Tesco's Financial Performance Analysis

This assignment requires a thorough analysis of Tesco's financial performance. Students must evaluate key financial ratios to assess the company's health and identify trends in its performance. Additionally, they need to apply various valuation methods to determine Tesco's worth. The report should also discuss the implications of these findings for potential acquisitions by Tesco, considering both the financial and strategic aspects.

INTERNATIONAL FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Ratio analysis...............................................................................................................................3
TASK 2............................................................................................................................................6
(a) Advantages and disadvantages of three valuation methods...................................................6
(b) Valuation of shares.................................................................................................................7
© Reasons due to which valuation methods generate different results.......................................7
(d) Risk faced by the FTSE 100 Company Tesco in its business................................................8
(e) Impact of situation on the choice of valuation method in this case.......................................8
TASK 3............................................................................................................................................8
(a) Recommendation in relation to acquisition............................................................................8
CONCLUSION................................................................................................................................9
REFERNECES..............................................................................................................................10
Table 1Ratio analysis of the Tesco..................................................................................................3
Table 2 Shares valuation for Tesco.................................................................................................7
Table 3 Valuation on the basis of Price earnings ratio....................................................................7
Table 4 Valuation on the basis of dividend growth model..............................................................7

INTRODUCTION
Finance is the lifeline of every business entity of every industry, which plays a lead role
in the business. Without finance company cannot exist in the market. International finance
sometimes known as international macroeconomics is a section of financial economics that deals
with monetary interactions that occur between two or more countries. The report is based on the
Tesco Company which is a leading company across the world. The report describes the ratios of
the company, ratios are such as current ratio and liquid ratio. It shows the three methods of
valuation of the business such as net asset method, PE ratio method and dividend valuation
method. The report describes the market situations, financial performance as well as economic
environment is how affect to the valuations. Report is provides the recommendations that it
should acquire or not.
TASK 1
Ratio analysis
Table 1Ratio analysis of the Tesco
2016
Gross profit 2854
Net sales 54433
Gross profit ratio 0.052431
Net profit 353
Net sales 54433
Net profit ratio 0.006485
Current assets 14828
Current liability 19714
Current ratio 0.752156
Current assets 14828
Stock 2430
Prepaid expenses 0
Current liability 19714
Quick ratio 0.875418
Debt 10711
Equity 8616

Debt equity ratio 1.243152
Net profit 353
Equity 8616
ROE 0.04097
Price 214
EPS 0.05
Price earnings ratio 4280
 Gross profit ratio: It is the ratio which is used by the business firms to measure the firm
business performance. Cost is the one of the most important factor that greatly influence the
profitability and growth of the business firms. Gross profit ratio help business firms in
computing the portion of sales that is encompassed by the gross profit. Higher is the gross
profit ratio of the firm more company is better condition (Garcia and Tsafack, 2011). This is
because such kind of performance on the ratio indicate that firm have a stiff control on its
direct expenses. It can be seen from the table that gross profit ratio of Tesco is 0.05 which is
5% and is very low in the business. On this basis it can be said that firm performance is very
poor and it have very loose control on its direct expenses.
 Net profit ratio: Net profit ratio is the one of the most important ratio which is used by the
managers to measure firm’s business performance. Performance on the ratio reflect the firm
capacity to control indirect expenses in the business. Business firms must try to ensure that
there net profit ratio is increasing consistently. It can be observed from the table given above
that net profit ratio of Tesco is 0.06 which is 6%. It is clear that firm is earning very low
profit margin in its business. This reflects that firm have less control on its indirect expenses.
On analysis of gross and net profit ratio of the firm it can be said that company expenses
control policy is very weak and this is the area in which it needs to work in order to improve
its performance.
 Current ratio: This is the ratio which help managers in ascertaining and evaluating the
liquidity position of the firm (Houston, Lin and Ma, 2012). It is very important to ensure that
there is high liquidity in the business. This is because high liquidity reflects that there is
greater amount of money in the firm business. It can be observed from the table that current
ratio of Tesco is 0.77 which is below standard value of the ratio 2. It can be said that for
every one GBP of current liability firm must have two GBP in its business. In case of Tesco

current ratio is 0.77 which is below standard value 2. Even value of ratio is less than 1 and it
reflects that firm is not capable to pay its current liability on time by using current assets.
 Quick ratio: Quick ratio is also one of the most important ratio that help firm in measuring
liquidity in the business. This ratio give clearer picture of the firm liquidity then current ratio.
This is because it is the ratio which is interpreted above stock and prepaid expenses are
included. Stock is the one of the most important asset of the business firm. The main feature
of this asset is that it takes time to get converted in to cash in the business (Kresta and Tichy,
2012). Hence, it can be said that quick ratio does not give better overview of the liquidity to
the business firm. It can be observed from the table that quick ratio of the firm is 0.87 which
is nearby to 1. On this basis it can be said that firm liquidity position is good and to great
extent but not completely it can pay current liability by using current assets in the business.
Hence, on this ratio Tesco give good performance.
 Debt equity ratio: It is one of the most important ratio because it reflect the capital structure
of the firm. It is the capital structure which determine the business cost of capital. Firms must
ensure that capital structure of the business is balanced. Capital structure in the business must
not be covered mostly by debt or equity (Eichengreen and Flandreau, 2012). Capital structure
must be balanced because by doing so cost of capital can be minimized in the business. It can
be observed that debt equity ratio of the Tesco is 1.24. This means that for everyone unit of
the GBP of equity there is 1.24 unit of debt. It is clear that capital structure of the firm is
mainly covered by the debt. However, this coverage is not so high. On this basis it can be
said that there is high debt in the firm business and it needs to control same.
 Return on equity: Return on equity is the one of the main ratio that is used to measure the
firm business performance in terms of return it give to its shareholders. It can be observed
from the return on equity ratio that return on equity is 0.04 or 4% which is very low. On this
basis it can be said that firm is giving less return to its shareholders which is not good in the
business.
 Price earnings ratio: Price earnings ratio help firm in doing valuation of the shares. By using
this ratio it can be identified that firm shares are undervalued or overvalued (Frankel and
Poonawala, 2010). In order to do valuation of the firm share industry PE ratio is required. By
comparison company and industry PE ratio it is identified whether shares are undervalued or
overvalued. On analysis of firm PE ratio it can be said that its shares are overvalued. This is

because PE ratio value is very high. It can be said that investors are paying more amount then
required to purchase shares of the Tesco.
On analysis of figures it can be said that Tesco must nor acquire other FTSE 100
company. This is because its condition is not good. There is very low profit in the business.
Liquidity position is very poor in the business. Moreover, firm is not able to give good return to
its investors. If firm failed to earn profit in the newly acquired company then it will face huge
loss in its business. Thus, it is assumed that Tesco must not try to acquire small FTSE 100
Company.
TASK 2
(a) Advantages and disadvantages of three valuation methods
There are various types of method that can be used to do valuation of the shares. Some
specific methods that are used to do valuation of shares are given below. Net assets basis: It is the method under which liabilities are deducted from the assets and
output value is divided by the number of shares that are issued by the firm in the market.
There are number of advantages and disadvantages of this method (Gilpin, 2011). The main
merit of this method is that data that is required for valuation can be easily obtained by the
business firm or equity research analysts. Moreover, it does not consider market data to do
valuation of shares. The main demerit of this method is that intangible assets like goodwill
are not used in doing valuation of shares of the firm. Hence, it can be said that this method
have both merits and demerits. Price earnings ratio: This is the method of valuation that is used by all sort of investors and
research analysts. The main merit of this approach is that in this shares are overvalued or
undervalued is determined by comparing PE ratio with standards. The main demerit of this
method is that in this approach share price is taken in to account which keeps on changing
consistently (Hunter, Kaufman and Krueger, 2012). Hence, everyday PE ratio keeps on
changing consistently. It is very difficult to take investment decisions solely on the basis of
PE ratio. Dividend valuation basis: This is the method in which prediction is made about the dividend
and its present value is computed by using discount factor. Gordon growth dividend model is
used in the present report to do valuation of shares. The main advantage of this method is that

it is easy to apply this approach for doing valuation of shares. The demerit of this method is
that apart from dividend it does not taken in to account any factor to do valuation of shares.
(b) Valuation of shares
Table 2 Shares valuation for Tesco
Assets 43904
Liability 35288
Net assets 8616
Outstanding shares 2714
NAV 3.17465
Interpretation
It is clear from the table that on the basis of net asset value method real price of the Tesco
share is 3.17GBP. Hence, it can be said that Tesco shares are not fairly valued in the market.
Table 3 Valuation on the basis of Price earnings ratio
Price 214
EPS 0.05
Price earnings ratio 4280
Interpretation
Price earnings ratio of Tesco is higher than same of the industry. On this basis it can be
said that firm shares are overvalued.
Table 4 Valuation on the basis of dividend growth model
Next year dividend 0.35
MPS 214
G 2.00%
Dividend Value D1/P0+G 0.02163551
Interpretation
On the basis of dividend growth model it can be said that actual value of the firm shares
is 0.021 GBP. Hence, it can be said that on the basis of these valuation methods Tesco shares are
valued in proper way.
© Reasons due to which valuation methods generate different results
Each valuation method give different value of the shares. This is because in all valuation
methods different items are taken in to consideration (Devereux and Yetman, 2010). Hence, it is
not possible to obtain similar results from all valuation methods. In PE ratio market data is taken

in to account. On other hand, in case of dividend growth model internal data related to firm
performance is considered. Hence, it can be said that all methods of valuation calculate price of
the shares in the different manner. Due to this reason it is very hard to obtain similar results from
the all valuation models.
(d) Risk faced by the FTSE 100 Company Tesco in its business
There are many sort of risks that faced by the FTSE 100 company in its business. Currently,
Tesco revenue and profit is declining consistently and it is the big problem that firm currently is
facing in its business. Firm needs to solve this problem and in this regard it needs to formulate
sound business strategy (Lall, 2012). It can generate economies of scale in its business which
will reduce cost and will elevate its profitability. This will lead to development of investors’
confidence on the business firm. The rate of sale of shares in the secondary market will decline
to some extent. On other hand, with increase in the firm profit its image will get improved
among the investors which lead to elevation in purchase of the firm shares. In this way risk faced
by the firm can be managed.
(e) Impact of situation on the choice of valuation method in this case
Disposable of the asset to some extent affects the choice of the specific valuation method.
This is because assets are the important part of the business and is used to measure the firm
financial position (Obstfeld, Shambaugh and Taylor, 2010). In case of acquisition if one firm is
acquiring other one then in that situation it is better to use discounted cash flow model for
valuation of shares. This is because in this model projections are made about the cash inflow and
outflow. Cash inflow to some extent is determined by the investment that firm currently made in
the business. Hence, it is very important for the business firms to make use of appropriate
valuation method. The way in which firm is going to acquire other one help one in determining
the valuation method that must be used in the business for computing value of shares.
TASK 3
(a) Recommendation in relation to acquisition
On the basis of ratio analysis it is recommended that Tesco must not acquire any FTSE 100
company. This is because firm is earning very low amount of profit. Its gross and net profit ratio
is very low. Hence, company is earning less amount of retained earnings in its business. It is not
possible for the company to acquire other one by using internal sources of finance. In order to

acquire other company firm will need to take heavy amount of debt from the market. Interest rate
will be moderate or high. Hence, after acquisition finance burden will increase on the business
firm. On other hand, if acquired firm failed to perform better then Tesco will face heavy loss in
its business which will not be good for the firm (International finance, 2016). Thus, on this basis
it is recommended that is will not be beneficial for Tesco to acquire other company. Value of the
firm shares is very low. It can be seen that value of shares is different in varied valuation models.
Share price is very low in case of all valuation models. There is very little fair value of the firm
shares. It can be said that Tesco is not in better condition and due to this reason it can take
decision to acquire other company.
CONCLUSION
On the basis of above report it can be articulated that the company Tesco is not
performing well in the market. All the financial ratios of the company is continuously
decreasing, which shows that company is in bad condition and performing badly. The suggestion
is that it should not acquire the business. According to the three valuations also the company not
performing well. So, the company is not good for the investment as well. It can be suggested that
should not choose the company to make investment and acquire.

REFERNECES
Books & journals
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Frankel, J. and Poonawala, J., 2010. The forward market in emerging currencies: Less biased
than in major currencies. Journal of International Money and Finance. 29(3). pp.585-598.
Garcia, R. and Tsafack, G., 2011. Dependence structure and extreme comovements in
international equity and bond markets. Journal of Banking & Finance. 35(8). pp.1954-1970.
Gilpin, R., 2011. Global political economy: Understanding the international economic order.
Princeton University Press.
Houston, J.F., Lin, C. and Ma, Y., 2012. Regulatory arbitrage and international bank flows. The
Journal of Finance. 67(5). pp.1845-1895.
Hunter, W.C., Kaufman, G.G. and Krueger, T.H. eds., 2012. The Asian financial crisis: origins,
implications, and solutions. Springer Science & Business Media.
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NIG Model and Ordinary Copula Functions. Finance a Uver. 62(2). p.141.
Lall, R., 2012. From failure to failure: The politics of international banking regulation. Review of
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Obstfeld, M., Shambaugh, J.C. and Taylor, A.M., 2010. Financial stability, the trilemma, and
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Online
International finance, 2016. [Online]. Available through:<
https://www.tutorialspoint.com/international_finance/international_finance_introduction.ht
m>. [Accessed on 22nd November 2016].