Financial Analysis and Risk Management Strategies at Tesco Plc

This report provides a comprehensive risk and financial analysis of Tesco Company, evaluating various types of risks faced by the company on a global scale, including compliance, operational, financial, reputational, and economic risks. It explores the strategies Tesco employs to manage these risks, such as strategic planning, corporate governance, market-making procedures, hedging, and capital budgeting techniques. The report includes a financial analysis of Tesco, utilizing ratio analysis to assess the company's liquidity, profitability, and solvency positions over the past five years. It also touches upon the impact of earnings management and transfer pricing on the quality of financial information. The analysis reveals insights into Tesco's financial performance, highlighting both its growth and challenges due to market conditions.

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Name of the student
Topic- Management of Risk
University Name-

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Table of Contents
Introduction...........................................................................................................................................2
Critically evaluate the various types of risks faced by Tesco.................................................................3
Managing these all types of risk by using different strategic plans and procedure by Tesco Company 6
Financial analysis of Tesco Company.....................................................................................................8
Working capital analysis of Tesco Company........................................................................................14
Earnings Management and transfer pricing could affect the quality of the financial information........15
Conclusion...........................................................................................................................................16
References...........................................................................................................................................17

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Introduction
This report focuses on the risk and financial analysis of a company. In this report,
Tesco Company has been taken into consideration. There are various financial tools such as
ratio analysis, cash flow analysis and capital budgeting tool which may influence the business
of an organization. In this report, various types of risks which would be faced by a company
on the global scale have been evaluated. This company has used various strategies to
overcome or manage these risks. After that, ratio analysis has been used to evaluate the
financial performance of a company.
Description of Tesco Company
It is British international general merchandise and Grocery Company. The main head
quarter of company is in Welwyn Garden city, England, United Kingdom. The Dave Lewis is
present CEO of company. This Tesco Company has several subsidiaries such as Tesco Bank,
Tesco Mobile, and Tesco Lotus.
Vision
It has the vision to create strong position in client’s mind through its integrity and
commitment (Brigham and Ehrhardt, 2013).
Mission
It has the mission to generate core competency in selling products and services through its
advanced supply chain.
It is evaluated that company has been facing several kinds of risks in its business which may
cause serious loss of profit or even bankruptcy. There are several risks such as operational

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risks, financial risks, reputational risks, compliance risk and strategic risks. The annual
report and other business functioning of the company have been assessed to evaluate all the
possible risk of business (Tesco Plc, 2014).
Critically evaluate the various types of risks faced by Tesco
It has been undertaking various strategic alliance and investment decisions. However,
business plan of Tesco Company is based on the well-structured comprehensive business
plan. Ideally, the strategic decision of company is highly influenced by competitors offering,
clients demand, and technologies changes. For instance, Tesco Company was having the
strong position in the market. However, due to the increased use of technologies and online
business models, Tesco faced high destruction in its retails products selling (Tesco Plc,
2017).
Compliance risk
This compliance risk arises when company fails to comply with the applicable rules
and regulations. These are the main risk which arises due to the non-compliance program of
Tesco Company. It is evaluated that it has faced high amount of penalties due to the non-
compliance of international rules and regulation. It has the international business and may
fail to establish proper harmonization in its international and domestic reporting framework
(Tesco Plc, 2016).
Operational risk
Operational risk refers to an unexpected failure in the company in its daily operations.
It may be technical failure, server outrage and other value chain activities problems.
Operational risk issue arises due to the failure of its operational activities. For instance, if the
payment department of Tesco wrote a check of $ 1, 00,000 instead of 10,000 by mistakes

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then a company may face loss of $ 90,000. In addition to this, if the offered in retails business
in not up to the mark due to the less efficient functioning of employees then company may
also lose some clients in market (Titman, Keown and Martin, 2017).
Financial risk
It is the type of risk which has high financial impact on the business of an
organization. This risk refers to flow of money in and out of the busienss or possibility of
sudden financial loss. Tesco Company has been facing this financial risk due to its less
efficient financial investment plan. This risk arises due to the non-effective capital investment
plan. For instance, if a company has two investment project plan and due to its less effective
capital budgeting decisions, it opted loss-making project. It may result to destruction of the
capital invested in particular project of company. This rise arises due to internal and external
business factors. Tesco Company needs to asses these factors before investing money in
particular project (Tesco Plc, 2015).
Reputational risk
There is different kind of business risk but all the companies may face reputational
risks. It is evaluated that if the reputation of company is damaged then it may impact the
profitability and earning capacity of organization. The reputation risk is based on the
employee turnover, marketing activities and promotional plan of the organization. For
instance, if company damaged its brand image then it will have to lose various tenders. The
reputation risk could take the form of the major lawsuit, an embarrassing product recall,
negative publicity about the business (Tesco Plc, 2014).
Economical risk

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These risks arise due to changes in purchasing power, bank interest rate, call risk and
changes in tax policies and laws. It is analyzed that Tesco Company has faced issue these
issues due to the changes in the economic factors of organization.
Market risk
This risk is also known as systematic risk. The main impact of these types of risks
mainly affects the share price of company and value of organization. However, my using
marketing making and hedging technique, financial manager of a company could overcome
this type of issues (Yahoo finance, 2018).
Foreign exchange risk
This risk arises due to the change in the foreign exchange rate of one country as
compared to other countries. Tesco Company may destruct the value of its income if, at the
time of converting its capital into another currency, the currency rate went down.
Transactional risk
This risk arises if the transaction date of company is different from the reporting
period of a company. It is evaluated that due to changes in the foreign exchange rate, Tesco
Company may destruct the value of its capital.
These all above risks are a major concern which may impact the financial and non-
financial business. It is evaluated that if Tesco Company could manage these above-given
risk through its advanced strategic planning then it could easily implement proper strategic
program. However, Tesco Company could mitigate financial risk by using hedging and
capital budgeting techniques.

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Managing these all types of risk by using different strategic plans and
procedure by Tesco Company
Tesco Company has been managing these all types of risk by using different strategic
plans and procedure in determined approach. The below-given table reflects how well Tesco
Company could manage these risks (Fernandes, Ferreira and Moura, 2016).
Types of risk Possible action to overcome these risks
Compliance risk This type of risk could be mitigated by using
proper strategic plan and incorporating
proper corporate governance department. The
proper code of conduct and compliance
department will evaluate these issues to
mitigate the compliance risks.
Market risk This risk could be managed by Tesco
Company by using proper market-making
procedure. This market risk is reduced by
setting proper relation with the banks and
financial institutions to increase the overall
outcomes.
Economic risk This risk could be mitigated by using proper
strategic plans and procedure. This risk also
reduced by indulged in proper strategic plans
and procedure. This economic risk is not
under the control of the company. However,

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by using proper forecasting technique, a
company could mitigate this issue.
Reputation risk Tesco company is mitigating this type of
risks by setting proper quality control
procedure. This reputation risk is managed
by a proper strategic procedure. This
reputation risk could be managed by
arranging proper strategic plans and
arranging new methods.
Financial risk This type of risk arises when company faces
issues related to investment plan. Tesco
company could manage this risk by using
proper investment plan, capital budgeting
tools and ratio analysis technique.
Operating risk This operating risk is managed by Tesco
company by hiring more line managers. It
increases the overall effectiveness of the
working of an organization. It could also be
reduced by using proper working codes and
setting quality control mechanism.
Foreign exchange risk This foreign exchange risk is eliminated by
the Tesco company by using the proper
hedge funds and entering into the forwarding

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contract. It allows a company to book the
foreign exchange rate for the future
transactions amount.
Transactional risk This risk arises when Tesco company report
its income transactions at the different date
from the time when it was earned. It also
managed by using put options and call option
in the international business.
After evaluating all the risks and associated factors of business, it could be inferred
that Tesco Company could manage these all risk by implementing proper strategic plans
either related to taking strategic business planning, use of financial tools and forecasting
technique. It is analyzed that due to its exposure to its global business, company has managed
its transactional and reporting risk. It arises due to the changes in the value of the currency
due to forewing exchange risk.
Financial analysis of Tesco Company
This analysis reflects the financial performance of Tesco Company. It is evaluated
that since last five years, the financial performance of Tesco Company is very effective and
showing the high amount of growth. However, due to sluggish market condition, Tesco
Company has faced the high amount of loss in its business. The ratio analysis helps in the
establishment of relation between two financial factors of business (Finkler, et al. 2016).
Liquidity ratio of Tesco Plc

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This ratio reflects the liquidity position of company. It shows company's ability to pay
off its short terms and long-term debts with the available resources.
Liquidity ratio
Particular Formula 2013 2014 2015 2016 2017
cash ratio
Cash equivalents
+ cash / current
liabilities 0.13 0.12 0.11 0.16 0.20
Current
ratio
Current
assets/current
liabilities 0.69 0.73 0.60 0.75 0.79
Quick
Ratio
Current assets-
Inventory/current
liabilities 0.49 0.56 0.45 0.63 0.68
After analyzing the details, it is analyzed that company has increased its cash ratio
by .07 points since last five years. In addition to this, current ratio of company has also
increased by .10 points in 2017 as compared to last five years. The quick ratio of company
has increased to .68 which is .19 higher in 2017 as compared to 2014 data. This ratio reflects
the company has increased its liquidity position and increased the current assets investment
(Mohd, Idris, and Momani, 2013).

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Profitability ratio of a company
This profitability ratio reflects the profitability position of Tesco Company and how it
has increased its business functioning. This ratio reveals company's ability to earn profit from
the revenue. The operating profit of company has decreased to 1.99 % in 2017 as compared
to last five year data. It is analyzed that company has decreased its return on equity to -
0.072% in 2017 from 0.191%. In addition to this, return on assets of company has also
decreased to -0.62% which is not the good indicator for the organization. This is evaluated
that company has faced issue in the profit earning of company and decreased its profitability
throughout the time (Shouman, El Shenawy, and Khattab, 2016).
Profitability Ratios
Formula
2013-02 2014-02 2015-02 2016-02
2017-
02
Return on equity
Net
profit/revenues 0.191% 1.532% -9.217% 0.254% 0.254%
Return on assets
Net
profit/Equity 0.75% 6.62% -81.19% 1.60% 1.60%
Solvency

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This ratio shows how well company has maintained its solvency capacity. It is
evaluated that company has the strong position to cover its fixed cost with its earnings before
interest and tax amount (Rashid and Ghose, 2015).