bedrock for financial analysis vis-à-vis financial ratios.

ii.          To critically analyze the performances and position of the firm within its industry, using the accounting information conveyed by its financial statements and annual reports in previous years.

iii.        To verify whether the financial statementhave been prepared and presented in compliance with statement of accounting standards and other professional internal ional accounting standard.

iv.         To ascertain whether the firm in question is as a going concern can meet and face future challenges and demands of both legal and social responsibilities.

1.8   LIMITATIONS OF THESTUDY

Ø Basically the research works is limited to the information purveyed by the financial statements of Nestle Food Nigeria Plc.

Ø The study is also limited by the responses provided by the respondent via the personal interview aimed at sampling requisite information relevant to the study.

Ø Above all the study is limited by the average industry ratio which is not provided in the annual report and account of the firms.

Ø Other imitation of the study conic in farm of the accounting policies, practices, basic and methods employed in the preparation and presentation of the financial statement upon which financial analysis have been based.

1.9   DEFINITION OFTERMS

i.            FINANCIAL ACCOUNTING RATIO:This refers to the proportion of fraction or percentage, which expresses the relationship between one item of account and another in the same financial statements.

ii.          FINANCIAL ANALYSIS: This refers to the assessment of past, present and anticipated future event of the financial position and conditions armed at identifying any weakness or strength in the performance of the firm evaluated.

iii.       REPORTING ENTITY: This is an accounting terminology employed specifically to refer to the company which its financial statement is being analyzed by way of financial ratios.

iv.        FINANCIAL INFORMATION: This refers to those piecesof in formation contained in the financial statement of the firm being assessed.

v.           HISTORICAL ACCOUNT: This refers to the financial statement which has been prepared and presented in accordance with historical cost concept, which holds thatcostis the appropriate basis for initial accountingrecognition of all assets acquired, services rendered or received and expenses incurred.

vi.        FINANCIAL APPRAISAL: This is the assessment or evaluation of the operating financial performance of the management of company overtime via the use of financial ratios.

1.10 HISTORICAL BACKGROUND OF THE CASE STUDY

Nestlé Company had started off from a single man's idea, and developed into a giant corporation. In 1866 Henri Nestlé, a pharmacist, developed a milk food formula for infants who were unable to tolerate their mother milk (Nestle.com). His product became a success, and it created a demand throughout Europe. As Nestlé’s popularity grew more businesses wanted to merge and become partners with Henri Nestlé's business. From 1866 to 1947 the Nestlé Company had gone through several name changes. In 1905, Anglo-Swiss Condensed Milk Co. and Farine Lactee Henri Nestlé merged, and the company’s name became Nestlé & Anglo-Swiss Condensed Milk Co. Then in 1929, Peter-Cailler-Kohler Chocolats Suisses S.A. merged with the company. The name was then changed to Nestlé & Anglo-Swiss Holding Co. Ltd, on November 27, 1936. In December 1947, Co. acquired all the shares capital of the Alimentana S.A. company in exchange for fifteen Nestlé shares and fifteen Unilac shares for each of Alimentana S.A. share, so this point the name was at Nestlé Alimentana S.A. And then finally, the last name change that the company would endure was in 1977, where it adopted the name Nestlé SA (Mergent Online). Along the way Nestlé’s company remain successful, which allowed them expand to new region and territories throughout the world, making them the world’s biggest food and beverage company. Nestlé’s headquarters are located in Vevey, Switzerland, but the Nestlé Company has factories or operation in almost ever country in the world. Since the Nestlé case was published in 1998, it stated that Nestlé had employed 230,000 people worldwide, with $71.7 billion in sales (Rodgers, 2000). Now moving forward to 2003, Nestlé has increased the amount of employees to 253,000 people, with $88 billion in sales (Nestle.com). Nestlé is increasing the size of their company year by year. In addition, to the increase in the size of the Nestlé Company; Nestlé also has increased the variety in the different products they offer. In Nestlé’s business strategy they encourage product growth through innovation and renovation (Nestle.com). This strategy has allowed Nestlé to develop many different products in the various fields: baby foods, dairy products, breakfast cereals, ice creams, chocolates and confectionery, prepared foods, beverages, food services, bottled water, and pet care. This brings us to the main focus of our case analysis, the dairy division, and the yogurt product LC1 that lies within that division.

Nestlé strives on being innovator and renovators. So their research team in Switzerland discovered a culture called Lactobacillus acidophilus, or La-1. This particular product was chosen because it contains a probiotic agent, which is living microbial feeding supplements that allow the lower intestine to function better (Rodgers, 2000). La-1 helps the small intestine function by improving the body’s immune system, and in turn helping the body in preventing diseases. Nestlé has now found a solution for their health conscious consumers, but now they need to find away to implement it into one of their products. That when the researchers at Nestlé discovered that if they replace one of the mixes in their yogurt with the La-1 the same texture would be maintained. Now with the combination of Nestlé yogurt mix and the La-1; Nestlé has given their yogurt the name of LC1

Nestlé describes itself as a food, nutrition, health, and wellness company. Recently they created Nestlé Nutrition, a global business organization designed to strengthen the focus on their core nutrition business. They believe strengthening their leadership in this market is the key element of their corporate strategy. This market is characterized as one in which the consumer’s primary motivation for a purchase is the claims made by the product based on nutritional content.

In order to reinforce their competitive advantage in this area, Nestlé created Nestlé Nutrition as an autonomous global business unit within the organization, and charged it with the operational and profit and loss responsibility for the claim-based business of Infant Nutrition, HealthCare Nutrition, and Performance Nutrition. This unit aims to deliver superior business performance by offering consumers trusted, science based nutrition products and services.

The Corporate Wellness Unit was designed to integrate nutritional value-added in their food and beverage businesses. This unit will drive the nutrition, health and wellness organization across all their food and beverage businesses. It encompasses a major communication effort, both internally and externally, and strives to closely align Nestlé’s scientific and R&D expertise with consumer benefits. This unit is responsible for coordinating horizontal, cross-business projects that address current customer concerns as well as anticipating future consumer trends.

Nestlé is a global organization. Knowing this, it is not surprising that international strategy is at the heart of their competitive focus. Nestlé’s competitive strategies are associated mainly with foreign direct investment in dairy and other food businesses. Nestlé aims to balance sales between low risk but low growth countries of the developed world and high risk and potentially high growth markets of Africa and Latin America. Nestlé recognizes the profitability possibilities in these high-risk countries, but pledges not to take unnecessary risks for the sake of growth. This process of hedging keeps growth steady and shareholders happy.

REFERENCES

Abata, M.A (2002):“Financial Accounting Theory and Practices” Minerib Accord Ltd

Annual Reports and Account ofNestle Food Nigeria Plc, 2000-2004

Frank Wood and Allen Samsta “Financial Accounting forBusiness’’

Robert I.(2002):“Financial Accounting Made Simple.