KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT (KUSOM)
Balkumari, Lalitpur
An Assessment on Financial Analysis of
Nestlé India Limited
Submitted to
Professor Sabin Bikram Panta
Financial Management
Submitted by:
Niharika Chitrakar (25312)
Om Prakash Pandey(25328)
Sara Gurung (25303)
Saroj Dhakal (25314)
Saya Mathema (25326)
Date: November 29, 2025
Table of Contents
1. Introduction..........................................................................................................................................................
2. Analysis of Financial Statements.........................................................................................................................
2.2 Balance Sheet Trend.......................................................................................................................................
2.3 Cash Flow Trend............................................................................................................................................
3. Earnings Quality...................................................................................................................................................
4. Ratio Analysis.......................................................................................................................................................
4.1 Profitability Ratios..........................................................................................................................................
4.2 Liquidity Ratios..............................................................................................................................................
4.3 Efficiency Ratios............................................................................................................................................
4.4 Leverage Ratios..............................................................................................................................................
5. DuPont Analysis....................................................................................................................................................
6. Economic Value Added........................................................................................................................................
7. Market Value Added............................................................................................................................................
8. Bankruptcy Analysis............................................................................................................................................
9. Linking Financial Analysis to Corporate Governance.....................................................................................
10. Conclusion........................................................................................................................................................
References..................................................................................................................................................................
1. Introduction
The purpose of this financial analysis is to assess the financial performance of Nestle India with
an emphasis on how the financial health of the company complies with corporate governance
structures. Nestle India Limited is a major FMCG company of India, known for its strong brand
portfolio, market presence, and continuous profitability. In addition to understanding the
operational efficiency and value creation for its shareholders, evaluating the financial
performance of a business is crucial for determining if governance policies and practices are
accountable for stable performance that is transparent and protects the interests of all
shareholders and stakeholders.
2. Analysis of Financial Statements
While doing analysis of financial statements and financial ratios, we have taken into account that
Nestlé India transitioned its financial year from January–December to April–March during the
period under review. Consequently, the Annual Report of FY 2023–24 covers 15 months, while
other years cover 12 months.
2.1 Income Statement Trend
Sales Revenue of the company has increased from Rs. 132,902 Million to Rs. 200,775 Million
over the period of last five years with a compounded annual growth rate of 10.87%. It indicates
the company is growing with consistent top-line expansion.
Gross Profit of the company has increased from Rs. 76,163 Million to Rs. 113,277 Million over
the period of last five years with a compounded annual growth rate of 10.43%. It indicates the
company has been able to maintain the Cost of goods sold increment proportionally with sales.
So, it is witnessing a stable increase in gross profit aligning with the increment in sales revenue.
Operating Profit of the company has increased from Rs. 28,775 Million to Rs. 43,104 Million
over the period of last five years with a compounded annual growth rate of 10.63%. It indicates
the company has been able to maintain operating expenses proportionally with sales. So, it is
witnessing a stable increase in operating profit aligning with the increment in sales revenue.
Net Profit of the company has increased from Rs. 20,824 Million to Rs. 33,145 Million over the
period of last five years with a compounded annual growth rate of 12.32%. The growth rate of
Net Profit is slightly higher than the growth rate of sales revenue. It indicates that the company is
growing consistently but at a faster rate than the sales growth.
Growth rates of sales, gross profit, operating profit, and net profit shows that the company is
growing consistently and healthily.
2.2 Balance Sheet Trend
Total Assets of the company have increased from Rs. 78,997 Million to Rs. 123,239 Million over
the period of five years with a compounded annual growth rate of 11.76%. Growth of Total
Assets has been fueled by the company’s heavy increment in Non-Current Assets. Specifically,
the company has increased its investment in property, plant, and equipment, and machineries. It
indicates that the company is making investments for future growth. However, the current assets
of the company have decreased slightly over the period.
Total Liabilities of the company has increased from Rs. 58,804 Million to Rs. 82,067 Million
over the period of five years with a compounded annual growth rate of 8.69%. Growth of
Liabilities has been fueled by the increment in current liabilities specially payables and financial
liabilities. However, Non-current Liabilities of the company have slightly decreased over the
period. Lower growth in Total Liabilities compared to the growth in Total Assets indicates that
the company is not excessively leveraging itself. It contributes to enhanced creditworthiness and
stability of the company.
Total Equity of the company has increased from Rs. 20,193 Million to Rs. 41,172 Million over
the period of five years with a compounded annual growth rate of 19.50%. Growth of Equity has
been fueled by the growth in retained earnings of the company while share capital being constant
over the period. It indicates that the company is retaining a significant portion of its net profit
each year strengthening its capital structure. Moreover, it also indicates that the company is
doing robust shareholder’s wealth creation.
Growth of Assets, Liabilities, and Equity shows that the company is doing growth-driven asset
scaling upon the solid foundation of growing retained earnings driven by growing net profit.
Moreover, the company is improving its solvency position and maintaining a healthy capital
structure along with building shareholders’ wealth rapidly.
2.3 Cash Flow Trend
Operating Cash flow of the company has increased from Rs. 24,545 Million to Rs. 29,363
Million over the period of five years with a compounded annual growth rate of 4.58%. The
growth rate of operating cash flow is considerably low compared to the growth rate of sales and
net profit during the period. The main reason behind the lower growth in operating cash flow are
higher increment in inventories and receivables of the company compared to the sales. Over the
period, the sales of the company has grown by 51.07% while the inventories and receivables
have grown by 101.21% and 120.25% respectively. It indicates that the company is negatively
impacted by its rising inventories and the receivables collection pace is not keeping up with the
pace of revenue growth.
Free cash Flow of the company has fallen from Rs. 19,804 Million to Rs. 9,319 Million over the
period of five years with a compounded annual rate of 17.18%. Despite growing revenues,
profits, and operating cash flows, the free cash flow of the company grew negative. The main
reason behind the fall of free cash flow over the period is the increment of capital expenditure of
the company. Over the period, the capital expenditure of the company has grown from Rs. 4,741
Million to Rs. 20,044 Million, a 4.23 times increment. In particular, the company has made
massive capital expenditures in the last two fiscal years. The company has been making capital
expenditure to invest in property, plant, and equipment, and machineries. It indicates that the
company is making investments for future growth.
Trend of Operating Cash Flow and Free Cash Flow show that the company has not been able to
maintain the pace of revenue growth and cash generation because of rising inventories and
receivables. Moreover, the company’s free cash flow has fallen sharply because of high capital
expenditures in the last two fiscal years. The decline in the free cash flow because of capital
expenditure has a negative impact on dividends, debt servicing ability, and liquidity of the
company in the short run. However, the potential return from the investment made may have a
positive impact on the financials of the company in the long run. The crucial issue is whether the
investment will generate good returns in this case.
3. Earnings Quality
Earnings quality measures whether the company’s earnings are genuine, recurring, and backed
up by the company’s actual cash flows.
Recurring Revenue: The company’s core revenue, in particular, sales revenue has consistently
increased over the period. The company’s net profit has also consistently increased, aligning
with the sales revenue.
Net Profit and Operating Cash Flows: Despite the net profit of the company having increased
with a Compounded annual growth rate of 12.32%, the operating cash flow of the company has
just increased by Compounded annual growth rate of 4.58%. It means the gap between net profit
and operating cash flow is widening.
Free Cash Flow Growth: The free cash flow of the company has declined sharply over five
years. This is because the cash generated by the company from its operations has been consumed
heavily by the capital expenditure.
The earnings quality of the company has been deteriorating over the period. This is a red flag for
the company. The company should take steps to improve the quality of earnings by holding less
inventories and speeding up the collection of receivables. The company should also focus on
getting return from its capital expenditure as early as possible to increase cash flows.
4. Ratio Analysis
4.1 Profitability Ratios
Particulars 2020 2021 2022 2023/24 2024/25
Operating Profit Margin (%) 21.7 22 20 22 21.5
Net Profit Margin (%) 15.7 14.4 14.2 16.2 16.5
Return on Net Worth (ROE) (%) 105.8 111 108.5 108.5 88.9
Return on Asset (%) 26.9 25.91 25.31 29.3 28.34
NOPAT (₹ million) 21,532.33 24,161.11 25,187.03 39,972.69 32,254.72
Invested Capital (₹ million) 61,449.3 74,914 80,521.9 97,641.9 121,171.4
ROIC 0.3504 0.3225 0.3128 0.4094 0.2662
Earnings Per Share (₹) 21.6 21.97 24.79 40.79 34.38
Source: Annual Reports of Nestlé India
1. Operating Profit Margin (%)
The operating profit margin over the 5 years duration shows that the operating profit margin
remained consistently strong. In 2022, however the margin dropped to 20% which suggests there
could have been increased operational cost. It could also have been due to the scandal associated
with the excessive sugar content in their cerelac, leading to the drop in sale of their overall
products due to the loss in trust among the customers. Regardless, the company was able to
swiftly recover to 22% operating profit margin in the following year of 2023-24 which indicates
operational resilience. The operational profit margin dropped to 21.5% showing that there might
be some additional cost pressure. Overall, operating profitability seems to be stable throughout
the 5 year period.
This data indicates that the company has efficient production and effective cost management.
The ability to maintain the margin adobe 20% consistently demonstrates operational strength,
ability to control direct costs and overheads and strong demand in the market.
2. Net Profit Margin (%)
The Net Profit Margin in 2020 is 15.7% and then it dips to 14.4% in 2021 followed by further
dip upto 14.2% in 2022 indicating higher tax, interest or additional expenses during the years.
The company is however able to recover the net profit margin to 2023/24 to 16.2% and 16.4% in
2024/25. This demonstrated that the company was successful in strengthening its operational
performance and also controlling the costs.
The rising net margin shows growing profitability and stronger revenue retention as net income,
perhaps as a result of effective financial strategy, optimized cost structures and increased demand
of the company’s goods. This can be a positive sign for investors and company’s sustainability.
3. Return on Equity (ROE)
The ROE derived from the reports are exceptionally high until 2023-24. It has dipped to 88.9%
in 2024/25 which still represents a strong performance compared to typical industry benchmarks
which averages around 69.5% according to Mittal Analytics Private Ltd.
Such high ROE indicates high return for shareholders and strong capital efficiency as a result of
efficient utilization of equity capital.
4. Return on asset (ROA):
The ROA of the company over the 5 year period ranges from 25.21% to 29.3% with a slight
downward trend in 2020 from 26.9% to 25.31% in 2022, indicating an increase in Total Assets
that didn’t translate into higher profit immediately. However the company’s ROA is strong
compared to the FMCG industry average in India which is 9.37%. This strong ROA suggests
Nestle India is able to efficiently convert asset investments into earnings.
5. Return on Invested Capital (ROIC)
The company’s Return on Invested Capital (ROIC) shows strong performance overall, starting at
35.04% in 2020 and slightly declining to 31.28% by 2022. It then surged impressively to 40.93%
in 2023–24, indicating highly efficient use of capital, before dropping sharply to 26.62% in
2024–25, signaling a notable decrease in profitability relative to invested capital.
The trend suggests that while the company has been capable of generating high returns on its
investments, its performance is volatile. The spike in 2023–24 reflects a period of exceptional
efficiency or profit growth, but the steep decline in 2024–25 raises concerns about operational
challenges, increased costs, or less effective capital utilization, highlighting the need for careful
management attention.
6. Earning Per Share:
The EPS from 2020 to 2022 remained stable from 21.6 to 24.7. It experienced a sharp jump to
40.7% in 2023/24 which reflects strong profit growth. In 2024/25, EPS fell slightly to 34.38 but
stayed well above historical levels, maintaining a high value per share. This makes the company
attractive to investors as it generates increasing earnings for share outstanding.
4.2 Liquidity Ratios
Particulars 2020 2021 2022 2023–24 2024–25
Current Ratio 1.7 1 1.1 0.9 0.8
Quick Ratio 1.1107 0.445 0.5069 0.3552 0.188
Cash Ratio 0.7 0.27 1.13 0.88 0.8
Source: Annual Reports of Nestlé India
Across the 5 year period, the current ratio declined steadily from 1.7 to 0.8 from 2020 to 2024/25
which shows a decline in current assets relative to current liabilities. This signifies increased
reliance on short-term financing. The quick ratio fell from 1.11 in 2020 to 0.188 in 2024/25
which suggests that liquid assets (excluding inventory) is insufficient to cover current liabilities.
On the other hand, Cash ratio dropped to 0.27 in 2021 but recovered to 0.8 in 2023/24. This
represents that the company maintained adequate cash reserves to meet the urgent liabilities
despite the low working capital.
The liquidity analysis with decreasing current and quick ratio and higher cash ratio indicates
potential short-term pressure to cover the liability. The decline in CR and QR shows increasing
dependence on supplier credit and short term borrowings. The stronger Cash ratio from 2023 to
2025 shows the management is trying to maintain a sufficient cash buffer for compensating the
weaker liquidity. This allows Nestle India to meet immediate financial obligations which can
reduce liquidity risk. Nonetheless, the downward trajectory of working-capital-based ratios
implies that the firm must continually maintain robust cash flows and supplier relationships to
avoid liquidity stress. In summary, liquidity is efficient but fragile, strategically managed rather
than abundant, and requires continued vigilance to ensure operational stability.
4.3 Efficiency Ratios
Particulars 2020 2021 2022 2023-24 2024-25
Inventory Turnover Ratio 9.8 9.8 9.5 9.7 8.1
Account Receivable Turnover Ratio 91.9 88.6 93.8 78.9 60.5
Accounts Payable Turnover Ratio 3.77 3.89 4.22 6.3 6.1
Total Asset Turnover 1.68 1.78 1.87 2.31 1.63
Source: Annual Reports of Nestlé India
Interpretation
The above data shows a clear picture of the operational efficiency of the company over the span
of five years. The company seems to have a stable Inventory Ratio from the years 2020-2024.
However, it significantly dropped to 8.1 in the recent fiscal year 2024-2025. The decrease in ITR
could mean that Nestlé India is selling its inventories at a slower rate and demand is
comparatively low than that of the previous four years.
Accounts Receivable Turnover Ratio in the year 2020 was 91.9 times which means that the
company collected its accounts receivables 91.9 times in that year. Similarly, the accounts
receivables were collected 88.6 and 93.8 times in the years in the years 2021 and 2022
respectively. However, there was a subsequent drop in the receivables in the years 2023-24 and
2024-25 i.e. 78.9 and 60.5 times. This indicates that Nestle India has not been able to collect cash
effectively from its customers. This may negatively affect the cash flow of the company.
Accounts Payable Turnover Ratio of the company was the highest in the year 2023-2024 and
lowest in the year 2020. The company paid to the creditors 6.3 times in 2023–24 and 3.77 times
in 2020. In the year 2024-25, Payable Turnover Ratio is slightly decreased at 6.1. This may make
an unfavourable reputation of the company among their creditors, but the company can still take
advantage of the cash that remains in the company.
Asset Turnover Ratio consistently increased in the years 2020 (1.68 times) to 2024 (2.31 times).
In the year 2024–25, it decreases to 1.63 times. The company was able to utilize most of its
assets in the year 2022 (1.87 times). This indicates a sharp decrease in efficient asset utilization
by the company.
Overall, the company’s performance in efficiency is declining which may be due to the
decreased demand and sales of their products in the market. The decrease in Account Payables
Turnover ratio may also be due to pressure on cash flow caused by lower sales and lower
collectibles.
4.4 Leverage Ratios
Under the leverage analysis framework, a firm’s long-term solvency and reliance on external
financing can be evaluated through three key ratios: the Debt-Equity Ratio, the Debt Ratio and
the Interest Coverage Ratio.
Debt Ratio = Total Assets/Total Debt
Interest Coverage Ratio = Interest Expense/EBIT
Debt–Equity Ratio = Total Debt/Shareholders’ Equity
Where,
Total Debt = Short-term Borrowings+ Long-term Borrowings
Leverage Ratios 2020 2021 2022 2023-2024 2024-2025
Debt-Equity Ratio 0.01725 0.01750 0.01221 0.00932 0.18298
Debt-Ratio 0.00441 0.00415 0.00334 0.00296 0.06113
Interest Coverage Ratio 18.13235 15.29631 22.06470 39.95853 31.50368
Source: Annual Reports of Nestlé India
Interpretation
The leverage analysis of Nestle India highlights a clear shift in its financing strategy in the year
2025. But still it remains well within the conservative safety limits. From 2020 to 2024, the
company operated almost as a zero-debt firm, with a Debt to Equity ratio hovering around 0.01,
indicating that there is a strong preference for internal funding rather than hovering around for
external borrowing. The case changes in 2025 where the leverage metrics show a deliberate
strategic increase in debt usage with the Debt-to-Equity ratio rising to 0.18 and the Debt Ratio
moving up to around 6% likely to fund expansion or manage working capital, rather than
financial stress the firm continues to maintain extremely safe solvency position. The Interest
Coverage Ratio of 31.5x indicates that the company’s operating earnings exceed interest
obligation by a huge amount which ensure that there is a negligible financial distress risk.
Overall while the firm has begun optimizing its capital structure by incorporating moderate
leverage, it continues to maintain a high stable and low risk balance sheet.
5. DuPont Analysis
Under the DuPont Framework, the Return on Equity of Nestlé India is broken down into five
subcomponents to provide a deeper look into the performance of the company by examining its
profitability, asset utilization efficiency, leverage and the effects of interest and taxes on final
earnings.
ROE=Operating Margin× Asset Turnover × Interest Burden× Tax Burden × Equity Multiplier
Where,
EBIT
Operating Margin=
Sales
Sales
Asset Turnover=
Assets
EBT
Interest Burden=
EBIT
Net Income
Tax Burden=
EBT
Assets
Equity Multiplier=
Equity
Components 2020 2021 2022 2023-24 2024-25
Operating Margin 0.22 0.21 0.20 0.22 0.23
Asset Turnover 1.68 1.78 1.87 2.31 1.63
Interest Burden 0.94 0.93 0.95 0.97 0.97
Tax Burden 0.74 0.74 0.73 0.74 0.75
Equity Multiplier 3.91 3.94 3.65 3.15 2.99
ROE 1.03 1.03 0.97 1.18 0.81
Source: Annual Reports of Nestlé India
From the DuPont analysis of the company’s ROE, the components primarily responsible for the
fluctuations in ROE have been asset turnover and leverage. With a sharp rise in asset turnover in
the Year 2023-24 of 2.31, there was a corresponding increase in ROE from 0.97 to 1.18.
However, in the Year 2024-25 there was a decline in asset turnover which significantly reduced
ROE to 0.81. This suggests that the company is not able to efficiently utilize its assets to earn
profits. This discrepancy between the two years may partly be due to the shift from a 15 month
reporting period in 2023-24 to a regular 12 month period in 2024-25 which naturally affects asset
turnover ratio.
Likewise, with gradual decrease in leverage of the company, the ROE of the company also
decreased, suggesting that the company is dependent less on borrowed funds, lowering financial
risk but putting a pressure on ROE. In contrast, operating margin, tax burden, and interest burden
remained consistent over the period, suggesting stable profitability and tax and interest policies.
Overall, the improvements in asset utilization and a balance between debt and equity are required
to improve the performance of the company’s ROE.
6. Economic Value Added
Economic Value Added (EVA) refers to the true value of the economic profit made by a
company generated after all the accounting costs of the company. EVA aims to measure the
firm’s ability to generate profits in excess of the cost of the capital employed to generate those
profits. (DESAI & FERRI, 2006)
EVA= NOPAT - (Cost of Capital*Capital)
Where,
NOPAT= Net Operating Profits After Taxes
Capital= Capital invested by debt holders and equity holders
Cost of Capital= Weighted average of the after-tax cost of debt and cost of equity
EVA of Nestlé India
EVA= NOPAT - (Cost of Capital*Capital)
=36588.2 - (0.0852*76385.4)
=Rs. 30080.16 million
Where,
NOPAT= EBIT*(1-Tax Rate)= 49091.9*(1–0.2547)= Rs. 36588.2 million
Debt Equity
Cost of Capital= WACC= *(1-Tax Rate)*r(debt) + *r(equity)
Debt + Equity Debt + Equity
= (1.58+6.94)%
=8.52%
Capital= Total Assets-Current Liabilities= Rs. 123238.9 - Rs. 46853.5 = Rs. 76385.4
Interpretation
The Economic Value Added for Nestlé India is approximately Rs. 30080.16 million. The amount
generated is far in excess of the total cost of capital generated by the company. It implies that the
firm is creating enough wealth in order to increase the value of the company.
This positive outcome is a strong indicator of good corporate governance for Nestlé India. While
corporate governance primarily focuses on the board structures, audit committees, agency
relationships, EVA can be used as a strong metric to measure a performance based outcome of
the company. This strong EVA results validates the effectiveness of the governance of the
company.
Essentially, Nestlé India can integrate the EVA with compensation of the managers. This
encourages the managers to think and work like the owners of the company. Aligning
compensation with a positive and high EVA will motivate managers to take projects that provide
returns comparatively higher than the cost of capital. This can add more value to the effective
corporate governance of the company.
Limitations
● A 5-Year beta is used to calculate the cost of equity, which has a significantly lower
volatility than the market.
● Market Risk Premium is an estimated and generally accepted value.
7. Market Value Added
Market Value Added (MVA) measures how much a company’s market value exceeds the total
capital invested by shareholders and bondholders. (Chen & Investopedia, 2025). Market Value
can be calculated as
MVA= MV of Stock - Equity Capital supplied by the investors
Where,
MV= Market Value
MVA of Nestlé India
Particulars Fiscal Year 2024-25
Stock Price 1266
Number of shares (in millions) 964.2
Market Value (in millions) 1220622.965
Book value of equity (in millions) 41171500000
MVA (in millions) 1179451.456
Interpretation:
The figure shows that Nestlé India's MVA is positive and very large. The company has created a
sufficient amount of wealth for their shareholders over the years, surpassing the amount of
capital that they have invested in the company. The value indicates how much the company can
create wealth in the future. It suggests that the market has a high expectation on the future
performance and profitability of the company.
A high MVA, along with a high EVA, emphasizes that the company’s historical economic
profits continue to result in high future expectations from the investors and shareholders. It
shows transparency in the organization, helping the investors to reduce information gaps and
evaluate operational efficiency. It indicates that there exists good trust among the stakeholders
and there is confidence in the corporate governance of the company.
Assumptions and Limitations
● It is assumed that the equity capital supplied by the investors is the book value of the
equity.
● Market may fluctuate due to the changes in stock price- the current price is used from the
recent data from Bombay Stock Exchange website.
8. Bankruptcy Analysis
A firm becomes bankrupt when the value of its assets equal to the value of debt. It is generally
the situation where a company is running out of cash.
Z score – a multiple discriminant analysis technique, developed as a powerful diagnostic tool
measuring solvency.
Z-score Formula
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 +0.999X5
X1 = working capital/total assets,
X2 = retained earnings/total assets,
X3 = earnings before interest and taxes/total assets,
X4 = market value equity/book value of total liabilities,
X5 = sales/total assets
Z = overall index
Zones of Discrimination:
Z>2.99 “Safe” Zone
1.8<Z<2.99 “Grey Zone”
Z<1.80 “Distress” Zone
Metrics 2020 2021 2022 2023-2024 2024-2025
Current
Assets 41,850.80 27,387.60 34,901.50 34,947.20 37,341.60
Current
Liability 24,925.50 27,621.80 30,797.50 39,560.70 46,853.50
Working
Capital 16,925.30 -234.20 4,104.00 -4,613.50 -9,511.90
Total Assets 78,997.30 82,099.30 89,787.40 105,230.60 123,238.90
Retained
Earnings 19,229.20 18499.6 23627 32444.7 40,207
EBIT 29,769.70 30,849.60 34,105.40 54,343.60 45,834.70
Market
Value of
Equity 1,773,312.00 1,899,925.00 1,890,327.00 2528358 2,170,077
Book Value
of Total
Liabilities 58,804.00 62,877.50 65,195.70 71,821.70 82,067.40
Sales(Reven
ue) 133,500.30 147,094.10 168,969.60 243,938.90 202,015.60
Coefficient
1.2 0.2143 -0.0029 0.0457 -0.0438 -0.0772
1.4 0.2434 0.2253 0.2631 0.3083 0.3263
3.3 0.3768 0.3758 0.3798 0.5164 0.3719
0.6 30.1563 30.2163 28.9947 35.2033 26.4426
0.999 1.6899 1.7917 1.8819 2.3181 1.6392
Z-Score 21.6235 21.4717 20.9535 25.5210 19.0946
Source: Annual Reports of Nestlé India
Interpretation :
The Altman Z-Score analysis for Nestle India shows strong financial health. With scores ranging
from 19.09 to 25.52 across the period which is far beyond the threshold of safe zone(i.e 3.0).
This means the company is not only safe but performs 6x to 8x better than the benchmark,
indicating that there is zero probability of bankruptcy and reflecting extremely high investor
confidence. The primary driver behind this unusually high Z-Scores is the Market Value of
Equity to Total Liabilities ratio which is due to Nestle India’s consistently high market valuation
and low debt levels. Although working capital component is negative in multiple years, which is
common in FMCG companies and strategically advantageous for FMCG companies because
they sell faster than they pay suppliers. The slight drop in the Z-Score in 2025 is not a sign of
financial weakness but shows a strategically incorporated debt. Even after this decline, a Z-Score
near 19 remains extraordinarily high, confirming Nestle India continues to be in an extremely
solvency position with no financial distress risk.
Assumption :
1. The Model Fits the Industry Type
9. Linking Financial Analysis to Corporate Governance
Assessment of Corporate governance of the company has been done with the help of financial
analysis of the company as follows:
Earnings Quality and Corporate Governance
The Net profit of the company has been driven by the regular sale of core products of the
company. the figures of sales and profit are not manipulated. It shows strong corporate
governance of the company.
Operating cash flow has grown slower than the net profit during the period of five years. Having
more inventories and receivables indicates inadequate supervision of management over working
capital. Free cash flow of the company has declined considerably. Though, it is because of
capital expenditure which the company aims to get a return from in future, it hits the financial of
the company temporarily. So, the board and the management may face pressure from
stakeholders for short run benefits. However, up-to now, they are focusing on long term wealth
maximization over short run gain.
Ratios and Corporate Governance
The operating profit margin and net profit margin of the company remains stable over the period.
It indicates the management has been concerned about the profitability position of the company.
Return on Equity of the company has declined over the period. It is because of the higher rate of
increment in equity of the company. Return on Equity is considered one of the important
indicators to assess the performance of management. So, it creates pressure on the management
to increase the metrics. Having limited scope to increase net profit, management distributes the
equity as a dividend to shareholders to maintain favorable ROE while impacting the capital
structure. However, the management of Nestle India has not manipulated the metrics by playing
with the capital structure. Moreover, it is also to be noted that the company is investing the
equity for expansion of the company which will create value for shareholders in the long term. It
indicates the good corporate governance practice of the company.
Liquidity ratios of the company are getting weaker. It increases the risk of insolvency and
bankruptcy. Having unfavourable liquidity ratios draws the attention of creditors towards the
company since their stakes remain in risk. It creates pressure on the company since it becomes
difficult to make procurement in credit. So, management of the companies manipulate the
liquidity ratios to make them look good. However, the management of Nestle India has been
depicting the true liquidity ratios transparently over the period. It is a sign of good governance
practice of the company.
10. Conclusion
Assessment of Nestle India Limited’s corporate governance through the financial analysis led to
the conclusion that the company has good corporate governance practices.
References
Chen, J., & Investopedia. (2025, November 7). Understanding Market Value (MVA): Definition,
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