Financial Management and Analysis of Tesco PLC: A Detailed Report

This report provides a comprehensive financial analysis of Tesco PLC, focusing on its financial performance and management. It begins with an introduction to financial management and its importance in business, followed by a detailed analysis of Tesco's financial health using various ratios, including liquidity, profitability, efficiency, and capital structure ratios, for the years 2018 and 2019. The report identifies problems and limitations of the ratio analysis, such as reliance on historical data and potential manipulation of financial statements, and provides recommendations for improvement, including the use of analytical tools and consistent accounting practices. Furthermore, the report evaluates investment decisions using payback period, net present value (NPV), and internal rate of return (IRR) for three mutually exclusive projects, recommending the project with the highest NPV. The analysis concludes with a discussion on the importance of NPV for measuring economic feasibility.

FINANCIAL MANAGEMENT
AND ANALYSIS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................8
TASK 3..........................................................................................................................................11
TASK 4..........................................................................................................................................12
Task 5.............................................................................................................................................14
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................19

INTRODUCTION
Financial management is an important aspect of accounting which is focussed
towards the effectively running of the business. It manages the financial resources of
the organization. It undertakes various functions such as planning, directing, controlling
of the monetary aspects of the business. In this report, Tesco plc is taken as an
organization which is the largest retail organization in UK. This report provides an
insight into the financial position and performance of the organization and also states
about the problems identified. It involves undertaking investment related decisions,
valuation of right issues and along with it valuation of the organization using various
approaches.
TASK 1
1) Calculating ratios of Tesco company to know financial health condition
Liquidity Ratio
Current Ratio
Particulars Formula 2018 2019
Current Assets 13600 12570
Current liabilities 19233 20680
Current Ratio Current Assets/Current
liabilities
13600/19233
0.70 times
12570/20680
0.60 times
It can be analysed that Tesco current ratio is not much effective to pay short term
obligations. The calculated ratio for the year 2018 and 2019 is 0.70 & 0.60 times
respectively. Ideal ratio is considered to be 1 which ensures proper utilization of current
assets (Nalurita, 2017).
Quick Ratio
Particulars Formula 2018 2019
Liquid Assets 11336 9953
Current liabilities 19233 20680
Quick Ratio Liquid Assets/Liquid 11336/19233 9953/20680

Assets 0.58
0.48
Tesco has quick liquidity in ratio of 0.58 & 0.48 for period of 2018 and 2019
respectively. This is calculated to identify company's liquidity position through cash
availability to deal with short term liabilities. The change has occurred in downward
direction that need to be improved.
Profitability Ratios
Gross Profit ratio
Particulars Formula 2018 2019
Gross profit 3352 4144
Revenue 57493 63911
Gross Profit ratio Gross
profit/Revenue*100
3352/57493*100
5.83%
4144/63911*100
6.48%
It is calculated to analysing company's profit left after deducting cost of goods sold. The
current ratio for company is 5.83% and 6.48% for 2018 & 2019 years respectively.
When it is 65% it is said to be financial healthy company (Satryo, Rokhmania qand
Diptyana, 2017).
Operating profit Ratio
Particulars Formula 2018 2019
Operating profit 1839 2153
Sales 57493 63911
Operating profit
Ratio
Operating
profit/Sales*100
1839/57493*100
3.19%
2153/63911*100
3.36%
This profitability ratio makes able to evaluate that firm is generating enough
profits from its operation after paying cost associated with it. The ratio for Tesco
company in 2018 and 2019 are 3.19% & 3.36% respectively. The ideal margin is 15%
which is more than current commutated ratios therefore organization need to make
changes in way of functioning.

Net profit ratio
Particulars Formula 2018 2019
Net profit 1210 1320
Sales 57493 63911
Net profit ratio Net profit/Sales*100 1210/57493*100
2.10%
1320/63911*100
2.06%
The respective ratio for Tesco in year 2018 and 2019 is 2.10% and 2.06% that is
lower than perceived ideal ratio that is 10%. Tesco require to modify its net profit
margins so that better profitability can be obtained.
Efficiency Ratio
Inventory Turnover ratio
Particulars Formula 2018 2019
COGS 54141 59767
Inventory 2264 2617
Inventory
Turnover ratio
COGS/Inventory 54141/2264
23.19
59767/2617
22.83
It is done to assess that how much inventory is sold and consumed which need
to be between 5-10 for having healthy working of organization. The present ratio of
specified business is 23.19 and 22.83 for years 2018 & 2019 that is showing downward
trend. It is more than ideal that is significant competitive advantage of company (Parvez,
2020). It can be perceived from this by analyst that firm is having good demand in
market therefore inventory turnover ratio is high.
Total Assets Turnover Ratio
Particulars Formula 2018 2019
Revenue 57493 63911
Total Assets 44884 49047
Total Assets Revenue/Total 57493/44884 63911/49047

Turnover Ratio Assets 1.28 1.30
This helps firm to examine its efficiency of using assets for generating revenue.
Mentioned firm has 1.28 in 2018 and 1.30 for 2019 which lower than perfect figure of
2.5. There are various improvement area that firm need to concentrate for proper
utilization of resources (Iskandar, 2020).
Receivable Turnover Ratio
Particulars Formula 2018 2019
Sales 57493 63911
Receivable 1504 1640
Receivable
Turnover Ratio
Sales/ Receivables 57493/1504
38.22
63911/1640
38.97
Average receivable ratio is 7.8 for any kind of industry. Tesco has 38.22 as well
38.97 for period of 2018 and 2019. It is reflecting signification of not having good
financial condition of organization (Guerard, Saxena and Gultekin, 2021).
Capital Structure Ratio
Debt Equity Ratio
Particulars Formula 2018 2019
Total Debt 34404 34213
Shareholders equity 10480 14834
Debt Equity Ratio Total Debt
/Shareholders equity
34404/10480
3.28
34213/14834
2.30
This compares firm's total liability to its equity to evaluate how leverage a
company is using. Optimal ratio tend to vary from sectors but it should not be above 2.
The current company has ratio of 3.28 in year 2018 and for 2019 it is 2.30. Tesco need
to take serious actions for improvement of strategic decision-making.
Dividend Coverage Ratio
Particulars Formula 2018 2019

Dividend per share 82 357
Net income 1210 1320
Dividend Coverage
Ratio
Dividend/Net income 82/1210
0.067
357/1320
0.27
It represents business earning over dividend paid to shareholders. In 2018 and
2019 the respective ratio are 0.067 & 0.27. This need to be between 35-55% that is
greater than computed ratio which indicates requirement for improvement (Nicholson
and Stevens, 2021).
Stock Market Performance Ratio
Earning per share ratio
Particulars Formula 2018 2019
Net income-
preferred dividend
1210-82 1320 – 357
Number of shares 8192 9758
Earning per share
ratio
Net income-
preferred
dividend/Number of
shares
(1210-82)/8192
0.137
(1320- 357)/9758
0.098
This indicates how much money company makes for each share. Tesco has
0.137 & 0.098 for 2018 and 2019 financial years. The changed has occurred in downfall
direction.
Price Earning ratio
Particulars Formula 2018 2019
Current Share price 207 226
Earning per Share 14.8 13.65
Price Earning ratio Current Share
price/Earning per
Share
207/14.8
13.98
226/13.65
16.55

It relates Tesco's share price to its earning per share. The present organization
has 13.98 and 16.55 which is presenting growing stage of firm that is positive sign for
attracting shareholders.
2)
Problems and limitations of the analysis
The major problem or limitation pertaining to the ratio analysis is that it is based
upon the historical values of the company which is being released by the organization
like Tesco. Thus, it does not result into providing any relevant information in respect to
the future of the company. In addition to this, the financial statements of the company
are released periodically and along with that there is a time difference between each
release. Apart from this, if inflation occurred in that time frame then it does not reflect
the real figures of the financial statements. This results into inaccurate comparison of
the financial data until and unless it is adjusted to inflation (Limitations of ratio analysis.
2020). Other limitation is that, the accounting formula used by the organization differs
which creates problem while making comparison. There is also the chances that the
financial accounts of the company is manipulated by the employees or the management
in order to hide something or present a better picture of the financial performance of the
company. Therefore, these are certain limitation of the ratio analysis in respect to the
Tesco plc. This analysis has faced the problem pertaining to the problem like the
company might have implemented or followed different accounting practices in the two
years which resulted into making the comparison less or inaccurate comparable.
3)
Recommendation for improvement
In order to overcome the limitations of the ratio analysis, there are certain
strategies which can be implemented in order to overcome the drawback of the ratio
analysis or the limitation that mostly occurs while carrying out the ratio analysis. In
respect to the above identified issues, the top management of Tesco or the internal
users of the financial statements should make use of different analytical tools and
approaches which plays a significant role pertaining to reducing the effect of these
limitations. Proper and timely analysis of the financial records should be put in place in
order to make sure that the accounts are recorded in a proper and effective way. In

addition to this, the organization should make sure that it follows accounting practices
consistently and are making changes only in the case when there is requirement by the
law or the statutory requirement. Apart from this, the organization is required to make
sure that proper adjustment to the changes in the market conditions is made like
inflation in respect to financial figures of the company's account. Along with that, by
implementing review and monitoring system in place will assist in better management of
the financial accounts of the company. This will assist in determining the areas of errors
and mistakes so that timely actions can be taken to mitigate it. Thus, these are the
certain ways through which the Tesco plc can overcome the limitation in regard to
carrying out the ratio analysis of the company.
TASK 2
(a)
Computing payback period
Choice A
Payback period = Initial investment / Annual cash inflow
= 105000/48000
= 2.19 years
Choice B
Payback period = Initial investment / Annual cash inflow
= 187000/48000
= 3.90 years
Choice C
Payback period = Initial investment / Annual cash inflow
= 245000/48000
= 5.1years
(B)
Calculation of NPV of each choice
Year
Discount
ing
Cash
inflow
Present
value of
Cash
inflow
Present
value of
Cash
inflow
Present
value of

factor
@10% Choice A
cash
inflow of
Choice A Choice B
cash
inflow of
Choice B Choice C
cash
inflow of
Choice C
1 0.909 48000 43636.36 48000 43636.36 48000 43636.36
2 0.826 48000 39669.42 48000 39669.42 48000 39669.42
3 0.751 48000 36063.11 48000 36063.11 48000 36063.11
4 0.683 48000 32784.65 48000 32784.65
5 0.621 48000 29804.22 48000 29804.22
6 0.564 48000 27094.75 48000 27094.75
7 0.513 48000 24631.59
8 0.467 48000 22392.35
9 0.424 48000 20356.69
Present
value of
cash inflow
119368.9
0
209052.5
1
276433.1
4
Initial
investment 105000 187000 245000
NPV (PV of
cash inflow
less net
cash
outflow) 14368.90 22052.51 31433.14
(c)
Calculation of IRR
Year
Cash inflow
Choice A
Cash inflow
Choice B
Cash inflow
Choice C
0 -105000 -187000 -245000

1 48000 48000 48000
2 48000 48000 48000
3 48000 48000 48000
4 48000 48000
5 48000 48000
6 48000 48000
7 48000
8 48000
9 48000
IRR 17.62% 13.93% 13.14%
(d)
It is being given in the case that there are 3 projects which are mutually exclusive
and therefore, the company can only select one project out of the three choices made
available. It is important to understand that the all the three choices are for the different
time interval (Willigers, Jones and Bratvold, 2017). The choice A is for the 3 years while
that of choice B and choice C is 6 years and 9 years respectively. In terms of NPV, the
Choice C is having greater net present value of €31433.14 while in contrast to it Choice
B is having second highest NPV of €22052.51 which is followed by €14368.90. In
regard to the payback period, the choice A is having the lowest PBP of 2.19 years in
comparison to the 3.90 years of the Choice B and 5.10 years in project Choice C. Also,
by looking at the Internal Rate of Return (IRR), the Choice A is having the 17.62% while
that of other projects is 13.93% (Choice B) and 13.14% (Choice C) (Gisin and Volkova,
2017).
Based upon the values derived it can be stated that the Brussels plc should
make an investment into Choice C as it is having the highest NPV in comparison to
others (Daryanto and Primadona, 2018). It is highly recommended making an
investment into the Choice C which is mainly because of high NPV but in contrast it is
having higher payback period. Even though it is having contrasting value, NPV is
considered as the better tool for the purpose of measuring the economic feasibility of
the investment plan. This is an important and popular investment appraisal technique as

it takes into consideration time value of money. This is also effective under the situation
where the multiple projects are there and only one is required to be selected. Therefore,
it is considered to the best approach towards determining and the computation of the
feasibility of the investment (Arifin and Daryanto, 2018). Also, the IRR of the Choice is
positive but not higher in comparison to Choice C but is good and can be beneficial for
the Brussels plc as it also accounts for the time factor irrespective of the fact whether
the cash inflow is regular or uneven. It takes into consideration the entire economic life
of the project. Apart from Choice C an alternative to it would be Choice B because of
the same reason having high NPV.
TASK 3
(a)
Computation of the theoretical ex-rights price (TERP) of Düsseldorf plc
Theoretical Ex-Rights Price
= (Market Value of shares prior to rights issue + Cash raised from rights issue)
Number of shares after rights issue
= (200000 +50000) / 150000
= €1.67
(b)
Value of the rights attached to each existing share
Market value of the shares already held by shareholder = 100000 *2 = 200000
Add: Price to be paid for buying one share = 50000*1 = 50000
Total shares (150000) = 250000
Average price of one share = 250000/150000 = 1.67
Value of the right = Market value – Average price
= 2 – 1.67
Value of right = 0.33
(c)
(I) Takes up his right
If the shareholder, Lukas, having existing shares of 1000 in Düsseldorf plc, takes up the
rights issue, then he will be buying additional shares of 500 shares at €1 per share.