Financial Analysis of Tesco
This paper highlights different financial aspects of TESCO Ltd. Company. It identifies different sources of finance for the company. An overview of different financial ratios which represent liquidity, profitability and performance of the company. Then an investment appraisal has been developed for TESCO for further growth, development and expansion of the business. Table of Contents Abstract:2 Introduction:4 Sources of Finance:5 Internal Resources:5 External Sources:6
Recommendations:8 INVESTMENT APPRAISAL:10 Post Completion Review (PCR):10 Methods of Investment Appraisal11 Ratio Analysis:13 Profitability Ratios:13 Return on Assets:15 Efficiency Ratios:17 Liquidity Ratios:20 Quick Ratio:21 Stability Ratios:22 References:23 Introduction: TESCO was founded by Mr. Jack Cohen in 1919, when he initiated to sell surplus groceries from a stall in the East End of London. It’s first own brand product was TESCO Tea and its first store was Burnt Oak, Edgware, North London. In 1932 TESCO stores became a private limited company.
First modern food warehouse was introduced by TESCO in 1934. In last ten years, the following are the major milestones of TESCO. • Tesco. com was launched and in this was it became online. • TESCO became leading organic retailer in the UK. • TESCO launched ‘Customer Champions’ in its stores. • It entered Malaysia, Japan, Turkey, China, United States, South Korea and India in different types of business opportunities and with different products according to the local requirements. • It became first major British Super Market to enter music download market. • It launched Tesco Homeplus.
The current strategy of TESCO is to diversify the business which was laid down in 1997 and it has proved the base of success for the business not only in UK but also in many other markets and it had proved itself as a market leader. Sources of Finance: [pic] Internal Resources: Retained Profit: Retained profit is the amount of profit or dividend which is not distributed to the share holders but retained for the some new investment/project like that. So instead of going to banks or any other outside source of finance, mostly organizations prefer to utilize retained profit.
Table and graph showing retained earnings from 2008 to Feb. 2010 [pic] Sale of fixed assets: Sale of fixed assets which are no more needed in the organization due to the replacement of new technology can be a source of finance as well so it would be a sensible decision that instead of paying cost to maintain and stock such fixed assets, those assets should be sold and finance should be obtained. External Sources: Bank Overdraft: When an account reaches zero, even then the company can withdraw the money from the account, this is called overdraft (Sayer 2007).
This facility is very important for the company as sometimes it may need to use this facility urgent to accomplish some transaction. HP/ Leasing: According to Sayer (2007), “An agreement in which one party gains a long-term rental agreement and the other party receives a form of secured long-term debt. ” The companies prefer to lease the costly machinery usually instead of purchasing it. The company pays the rent of the leased item as per terms and conditions whereas the leasing companies maintains the items and usually replace whenever there is some problem.
Trade Credit: “Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment” (Atrill and McLaney 1995). It is the easiest and quickest way to delay the payment without any type of interest. Trade credit is the basic and foremost need of every business. Loans: Loan the amount of money which is borrowed from the financial institution to start a new business or initiate some new projects or products in the existing business.
Usually after paying the interest on loan, tax is paid, so some organizations prefer to take loan instead of utilizing the retained earnings for the business requirements. Before issuing loan the financial institution always check the balance sheet of the organization to evaluate the stability and credibility of the business. This is usually done by business analysts. Debentures: “A debenture is an unsecured bond. Essentially, it is a bond that is not backed by a physical asset or collateral” (Ennew and Waite 2007). Debentures may be convertible or non-convertible.
Convertible debentures allow the holder to exchange the debenture for the company’s shares whereas non convertible debentures can never be converted into company’s stock. Normally the interest rate of non convertible debentures is higher than convertible debentures. Preference shares: There are two main characteristics of preference shares which make them different from common stock: i) The holders of preferred stock are given preference in the distribution of dividend. ii) They don’t have the power or right to vote. Preference shares can be converted into common stock. Recommendations:
As we look at the balance sheet of TESCO and focusing on short term external sources of finance, we come to know that current liabilities which are actually short term sources of finance are trade and their payables, borrowings, derivative financial instruments and other liabilities, customer deposits and deposits by banks. From the values it is obvious that the current liabilities are increased from 2008 to Feb. 2010 negatively. The most important factor is that they have negative current liabilities. Net current liabilities are shown by the following table and chart. |2008 (? ) |2009(? m) |Feb Feb. 2010(? m) | |(4045) |(4116) |(4250) | Table: Net Current Liabilities [pic] Graph showing Short Term Liabilities of TESCO Long Term Liabilities are the sources of finance which are required to pay by the business in long term i. e. more than one year. Some its examples are Debentures, bank loans and mortgages, venture capital etc.
By analyzing the balance sheet of TESCO it is perceived that it has negative non- current liabilities like borrowings, derivative financial instruments and other liabilities in negative which is really an unusual trend and show the strength of the business. Overall it has the following total non-current or long term liabilities. |2008 (? m) |2009(? m) |Feb. 2010(? m) | |(7,946) |(15063) |(15,327) |
Table showing total non-current liabilities [pic] Graph showing total non-current liability for three years From the analysis of current and non current liabilities of TESCO it is very much clear that the company is in a very strong position. But at the same time they are missing the opportunity of utilizing the liabilities, so it should expand the business by getting loans, as they have a really good credibility position and every financial institution would wish to be its creditor. INVESTMENT APPRAISAL:
When the companies are going well and they are in a strong position, they expand their business which is a good option. TESCO is also working on the same lines; it has already expanded its business to different countries. It entered Malaysia, Japan, Turkey, China, United States, South Korea and India in different types of business opportunities and with different products according to the local requirements. It is very necessary to make an investment proposal. Six Stages of Project Appraisal:
Project Identification: First of all it is needed to identify the project which will be the most profitable and will also be least risky. Shareholders will obviously be concerned and interested only in that project which gives them maximum return on the investment. Project screening: it is the stage in which previously guessed feasible project evaluated keeping in view all the aspects of its implementation, profitability and all other matters. It is the main selection stage for the best feasible project.
Analyze Implication: In this stage it is evaluated that the implication of the project is feasible or not. So it is completely examined and studied. Project Evaluation: This stage of the project is more concerned with the outcomes of the project. It means after the development of the project is complete what would be the outcomes of the project. It also makes clear that what would be the future prospects. oo Accept or Reject: if the project is feasible in terms of cost, people and other resources and it would be beneficial for the company, and then now the company decides to accept it or reject.
As at this stage it is better to reject a non feasible project instead of investing and wasting a large amount of money. Post Completion Review (PCR): According to Hirst and Kerrison (2009), “A post completion review is a process aimed at assessing, ex post, the efficiency and effectiveness of a capital budgeting decision and of the management of its implementation. It is based on a comparison between planned and actual actions, costs and resource usage, results and benefits. ” It encompasses the review of all guesses about markets, technology, personnel, environment, competition, cost of capital, etc. hat were made during the decision-making period. It is the comparison of assumption and the real outcome and it is an ongoing process through which organizations improves.