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Accounting and Financial Management
Accounting and Financial Management
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Table of Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................2
Company Background................................................................................................................2
Industry Analysis for TESCO....................................................................................................3
PESTEL Analysis...................................................................................................................3
SWOT Analysis......................................................................................................................5
Comparison of company performance with industry based upon ratios calculated...................7
Analysis of the different sources of finance available to TESCO............................................14
Sources of long and short-term finance for Tesco................................................................15
Financial structure of Tesco..................................................................................................16
Financial disciplines of Tesco in terms their approach to growth and returns.....................19
Justification for choice of financing.........................................................................................20
Conclusion................................................................................................................................22
References................................................................................................................................23
Web references.........................................................................................................................24
Executive Summary
It is important to note that in order to evaluate the performance of a certain organization,
business ratios or indicators can be used to do the performance analysis. Despite the fact that
there is an immense competition in the market, it is important for companies to survive in the
market that they operate and develop. In achieving sustainable development for companies,
one of the most efficient and effective way will be analyze historical performances through
different business ratios and other indicators. As investors want to make sure that it is worth
investing in the company, ratios and performance analysis will contribute towards hugely to
have insights into the target companies performances. Other than that this will help
companies to understand their financial strength and position to identify the feasibility of
investing in new projects and assets. In this way, the business performance evaluation is
exceptionally useful for the organizations and their partners. In fact, the organizations can't
encourage or fortify their business performance without directing analysis of their history in
light of the fact that the performance assessment empowers the organizations to discover the
qualities, shortcomings that should be enhanced, the finance feasibility and the budgetary
position of the organization too to encourage the decision making procedure for the
organizations.
Introduction
In this report it will present the financial analysis which is done for Tesco PLC based upon
the different rations for the company for the years of 2014, 2012 and 2010. These ratios will
include Return on Capital Employed, Operating Profit Margin, Asset Turnover, Current ratio,
gearing ratios, Interest Cover, EPS and PE Ratio along with relevant workings and supporting
documentation. Along with that an analysis will be provided regarding the role and functions
of the company. This will be supported by an analysis of the companys industry and
comparison of company performance with their competitors. At the end it will analyze the
issues regarding financing and investment decisions of Tesco to support the purchase of land
building in order to identify the best sourcing of financing for the required investment.
Company Background
TESCO PLC is a multinational company for
grocery and general merchandise goods retailer
founded in 1919 by Jack Cohen and Tescos
headquarter is in London, United Kingdom.
Compared to other retailer organizations, Tesco
can be considered as the second-largest retailer
(Largest retailer Wal-Mart) in the world in terms of profits and it falls into the third place in
revenues. Tescos operations are being carried out in 14 different countries across Asia,
United
in
clothing,
Furthermore
electronics
they
and
provide
software.
financial,
2013).
PESTEL Analysis
PESTEL framework will analyze environment in which Tesco carry out their operations by
giving attention to different forces which have the most impact on companys performance in
the dynamic environment they operate.
Political
The UK government adopting a new tax measure which will affect the operations of
Tesco.
UK government increasing the VAT rate from 17.5% to 20% with the aim to increase
Economic factors are really important for Tesco as thy impact of these are direct on
like Tesco.
UK spending on retail items (mainly food items) has increased over the past years
Social
UK market demographics shows that there more elder people than younger people or
children (Represent baby boom generation) which affect Tesco as they dont tend to
Technological
Technology to develop and maintain better supply chain networks have become more
media.
Mobile apps to carry out retailing activities for customers which make their lives
of UK.
Attention to reusable bags has risen to a better level and even refuse plastic bags from
grocery retailers.
More concerns towards being socially responsible in dealing with the environment for
companies.
Adding carbon food print data on dairy products, potatoes and orange juice by
companies like Tesco in the retailing industry.
Legal
Number of laws affect retailers like Tesco due to the fact that they provide large
number of products.
Increase of VAT by the UK government to over a level of 20% to finance their budget.
Limiting subsidies provide to farmers which in return affect the standards set for them
by the industry they operate with.
SWOT Analysis
Strengths
Weaknesses
Ratio Analysis
Comparative financial statement analysis
Common size statement analysis
Ratio Analysis
Ratio Analysis can be considered as one of the most important tool in financial analysis and it
will yield quantitative information to assist decision making. In evaluating Tescos
performances following ratios will be mainly calculated:
Earnings before
2010
2,835
2012
2,775
2014
2,631
47,206
17,731
9.62%
50,781
19,249
8.80%
50,164
21,399
9.216%
As we know primary objective of a business is to obtain substantial return from the capital
invested. ROCE yield how well a company use their capital to yield a better income. In that
case we could see that over the 5 years time period there has been a huge drop and then an
increase after 2012 period. This could be due to the reason that recession period Tesco went
through since the period began from 2010 first quarter. Even though the total assets amount
has gone up along with the current liabilities Tescos earning has gone down over the years.
There are clear indications regarding the lack of management concerns over the utilization of
capital of the company to get a better return.
Operating profit ratio reveals the relationship between how much operating profit was
reported and sales. From the ratio it can determine whether the average percentage of mark
up from the sales made is obtained or not. Operating profit margin of Tesco over the years has
dropped significantly after 2012 even though the revenue has maintained at a better level.
There could be number of reasons for this.
9
The asset turnover ratio shows the efficiency of a company and their capacity to use their
assets in generating an income for the company. Below table shows Tescos asset turnover
and other related ratios.
Asset turnover over the 5 years (From 2010 to 2014) hasnt changed much where in 2010 it
was 1.24 and in 2014 it was 1.27. This implies that Tesco has been able create sales 1.27
times of Assets they have. Where through sales they have been able to cover the value of
assets of the company (For every 1$ of asset Tesco makes 1.27$). For a company higher the
ratio, the better it is. Therefore it could be said that Tesco management has been able to carry
out their activities more efficiently and effectively.
Current Ratio (Current Asset / Current Liabilities) and Gearing Ratio (Debt / Equity)
10
Solvency and liquidity ratios shows how well company can cover their liabilities reflecting
their financial stability in the long term. Current ratio is used commonly in calculating
liquidity levels of a company. Liquidity is defined as the capacity of a company to meet their
current liabilities as the time passes. The standard rate of current ratio is 2:1, where in the
industry it is considered as ideal. So it is identified that the current ratio of Tesco is not up to
the ideal standards and therefore lagging behind. The figures shown in the above tables shows
that the trend in the current ratio does not reach the standard; where a low ratio tells that the
working capital is quite inadequate. Current ratio of Tesco hasnt had any increase or
decrease over the past 5 years where it stays at 0.73 though there is a drop in 2012 which
means that Tescos ability to pay its short term debt has stayed at the same level. The current
ratio of Tesco is also low due to supermarket like Tesco does not want to hold more stock and
nil debtors.
Gearing
The gearing ratio of Tesco has come down compared to year 2010 though its an increase
from the year 2012. The higher an organizations gearing, the more the company is known to
be risky. Acceptable level is set for a company considering the industry they operate where in
this case it is the retailing industry. It could be interpreted that Tesco has been able to reduce
debt level of the company with the sales they made over the years. It may have increased
from year 2012 due to higher creditor rate.
Interest Cover
Year
Interest Coverage
2010
2012
2014
6.98
10.20
6.05
The interest cover ratio determines how many times the profit before interest and tax (PBIT)
can cover the interest cost the company has to incur. When a company has a better interest
cover it is known to have a lower financial risk. Interest cover ratio of Tesco is better than the
companies in the industry. When we look at Tescos past years Interest coverage has
11
EPS is calculated divide total revenue by number of shares where it shows the amount of
money one share earns and this is considered to be the single and yet most critical variable in
deciding a shares price. This is also used in calculating price to earnings ratio. We can see
that over the years EPS has come down 0.36 from 0.88 in 2010. This could be due a recent
share issue where number of share prices were increased but not the total sales. Also with
recent market crashes share prices went down in totally where this EPS reduction reflects that
as well.
The price-earnings ratio (P/E ratio) is a way to evaluate and compare level of stock prices
against the company profits in order provide investors with details regarding a value of a
stock.
EPS
Price per share
PE Ratio
2010
1.37
7.40
5.4
2012
1.62
10.57
6.52
12
2014
0.56
9.70
17.32
14
These finance requirements are really different when we compare with each other in terms of
time length and other characteristics. Because of that provide finance to them needs to be
taken care of in a different way. For Tesco it may be filling short term requirements for
buying goods for their markets and opening up a new supermarket in a new area. Therefore it
is critical to identify and provide finance to each requirement in a way where requirement
will be fulfilled as well as funding process has maintained efficiently as well. Balancing both
liquidity and profitability are critical parts in this.
For long term requirements Use more of long term financial sources
For short term requirements Use more of short term financial sources
15
Long term sources Different sources are included in this where long time will be
given to repay. This includes sources such as long terms loans, Bonds, Preference
shares, etc. Compared to other sources these can be considered as cheap where still
can make an impact on the companys gearings and also on profit levels. Even the
finance charges for these are tax deductible which enable the organization in save part
of the profit which could be significant in paying back. Long terms sources also can
include options such as share issues, which are important in funding long term
requirements and where outcome of the investment will bring benefits to the company
in the long term. When considering Tesco they mostly consider long term sources
even in their working capital management following a more like conservative strategy
16
When we consider the companys debt, thinking that capitalizations debt aspect is covered
from borrowings, derivative financial instruments, post-employment benefit obligations,
deferred tax liabilities and provisions, total debt was 14,483 million in 2013, increased
approximately 5.47% from 2012.When we assess about different measurements, debt/equity
ratio for 2013 is 87 %, while in 2012 it was 77%. Apart from that, a conclusion can be made
that capital is structured 53% by shareholders equity and 46.5% by debt. These mentioned
values were 56.4% and 43.5% respectively, in 2012. In common it can be identified that
organizations proportion for debt in financing of their activities has had a rise of 6.4% in
2014 compared to 2012.
17
2014 amount
Share Capital
Share premium
Retained earning
Accumulated other
in m
402
4964
12,369
442
in m
404
5020
9,728
(93)
comprehensive income
Equity contributed to parent
17,907
15,059
Increase/Decrease
Amount
Percentage %
2
56
(2,641)
(535)
0.25
1.1%
(21.35%)
(121%)
company
Table 1: Equity Capital
For the financial year ended in Feb 2012, 19 million ordinary shares of 5p each were issued
in relation to share options for an aggregate consideration of 57m and during the financial
year 2014 4 million shares of 5p each were issued in relation to share bonus awards for an
aggregate consideration of 0.2m.
Therefore when we consider an option like Share issue with the large number of shares and
considering the current status of the market it might not be seen as a great idea to carry out
another share issue as even the dividend payout has gone down as well. Therefore it is
important to consider an alternative to this option such as preference share issue where as
shown in the Figure 9, no preferred equity has been raised over the past few years. Therefore
given the priority in paying back investors in the market will consider in investing in Tesco as
the recent forecasts shows a growth in terms of financial figures since the recession period
came to an end.
As we mentioned earlier long term sources include long term loans as well. This can be seen
as a better way of obtaining funds because:
18
Because of these evaluations banks will consider Tesco as a lesser risk company and provide
loans to them at a low interest rate. As per figure 10 we can see that even after the year 2014
long-term only stands at 9,188 million where it has gone down compared to previous years.
Therefore Tesco can go ahead and fund their future requirements by obtaining a long-term as
well.
Other than long-term sources and issuing shares, another way of funding a project from in
house sources will be using retained earnings or profits earned. But it is important consider
consequences before using such method. As we can see form Table 1, comprehensive income
has gone below zero where it shows a negative value. Also compared to previous years
retained earnings shows a lower value as well. Therefore concerns might be raised using
these for funding projects where company even might lose out benefits they can obtain via
taking a loan such as interest deduction from tax.
Another important finance methods for companies such as Tesco in UK is that finance from
government. The government and the European Union provide finance in order to support
business in UK:
Protect jobs in failing/declining industries such as retail market at the moment in UK.
If Retail market can be properly developed then can create number of jobs.
For companies like Tesco to build up on new businesses.
Sale and leaseback would be another option Tesco can carry out in countries or in counties
where the business is declining and to fund this they can sell a properly which in freehold and
invest the money they get from the business in developing and come up with new products
while leasing the property back to carry out their business activities.
19
Therefore when funding new projects it is important to focus on above three segments while
fulfilling below expectations of shareholders and investors:
20
Long-term loan
Pros
As the market has come to a stable state at Considering gearing ratios and the amount
the moment there will be more investors of long term debt of the company acquiring
willing to invest their money companies like a long term would be much easier compared
Tesco which shows a better future in terms to other sources.
of development.
Holds no right to pay dividend or payback Long time gap to pay back the loan hence
unless directors declared by directors.
company can afford to do it in the long run
As shares issues has been carried out Since the company name is well established
previously procedures would be much easier banks will provide loans to Tesco at a very
lesser rate
Through a share company might be able to No change in ownership of the business
attract new investors other than existing where unlike in share issue which can lead
shareholders.
agreements
and
legal
activities
22
Conclusion
Performance evaluation will help a company to understand different sides of their business
operations on one hand where by analyzing performance in a certain period and help the
company to forecast their future business performances. These information obtained on
business performances can be used by number of parties, different stakeholders which include
shareholders, creditors, employees, tax authorities, government, media, etc. All the mentioned
parties can use these information of performance evaluation with an aim to assess the
business operations of the firm, future of the company and can contribute towards decision
making process of the company as evaluation will bring a clear image on the organizations
financial health or status, the financial feasibility, profitability and resource management.
Also with the right information investors and shareholders will be able to make the right
decision in terms of their investments where proper opportunities can be identified regarding
the potential of positive outcome of it. In Tesco with the recent changes in market and
economy there has been lots of changes to the organization as well. This is due to recession
as well as changes in the retail industry which affected all the players in the market. In
assessing finance options for a company like Tesco it is important to assess the industry and
assess the companys performance using different ratios to understand the situation of the
company. With that understanding company like Tesco can go ahead and consider about new
investments to decide which options to select and how to finance these options. Companys
capital structure decides how the company is going to fund their activities in the long term to
obtain more benefit and maximize their wealth. With that they can select the best options to
finance their needs and wants to achieve mentioned objectives where in Tescos case it
needed to assess sources of long and short term, finance structure and finance disciplines
before come to an conclusion.
23
References
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Edition, New York: The McGraw-Hill
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business press
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Edition, Cambridge: Prentice Hall
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Web references
About Tesco, (Online), Available from: http://www.tescoplc.com/about-tesco [Accessed on
04-07-2015]
About Tesco history (Online), Available from: http://www.tescoplc.com/index.asp?pageid=11
[Accessed on 04-07-2015]
Growth,
Profitability
and
Ratios
for
Tesco
(Online),
Available
from:
https://files.the-
group.net/library/tesco/annualreport2013/pdfs/tesco_annual_report_2013.pdf
[Accessedon 04-07-2015]
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