Financial Analysis Of Tesco Plc And Industry Sector

Present description of company

With the ramified economic changes and complex business functioning, each and every company has been increasing its turnover and revenue to attract more investors in their business. In this report, TESCO Company has been taken into consideration to evaluate its financial performance, business trend and growth rate of company. Ratio analysis, bottom down analysis and other financial tools have been used to evaluate the financial performance of company.

Tesco Pl is London, UK based company having international merchant retails business around the globe. The stock price of company is 186.10 GBX +9.10 (+5.14% which has increased 20% since last two years. Currently, in 2017 company had revenue of 55.92 billion GBP which is 10% higher as compared to last five years average turnover (TESCO plc, 2016).

Tesco Pl is London, UK based company which has various domestic and international rivals around the globe such as Morrison plc, ALDI and ASDA. These companies have been running its business since very long time and giving tough rivalry to TESCO throughout the time. However, due the sluggish market condition of retail super market business in UK, these companies have gained average 15 % to 20% increment in their turnover. However, on the other hand, TESCO has decreased its turnover to GBP 55917 million in 2017 as compared to GBP 64826 million in 2013 data (TESCO plc, 2017).

Liquidity ratio of company

This ratio reflects the relation between two factors of business and provides the idea about the business performance of company.

The Tesco plc has increased its current ratio to .79 in 2013 which is .11 points high as compared to last five years data. However, average industry data of Morrison, ASDA, ALDI have shown that ideal current ratio of company should be around .82 which is .3 points higher as compared to Tesco’s current ratio. Nonetheless, TESCO plc has increased its liquidity position to discharge its operating activities and increase its overall turnover (Brigham, and Ehrhardt, 2013). 

Description	Formula	Tesco Plc
		2013	2014	2015	2016	2017	Industry average
Current ratio	Current assets/current liabilities	0.69	0.73	0.60	0.75	0.79	.82
Quick Ratio	Current assets-Inventory/current liabilities	0.49	0.56	0.45	0.63	0.68	.70

Quick ratio- This ratio shows company’s extreme abilities to pay of its short term and long term debts through quick assets. However, TESCO plc throughout these five years it has increased its quick ratio to .68 in 2017. Nonetheless, industry average of company is .70 which is 2 points higher. This has shown that other companies such as ALDI, ASDA and Morrison are maintaining stronger quick ratio (Gitman, Juchau, and Flanagan, 2015)

These ratio reflects how well TESCO plc has been earning through its business functioning. The Tesco plc has decreased its profitability ratio due to sluggish market condition. It is evaluate that return on equity of company has gone down by 44% points as compared to last five years data. However, average industry data of Morrison, ASDA, ALDI have shown that positive return on equity which is negative indicators for TESO. Return on assets of company was .007 in 2013 which went down to -.0063 in 2017. Nonetheless, TESCO plc has increased its assets turnover ratio by 1 % in these five years. However, at the same time, earning per share of company has gone negative which reflects that company has damaged its business value and invested capital. On the other hand, ALDI, Morrison and ASDA have also faced this downfall in their revenue but due to their effective business functioning they have been maintain positive turnover and net profit throughout the time. Therefore, it could be inferred that TESCO company has damaged its business throughout the time and lost its brand image in market (Ehrhardt, and Brigham, 2016).

Competitors Company’s name

Description	Formula	TESCO PLC			Industry average
		2013	2014	2015
Profitability
Return on equity	Net profit/revenues	0.0019128	0.0153248	-0.092175	0.000980049	0.000980049	0.000980049
Return on assets	Net profit/Equity	0.0074506	0.066191	-0.811908	0.010727969	0.010727969	0.010727969
Financial leverage	EBIT / EBIT – Interest	1.2553069	1.2046703	0.9206803	2.028	2.028	2.028
Asset turnover	total assets / total sales *365	282.24917	288.08566	259.10523	0.332166608	0.332166608	0.332166608
Earkings per share	Net income – pref div / shares outstanding	0.0074506	0.066191	-0.811908	0.010727969	0.010727969	0.010727969

Receivable turnover ratio- This ratio shows how well TESCO has been managing its cash in its business functioning. TESCO company has zero receivable which is very good indicators of no amount blockage. While on the other hand, other rivals average receivable turnover is around 26 which increases the overall cost of the capital (Duchin and Sosyura, 2014.).

Efficiency ratio	Tesco Plc
Particular	Formula	2013	2014	2015	2016	2017	Industry average
Receivable turnover	Receivables/ Total sales*365	–	–	–	–	–	26.30
Inventory turnover	Inventory / cost of goods sold *365	22.50	21.92	16.76	17.20	15.84	13.44
Creditor Turnover	Creditors/ Total purchase*365	9.94	9.79	7.88	8.83	16.74	14.17

Inventory turnover- This ratio reflects that TESCO plc has decreased its inventory turnover to 15.84 in 2017 which is 25% less compared to its last five years data. It has shown that company has reduced its amount blockage in its inventory storage. On the other hand, other rivals Morrison, ALDI and ASDA have been maintain around 13.44 inventory averages which is 2% less as compared to TESCO data.

Creditor turnover- This ratio reflects the amount blockage in company’s purchasing. It is considered that company should keep more creditors turnover to reduce the amount blockage. IN 2013, TESCO plc had 9.94 creditor turnover afterward , this ratio increased to 16.74 in 2017. This shows that company planned to reduce its cost of capital. However, industry average for creditors turnover is 14.17 which is less compared to TESCO (Bloomberg, 2017).

This ratio reflects company’s ability to manage effective capital structure.

Interest coverage ratio- This ratio shows that company has managed its EBIT higher than its interest payment amount in all of these five years. However, TESCO could also raise more debt capital to reduce its overall cost of capital (Weygandt, Kimmel and Kieso, 2015).

Debt to equity ratio- This ratio reflects the debt and equity portion of Tesco Company. TESCO has increased its debt to equity portion. However, industry average debt equity will not be much use as debt to equity ratio is determined on the basis of internal and external factors of business.

Debt to capital	Tesco Plc
Particular	Formula	2013	2014	2015	2016	2017	Industry average
Times interest earned	EBIT / Interest expenses	4.9168539	5.885906	-11.60721	2.1004016	1.967117988	1.972762646
Debt to Equity Ratio	Debt/ Equity	3.01	3.41	6.25	5.09	7.12	7.40

It is evaluated that Tesco has decreased its price earnings ratio since last five years. However, since last five years, company has decreased its overall earning and resulted to negative market based ratio. On the other hand, industry average of other companies is GBP 38311.07 which is very high and reflects that TESCO plc has destructed its core value throughout the time (Zhu, 2014). 

Debt to capital	Tesco Plc
Particular	Formula	2013	2014	2015	2016	2017	Industry average
Price / earnings ratio	Market value per share / earnings per share	24,159.19	2,749.62	(225.40)	11,501.33	(29,775.75)	38,311.07

TESCO plc has been facing various challenges due to the internal and sluggish market condition. However, efficiency ratio of company has shown that company has been managing its business efficiently but due to other factors, profitability of company has gone down. Company has failed to manage its business and resulted to destruction of its business. However, if company wants to make profit then it has to increase its overall revenue. TESCO Company has to increase its total turnover by 30% if it wants to keep up with the industry average in retail business. However, the big challenge is related to its downfall in its overall earning which will not only destruct the value of the shareholders but also decrease the brand image of company at large (Yahoo finance, 2017).

Part-1

After evaluating the last two years data,, it could be inferred that company has increase its total revenue but as compared to industry average it has very low total revenue. Company needs to increase its investment in its current assets to increase the overall production and turnover. However, entering into strategic alliance with other partners will help company to reduce the cost and create synergy. It has shown that company has trend of increasing overall turnover but it is not sufficient. TESCO needs to increase the overall turnover by at least 30% each year. Then only it could create value for the invested capital in business.

Computation of financial data
Details	(TESCO plc financial data GBP in million)
	2013	2014	2015	2016	2017	Industry average
Total revenue	64,826	63,557	62,284	54,433	55,917	71425

After evaluating the annual report of TESCO and other companies such as Morrison, ALDI and ASDA, it is considered that TESCO is far more behind than other rivals in this retail industry. Other companies on average have more efficiency in market as compared to TESCO. However, TESCO is efficient to reduce the amount blockage but has failed to keep higher revenue as compared to industry average. On the other hand, TESCO has negative profitability which is not a good indicator for the sustainable business of TESCO. 

This report has reflected that TESCO needs to increase its overall turnover and keep profitable business if it wants to grow In this report, all the details and data have been collected by using annual report of Tesco company and industry average have been taken from the Bloomberg, Yahoo finance and Morningstar. These sites have provided all the reliable data which have been gauged by comparing all the data with each other sites. Tesco Company has followed International financial accounting standards and UK accounting rules for preparing and reporting of its financial statement. This company has also complied with other accounting rules and conventions with a view to harmonize its domestic and international reporting standards. The main problem which arises while implementing financial analysis is related to collecting industry average data. In this data, only three companies’ average data have been taken i.e. Morrison, ALDI, ASDA which are good indictors for evaluating the financial performance of TESCO. This company needs to make several improvements in its financial performance and first is related to increasing its turnover and profitability at large (Bloomberg, 2017). 

Conclusion 

After analyzing all the details and annual report of these companies, it could be inferred that if TESCO wants to have sustainable business then it will have to increase its overall turnover and profit. Other rivals such as Morrison, ASDA and ALDI are performing well and giving high return to the investors. If TESCO do not perform well then it will destruct its business in very short span of time.  

References

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Engage Learning.

TESCO plc, 2016, annual report, retrieved on 14^th November, 2017 from https://www.google.co.in/search?q=tesco+annual+report&oq=tesco+ann&aqs=chrome.1.69i57j0l5.3525j0j7&sourceid=chrome&ie=UTF-8

TESCO plc, 2017, annual report, retrieved on 14^th November, 2017 from https://www.google.co.in/search?q=tesco+annual+report&oq=tesco+ann&aqs=chrome.1.69i57j0l5.3525j0j7&sourceid=chrome&ie=UTF-8 

Zhu, J., 2014. Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets (Vol. 213). Springer

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.

Duchin, R. and Sosyura, D., 2014. Safer ratios, riskier portfolios: Banks? response to government aid. Journal of Financial Economics, 113(1), pp.1-28.

Bloomberg, 2017 retrieved on 14^th November, 2017 from www.bloomberg.com.au

Yahoo finance, 2017 retrieved on 28^th October, 2017 from https://in.finance.yahoo.com/

Bloomberg, 2017, government security retrieved on 14^th November, 2017 https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia