Financial management is the arrangement of funds with an aim to achieve desired objective of the organisation in an effective and efficient manner. This is the differentiated function that is associated with the top management (Ahrendsen and Katchova, 2012). The main purpose of preparing this report is to determine the financial position of the company by calculating various ratios. In addition to this, impact of legal, political, economic and tax changes on the financial statements of the company is also evaluated. Along with this, the other purpose of preparing this report is to find out the stock market performance of the company. In regard to all this, weakness of ratio analysis will be assessed to improve the same. In order to study the financial statements of the company, ratio analysis has been done by using various secondary data sources like internet, books and journals.
The main purpose of choosing Tesco is to determine the financial performance of the company for the last five years. Tesco is a multinational company of UK which deals in all types of consumer goods.
In the following report, Tesco has been taken into consideration. It is a multinational retail and grocery company which deals in all types of consumer products. It is the third largest retail company headquartered in Welwyn Garden City, Hertfordshire. This company is a public limited company listed on London Stock exchange. This company was founded in 1919 by Jack Cohen. In the year 1990, Tesco has repositioned its structure and move on from state down-market and low-cost retailer (Tesco PLC ADR, 2015). This in turn proves to be very successful for the company. Tesco had a market capitalization of around £18.1 billion up to 22 April 2015.
Tesco is one of the fastest growing companies in retail industry. It is continuously providing new and innovative consumer goods which in turn attract the large number of customer. As it is a growing company so analysing the financial statements of this company will prove to be very beneficial for us. Another reason of using this company is to analyse its financial position and to decide whether investing in this company prove to be beneficial or not. It is one of the growing industries which in turn will provide lot of reliable data in order to analyse the financial performance of various industry. In addition to this, retail industry is one of the fastest growing company which in turn will help to find out the latest trend that are taking place in the corporate world.
Profitability ratio indicates the part of the sales revenue that is covered by the gross profit. This ratio also indicates the firm’s ability control its direct expenses (Estrada, 2005). In order to measure firm’s performance on cost control, it is necessary to compare current year ratio value with the previous year. If sales is growing rapidly but direct expenses grow at slow pace, then it means that firm is keeping good control on direct expenses.
Gross profit ratio
Net profit ratio
Gross profit ratio of the Tesco is declining continuously and in last year, it was negative. This reflects that every year firm is earning less gross profit on sales. There is an increase in previous year’s sales but gross profit increases at slow rate. Hence, it can be said that less control on direct expenses is one the main reasons which are responsible for the decline of the firm’s gross profit. On the other hand, there is a net profit ratio which indicates the proportion of the net profit on sales. This also reflects firm’s capability to control indirect expenses. Net profit ratio of the firm is declining sharply and it was negative in the last fiscal year. This shows that condition of the firm is very critical. This decline is observed in the sales because there was loose control on the indirect expenses of the firm. There may be many other reasons that are responsible for the low net profit. Due to recession, demand for products fall from people side and due to this reason, Tesco earns low amount of profit on sales. In the retail industry, there is a stiff competition and due to this reason, firms operating in this industry are continuously reducing their product’s prices. This leads to low earning of margin on sales. Tesco is also compelled to reduce its product price and due to this reason; it is earning low profit on per unit of sales. This is the basic reason behind decline in profit.
Current ratio- This ratio indicates the firm’s liquidity position. If current ratio is increased, then it means that firm has large amount of current assets to meet its current liability on time (Kastantin, 2005). Current ratio of the Tesco is fluctuating steadily. It shows good increase in current ratio at good growth rate but also declines at fast rate as well. However, in past years, its performance was not good this is because; it failed to beat benchmark of 2:1 which is a set standard. It is even when its current ratio value failed to become 1. Current figure of current ratio indicates that for every one pound of current liability, firm has 0.67 pound of current assets. Hence, firm is not in the position to pay its current liabilities on time. It can be said that firm needs to make lots of efforts in order to improve its liquidity position in the business.
Quick ratio- This ratio gives a clear picture of firm’s liquidity position than current ratio. In this ratio, same formula is applied but prepaid expenses and stock are not included in the company’s current assets. Hence, quick ratio shows company’s liquidity position in a proper manner. Quick ratio of Tesco is also declining steadily and the one main thing on which attention is needed is that there is a huge gap in the current and quick ratio. This reflects that stock and prepaid expenses cover a large portion of the Tesco’s current assets. On this basis, it is stated that firm must try to make its liquidity position as strong as possible.
Current liabilities (CL)
Working capital is calculated by the company in order to find out the efficiency and short term financial health of the company (Leong, Pagani and Zaima, 2009).
Working capital ratio
As per the above calculation, it can be interpreted that working capital of the company is constantly fluctuating. Company's current assets are less as compared to current liabilities. The reason behind this situation can be that company is not able to make payment to its creditors on time. Therefore, in order to overcome this problem, company should start preparing various strategies and financial activities in advance.
Capital structure shows how a company is able to finance its overall activities and operations by using various sources of finance. Debt of the company includes all types of bonds that are issued by the company (Nissim and Penman, 2001). On the other hand, shareholders equity includes retained earnings, preference shares, equity shares and many more things.. Below is the calculation of debt-equity ratio of Tesco.
As per the above calculation, it can be interpreted that company's debt is more as compared to that of equity which is not a good sign. In order to be successful, equity of the company should always be more as compared to that of its debt. In short, it can be said that debt is the expense of the company and equity is the income.
In the above calculation, it can be seen that debt equity ratio of Tesco is constantly increases. From year 2011 to 2014, debt equity ratio was growing at a slow rate, but in year 2015, its capital structure ratio increases at a high speed. This is turn shows that firm is not able to properly manage all its operations. Liabilities of the Tesco are constantly increasing. In addition to this, it also indicates that Tesco is not able to pay to its creditors on time due to which its liabilities are constantly increasing. The reason behind this condition can be that Company is not able to reduce the cost of its production. Change in economic condition of the organization can also be one of the reasons for the reduction in the level of equity. It also shows that they are not able to maintain the balance between its inflow and outflow of cash. In addition to this, they are also not able to hold a balance between assets and liabilities of the enterprise.
Stock market is the place where large number of brokers comes together with an aim to buy and sell the stock and various other securities of the different companies. This is the market where electronic trading process takes place (Werner and Brand, 2001).
Henceforth, stock market performance is the presentation of the company over a certain specified time period. This helps the company to enhance financial performance of the particular company. By analysing this performance, one can conclude whether company is growing or moving towards downward.
Therefore, the stock market performance of Tesco Company is listed below:
On the basis of the above chart, it can be concluded that financial position of Tesco is not good. Its market share is continuously fluctuating. After analysing the last past five years performance of the company, it is seen that from continuous five years, market share of Tesco is declining. In year 2013, it was able to grow its market share as compared to 2012. But still it was not able to grow at high rate. Its market share still shows the negative balance.
Again in the year 2014, its market share again declines at a high rate as compared to 2013. Market share of Tesco’s shows a falling trend from -5.42% to -43.12%. Likewise, in the year 2015, Tesco has made great efforts to grow. It was able to increase its market share from -43.12% to -4.10%. But it cannot be ignored that its market share still shows a negative balance.
Thus, after analysing the overall performance of Tesco, it can be concluded that financial position of the company is not good. Therefore, it is recommended that Tesco should start focusing more on the formation of its strategies with an aim to reduce its cost of production. In addition to this, they should bring innovation in its products.
Ratio analysis can be used to compare the financial statements of various companies and to gain general understanding about the results. But at the same time, it cannot be ignored that there are various limitations of conducting ratio analysis. Some of the weaknesses are as follows:-
On the basis of above report, it can be concluded that financial position of Tesco from the last five year is not good. Its liabilities and debts are constantly increasing and assets and equity are reducing. This indicates that the company is not properly able to manage its all operations. In addition to this, it can interpret that Tesco’s gross profit and net profit ratio are reducing constantly. While in the year 2015, it has been seen that company's gross profit and net profit margin reduces at a high speed. Company has suffered a huge loss in year 2015. The current assets of the company are less as compared to its current liabilities for the last five years. Recommendation
After analysing the financial position of the company by calculating various ratios, it can be interpreted that company is not doing well. Therefore, recommendations that can be followed by the Tesco in order to improve its financial position have been discussed below:
Books and Journals
Ahrendsen, L. B. and Katchova, L. A., 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review. 72(2). pp. 262 – 272.
Estrada, J., 2005. Adjusting P/E ratios by growth and risk: the PERG ratio. International Journal of Managerial Finance. 1(3). pp. 187 – 203.
Kastantin, T. J., 2005. Beyond earnings management: Using ratios to predict Enron's collapse. Managerial Finance. 31(9). pp.35 – 51.
Leong, K., Pagani, M. and Zaima, K. J., 2009. Portfolio strategies using EVA, earnings ratio or book‐to‐market: Is one best?. Review of Accounting and Finance. 8(1). pp. 76 – 86.
Nissim, D. and Penman, S. H., 2001. Ratio analysis and equity valuation: From research to practice. Review of accounting studies. 6(1). pp. 109-154.
Werner, R. A and Brand, W. A., 2001. Referencing strategies and techniques in stable isotope ratio analysis. Rapid Communications in Mass Spectrometry. 15(7). pp. 501-519.
Ye, X., Wang, D. and Zheng, X., 2015. Effects of density ratio and diameter ratio on penetration of rotation projectile obliquely impacting a granular medium. Engineering Computations. 32(40). pp. 1025 – 1040.
Contents. 2015. [PDF]. Available through: < https://investor.ryanair.com/wp-content/uploads/2015/07/Annual-Report-2015.pdf>. [Accessed on 10th February, 2016].
Financial ratios. 2015. [Online]. Available through: < http://www.cpaclass.com/fsa/ratio-01a.htm>.[Accessed on 10th February, 2016].
Summary of the balanced scorecard concepts. 2015. [Online]. Available through: < http://maaw.info/BalScoreSum.htm>. [Accessed on 10th February, 2016].
Tesco PLC ADR. 2015. [Online]. Available through: < http://financials.morningstar.com/balance-sheet/bs.html?t=TSCDY®ion=usa&culture=en-US>. [Accessed on 10thFebruary, 2016].
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