Financial Management: Performance Evaluation and Recommendations for Improving Profitability

This document provides an analysis of Tesco Plc's financial performance, including balance sheet analysis, income statement analysis, and cash flow analysis. It evaluates profitability, liquidity, efficiency, and market-based ratios. The document also offers recommendations for improving profitability, such as removing unprofitable products, attracting more customers, increasing conversion rates, reviewing pricing structure, reducing inventory, and minimizing direct costs.

Financial Management

Table of Contents
INTRODUCTION ..........................................................................................................................1
MAIN BODY...................................................................................................................................1
Performance evaluation...............................................................................................................5
Recommendations for improving profitability............................................................................8
Recommend one new investment project to the company........................................................10
Decide whether or not the company should pay return earnings or not....................................11
CONCLUSION..............................................................................................................................12
REFERENCES .............................................................................................................................13

INTRODUCTION
Financial management is indeed an necessary activity to control the financial capital for
every entity in modern dynamic environment (Antonopoulos and Hall, 2016). This is basically
related with financial plan for certain tasks, such as strategic forecasting, arranging, handling
and monitoring corporate assets. Financial management is exactly the job of financial executives
in order to accomplish the targets of companies in a specific period. Financial analysis is defined
as a means of analysing company numerical knowledge over a particular time period. In other
terms, this should be interpreted as a means of evaluating firms, programs and expenditures with
a view to determining the financial position of companies. In order to better understand the
crucial about FM Tesco Plc have been selected which is leading supermarket in present time.
In this report, performance evaluation by analysing the different performance measures,
recommendations for improving the profitability is discussed. In addition, recommendation for
one new investment project and discussion about company should pay return earnings or not is
also discussed.
MAIN BODY
Overview of company
Tesco is a very well-known supermarket that offers its non-food customers a range of
items, including food. It is among the UK's biggest supermarkets and one of globe's growing
grocery distributors. Jack Cohen began offering extra food in the Eastern suburbs area in
Brixton, London in 1919 this lead establishment to greatest London retail shop. The business
works continuously these comprise a wide variety of grocery and oil store stores via Tesco
Express fascia, the local highway outlets via Tesco Metro, super centres via Tesco Extra and
semi-food providers through Tesco Home plus (Banerjee, 2016). Tesco has consolidated to cover
book shopping, clothes, appliances, accessories, toys, energy, tech, financial services,
telecommunications and Internet. In recent trade of marketing Tesco established a new retail
store in 2018, Jack's, to deal with Lidl and Aldi. In April 2013, in its recording costs of £ 1.2
trillion Tesco announced that this was stepping back from the US sector. On 27 January 2017 the
firm revealed that Tesco had entered into an deal to combine with the largest retailer Company in
Britain, Booker, to form the World's largest grocery business. However this was obsessed with
controlling the British sector.
1

Analysis of balance sheet:
1

Analysis – On the basis of above presented balance sheet, this can be find out that company’s
performance is different in both of years. In the context of volume of total assets of company this
can be find out that they had of 44862 GBP million in year 2018 which raised in next year and
became of 49047 GBP million. This is showing that company made purchase of more assets in
year 2019. Herein, this is important to know that current assets of company have been decreased
in year 2019 in compare to year 2018. Such as in year 2018, their current assets were of 13726
GBP million which reduced and became of 12668 GBP million. It is indicating that company’s
liquidity position has been decreased in year 2019. In the context of total liabilities, this can be
assessed that in year 2018, their liabilities were of 34382 GBP million which reduced and
became of 34189 GBP million. It is showing that company managed their total debts and
liabilities in year 2019. That is why the amount of total liabilities decreased in this year. On the
other hand, in the aspect of current liabilities this can be stated that in year 2018, current
liabilities were of 19238 GBP million which increased and became of 20680 GBP million in next
year 2019. It is indicating that company’s efficiency of managing short term debts has been
decreased in an effective manner (Yulihantini and Wardayati, S2017).
In addition, the value of total stakeholder’s equity also increased in year 2019 as
compared to year 2018. Such as in year 2018, total stakeholder’s equities were of 10480 GBP
million which increased and became of 14858 GBP million in year 2019.
Analysis of income statement:
2

Analysis- On the basis of above income statement, this can be find out that net income of
company is different in both years. Such as in year 2018, net income was of 1206 GBP million
which raised and became of 1322 GBP million in year 2019. This is showing that company is
able to generate higher revenues in year 2019 as compared to year 2018. Same as the net profit,
company’s gross profits also raised in an effective manner in year 2019 instead of year 2018.
3

Analysis of cash flow:
4

Analysis- The cash flow of above company has been prepared by three different methods which
are operating, financing and investing activities. In the financing activity company is getting net
cash outflow that is of 3236 GBP million and 1981 GBP million for year 2018 and 2019. While
from operating activities, company is generating cash inflow in both of the years. In the end,
company has free cash flow of 1145 GBP million in year 2018 and 674 GBP million in year
2019.
Performance evaluation
Profitability ratio
Year 2018 Year 2019
Gross Profit 3350.00 4144.00
Revenues 57491.00 63911.00
Gross Profit Margin 5.83% 6.48%
Year 2018 Year 2019
Net Profits 13 -163
Revenues 57491 63911
Net Profit Margin 0.02% -0.26%
Analysis- On the basis of profitability ratio this can be find out that
their gross profit ratio of company was of 5.83% in year 2018 which
increased and became of 6.48% in year 2019. This is showing that
company is generating higher amount of profit in year 2019 as
compared to year 2018.
While in the context of net profit margin of company, it can be stated
that in year 2018, this was of 0.02% which reduced and became as
net loss margin of -0.26%. It shows that company has performed
poor in year 2019 and faced too much losses.
5

Liquidity ratios
Year 2018 Year 2019
Current Assets 13726 12668
Current Liabilities 19238 20680
Current Ratio 0.71 0.61
Year 2018 Year 2019
Quick assets 11463 10051
Current Liabilities 19238 20680
Quick ratio 0.60 0.49
Analysis- On the basis of above mentioned both liquidity
ratio of company, this can be find out that they are unable
to meet criteria of ideal ratio in both of years. In the
aspect of current ratio of company, this can be find out
that in year 2018, it was of 0.71 times which reduced and
became of 0.61 times.
As well as quick ratio also reduced in year 2019 as
compared to year 2018. In year 2018, this was of 0.60
times which decreased and became of 0.49 times.
It is indicating that company is unable to pay its short
term debts.
Efficiency ratios
Year 2018 Year 2019
Sales 19238 20680
Account receivables 1482 1640
6

Account receivables turnover ratio 12.98 12.61
Analysis- On the basis of this ratio, it can be stated that
company’s performance is almost similar in both of
years. Such as in year 2018, ratio was of 12.98 times
which reduced and became of 12.61 times. In
comparative manner, company’s performance was better
in year 2018.
Year 2018 Year 2019
Cost of goods sold 54141 59767
Inventories 2263 2617
Inventory turnover ratio 23.92 22.84
Analysis- Same as the above ratio, this is also similar in
both of years. Like in year 2018, this was of 23.92 times
that decreased and became of 22.84 times. It is indicating
that company was able to manage their inventories in
year 2018 as compared to year 2019.
Year 2018 Year 2019
Sales 54141 59767
Assets 44862 49047
Assets turnover ratio 1.21 1.22
Analysis- The assets turnover ratio is similar in both of
years. Such as in year 2018, it was of 1.21 times which
raised by a little margin and became of 1.22 times. It
7

shows that company is able to manage its assets
effectively in both of years.
Market based ratio: Year 2018 Year 2019
Shareholder's Equity 281 291
Net Profits 13 -163
Return on Equity 4.63% -56.01%
Year 2018 Year 2019
Debt 6334 6278
Equity 281 291
Debt Equity Ratio 4.44% 4.64%
Analysis- On the basis of above mentioned ratios, this can be find out that in company’s
efficiency to generate return on equities has been reduced by huge margin in year 2019.
Company failed to generate return in year 2019.
While in the aspect of debt to equity ratio, it can be stated that company is unable to meet
ideal condition which is of 1 to 1.5. company’s ratio was of 4.44 and 4.64 in both year 2018 and
2019.
Recommendations for improving profitability
In the above analysis, it is determined Tesco Plc overall profitability is quite good and
company is earning sufficient profit throughout the financial year. However, the current and total
liabilities of company is increasing due to the over dependence on debt and loans to meet the
various operation. There are number of ways which can be beneficial in the context of Tesco to
improve the profit margin in upcoming year and help in gaining the top position through the
entire world. Some of these are discussed underneath:
 Remove Unprofitable Products and Services: The first and most interesting option for
the Tesco plc is to add the commodities with the largest operating margin that can
directly increase the profit margin for the future time. Manager of Tesco plc are
8

recommended to focus on those valuable goods or services until company have
established the most profitable one as it can change the profit figures (Brusca, Gómez‐
villegas and Montesinos, 2016). They can also need to decide whether to delete the
unsustainable goods or services or even evaluate the opportunities of making any change
in existing product.
 Find more and more customer: Potential customers could support Tesco Plc to expand
in more areas where growth can be attained as well as increase the overall profitability.
However, that may be the most costly method for raising extra sales as adding new
customer forces company to spend more on promotional activities so that customer can
know about Tesco Plc product. As it have been is observed that attracting a new
consumer costs six percent as much as maintaining an established client. The easiest and
most cost effective approach to attract potential consumers is to give rewards to the
existing clients which can inspire them and these existing customer of Tesco plc would
tell other customer to join company. In recent dynamic market circumstance word of
mouth is the most powerful form of advertising which can lead to higher profitability.
 Increase your Conversion Rate: New lead generation is an vital part of doing business
development in today's business era (Cantillon, Maître and Watson, 2016). The facts is
that manager of Tesco plc must exactly t know which proportion of new leads can
actually transform into a sale and raise revenue. Rising conversion of revenue in Tesco
Plc is among the best and cheapest ways of raising profitability within an accounting
year. This can also be beneficial to reduce the current and other liabilities and increase
the total cash in hand for company which can be put into other operating and financing
activities.
 Review Current Pricing Structure: Increasing inflation may be a frightening prospect
because a minor rise in Tesco costs will affect total operating income in a unsurprising
way. Thus manager of respective company are recommended to assign right cost of the
goods and services which is a quite necessary option to increase profit margin. They are
recommended to periodically check the quality of company goods and change their prices
accordingly.
 Reduce your inventory: A smart way to simplify the Tesco plc profit margin and
increase the cash flow is stock management (Tang and Baker, 2016). Thus, putting less
9

capital in extremely slow demand products or less costs related to unwanted and expired
or discontinued product. This can help to make other investment through different
channels which can generate more income in the meanwhile. Most regularly buying
allows manager to monitor rates and reap the benefits of holiday sales or overstock
reductions.
 Reduce your overall direct costs: One more interesting option which can be adopted by
Tesco Plc to increase the profitability performance in the future time is decreasing the
net direct expenses that can affect profit margin considerably in positive manner. In
addition, one way to eliminate direct expenses is to negotiate for the supplier before
making any raw material purchase (Engel and et.al., 2016). If the quality is equivalent
seeking the lowest prices could allow a new manufacturer to be identified. Another
approach to prevent needless transactions is to reduce the direct expenses within Tesco
Plc. An in-depth analysis of the direct expenses will illustrate in the view of manager of
respective firm to certain the situations where there has been an excessive spending.
 Reduce your overheads: Overhead expenditures have a history of going up total cost
over time for Tesco plc. Reviewing company operating costs annually is a quick and
efficient way to increase the actual net income within an accounting year. Thus manager
are recommended to adopt the techniques of Benchmarking with similar businesses in
same sector Like Sainsbury's, ALDI etc. which can demonstrate opportunities for
improvement of profit in the upcoming year.
Recommend one new investment project to the company.
As company is planning to make a new investment into new project in the future year that
will lead to increase the profit and expand business. From the scenario, it is determined that
Tesco Plc can make use of 40% from its capital, thus the total amount for company to make any
future investment is approx $ 2042.8 (Figures extracted from the above mention balance sheet).
 To show NPV and WACC is a better solution:
As NPV techniques is effective in defining the actual time value of money will be
effective for Tesco Plc before making future investment. Moreover, NPV system helps
businesses to take decisions. NPV tells investment manager to exactly know if the benefit of all
the retained earnings produced by a project would outweigh the expense of starting the specific
project (Ferguson and Morton-Huddleston, 2016). This would simply inform you that there is a
10

optimistic or a pessimistic outlook for your idea. This not only helps to compare ventures of the
same scale, but it also helps to determine how well a single venture is making a profit or losing
money. In the specified scenario of Tesco the current currency outflow value is greater than the
existing capital accumulation value. So it's not a feasible investment choice. Another value of
NPV being that it allows optimize the entity's profits by engaging in projects that produce the
highest profit. In addition, WACC is also an crucial techniques which enables the manager of
Tesco Plc to determine the risk related with investments. Furthermore, The weighted average
cost of capital (WACC) is an significant financial principle that is commonly used in investment
markets to check to see if a return on investments will surpass or equal the value of the resources
incurred by an asset, project or business. WACC is an operational measure of the capital expense
of a business which may be measured either on the grounds of a demand or a fair value.
 To show cash or use retained earnings is better option:
The part of income that are not allocated to owners but held and used in industry is called
retained earnings. This is also regarded as profit-back ploughing. It is one of the most significant
internal finance channels used for both productive and operating capital. In the case of a growing
firm like Tesco Plc retained earnings increase shareholder value. Including remaining profits will
not mean the risk of purchase. There is no duty for the client to compensate compensation for the
remaining earnings (Lewis, 2016). Retained earnings reinforce an enterprise's financial status
and thereby giving the company financial stability. Shareholders that receive secure dividend
even though the business is not making enough profit. Retained earnings improve an overall
financial status and maintain the capital which eventually raises equity price valuation.
Thus, from reviewing both the option for making an investment for Tesco Plc, the second
option making use of cash as retained earning would a better and profitable option in the
meanwhile.
Decide whether or not the company should pay return earnings or not.
The return on equity ratio or ROE is a productivity ratio which measures a firm's ability to
create income from the corporation's stakeholders ' investment. In other terms, the return
on equity ratio indicates how much income each dollar produces from the resources of the
common shareholders (Muneer, Ahmad and Ali, 2017).
The value of return on equity depends on company’s net profitability. It is so because if
company is not able to generate higher amount of net income than this will be difficult for
11

them to pay return to shareholders. On the other hand, if company is generating higher
amount of net income than it will be easier for them to pay return to their shareholders. In
the context of above Tesco plc, it is important to know about their net profitability and
return on equity ratio so that this can be determined whether they should pay return on
earnings or not. Herein, below calculation of return on earnings is done below in such
manner:
2018 2019
Net income 1206 1322
Shareholders’ equity 10480 14858
Calculation 1206/10480 1322/14858
Return on earnings 0.11 0.088
Analysis- The above table is indicating about return on earnings of Tesco plc. It can be find out
that in year 2018, company was able to generate return of 0.11 which reduced and became of
0.088 in next year 2019. This is so because of increasing in volume of shareholders’ equity in
year 2019 as compared to 2018. Such as in year 2018, the shareholder’s equity was of 10480
GBP million which increased and became of 14858 GBP million.
On the behalf of above mentioned table this can be stated that company should not pay
return on earning to their shareholders. It is so because number of shareholders are increasing by
huge gape while net income is not increasing effectively (Munge, Kimani and Ngugi, 2016).
Though, there might be lot of conflicts if they will not pay return to their shareholders.
This situation can be overcome only if company focus on increasing the net profitability by huge
margin. It can become possible if they minimise their expenses and raise sales revenue. As well
as they should try to reduce number of shareholders. This is so because if there will more number
of shareholders than it will be difficult for them to pay return and each shareholder will get lower
amount of return (Nkundabanyanga and et.al., 2017). So overall this can be stated that company
should not pay return on earning to their shareholders due to lack of availability of net income as
well as because of higher number of shareholders in year 2019. Instead of paying return on
earnings in year 2019, they may make statement to pay higher return in next year 2020 to their
shareholders.
12

CONCLUSION
On the basis of above project report, this has been concluded that analysis of financial
performance of companies is too crucial. It is so because on the basis of this managers take
further decisions. The report concludes about financial performance of Tesco plc and for this
purpose its financial statements has been analysed as well as different ratio are also calculated. It
can be articulated that company’s performance is average. In the further part of report, this can
be concluded that company should go with the return earning option for making funding of their
investment project. In the end, this can be commented that company is unable to make payment
of return on earnings due to shortage of earnings in current year.
13

REFERENCES
Books and Journals:
Antonopoulos, G. A. and Hall, A., 2016. The financial management of the illicit tobacco trade in
the United Kingdom. British Journal of Criminology. 56(4). pp.709-728.
Banerjee, A. and et.al., 2016. E-governance, accountability, and leakage in public programs:
Experimental evidence from a financial management reform in india. (No. w22803).
National Bureau of Economic Research.
Brusca, I., Gómez‐villegas, M. and Montesinos, V., 2016. Public financial management reforms:
The role of IPSAS in Latin‐America. Public Administration and Development. 36(1).
pp.51-64.
Cantillon, S., Maître, B. and Watson, D., 2016. Family financial management and individual
deprivation. Journal of Family and Economic Issues. 37(3). pp.461-473.
Engel, L. and et.al., 2016. Identifying instruments to quantify financial management skills in
adults with acquired cognitive impairments. Journal of clinical and experimental
neuropsychology. 38(1). pp.76-95.
Ferguson, A. and Morton-Huddleston, W., 2016. Recruiting and retaining the next generation of
financial management professionals. The Journal of Government Financial
Management. 65(2). p.46.
Lewis, C. W., 2018. The Field of Public Budgeting and Financial Management. 1789–2004. In
Handbook of Public Administration. (pp. 151-225). Routledge.Mitchell, G. E. and
Calabrese, T. D., 2019. Proverbs of nonprofit financial management. The American
Review of Public Administration. 49(6). pp.649-661.
Muneer, S., Ahmad, R. A. and Ali, A., 2017. Impact of financial management practices on SMEs
profitability with moderating role of agency cost. Information Management and
Business Review. 9(1). pp.23-30.
Munge, M. N., Kimani, E. M. and Ngugi, D. G., 2016. Factors influencing financial management
in public secondary schools in Nakuru County, Kenya.
Nkundabanyanga, S. K. and et.al., 2017. The impact of financial management practices and
competitive advantage on the loan performance of MFIs. International Journal of Social
Economics.
Tang, N. and Baker, A., 2016. Self-esteem, financial knowledge and financial behavior. Journal
of Economic Psychology. 54. pp.164-176.
Yulihantini, D. T. and Wardayati, S. M., 2017. Financial accountability in the management of
village fund allocation.
14