Finance Statement of Tesco Assignment

FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
2.1 Financial analysis:.................................................................................................................3
2.2 Valuation of company:........................................................................................................14
2.3 Capital structure..................................................................................................................19
CONCLUSION .............................................................................................................................22
REFERENCES..............................................................................................................................23

INTRODUCTION
The finance is a basic element for a business because it fulfil the need of fund to operate
all type of activities which are being performed in an organisation (Morris, 2012). In the absence
of sufficient finance, it can be difficult for businesses to sustain in competitive environment. For
effective management of finance, companies prepare various kind of financial statements such as
income statement, balance sheet, cash flow, ratios calculation etc. The companies assess the
performance of various activities as per analysis of these financial statements. Herein, the project
report Tesco company's financial performance is analysed and compared with competitor so that
issue of their shareholders regarding to pension fund can be resolved. Further, in report valuation
of Tesco is done in terms of asset based valuation, dividend valuation model. Additionally, some
calculation is done such as cost of debt, equity, weighted average cost of capital on the basis of
given information.
2.1 Financial analysis:
(a) Financial analysis-
To analysis of financial position of above Tesco company, various types of financial
statements such as income statements, balance sheet, cash flows and ratios are interpreted.
Herein, below Income statement of Tesco company is analysed that is as follows:

Income statement for year ending 2018 of Tesco Plc
Analysis- On the basis of above income statement of Tesco plc, it can be analysed that
company's overall financial performance is in good condition. It is so because their gross profit is
of £4144 GBP million and in compare their operating expenditures are of £2068 GBP million
which are not in huge amount (About financial statement of Tesco, 2019). As well as their net
income from continuing operations is of £1320 GBP million and to share dividend with
shareholders, they have net profit of £1322 GBP million. It shows that their financial condition is
well enough to pay the pension to their shareholders.
Comparison of income statement of Morrison's with the Tesco Plc:
Income statement for year ending 2018 of Morrison's plc

Differentiation:
Particular Tesco
(Amount in £ GBP
million )
Morrisons(Amount
in £ GBP million )
Difference
(Amount in
£ GBP
million )
Net income 1320 311 1009
Net income available for
shareholders
1322 311 1011
EBITDA 3343 862 2481
Analysis- On the basis of above comparison of both companies' income statement, this can be
analysed that Tesco seems to be more comparable and strong in compare to Morrisons. It is so

because net income of Tesco plc is of £1320 GBP million while Morrison's income is of £311
GBP million. Along with comparison between both companies' net income is of £1009 GBP
million. As well as availability of net income for shareholders is also different of both
companies. Like £1322 GBP million (Tesco) and £311 GBP million (Morrisons). Hence, as per
the above comparative analysis of both companies, this can be said that Tesco company is
capable for making payment to their shareholders.
Balance sheet of Tesco company for year 2018:

Analysis- On the basis of balance sheet of above companies, this can be analysed that company's
total current assets are of £12668 GBP million that are less then to current liabilities which are of
£9402 GBP million. It indicates that company's liquidity position is good due to availability of
current assets to pay the short term debts. While company's non current-assets are of £36379
GBP million and non current liabilities are of £13509 GBP million. It shows that company has
enough long term assets to pay their long term debts. In addition, total shareholder's equity is of
£14858 GBP million. So overall company's financial position is good enough to pay their
shareholders because there is difference in total non current assets and liabilities.
Comparison of balance sheet of Morrison's with the Tesco Plc:

Differentiation:
Particular Tesco
(Amount in £ GBP
million )
Morrisons(Amount
in £ GBP million )
Variation
(Amount in
£ GBP
million )
Current assets 12668 1382 11286

Current liabilities 9402 3295 6107
Non current assets 36379 8534 27845
Non current liabilities 13509 1990 11519
Total assets 49047 9916 39131
Total liabilities 34189 5285 28904
Analysis- On the basis of above company's comparison as per the balance sheet, it can be
analysed that there is huge difference in assets and liabilities. Like Tesco' s current-assets are of
£ 12668 GBP million but in compare Morrison's is of £ 1382 GBP million (About financial
statement of Morrisons, 2019). Apart from it, total assets of Tesco company is 80% more in
compare to Morrison's. Additionally, difference in total non current-assets is of £27845 GBP
million. Hence, it can be valued that Tesco company's financial position is better then to
Morrisons in the aspect of paying pension to shareholders.
Cash flow of Tesco plc for year ending 2018:

Analysis- On the basis of above cash flow of Tesco company, this can be analysed that there is
inflow of cash from operating activities of £1966 GBP million. While from, financing activities
there is outflow of cash of £1981 GBP million. Same as from investing activities, cash out flow
of £1143 GBP million. It shows that company's liquidity position is not so good because there
are more activities by which cash is outing.
Comparison of cash flow of Tesco and Morrison's plc:

Differentiation
Particulars Tesco
(Amount in £ GBP million )
Morrisons(Amount in £
GBP million )
Cash flow (operating activities) 1966 712
Cash flow (financing activities) -1981 -344
Cash flow (investing activities) -1143 -431
Analysis- On the basis of above comparison of both companies, this can be analysed that both
companies cash flow condition is almost similar. In both companies cash is outing as per the
financing and investing activities. The difference is only of amount which is more in Tesco

company due to their large amount of operations. So overall, this can be evaluated that Tesco
company's financial situation is better because free cash of this company is of £674 GBP million.
While Morrison's free cash flow is of £254 GBP million. Hence, Tesco company is capable to
pay pension to their shareholders as well as to overcome the conflict among shareholders.
Ratio analysis:
Gross profit ratio of Tesco and Morrison's company:
Particular 2018-19
Morrisons:
Gross profit
Sale
Gross Profit Ratio
607
17735
3.42%
TESCO:
Gross profit
Sale
Gross Profit ratio
4144
63911
6.48%
Analysis- On the basis of above ratio analysis of both companies, it can be assessed that Tesco
company's GP ratio is of 6.48% which is 3.06% more in compare of Morrison's plc. It indicates
that Tesco's profitability is in better condition and they are able to pay their shareholder' dividend
from the availability of total profit.
Net profit ratio of Tesco and Morrison's company:

Particular 2018-19
Morrisons:
Net profit
Sale
Net Profit Ratio
311
17335
1.79%
TESCO:
Net profit
Sale
Net Profit ratio
1320
63911
2.06%
Analysis- On the basis of above comparison of net profit ratio of both companies this can be
analysed that Tesco company's net profit ratio is much better as compare to Morrison's. It is so
because Tesco' net profit ratio is of 2.06% while Morrison's is of 1.79%. This indicates that they
are able to pay their shareholders pension from their total net profit ratio which is of £1320 GBP
million.
Return on equity ratio of Tesco and Morrison's company:
Particular 2018-19
Morrison's:
Return on equity ratio 5.32%
TESCO:
Return on equity ratio 10.43%
Analysis- On the basis of above companies' return on equity ratio, this can be analysed that if
investors will invest in Morrison's company then they will earn 5.32% on invested equity. While

in the aspect of Tesco company, their return on equity ratio is of 10.43% which means
shareholders will be in benefit if they will invest in Tesco company.
Return on capital ratio of Tesco and Morrison's company:
Particular 2018-19
Morrison's:
Return on capital ratio 4.74%
TESCO:
Return on capital ratio 7.45%
Analysis- The return on capital ratio indicates about expected amount of return on invested
amount of capital. Higher value of this ratio will be beneficial for both to the company and
shareholders. In the context of both companies, their ratios are different. Such as in the
Morrison's company, it is of 4.74% while in the Tesco company it is of 7.45%. It stats that Tesco
company is better position to pay their shareholders because of higher percentage for paying on
invested capital.
(b) Four possible limitation of financial analysis: There are various types of limitations in the
aspect of financial analysis and comparison on the basis of ratio. Some of them are mentioned
below such as:
 The financial ratios are not suitable to resolve any kind of financial issues just because of
variation in method of calculating ratios (Tatewaki, 2012).
 As well as in the ratio analysis, qualitative aspect of companies is completely ignored that
indicates that it is not suitable to complete analysis of firms.
 Additionally, the ratio analysis neglects the change level of price. It is so only because of
inflation.
 Lack of standard definition of ratio is also an another drawback of the ratio analysis.
So these are some basic limitation of ratio analysis.

2.2 Valuation of company:
On the basis of above financial statements of Tesco company, their valuation is
mentioned below that is as follows:
 Assets based valuation- It can be defined as a kind of valuation approach that is related to
the proper valuation of assets of an organisation on the basis of available net assets
(Mazanai and Fatoki, 2012). The term net assets is being calculated by subtracting
amount of total liabilities from total amount of assets. Most of the stakeholders use this
approach to valuation of company's financial position. Herein, below assets based
valuation of Tesco company is mentioned that is as follows:
Asset Based Valuation of Tesco Plc
2018-19
Amount in
Assets
GBP in Million except per
share data
Current assets
Cash
Cash and cash equivalents 2916
Short-term investments 457
Total cash 3373
Inventories 2617
Other current assets 6678
Total current assets 12668
Non-current assets
Property, plant and equipment
Fixtures and equipment 7063
Other properties 24949
Property and equipment, at cost 32012
Accumulated Depreciation -12989
Property, plant and equipment, net 19023
Goodwill 4909

Intangible assets 1355
Deferred income taxes 132
Other long-term assets 10960
Total non-current assets 36379
Total assets 49047
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 1563
Capital leases 36
Accounts payable 9354
Taxes payable 325
Other current liabilities 9402
Total current liabilities 20680
Non-current liabilities
Long-term debt 5580
Capital leases 93
Deferred taxes liabilities 236
Pensions and other benefits 2808
Minority interest -24
Other long-term liabilities 4816
Total non-current liabilities 13509
Total liabilities 34189
Net Assets of Company 14858
So Company's value as per assets based valuation is GPB
14858 millions
Cross Check:
Stockholders' equity
Common stock 490

Additional paid-in capital 5165
Retained earnings 5405
Accumulated other comprehensive income 3798
Total stockholders' equity 14858
 Dividend valuation model- This can be defined as a kind of model which is related to
forecasting the price of an organisation's stock on the basis of theory that stats about
capacity of stock to pay dividends (Jamaldeen, 2012).
 Price earning ratio- It can be defined as a kind of ratio which is related to valuing an
organisation that measures current share price related to its per share earnings (Garcia,
2013). This is also known by earning multiple. Along with, it is being applied by

investors to evaluate the value of an organisation's shares. To compute the price earning
ratio, there is a particular formula that is as follows: Market value per share/ earning per
share. Herein, below the price earning ratio of Tesco company is mentioned which is as
follows:
Hence,
Price earning ratio= Market value of share/ EPS
= 214.10/ 0.41
= 522.19

Value of business: As per the price earning ratio of above company, value of business is
calculated below-
= Price earning ratio * Net income
= 522.19* 1320
= £689290.8 GBP Million
(b) Discussion on above used valuation methodologies:
On the basis of above valuation methods that are used above, it can be said that in all
three methods of valuation company's value is different. Such as in the assets based valuation
model, company's value is of £14858 GBP million. As well as in the dividend valuation model,
organisation's value is of £635083.19 GBP million and from price earning ratio method, value is
of £689290.8 GBP Million. So in all three methods, company's value is different but from P/E
ratio model, it is higher of £689290.8 GBP Million. Hence, the expected amount that can be
worth for Tesco is of above £ 690000 GBP million.
2.3 Capital structure
(a) Cost of debt of the convertible bonds for Absolute plc:
Cost of debt- It can be defined as a kind of interest rate which is paid by an organisation in
relation to its obligations, loans, or any other debts ( Francke and Hudson, 2013). In general, this
is beneficial for assessing an entity's after tax cost of debt. Herein, below cost of debt of above
Absolute plc is calculated:

(b) Cost of equity- It can be defined as an amount of return which is being paid by an
organisation on the investment which is made by investors (Cumming, 2012). Basically, this
amount of return is being paid by companies to investors for the risk which they bear by
investing capital into company. It is calculated by a particular formula that is as follows: Divided
per share/ market value of ordinary shares + rate of growth. Below cost of equity of Absolute plc
is computed that is as follows:
(c) Weighted average cost of capital: It can be defined as a rate which an organisation expects to
pay to security holders for financing of assets (Hall, 2012). Below WACC is calculated which is
as follows:

(d) Issues during calculation of WACC:
 The main difficulty during calculation of WACC is dependency on capital structure of
organisations. It means if capital structure is complex then this can be difficult to
compute the WACC (Goetzmann, 2016).
 In this calculations are based on the required returns not as per the historical returns. So
the issue is that for equities only market value is taken by ignoring book value..
 Additionally, during calculation, the analyst requires to add leases in debt as well as rate
of borrowing in long term.
 Along with, the users can apply various kind of models which may lead to difference in
rate (Mazzucato and Penna, 2015).

CONCLUSION
On the basis of above project report, it has been concluded that financial analysis of a
company can be done with the help of evaluation of financial statements. In the project report,
Tesco company's financial statements with compare to Morrison's plc is concluded with an
objective to assess which company is better to pay their shareholders. Further, in report
company's valuation is done with the help of assets based valuation, price earning ratio and
dividend model. In the end part of report, cost of capital, debt, WACC is calculated as per the
given capital structure of an entity. Along with difficulties in the calculation of WACC is also
mentioned.