Analysis of Tesco Plc and its Market Segment - Case Study Example

Analysis of Tesco Plc and its Market Segment Name Institution Course Date Introduction Companies and organizations employ the services of financial analysts to undertake the financial analysis of their performance. In most cases, financial analysts use financial statements for several years of a company or a particular financial year statements in conducting their analysis. Financial analysis is the process of selecting, evaluating, and interpreting financial data of a company with other pertinent information which assists in assessment of risk and return associated with a particular investment (Drake & Fabozzi 2012, p. 101). Analysis of financial data has some benefits to both internal and external stakeholders of a company. It may be used in evaluating efficiency of operations, credit policies effectiveness, and company’s creditworthiness among other things. In this report, analysis of Tesco plc and its market segment is conducted by mainly using financial ratios. Discussion of Tesco plc strategy and market share as well as comparison of profitability with a competitor are also included in this report. Overview of Tesco PLC Tesco PLC is a multinational general merchandise and grocery retailer founded in 1919 in London, United Kingdom. The company is one of the World’s largest retailers having its headquarters in Chestnut, Hertfordshire, United Kingdom. Tesco PLC has expanded its operations and it is now conducting business in 12 countries across Europe, North America and Asia. It is currently employing over 530,000 people (Tesco PLC 2014). Financial analysis of Tesco PLC will be mainly drawn from the primary source financial data, that is, the annual report and disclosures of Tesco PLC. The current events such as extraordinary losses, development of a new product, and acquisition of another company which has a bearing on future prospects will be also considered in relation to Tesco PLC current situation. Financial Statement Analysis Financial management and effective planning is required in order to have a sustainable business. Analysis of financial ratios thus becomes a useful tool to the management in improving understanding of a company’s financial results and provision of key indicators of an organizational performance. Ratio analysis is important in this analysis because it focus on evaluation of a company’s market performance and financial policies. The financial ratio analysis of Tesco Plc is done for the financial year 2014 and compared it with that of previous year 2013. The first part of Tesco PLC financial ratio analysis is construction of profitability ratios. Profitability Analysis Profitability analysis is achieved by calculating profitability ratios. Profitability in essence reflects the end result of business operations. Profit margin and rate of return are the two types of profitability ratios. Gross profit margin, net profit margin and operating profit margin ratios are common profit margin ratios. Rate of return ratios include return on assets and return on equity ratios. It reflects the relationship between profit and investment (Chandra 2011, p. 80). Profit margin ratios Gross profit margin ratio This ratio is calculated as follows: Gross profit/Sales revenue. The 2014 and 2013 Tesco gross profit margin ratios are as follows: 2014 2013 4,010/63,557= 6.3 percent 4,154/63,406=6.55 percent This ratio indicates the amount of money left out of the sales revenue the company has generated (Tracy 2012, 14). This will be used in paying the expenses and remaining becomes net profit. Interpretation is that 6.3 percent of Tesco PLC sales revenue ended up as profit in 2014 and 6.55 percent in 2013. The company’s gross profit margin ratio marginally decreases in 2014 from that of 2013 indicating increases in costs of operations of the company. Net profit margin ratio Net profit margin ratio is important and most popular of all the other ratios as it indicate how much profit is generated by the company’s sales; specifically, this is the percentage of sales revenues that ends up in profit (Tracy 2012, p.12). It is calculated as follows: Net Income/Sales Revenue 2014 2013 1,912/63,557=3% 1,528/63,406=2.4% 3 percent of Tesco plc sales revenue ended up as profit in 2014 and 2.4 percent in 2013. The profit margin ratio of the company increases from 2.4 in 2013 to 3% in 2014 indicating fall in expenses and efficient management is controlling its costs. Operating profit margin ratio This ratio shows the amount of margin that is left after manufacturing expenses, general and administration, depreciation and selling expenses are met. It reflects operating efficiency of a company (Chandra 2011, p. 81). It is calculated as follows: Operating profit/Sales Revenue 2014 2013 2,631/63,557= 4.14% 2,382/63,406=3.76% Operating profit margin ratio increases indicating efficiency in management of costs control by Tesco plc. Rate of return ratios Return on assets ratio This ratio measures the company’s net income after taxes against the company’s assets (Vasigh, Fleming, & Mackay 2010, p. 170). It is calculated by dividing net income against total assets. 2014 2013 1,912/14,722= 13% 1,528/16,661=9.17% Tesco plc return on assets ratio increased from 9.17% in 2013 to 13% in 2014. This is a sign of good utilization of the firm’s assets in generation of sales. Return on equity This ratio measures the performance of the company against the total shareholders’ equity in a firm (Vasigh et al., 2010, p. 117). It is calculated as follows: Net Income/Total Shareholders’ Equity 2014 2013 1912/14722=13% 1528/16661=9.17% Tesco is utilizing its equity in generation of profit in an efficient and effective manner as indicated by an increase in this return on equity ratio. Liquidity ratios A company may be profitable but the ability to pay its debts on time is an important measure of its financial health. In financing its short-term debt, a firm should have a favourable liquid position. This means that its current assets can be quickly converted into cash or it has a substantive cash balance. Liquidity ratios measure the company’s ability to pay the short-term debts it has when they fall due (Gitman & McDaniel 2008, p. 491). The main liquidity ratios are current and acid-test (quick) ratios. Current ratio It measures ability of a firm to meet its current debt. It shows how well a firm is prepared to meet is liabilities that falls within a year (Dlabay & Burrow 2007, p. 125). It is arrived at by dividing current assets over current liabilities. 2014 2013 13,085/21399=0.61times 12,465/18985=0.66 times A current ratio of 0.61 indicates that 61% of Tesco plc current liabilities will be met by the current assets. In the both years, the company faced a short-term liquidity issue. Acid-test (quick) ratio It is stricter measurement of the firm’s ability to meet its short-term obligations. It measures the company’s ability to pay-off short-term liabilities without reliance on inventories sales (Brigham & Houston 2009, p. 88). This ratio is calculated by deducting inventories from current assets then dividing it by current liabilities. 2014 2013 13085- 3576/21399=0.44times 2465-3744/18985=0.46times Tesco plc quick ratio is low compared to the industry average thus may have difficulties in settling its short-term obligations. Limitations of Ratio Analysis Ratio analysis is important to many stakeholders of a company such as lenders and investors. It presents a general financial condition of a company (Dlabay & Burrow 2007, p. 130). Although financial ratios are important in analysing financial health of a firm, it has some limitations. Financial ratios are insignificant on their own and only become meaningful when they are compared with the firm’s previous performance or other firm’s performance (Siddiqui 2005, p. 625). Ratios can give false results when financial statements in which they are based upon are incorrect. Price level changes affect financial ratios meaning that ratios are meaningful for comparison when prices do not change. Tesco plc market share and strategic Analysis Companies continually involve themselves in putting strategies in place that will expand their market share. Tesco plc is one of the market leaders in retailing business and its strategies have focused on maintaining this fact. Long-term strategies of Tesco plc have mainly focused on growing United Kingdom business, being a successful international retailer and develop retailing services (Henry 2011, p. 75). The rationale for Tesco plc strategy is to broaden its business scope enabling it to deliver a strong and sustainable long-term growth. They have been doing this by following customers in large expanding markets in United Kingdom such as Non-food, telecoms and financial services and new markets abroad. Tesco plc competes with giant retailers such as Wal-Mart stores of United States and Germany’s Metro and local Sainsbury. It dropped its market share in 2009 by 31 percent in United Kingdom while its competitor Sainsbury increases its market share by 15.9 percent (Henry 2011, p.77). Reasons why Companies produce Annual Accounts Companies produce annual financial statements for a number of reasons. They prepared financial statements to satisfy legal and regulatory requirements. These requirements are contained in the Companies Acts of 1985 and its amended version of 1989 in United Kingdom (Lee 2006, p. 67). They are also prepared to assist in making economic decisions. Annual accounts are also produced as way of portraying the firm’s annual performance to its various stakeholders. References Brigham, EF & Houston, JF 2009, Fundamentals of financial management. South-Western Cengage Learning, Mason, OH. Chandra, P 2011, Financial management: theory and practice, 8th edn. Tata McGraw-Hill Education, New Delhi. Dlabay, L. R & Burrow, J 2007, Business finance. Thomson South-Western, Mason, OH. Drake, P & Fabozzi, F. J 2012, Analysis of financial statements, 3rd edn. John Wiley & Sons, New Jersey. Gitman, LJ & McDaniel, CD 2008, The future of business: the essentials, 3rd edn. Thomson South-Western, Mason, OH. Henry, A 2011, Understanding strategic management, 2nd edn. Oxford University Press, Oxford. Lee, T. A 2006, Financial reporting and corporate governance. John Wiley & Sons, Chichester. Siddiqui, S. A & Siddiqui, A. S 2005, Managerial economics and financial analysis. New Age International, New Delhi. Tesco PLC 2014, History, accessed 10 July 2014, . Tracy, A 2012, Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. Createspace, Sydney. Vasigh, B, Fleming, K & Mackay, L 2010, Foundations of airline finance: methodology and practice. Ashgate Publishers, Burlington. Read More