Accounts Project

Principles of Accounting Project
Ratio analysis; Introspecting the impact of demonetization
Analysis of the financial effect of demonetization on the food

processing industry companies- Nestlé India Limited and
Britannia Industries Limited
Word Count: 6635

Table of Contents
Declaration ................................................................................................................................................... 3
Introduction .................................................................................................................................................. 4
Solvency Ratios ............................................................................................................................................ 5
Liquidity Ratios .......................................................................................................................................... 10
Activity Ratios............................................................................................................................................ 13
Profitability Ratios ...................................................................................................................................... 18
Demonetization and its effects .................................................................................................................... 26
Ratio Table ................................................................................................................................................. 27
Comparative analysis of rations between firm A and B ............................................................................... 28
Conclusion ................................................................................................................................................. 30
References .................................................................................................................................................. 31
2
Declaration
The current project titled “Analysis of the financial effect of demonetization on the food processing industry
companies- Nestlé India Limited and Britannia Industries Limited” has been undertaken by the following
group members of the course BBA LL.B. (Honours), 2nd year, section A of O. P. Jindal Global University –
1. Aakash Joshua Ramesh (19010007)
2. Afrrin Advani (19010045)
3. Chaitanya Kishore Sunkara (19010143)
4. Pooja Bommareddy (19010350)
5. Pranav Srinivas Mattapalli (19010356)
The project undertaken has been submitted to Professor Ammar Hafeez, as a part for our internal assessment
of the subject Principles of Accounting.
We confirm that the present work is original and the result of our efforts. We further confirm that the same
has not been submitted anywhere else for consideration.
3
Introduction
Industry: Food processing

The firm with dominant hold: Nestlé India Ltd. (Firm A)
Firm posing rivalry: Britannia Industries Ltd. (Firm B)
Food processing as an Industry was chosen for the project, for it is one of the essential industries to function,
which produces crucial goods for the economy. This industry can directly or indirectly employ lakhs of
employees and is an industry which is vital for farmers, for it is their raw materials that are used. As farmers
make up more than 60% of the country’s population, analyzing the performance of these industries can be
indicative of the economy at large, and a policy decision such as demonetization can be best analyzed
through such industries.
— Why this specific firm (FIRM A) was chosen?

Nestlé India Limited, an Indian subsidiary of the Swiss multinational company Nestlé, has had a dominant
hold of the food processing industry in India for quite some time now. Nestlé came to India when it set up
its first factory in Moga, Punjab in 1961 and has been a partner in India’s growth for over nine decades now.
The firm sells goods ranging from under internationally famous brand names such as Nescafé, Maggi, Milky
bar, Kit Kat, and Nestea. In recent years the company has also introduced products of daily consumption and
use such as Nestlé Milk, Nestlé Slim Milk, Nestlé Dahi and Nestlé Jeera Raita.
We chose this firm not only because of its prominent presence in the food processing industry but also
because there is potential in analyzing the impact of the 2016 Indian banknote demonetization.
— How does it rival the other firm (FIRM B) (Substantiate with instances of past/present rivalry
records)?
Britannia Industries Limited is an Indian food and beverage company founded in 1892. Headquartered in
Kolkata, it is one of India’s oldest existing companies and poses a great rivalry to firm A: Nestlé Limited.
Britannia is the leading biscuit manufacturer with a 33% market share of the overall biscuit market. Apart
from the core business of biscuits, the company has a presence in other food categories such as dairy, cake,
bread and rusk. Nestlé India, on the other hand, is a 100-year old and second-largest food processing
industry company dominating the instant noodle (Maggi) and the instant beverage (Nescafe) categories.
Both these companies produce goods which are closely related, and due to this, they pose as the biggest
competitors to each other.
Since demonetization directly and immediately affects the liquidity of a firm, it will be interesting to note
the effect of it on two of the largest food processing firms in the nation.
NOTE: All figures mentioned below are in crores. (₹1,00,00,000)

4
Solvency Ratios
Debt-equity ratio
Nestlé India Limited
Formula Total Debt
Shareholder’s Equity
Calculation Year Ending 2016:
Debt = Non-Current Liabilities = 21595.7
Equity = Shareholder’s Funds = 30137
Debt-equity Ratio = Debt/Equity = 21595.7/30137 = 0.716: 1
Year Ending 2017:

Debt = 24492.9
Equity = 34205.9
Debt-equity ratio = 24492.9/34205.9 = 0.716: 1
Year Ending 2018:

Debt = 25593.9
Equity = 36737.4
Debt-equity ratio = 25593.9/36737.4 = 0.696: 1
Analysis A low debt-to-equity ratio indicates a lower amount of financing by debt via
lenders, versus funding through equity via shareholders. A higher ratio indicates
that the company is getting more of its financing by borrowing money, which
subjects the company to potential risk if debt levels are too high

Formula Total debt
Shareholder’s equity
Debt = 69
Equity = 1766.48
Debt-equity Ratio = 69/1766.48 = 0.039:1
Year Ending 2017:

Debt = 64.38
5
Equity = 2696.42
Debt-equity ratio = 64.38/2696.42 = 0.023:1
Year Ending 2018:

Debt = 120.58
Equity = 3419.37
Debt-equity ratio = 120.58/3419.37 = 0.035:1
Analysis It is common knowledge that a relatively ‘good’ D/E ratio for a firm depends on
the industry it operates in. Britannia operates in a capital-intensive industry, and
the norm is that they tend to have a ratio above 2. However, this is not the case, as
in this given scenario, we can see that the amount of debt relatively low. As the
ratios over the years are too low, it can be said that the firm is over-relying on
equity to finance its business (can be costly and inefficient).
Debt-assets Ratio
Formula Total debt
Total assets
Debt = Non-current liabilities = 21595.7
Assets = 68059.7
Debt-assets ratio = 21595.7/68059.7 = 0.317: 1
Year Ending 2017:

Debt = 24492.9
Assets = 73625.9
Debt-assets ratio = 24492.9/73625.9 = 0.332:1
Year Ending 2018:

Debt = 25593.9
Assets = 80880.8
Debt-assets ratio = 25593.9/80880.8 = 0.316: 1
Analysis Generally, a ratio of 0.4 – 40 percent – or lower is considered a good debt ratio.
This means that Nestlé will have to pay out a smaller percentage of its profits in
principle and interest payments. Thus, lower is always better.
6
Formula Total debt
Total assets
Debt = 69
Assets = 3457.1
Debt-assets ratio = 69/3457.1= 0.019:1
Year Ending 2017:

Debt = 64.38
Assets = 2339.42
Debt-assets ratio = 64.38/ 2339.42= 0.027:1
Year Ending 2018:

Debt = 120.58
Assets = 5187.92
Debt-assets ratio = 120.58/5187.92 = 0.023:1
Analysis Here, in the case of Britannia, we can see that the company has extremely Low
debt in relation to its total assets, which shows that the company has poor
leveraging. This means that they are unable to create adequate wealth for their
shareholders. Nevertheless, a company with a D/A ration lesser than one indicates
that the company owns more assets than liabilities and can meet their obligations
by selling assets if needed. Britannia’s extremely low D/A ratios also suggest that
the risk for default or bankruptcy are low.
Proprietary Ratio
Formula Total equity
Total Assets
Calculation Year Ended 2016:
Equity = 30137
Assets = 68059.7
Proprietary Ratio = 30137/68059.7 x 100 = 44.28%
7
Year Ended 2017:
Equity = 34205.9
Assets = 73625.9
Proprietary Ratio = 34205.9/73625.9 x 100 = 46.45%
Year Ended 2018:

Equity = 36737.4
Assets = 80880.8
Proprietary Ratio = 36737.4/80880.8 x 100 = 45.42%
Analysis A high ratio value shows that a firm is financially healthy as it finances its assets
with equity rather than taking on debt. Nestlé has managed to maintain constant
financial stability throughout the three financial periods, and the ratio falls under
the value of an ideal ratio for a strong financial position.

Formula Total equity
Total Assets
Equity = 1766.48
Assets = 3457.1
Proprietary Ratio = 1766.48/3457.1 x100 = 51.09 %
Year Ended 2017:

Equity = 2696.42
Assets = 4108.80
Proprietary Ratio = 2696.42/ 4108.80 x 100 = 65.62 %
Year Ended 2018:

Equity = 3419.37
Assets = 5187.92
Proprietary Ratio = 3419.37/ 5187.92 = 65.91 %
Analysis A high ratio value shows that a firm is financially healthy as it finances its assets
with equity rather than taking on debt. Here, we can see that there was a 15%
Increase in the proprietor’s ratio, marked by an increase in equity and assets.
Britannia has significantly improved its financial stability from 2016-2017 and
increases further (though slightly) from 2017-2018.
8
Interest coverage ratio
Formula EBIT (Earnings Before Interests and Taxes)
Calculation N/A
Analysis The company has not declared interest amounts and other required information in
their annual reports, and other SEBI mandated Financial declarations; this ratio
cannot be accurately calculated.

Formula EBIT (Earnings Before Interests and Taxes)
Calculation N/A
Analysis The company has not declared interest amounts and other required information in
their annual reports and other SEBI mandated Financial declarations; this ratio
cannot be accurately calculated.
9
Liquidity Ratios
Current Ratio
Formula Current assets
Current liabilities
Current Assets = 32789.9
Current Liabilities = 16327
Current Ratio = 32789.9/16327 = 2.01:1
Year Ending 2017:

Current Liabilities = 14927.1
Current Ratio = 39373.9/14927.1 = 2.63:1
Year Ending 2018:

Current Ratio = 47369.5/18549 = 2.55:1
Analysis A current ratio is used to measure a company’s ability to meet its short-term
obligations and cash demands. An ideal current ratio is 2:1. If the company’s
current ratio is too high, it may indicate that the company is not efficiently using
its current assets or its short-term financing facilities. Here we can see that
Nestlé’s current ratio is nearly ideal throughout all the three financial periods.

Formula Current assets
Current liabilities
Current Ratio = 1.055:1
Year Ending 2017:
10
Year Ending 2018:

Analysis Here, we can see that Britannia’s current Ratio was not initially Ideal but has
gradually increased to a favourable amount. An ideal Current Ratio should be 2:1
For the Industry Britannia’s in, which we can see that Britannia can achieve,
which shows that their current assets and liabilities are under control.
Liquid Ratio
Formula Liquid assets
Current liabilities
Calculation Liquid Assets = Assets - Inventories
Ending 2016
Liquid Assets = 32789.9 – 9431.8 = 23358.1
Liquid Ratio = 23358.1/16327 = 1.43 :1
Ending 2017
Liquid Assets = 39379.9 – 9024.7 = 30355.2
Liquid Ratio = 30355.2/14927.1 = 2.03: 1
Ending 2018
Liquid Assets = 47369.5 – 9655.5 = 37714
Liquid Ratio = 37714/18549 = 2.03:1
Analysis A liquid ratio reveals a company’s ability to meet its short-term operating needs
by using its liquid assets. An ideal liquid ratio is 1:1; when the ratio is 1:1, it
indicates that the company can pay off its current debts without selling off its
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long-term assets. Here, Nestlé’s liquid ratio is higher than 1, which means that the
company has more liquid to cover its short-term obligations and debts. A high
liquid ratio may indicate that the company is overly focused on liquidity, which
may prove to be detrimental to the effective use of capital and business expansion.

Formula Liquid assets
Current liabilities
Calculation Liquid Assets = Assets - Inventories
Ending 2016:
Liquid Assets = 1704.84 – 440.65 = 1264.19
Liquid Ratio = 1264.19/1616.3 = 0.78:1
Ending 2017:
Liquid Assets = 2004.88 – 602.61 = 1402.27
Liquid Ratio = 1402.27/1345.40 = 1.04:1
Ending 2018:
Liquid Assets = 3151.28 – 652.79 = 2498.49
Liquid Ratio = 2498.49/1647.97 = 1.51: 1
Analysis Here, we can see that the Liquid Ratio has continuously been rising in the
company, and we can see that the company, wherein was initially below
favourable amounts 1:1, soon exceeded that amounts. This could signify that there
has been some mismanagement by the company, where such assets have not been
efficiently used, but does not pose significant financial threats to the business.
12
Activity Ratios
Inventory turnover ratio

Formula COGS (Cost of Goods Sold)
Average Inventory
Calculation Cost of Goods Sold = Cost of Materials Consumed + Purchases of Stock-in-trade
+ Changes in inventories of finished goods, work in progress, stock-in-trade
Note: (Changes in inventories of finished goods, work in progress, stock-in-trade

is added if it is negative and subtracted if it is positive)
Average Inventory = (Opening Inventory + Closing Inventory)/2
Year ending 2016

Cost of Goods Sold = 37705.9 + 1153.8 + 107.8 = 38967.5
Average Inventory = (8208.1 + 9431.8)/2 = 8819.95
Inventory turnover ratio = 38967.5/8819.95 = 4.42
Year ending 2017

Year ending 2018

Analysis Inventory turnover is a ratio showing how many times a company has sold and
replaced inventory during a given period. This ratio would help Nestlé to more
effectively choose to price their products, decide manufacturing number,
marketing and purchase new inventory. Due to demonetization Nestlé saw a dip in
sales of inventory towards the end of 2016, but because of a good marketing
strategy they quickly recovered. (Re-Introduction of Maggi in a good way to make
up for the losses caused by loss of sales)
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Formula COGS (Cost of Goods Sold)
Average Inventory
Calculation Cost of Goods Sold = Cost of Materials Consumed + Purchases of Stock-in-trade
+ Changes in inventories of finished goods, work in progress, stock-in-trade

Average Inventory = (Opening Inventory + Closing Inventory)/2
Year Ending 2016:

Cost of Goods Sold = 4317.7 + 685.5 + (-4.27) = 4998.93
Average Inventory = (404.04 + 440.65)/2= 422.345
Inventory Turnover Ratio = 4998.93/422.345 = 11.83 times
Year Ending 2017:

Year Ending 2018:

Analysis These numbers signify that Brittania can efficiently sell the goods that it produces,
and that there exist no problems of stock being unsold, and that there is a demand
in the market that is being fulfilled by the company and can maintain consistent
ratios. If any issues of under or overtrading do exist, they are largely negligible.
Trade receivables turnover ratio

Formula Credit revenue from operations
Average trade receivables
Calculation N/A
14
Analysis As the company has not declared net credit sales in their annual reports and other
SEBI mandated Financial declarations; this ratio cannot be accurately calculated.

Formula Credit revenue from operations
Average trade receivables
Calculation N/A
Analysis As Net Credit sales have not been declared by the company in their annual reports
and other SEBI mandated Financial declarations; this ratio cannot be accurately
calculated.
Trade payables turnover ratio

Formula Credit purchases
Average trade payables
Calculation N/A
Analysis As the company has not declared net credit Purchases in their annual reports and
other SEBI mandated Financial declarations; this ratio cannot be accurately
calculated.

Formula Credit purchases
Average trade payables
Calculation N/A
Analysis As the company has not declared net credit Purchases in their annual reports and
other SEBI mandated Financial declarations; this ratio cannot be accurately
calculated.
Working Capital Turnover Ratio

Formula Revenue from operations
Working capital
Calculation Working Capital = Current Assets – Current Liabilities
Year Ending 2016:
15
Revenue from Operations = 92238
Working Capital = 32789.9 – 16327 = 16462.9
Working Capital Turnover Ratio = Revenue from Operations/Working Capital
= 92238/16462.9 = 5.602 times
Year Ending 2017:

Revenue from Operations = 101921.8
Working Capital = 39373.9 – 14927.1 = 24446.8
Working Capital Turnover Ratio = 101921.8/24446.8 = 4.17 times
Year Ending 2018:

Working Capital = 47369.5 – 18549.5 = 28820
Working Capital Turnover Ratio = 112922.7/28820 = 3.92 times
Analysis This ratio shows the number of times working capital has been employed in the
process of carrying on the business. Higher the ratio, better the efficiency in the
utilization of working capital. Working capital turnover rate is a measure of how
well a company uses its working capital to support a certain amount of sales. We
can notice that the Working Capital Turnover Ratio is on a constant decline for
Nestlé India, a low ratio indicates that a business may be investing in too many
accounts receivables and inventory to support its sales; this could eventually lead
to a large amount of bad debts.

Formula Revenue from operations
Working capital
Calculation Working Capital = Current Assets – Current Liabilities
Year Ended 2016:

16
Working Capital = 1704.84 – 1616.3 = 88.54
Year Ended 2017:

Revenue from Operations = 9232.3 + 91.81 = 9324.11
Working Capital = 2399.24 – 1345.40 = 1053.84
Year Ended 2018:

Working Capital = 3151.28 – 1647.97 = 1503.31
Analysis The figures for 2016 show a dangerous trend for overtrading- where the company
nearly equalized their current assets and Liabilities, and even some sudden short-
term liability could have caused financial troubles, as they did not have a
sufficient buffer. However, we see that they have decent figures for the succeeding
years, which could signify that Fy 2015-2016 was a risk they successfully took
and were able to be extremely efficient.
17
Profitability Ratios
Gross Profit Ratio

Formula Gross Profit
x 100
Net Sales
Calculation Cost of Goods Sold (COGS) = Cost of Materials Consumed + Purchases of Stock-
in-trade + Changes in inventories of finished goods, work in progress, stock-in-
trade

Gross Profit = Net Sales – COGS
Year Ending 2016:

Gross Profit = 91592.8 – 38967.5 = 52625.3
Net Sales = 91592.8
Gross Profit Ratio = 52625.3/91592.8 x 100 = 57.45%
Year ending 2017:

Gross Profit = 101351.1 – 44859.8 = 56491.3
Net Sales = 101351.1
Year Ending 2018:

Gross Profit = 112162.3 – 46022.5 = 66139.8
Analysis This ratio indicates the relationship between gross profit and net sales. Higher the
ratio, lower the cost of goods sold. We can notice that the Gross Profit Ratio for
Nestlé India shows a gradual increase. A high gross profit ratio indicates that a
18
company can make a reasonable profit on sales. Investors tend to prefer
companies with a higher gross profit ratio.

Formula Gross Profit
Net Sales
Calculation Cost of Goods Sold (COGS) = Cost of Materials Consumed + Purchases of Stock-
in-trade + Changes in inventories of finished goods, work in progress, stock-in-
trade

Gross Profit = Net Sales – COGS
Year Ended 2016:

Gross Profit = 8607.06 – 4998.93 = 3608.13
Net Sales = 8607.06
Year Ended 2017:

Gross Profit = 9232.3 – 5588.68 = 3643.62
Net Sales = 9232.3
Year Ended 2018:

Gross Profit = 9905.63 – 6107.1 = 3798.53
Net Sales = 9905.63
Analysis A high gross profit ratio is good as it means that the company has more cash to pay
its indirect and other costs. Here, we can notice a slow decline in Britannia’s Gross
Profit Ratio, thereby indicating that they may not be generating strong sales prices
relative to their Cost of Goods Sold. However, their ratio ranging between 41.92%
19
and 38.3% is considered high for the food processing industry. Britannia can meet
its operating expenses and allow for the creation of reserves.
Operating Ratio
Formula Operating Cost/Net Sales x 100
Calculation Operating cost = Cost of Goods Sold + Operating expenses
Year ending 2016:

Operating cost = 76519.3
Net Sales = 91592.8
Operating ratio = 76519.3/91592.8 x 100 = 83.54%
Year ending 2017:

Operating cost = 85298
Net sales = 101351.1
Operating ratio = 85298/101351.1 x 100 = 84.16%
Year ending 2018:

Operating cost = 91222.4
Net sales = 112162.3
Operating ratio = 91222.4/112162.3 x 100 = 81.33%
Analysis This is calculated to assess the operational efficiency of the business. A decline in
the operating ratio is better because it means a higher margin, meaning more profit.
After the slight increase in the Operating Ratio in 2017, we see a decline of almost
3% in 2018’s Operating Ratio. This is a good sign, as it means that Nestlé’s
operating expenses are becoming a smaller part of their net sales.

Formula Operating Cost/Net Sales x 100
Calculation Operating cost = Cost of Goods Sold + Operating expenses
Year Ended 2016:

Operating Cost = [(4317.7 + 685.5 + (-4.27)) + 669.98] = 5668.91
Net Sales = 8607.06
Operating Ratio = 5668.9/8607.06 x 100 = 65.86%
20
Year Ended 2017:
Operating Cost = [(4839.57 + 803.31 + (-54.2)) + 650.02] = 6238.7
Net Sales = 9232.3
Year Ended 2018:

Operating Cost = [(4906.08 + 1194.72 + 6.30) + 623.32] = 6730.42
Net Sales = 9905.63
Analysis A lower operating ratio is considered better as it leaves a higher profit margin to
meet the non-operating expenses. We initially notice a 2% increase in the
company’s Operating ratio from FY 2016-17; the ratio remains the same roughly
from FY 2017-18. A high operating ratio is not a favourable sign as it shows that
the company’s operating expenses are becoming a larger part of their net sales,
hence, leading to a lesser amount of profit. The company needs to ensure that their
Operating Ratio does not rise anymore, and is kept a minimum.
Operating Profit Ratio

Formula Operating profit/Net Sales x 100
Calculation Year Ending 2016
Operating Profit = 15036.8
Net Sales = 91592.8
Operating Profit Ratio = 15036.8/91592.8 x 100 = 16.42
Year Ending 2017

Operating profit = 18393
Operating Profit Ratio = 18393/101351.1 x 100 = 18.15
Year Ending 2018

Operating Profit = 24289.5 (no exceptional items mentioned)
Operating Profit Ratio = 24289.5/112162.3 x100 = 21.65
21
Analysis Operating Profit Margin is a profitability or performance ratio that reflects the
percentage of profit a company produces from its operations. Nestlé has shown a
constant and gradual increase in its operating profit ratio. Regardless of market
instabilities if Nestlé was able to maintain its operational efficiency, it displays good
management of resources. However, Nestlé can perform better in a competitive
market.

Formula Operating profit/Net Sales x 100
Calculation Operating Profit = Revenue from operations – Operating cost
Year Ended 2016:

Operating Profit = (8678.85 – 5668.9) = 3009.95
Net Sales = 8607.06
Operating Profit Ratio = 3009.95/8607.06 x 100 = 34.97%
Year Ended 2017:

Operating Profit = [(9232.3+91.81) – 5588.68] = 3735.43
Net Sales = 9232.3
Year Ended 2018:

Operating Profit = (9905.63 – 6730.42) = 3175.21
Net Sales = 9905.63
Analysis An increase in the operating profit ratio indicates that there is an improvement in
the operational efficiency of the firm. From the financial year 2016 to 2017, there is
a 5% increase in the operating profit ratio. From 2017 to 2018, however, there is an
8% decrease in the ratio (worse off that financial year 2016 for Britannia). A low
operating profit margin suggests Britannia to improve its operational efficiency.
Net Profit Ratio

Formula Net profit/Net sales x 100
Calculation Year ended 2016:
Net Profit = 9265.5
22
Net Sales = 91592.8
Net profit ratio = 9265.4/91592.8 x 100 = 10.11%
Year ended 2017:

Net profit = 12251.9
Year ended 2018:

Net profit = 16069.3
Analysis A higher net profit margin means that a company is more efficient at converting sales
into actual profit. Regardless of market instabilities and difficulties – Nestlé has
shown a gradual increase in the net profit ratio. If Nestlé kept the same progress or
improved on it, the company could reach an excellent ratio of 25% within five years.

Formula Net profit after tax/Net sales x 100
Net Profit = 806.11
Net Sales = 8607.06
Net Profit Ratio = 806.11/8607.06 x 100 = 9.36%
Year Ended 2017:

Net Profit = 884.61
Net Sales = 9232.3
Year Ended 2018:

Net Profit =1003.96
Net Sales = 9905.63
Analysis The company has maintained a consistent net profit. While these figures remain
decent, the company must try to increase its net profits by cutting costs or increasing
profit to perform better than the competition.
23
Return on Investment
Formula Net profit before interest & tax/Capital Employed x 100
Calculation Capital Employed = Shareholder’s Funds + Long Term Debts
Year ended 2016:

Capital employed = 30137 + 331.5 = 30468.5
Net profit before interest & tax = 14415.4
Return on Investment = 14415.4/30468.5 x 100 = 47.31%
Year ended 2017:

Capital employed = 34205.9 + 351.4 = 34557.3
Net profit before interest & tax = 18393
Return on Investment = 18393/34557.3 x 100 = 53.22%
Year ended 2018:

Capital employed = 36737.4 + 351.4 = 37088.8
Net profit before interest & tax = 24289.5
(Interest has not been mentioned in the financial statements)

Analysis Here, we can see that Nestlé has significantly high Return on Investments, which seem
to be increasing with there being a sharp rise of roughly 12% from 2017-18. This is a
favourable outcome as it means that the company indicates efficiency and profitability.
Nestlé’s Return on Investment is much higher than most of its competitors within the
same industry.

Formula Net profit before interest & tax/Capital Employed x 100
Calculation Capital Employed = Shareholder’s Funds + Long Term Debts
Year Ended 2016:

Capital Employed = (1766.48 + 69) = 1835.48
Net Profit before interest & tax = 1213.1
24
Year Ended 2017:
Capital Employed = (2696.42 + 64.38) = 2760.8
Net Profit Before Interest & Tax = 1304.00
Year Ended 2018:

Capital Employed = (3406.23 + 120.58) = 3526.81
Net Profit before Interest & Tax = 1518.36
Analysis We can see that the company has significantly high returns on investments, which is a
favourable sign, and much higher than the return generated by most companies.
However, there has been a declining trend in the returns generated by the company
post FY 2015-16. While the returns remain good, the company must ensure that their
returns don’t continue this downward slope.
25
Demonetization and its effects
The central government on 8th November 2016, announced that it was banning ₹500/- and ₹ 1,000/- notes,
which at the time made up 86% of the currency in circulation. This was announced by Prime Minister
Narendra Modi on 8th November 2016, in a bid to curb the menace of black money and corruption which
plagued the nation. While the Merits and the demerits of the move are still debated, the then GDP growth
still fall, and many industries were affected.
In this project, we are attempting to examine the effects that demonetization had on India’s top two food
processing industries – Nestlé and Britannia, by analyzing their declared financials and Balance sheet data
through a series of Liquidity, Solvency, Profitability and Activity Ratios.
 Between 2016 and 2017 Nestlé saw a massive decrease of stock in trade -10.78 in 2016 to -79.56 in
2017 (money control) (If stock in trade is decreased. It means, company did not produce but
consumed of previous finished stock. At that time, we also record the cost of that decrease stock in
trade on the expenditure side because its sale price will be shown on the revenue side.) – Inventory
Turnover Ratio
 4th quarter of 2016 took a hit of 8.6% in net profits due to demonetization. (strategies employed to
help Nestle get their sales up by 16.17% - How Nestlé recovered) Profitability
 Food processing industries saw a dip in sales to customers in most rural areas where cashless
payments were not popular. “Rural economy is all cash” was a statement made by the managing
director of Britannia Industries. – Liquidity Ratios
 A common issue for both Nestlé and Britannia were issues with Cash flow which affected the
reduction in purchasing activities and employment. – Inventory Turnover Ratio and Working
Capital Ratio
Points of Conflict
 Almost all companies in the FMCG industry recovered soon. Ratio analysis of the annual report does
not directly portray the effects of demonetization; however, the quarterly differences do portray these
effects that demonetization had on the respective companies.
26
Ratio Table
Ratios and companies Nestlé India Britannia Industries
2016 2017 2018 2016 2017 2018

Liquidity
Current Ratio 2.01 2.63 2.55 1.055 1.783 1.912
Quick Ratio 1.43 2.03 2.03 0.78 1.04 1.51
Activity
Inventory Turnover Ratio 4.42 4.87 4.93 11.83 10.14 9.29
Working capital 5.602 4.17 3.92 98.02 8.85 6.59
Solvency
Debt/Equity 0.716 0.716 0.696 0.039 0.023 0.035
Total Debts/Assets 0.317 0.332 0.316 0.019 0.027 0.023
Proprietary Ratio 44.28% 46.45% 45.42% 51.09% 65.62% 65.91%
Profitability Ratio
Gross Profit Ratio 57.45% 55.74% 58.76% 41.92% 39.46% 38.30%
Operating Ratio 83.54% 84.16% 81.33% 65.86% 67.57% 67.94%
Operating Profit Ratio 16.42 18.15 21.65 34.97% 40.46% 32.05%
Net Profit Ratio 10.11% 12.09% 14.32% 9.36% 9.58% 10.13%
Return on investment 47.31% 53.22% 65.49% 66.10% 47.20% 42.10%
1. All calculations and analysis for each ratio pertaining to the company has been provided above.
2. The ratios are calculated for the year ending 2016, 2017 and 2018.
3. In order for us to answer whether which firm has suffered more, and which one is at a better position,
we use this ratio table for a comparative analysis between the two firms (A and B) below.
27
Comparative analysis of rations between firm A and B
Liquidity
 With the numbers above both the firms can be seen to have a large jump from the year 2016 to 2017
and have shown a gradual increase from then.
 With respect to demonetization it can be noted that its effects are not evident in the yearly reports as
being a part of the FMCG industry, they recovered very quickly. But in the quarterly reports, Both
Nestlé and Britannia suffered in the last quarter of 2016 and the first quarter of 2017.
 The main issues with respect to liquidity reported by the two firms are the inability to pay workers in
rural areas due to shortage in cash, reduction in employment and reduction of purchasing activities.
“Rural economy is all cash” was a statement made by the managing director of Britannia Industries.
Nestlé used marketing strategies such as making Maggi a hot selling brand to make up from the
losses caused by demonetization. Britannia, while their strategies are unknown, they employed
various means to make up for the losses caused by demonetization.
So, in terms of liquidity, both suffered equally and was quick to recover. Still, overall, Nestlé is at a
better position than Britannia to meet its short-term obligations and current liabilities.
Activity
 Activity ratios measures how effectively has a firm used all its available resources. In this case, we
have data for Inventory Turnover Ratio and Working capital turnover ratio for both Nestlé and
Britannia (Trade receivables and payables turnover ratio not applicable in this case due to the reasons
mentioned above)
 Firm A, Nestlé, shows a consistent increase in their inventory turnover ratio, which shows that more
sales are being produced by a rupee of investment in their inventory. However, their working capital
ratios have declined each year. It can be inferred that demonetization affected Nestlé’s production of
sales each time a unit of rupee was invested.
 Firm B, Britannia, shows a decrease in both their inventory turnover ratio and working capital ratio.
It is paramount to notice the massive jump from 2016’s working capital ratio of 98.02 to 8.85 times.
In terms of Activity, Nestlé is at a better position as their inventory turnover ratio has improved
through the financial years despite demonetization. Britannia, on the other hand, saw a dip in their
inventory turnover ratio as well as a working capital ratio. Hence, Britannia suffered more due to
demonetization.
Solvency
 Carefully analyzing the figures provided under the debt-equity Ratio, Total assets and debt Ratio and
the Proprietary ratio, it can be safely concluded that -
28
 Nestle’s solvency was not significantly affected by demonetization and have been able to maintain
consistent figures. This could mean that the demonetization, while not have affected the business
much, nestle might have been prevented from raising more debt to expand their business, and having
to in fact even reduce a little debt, reducing leveraging, further evidenced by the fact that there
haven’t been many changes in the debt to total assets or any changes given in the proprietary ratio.
 Britannia’s solvency ratios, while are not indicative of major effects of demonetization mainly, it is
worthy of taking note of the Proprietary ratio, which suddenly rose by 15%. This can indicate that
Britannia chose to increase equity, instead of raising more debt, even though they have the capacity,
and in fact, ideally should leverage their profits better. This shows their unwillingness to take more
debt and instead pass on risk to shareholders.
This analysis indicates that Britannia, either directly or indirectly had a more significant effect on
their solvency during the period of demonetization, as compared to Nestle, and has had in general a
more significant adverse impact on their business during this period, although the information cannot
be entirely determined in this regard.
Profitability
 Profitability Ratios help us in assessing a business’ ability to generate earnings relative to its
revenue, operating costs, and shareholder’s equity over a period.
 Analyzing the table given above; we can notice that both the firms – Nestle India Ltd. and Britannia
Industries Ltd. – being a part of the FMCG industry have remained mostly unaffected by
demonetization.
 Looking at each firm specifically, we notice that Firm A, Nestle India Ltd., seems to have remained
the most unaffected by demonetization regarding its Profitability ratios. In fact, under Return on
Investment (ROI), Firm A appears to have undergone a sharp rise from 2016-17 and again from
2017-18 – this is highly favourable for them, and they enjoy a position of domination over most
other companies in the FMCG industry due to their high ROI. Firm A also enjoys a consistent
minute increase of around 1-3% in its Operating Profit Ratio and Net Profit Ratio. Looking at the
other ratios, i.e. Gross Profit Ratio and Operating Ratio, they initially experience a minuscule decline
from 2016-17, but do not show any drastic changes thereafter.
 While analyzing Firm B, Britannia Industries Ltd., we can see that it too remained unaffected by
demonetization for the most part. Firm B’s Return on Investment (ROI) shows that they experienced
a sharp decline of almost 20%, a further decline of 5% was seen in the year ended 2018. While their
ROI remains high, we can see that they experienced an unfavourable change as their lowering ROI
could be an indicator of low efficiency and profitability. Firm B’s Operating Profit Ratio in the year
ended 2016 suggests that their Operational efficiency became less reliable due to demonetization.
29
The rest of the ratios do not seem to have had a considerable impact on Firm B’s ability to generate
earnings as they were minimal differences.
Hence, we can conclude that Firm A, Nestle India Ltd., enjoys a better position in comparison to Firm
B, Britannia Industries Ltd., due to Firm A’s Profitability increasing after the implementation of
demonetization, whereas, Firm B’s Profitability was negatively impacted after the implementation.
While they both remain unaffected for the most part, we can assume that Firm B experienced more
unfavourable changes as compared to Firm A.
Conclusion
— Which firm has suffered more, and which is in a better position?

As discussed above in detail, due to demonetization, there is an inevitable change in the expenditure on the
part of consumers and the food processing industry alike. According to the comparative analysis of the
financial ratios for firm A and B, it can be concluded that Britannia suffered relatively more than Nestlé. This
conclusion is gathered as Nestlé was at a more advantageous position under each type, namely liquidity,
activity, solvency and profitability. Moreover, a closer look at the quarterly reports indicates that Nestlé had
a better recovery as compared to Britannia.
30
References
— Nestlé India Limited. (2017, February 15). Annual Report 2016. Retrieved October 1, 2020, from
https://www.nestle.in/sites/g/files/pydnoa451/files/investors/stockandfinancials/documents/annual_re
port/nestle-india-annual-report-2016.pdf
— Nestlé India Limited. (2018, February 14). Annual Report 2017. Retrieved October 1, 2020, from
port/nestle-india-annual-report-2017.pdf
— Nestlé India Limited. (2019, February 14). Annual Report - 2018. Retrieved October 1, 2020, from
port/nestle-india-annual-report-final-2018.pdf
— Britannia Industries Limited. (2016, March 31). Britannia Annual Report 2015-16. Retrieved October
1, 2020, from http://britannia.co.in/pdfs/annual_report/Britannia_Annual_Report_2015-16.pdf
— Britannia Industries Limited. (2017, June 30). Britannia Annual Report 2017. Retrieved October 1,
2020, from http://britannia.co.in/pdfs/annual_report/Britannia_Annual_Report_2016-17.pdf
— Britannia Industries Limited. (2018, May 15). Annual Report 2017 - 2018. Retrieved October 1, 2020,
from http://britannia.co.in/pdfs/annual_report/Annual-Report-Britannia-2018.pdf
— Britannia Industries Limited. (2016, May 20). Consolidated audited financial results (Rep.).
Retrieved October 1, 2020, from
http://britannia.co.in/pdfs/quarterly_report/Consolidated%20BIL_RESULTS_201516.pdf
— Britannia Industries Limited. (2017, May 25). Consolidated financial results (Rep.). Retrieved
October 1, 2020, from http://britannia.co.in/pdfs/quarterly_report/BIL_ConsolResults_31032017.pdf
— Britannia Industries Limited. (2018, May 15). Consolidated financial results (Rep.). Retrieved
October 1, 2020, from http://britannia.co.in/pdfs/quarterly_report/Q4-2017-18-Financial-Results.pdf
— Nestlé India Limited. (2017, February 15). AUDITED FINANCIAL RESULTS FOR THE
QUARTER AND YEAR ENDED 31ST DECEMBER 2016 (Rep.). Retrieved October 1, 2020, from
https://www.nestle.in/sites/g/files/pydnoa451/files/investors/documents/financial-results/nestle-
india-31-12-2016-q4.pdf
31
— Nestlé India Limited. (2018, February 14). STATEMENT OF AUDITED FINANCIAL RESULTS
FOR THE QUARTER AND YEAR ENDED 31ST DECEMBER 2017 (Rep.). Retrieved October 1,
2020, from https://www.nestle.in/sites/g/files/pydnoa451/files/investors/documents/financial-
results/financial_result_q4_2017.pdf
— Nestlé India Limited. (2019, February 14). STATEMENT OF AUDITED FINANCIAL RESULTS
FOR THE QUARTER AND YEAR ENDED 31ST DECEMBER 2018 (Rep.). Retrieved October 1,
2020, from https://www.nestle.in/sites/g/files/pydnoa451/files/investors/documents/financial-
results/financial-results-q4-14-2-2019.pdf
32

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Principles of Accounting Project

Ratio analysis; Introspecting the impact of demonetization

Analysis of the financial effect of demonetization on the food

Word Count: 6635

Solvency Ratios ............................................................................................................................................ 5

Liquidity Ratios .......................................................................................................................................... 10

Profitability Ratios ...................................................................................................................................... 18

Demonetization and its effects .................................................................................................................... 26

Ratio Table ................................................................................................................................................. 27

Comparative analysis of rations between firm A and B ............................................................................... 28

1. Aakash Joshua Ramesh (19010007)

2. Afrrin Advani (19010045)

3. Chaitanya Kishore Sunkara (19010143)

4. Pooja Bommareddy (19010350)

5. Pranav Srinivas Mattapalli (19010356)

of the subject Principles of Accounting.

has not been submitted anywhere else for consideration.

Industry: Food processing

— Why this specific firm (FIRM A) was chosen?

NOTE: All figures mentioned below are in crores. (₹1,00,00,000)

Year Ending 2017:

Year Ending 2018:

Britannia Industries Limited

Year Ending 2017:

Year Ending 2018:

Year Ending 2017:

Year Ending 2018:

Year Ending 2017:

Year Ending 2018:

Year Ended 2018:

Britannia Industries Limited

Year Ended 2017:

Year Ended 2018:

Britannia Industries Limited

Year Ending 2017:

Year Ending 2018:

Britannia Industries Limited

Year Ending 2017:

Year Ending 2018:

Britannia Industries Limited

Inventory turnover ratio

Note: (Changes in inventories of finished goods, work in progress, stock-in-trade

Year ending 2016

Year ending 2017

Year ending 2018

Note: (Changes in inventories of finished goods, work in progress, stock-in-trade

Year Ending 2016:

Year Ending 2017:

Year Ending 2018:

Trade receivables turnover ratio

Britannia Industries Limited

Trade payables turnover ratio

Britannia Industries Limited

Working Capital Turnover Ratio

Year Ending 2016:

Year Ending 2017:

Year Ending 2018:

Britannia Industries Limited

Year Ended 2016:

Year Ended 2017:

Year Ended 2018:

Gross Profit Ratio

Note: (Changes in inventories of finished goods, work in progress, stock-in-trade

Gross Profit = Net Sales – COGS