Performance, Liquidity and Financial Structure of Tesco Plc

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BA 4008 Business Decision Making
Coursework

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Task One
Part 1: Analysis and Evaluation of the Performance, Liquidity and Financial Structure of
Tesco over the Financial Period 2015-2018
Profitability Analysis
Tesco Plc has largely improved its profitability position as evident from increasing trend
of the ratios such as return on shareholder funds with increase in its statutory profit from 2015-
2018 enabling it to pay larger dividends for the shareholders (Tesco PLC: Understanding Tesco,
2018). There is also improvement in the returns realized from capital employed with high sales
growth realized in its core businesses over the financial period 2015-2018 (Tesco Plc: Annual
Report, 2018). The increase in return on total assets ratio over the selected financial period also
indicates that the company is able to derive increasing profits from the assets utilized and also
there has been increase in its gross profit margin over the years 2015-2018. Thus, it can be said
that the company in the financial year 2018 is able to recover from the losses suffered by it in the
financial year 2015 due to reported fraudulent accounting activities (BBC News, 2018). The
increase in the profits realized from per employee on unit basis also indicates that it is able to
realize increasing profits from its workforce.
Operational Analysis
The operational analysis of the company as depicted from the increasing trend of ratios of
interest coverage, stock turnover and creditors payment over the financial years 2015-2018 has
revealed that it is able to effectively meet its debt obligations, realize sales from its inventory and
is also paying its creditors in a regular manner which reveals that it is having a good operational
efficiency. Also, the decreasing trend of debtor collection also indicates that it is able to collect
its debt in a regular manner. The good operational efficiency of the company is also supported by
its increased retail operating cash flows during the financial years 2015-2018. The retail
operating cash has supported by the increase of £495m in the financial year 2018(Tesco Plc:
Annual Report, 2018).
Liquidity Analysis
The company has also reported improvement in its liquidity position from the financial
years 2015-2018 as analyzed with the trend of the ratios such as current and liquidity ratio. The
increase in the current and liquidity ratio depicts an increase in the current assets as compared to
current liabilities.
The company has also depicted a decrease in the capital expenditure in the financial year
2018 as compared to the previous year and thus it is able to deliver attractive returns as
illustrated from its annual report:

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(Source: Tesco Plc: Annual Report, 2018)
Part 2: Limitations in the use of accounting ratios
The evaluation of the financial performance of Tesco Plc from the use of technique of
ratio analysis also suffers from the limitation of using only historical information and therefore
not reliable to analyze its future performance. The financial statements information are also
subjected to fluctuations from the economic conditions such as inflation and this make the
technique less effective for comparative analysis (Bragg, 2010).
Part 3: Evaluation of Tesco Performance over the Financial Years 2015-2018
It can be said from the analysis of the company performance over the selected financial
period that the company is taking strong measures top recover itself from the losses suffered in
the financial year 2015 due to occurrence of fraudulent accounting scandal. The Serious Fraud
Office (SFO) has reported that it has done about £246m accounting scandal in the supermarket
chain. The accounting scandal has resulted in the occurrence of high losses as depicted from its
weak profitability, operational and liquidity performance in the financial year 2015. However, it
has taken strong measures to recover from these losses by increase in its sales in its group
performance. Its share prices have however declined by 9 per cent in the financial year 2018 due
to challenging external environment conditions such as inflation and aftermath of Brexit (Eley,
2018). Its share prices has however risen from the financial year 2016 to 2018 due to increase in
its operating profit as illustrated below:
(Source: https://www.ft.com/content/a0863b1c-c6d0-11e8-ba8f-ee390057b8c9)

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Task Two
Part a: Investment appraisal techniques
Given Data
Years Particulars Super Deluxe
Year 0 Initial Investment -£ 250,000.00 -£ 400,000.00
Year 1 Cash Inflow £ 125,000.00 £ 75,000.00
Year 2 Cash Inflow £ 50,000.00 £ 100,000.00
Year 3 Cash Inflow £ 50,000.00 £ 125,000.00
Year 4 Cash Inflow £ 25,000.00 £ 50,000.00
Year 5 Cash Inflow £ 75,000.00 £ 50,000.00
Year 6 Cash Inflow £ 50,000.00 £ 125,000.00
Year 6 Scrap value £ 10,000.00 £ 40,000.00
Cost of Capital 8%
(i): Payback Method
Payback Method
For Even cash
inflows
For Uneven Cash
Inflows
Initial Investment A+ B/C
Cash Inflow per
Period
Where:
A is the last period with a negative
cumulative cash flow;
B is the absolute value of cumulative cash
flow at the end of the period A;
C is the total cash flow during the period
after A
(Davies and Crawford, 2011)
Cumulative Cash Flows of Super Model
Years Super
Cumulative Cash
Flows
Year 0 -£ 250,000.00 -£ 250,000.00
Year 1 £ 125,000.00 -£ 125,000.00
Year 2 £ 50,000.00 -£ 75,000.00
Year 3 £ 50,000.00 -£ 25,000.00
Year 4 £ 25,000.00 £ -
Year 5 £ 75,000.00 £ 75,000.00