International Finance: Tesco's Financial Performance Analysis Report

This report provides a comprehensive analysis of Tesco's financial performance within the context of international finance. It begins with an introduction to international finance and discusses two recent developments impacting Tesco: Brexit and the US-China trade disruptions. The report analyzes how these events affect Tesco's financial performance and future outlook. It then delves into the key elements of international financial and risk management strategies, including sources of finance and dividend policies. Finally, the report presents a detailed financial analysis of Tesco for the years ending 2019 and 2018, utilizing liquidity, profitability, efficiency, and gearing ratios to assess the company's performance. The analysis highlights the impact of external factors, such as currency fluctuations and trade uncertainties, on Tesco's financial health, and offers insights into the company's financial position and management's efficiency.

INTERNATIONAL FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
a. Two recent developments in international financial environment that have impacted the
company’s performance. It will also provide about how the developments are going to impact
company in future........................................................................................................................1
b. Discussing key elements of international financial and risk management strategy in the
context of ABC............................................................................................................................3
c. Analysis of financial performance of Tesco for the year ending 2019 and 2018....................4
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUTION
The international Finance is also recognised as international macroeconomics which refers
to the study of monetary interactions between the different nations. It focuses over interest rates,
foreign direct investments. In the globalised environment all countries are depended over one
another for services and products from developing countries. The report will discuss about the
recent developments in the international finance. This has impacted performance and the
development in financial environment and which have impacted development and performance
of company. The study will also analyse different aspects of development in future. The study
will also discuss about international risk and financial management strategies. The report will be
covering major part in assessing the financial performance of company for year ending 2020.
The ratio analysis could be as the tool for assessing performance and to take sustainability
measures. Report is focused over Tesco Plc which is British Multinational grocery and general
merchandise retailer having headquarters in UK. Company is 3rd largest retailer in world by
gross revenues and 9th largest in world by revenues. Company is having stores in different areas
of the world.
a. Two recent developments in international financial environment that have impacted the
company’s performance. It will also provide about how the developments are going to
impact company in future
There are number of developments in the international market that are significantly
influencing the market and the businesses all over the world. The developments range from the
economic prosperity leading companies to grow in specific sectors while also crash of Wall
Street for many companies. This era is significantly dynamic and industries that have not been
able to manage their operations as per the changes and developments in international market
have suffered at large scale. There have been various political influences that affected
international trade and financial market and also Brexit has impacted the big companies resulting
in downfall of their revenues and income (Lane and Milesi-Ferretti, 2018). Developments in
financial market that have affected performance of Tesco plc are
1 Brexit
Everyone is aware about the Brexit which is exit of UK from the European Union. The
effects of action of UK government are seen in every industry operating in country. The
investors have postponed their proposals for investments in country. The economy of UK
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considered as most stable has seen fluctuations after the move of government. The investments
in country have decreased by 6%. It has increased the interest rate over loans making finances
more costly. To meet the working capital requirements company borrows short term loans every
year but increased will reduce the profits. Due to exit now the companies operating in UK have
to pay tariffs and other taxes for selling to and importing products from the members of EU. It
has further increased the cost of company (Gibbins, 2019). The major reason of lowering pound
is Brexit and slow growth of economy. Company has to suffer the foreign exchange losses due to
decreasing pound values. This has impacted the financial performance of the organisation
significantly. It could also be evaluated that organisations have seen decline in their revenues as
compared with last year after the steps of government.
2 US – China trade disruptions
The ongoing US – China trade war is disrupting the trade operations of most of the
countries. The countries being major trade partners influence the trade of most countries and also
impacts economic conditions of the country. It has influenced the international financial markets
to a considerable extent. Many major trade contracts are put to hold as the future negotiation can
change the marker conditions. US have increased the tariff rates over imports and exports that
has increased the prices of different materials. Also the suppliers and major customers have
reduced their supplies and orders due to high taxes. Also this is influencing the currency prices
of countries associated with these countries. UK is major trade partner of both US and China
which is influencing the economy of UK (Hall, 2017). Currency fluctuations and lowering
demands is affecting the business operations of Tesco.
Impacts in Future
The trade disruptions and Brexit may bring uncertainties for the businesses operating in UK.
If Brexit negotiations do not brings positive agreements there will be increase in prices of goods
supplied due to higher taxes and this may also lower the revenues of company in other nations.
The trade disruptions can increase the cost of finance and influence currency rates which will
require companies to suffer exchange differences. The strategies and operations of business are
required to be managed keeping in view the uncertainties that may be caused due to them. The
expansion projects of the company are put at hold because of fluctuations in international
financial market.
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b. Discussing key elements of international financial and risk management strategy in the context
of ABC
Key elements and risk factors associated with Tesco
Multinational company forms the strategies in such a form that it provides benefits to the
firm as institutional form, from government transaction across borders, also provide them various
opportunities. Company like Tesco make various strategies for sources of finance and dividend
policy so the company can earn more profit as well as it can keep satisfy to its shareholders and
stakeholders.
Sources of finance:
For sources of finance some companies like Tesco divide their plan into two part – equity
capital financing and debt financing. mostly companies use the commons ways of sourcing that
help business to grow as well as increases its wealth.
 Personal savings:
These best ways to source fund it will make the company free from the burden of paying interest,
it will also make company goodwill more good (Radović, 2016).
Venture capital:
It is also good way to choose to source fund, the venture capitalist will give his money to
a small business so the company can have long term growth. The company need to pay interest
to the venture capitalist (Ali and Khalid, 2019).
Commercial bank loans and overdraft:
Bank provide long term entrepreneurial business overdraft facility which is also largely
use option to raise fund from outside (Singh and Maiti, 2019).
Financial bootstrapping:
Here is some example of bootstrapping is sweat equity, minimization of account payable,
delaying payment, subsidy finance etc.
Business angels:
These are professional investors that invest their wealth in innovative business.
These are some ways through which Tesco company can take funds., the borrowed funds should
not have high interest rate so the company can secure more retained earnings and earn more
profit so the company can not only make more investment but also it can keep happy to
shareholders.
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DIVIDEND POLICY:
When deciding how much cash to distribute the company always keep in mind to
maximize the shareholders’ value. An important factor is that company have additional dividend
policy to consider.
 Dividend to external shareholder
 Dividend between group companies, facilitating the movement of profit and funds within
group.
Alternative dividend policy followed by Multinational company like Tesco:
a) Stable amount:
Most common technique adapted by company is stable policy, it is adopted for external
shareholders. It never gives bad news to share holder but it’s always rising dividend per share.
b) Constant pay-out:
Multinational companies use constant pay-out because tremendous fluctuation in
dividend per share (Nazaire, Pacurar and Sy, 2020). Many firms use to reach the smooth
functioning of long term pay-out percent.
c) Residual Approach:
These avoids the unnecessary transaction cost involved in paying shareholder a dividend
and taking further funds from same holders for other projects (Kelly, 2020). The biggest problem
with this type of dividend policy is that it can generate big fluctuation in dividend which can be a
bad news for shareholders.
d) zero pay-out:
There are many companies also that adopt zero pay-out policy. These are some
companies which make sure to increase the value of shareholders (Baryannis and et.al., 2019).
These are some risk management strategies of source of finance and dividend policy
c. Analysis of financial performance of Tesco for the year ending 2019 and 2018.
Tesco plc is British multinational supermarket headquartered in England. Company is
having operations in around 11 countries of world. It has diversified in areas like retailing of
clothing, books, electronics, toys, furniture, software, financial services, petrol and the internet
services. Tesco listed over LSE and constituent of FTSE. It had revenues of 63.91 billion and the
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operating income of 2.206 billion of 2019 and is having 1.320 billion. It employs around 450,000
people over its different stores.
The financial analysis of the company would help to assess the performance and
profitability of the company. It enables the decision makers to assess the internal working of
company and efficiency of the management in running the operations. Ratio analysis is a tool
used for assessing the financial performance of company.
FINANCIAL ANALYSIS
Liquidity ratio
Tesco
2019 2018
Current assets 12570 13600
Current liability 20680 19233
Inventory 2617 2264
Quick Assets 9953 11336
Current ratio
Current assets /
current liabilities 0.61 0.71
Quick Ratio
(Current Assets -
Inventory) /
Current Liabilities 0.48 0.59
Profitability ratio
Tesco
2019 2018
Employed Capital
(Total Assets -
Current Liabilities) 28269 25502
Net profit 1320 1210
Return on capital
employed
Net operating
profit/Employed
Capital 4.67% 4.74%
Net Income 1320 1210
Shareholder's Equity 14858 10502
Return on Equity
Net Income /
Shareholder's
Equity 8.88% 11.52%
Tesco
2019 2018
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Cost of Sales 59767 54141
Sales 63911 57493
Gross Margin
Total Sales –
COGS/Total Sales 6.48% 5.83%
Net profit 1320 1210
Sales 63911 57493
Net profit ratio
Operating Income/
Net Sales 2.07% 2.10%
Efficiency Ratios
Tesco
2019 2018
Trade Payables 9354 8994
Trade Receivables 1640 1504
Net Assets 14858 10502
Cost of Sales 59767 54141
Sales 63911 57493
Inventory turnover
ratio Sales / Inventory 4.30 5.47
Accounts Payable
Days
Sales / Inventory
*365 53.42 57.10
Account receivable
days
Sales / Accounts
Receivable * 365 9.37 9.55
Gearing Ratios
Tesco
2019 2018
Debt 12166 13990
Equity 14858 10502
Debt equity ratio Debt/ Equity 81.88% 133.21%
Liquidity Ratio
Current Ratio analyses the liquidity position of company. Tesco plc is having current ratio
of 0.61 which has declined from 0.71 in 2018. The downward is seen due to increasing short
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term obligation of the company. The standards for current ratio are 2:1 where the company is
having ratio very low. It could be evaluated from the ratio that the current assets are not even
equal to its short term liabilities they are more lower. This shows that cash management of
company is not effective. The ongoing trade situations are impacting the business and also the
decreasing profits are causing company to borrow from external parties with high rate of interest
(Adewuyi, 2016). It has to take measures to improve the liquidity position of company to ensure
that it does not falls further. Lowering ratio may even lead the company to shut down.
Quick Ratio of Tesco is also very low which is 0.48 only where the standard ratio is 1.5.
Company is having significantly weak liquidity positioning. It is alarming stage for the firm as it
could cause the company to suffer losses and in serious consequences to even liquidate. The
management has to pay attention over cash inflows and outflows (Annual Report Tesco plc,
2019). It could cut down the short term borrowings by taking long term loans at lower rates of
interest. Weak liquidity position presents negative image of the company causing suppliers to
stop their supplies. Management has to take immediate steps for improving liquidity.
Profitability Ratios
Return on Capital employed is used to assess the efficiency of management to generate
revenues utilising the assets of company. ROCE of firm is 4.67% in 2019 and it was 4.74% in
2018. It could be evaluated that ROCE of firm is very and it has also gone down as compared
with previous years. The lower return is also due to low profits of company as against the assets
that shows management is not efficient in using the resources (Shi and et.al., 2018). The low
ROCE requires the management to take measures and adopt change in the existing strategies for
improving the return. Firm could decrease the unproductive assets that are adding value to the
entity to improve the existing ratio of firm.
Return on Equity is the ratio showing return earned by the company over the equity
investments. The ratio is 8.88% which has declined from 11.52% in 2018. There has been a
downward movement in ratio. The return is adequate of company and is required to be enhanced
further by taking more effective strategies. The management is required to adopt other policies
and procedures that focus over increasing the revenues and profits (Alam and Raut-Roy, 2019).
Investors have the main motive of earning returns over their investments and therefore it is
essential for the business to earn adequate profits for retaining interest of the investors.
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The Gross margin evaluates the profit available with the company after carrying out the
business trading operations. Company is having GP ratio of 6.48% and it has shown
improvement from last year. It could be assess that there has been increase in revenues and the
strategies adopted have helped in increasing GP in current year (Fenyves and et.al., 2020). The
ratio is very low which shows that company is left with very low profits to carry out further
business operations.
The net profit margin of company is 2.07% and it was 2.10% in 2018. There was low
change in the profits of company over the two years. The profit margins are very lower of the
business which represent that company is not having adequate returns from the business. Though
the revenues are increasing every year but the similar growth is not seen in profits.
Efficiency Ratios
Inventory Turnover ratio has declined to 4.30 from 5.47 previous year. The inventory
ratio shows the ability of management in earning the returns over sales. It could be assessed that
the lowering inventory ratio is caused due to the Brexit imposition declining sales.
The accounts payable days shows the payment days in which dues of suppliers are
cleared by the company. It is currently having supplier days of 53 days which was 57 days. The
decrease in supplier days is made from last year.
The accounts receivables days of the company are 9 days which shows collection of the
dues from the debtors by the company. The change is not seen in debtor days. It reflects that
management is taking active measures for improving the cash cycle of the firm.
Gearing Ratios
Debt equity ratio is 81.88% and it was 133.21% in 2018. It shows that the business is
having high debts as against the equity. The financial risk of the business is very high which
makes the firm unattractive to investors (Eneizan and et.al., 2016). The capital structure of
company is not adequate as it has high debts even after making repayments in current year.
CONCLUSION
It could be concluded from the above report that international financial environment is
very dynamic and the change in it impacts the different businesses. The financial development in
international markets also influences the dividend policy and sources of finance. The financial
analysis shows that financial performance and position of Tesco is very weak and requires
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considerable actions from the management. The investor point of view the company is not
profitable as the profits and returns are very low.
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REFERENCES
Books and Journals
Lane, P.R. and Milesi-Ferretti, G.M., 2018. The external wealth of nations revisited:
international financial integration in the aftermath of the global financial crisis. IMF
Economic Review. 66(1). pp.189-222.
Hall, S., 2017. Rethinking international financial centres through the politics of territory:
renminbi internationalisation in London's financial district. Transactions of the Institute of
British Geographers. 42(4). pp.489-502.
Gibbins, J., Theorizing Brexit: UK/EU Relations and International Relations Theory.
Adewuyi, A.W.A.W., 2016. Ratio Analysis of Tesco Plc Financial Performance between 2010
and 2014 in Comparison to Both Sainsbury and Morrisons. Open Journal of
Accounting. 5(03). p.45.
Shi, Y., and et.al., 2018. The impact of retail format diversification on retailers’ financial
performance. Journal of the Academy of Marketing Science. 46(1). pp.147-167.
Alam, S. and Raut-Roy, U., 2019. Evaluating the Effectiveness of Reward Strategy at Tesco:
Evidence from Selected Stores in UK. Indian Journal of Industrial Relations. 55(1).
Fenyves, V., and et.al., 2020. Financial performance of Hungarian and Romanian retail food
small businesses. British Food Journal.
Eneizan, B.M., and et.al., 2016. Effects of green marketing strategy on the financial and non-
financial performance of firms: A conceptual paper. Arabian Journal of Business and
Management Review (Oman Chapter). 5(12). p.14.
Ali, K. and Khalid, M., 2019. Sources to finance fiscal deficit and their impact on inflation: A
case study of Pakistan. The Pakistan Development Review. 58(1). pp.27-43.
Baryannis, G. and et.al., 2019. Supply chain risk management and artificial intelligence: state of
the art and future research directions. International Journal of Production Research.
57(7). pp. 2179-2202.
Kelly, J., 2020. Airline finance and financial management. Air Transport Management: An
International Perspective. p. 197.
Nazaire, G., Pacurar, M. and Sy, O., 2020. Factor Investing and Risk Management: Is Smart-
Beta Diversification Smart?. Finance Research Letters. p. 101854.
Radović, G., 2016. Sources of finance for rural tourism in the Republic of Serbia. Economics of
agriculture. 63(3). pp. 1053-1065.
Singh, P. and Maiti, D., 2019. Sources of Finance, Innovation and Exportability in Asia: Cross-
country Evidences. Journal of Asian Economic Integration. 1(1). pp.73-96.
Online
Annual Report Tesco plc. 2019. [Online]. Available through : <
https://www.tescoplc.com/media/476423/tesco_ar_2019.pdf>.
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