Non Financial Factors
This report will evaluate the financial performance of Tesco’s and comparing it to Marks and Spencer’s has the purpose of evaluating the company’s worthiness as investment.
As a well knowing company around the world and having an important background in the retail environment Tesco’s is one of the largest supermarkets in the world. Present in 14 countries around Europe, Asia and North America. Tesco’s is always dealing in the financial world, providing also bank and insurance services. ‘Tesco was founded in 1919 by Jack Cohen from a market stall in London’s East End. Over the years our business has grown and we now operate in 14 countries around the world, employ over 500,000 people and serve tens of millions of customers every week.
We have always been committed to providing the best shopping experience. Today we continue to focus on doing the right thing for our customers, colleagues and the communities we serve. ’ (Tesco 2012). The first section of this report, which is the main body, will use financial statements from 2010, 2011 and 2012, along with standard financial ratio analysis to develop a clear picture of Tesco’s financial performance comparing to the competitor. The second section includes a comparative analysis of the competitor strategy and also a conclusion on the performance and health of Tesco PLC based on the years 2010, 2011 and 2012.
The third section, presents a critical analysis containing the non-financial factors and risks impacting on the future of Tesco PLC.
Tesco’s Ratio Analysis
Ratio Analysis simplifies the financial statement and helps in future planning. It also helps us to inform the entire story of changes and current performance of the company. Ratios highlight all the different factors linked with successful and unsuccessful business. It is a powerful tool of financial analysis in the company. By using Ratio analysis it is easy to evaluate and understand financial health and trend of the business and possible future forecast of the company.
The return on capital employed is an important measure of a company’s profitability. If ROCE is higher than the company is sound healthy. In 2010 Tesco had 11. 52% ROCE which increase steadily in 2011 and 2012 respectively 12. 93 and 12. 64. So there is a possible reason for this change is that profit increase. It determines management’s ability to generate earnings from a company’s total pool of capital. Company’s gross profit margin ratio shows that there is slightly difference between 2010 and 2012 which shows there was no any major change in their prices.
In 2011 the company recorded a gross profit margin ratio of 8. 30%. The positive trend in this margin shows that the company is on profitability trend and therefore is a good investment option. So there is a possible reason for this change the higher cost of production. Operating Margin often refer to simply as a company’s profit margin, there is no major change during the period from 2010 to 2012.
Assets Turnover: Asset Turnover= Sales revenue/Capital employed During the last three years Tesco has improved gradually returning continuously in 2011 and 2012 turnover was respectively 2. 4 and 2. 06 . For most companies, their investment in net assets represents the largest component of their total assets. There are no significant changes in asset turnover.
Liquidity is a very important ratio for money lenders, suppliers and potential investors to access. According to the Tesco annual statement the result from 2010 to 2012 shows that the current ratio was less than 1 which has a problem to meet their liability in short term. Tesco’s assets are less and its liabilities are quite high which indicates company’s weak current ratio and liquidity problem.
Quick ratio is a more conservative (safer) measure of liquidity. A higher quick ratio implies greater safety. According to the acid test ratio Tesco’s acid test ratio was not good because it is below the standard. The liabilities have increased because of increased loan 2010, 2011 and 2012 respectively. In the year 2010 Receivable days was 12. 10 days but after that in 2011 and 2012 fiscal year respectively it was increased to 13. 86 days and 15. 02 days, which is showing their position is not good to collect receivable earlier.
It could affect business as well because customers always prefer a long time to pay back whatever they have taken on credit. 2012 = 3598/59278*365 = 22. 15 days It takes Tesco’s approximately 19 to 22 days taken to sell its product from the time it acquire it. Inventory days increased continuously since 2010 to 2012. The possible reasons could be the company’s sales are not good.
The term “capital gearing” or “leverage” normally refers to the proportion of relationship between equity share capital including reserves and surpluses to preference share capital and other fixed interest bearing funds or loans.
As the higher a company’s degree of leverage as the more the company is considered risky. In, Tesco’s gearing scenario gearing was decreased in 2010 and 2011 separately from 0. 51 to 0. 43, and it was standstill 0. 43 in 2012, which indicates the company improving financially. So there are possible reasons for this change, long term is decreasing in comparison with capital employed.
Return on assets:
The profitability ratio here measures the relationship between net profit and assets. Return on assets= Net profit before interest and tax / Total asset*100
Return on asset (ROA) indicator of how profitable a company is relation to its total asset . ROA gives us an idea of Tesco how efficient management is sat using its asset to generate earning. In 2010 return on asset was 7. 51% after that there was a decrease till 2012 to 5. 54 %. Tesco PLC has recorded in decreasing sharply value of P/E with values of 14. 12, 12. 12, and 8. 74, being recorded for 2010, 2011, and 2012 respectively (Yahoo Finance 1st Nov 2010,2011,2012). A number of factors could be possible vary due to decreasing in P/E including increased competitiveness for capital in market. Yahoo Finance 2012)
Earnings per share:
The Earning per Share (EPS) considers the profits that could be paid to each ordinary shareholder. The increase in profit resulted in the increase in EPS.
Earnings per share:
Earnings o holders / No of o shares in issue 2010 = 29. 33p 2011 = 34. 43p 2012 = 36. 75p The company recorded EPS increased in 2010, 2011 and2012 respectively. There could be number of reason for increasing earnings per share. Possible reason could be the increase in profit, increasing in loan. But it would not be the long term sustainability.
Dividend per share (DPS) is the sum of declared dividends for every ordinary share issued. DPS is the total dividends paid out over an entire year divided by the number of outstanding ordinary shares issued. Tesco financial statements indicate that dividend yield for the company has been rising in the last five years. The company recorded dividend yields of 3. 15%, 3. 56 %p and 4. 59% for 2010, 2011 and 2012 respectively (Yahoo Finance 1st Nov 2010, 2011, 2012). This is an indication that investor willing to invest in the company have a chance of receiving better dividend in the future. Yahoo Finance 2012) In 2011 company’s debt/equity ratio was higher to1. 04, which is not very good indication for the company. Because it heavily depends on loan is not a good policy for any business. But it was reduced the following years in 2011 and 2012 respectively 0. 77 and 0. 77.
Debt to Equity:
Debt to equity = Non-current interest bearing debt: Equity It is used to determine how easily a company can pay interest expenses on outstanding debt. In 2010 company’s interest coverage was 5. 99 times which increased in 2011 to 10. 47 times but in 2012 decreased slightly to 9. 5. The company’s profit has increased to pay their interest easily. Interpretation and ratio analysis conclusion: In the year 2012 Tesco‘s activity, profitability, liquidity ratio, financial gearing, and investment ratio was comparing with the previous year ratio. In the activity ratio net assets turn increased. Liquidity ratio was quite reasonable due to the economic condition and creditor days decreased which was not good for the company. Financial gearing was not satisfactory and finally, investment ratio increased margin which indicates revenue.
The organization managed to increase its return on capital and assets turn over remarkably. Tesco has slightly increased its receivable and payable credit payment period currently showing its financial position. On the other side, it can also be an opportunity for the customers to attract more customers as they always prefer to hold back as much as possible. There is no major difference in the net profit and gross profit margin that means Tesco did not bring any change in its prices and there was not any external pressure from government or competitors.
Liquidity of Tesco shows not a major decline over the past 3 years even though it is below 1 which is quite risky condition because current ratio below 1 means liabilities are more and assets are very less. If there will be major decline in the business, the company will not be able to pay their short term liabilities. The Interim report shows that they are reducing the gearing but we Tesco improved its shares value by having an increase in the dividends per share and share price. Investors will be attracted by this but this will not stay for long. Yahoo Finance, 2012)
Tesco’s Vs Marks and Spencer’s We can use Ratio Analysis to do a comparative analysis and seeing our performance with respect to our competitors. For this I have taken Marks and Spencer Group PLC and compared it with Tesco PLC to see the Standing of my company with another company. This helps us to know our strengths and weaknesses in all the areas of the business.
Summary of Comparative
Results between M & S and Tesco (2010-2012) Revenue and Operating Profits: The revenues earned by the company and the level of operating profit does tell us the size , capacity and type of player the company is in market. The Tesco’s Operating profit s increase over the years but if we see the table below M & S, they reduced the operating cost, but the revenue increased constantly as well.
Chart : Tesco & M and S Revenue Comparison The Comparison of Tesco and Marks & Spencer tells us that Tesco is a much bigger company and has a much higher turnover. But through its policies we see that the level of Operating profit of Tesco is higher because of its strong Optimization policies and procedures.
Ratio’s comparison between M& S and Tesco: Tesco’s and M & S ratio analysis: Ratio Analysis helps us to inform the entire story of changes and current performance of the company. = 12. 93% 2012 = 3985/ (13731+17801) *100 = 12. 64 % The return on capital employed is an important measure of a company’s profitability.
If ROCE is higher than it the company is sound healthy. If we see the chart we can M is in stronger condition. 2011= 9740. 30/ (2677. 40+2456. 50) =2. 46 2012= 9934. 30/ (2778. 80+2489. 10) = 2. 49 = 0. 43 2012 = (1460. 10-681. 90) /2005. 40 0. 38
Earnings per share: Earnings o holders / No of o shares in issue 2010 = 29. 33p 2011 = 34. 43p 2012 = 36. 75p M & S 2010 = 33. 50 p 2011 = 38. 80 p 2012 = 32. 50 p The increase in earnings per which is attractive point for investors. Tesco Earning per share increased on 2012 while M Earning per share decreased. 2012 = 2489. 10/2778. 80 = 0. 89% Tesco debt/equity ratio was higher to 1. 04 %, which reduced the following years in 2011 and 2012 respectively 0. 77% and 0. 77%. While M & S was 1. 40 % on 2010 & it’s got bit better on following years.
IV-Critical Analysis of the non- financial factors and risks for Tesco PLC In today’s worldwide competitive environment organisations have to compete with others regarding a wide range of fields like product quality, delivery, reliability, after-sales services, brand, customer care and feedbacks… (Chairman, FTSE 100 Company, 2003) The financial ratio analysis done above, is very useful as it summarises all the necessary information in order to understand the health of a company, covering profit, liquidity, growth and risk of a company.
But it is also essential to look at the non financial factors that can have a huge impact on a company’s future potential.
Taking into consideration the ratio analysis applied to Tesco’s between 2010 and 2012 what can be noticed is that the company had some variation. According to level of risk, Tesco’s is less risky than M&S in terms of investment considering that in 2010, 2011 and 2012 had as gearing ratios: 1. 04 %, 0. 77% and 0. 77% respectively and M & S for the same period 1. 40 %, 0. 92% and 0. 89%. As much higher is the gearing ratio more vulnerable is the company to downturns.
With an improvement of its shares value by having an increase in the dividends per share and share price, Investors will be attracted by this but this will not stay for long. Moreover considering how much cash flow is available for each pound invested, which is demonstrated by the dividend yield, Tesco’s in 2010 had a variation from 3. 15% to 4. 59% in 2012 which is positive for the business. On the other hand, Tesco’s reacted negatively into the full analysis of profitability, efficiency and effectiveness, liquidity and investor ratios.
As an example, the investment per share had a decrease of 5. 38 from 2010 to 2012 and also receivable days had a considerable increase which is a negative impact. Despite of having lower prices than M&S with strong position in UK and also in other continents, Tesco’s might be a good investment in the future, depends on its performance and long-term investment for the follow years. However currently it is not an investment to be considered.
- London Stock Exchange (2012). Tesco PLC ORD SP. London
- Stock Exchange (2012). Marks and Spencer Group PLC ORD 25P. Available at:http://www. londonstockexchange. com/exchange/prices/stocks/summary/fundamentals.
- html? fourWayKey=GB0031274896GBGBXSET1 Mark and Spencer (2010)-Annual Report and Financial Statements. Available at http://corporate. marksandspencer. com/documents/publications/2010/annual_report_2010
- http://corporate. marksandspencer. com/documents/publications/2011/annual_report_2011
- http://corporate. marksandspencer. com/documents/publications/2012/annual_report_2012 (Yahoo Finance, 2012)
- http://www. bizmove. com/finance/m3b3. htm