Cash flow statements: initial analysis Swiss-based Nestl is the worlds largest consumer foods company with 2001 sales

Cash flow statements: initial analysis Swiss-based Nestlé is the world’s largest consumer foods company with 2001 sales of A56 billion. It’s best known for its beverage (Nescafé), bottled water (Perrier, Vittel) and confectionery (Kit Kat)

brands. In recent years, it has expanded its petfood business through acquisitions of companies

(Spillers (1998), Ralston Purina (2001)). Its consolidated cash flow statement for calendar 2001 is set out in Exhibit 18.10.

Nestlé prepares its cash flow statement according to IAS. The statement has certain unusual features, however. ‘Net profit of consolidated companies’ (the first item under ‘Operating activities’)

is group net profit, i.e. before taking account of minority interests in subsidiaries’ profits and Nestlé’s share of associated companies’ profits. (The dividend Nestlé received from associated companies is shown against ‘Income from associates’ under ‘Investing activities’.) Nestlé shows changes in marketable securities and short-term investments under ‘Financing activities’: management view liquid assets as part of net debt and thus changes in these assets are presented alongside changes in debt.

Required

(a) Prepare an initial analysis of Nestlé’s cash flows in 2000 and 2001. Condense the company’s cash flow statement and calculate the following key numbers for both years:

(i) Free cash flow (defined as OCF less net capex and dividends paid);

(ii) Net cash flow before financing;

(iii) Net increase or decrease in debt;

(iv) Net increase or decrease in liquid assets.

(b) As part of your analysis, answer the following questions:

(i) Was the company self-financing in 2000 and 2001? If it was, how did it deploy the cash surplus? If it was not, how did it finance the shortfall?

(ii) Were there any major events affecting the company’s investment strategy or financial structure in either year? If so, how did they affect the company’s cash flows?

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