Financial Analysis of Tesco Plc and Valuation Methods

Finance
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
Financial Analysis..................................................................................................................3
Company valuation:................................................................................................................6
Capital structure....................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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Introduction
Finance is a broad term used for management of money and investment activities related
to money. It represents process of raising funds for the business operations and their
management (Choi and et.al., 2018). It deals with activities associated with leveraging, debt-
equity, capital market, etc.
Tesco Plc is a British company founded in 1919. It operates as a groceries and general
merchandise retail chain. The stores also provide software and financial services. It offers both
online and offline channels of distribution. The following report contains three major parts. First
part contains assessment of financial and operating performance of Tesco Plc and its two
competitors Morrisons Supermarket Plc and J Sainsbury Plc using comparative ratio analysis.
Second part contains valuation of Tesco through different approaches. Final part consists of
practical questions related to capital structure of Absolute Plc. In it, cost of debt, cost of equity
and weighted average cost of capital is determined.
Task 1
Financial Analysis
Financial analysis refers to the process of using financial information of a company to
assess profitability of businesses, projects or budgets of company. Necessary recommendations
for improvement are made on its basis. Various techniques are used for financial analysis such as
ratio analysis, trend analysis, cash flow and fund flow analysis, etc.
Ratio Analysis - Ratio analysis is a technique of financial analysis which helps
management in gaining insights into company's profitability, liquidity, solvency and efficiency.
It helps management of company in analysing the financial performance and health of company
in comparison to its own historical records as well as competitor's performance (Luo and et.al.,
2016). Financial ratios are grouped in certain categories. Below is the comparative ratio analysis
of Tesco Plc and its two competitors – Morrisons Supermarket Plc and J Sainsbury Plc in above
mentioned categories: Figures are taken from Annual-report of the three companies for period
ending Feb-Mar 2019. Liquidity Ratios – Liquidity refers to a company's capability of converting their assets
into cash. These ratios are fundamental ratios to assess the company's ability to meet its
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short term debt liabilities as and when they become due. Some liquidity ratios are current
ratio, quick ratio, acid-test ratio, etc. Current ratio of companies is determined below:
Current Ratio – It helps managers assess ability of current assets of company to finance
their current liabilities. Ideal ratio is maintained at 2:1 i.e. current assets shall be twice of
current liabilities. Sainsburry has the best current ratio out of the three companies.
(Year: 2019)
(Amount in GBP
million)
Companies
Tesco Plc Morrisons
Supermarket Plc
J Sainsbury Plc
Current-assets 12570 1343 7581
Current-liabilities 20680 3295 11417
Current Ratio 0.61 0.41 0.66
 Solvency Ratios – Solvency ratios are also called financial leverage ratios and assess a
company's financial viability in the long term (Hatefi, 2019). These ratios compare debt
levels of company with its equity, assets and annual earnings to evaluate long term
sustainability of the business. Examples of solvency ratios include: debt-equity ratio,
debt-assets ratio, interest coverage ratio, etc. Debt-equity ratios of companies is
determined below:
Debt-equity ratio- This ratio compares company's total debt to its total equity. It reflects t
he ability of equity shareholding of covering all outstanding debts. A high debt/equity r
atio is associated with high risk. As per the below we can conclude that Tesco Plc has
most debt liabilities over its shareholders equity.
Debt-equity ratio = Total Liabilities/Total Shareholders' Equity
(Year: 2019)
(Amount in GBP million)
Companies
Tesco Plc Morrisons
Supermarket Plc
J Sainsbury Plc
Total Liabilities 34213 5285 15085
Total Shareholders' Equity 14834 4631 8456
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