The Investment on the Tesco Barber Shops - Case Study Example

CRITICAL FINANCIAL ANALYSIS By Student's Name Code + Course Name Professor's Name College/University City, State Date The company chosen for the basis of this group discussion will be Tesco men’s barber shop that operates in London. The company is a British multinational company that currently ranks at third position regarding the profits that the company generates (TESCO 2015). Moreover, the company can confidently boast of being the second largest retailer in terms of the revenues that it generates every single year. Currently, the company has a total of three thousand, five hundred and thirty five stores spread across twelve different nations located in both Europe and the Asian continent (TESCO 2015). The availability of the Tesco stores in the named locations, it has been decided that the company will invest and run projects on barber shops within a given number of the stores. The investment on the barber shops will cost approximately ten million pounds, which will be used in a span of five years period. The project will be designed in such a way that each of the stores will have two hairdressers who will attend to the needs of the clients. The hairdressers will have one assistant who will be within the same facility for the entire period of the project. The project will be run based on an initial sample of five hundred stores that will have a main target of increasing the profitability of the company. Since the project will be running in an industry that already has a blotted number of operators, there will be some competition from rival companies. One of the rival companies that will be expected to issue a very competitive platform will be Jack the Clipper. The company was established way back in the year 1966 through the help of the first family which was also the biggest of the Turkish master barbers. The company will also offer stiff competition in the industry due to the long period that it has been in existence since its establishment. With more than one hundred years of experience, it is expected that the company will be one of the institutions to watch out for during the five-year course of the project. Jack the Clipper has been a household name for such a long period due to its nature of competitiveness in making the customers leave with utmost satisfaction. Moreover, every customer of the company can be proud of looking sharp all throughout the year courtesy of the quality services they receive from Jack the Clippers. Jack the Clipper has a Turkish heritage, something that very few of the other competitors have. Their Turkish heritage is then mixed with some of the ancient fashion designs and cuts that make them the trend setters when it comes to barber cuts. Their unique cuts cannot be matched by any other form of cuts that is witnessed from other companies. In order to beat Jack in the business, Tesco will have to be very innovative regarding bringing new cut designs and trends that will appeal to the majority of the customers. Moreover, the cuts will have to be done in the most professional manner and within a range of the customer’s financial abilities. Moreover, the hairdressers that will be picked by Tesco will have to be very passionate about hairdressing. One of the strong areas of Jack is the passion and the self-drive of the shop operators who value and love what they do. It will, therefore, be important that the new staff members at the Tesco shops be very passionate about the work they will be doing for them to match the standards that have already been set for them by jacks. The first impression given to the customers when they make their entrance into the shops willdefinitely be the game changer or the undoing factor for the new stores that are yet to open. If the first impression is good, then the customers will always be satisfied as opposed to a poor impression given on the first contact. Financial Ratios To make comparisons between the two companies, an analysis will have to be done on the financial ratios of the two to come up with the most relevant and logic conclusion. For instance, in the case of Tesco, it will be expected that the company will have cash at hand worth 0.8 million during the period for which the project will be running. Additionally, it will be expected that the company will hold and inventory worth 0.2 million. Finally, the installations done in the premises will be expected to cost up to nine million pounds. Whether the given figures will eventually result in profit making or losses will only be determined through a thorough analysis on the financial ratios. Generally, financial ratios are used in making comparisons between companies in various industries irrespective of the nature and size of the company (Poznanski 2013). Moreover, it is through such comparisons that will, in the long run, reveal either the weaknesses or the strengths of the company. Financial ratio analysis can be conducted from some aspects such as the profitability of the company, its liquidity, investment leverage and the solvency of the company. In order for the financial ratios to be meaningful to the end users such as the Chief operating officer of the company, then certain conditions have to be met. First of all, the information must be generated and calculated from accurate financial information. Secondly, the information must be compared to the financial information of other companies that exists within the same industry. The third condition is to ensure that the values are calculated in a consistent manner from one period to the next. Finally, the values obtained from the calculations have to be interpreted correctly; otherwise the end users might end up making wrong decisions. Sales growth The sales growth of a company measures the percentage increase or decrease of sales made between two consecutive periods. If the general costs and inflations within an economy are increasing then, a company should also experience an increase in the total sales. If, on the contrary, the company does not get any increase in the sales, then it should consider using other policies such as adjusting the prices of the commodities. In the case of Tesco and Jack the Clipper, a comparison can be made on the sales to know which company will most likely win the battle concerning sales. The data from Jacks financial statements shows that in 2012, they made a sales networking capital of 25.81. In the year 2013, the sales dropped to 19.42 and a further drop witnessed in 2014 where it was -2.48. For the case of Tesco, the following general formula will be used to calculate the sales growth of the company for the next five years. As it can be deduced from the calculations, the sales growth for Tesco is expected to undergo a drop from the first year up to the third year then maintain the sales at 55.5%. The drop in sales may not be the best solution for the company since it may negatively affect the revenues generated by the company over that period. To increase the revenues, the company will have to make adjustments on the prices charged on the services (Carcello et al. 2008). It will be most appropriate if the company considered increasing the prices of the services offered. Net profit margin This ratio is used to evaluate a number of pounds that a company can make out of every sale that the company makes. Moreover, this ratio should be able to tell if the company can make enough profits that can cover the operating costs as well as the indirect costs incurred by the company (Homan 2009). The following formulae will be used to calculate the net profit margin over the five-year period of the project. Clearly from the calculations it can be deduced that Tesco as a company will be growing in terms of the net profit margin within the five year period. The ratios mean that the company will struggle to pay back its debts within the first two years of its operations but then as the years progress, the company will be improving regarding its finances. From the third to the fifth year, the company will not have any difficulty in paying back its debts as well as covering all the operating costs and the indirect costs that will be incurred during that period. Return on assets This financial ratio is used to measure the ability of a company to turn its assets into profits. If the ratios of a given company are lower as compared to that of the industry then it means that the competitors are operating more efficiently than that company (Carcello et al. 2008). The best solution is to get the correct mechanisms that can enable the company to operate more efficiently than it did before. For the case of Jack the Clipper, we already have the data for the return assets. For the year 2012, 2013 and 2014, the returns were 75.12, 896.17, and 578.46 consecutively. For the case of Tesco, the values will have to be calculated to come up with the correct figures. The following general formula will be used to calculate the return on assets. The results clearly show that the company will be in a position to make positive returns on its assets or making profits from the use of the assets. The value for the first year is negative because the company will still be employing its initial capital in making purchases and establishing the company on the ground. However, the returns on the assets are much low as compared to those that were made by Jack for the past three years. If the trend witnessed in Jack the Clipper is anything to go by then most probably the company will make much higher returns than Tesco for the next five years. It will, therefore, be up to the management of the company to come up with the most appropriate mechanisms for achieving efficiency of using the assets. Working capital This ratio is used to determine the capability of the company in meeting its obligations such as payment of its bills and making loans repayment. If a company finds its current assets to be equal to the current liabilities, then it means that the company generates no working capital. On the contrary, if the assets are greater that the liabilities then it mean that the company has a working capital, and it can easily pay off its debts. The higher the value of the working capital, the more prompt a business is capable of repaying back its debts. A low value of the working capital means that the company has a low capability of repaying its debts. Equity ratio This is a solvency ratio that measures the ratio of the company that is owned by the company’s investors. Moreover, this ratio makes a comparison between the total equity of the shareholders as compared to the total assets of the same company. In other words, this ratio determines all the assets that an investor is most likely to remain with after all the liabilities are paid off by the company. The following general formula will be used to calculate the equity ratio: The ratios generated from the calculations are so low giving the indication that Tesco will be a very risky place for the investors to invest their money (Averkamp 2012). On the contrary, if the ratios were much higher then, the investors would be easily attracted since such a corporation maybe very promising. Additionally, Tesco may lack funding from the creditors because of the low value of the ratios which is an indicator that Tesco is a risky venture or business to lend money. The most probable solution for Tesco will be to change their business operations so that the equity ratio can increase to a level beyond 1. In that case, the company will be able to get more funding from the investors as well as getting loan from the creditors (Edmans 2013). The loans and funding from the creditors and investors may act as backup plan for the company just in case the initial available capital fails to be enough. References Company check, Jack The Clipper Ltd, viewed 5 January 2016, Edmans, A 2013, Block holders and corporate governance, Working Paper, The Wharton School Averkamp, H 2012, Financial ratios based on the balance sheet. American University, unpublished manuscript Poznanski, J 2013, A guide to useful ratios for understanding your social enterprise’s financial performance, viewed 6 January 2016, < http://www.demonstratingvalue.org/sites/default/files/resource- files/Financial%20Ratio%20Analysis%20Dec%202013.pdf> Homan, MJ 2009, Profit margins using co-measures of risk, Casuality Actuarial Society E-Forum, no. Winter, pp. 225-235. TESCO 2015, viewed 3 January 2016, Carcello, JV Williams, JR Haka, SF & Bettner, MS 2008, Financial & Managerial Accounting, McGraw-Hill, Irwin. Read More