Financial Analysis Tesco PLC

Question: Discuss about the Report for financial analysis Tesco PLC? Answer: Introduction Tesco was founded by Jack Cohen in 1919 when he started selling daily commodities at a small stall in London. On the first day of business, Mr. Cohen made a profit of on 1 pound from sale of just 4 pounds. Company started to expand to sell more products in the 60s in even bigger stores. Company started selling its products online when it launched its website in 2000 that is Tesco.com. Additionally the company also expanded its product range by including items such as cosmetics, clothes and electronics. In 2009, company also entered into banking business. Financial Anlysis Return On equity Return on equity calculates the profit earned by the company with relation to investment made in the company. The ratio would assess that how efficiently the management of the company is utilizing its assets to earn profits and companys ability to properly allocate the assets to the specific projects. The company earned a Return on equity of 8.05% which grew by 50% to 12.19%. This would suggest that company is not utilizing its assets efficiently to earn profits by allocating assets to the projects which are profitable(Damodaran, n.d.). Additionally the assets may be more costly as there is an increase in expenses. This increase would be due to increased sales of the company or may be due to the falling prices of oil which would have reduced the transportation costs. Reduced transportation costs would have resulted in increased profit as compared the equity of the company. Return on capital employed Return on capital employed calculates the profit earned by the company with relation to the total assets of the company. The ratio would assess that how efficiently the management of the company is utilizing its assets to earn profits and companys ability to properly allocate the assets to the specific projects. The company earned a Return on capital employed of 6.9% which grew by 28% to 8.84%. This would suggest that company is not utilizing its assets efficiently to earn profits by allocating assets to the projects which are profitable(Kantila, 2011). Additionally the assets may be more costly as there is an increase in expenses.This increase would be due to increased sales of the company or may be due to the falling prices of oil which would have reduced the transportation costs. Reduced transportation costs would have resulted in increased profit as compared the equity of the company. Sales revenue to capital employed Sales revenue to capital employed calculates the sales revenue earned by the company with relation to the total assets of the company. The ratio would assess that how efficiently the management of the company is utilizing its assets to earn Sales revenue and companys ability to properly allocate the assets to the specific projects. The company earned Sales revenue to capital employed of 2.04% which grew by 4% to 2.14%. This would suggest that company is not utilizing its assets efficiently to earn sales by allocating assets to the projects which are profitable. Additionally the assets may be more costly as there is an increase in expenses. Companys increased sales revenue as compared to its capital due to increased marketing of the company. Additionally, companys sale also increased due to opening of new stores in the areas that had huge demand for consumer goods. Sales revenue per employee Sales revenue per employee calculates the sales revenue earned by the company with relation to the total employees of the company. The ratio would assess that how efficiently the management of the company is utilizing its human resources to earn Sales revenue and companys ability to properly allocate the HR to the specific projects. The company earned sales revenue per employee of 0.155% which grew by 3% to 0.16%. This would suggest that company is utilizing its assets efficiently to earn profits by allocating HR to the projects which are profitable. Companys increased sales revenue as compared to its capital due to increased marketing of the company. Additionally, companys sale also increased due to opening of new stores in the areas that had huge demand for consumer goods. Quick ratio Quick ratio assesses the companys position with respect to its liquid assets and short term liabilities. It assesses companys ability to pay its short term obligations with its liquid assets. Liquid assets are cash or those that can easily and immediately be converted to cash. In 2013 company had a quick ratio of 94% which decreased by 47% to 44%. This would suggest that that company does not have sufficient liquid assets to immediately meet its current financial obligation. Company currently has reasonably low quick ratio suggesting weak short term financial position. Companys low quick ratio would be mainly due to the fact that companys majority of the current assets are companys inventory. Since inventory is not considered as a liquid asset it wasnt taken into account in the calculation lowering the current assets and thus it resulted in low quick ratio. Current ratio Current ratio assesses the companys position with respect to its current assets and short term liabilities. It assesses companys ability to pay its short term obligations with its current assets. In 2013 company had a current ratio of 68% which decreased by 11% to 61%. This would suggest that that company has sufficient current assets to meets its current financial obligation. Company currently has reasonably low current ratio suggesting unhealthy short term financial position(Gryglewicz, n.d.). Such low current ratio would be due to the fact company might be selling its goods on high credit which would result in less available cash. Gearing ratio The gearing ratio assesses the financial leverage of the company to determine the financial risk that is being faced by the company. In 2013 company had a gearing ratio of 87% which increased by 9% to 96%.Such trend indicates that company is majorly funded through debt finances and faces huge financial risk due to such funding measures(Feld, Heckemeyer and Overesch, 2013). One of the reasons for increased gearing would be the expansion policy of the company. Company is rapidly growing by opening new stores in more demanding locations. These expansions required funding, which was then obtained through issuing new loan. Such actions increased companys debt and thus increased companys gearing. Interest cover Interest cover assesses the companys ability pay off its interest obligations when required by comparing its interest costs or expenses with the companys profit before tax and interests. It assesses how secure the company is financially. Company achieved an interest cover ratio of 3.76 times in 2013 which grew by 30% to 4.66 times in 2014. This trend would suggest that company earns more than required profits and such profits are enough to cover for companys financial obligations. Dividend Payout ratio Dividend payout ratio assesses the companys policy regarding dividend to be paid to its shareholders. However ideal payout ratio depends upon the expectations of the shareholders of the company. Some share holders might be expecting regular dividends to meet their regular expenditures. Where as some share holders expect the company to retain its earnings and expand to achieve capital gains for the value of shares. Company had a payout ratio of 85.42 in 2013 which fell by 24% in 2014 to 62.29%. The decrease in the payout ratio would be due to the expansion of the company and these retained earnings would have been utilized to fund the expansion. Price to earnings ratio Price to earnings ratio assesses companys perception in the market as compared to earnings by comparing companys market price of its share with the earning per share. Company had P/E ratio of 186 times which fell to 28 times in 2014. This was due to increase in the eps as expected by the market. Conclusion In accordance with the above financial ratios, it can be said that Tesco does not have adequate funds to meet the short term debt obligations since the quick ratio and current ratio indicates this fact as the current assets are lower than the current liabilities. The companys capital structure is dependent more on debt and less on equity funds due to which there could be numerous issues for Tesco which can definitely produce a more drastic impact on its operations and even on profits as well. However, Tesco has the ability to cover the interest expenses on the debt it owes and that is quite clear from the interest coverage ratio. References Damodaran, A. (n.d.). Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications.SSRN Electronic Journal. Feld, L., Heckemeyer, J. and Overesch, M. (2013). Capital structure choice and company taxation: A meta-study.Journal of Banking Finance, 37(8), pp.2850-2866. Gryglewicz, S. (n.d.). Corporate Liquidity and Solvency.SSRN Electronic Journal. Kantila, D. (2011). A Survey of Pharmaceutical Companies with Respect to Return on Net Capital Employed.IJAR, 2(3), pp.12-13.