Financial Analysis of Tesco PLC

This assignment delves into a financial analysis of Tesco PLC using various financial ratios. It evaluates Tesco's solvency by calculating the gearing ratio, assesses its profitability through operating and gross profit margins, and explores the company's ability to meet short-term obligations. The analysis aims to provide insights into Tesco's financial performance and risk profile.

FINANCIAL AND
ECONOMIC LITERACY
FOR MANAGERS

Table of Contents
Managers make decision about firm’s finances...........................................................................1
Ratio analysis...............................................................................................................................2
REFERENCES................................................................................................................................7

Managers make decision about firm’s finances
In the modern era managers have to take financial decisions linked with firm in effective
manner. Further, it is required by them to undertake large number of variables so that financial
performance of the enterprise can be well maintained with the help of this. Finance is regarded as
the life blood of the business and plays most crucial role in the organization (Jappell & Padula
2013). Without appropriate finance no business can survive in the market and its inadequacy has
adverse impact on the overall operations of the company. Proper planning in relation with the
financial resources leads to effective utilization of resources and in turn acts as development tool
for the business.
In the present scenario, financial planning has become one of the most crucial aspects for
businesses. Nowadays, manager of companies emphasizes on analyzing financial statements and
carrying out financial planning to ensure long-term growth and sustainability of organizations.
It can be expressed that managers are able to carry out an effective forecast of cash flows
through the development of financial plans (Gray 2014). The planning also plays a vital role in
managing the day to day operational cost of a business enterprise. On the other side of this, it can
be stated that financial planning and analysis of financial statement is important because it helps
managers to identify the key and potential sources from where finances for a company can be
raised. It also supports in ensuring that adequate money will be there to satisfy the future
financial needs of an organization. In the modern era, financial planning and evaluation of a
company’s financial statements are also carried out by managers with an objective to carry out
the best and most effective utilization of all available financial resources.
The decision-making becomes more calculative and well informed when managers
conduct financial planning at regular intervals. On the other side of this, it can be asserted that
such type of planning and evaluation of a company’s financial statement is crucial in terms of
identifying the overall cost of operations (Fleischmann, Meyr & Wagner 2015). It assists
managers to calculate and analyze major cost including cost of production, material, factory
overhead, cost of sales, administration etc. On the basis of information collected, managers can
develop appropriate strategies for controlling the operational cost and enhancing the profit
margins. Another significance of financial planning is that it assists managers to measure the
return on investment or a particular project. Thus, a sound decision can be taken by managers in
terms of whether a company should invest finances in a particular project or not.
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Financial statements are undertaken which takes into consideration balance sheet, income
statement, cash flow statement, etc (Lusardi & Mitchell 2014). By analyzing all these statements,
it is possible for the manager to know an overall position of the company in the market. Income
statement helps in identifying all the sources of revenues and expenses. Further, in case if all the
major expenditures of the enterprise are high then the manager can quickly take corrective action
so that income level can be enhanced and this, in turn, can prove to be beneficial for the
enterprise in every possible manner.
Capital budgeting is also one of the most significant aspects which are also undertaken by
managers working in the organization (Fernandes, Lynch Jr & Netemeyer 2014). This concept is
associated with taking investment decision where the manager has to make a decision in which
project to allocate funds to obtain the higher return. Different capital investment techniques are
present which takes into consideration net present value, internal rate of return, the average rate
of return, payback period, etc. All these methods undertake the investment amount for instance
with the help of payback period method it is possible for a manager to know how much time the
invested amount can be recovered. So, this directly provides the base to the manager in utilizing
the financial resources, and in turn, all the financial decisions can be taken quickly for the overall
benefit of the business.
Apart from this concept of financial control is also undertaken which is all about taking
corrective actions well in advance to avoid wastage of financial resource (Adewuyi 2016).
Through this managers search for the areas where they can have control over the financial
resource and in turn it directly allows in an accomplishment of the desired objectives of the
enterprise. Therefore, in this way managers take the financial decision after considering the
various critical aspects of the finance which involves financial planning and control, capital
budgeting, analyzing the financial statements. In short, taking financial decisions are linked with
the success of the business, and its long-term performance is associated with the same in the
market.
Ratio analysis
Liquidity ratio
Current ratio = current assets / current liabilities
= 13085 / 20206 = 0.64
Interpretation
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Liquidity ratio supports in knowing about the cash position of the business. Further, higher ratio
allows a company in knowing that adequate amount of cash is available that can be utilized in
various areas. Tesco liquidity ratio is 0.64 which is indicating that company will face issues to
pay back its current liabilities. The company does not have enough cash to carry out its overall
operations, and this can surely act as the disadvantage for the enterprise. Liquidity ratio of 1 is
acceptable for the company and in case if this ratio is less than one then it directly indicates that
adequate amount of funds are not present in the business for conducting overall operations
smoothly and it directly acts as the hurdle.
Market value ratio
Price/ Earnings ratio
Market price per share / Earnings per share
= 364.85/ 12.07p
= 30.22
PE ratio is considered to be most effective especially at the time of stock selection. Further, it is
calculated by dividing current market price of the stock with the earnings per share. Higher PE
ratio supports in knowing that investors are expecting higher return in the near future as
compared with the lower PE ratio. In short, this ratio supports in knowing the overall efficiency
of the business in meeting expectations of the shareholders which is necessary for the enterprise.
Generally to operate efficiently in the market it is required for business to satisfy need of its
investors as long term performance of the enterprise in linked with the same.
Considering the case of Tesco its PE ratio is 30.22 and it is indicating that business is capable
enough in delivering high return to its investors. Investors prefer to invest in the stock of the
business and this is surely beneficial for the enterprise in every possible manner. Apart from this,
investment decisions are favorable for the business and with the higher profits and returns Tesco
can easily attract large number of investors.
Asset management ratio
Average inventory turnover period = Average inventories held / Cost of sales * 365
Average inventory = opening + closing /2 = 2957 + 3576 / 2 = 3266.6
3266.5 / 59547 * 100 = 5.48 times
Interpretation
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Inventory turnover ratio represents the efficiency of the business and is calculated by comparing
the cost of goods sold with the average inventory. It represents the inventory available with the
company is adequately utilized and in turn indicates the business efficiency (Peavler 2017). High
inventory ratio is considered to be beneficial for the firm as it represents that more sales are
generated in a certain amount of stocks. It is the ultimate objective of every business to utilize its
inventory efficiently, and this is possible through efficient management of resources present with
the enterprise. This ratio is considered to be most significant as it relies on two components of
performance. First one is stock purchase and the second one is sales. Considering the case of
Tesco its average inventory turnover period is 5.48 times which is quite high. It represents that
business is efficiently utilizing its inventory and no such overspending is present. Wastage of
resources is very less, and Tesco is effectively selling the inventory that it has purchased. So, in
this way, this ratio has supported in knowing the overall efficiency of Tesco in conducting its
overall operations in the market.
Debt management ratio
Interest coverage ratio = operating profit / interest payable
2631 / 68 = 38.69 times
Interpretation
Interest coverage ratio supports in knowing how quickly the firm can pay its interest expenses on
the outstanding debt. Interest coverage ratio below 1 represents that business is not able to
generate adequate funds to meet its interest expenses. Lower the ratio the firm is more burdened
by the debt expense. It directly leads to difficulty in meeting the interest expenses, and this has
an adverse impact on the entire business in every possible manner. Considering the interest
coverage ratio of Tesco plc it has been found that ratio of 38.69 is beneficial for the firm. It is
indicating the efficiency of the business where Tesco can easily pay its interest expenses on the
outstanding debt. The company will not face any difficulty, and no such burden is present on the
firm. On the continuous basis, Tesco must try to maintain this ratio so that its long-term
performance can be well maintained with the help of this. Moreover, on long-term basis interest
expenses can be easily paid by the enterprise. In short higher the ratio the better it is for the
business. Overall operating profit of Tesco is capable enough in covering the interest expenses of
the enterprise, and this is beneficial for the firm.
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Gearing ratio = long term liabilities (non current ) / share capital + Reserves + Long term
liabilities * 100
14043 / 405 + 498 + 14043 * 100
14043 / 14946 * 100
93.95%
Interpretation
Gearing ratio supports in comparing some form of owner’s equity to funds borrowed by the firm.
Further, it helps in measuring the financial leverage of the business and the range of activities
that are supported by the owner’s funds versus creditor’s capital. High gearing ratio indicates a
high degree of leverage and is more prone to risk in the business cycle. Gearing ratio of more
than 50 percent is considered to be high. In short, it allows business in knowing its financial
fitness, and by same, it is possible to take corrective actions so that company can operate
efficiently. Firms that have high gearing ratio possess increased risk as even a brief period of
reduced profits can have the unfavorable impact on the enterprise in the form of loan default and
bankruptcy. Considering the case of Tesco its gearing ratio is 93.95%, and this is deemed to be
risky for the business as the chances of bankruptcy are high. It is representing the high
proportion of debt to equity which is required to be managed by enterprise properly. The
company has borrowed the high amount which is considered to be the risk, and it is required for
Tesco to handle this situation.
Profitability ratio
Operating profit margin = Operating profit / Sales revenue * 100
2631 / 63557 *100 = 4.13%
Interpretation
Operating profit margin supports in knowing about the proportion of company’s revenue that is
left with the business after paying all the expenses (Peavler 2017). Tesco’s operating profit
margin ratio of 4.13% is high, and this is indicating that company can satisfy its creditors and is
generating value for its shareholders. Business is less financially risky, and this reflects the
efficiency of Tesco. Gross profit margin = Gross profit / sales revenue * 100
4010 / 63557 * 100 = 6.30%
Interpretation
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Gross profit margin helps in knowing the financial health of the business. Tesco’s gross profit
ratio is 6.30%, and this is indicating that company can meet its operating expenses properly.
Therefore, shortly also it is required for the business to maintain this ratio so that all the major
expenses can be recovered and this can surely build the internal strength of the enterprise in
every possible manner.
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REFERENCES
Books and Journals
Adewuyi, AW 2016, 'Ratio Analysis of Tesco Plc Financial Performance between 2010 and
2014 in Comparison to Both Sainsbury and Morrisons. ', Open Journal of Accounting, vol 5, no.
3, p. 45.
Fernandes, D, Lynch Jr, JG & Netemeyer, RG 2014, 'Financial literacy, financial education, and
downstream financial behaviors', Management Science, vol 60, no. 8, pp. 1861-1883.
Fleischmann, B, Meyr, H & Wagner, M 2015, Advanced planning. In Supply chain management
and advanced planning, Springer Berlin Heidelberg., Berlin.
Gray, SJ 2014, International accounting and transnational decisions, Butterworth-Heinemann,
United Kingdom.
Jappell, T & Padula, M 2013, 'Investment in financial literacy and saving decisions', Journal of
Banking & Finance, vol 37, no. 8, pp. 2779-2792.
Lusardi, A & Mitchell, OS 2014, 'The economic importance of financial literacy: Theory and
evidence', Journal of Economic Literature, vol 52, no. 1, pp. 5-44.
Peavler, R 2017, Use Asset Management Ratios in Financial Ratio Analysis, viewed 22 August
2017, <https://www.thebalance.com/use-asset-management-ratios-in-financial-ratio-analysis-
393187>.
Peavler, R 2017, What Is a Profitability Ratio Analysis?, viewed 22 August 2017,
<https://www.thebalance.com/profitability-ratio-analysis-393185>.
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