Waterfall charts are a powerful tool that allows us to visualize and explain the evolution of a key
business metric for example sales Ebbitt or earnings before interest taxes depreciation and amortization
net debt volumes traded and so on.
The idea is to break down the metric and understand which components drive it's performance the information
to present here is the trend across several years in a key performance indicator or a KPI.
Our analysis can be of historical or projected figures way it works is we start from the total amount
or value of our KPI for a base year and then we add blocks which increase or decrease the total amount
to arrive at the new total for the following year.
All blocks that increase or decrease the total basically represent the year to year change in the respective
variable component.
We are going to illustrate this with a few examples to make it clear.
We have prepared several sample waterfall chart slides for you again using Nestle as an example.
Nestle organizes its financial reporting along several geographical end product business segments.
If you look at the first chart it presents the sales evolution of Nestle from 2014 to 2016.
Breaking it down by reporting segments.
So here we see total sales going down from 2014 to 2015 as a result of basically all components of the
sales split decreasing Europe Middle East and North Africa falling the most by 1.6 billion Swiss Francs
followed by smaller decreases in the other geographic and product segments.
Then we have an increase in total sales from 2015 to 2016 which consists of sales in Europe Middle East
and North Africa falling again this time by a smaller amount of 0.2 billion Swiss francs which is more
than offset by increases of sales in the other geographical and product segments with the net fact being
positive.
Total sales growth from 2015 to 2016 a graph like this is very useful as it clearly shows which part
of the company's business may have an issue and which one is doing well here we can see that Nestle's
business in Europe Middle East and North Africa has been consistently challenged compared to its other
businesses.
If this slide is being presented to a senior executive at Nestle as part of its internal reporting the
executive in charge would immediately understand he or she needs to have a closer look at the underperforming
region to figure out what the factors are for the under-performance.
If an investor looks at this slide he or she would raise a similar question using such a waterfall chart
for presenting business performance is much more user friendly than reporting the same information with
just numbers in a table.
Therefore it is very commonly used and highly appreciated by senior executives and investors.
Our next slide here presents a similar chart of Nestle's sales evolution from 2014 to 2016.
This time breaking it down by product group we can immediately see which product groups have been doing
well and which ones not so well and draw conclusions based on this information.
Our last waterfall slide is structured in a slightly different way with two charts representing Evita
and net debt evolution from 2014 to 2016.
These charts are also very useful to understand the business dynamics better in the Evatt the chart
we see actually that Ebbitt has increased from 2014 2015 despite the decrease in sales for the same
period.
This is due to a decrease in cost of goods sold which has completely offset the profitability impact
of the decrease in sales.
This in fact is not totally unexpected as these are variable costs which depend on the level of company
output and sales and normally fluctuate with them.
We can see also that marketing and administrative costs have increased slightly with a negative impact
on Abbott.
But this has been more than offset by improved efficiencies and other operating items.
Thus we can conclude that Nestle's management has done a great job in 2015 to increase Ebbitt despite
falling sales.
Let's look now at the 2015 through 2016 performance as we already know sales have increased.
What is more interesting is that cost of goods sold has decreased with a positive impact on eBay.
We can interpret this as a possible improvement in working capital management or achieving stronger
market position with respect to suppliers.
The only negative impact on Ebbitt.
Here comes again from marketing and administrative expenses which probably means that Nestle is consistently
making a stronger push in its marketing efforts.
Or simply that it is getting more and more expensive to do marketing nowadays in the last waterfall
chart we'll discuss here.
You can see Nestle's net debt evolution from 2014 to 2016.
If you are not sure what net debt is it is a total financial debt like bank loans and bonds minus total
cash and cash equivalents.
Here we have a total net debt standing at around 12 billion Swiss francs.
As of 2014 year end we can see on the chart that during 2015 Nestle has bought back some of its own
shares on the market.
Paying for them in cash which has increased its net debt.
Nestle has also spent some cash on acquiring other companies.
As you can see from the M&A block on the chart so far we have seen only blocks decreasing Nestle's cash
and increasing its net debt.
Hopefully the company is not heading towards bankruptcy.
Next we see a sign of relief healthy free cash flow coming from operations throughout the year and positive
foreign exchange impact totaling over 10 billion Swiss francs.
This offsets most of the cash outflow from dividends share buybacks and other investments so that Nestle
finishes 2015 with a net debt of about 15 billion Swiss francs.
Three billion more than at the end of the previous year.
Thats not so bad for the largest company in Europe with over 250 billion Swiss francs in market capitalization.
If we look next at the 2015 through 2016 net debt dynamic we can see a similar picture.
The only major difference being that this time Nestle sold some of its treasury or own shares on the
market rather than buying them back which had a positive cash impact reducing that debt.
Overall we can see the total net debt at the end of 2016 stood at around 14 billion Swiss francs over
1 billion lower than at the end of the previous year.
Great job Nestle management stakeholder should be happy about that.
Hopefully with these examples you have a better understanding of waterfall chart slides now and you
can appreciate how useful they are to visualize and bridge the gap between total KPI values from one
period to another when analyzing and presenting a company.
You can have different variations of the sample slides you just saw describing both historical and projected
items.
For instance you can slice and dice sales and Ebbitt in any number of different ways to flesh out some
of their specific components depending on the company and case at hand you can have one full page chart
2 1/2 page charts splitting the page horizontally or vertically or in rare cases more than two charts
on a page.
You can also have KPI evolution over two three four or in rare cases more years.
Please keep in mind that it is a good formatting practice to use different colors for bars indicating
increases of the KPI bars indicating its decreases and total amounts of the KPI at year or period ends.
That's pretty much all for this topic.
We believe that the templates we showed you are relevant and useful in most cases.
And you can always refer to them in your work.
Also hope that you enjoyed learning some new things in this lesson.
See you soon.