Financial Analysis: Tesco - Assignment Example

? Number] Financial Analysis: Tesco Introduction Tesco is a British retailing and general merchandising company, established in 1919 by Jack Cohen. Operating in fourteen countries and employing about 520,000 people. It ranks third among largest multinational retailers and general merchandise stores. Tesco has showed a magnificent performance throughout the years, it ranks second after Wal-Mart for profits. This company has maintained its performance through the times of recession and has made a profit record in 2010 amongst the best British retailers. An approximate turnover of the company is about ?59,249,000,000 per year. It is constituted under the FSE 100 company house under London Stock Exchange. Performance of the company has been evaluated on the bases of basic financial indicators (i.e. ratios). This document highlights the potential, performance and market position of Tesco with the other competing retailing companies. Tesco is a leading multinational retailing chain, the document shall elaborate the strategies that has made the company strive throughout the recession and maintaining its position in international market. In 2010, Tesco had a record for most profit yielding retailing company in Britain. However, the rate of turnover has been decreased during preceding years due to fall in the sales of the company. In 2012 the inventory turnover was higher than 2011, sales was efficient in 2012 but the buyers have seemed to be ineffective. This may cause dilemma of fall in the price of the merchandise offered to the customer, resulting in decrease in the profit margin. Data depicts that Tesco has reduced the credit facilities to the customers and has cash sales more. In comparison, the receivable turnover rate is higher than that of 2011 demonstrating an effective credit collection (Bragg). Credit sales is an tool to boost sales but the company is relaying on cash sales thus an effort should be made to re-assess the credit policies while maintaining the collection (Spencer and Stradling). Policies regarding utilizing its assets for generating revenue are stabilized but a decrease of 0.01% has been noticed, though the buyers have remain ineffective company maintained returns over assets by decreasing the prices of the merchandise. Over viewing the performance of the company it comes to understanding that the company has strived hard to maintain it polices in order to cope with the inefficient sales (Bragg). Company can increase the sales of the product by reassessing the credit policies and efficient collection against it. If the company relies on the cash sales, it seems to be an obstacle in the growth of the company. Tesco has a current ratio of 2.01, indicating a healthy ability of the company to meet its obligation. Analyzing the efficiency of the company, it has been observed that the company is relying more on the cash transaction. A significant change in the current assets has been observed; cash ratios have fallen from 2.04 to 0.36 indicating that the outflow of the cash has remained much. On the other hand, the company has maintained availability of quick asset to meet its current debts (Brigham and Daves). Company has a working capital of 0.36 that is below normal, indicating that the company has a negative working capital. Assets of the company are not sufficient enough to meet it current liabilities. It can further cause the company to fall in a worst scenario of bankruptcy. Over the period company has a declining working capital it can be an alarming situation and can cause several losses. Poor working capital can also lose the interest of the investors as it shows that the operation efficiency of the company has decreased over the time. In contras Sainsbury has an effective working capital as compared to Tesco. Due to which Sainsbury has maintained its share’s market value since March 2011 and Tesco has faced a fall of 0.30% its market value (Pamela P. Peterson). Although the company has a healthy ability to pay off its current obligations the company should take strict measures to control outflow of the cash. Operational performance of the company has remained ineffective that has result in a declining rate of working capital (Peterson and Fabozzi). Evaluating the financial data, Tesco has found to have a fall in the long term debt as compared to the previous year. This indicates that the company has taken considerable measures to pay off its long term obligations and will allow the company to grow without debts. In 2012 the long term debt ratio of the firm has remained 0.41 and 0.43 in 2011; it shows that the company has paid off 0.02 of the debts (Peterson and Fabozzi). Company is making efforts to grow without depending on the debts that will result in less interest expense and increasing the net profits. In the current year Company has found to pay off its pervious long term obligations. It has caused the company to reduce its interest expenses and has increased the profit proportionately (Brigham and Daves). Pay off the long term obligations of the company is a fine step but it should ensure that the outflow of the cash should be retained. This step can currently affect the profitability but in times to come, burden of interest expenses will be levied yielding more profit. The profit earned over sale in 2011 was 4.42% and the recent analysis depict that a fall of about 0.06% in 2012 i.e. about ?45,390,000 decrease in profit (Baker and Powell). The net profit margin of the year remained 4.36%; where as in the preceding year the company gained higher profits. Sales of the company has fallen and affected all the returns of the profit. Wall Mart the other major retailing company has made a major increase of about 1.50% in the sales, where as Tesco has seemed to have decreased in the sales. Profit that was being yield on the money invested by the shareholders has fallen to 1% as compared to the previous year. Since March 2011, market share of Tesco has fallen to 0.4% thus the investors are hesitating for further investments. In contrast, Asda, a competitive retailing company, has an increase of 0.6% on the market price and Sainsbury has a sustainable market price. Gradual fall in the market price of Tesco has discouraged the shareholders to invest (Brigham). The main focus of Tesco company has remained on is assets utilization. Company has taken favourable measures to maintain its probability on its assets. The operational activities of the company have remained ineffective and has lost the interest if the investors causing an obstacle in the growth of the company (Bragg). Conclusion: Analyzing the financial status of Tesco with the assistance of financial indicators depicts that the company has no wonder strived throughout the time of recession and earned enormous profit. But with the passage of time the company is losing it performance ability. Evaluating the performance of Tesco with its competitors and past year performance has been declined (Baker and Powell). The main area company has found to lose its ability is the operational activities. Working capital of the company is inefficient that has further lost the interest of the investors and seems to be a big obstacle in the times to come. Perhaps the other competitors like Sainsbury and Asda have found to be more efficient in carrying out its operational activities and share’s market price. Asda has found to be the most efficient amongst the other retailing companies and has a potential to capture the market in times to come (Brigham and Daves). Though the turnover of the company has remained favourable but the ineffective buyers have caused profitability to fall. Company is also facing problems in paying to its creditors as it lacks in the availability of quick assets to cover requirements of its short-term obligations. The company had paid off its long term liabilities that cause significant amount of out flow of the cash due to which the company has fallen short of the quick assets. This may cause the company to fall in a worst scenario of Bankruptcy (Peterson and Fabozzi). Tesco still maintains a highly liquid as it has sufficient amount of assets to pay off its liabilities. Operational activities of the company weren’t effective enough to pay off the debts and at the same time maintaining its profitability. Company should re-assess its policies regarding the sales; ensuring and attracting more buyers (Bragg). A strict measure should be made for carrying out its operation activities. Receivable turn over been increased indicating the company has made a better step in recovery but the company should modify its credit policies. This can assess company to re-instates its sales (Spencer and Stradling). Works Cited Bragg, Steven M. Financial Analysis: A Controller's Guide. Beijing: John Wiley & Sons, 2012. Brigham, Eugene F. and Daves, Phillip R. Intermediate Financial Management. Hampshire: Cengage Learning, 2012. Baker, H. Kent and Powell, Gary. Understanding Financial Management: A Practical Guide. Beijing: John Wiley & Son, 2009. Peterson, Pamela P. and Fabozzi, Frank J. Analysis of Financial Statements. John Wiley & Sons, 2012. Spencer, Tudor and Stradling, Bob. Financial Analysis. London: Selected Knowledge, 1998. Tesco Liquidity Ratios 2012 2011 Current Ratio Current Assets/Current Liabilities 2.01 2.12 Current Assets 12,863,000,000 12,039,000,000 Current Liabilities 6,386,000,000 5,692,000,000 Quick Ratio Current Assets-Inventory/Current Liabilities 1.45 1.56 Current Assets 12,863,000,000 12,039,000,000 Inventory 3,598,000,000 3,162,000,000 Current Liabilities 6,386,000,000 5,692,000,000 Net Working Capital to Assets Net Working Capital/Assets 0.36 0.38 Net Working Capital 6,477,000,000 6,347,000,000 Total Assets 17,801,000,000 16,623,000,000 Cash Ratio Cash and Cash Equivalents/Current Liabilities 0.36 2.04 Cash and Cash Equivalents 2,305,000,000 11,608,000,000 Current Liabilities 6,386,000,000 5,692,000,000 Efficiency Measures 2012 2011 Receivables Turnover Sales/Accounts Receivables 24.29 25.95 Sales 64,539,000,000 60,455,000,000 Accounts Receivables 2,657,000,000 2,330,000,000 Receivables Turnover Period 365/Receivables Turnover 15.03 14.07 Receivables Turnover 24.29 25.95 Inventory Turnover Cost of Sales/Inventory 16.48 17.50 Cost of Sales 59,278,000,000 55,330,000,000 Inventory 3,598,000,000 3,162,000,000 Inventory Turnover Period 365/Inventory Turnover 22.15 20.86 Inventory Turnover 16.48 17.50 Asset Turnover Sales/ Total Assets 3.63 3.64 Sales 64,539,000,000 60,455,000,000 Total Assets 17,801,000,000 16,623,000,000 Fixed Asset Turnover Sales/ Total Fixed Assets 1.70 1.72 Sales 64,539,000,000 60,455,000,000 Total Fixed Assets 37,918,000,000 35,167,000,000 Leverage Measures 2012 2011 Long Term Debt Ratio Long Term Debt/Total Assets 0.41 0.43 Long Term Debt 7,345,000,000 7,160,000,000 Total Assets 17,801,000,000 16,623,000,000 Long Term Debt to Equity Ratio Long Term Debt/ Total Equity 0.41 0.43 Long Term Debt 7,345,000,000 7,160,000,000 Total Equity 17,801,000,000 16,623,000,000 Total Debt Ratio Total Debt/Total Equity 1.08 1.11 Total Debt 13,731,000,000 12,852,000,000 Total Equity 12,771,000,000 11,599,000,000 Times Interest Earned Operating Profit/Interest Expense 1.41 1.47 Operating Profit 3,985,000,000 3,917,000,000 Interest Expense 2,817,000,000 2,671,000,000 Cash Coverage Ratio Cash From Operating Activities/Total Debt 0.41 0.44 Cash From Operating Activities 5,688,000,000 5,613,000,000 Total Debt 13,731,000,000 12,852,000,000 Profitability Ratios 2012 2011 Operating Profit Margin Operating Profit/Sales 6.17% 6.48% Operating Profit 3,985,000,000 3,917,000,000 Sales 64,539,000,000 60,455,000,000 Net Profit Margin Net Profit / Sales 4.36% 4.42% Net Profit 2,814,000,000 2,671,000,000 Sales 64,539,000,000 60,455,000,000 Return on Assets Net Profit / Total Assets 15.81% 16.07% Net Profit 2,814,000,000 2,671,000,000 Total Assets 17,801,000,000 16,623,000,000 Return on Equity Net Profit / Total Equity 22.03% 23.03% Net Profit 2,814,000,000 2,671,000,000 Total Equity 12,771,000,000 11,599,000,000 Return on Capital Net Profit / Total Capital 15.81% 16.07% Net Profit 2,814,000,000 2,671,000,000 Total Capital 17,801,000,000 16,623,000,000 Read More