Finance论文模板 – Tesco Financial Analysis

Introduction

Tesco PLC is a leading retailer in the world, being the third largest in the world behind Wal-Mart and Carrefour of USA and France respectively. The company has an estimated 30% control of market share in the groceries industry in the United Kingdom, which is close to the sum of the market share of its closest competitors Asda and Sainsbury’s. The company’s strong foothold in the retail market is mostly owed to its wide approach, incorporating a wide range of commodities not only in the food sector, but also in dealing with household appliances, common equipments, flowers, books, wines and the list is endless. Tesco’s financials have been plausible in the last 5 years, although economic downturns and worsening consumer confidence have been key challenges to the corporation. However, the company has tried to salvage its performance streak through better management of its costs, investments and acquisition of new stores, reduced prices as well as better payment rates. Such investments have been crucial to the expansion and profitability of Tesco, for instance the consolidation of Tesco bank in 2010 which significantly increased retained profits and finance incomes. This report delves to undertake an analysis of Tesco through evaluation of trend and performance using various financial metrics and ratios.

The calculated ratios

RatioTescoWal-mart
Return on invested capital5.0614.54
Earnings Before Tax margin3.025.49
Asset turnover1.272.34
Payables turnover36.3738.48
Current ratio0.730.88
Quick ratio0.430.20
Debt to equity0.630.58
Financial leverage3.412.69
Earnings per share0.124.88
Return on equity6.2121.00

Discussion and analyses

The company’s profitability

Profitability ratios are common financial metrics used to gauge a firm’s ability to generate revenues past the relevant production costs incurred in the period (Bragg, 2000). An important ratio is the return on invested capital. In perspective, Tesco’s return on invested capital in 2013 was 5.06, an increase from 1.54 in the previous year. However, the two figures indicate a general decline in the metric since the 2011-2012 average was 10.85. The declining trend may indicate that although Tesco has made numerous investments in the recent past, there may not have been efficient utilization of such resources to yield revenues.

Another important profitability ratio is the Earnings Before Tax Margin, which shows the firm’s earnings before tax indicated as a percentage of its net revenues (Vance, 2002). The company’s Earnings before tax was 3.02 in 2013, a drop from 5.94 in the previous year.  Given that this ratio indicates the bottom line profits of the corporation, a reduction therefore indicates a downward trend in profitability. A probable reason for the trend would be the heightened competition from other national and global competitors, which has substantially reduced the company’s market share and hence lowered the sales of the company in the recent past.

Efficiency

The efficiency ratios indicate the value of the company’s receivables and the efficiency with which it employs other assets (Peterson Drake & Fabozzi, 2006). A key ratio in this segment is the asset turnover, which was 1.27 in 2014, 1.28 in 2013 and 1.32 in 2012. Although there is a slight decline, the ratios indicate that the company is using its assets in an efficient way for the realization of revenues. However, the company should seek to raise that ratio through intervention into overseas markets and reinvestments in the local market, where a similar decision was made in 2013 which improved oversight, efficiency and profitability (Tesco, 2013).

Further, the payables turnover indicates how long Tesco takes to pay its outstanding dues to the suppliers of goods or creditors and other financiers. The payables period in 2014 was on average 36.37, while in 2013 the measure was 36.08. Although this metric varies across industries, it is widely accepted that an average of 30 is an indication of plausible efficiency (Vance, 2002). Although a higher payables turnover period may postulate that Tesco has more money at hand to support operations, the company needs to beware not to offend creditors or financiers who the company may need for future needs.

Liquidity

Liquidity ratios indicate the financial health of a company, in terms of how well it is able to meet its short term obligations (Peterson Drake & Fabozzi, 2006). A common metric in liquidity ratios is the current ratio. Tesco’s current ratio for 2014 was 0.73, while in 2013 the metric was 0.69. It is plausible to state that these figures indicate a very low liquidity, given that one current asset cannot fully cover one current liability. This indication is below the generally accepted 2:1 ratio and may be attributed to the rise in current liabilities reported in the company’s financial statements.

The quick ratio is considered more succinct compared to the current ratio because it considers only the most liquid current assets, meaning that it excludes the inventory in its calculation (Rodgers, 2008). The quick ratio for 2014 was 0.43, which was close to the measure in 2013 calculated as 0.44. It is clear that these figures fall short from the current ratio and is therefore a better indicator of liquidity. In this light, the interpretation of the calculated results indicates a very low liquidity status, given that the measure falls even below 1:1. Such a postulation may be an indicator that the company’s current liabilities have increased more than the increase in the current assets (Garcia-Feijoo, 2006). The total current liabilities in 2014 were 21,399 million Pounds, an increase from 2013’s reported figure of 18,985 million Pounds (Tesco, 2014). Given that the total assets in exclusion of the inventory for 2014 were 11, 994 million Pounds, the company’s financial health is very weak and may not attract creditors and financiers.

Financial structure

Financial structure metrics evaluate the mixture of long-term debt and equity that an organization incorporates in its operations (Gil Lafuente, 2005). A useful metric is the debt to equity ratio, that indicates the proportions of debts and equity that the firm utilizes in its operations. The calculated value for debts and equity ratio in 2014 was 0.63, while in 2013 it was 0.6. Ratios equal to 1 indicate that the business is being financed equally by debts and equity. Given that this measure is below 1, the proportion of assets supported by debt is sufficiently low indicating a plausible debt to equity ratio (Friedlob & Schleifer, 2003). It is clear that although the company has acquired debts to finance its expansion and operations, such decisions have been well calculated to fit a good capital structure.

Further, the financial leverage ratio is important in this analysis, indicating how much the business relies on long-term debts to support its operations (Gil Lafuente, 2005). It is therefore important in the estimation of Tesco’s solvency. Financial leverage ratio was 3.41 in 2014, an increase from 3.01 in 2013. The 2012 measure was 2.85, indicating that there has been an increase over the years. Given that such figures are higher than 2, the company is over-leveraged indicating financial weakness and faced with threat of bankruptcy. This may be caused by the company’s lack of consideration when taking long-term debts as is the case with other general liabilities

Stock market ratios

The Earnings Per Share is considered one of the most relevant metrics in the stock markets especially to the stockholders and [potential investors (Rodgers, 2008). The company’s EPS for 2014 was 0.12 an increase from the previous year’s EPS of 0.02.  However, the 2012 EPS was 0.35, indicating that previous periods had higher EPS and there is therefore a general decline. Declining EPS indicates declining net incomes and the company may not be maximizing the wealth of the shareholders as they may require (White, Sondhi & Fried, 1998).

The return on equity on the other hand measure how much profits the company makes from each unit of the shareholders equity. The calculated figure for 2014 was 6.21, an increase from 2013 measure of 0.72. However, the 2012 measure was 16.30 indicating a general decline in the metric. The measure can be used to measure the company’s performance alongside its competitors in the industry.

A further analysis is comparison with Wal-marts and it is clear that Wal-mart’s financials are better compared to Tesco in the given ratios. In comparison, Wal-mart has a higher profitability and efficiency and performs better in the stock market. However, both companies have weak liquidity ratios and leverage, implying that the industry may be facing high debt levels and consequently lower levels of liquidity.

Conclusion

The report has detailed the financial analysis of Tesco PLC using various metrics and ratios. It is plausible to note that although the company is a major force in the retail industry, it is clear that the trend evidenced by the analysis may not be promising. It is recommended that the company minimizes its level of debt and devises ways to reduce its costs. Finally, the company should aim at strategies that maximize the value of the shareholders and also increasing the firm value through profitability.

References

Bragg, S. (2000). Financial analysis. New York: Wiley.

Friedlob, G. and Schleifer, L. (2003). Essentials of financial analysis. Hoboken, N.J.: John Wiley.

Garcia-Feijoo, L. (2006). Financial Statement Analysis. CFA Digest, 36(2), pp.63-64.

Gil Lafuente, A. (2005). Fuzzy logic in financial analysis. Berlin: Springer.

Peterson Drake, P. and Fabozzi, F. (2006). Analysis of financial statements. Hoboken, N.J.: Wiley.

Rodgers, P. (2008). Financial analysis. Oxford: CIMA.

Stock.walmart.com, (2015). Walmart Annual Reports. [online] Available at: http://stock.walmart.com/annual-reports [Accessed 19 Feb. 2015].

Tesco.com, (2012). Tesco PLC – Annual Report 2012. [online] Available at: http://www.tescoplc.com/files/reports/ar2012/index.asp [Accessed 19 Feb. 2015].

Tesco, (2013). [online] Available at: http://files.the-group.net/library/tesco/annualreport2013/pdfs/tesco_annual_report_2013.pdf [Accessed 19 Feb. 2015].

Tesco, (2014). [online] Available at: http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf [Accessed 19 Feb. 2015].

Vance, D. (2002). Financial analysis & decision making. New York: McGraw-Hill.

White, G., Sondhi, A. and Fried, D. (1998). The analysis and use of financial statements. New York: Wiley.

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