Financial report of Tesco Plc
This is the CW1 of Financial report of Tesco Plc, which I have to fix in order to re-sit this Coursework. Please study my whole work.
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1.Executive summary – 150 words Please read all the work to write it
2. Introduction – 150 wordsPlease read all the work to write it
3. Comparison with industry average figures -200 words (Please see my friend version to fix this)
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Table of Contents
1.COMPARISON OF LATEST YEAR RESULTS WITH PREVIOUS YEAR RESULTS 5
2.TESCO PLC RATIO ANALYSIS OF BOTH LATEST AND PREVIOUS YEARS 6
A. LIQUIDITY 7
QUICK RATIO 7
B. SOLVENCY 7
C. WORKING CAPITAL MANAGEMENT 8
D. PROFITABILITY 8
E. ASSET EFFICIENCY 9
3.0 COMPARISON WITH INDUSTRY AVERAGE FIGURES (PLEASE SEE MY FRIEND VERSION TO FIX THIS) 9
4.0 MEASUREMENT AGAINST THE ORGANISATION’S KPIS 10
5.0 EVALUATION OF THE USES OF KPIS IN ASSESSING ORGANIZATION PERFORMANCE 10
6.0 DISCUSSION AND EXPLANATION OF YOUR RESULTS 11
7.0 ADVANTAGES AND LIMITATIONS OF THE ANALYSIS TECHNIQUES 12
REFERENCE PLEASE MAKE IT IN HARDVARD STYLE 13
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1.Comparison of latest year results with previous year results
The comparison of key financial results of Tesco Plc of current financial year i.e. 2013 and previous financial year i.e. 2012 have been analysed in below table. The quantitative comparative analysis has been done by calculating the change in values and percentage change of key financial results such as revenue, net profit, assets, liabilities, equity etc.
KPIs 2013 2012 Change
Total current assets 12,465 12,353 112 1%
Total non current asset 12,465 12,353 112 1%
Total assets 50,129 50,781 -652 -1%
Total current liabilities 18,985 19,249 -264 -1%
Total non current liabilities 33,486 33,006 480 1%
Total liabilities 33,486 33,006 480 1%
Total equity 16,643 17,775 -1,132 -6%
Total revenue 64,826 63,916 910 1%
Total operating expense 62,638 59,734 2,904 5%
Operating income 2,188 4,182 -1,994 -48%
Net income before taxes 1,960 4,038 -2,078 -51%
Net income after taxes 1,386 3,164 -1,778 -56%
Net income 124 2,806 -2,682 -96%
Earning per share 0.17 0.39 0 -56%
Dividend per sahre 0.15 0.15 0 0%
Source: Tesco PLC Annual Report and Financial Statement 2013
The above comparative analysis of key financial results of latest year and previous year indicates that current assets increased by 1% and current liability decreased 1%. Therefore, working capital has increased by 2% which the slight growth of liquidity position of the company. Total long term liabilities of the company is close to double of the total current liabilities and this increased by 1% which leads to overall increase of total liability by 1%. On the other hand, equity position of the company has decreased by 6%. Revenue has increased 1% whereas operating expenses has increased by 5% which leads to major decrease in operating income by 48%. This fact indicates inefficiency of management regarding cost effective business operation directly reflects on net profit, which has decreased dramatically by 96% from the previous year. From the decrease of net profit, earning per share also has decreased by 56%. In-spite of major decline in profitability, the company retains the same dividend per share to the shareholders and this indicates strong focus of the management towards the equity of the company (Rosenbaum andPearl, 2009, p.76).
2.Tesco Plc Ratio Analysis of both latest and previous years
Liquidity Current Ratio 0.66 0.64
Quick ratio 0.46 0.45
Solvency Assets to Debt ratio 1.50 1.54
Debt Equity ratio 2.01 1.86
Working capital management Working Capital turnover -9.94 -9.27
Inventory Turnover ratio 16.22 16.26
Profitability Gross Profit ratio 6.3% 8.4%
ROE 0.7% 15.8%
Asset efficiency Assets turnover ratio 129.3% 125.9%
ROA 0.2% 5.5%
Source: Tesco PLC Annual Report and Financial Statement 2013
Current ratio refers to the ability of the company under consideration to deliver the liabilities in the short term. The company uses the short term assets like inventory, liquid cash and receivables to pay off the liabilities. It is the ratio between the current assets and current liabilities (Berk,Stanton, and Zechner, 2010, p.36). If the value of current ratio is high then it suggests that the company has the ability to pay off high obligations.
The usage of the quick ratio lies in analysing the short term liquidity of the company in the short term. The function of the quick ratio is to assess the ability of the company in meeting the short term obligations by utilizing the liquid assets. Inventories are not taken into account in calculation of the ratio. It is the ratio of sum of cash and equivalents, accounts receivable, marketable securities and current liabilities (Stoughton, Wu and Zechner, 2011, p.57). A high value of quick ratio suggests better liquidity position of the company.
Assets to debt ratio: This ratio indicates the amount of debt the company accrued compared to assets. The function of the assets to debt ratio also lies in analysing whether the company will be able to pay off the debts in times of emergency with the help of its assets. The debt ratio signifies the proportion of the assets of the company that are financed by debt (Tesco PLC, 2012). If the value of the ratio is greater than 1 then it implies that the company is holding more debts compared to assets. The ratio of total debts to total assets gives assets to debt ratio (Financial Times, 2013).
Debt-Equity ratio: The financial leverage of the company is determined by the debt equity ratio. The function of the debt equity ratio lies in indicating the proportion of debt and equity the company under consideration makes use of to finance the assets. The ratio of total liabilities and stockholders equity is regarded as the debt equity ratio (Bloomberg Magazine, 2013, p. 21). A high value of the ratio signifies the initiation of the company to finance growth by debt. The equality between equity and debt is ideal for the company (Weston, 1990, p. 153).
C.Working Capital Management
Working capital turnover: The usage of this ratio lies in comparison between decreases in working capital to the generation of revenue over a given period of time. It implies the effectiveness of the company to generate revenue with the use of working capital (Williams, Susan, Bettner and Carcello, 2008, p. 52).
Inventory turnover ratio: This ratio is calculated as the ratio of cost of goods sold and average inventory while the function of the ratio is to indicate the number of times the inventory cycle is getting repeated over time.
Gross Profit ratio: A high value of gross profit margin indicates a company has been able to retain more on each unit sold. It is calculated as the ratio between the difference of revenue and cost of goods sold and revenue.
Return on equity: this ratio is expressed as a percentage and calculated as the ratio of net income and shareholder’s equity. It is the measure of profitability. A high value indicates better use of investments to generate profits (Bragg, 2012, p. 26).
E. Asset Efficiency
Total Asset turnover ratio: this ratio is calculated as the ratio of revenue to assets and indicates the sales generated with respect to one unit of assets. The major purpose is to show the growth of the company in proportion to sales (Yahoo Finance, 2013).
Return on Assets: It signifies the profitability of the assets of the company in generating the revenues. It is calculated by dividing the net income by total assets.
3.0 Comparison with industry average figures(Please see my friend version to fix this)
2013 2012 Industry
Liquidity Current Ratio 0.66 0.64 1.4
Quick ratio 0.46 0.45 0.9
Solvency Assets to Debt ratio 1.50 1.54 1.5
Debt Equity ratio 2.01 1.86 2.1
Working capital management Working Capital turnover -9.94 -9.27 -2.5
Inventory Turnover ratio 16.22 16.26 14.7
Profitability Gross Profit ratio 6.3% 8.4% 26.1
ROE 0.7% 15.8% 7.5
Asset efficiency Assets turnover ratio 129.3% 125.9% 135%
ROA 0.2% 5.5% 6.60%
From the above comparative analysis of company’s ratios with the industry averages ratios, the company’s financial position can be evaluated. Liquidity of the company is much lower than industry liquidity position. Solvency of the company is quite similar to industry average. Working capital position is quite weaker than industry average. Profitability of the company is much lower than industry average. Asset efficiency of the company is quite similar to industry average.
4.0 Measurement against the organisation’s KPIs
Growth rate in profit before tax is -14.5% which indicates poor profitability of the company in the current last financial year. Similarly earning per share has decreased 14% in the current year. Another important KPI is return on capital employed, which is 12.7% for the current year. Shareholder’s return is 2.5%, capital expenditure is 4.1% and gearing is 39.6% for the financial year 2012-2013. By comparing the figures of KPIs with the measurement of ratios and other key financial results discussed above, it can be stated that KPIs are perfectly reflects the financial position of the company evaluated by previous ratio analysis (Tesco PLC, 2013, p.16).
5.0 Evaluation of the uses of KPIs in assessing organization performance
KPIs are presented in company’s annual report to highlight the key statistics of overall financial performance of the company in a particular financial year as well as comparison of that with the previous year. Uses of KPIs in annual report are very important as these indicators make the shareholders easily understand the financial performance and growth of the company at a glance. These help the investors to take basic and quick decision of investment without knowing or without doing the detailed financial analysis (Christopher and Zechner, 2011, p.31). Therefore, KPIs have high importance in assessing organization performance to the readers who have less knowledge and time to analysis company’s financial statements.
6.0 Discussion and explanation of your results
It can be seen that the current ratio of Tesco has increased by 0.02 compared to last year which shows improvement in ability to pay off debts. On the other hand the quick ratio has risen by 0.01 but the company lacks the ability to pay off debts without selling inventories (Tracy, 2004. P. 242). The debt ratio has fallen from 5.12 to 4.98 and it indicates that Tesco is reducing the financial risk of solvency. It also indicates that Tesco has higher debt than assets (Money Control, 2013). The debt ratio is at stable position which indicates that the company is becoming debt free and the probability of earnings being volatile (Tesco PLC, 2012). The analysis of the working capital turnover signifies that Tesco is not much effective in generating revenue from the inventory. It is considerably weak and negative. There is fall in working capital turnover from -9 to -9.94 in 2013 from 2012. There has been a fall in stock turnover by 0.04 from 2013 which indicates that Tesco has strong sales and repeating inventory cycle. It also indicates that the rate of return is higher as compared with the investment level. There has been a decrease in gross profit margin in 2013 by 0.02. It shows that Tesco experienced a balanced change in income and spending which contributed in the fall of gross profit margin (Business week, 2012). The return on equity fallen in 2013 from 2012 which indicates the improvement in the capability of Tesco to channelize the investments into profits (Gallagher, 2003, p. 90). The assets turnover ratio implies that Tesco has taken the stable path in generating sales by making proper utilization of the assets available. The return on assets in consistent over the years and the fall in the value signifies the inefficiency of Tesco to make proper utilization of investments (Bloomberg, 2012).
7.0 Advantages and limitations of the analysis techniques
Ratio analysis simplifies the financial statements. Ratio analysis helps in comparing the financial statements between different companies and also contributes in analysing the trend analysis over a period of time. It also contributes in making the information simpler for the analysts. The companies operate under different environmental conditions and have to deal with different regulations and therefore comparison between different companies may be misleading. The estimates may get affected by forecasts and estimates (Flynn, Uliana, and Wormald, 2012, p. 29). The standards of accounting account for comparability and hence ratio analysis may not be much useful in such cases. It explains the relation between past and present on the other hand the analysts are more interested in comparing present and the future.
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