Financial Analysis Of Tesco Limited

Overview of Tesco Limited

This report has analyzed to identify the final financial figures of the Tesco and interpret the data for the future planning of the company. This repost has undertaken over Tesco and it analyzes the various ratios of the company to analyze the figures from stakeholder’s perspective and management perspective. Various tools and ratios have been calculated to analyze the financial condition of Tesco limited.

In this report, 3 parts has been depicted which depict about the TESCO’ financial condition and future perspective of the company (Tesco, 2017). First part explains the user about TESCO’s history, operations etc. Further, many ratios have been calculated in this part to analyze the performance of the company.

Second part of the report analyzes the different available sources in the market available for Tesco to prepare a proposal for the company that how can it access the necessary finance to fund the assets as Tesco is looking to invest into fixed assets to enhance the business operations of the company (Tesco, 2017).

Thirdly, the last part of the report has discussed about the budgeting process that whether it is suitable for modern businesses and environment. And after it, a conclusion part has given at the end of the report to the company to implement so that the operations and growth of the company could be enhanced.

Overview of Tesco Limited:

Tesco limited has been found as the top leading company of retail chain in Australia. Tesco limited’s business operations are mainly in general merchandise and grocery stores. Tesco limited is performing very well in the market in current scenario. The financial performance of the company has been analyzed and found that company is enhancing its financial operations and thus the performance of the company is also enhancing. It has been analyzed that the value of shares of Tesco is also enhancing day by day (Bloomberg, 2017). It has been found that the profitability ratio of the company is quite high which depict that company is making huge money from its operations. Currently, the company has been appreciated and awarded as top 3^rd company worldwide in context of profitability.

History of Tesco Limited:

Tesco limited came into existence in 1999. The Headquarter of the company is in UK. Currently this company has listed itself in many stock markets to sell its shares. Tesco limited has suffered from many losses and issues in its early time but it has been found after analyzing the financial figures of the company that currently the company is performing very well in the market (Tesco, 2017).

Business Segment:

Tesco limited is offering many services to its client through many other business segments. Mainly, Tesco limited is a retail chain which normally operates in grocery and general merchandise but company also assist its clients by offering them many other services such as insurance services, finance services, banking services etc.

Share performance Analysis:

Share performance analysis is the biggest factor of every company to analyze the financial performance and growth of the business. There are always current and future prices of a share which assist the analyst to evaluate the true worth of shares (Tesco, 2017). It has been analyzed through this report that currently the share price of company is enhancing and the price is euro 174.

History of Tesco Limited

Ratio analysis is a technique which helps an analyst and organization to calculate the worth of the business with the help of many factors and financial aspect of the company; in this report 2015 and 2016 data has analyzed and consolidated income statement and balance sheet of the company has also been considered to calculate the effective ratio. Ratios have been calculated under 3 categories to make it clear for the user to identify the relevant data. The categories are profitability and long term solvency. Ratio analysis of Tesco is as follows:

Profitability analysis:

Profitability analysis is a tool which depicts the user about the profitability condition of the company. These ratios depict about the capability of company to generate the return. Following ratios has calculated:

ROCE:

ROCE stands for return on capital employed. This ratio is calculated to generate the total profit in context of total capital employed of Tesco (Brigham and Ehrhardt, 2013). It has been analyzed through calculating the ROCE of Tesco that the EBIT of the company is quite lower than the total capital employed of the company. Generally, ROCE is regarded as a pre measurement in a great way to analyze the profitability of the company. The ROCE has increased from -0.2373 to 0.0432 which depict that the operating profit of the company has enhanced from last year in 2016. The return on capital employed has also enhanced due to growth in operating profit of the company. Capital employed includes the long term finances and equity. Increment in the ROCE explains that the sources are utilized by the company in good manner. Company could also use more techniques to utilize the whole resources (Tesco, 2017). Through the annual report of the company, it has been analyzed that the company is becoming more competitive by utilizing the minimum resources at maximum. The capital employed of the company has decreased from -0.008769 whereas the operating profit of the company has enhanced by 1.18% from 2015.

The market return has been analyzed and found that the current market return of Australia is 7%. The return of Tesco is quite lower in comparison of market return. This depicts that the Tesco is facing huge losses in comparison of whole Australian industry. Return on investment is quite similar to the capital employed return where generated profit from a project is divided through capital employed of the company (De Haan and Amtenbrink, 2011).

Gross profit margin:

Gross profit margin depicts about the operating profitability of a company. It shows the total profit made by the company in comparison of sales as a percentage. The higher the gross percentage would be the higher the profitability of company would be. The gross profit of Tesco has enhanced from last year. As the increment of gross profit of Tesco is quite impressive so investors would not be bothered about the operations and enhancement of company’s operations.

Gross profit of company has increased from -0.09299 to 0.01921 in 2016. The total enhancement of gross profit margin is 11.22%. This depicts that company has used more techniques to utilize the whole resources. With the help of annual report of the company, it has been analyzed that the company is becoming more competitive by utilizing the minimum resources at maximum. A higher percentage of gross profit depict that the profitability of the company is also higher and thus the net profit of company would also be greater.

Business Segment

Operating profit margin:

Operating profit margin is calculated by using the surplus of the company by deducting the variable cost of the company from gross profit. Operating profit margin depict about the operating profitability of a company. It shows the total profit made by the company in comparison of sales as a percentage after deducting the variable cost. The higher the operating percentage would be the higher the profitability of company would be. The operating profit of Tesco has enhanced from last year. As the increment of operating profit of Tesco is quite impressive so investors would not be bothered about the operations and enhancement of company’s operations (Tesco, 2017).

Operating profit of company has increased from -0.09299 to 0.01921 in 2016. The total enhancement of operating profit margin is 11.22%. This depict that company has used more techniques to utilize the whole resources. With the help of annual report of the company, it has been analyzed that the company is becoming more competitive by utilizing the minimum resources at maximum (Lacalle, 2017). A higher % of operating profit depict that the profitability of the company is also higher and thus the net profit of company would also be great.

Liquidity Analysis:

Liquidity analysis of company has been analyzed. Liquidity analysis depicts about the position of the company and analyzes that how much capable the company is to pay all the current obligation. Through this analysis, it has been analyzed that how much time company would take to repay its entire obligation.

Current ratio:

Current ratio depict about the current capability of the company to meet its entire current obligation (Tesco, 2017). It has been found by analyzing the current ratio of Tesco that the total current ratio of the company is 0.75 and 0.603 in 2016 and 2015. The current asset of the company has increased from 11958 to 14828 in 2016 whereas the current liabilities of the company have also decreased from last year. It has been found that the current ratio of the company has enhanced due to the increment in the current asset of the company. This depicts that the current obligation of the company is increasing rapidly. Thus it could be said that the Tesco is a good option and investors would definitely get high return from the company in terms of their investment (Madura, 2011).

Current ratio:

Acid ratio depict about the current capability of the company to meet its entire current obligation. It has been found by analyzing the acid ratio of Tesco that the total acid ratio of the company is 0.6 and 0.45 in 2016 and 2015. It has found that the acid ratio of the company has enhanced due to the increment in the current asset of the company. The quick asset of the company has increased from 9001 to 12398 in 2016 whereas the current liabilities of the company have also decreased from last year. This depicts that the current obligation of the company is increasing rapidly. Thus it could be said that the Tesco is a good option and investors would definitely get high return from the company in terms of their investment.

Share Performance Analysis

Leverage Analysis:

Leverage analysis is a technique which is used to analyze the investment strategy for the investors and organization. This strategy is useful for the investor to analyze the performance of the company, with the help of this analysis investors depicts that whether it is a good option to invest in the company or investors must ignore this option.

Gearing ratio:

Gearing ratio is a technique which is used to analyze the investment strategy for the investors and organization. This strategy is useful for the investor to analyze the performance of the company, with the help of this analysis investors depicts that whether it is a good option to invest in the company or investors should ignore this option (Tesco, 2017).

It has analyzed through this report that the gearing ratio of the company is 0.64 and 0.71 in 2016 and 2015. The gearing ratio of the company has enhanced from last year due to changes into the market. It has been found that the long term loans and capital employed of the company has changed from last year. The capital employed of the company is 24190 and 24404 in 2016 and 2016 and total liabilities of the company are 35278 and 37143 in 2016 and 2015. This depicts that the investment in the Tesco is quite risky as the gearing ratio of the company is decreasing rapidly and thus this causes the distraction among the investors of the company.

Equity ratio:

Equity ratio is a technique which is used to analyze the investment strategy for the investors and organization. This strategy is useful for the investor to analyze the performance of the company, with the help of these analysis investors depicts that whether it is a good option to invest in the company or investors should ignore this option. This ratio considers the equity of the company to make a decision about the investment in the company. This depicts about the sources of funds a company could rise to enhance its capital (Tesco, 2017).

Interest cover:

Interest coverage ratio is a technique which is used to analyze the investment strategy for the investors and organization. This strategy is useful for the investor to analyze the performance of the company, with the help of this analysis investors depict that whether it is a good option to invest in the company or investors must ignore this option (Tesco, 2017).

Interest coverage ratio considers the equity and finance cost of the company. It has been analyzed through investigating over the annual report of the company that the interest coverage ratio of the company is 2.10 and -11.61. This means the coverage ratio has enhanced from last year in 2016. It depict that the finance cost of the company is same but the net profit of the company has enhanced. Thus it is a good option to invest in the Tesco (Bloomberg, 2017).

By analyzing over the annual report of the company, history of the company, business segment of the company, overview of the company and ratio analysis of the company, it has been analyzed that the Tesco is a better option for the investors to invest in as the long term return of the company would be impressive. Currently, due to market fluctuations and economic condition, the company is suffering issues. But soon, it would be in better condition and that time, the investors would be able to get a good return from Tesco.

Profitability Analysis

The financial performance of the company has been analyzed and found that company is enhancing its financial operations and thus the performance of the company is also enhancing. It has been analyzed that the value of shares of Tesco is also enhancing day by day. Currently, the company has appreciated and awarded as top 3rd company worldwide in context of profitability (Tesco, 22017). Tesco limited has suffered from many losses and issues in its early time but it has been found after analyzing the financial figures of the company that currently is performing very well in the market. There are always current and future prices of a share which assist the analyst to evaluate the true worth of shares. It has been analyzed through this report that currently the share price of company is enhancing and the price is euro 174. It has been analyzed that the Tesco is a better option for the investors to invest in as the long term return of the company would be impressive.

Sources of finance are equity, debt, retained earnings, debentures etc. These sources are used by the company to enhance the funds in the company. In different situation, different sources are used in a company so that the best sources could be used. Sources are classified according to the ownership, control and power. Sources of finance are of many types.

In the case of Tesco, many sources are available into the market which could be used by Tesco to enhance the funds and meet the objective of the company. Tesco is looking for to expand its business and for that it is trying to implement a new plant with the help of 15% of its current assets. Therefore, this amount has been calculated to identify that which method is the best option for the company so that the company could enhance the euro 2224 which is the 15% of total current assets of the company (Saunders and Cornett, 2014).

This report would research over many available sources and to enhance the funds of Tesco from internal and external sources and identify the potential of company. For this, many methods would be calculated and according to that the recommendation and conclusion has been given for best financing option.

Issue of share capital:

Issue of share capital is one of the sources to raise the funds. These are used by the company to enhance the long term funds. Issue of share capital is long term debt. Company need to pay the dividend to shareholders on the basis of net profit. Shareholders are owners of the company. They buy ownership of the company with shares. The dividend paid by the company to the shareholders is flexible cost of the company (Madura, 2007).

Issue of share capital option could be opted by Tesco to enhance the funds for the organization and it would help the company to implement a new plant to enhance the operations of the company. The major advantages of raising the funds through borrowing are as follows:

• It is an easy source to raise the funds.
• Shareholder can get the total net profit of the company as dividends.
• Risk is lower.
• Flexible cost of capital
• Growth enhances.
• Net profit of company enhances.

ROCE

The major disadvantages of issuing shares to raise the funds are as follows:

• It could be diluted.
• Ownership gets affected.
• High cost.
• Management does not have any control.
• It is rigid in nature
• Risk is high in terms of cost.
• Tax amount get higher (Saunders and Cornett, 2014).

Using retained earnings:

Retained earnings are the internal source. It is quite easy for an organization to raise the funds through retained earnings. Retained earnings are the liquid assets of a company which is basically a portion of total net profit of the company, made by the company in a year, which is retained by the company by not giving it to the shareholders. The major advantages of retained earnings are as follows:

• It is the cheapest source.
• Complete control over retained earnings is in the hand of management.
• It could not be diluted.
• It is flexible in nature.
• Management need not to take permission from any external member to raise the funds through retained earnings.
• Retained earnings do not implement extra cost over the organization.
• The growth of the company enhances.
• Cost of capital gets reduced.

The major disadvantages of retained earnings are as follows:

• Stakeholders get distracted due to fewer dividends.
• Tax amount get high.
• Company need to take permission from shareholders.
• Risk is high.
• More chances of the shareholders to switch.

Debentures:

Debentures are one of the sources to raise the funds. These are used by the company to enhance the long term and short term funds. Debenture is long term debt. Company need to pay the fixed interest to debenture holders. Debenture holders are debtors of the company. They buy debentures of the company and in consideration; they get a fix percentage of amount as interest. The interest paid by the company to the debenture holders is fixed cost of the company (Tesco, 2017).

Debentures option could be opted by Tesco to enhance the funds for the organization and it would help the company to implement a new plant to enhance the operations of the company. The major advantages of raising the funds through debentures are as follows:

• It is an easy source to raise the funds.
• Risk is lower.
• Fixed cost of capital
• Growth enhances.
• Net profit of company enhances.
• Ownership doesn’t get affected.

The major disadvantages of issuing shares to raise the funds are as follows:

• It could be diluted.
• High cost.
• Management does not have any control.
• It is rigid in nature
• Risk is high in terms of cost.
• Tax amount get higher.

Owner’s investment:

Owner’s investments are the internal source. It is quite easy for an organization to raise the funds through the investment done by owner. Owner’s investments are the liquid assets of a company which is basically extra amount invested by the owner of the organization for raising the funds (Tesco, 2017). The major advantages of owner’s investments are as follows:

• It is the cheapest source.
• Complete control over owner and management.
• Management need not to take permission from any external member to raise the funds through owner’s investments.
• The growth of the company enhances.
• It could not be diluted.
• It is flexible in nature.
• Cost of capital gets reduced.

The major disadvantages of retained earnings are as follows:

• Tax amount get high.
• Risk is high.
• Owner’s investment applies extra cost over the organization.

Issuing bonds:

Bonds are one of the sources to raise the funds. These are used by the company to enhance the long term funds. Bonds are long term debt. Company need to pay the interest to bond holders on a fixed percentage. Bond holders are long term debtors of the company. The interest paid by the company to the bond holders are the fixed cost of the company.

Bonds option could be opted by Tesco to enhance the funds for the organization and it would help the company to implement a new plant to enhance the operations of the company (Tesco, 2017). The major advantages of issuing bonds to raise the funds are as follows:

• It is the easiest source to raise the funds.
• Shareholder can get the total net profit of the company as dividends.
• Ownership doesn’t get affected.
• Risk is lower.
• Fixed cost of capital
• Tax amount get lower.
• Growth enhances.
• Net profit of company enhances.

The major disadvantages of issuing bonds to raise the funds are as follows:

• It could be diluted.
• High cost.
• Management does not have any control.
• It is rigid in nature
• Risk is high in terms of cost.

Borrowing to raise capital:

Borrowings from external people are one of the sources to raise the funds. These are used by the company to enhance the long term as well as short term funds. Borrowings are long term as well as short term debt. Company need to pay the interest to borrowers on a fixed percentage. Borrowers are long term as well as short term debtors of the company. The interest paid by the company to the borrowers is the fixed cost of the company.

Gross Profit Margin

Borrowing option could be opted by Tesco to enhance the funds for the organization and it would help the company to implement a new plant to enhance the operations of the company (Tesco, 2017). The major advantages of raising the funds through borrowing are as follows:

• It is the easiest source to raise the funds.
• Shareholder can get the total net profit of the company as dividends.
• Ownership doesn’t get affected.
• Risk is lower.
• Fixed cost of capital
• Tax amount get lower.
• Growth enhances.
• Net profit of company enhances.

The major disadvantages of issuing bonds to raise the funds are as follows:

• It could be diluted.
• High cost.
• Management does not have any control.
• It is rigid in nature
• Risk is high in terms of cost.

Through analyzing this report it has been found that the Sources of finance are equity, debt, retained earnings, debentures etc. These sources are used by the company to enhance the funds in the company. In different situation, different sources are used in a company so that the best sources could be used. Sources are classified according to the ownership, control and power. Sources of finance are of many types.

In the case of Tesco, many sources are available in the market which could be used by Tesco to enhance the funds and meet the objective of the company as Tesco is looking to enhance the funds for implementing a new plant and for it long term sources could be used by company as short term sources such as retained earnings won’t help the company for implementing a new plant.

Bonds, debenture, share capital and borrowings are the long term sources which could be used by the company to enhance the funds. Annual report of company and market condition has been analyzed and found that it is the best option for the company to enhance the amount from share capital as the expected return of the company is quite competitive and it would be less risky for the company to raise the capital through share capital as market condition is not in the favor of the company (Saunders and Cornett, 2014). So company must choose a less risky source and annual report of company also depict that the debt equity ratio of the company could be enhanced for enhancing the funds.

Conclusion:

After investigating over this report it has found that the Sources of finance are retained earnings, debentures, equity, debt etc. These sources are used by the company to develop the funds in the corporation. In different situation, different sources are used in a company so that the best sources could be used. Sources are classified according to the ownership, control and power.

Thus it could be concluded that company must choose issue to share capital option to enhance the funds. Share capital source of the company is quite competitive and it would be less risky for the company to raise the capital through share capital as market condition is not in favor of the company. So company must choose a less risky source and annual report of company also depict that the debt equity ratio of the company shows that company even could enhance some amount through share capital to enhance the funds.

Traditional budgetary system is an old technique to measure the future estimates of the company. This budgetary system indicates a set of amount which has been allotted during a particular time period for particular financial obligation such as entertainment, rent or insurance. Traditional budget is prepared to assist the organization to spend the expenses and get the income according to a plan. This technique starts with the total income and list the total categories on that an organization plans to spend the whole amount. This analyzes the spending of an organization. It basically develops a plan, creates the expenditure and Fine-Tune spending.

Operating Profit Margin

The process of traditional budget is quite significant. First of all, it takes the income in consideration and then it performs the further plan and strategy.

It provides a control framework:

The role of traditional budgeting in an organization is to manage and set a link among financial activities of the company, for some level, budgeting makes the reference point. Indeed, traditional budgeting offers a control framework that creates it is easier to administer all the stability activities.

It has been found through this that budgeting process is helpful for the company to administer every financial aspect of the company and it is also helpful for the company to manage and set a link among financial activities of the company, for some level, budgeting makes the reference point.

It is a part of company’s culture:

Budgeting technique is used by the organization from a long time so it has become a culture for the organization. Thus, it might be a risky decision for the company to change the fundamental operating method.

This depict that budgeting system becomes a part of organizational culture due to their long term in the organization and employees and individual of organization adopts it as culture of organization.

It lodges the decentralize need:

Many institutions and organizations are using the benefits of decentralization such as banks. Budgeting helps the organization to decentralize every aspect of the company which would help the company to take the decision and make the strategy with the help of every level of manager (top, middle and lower level management).

This depict that budgeting system is used by organization to use the benefits of decentralization. Budgeting helps the organization to decentralize every aspect of the company which would help the company to take the decision and make the better strategy with the help of every level of manager.

Traditional budgetary process’s weakness:

The process of traditional budget is quite significant but it also has some weakness. Some of the weakness of budgetary system is as follows:

Inefficiency:

This budgeting system takes a lot of time and many resources. Still some of parties and individual think that the time and cost is worthwhile. It takes the help of spreadsheet and thus the time consumption becomes more.

It has been found that Tesco also have to face the issues of cost and time consumption due to this strategy as this would lead the company to high cost and time consumption.

Low change responsiveness:

Every business has an accounting cycle and it focuses over the budget and its errors to make it corrective and make the next budget. Thus reviews are only conducted annually which makes huge issues in front of organization.

It has been found that Tesco also have to face the issues of responsiveness due to this strategy as company would focus over the issues and changes in budgeting once in a year which is not sufficient to recognize every issue.

Disconnection from strategic plan:

As administration of an organization are so obsessed with the numbers to hit it in right manner. Frequently, they miss the purpose of budgeting in strategic manner. This budgeting process makes a focus over the cost reduction instead of value creation that means strategic initiative have lower priorities.

Capital Structure Analysis

It has been found that Tesco also have to face the issues of not a perfect strategic plan because of this strategy company would focus over the issues of less planning and changes in budgeting once in a year which is not sufficient to make a perfect strategy every year.

Failure to enhance the desirable behaviors:

Traditional budgetary system usually fails to motivate the individual to act according to the interest of company. Such as it enhances the unprofessional attitude and vertical control, it makes the people undervalued and it enforces the barriers in each department.

It has been found that Tesco also have to face the issues of behaviors responsiveness because of this strategy as company would focus over the issues and accordingly make enhancement of desirable behaviors in budgeting.

This depicts that there are huge problems a company could face due to the traditional budgeting system.

Traditional budgetary process’s viability:

Traditional budgetary process has been studied and found that this system is quite old but still people find it more worthy than any other budgetary technique available in the industry. It has found that the conceptual framework of the company is still quite strong. Traditional budgetary system is an old technique to measure the future estimates of the company. This budgetary system indicates a set of amount which has allotted during a particular time period for particular financial obligation such as entertainment, rent or insurance. Traditional budget is prepared to assist the organization to spend the expenses and get the income according to a plan. This technique starts with the total income and list the total categories on that an organization plans to spend the whole amount. This analyzes the spending of an organization. It basically develops a plan, creates the expenditure and Fine-Tune spending.

Changes proposed:

Through analyzing this report, it has found that traditional budgeting system has some negative and positive aspect both. Traditional budgeting system has also been studied in depth ways and found that this system helps the organization a lot to manage every financial aspect of the company. But this process has been quite outdated. Traditional budget is prepared to assist the organization to spend the expenses and get the income according to a plan. This technique starts with the total income and list the total categories on which an organization plans to spend the whole amount. This analyzes the spending of an organization. It basically develops a plan, creates the expenditure and Fine-Tune spending.

Thus it is suggested to the organizations to make some changes in the budgeting process as company have to face the issues of responsiveness because of this strategy as company would focus over the issues and changes in budgeting once in a year which is not sufficient to recognize every issue. Company also has to face the issues because of not a perfect strategic plan due to this strategy. Company would focus over the issues of less planning and changes in budgeting once in a year which is not sufficient to make a perfect strategy every year.

Further, It has found that Tesco also have to face the issues of behaviors responsiveness due to this strategy as company would focus over the issues and enhancement of desirable behaviors in budgeting. Thus it is suggested to the organizations to make some changes in the budgeting process.

References:

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

De Haan, J. and Amtenbrink, F., 2011. Credit rating agencies.

Lacalle, D., Credit?rating agencies. Life in the Financial Markets: How they really work and why they matter to you, pp.95-98.

Madura, J., 2011. International financial management. Cengage Learning.

Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill Education,.

Tesco. 20157. Annual Reports and Financial Statements 2015. Retrieved as on 18 June 2017 https://www.tescoplc.com/media/1426/tescoar15.pdf

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