Tesco is a retail store in UK. The company has a huge presence and deals in “consumer products, groceries, financial services and telecom” (Tesco Website, 2011). The fact that the company deals in so many products and huge reach has given a wide market. The company is planning to expand its reach and enter India as it is one of the most growing hubs for retail business (Mahapatra, 2010)The company has used different source of financing and the capital structure of the company is based on it. A look at the financial report suggest that Tesco has used retained profits, long and short term borrowings, capital market through equity, commercial paper, bank borrowings and leases in their capital structure.
(Annual Report, 2010, p. 40)A further analysis of the capital structure of Tesco will help to understand the capital structure better. This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios which help to determine it are asDebt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”.
(Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The calculation of the capital ratio is asRatiosFormula20092008Debt to Equity Ratio Long Term Debts / Equity15,018 / 12,995 = 1.1512,995 / 11,902 = 1.09The ratio indicates soundness on the part of Tesco. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects.
As the company works in a type of market where to grow large debt is needed so the ratio seems to be sound. Interest Coverage ratio: “It measures how well a companies is able to meet its interest cost from in comparison to the finance expenses”. (Transtutor, 2010) It is calculated as “EBIT / Net Finance Expenses”. The calculation of the capital ratio is asRatiosFormula20092008Interest Coverage RatioEBIT / Net Finance Expenses3,206 / 478 = 6.702,791 / 250 = 11.15The performance on Tesco fallen which shows the ability to meet the interest expenses from financing activities has suffered.
Tesco needs to continue to perform and look forward to improve it against their competitor. Earnings per Share: “It is defined as the profit attributed to the equity shareholders”. (Joseph, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The calculation of the capital ratio is asRatiosFormula20092008Earning per Share Net Income / Outstanding shares27.50p cents (given in financial statement)26.95p (given in financial statement)The above ratio indicates soundness on the part of Tesco.
Tesco has a higher earning per share indicating that the shareholders are getting a good return. The returns for Tesco have increased in 2009 as compared to 2008 which shows that the profit has increased. The overall result for the giant seems sound and is a good prospect to invest. The capital structure thus shows soundness for Tesco and the company has been able to maintain their planning well. This has also ensured efficient efficiency which has helped the company to build a strategy for the future. Factoring for business is an alternative means of financing the business and was used in traditional times.
In these methods the business sells their accounts receivable to another party at a discount so that ready cash is available to finance the business. In this method the business doesn’t rely on external sources but instead of that uses their own debtors which will be converted into cash sometimes in the future. While deciding the course of action in this method businesses have to give certain discount to lure the third parties.