My Fundamental Analysis

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Finding Your Investment Opportunity

Before we can analyze a stock, you have to find out what you want to invest in. You can start this process any number of ways: If you go to the supermarket and notice that the frozen meal aisle is becoming more and more like the Lean Cuisine aisle, taking up a greater part of the market. Acting upon this, you go home and find out Lean Cuisine is owned by Nestlé so you want to buy some Nestlé stock. 

Hold up, champ! Let's do some research first!

Associated Fees

You should have some tools in your tool belt (some provided to you on my Tools for Investing page). As we look up Nestlé, we will quickly find that it is a foreign stock, based in Switzerland, so you will immediately find American Depository Receipt, or ADR, fees are applicable on all trades with this company. This means you will need to account for a per share trade fee, usually between one and three cents.

ADRs aren't the only kind of fees. You should check with your broker to see if any fees are applicable to your investment opportunity. Uniquely, trading in Spanish, French, or Italian markets will often come with ADR fees plus Financial Transaction Taxes (FTT).

Calculating the Value of the Stock

Now that we understand the applicable taxes and fees, we'll need to factor that into our investing costs. Let's move onto looking at their Tangible Book Value, or TBV. The TBV is important because this means if we This can be quickly calculated by doing the following:

TBV = Total Assets Value - (Goodwill + Non-Tangible Assets)

The easiest place for us to pick up the financial data is from Nestlé themselves. Go to your favorite search engine and type in "Nestle 10-K" and you will find the first hit is Nestlé's Annual Report, including their financial statements. Now for those of you who know enough to be dangerous, you might think, but Mat, you said Nestlé is a foreign company and I know that foreign companies do not have to fill out 10-Ks! I told you that you didn't know what you were doing! Well, you are right, they don't but that is the great thing about the internet. Companies like Google and DuckDuckGo know that when I say "Nestle 10-K" (minus the quotes) that I really mean "Nestle Annual Report." Isn't it a great big scary world out there?

Alright, you're going to need to scroll down a lot. Remember Peter Lynch's concept of pretty paper versus cheap paper? Well, they have to show you the great stuff first, right? Keep scrolling, my dudes.

At the time of this writing, we will use the recently released 2021 annual report but if you are mid-year please know that this is still a relevant report to work off of but you will want to check the news and maybe some quarterly earnings reports to see if anything major has changed. As this is just a baseline, feel free to use this report.

On page 186 of 202 (the cheap paper), we find the balance sheet. In here we want to pull some key pieces of data but you need to recognize that they are working in a different currency: the Swiss Franc (CHF). No worries for our friends in the US as a Swiss Franc is relatively close to the US Dollar in value as a 1.08:1 ratio, respectively. Now let's look at that data:

• Total Value of Assets: 28,598,000,000 CHF
• Total Value of Goodwill: 0 CHF
• Total Value of Other Intangible Assets: 0 CHF

This is great news for the investor! We can see that Nestlé is not recognizing any intangible assets added to the value of their company. Therefore, we can see the TBV is 28.598 billion CHF.

Liabilities and Shareholder Equity

Debt can be crippling. Many of us who got a credit card at 18 and spent the borrowed money like someone else was paying the bill understand debt the best. Just like the credit agencies rate you and your debt, you will do the same for Nestlé.

Stay on page 186 and look right below those Total Assets at their Current and Non-Current Liabilities. Current liabilities are due in the near term while non-current liabilities are more long term debt. For more information on the different individual liability categories, check out Anderson Fuller's great YouTube video on the topic.

Here we see that they have roughly 5.5 billion CHF in near term debt and 2 billion CHF in long term debt, resulting in total liabilities of 7.548 billion CHF. That is roughly 26% of the value of their total assets.

So if they had to pay all of their debts and close the doors tomorrow, what do they do with the rest of the money? Shareholder Equity is what. so if we take 28.598 billion and subtract 7.548, we end up with 21.050 billion CHF that the shareholders would then split. Shareholder Equity and Total Liabilities should always equal Total Assets, tangible and intangible.

Calculating Stock Value per Tangible Book Value

So, we've done all of this math? Is this a good buy? I don't know. We have a long way to go but for today, we are going to calculate one last metric: the value you are getting for every dollar of tangible book value. The equation we are going to use is:

P/TBV = Market Cap / TBV

To find this data, we need to go find out the latest and greatest earnings report as well as their current market capitalization, more commonly called market cap. Market cap can easily be pulled up on Yahoo! Finance. At the time of writing, we are looking at a market cap of 308.801 billion dollars, US.

Now that we have all of the needed information, we can calculate that value:

P/TBV = 308,801,000,000 / 28,598,000,000

P/TBV = ~10.80 / 1

Bringing this back to terminology we can understand, that means for every share of Nestlé you are buying, you are paying roughly 10.80 CHF for every 1 CHF of assets.

So what does this mean?

Well, we don't know if we should or shouldn't buy stock in Nestlé right now. There are many factors at play here that we haven't researched yet. We know that the market has priced in growth expectations and this means that there is no guarantee that Nestlé will make these expectations. If they fall short, we cannot depend upon the value of assets to cover the cost of the stock. So we've seen some good and some not so good information here. No surprise, Nestlé is a good investment but is it a good investment at this price? We just don't know enough yet. We'll look at it more next week as we look at price to earnings, earnings per share, and fair market value of Nestlé's stock.

Disclaimer: This blog is intended for educational purposes only. The authors are not liable for any gains/losses incurred for readers that acted upon this information. The authors are not financial advisors and they strongly recommend you seek professional advice before investing your money in any market. We recommend you are disciplined with your own trading, and if you decide to follow any recommendations made by authors, you are accepting the fact that you may risk all your capital you put into a certain trade. Results are NOT guaranteed. Past experiences are not indicative of future results. Trade with an amount that you are comfortable with losing and that will NOT jeopardize yours or someone else’s financial well-being.