FIRST SEMESTER 2021/2022 SESSION (A211)

BWRR3123 CORPORATE GOVERNANCE (GROUP A)

INDIVIDUAL ASSIGNMENT

A STUDY ON NESTLE (MALAYSIA) BERHAD IN MALAYSIA:

PERFORMANCE AND ITS DETERMINANTS

PREPARED BY:

NUR FARHANA BINTI MOHAMAD NASIR (275624)

PREPARED FOR:
DR. WAEIBRORHEEM WAEMUSTAFA

SUBMISSION DATE:
31st DECEMBER 2021

Electronic copy available at: https://ssrn.com/abstract=4694762

 ABSTRACT

This research looks at the aspects that can impact the outcomes of Nestle (Malaysia) Berhad.
The goal is to discover internal and external variables, as well as the combination of factors
that may have an impact on the performance of Nestle (Malaysia) Berhad. To determine the
degree of significance of the connection between these variables, methods such as statistical
and regression techniques have opted in this research case. When certain variables are
considered, it becomes evident that operational risk instead of other determinants has the most
significant influence on Nestle (Malaysia) Berhad's performance. However, despite the fact
that the Nestle (Malaysia) Berhad controversy in 2020 possibly had a role in the corporation's
subsequent drop in their profitability, statistical data analysis reveals that the corporation's poor
operational risk management might directly impact their performance as well.

Keywords: Nestle (Malaysia) Berhad, profitability, performance, ROE, corporate governance.

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 TABLE OF CONTENTS

CHAPTER 1
Introduction
1.0 Introduction .......................................................................................................................... 1
1.1 Introduction .............................................................................................................. 1
1.2 Background of Nestle (Malaysia) Berhad................................................................ 1
1.3 Problem Statement ................................................................................................... 2
1.4 Research Objectives ................................................................................................. 3
1.5 Research Questions .................................................................................................. 3

CHAPTER 2
Literature Review
2.0 Literature Review................................................................................................................. 4
2.1 Introduction .............................................................................................................. 4
2.2 Corporate Governance ............................................................................................. 4
2.3 Performance ............................................................................................................. 4
2.4 Liqudity Risk ........................................................................................................... 5
2.5 Credit Risk ............................................................................................................... 6
2.6 Operational Risk ...................................................................................................... 6
2.7 Market Risk .............................................................................................................. 7

CHAPTER 3
Methodology
3.0 Methodology ........................................................................................................................ 8
3.1 Introduction .............................................................................................................. 8
3.2 Sampling Technique ................................................................................................ 8
3.3 Statistical Technique ................................................................................................ 8
3.4 Data Analysis ........................................................................................................... 9
3.5 Statistical Package for Social Sciences (SPSS) ....................................................... 9

CHAPTER 4
Finding and Analysis
4.0 Finding and Analysis ......................................................................................................... 11
4.1 Introduction ............................................................................................................ 11
4.2 Descriptive Statistics .............................................................................................. 11
4.3 Correlations ............................................................................................................ 14

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 4.4 Model Summary..................................................................................................... 15
4.4.1 Internal .................................................................................................... 15
4.4.2 External ................................................................................................... 16
4.4.3 Internal and External ............................................................................... 16
4.5 Coefficients ............................................................................................................ 16
4.5.1 Internal .................................................................................................... 16
4.5.2 External ................................................................................................... 17
4.5.3 Internal and External ............................................................................... 17
4.6 Trend Analysis ....................................................................................................... 18
4.6.1 Performance ............................................................................................ 18
4.6.2 Liquidity Risk ......................................................................................... 19
4.6.3 Credit Risk .............................................................................................. 19
4.6.4 Operational Risk ..................................................................................... 20
4.6.5 Corporate Governance Index .................................................................. 20
4.6.6 Macroeconomic....................................................................................... 21

CHAPTER 5
Discussion and Recommendations
5.0 Discussion and Conclusions .............................................................................................. 22
5.1 Introduction ............................................................................................................ 22
5.2 Discussion of Result .............................................................................................. 22
5.3 Limitations ............................................................................................................. 23
5.4 Recommendations .................................................................................................. 23

References ............................................................................................................................... 24

Electronic copy available at: https://ssrn.com/abstract=4694762

 CHAPTER 1
INTRODUCTION
1.1 Introduction
The subject matter of this chapter will be briefly discussed on the comprehensive
overview of Nestle (Malaysia) Berhad, mainly focusing on its history and background. Later
on, the problem statement, research goals, scope of the study, research questions and
organisation of the report will all be explored in further detail as well.

1.2 Background of Nestle (Malaysia) Berhad

Nestle (Malaysia) Berhad is a Malaysian wellness, nutrition, and health business
company, and it also operates as an investment holding company (Bursa Marketplace, 2020).
"Nestle started its operations in Malaysia in 1912 as the Anglo-Swiss Condensed Milk
Company in Penang and subsequently relocated to Kuala Lumpur in 1939 due to major growth
and expansion" (News Straits Times, 2016). Nestlé now dominates the domestic market with
more than 2000 brands and is present in 187 nations throughout the globe. Nestle also stated
their future core ambitions for 2030 while supporting the UN Sustainable Development Goals.

The three overarching aims are i. to assist 50 million youngsters in living better
lifestyles in the context of families and individuals, ii. to enhance the lifestyles of 30 million
people living in areas that are directly tied to our business operations in the context of
communities and iii. to make every effort to have zero environmental effect on our business
operations in the context of our planet (Nestlé, 2020).

Fast facts; Nestle (Malaysia) Berhad has been a publicly traded corporation on the
Malaysian stock exchange, Bursa Malaysia, since 1989, Nestle exports 20% of its total output
to more than 50 nations throughout the globe, and the company now has six manufacturing
factories and a Nestlé Distribution Centre (Nestle, 2019). Lastly, there are a total of three
fundamental principles underline the Nestle Code of Business Conduct ("NCBC"), which are:
a) avoiding any action that may create risk or jeopardise the Group's or its reputation, b) to act
in accordance with the law and with integrity, prioritise the Group's interests ahead of other or
self-interests, and c) to provide the right guidance on the subject matters related to the Board
of Directors and the Group's employees' behaviour, duties and conduct (Nestle, 2020).

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1.3 Problem Statement
A crisis or scandal inside a firm includes the execution of unethical, immoral, or
deceptive actions by the company or a person acting in their capacity as an employee of a
company. While corporate scandals are not uncommon, the complexities and ramifications of
the scandals kept the issue in the public eye for decades after it occurred. Scandals have the
potential to bring down a large, multinational corporation, creating concerns among
government authorities and business leaders alike. Nestle (Malaysia) Berhad is not an
exception; a significant corporation with aspirational claims to a sound corporate governance
framework is almost bound to run into issues inside their own walls.

According to Astro Awani, on December 24, 2020, Nestle (Malaysia) Berhad was fined
RM90,000 last year by the Sessions Court here for two counts of dumping liquid waste into
inland waterways (Umavathi, 2020). On the first count, the organisation was charged with
violating the "Regulation 11 (1) (b) of the Environmental Quality (Industrial Effluent)
Regulations 2009 by discharging five kinds of industrial effluent into inland waterways that
exceeded the statutory limit for biochemical oxygen demand requirements" (Bernama, 2020).
Whereas the second count was concerned with the issue of exceeding the regulatory limitations
for discharging concentrated chemical oxygen demand needs into inland waterways. As a
result, the organisation was fined amounting to approximately RM50,000 and RM40,000 for
the first and second counts.

Even though Nestle (Malaysia) Berhad's has its own Audit Committee and consistently
carries out its annual audit plan and risk assessment every year, they still highlight
environmental concerns like water pollution on December 24, 2020, as one of their critical
risks in their Corporate Governance & Financial Report 2020 (Nestle, 2020). From here, it can
be concluded that environmental concerns will always be an ongoing issue for Nestle
(Malaysia) Berhad every year. Since Nestle (Malaysia) Berhad is a consumer goods company,
therefore, their customers act as their primary asset. Whether the negligence was committed
intentionally or unintentionally, the consequences of their action will jeopardise their
relationship with their customers. Not only that but ensuring environmental sustainability is
one of the Nestle 10 Corporate Business Principles (Nestle, 2020). As a result, they need to
live up to their Corporate Business Principles. Otherwise, their customers would begin to doubt
their credibility, which will ultimately jeopardise their long-term success. Overall, there is a
statistically significant correlation between a company's performance and its profitability.

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1.4 Research Objectives
The objectives of this research are:

1. To ascertain the internal or firm-specific factors that could have influence on Nestle
(Malaysia) Berhad's performance.

2. To identify the external or macroeconomic factors that could have influence on Nestle
(Malaysia) Berhad's performance.

3. To investigate the internal and external factors that could have influence on Nestle
(Malaysia) Berhad's performance.

1.5 Research Questions

1. Is there any relationship between the internal factors with Nestle (Malaysia) Berhad 's
performance?
2. Is there any relationship between the external factors with Nestle (Malaysia) Berhad 's
performance?
3. Is there any relationship between internal and external factors with Nestle (Malaysia)
Berhad's performance?

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 CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
Performing a relevant literature review for this study is the focus of this chapter. It comprises
two components: internal and external factors, mainly focusing on the context of corporate
governance, performance, liquidity risk, credit risk, operational risk, and market risk.

2.2 Corporate Governance

Corporate governance, referring to the Cadbury Committee (1992), is defined as
follows: "the system through which companies are directed and controlled" (Mähönen, 2020).
Basically, "Corporate governance is a set of rules, processes, and practices that regulate and
control a business" (Chen, 2021). Chen (2021) defined corporate governance as a set of rules,
processes, and practices that are applied in a corporation to ensure such business operations are
run smoothly". It is essential to corporate governance for investors since it displays a
commercial enterprise's integrity and strategic direction. Businesses that practise effective
corporate governance are able to gain the trust of investors and the general public.

Additionally, the board of directors of the corporation is the most vital influencer in
terms of corporate governance. Poor corporate governance may jeopardise a company's
operations and ultimate profitability. Accountability, openness, responsibility and fairness are
the fundamental concepts of corporate governance. Besides that, a failure in corporate
governance may create concerns about a business's honesty, reliability, and responsibility to its
shareholders. In the long run, it can cause severe harm or detrimental impact on the company's
financial state. Support or condoning illegal or unlawful activities can lead to scandalous
controversy such as the one that shocked Volkswagen AG in September 2015 is one of some
examples of bad corporate governance (Chen, 2021). The importance of good governance and
corporate social responsibility (CSR) in ensuring the functioning of markets necessary for
economic growth and development cannot be overlooked (Witherell, 2002). Following the
1997 financial crisis and other business scandals in developed nations, the government in
Malaysia has put a strong priority on corporate governance. The Malaysian Code on Corporate
Governance, established in 2001, exemplifies this commitment.

2.3 Performance
"Profitability is the relationship between revenue and expenditures, the business's
current performance, the company's potential future development, and how the company

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manages its working capital" (Morshed, 2020). For a company, the primary goal is to maximise
revenue, profits, and assets while simultaneously considering the needs of its shareholders. All
company endeavours begin with the main aim of profitability (Johanns, 2019). A corporation
that does not generate profits will ultimately go out of business. Thereby, a corporation needs
to assess its past, present profitability, but at the same time, the corporation also needs to
forecast future profitability too. Additionally, profitability is defined as an increase in return
on assets combined with a decrease in working capital. For instance, a small business's success
is contingent upon its consistently generating profits. In general, any business cannot survive
without making a profit. According to Kangarlouei et al. (2012), a corporation's efficacy and
its performance are most often evaluated via the metrics of ROE aka return on equity at the
same time ROA aka return on assets. For ROA, it shows how its management uses its assets
and resources to generate money. In contrast, for ROE, in financial terms, ROE quantifies
explicitly the amount of profit generated by a corporation in relation to the equity it holds from
its shareholders. Although both ROE and ROA measure profitability, they represent distinct
aspects of an organisation's performance.

2.4 Liquidity Risk

Compared to before, the liquidity issue now poses a far greater threat. "Liquidity risk
is defined as the financial vulnerability of a firm, situations that result in an unanticipated
demand for resources as a result of an irregular or unplanned event financial resource accrued"
(Scanella, 2016). According to Kenton (2021) "liquidity refers to a business's, companies, or
perhaps a person's capacity to repay his debts without experiencing catastrophic financial
losses". Alternatively, "liquidity risk refers to a company's inability to pay its debts as they
become due without jeopardising its financial position" (Kumar & Yadav, 2013). Effective
liquidity risk management assists companies in meeting their obligations as they mature and
minimises the likelihood of an unfavourable scenario arising. This is significant because
liquidity crises may have systemic consequences even at a single institution. There are two
types of liquidity risk: funding liquidity risk and asset liquidity risk (Kumar & Yadav, 2013).
In the case of asset liquidity risk, liquidity is managed by reducing portfolio concentrations and
relative market sizes. In contrast, funding liquidity risk is controlled through diversifying
sources of funding, closing cash flow gaps, and obtaining credit lines. Liquidity risk has a
significant impact on a company's competence to operate successfully and its reputation
(Jenkinson, 2008). If depositors do not get their money on schedule, a company risks losing
their trust. There is a chance that the company's reputation may be tarnished due to this.

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2.5 Credit Risk
Credit risk has been described in various ways by various academics and organisations.
The majority of studies agreed with The Basel Committee and Basel Committee on Banking
Supervision's (2000) definition, "which defines it as the possibility that a debtor or counterparty
would default on contractually specified obligations according to the agreed-upon conditions".
Credit risk has long been a source of worry, not only for bankers but for everyone in business,
since the danger of a trading partner failed to pay his obligations in full and on time may imperil
the other partner's company (Achou & Tenguh, 2008). "The average collection period is one
of the credit risk indicators which refers to the amount of time it takes for a company to receive
payments owed by its clients in terms of accounts receivable (AR), and a delay in payment may
lead to a bad debt that has a negative impact on a company's financial performance" (Kenton,
2021). The average collection period is essential for businesses that depend primarily on
accounts receivable to earn cash. A shorter average collecting duration, in particular, is
preferred to a more extended average collection period. A shorter collection period implies that
credit transactions may be converted to cash more rapidly. One may argue that a shorter average
collection period shows higher efficiency in credit sales management and vice versa. To
determine the credit risk on a consumer loan, lenders use the five C's: the loan's condition,
credit history, capacity to repay, associated collateral, and capital (The Investopedia Team,
2021). Specific organisations have created departments exclusively dedicated to evaluating the
credit risks associated with their existing and prospective customers.

2.6 Operational Risk

Rejda and McNamara (2017, p.24) stated that "operational risk arises from the firm’s
business operations". For example, if "hackers" get access to the bank's computer, a bank that
provides online banking services may suffer damages. "Operational risk may alternatively be
defined as a subset of unsystematic risk that is peculiar to a specific business or sector" (Segal,
2020). Operational risk is concerned with how a company operates, not what is produced or
inherent in an industry. While there is no assurance that the risks will result in failure, decreased
output, or increased total costs, they are seen to be greater or lesser based on different internal
management decision-making. Because it is based on human-created procedures and cognitive
processes, the operational risk may be classified as a human risk; that is, it is the risk of a
company's operations deteriorating as a consequence of errors made by employees. It varies by
sector and is critical to consider when evaluating prospective investment choices. Industries
with a lower level of human contact are likely to have a reduced chance of operational failure.

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Maintenance of essential systems and equipment is one area that may entail operational risk.
Suppose two maintenance operations are needed, but only one can be performed at the moment.
In that case, when one option is chosen over another, it alters the operational risk associated
with the system that has been left in disarray. When a system breaks down, the negative
consequences that follow are directly proportional to the level of operational risk. By
comparing gross operating expenditures to sales revenue, the operating ratio illustrates a
corporation's management success. A decreasing operating ratio is seen better since it indicates
that operating expenditures have decreased as a proportion of revenues (Murphy, 2021).

2.7 Market Risk

According to Rejda and McNamara (2017, p.59) "market risks include unfavourable
price fluctuations in raw materials, changes in the overall level of prices (inflation), changes in
customer preferences, new technology, and greater rivalry from competitors". In essence,
"market risk is defined as the possibility which a person or other corporation would experience
losses as a result of factors that have an impact on the overall performance of investments in
the financial markets." (Hayes, 2021). The two primary types of investment risk are market
risk and specific risk (unsystematic). Market risk, sometimes referred to as "systematic risk,"
cannot be mitigated via diversification (Hayes, 2021). Still, it may be hedged in other ways.
The value-at-risk approach is widely used to assess market risk. The possibility of recessions,
interest rate fluctuations, terrorist attacks, and political upheavals are all sources of possible
market risk. Market risk is also known as a type of risk that tends to affect the whole market
simultaneously. Market risk arises as a result of price fluctuations. The entire market is exposed
to four main types of risk: equity price risk, commodities risk, interest rate risk, and foreign
exchange risk (Nickolas, 2020).

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 CHAPTER 3
METHODOLOGY
3.1 Introduction
Research methodology refers to the methods used to conduct the research. Additionally, this
section will cover sampling techniques, statistical techniques, and data analysis, all of which
will be carried out using the Statistical Package for Social Sciences (SPSS) Version 26.

3.2 Sampling Technique

The population for which inferential statistics will be used is Malaysia's food and
beverage industry. Nonetheless, for this study, the report's sample is the Nestle (Malaysia)
Berhad, which is the leading representative of the whole Malaysian food and beverage industry.
Data from Nestle (Malaysia) Berhad's annual report from 2016 to 2020 was selected to examine
the relationship between Nestle (Malaysia) Berhad’s performance and its determinants. As a
result, the dependent variable would be performance (ROE), whereas the independent variables
would be internal, external and internal and external factors.

3.3 Statistical Technique

The data utilised in this study were derived from the company's annual report for the
five years spanning 2016 to 2020. The income statement and balance sheet included in the
annual report are used to analyse the company's financial performance by estimating financial
ratios such as return on equity, current ratio, average collection period, CG Index, and operating
margin. Additionally, the data pertaining to Malaysia's exchange, unemployment, inflation as
well as interest rate accumulated to evaluate the economic state from 2016 to 2020. After that,
the data that has been extracted just now from the official database in the website will be
imported into an Excel database, which is then used to create charts for all of the ratios that are
significant to the outcomes of Nestle (Malaysia) Berhad's company in order to demonstrate
how the ratios have changed over time. Next, the primary approach utilised in this research is
Linear Regression, often known as Ordinary Least-Squares (OLS) regression. Multiple linear
regression is one of the two types of linear regression. According to Moore (2006) "multiple
regression is a statistical technique that can be used to analyse the relationship between a single
dependent variable and several independent variables". The researcher will use the SPSS 26th
edition to conduct the linear regression.

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3.4 Data Analysis
In this study, one dependent variable and three independent variables were chosen
based on the theoretical framework of future research. The methodology's flow chart is as
displayed below:

The relationship between one or more independent variables and a dependent variable
was evaluated using the Ordinary Least Squares (OLS) method. Based on the values of the
independent variables, a dependent variable's value may be determined using multiple
regression analysis. For this investigation, data from the annual report were analysed using the
IBM SPSS Statistics version 26. Regression analysis is often used for evaluating the
independent variables' impact on the dependent variable. The independent variables' effect on
the study's dependent variable may be shown using the above regression approach.

3.5 Statistical Package for Social Sciences (SPSS)

In this research, IBM SPSS version 26 was utilised to measure the data that were obtain
from the annual report. According to Landau and Everitt (2003) "SPSS, which stands for
Statistical Package for the Social Sciences, is a sophisticated, user-friendly data processing and
statistical analysis software package". There is no ambiguity in this software, and it is capable
of completing sophisticated data processing tasks. But that is not all; it can also gather data

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from any file format and utilise it to generate maps, aggregated reports, produce descriptive
statistics, and other things. Using IBM SPSS version 26, this study analysed quantitative data
from annual report and official websites to construct descriptive statistics, correlations table,
model summary and coefficients table in the context of relationship between the three
independent variables with the single dependent variable. A quick summary: SPSS is used to
identify the connection between various types of variables.

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 CHAPTER 4
FINDING AND ANALYSIS
4.1 Introduction
The researcher uses the SPSS analysis approach to analyse and evaluate financial data and
outcomes produced from the company's annual report. Nestle (Malaysia) Berhad's performance
concerns are analysed throughout this research using its financial ratios during the five years,
beginning in 2016 and ending in 2020.

4.2 Descriptive Statistics

Descriptive statistics are reported in the following tables. The data shown is generated
from 5 samples of data analysed by the researcher, and the financial reports and aggregated
data are collected from Nestle (Malaysia) Berhad's annual report from 2016 to 2020. A
descriptive statistic is a data analysis that explains or shows significant information, enabling
patterns to be analysed. The dependent variable (ROE) and independent variables are presented
in the first column, while the mean of the dependent variable (ROE) and independent variables
is shown in the second column. Lastly, the standard deviation of the dependent variable (ROE)
and independent variables is projected in the third column.

This study shows that mean of ROE is 1.0012, which implies that this company's
financial performance is about 100%, whereas the standard deviation is 0.0123 show small
volatility in profit within 5 years. The mean of ROA is 0.2347, indicating that this company's
annual profit is about 23% while the standard deviation is 0.0246, forecasting small volatility

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in profit within 5 years. Next, under liquidity risk, the mean of the current ratio is 0.6456. This
suggests that this company's short-term liquidity is about 65%; however, the standard deviation
is 0.0318 indicating small volatility in profit within 5 years. Having a low current ratio shows
that a corporation is unable to satisfy its financial obligations to its suppliers of goods and
services, creditors, and service provides on time (Owolabi et al., 2011).

After that, under credit risk, the mean of the average collection period is 37.0130,
implying that this company's length of time to recover payments due from its customers is
around 37 days. However, the standard deviation is 3.9642, indicating significant volatility in
profit within 5 years. According to the research study by Ponsian et al. (2014) the researcher
finds that as the number of days a company receives payment from its sale rise, thus it will
affect the company's profitability negatively. Additionally, the mean of debt to income is
3.3087, signifying that this company's capacity to take on more debt is about 331%. In contrast,
the standard deviation is 0.5047 implying small volatility in profit within 5 years.

Furthermore, under operational risk, the mean of operation ratio is 0.2221, which
implies that this company's management efficiency is about 22%. In contrast, the standard
deviation is 0.0104 show small volatility in profit within 5 years. In a study conducted by Javed
(2021) he stated that the lower the operating ratio, the higher the net profit ratio. As for
operating margin, its mean is 0.1896, which implies that this company's efficiency in
generating profits is about 19%, whereas the standard deviation is 0.0080 show small volatility
in profit within 5 years. Hayes (2021) mentioned that the higher the operating margin ratio, the
more efficient the firm is and the better it is at converting sales into profits.

Other than that, under macroeconomic factors, the mean of the inflation rate is 1.2820,
which implies that a rise in the cost of products and services of this company is about 128%.
In contrast, the standard deviation is 1.8121 shows significant volatility in profit within 5 years.
Rising inflation may contribute to increased profitability for businesses (Pettinger, 2016). The
mean of interest rate is 3.4845, which implies that this company's cost of borrowing the
principal is about 348%, whereas the standard deviation is 1.7017 show considerable volatility
in profit within 5 years. Next, the mean of the exchange rate is 4.1660, which implies that
exchanging a country's currency for another currency is about 417%.

In contrast, the standard deviation is 0.0968 show small volatility in profit within 5
years. Dumas (1978) predicted that changes in exchanges rates can affect a multinational
company's profitability, cash flow and its overall market value negatively. Then, the mean of

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the unemployment rate is 3.6020, which states the proportion of jobless employees in the labour
force as a whole is about 360%, while the standard deviation is 0.5335 show small volatility in
profit within 5 years. According to Regehr and Sengupta (2016) markets with better economic
circumstances, as seen by decreasing unemployment rates, tend to boost a company's
profitability.

Lastly, under corporate governance, the mean of the CG Index is 0.7846, which implies
that this company's non-financial output is about 78%. In contrast, the standard deviation is
0.0344 show small volatility in profit within 5 years. A company's financial performance can
be improved while positively influencing the company's internal efficiency through the
implementation of corporate governance standards (Goel, 2018).

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4.3 Correlations

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 This finding indicates that the ROE or Nestle (Malaysia) Berhad's financial
performance is negatively significant correlated to the operation ratio with a p-value of 0.027.
"A negative relationship means that when the independent variable increases, the dependent
variable tends to decrease, and vice versa" (Long, 2020). This finding is aligned with the study
of Thakur (2020), which suggest that a low operating ratio is regarded a positive indicator since
it indicates that the company's expenses are lower than its income. As a general rule, a reduction
in any company expenditure enhances profit. Next, the ROE or Nestle (Malaysia) Berhad's
financial performance is positively significant correlated to operating margin with a p-value of
0.066. "A positive relationship in a regression means that when the independent variable
increases, the dependent variable tends to increase" (Long, 2020). A study conducted by Lumen
(2017) also suggests a similar finding which tells that an increase in the operating margin ratio
will cause the company to become more profitable from its operations. For example, the
company's operating margin of 0.60 indicates that for every ringgit of revenue it generates, it
makes 0.60 profit.

Notwithstanding, current ratio, ROA, average-collection period, debt to income,

inflation, exchange, unemployment, interest rate interest rate, exchange rate, unemployment
and CG Index are not significant to ROE due to the p-value > 0.10.

4.4 Model Summary

4.4.1 Internal

This study shows that out of 8 variables, only 3 contributed to Nestle (Malaysia)
Berhad's financial performance or ROE with an adjusted r square of 0.312 or 31%. In contrast,
the remaining variables are not relevant to this study.

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4.4.2 External

Based on the study, it tells that out of 5 variables, only 3 contributed to Nestle
(Malaysia) Berhad's financial performance or ROE with an r square of 0.450 or 45%. In
contrast, the remaining variables are not relevant to this study.

4.4.3 Internal and External

This study displays that out of 12 variables, only 3 contributed to Nestle (Malaysia)
Berhad's financial performance or ROE with an adjusted r square of 0.996 or 100%. In contrast,
the remaining variables are not relevant to this study.

4.5 Coefficients
4.5.1 Internal

This study shows that ROA, average-collection period, and operation ratio are not
significant to ROE due to the p-value > 0.10, with a p-value of 0.842, 0.827, and 0.279,
respectively. When analysing the independent variables individually, the result shows that none
of these variables is significant to the dependent variable or ROE. A similar finding also can

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be found in the study of Schneider et al. (2010), who suggested that in many circumstances, a
single independent variable's contribution is insufficient to explain the dependent variable on
its own. As a result, these independent internal variables have no influence or impact on the
dependent variable or ROE.

4.5.2 External

This study shows that interest rate, exchange rate, and unemployment rate are not
significant to ROE due to the p-value > 0.10, with a p-value of 0.667, 0.647, and 0.534,
respectively. When analysing the independent variables individually, the result shows that none
of these variables is significant to the dependent variable or ROE. A similar finding also can
be found in the study of Ropella (2007) claimed that frequently, one independent variable is
insufficient to predict the result of the dependent variable. As a result, these external
independent variables have no influence or impact on the dependent variable or ROE.

4.5.3 Internal and External

This study displays that the current ratio is positively significant to ROE with a p-value
of 0.040, whereas the operation ratio is negatively moderate significant with a p-value of 0.021.
The Corporate Finance Institute (CFI) (2019) mentioned that if the ratio is declining, it
indicates that the organisation is efficiently lowering its operating expenses while increasing

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its revenues. In general, a reduction in any form of corporate expenditure helps to boost profit.
Not only that, but the interest rate is also positively weak significant to ROE with a p-value of
0.093. This is supported by the study of Maze (2015), who stated that Wells Fargo found that
a 100-basis point rise in interest rates reduces average net income in the restaurant business by
0.6% in a report presented at the Restaurant Finance & Development Conference. As a result,
increased interest rates would be detrimental to profitability. When analysing the independent
variables together, the result shows that all of these variables are significant to the dependent
variable or ROE. For that reason, these internal and external independent variables influence
or impact the dependent variable or ROE.

4.9 Trend Analysis

4.9.1 Performance

ROE is used to measure Nestle (Malaysia) Berhad's performance during five years from
2016 to 2020. Nestle (Malaysia) Berhad's ROE increased from 0.9844 in 2016 to 1.0105 in
2017. Later, it experienced a decline once again in 2018 (1.0070) and rose again a little bit in
2019 (1.0120). In 2020, Nestle (Malaysia) Berhad's ROE dropped again to 0.9921, possibly
due to the Covid-19 pandemic as one of the factors. This is supported by Mark Schneider, the
CEO of Nestle, has admitted the world's largest food maker has been unable to hit its "normal"
production levels during the Covid-19 pandemic (Best, 2020). Thus, it is affecting the
profitability of the company in that year.

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4.9.2 Liquidity Risk

The current ratio of Nestle (Malaysia) Berhad demonstrates its ability to meet its short-
term obligations. Nestle (Malaysia) Berhad's current ratio drops by 0.0033 from 2016 to 2017.
Then, the company started to experience a slight increase of about 0.0321 on their current ratio
in 2018. Nevertheless, its ROE significantly declines from 2018 to 2020 by 0.0876. A current
ratio of less than one shows that a company does not have enough liquid assets to cover its
short-term financial obligations. Vieira (2010) argued that a lack of liquidity would lead to
poorer profitability as a consequence of increased demand for loans, and a lack of profitability
would result in a lack of cash flow, resulting in a fatal cycle of debt.

4.9.3 Credit Risk

Nestle (Malaysia) Berhad's debt to income ratio demonstrates its capacity to incur
additional debt. From 2016 until 2018, its debt to income increased significantly by 0.4287,
then dropped again in 2019 by 0.2646 and rose again by 1.1053 in 2020. One of the main

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aspects of a company's financial health that lenders consider when determining how much debt
a company can take is the company's debt to income ratio.

4.9.4 Operational Risk

Nestle (Malaysia) Berhad must maintain a reasonable operating margin to meet its fixed
costs, including interest on the debt. A more considerable operating margin shows that a
company is less susceptible to financial and operational risk. Nestle (Malaysia) Berhad's
operating margin experience up and down throughout the year 2016 until 2019. Later, the
decline happened in 2020, which caused such operational and financial risks to rise.

4.9.5 Corporate Governance Index

From the CG Index table above, it is safe to say that Nestle (Malaysia) Berhad has a
stable and reasonably high CG Index since it has always prioritised corporate governance
principles. Nestle (Malaysia) Berhad's value has been stable at 0.7692 from 2016 to 2019.
Then, Nestle (Malaysia) Berhad's CG Index climbed to 0.8462 due to its commitment to have
30% of the board be female.

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4.9.6 Macroeconomic

From 2016 to 2020, the unemployment rate in Malaysia will be monitored to see how
it influences Nestle (Malaysia) Berhad in terms of the macroeconomic indicator. In 2016, the
unemployment rate declined by 0.14 until 2018. Then starting 2018 to 2020, its unemployment
rate increases significantly about 1.25. It is reaching a high peak of 4.55 unemployment rate in
2020, possibly due to the Covid-19 issue. Increased unemployment would mean that some
families would lose financial income. This would result in decreased earnings for many
businesses, as customers would spend less. Nonetheless, when the unemployment rate
increases, there are adverse consequences for long-run economic development.

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 CHAPTER 5
DISCUSSION AND CONCLUSIONS
5.1 Introduction
The purpose of this study is to assess the performance of one of Malaysia's food and beverage
companies, particularly Nestle (Malaysia) Berhad, and the factors which affect it. The focus of
this chapter will be on the researcher's concluding conclusions from chapter four. This chapter
also summarises the findings and suggestions for further research.

5.2 Discussion of Result

Nestle (Malaysia) Berhad, Malaysia's food and beverage company, is being studied to
see how well it performs in return on equity (ROE). The following research objectives drove
this study:

1. To ascertain the internal or firm-specific factors that could have influence on Nestle
(Malaysia) Berhad's performance.

2. To identify the external or macroeconomic factors that could have influence on Nestle
(Malaysia) Berhad's performance.

3. To investigate the internal and external factors that could have influence on Nestle
(Malaysia) Berhad's performance.

In the regression model, three types of models have been utilised, according to chapter
4 of this study: internal variables, external variables, and internal and external variables. These
three regression models provide the following results: the internal and external model has the
nearest R square value to 1, followed by the internal model, and then the external model at the
last place. As a result, there is substantial evidence that internal and external variables have a
more significant influence on Nestle (Malaysia) Berhad's performance than internal variable
model 1 and external variable model 2.

Besides that, referring to the correlation table, there is a total of six independent
variables, specifically ROA, current ratio, ROA, operating margin, interest rate, average-
collection period, exchange rate, which positively affect Nestle (Malaysia) Berhad's
performance. This indicates that when the six independent variables mentioned just now
increase, so does Nestle (Malaysia) Berhad's performance. However, the correlation table only
shows the operation ratio and operating margin significant to the ROE. In comparison, the
coefficient table shows that only the combination of internal and external factors shows

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significant results towards Nestle (Malaysia) Berhad's ROE, which consists of the current ratio,
operation ratio as well as interest rate. When cross-examining between the correlation table
and coefficient table, the outcome highlights the operation ratio as the primary influence on the
performance of Nestle (Malaysia) Berhad.

5.3 Limitations
The most significant drawback of this study is that Nestle (Malaysia) Berhad is the only
sample used to conclude Malaysia's food and beverage company, which is not a good strategy.
The annual report of Nestle (Malaysia) Berhad from 2016 to 2020 was the sole data source for
this research. Due to time restrictions, only a limited amount of information can be acquired to
do this research. The information is gathered from the annual report of Nestle (Malaysia)
Berhad, which can be accessed on the company's official website.

5.4 Recommendations
Based on the above discussion result, it shows that operational risk has the most
significant influence on Nestle (Malaysia) Berhad's annual profit and financial performance.
Furthermore, their 2020 corporate scandal of dumping liquid waste into inland waterways is
also heavily related to how the company manages their operation. Since Nestle (Malaysia)
Berhad is a consumer goods company, therefore they rely heavily upon their consumers'
support. Thus, to win society's support to maintain long-term profitability, the company needs
to minimise their operational risk by taking care of the environment. The company is
significantly responsible to society for what they do and how it functions, since society already
granted the company full permission to control and exploit natural resources. Such operational
risk can be managed through collaboration. Managing any kind of risks including operational
risk should not fall only on the shoulders of a single department, since business operations do
not operate in silos. A cross-functional approach in the context of co-operating with colleagues
from diverse departments would allow for a more holistic approach to problem solving and risk
management. Lastly, by appointing a risk committee in their company. The advantages of
having a risk committee are clear-cut: strengthen board oversight of firm operations and their
management and a capacity to predict and respond to situations and patterns that would
otherwise be impossible to understand (Eggleston & Ware, 2009). It would be one of the worst
outcomes for a corporation to establish a risk committee only to discover that it is entirely
ineffective, resulting in the board of directors dissolving the committee and reallocating
committee duties to other committees.

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