Discuss about the Analyzing Financial Statements Of Tesco Operating.
Financial analysis plays most important in the organization as through this it can be easily known whether the company is operating efficiently in the market or not. Apart from this, it is a well-known fact that market where the company operates is full of challenges and it directly acts as the hurdle in accomplishing the desired goals. Analyzing financial statements of the business allows in knowing the financial performance of the business and in turn corrective actions can be easily taken by the company for overall improvement. The present report is based on analyzing financial statements of Tesco operating in the market of UK. Various tasks have been covered in the study which involves history, the background of the company, directors, auditors, retained profits of the company and overall financial analysis.
In the present report, Tesco plc has been chosen as one of the organization that is a British multinational grocery and merchandise retailers headquartered in Welwyn Garden City, Hertfordshire, England, United Kingdom. The organization is considered to be the third largest retailer in the global market regarding profits and ninth largest retailer in the world regarding revenue. The organization was founded in the year 1919 by Jack Cohen, and at present, it has stores in 12 countries across Europe and Asia. Jack Cohen was the individual who founded the name of Tesco and took imitative to open hundred of stores in the market (Plc 2017). Since the period 1992, the entire company has grown at the faster pace where the market share of the enterprise has increased from 10.4% to 15.2%. The overall rise in the customer base of Tesco has allowed business to gain the competitive edge over its rivalry.
On a yearly basis, Tesco is earning high amount of profits and sales revenue along with this large number of customers are brand loyal towards the company in the market. Time to time the founder of the company carried out innovative practices, and this became one of the main reasons behind the success of the company in the market. The key products of the organization are segregated into supermarket, hypermarket, and superstore. Tesco offers every type of retail products in the market such as grocery, electrical, furniture, toys, petrol and software, etc. Apart from this, the service range of the organization involves telecom, internet service, financial service, etc (Plc 2017). All these products and services are offered to the target market as per their real expectations in the market. At present stores of Tesco are present worldwide, and its supermarket chain is popular in every area where every customer prefer to purchase products of the organization. Apart from this, the market where the company operates is highly competitive, and the key competitors of the organization are Sainsbury, Marks and Spencer, etc. So, this provides the overview of the entire organization and highlights the reasons behind the success of the organization in the market. Considering the year 2016 which has been undertaken for review the company has 6809 shops around the world, 460,000 colleagues and 79m shopping trips per week.
Undertaking the content page of the organization it has been found that financial review part is the most crucial area that dominates the entire report. Further, this section has been placed by organization separately, and it supports in knowing the overall performance of the business in the market. Under this section which starts from page number 14 to 20, it has been found that the organization has focused on the key areas which involve sales, revenue operating profit of different segments such as Tesco bank, and other business ventures. Along with this financial information of the entire group has been published that highlights whether the business is performing efficiently in the market or not. The main reason due to which Tesco focuses on a financial area is that it represents how business is operating efficiently as compared with other companies operating in the market.
The group sales are represented from fuel and the revenue. Apart from this, the operating profit which takes into consideration UK & ROI, international and Tesco bank figures are shown in the statement. Proper analysis of the financial figures has been done by the organization where the performance of the year 2016 has been compared with 2015. This part also represents the major expenses of the company along with the debt. Finance cost and income have been shown by the company which takes into consideration the interest payable, capitalized interest, statutory finance cost, interest receivable, etc. Further, capital expenditure, property and another form of elements are also highlighted in the financial review of the company which is also one of the most significant areas. The key reason due to which Tesco focus on this area on the continuous basis is that it is linked with the overall performance of the business in the market and corrective actions can be taken for improvement in near future.
The main directors of Tesco are John Allan (non executive chairman), Dave Lewis (Group chief executive), Alan Stewart (Chief Financial officer), Deanna Oppenheimer (Senior Independent Director) and Mark Armour (Non-Executive Director) (Plc 2017). So, these are some of the key directors of the organization who holds the responsibility to take major decisions and development of plans to carry out overall operations in the market. Considering the director report of Tesco plc it has been found that group results are shown that indicates revenue for the financial year ending 2016 along with the profit before tax. Dividend payment part has been shown where the group has decided not to pay the dividend. Share capital and control of the company section has been shown that represents the share capital of the organization in detailed form. Major shareholders of the organization have been shown that takes into consideration Norges bank, Deutsche bank, BlackRock Inc and Schroders plc (Plc 2017).
The article of association part has been shown in the director report along with the directors and their interest. It focuses on directors’ remuneration, share options along with another type of holdings that are crucial for the organization. Employment policies that are practiced within the workplace have been highlighted through which company has ensured that it provides proper assistance to its staff members when they need any kind of support. Directors ensure that equal opportunities diversity and inclusion policies are revised on the continuous basis and this in turn allows the business enterprise to operate efficiently. Directors statement of disclosure of information to auditor has also been represented in the report that highlights the awareness level of the directors in relation to the key practices of the business. So, in this way, these are some of the key highlights of the director report of Tesco.
The main auditor of Tesco plc is Deloitte where this organization holds the main responsibility to conduct the analysis of the financial statements prepared by the entity. Byron Grote is the audit committee chairman of the company who ensures that all the financial activities of the business are carried out properly or not. Considering the auditor report of Tesco plc it has been found that opinion on financial statements of a company has been given which undertakes financial statements must be developed by requirement of companies act 2006, group financial statements are properly prepared as per IFRS, and it is ensured that financial statements give true and fair value.
The key risks that auditors have identified involve store impairment review, inventory valuation, determining commercial income, provisions, and reserves in Tesco bank, obligation valuation and accounting for pension curtailment, retail technology environment, etc (Plc 2016). Apart from this, the principal risks have been identified that can influence the solvency position of the enterprise. Moreover, in the entire auditor report description of every risk has been provided such as store impairment review, recognition of commercial income, etc. so that business can take corrective actions with the motive to reduce the impact of risk.
Considering the case of Tesco plc it has been found that group sales have declined. In the financial year ending 2016 the group sales were £48,352m, and in the year 2015, it was £49,853m. This is representing that entire group sales have declined, and the different reasons are present behind the same. Sales of the fuel segment have also declined where in the year 2016 it was £6,081m and in 2015 £7,072m. So, this has directly affected the profitability and revenue level of the organization, and corrective actions are required to be taken. For enhancing the sales level, Tesco plc is required to take some actions such as controlling actions, etc.
Considering the total revenue figures that have declined in the year 2016 with (1.3%) (Butler 2016). Full year UK sales declined by (0.4%) on a 52-week basis, and it is representing the inefficiency of the organization. The main reason for the decline in the sales volume of the enterprise is the rise in the level of competition prevailing in the market. Apart from this, the company has witnessed the loss of customer, and it is also one of the valid reason due to which sales are declining. Competitors of the business are offering products at a lower price, and due to this reason, customers are shifting towards other brands in the market. Therefore, this represents some of the valid reasons due to which Tesco sales have declined in the year 2016 as compared with the previous year. In this situation, the company has to focus on its marketing activities through which customers can be attracted easily, and they can be influenced to purchase the products. Offering discounts and focusing on another type of promotional schemes can assist in enhancing sales volume.
Cash flow statement takes into consideration the three main key elements that are operating, investing and financing activities. Considering the operating activities of Tesco Plc, it has been found that the net cash inflow is 2126£m in the year 2016 and in the year 2015 it was 1467. This is clearly representing that inflow percentage is higher which is 65% in the year 2016 as compared with the previous year. This is indicating that organization is earning profits and the overall operations of the organization are efficient due to which business can generate higher cash from its overall operations. It is also leading to sound liquidity position of the business where adequate cash is available to meet the major expenses of the company. In case of investing activities, the cash has used cash of 615£m in the year 2016 which is comparatively lower as compared with the previous year which was 2015£m (Tesco 2016). So, this is directly representing that lesser investment took place in the year 2016 which is (69%), and company allocated lesser funds in all the investing activities. In the financing activities the total outflow in the year 2016 was 604£m and in the year inflow was 814£m which is (25%). This is indicating that Tesco plc was not able to generate cash from the financing activity in the year 2016 and the main reason was the borrowing level.
In the financial year ending 2016 profits of Tesco plc was 129£m which is favorable as compared with the previous year. In this year the organization had earnings of 2826£m which is considered to be quite high. This is indicating that company has debt burden due to which its overall performance is affected. The company is required to manage its debt and borrowing level as shortly it can surely influence profits of the enterprise. A situation such as non-payment of debt has the adverse impact on the business and the primary motive behind high borrowings is that organization is focusing on its expansion activities. Apart from this, trade and other payables are high which is 8568£m, the current tax liability of 419£m which has increased as compared with the past figure. This situation is required to be managed by business properly so that overall performance can be well maintained on a long-term basis. Borrowings have increased in the year 2016 as compared with the previous year.
Profitability
|
Ratio |
2016 |
2015 |
|
Net margin |
0.22 |
(9.22) |
|
Operating margin |
1.99 |
(10.10) |
|
Return on invested capital |
2.15 |
(23.54) |
Above shown are the profitability ratios of Tesco plc for the year 2016 and 2015. It is indicating that net margin of the business in the year 2016 is 0.22. Generally it indicates the actual revenue of the business which is left with the organization after deducting all the major expenses. So, it is favorable for the Tesco plc in the year 2016 as compared with the previous year which was negative. Same is the case with operating margin which allows in measuring efficiency of the pricing strategy of the company along with the operating efficiency. Pricing strategy of the business is more effective in the year 2016 as compared with the past. Return on invested capital of business is positive and this is showing that Tesco plc is able to receive more return in the year 2016 as compared with the past.
Liquidity
|
Ratio |
2016 |
2015 |
|
Current ratio |
0.75 |
0.60 |
|
Quick ratio |
0.59 |
0.42 |
Current and quick ratio of Tesco plc has increased in the year 2016 as compared with the year 2015 and it is representing that business is having adequate amount of cash and its cash position has increased where it has become possible to meet all the major expenses.
Asset turnover
|
Ratio |
2016 |
2015 |
|
Return on asset |
0.31 |
(12.17) |
|
Asset turnover |
1.24 |
1.32 |
Return on asset and asset turnover ratio of Tesco plc in the year 2016 has improved as compared with the previous year. This is indicating that organization is efficiently utilizing its assets and generating high income with the help of its key assets.
Leverage
|
Ratio |
2016 |
2015 |
|
Financial leverage |
5.09 |
6.25 |
|
Debt/Equity |
1.24 |
1.51 |
Financial leverage of Tesco plc is indicating that Tesco plc is lesser using debt to acquire additional assets. Further, firm has decreased dependency on loan and in case if Tesco plc does not maintains this ratio then it would be lesser risky for the business to operate in the market. Borrowing level of business is high which has been identified with the help of its financial statements.
Therefore, all the financial ratios has supported in knowing the growing performance of Tesco plc in the year 2016 as compared with the previous year. Business is operating efficiently in the market and is financially sound.
Conclusion
The entire study carried out has supported in knowing the financial practices of Tesco plc. Further, the company is operating efficiently in the market and is utilizing its financial resources efficiently. Moreover, the auditor report has shown the key risks that can influence overall operations of the business and required to be managed in the proper manner. Apart from this, sales volume of the organization has declined in the year 2016 where the main reason behind the same is that company has lost its value customers, and through promotional means, it is required to attract customers in the market.
References
Butler, S 2016, Tesco slows sales decline as recovery gathers pace, viewed 7 September 2017, <https://www.theguardian.com/business/2016/mar/08/tesco-recovery-sales-supermarket-retail-sector>.
Plc, T 2016, Independent auditor’s report to the members of Tesco PLC, viewed 7 September 2017, <https://www.tescoplc.com/media/264261/tescoar16_independentauditorsreport.pdf – Accounting>.
Plc, T 2017, Directors’ report, viewed 7 September 2017, <https://www.tescoplc.com/media/264168/tescoar16_directorsreport.pdf>.
Plc, T 2017, History, viewed 7 September 2017, <https://www.tescoplc.com/about-us/history/>.
Plc, T 2017, Our businesses , viewed 7 September 2017, <https://www.tescoplc.com/about-us/our-businesses/>.
Plc, T 2017, Tesco’s Board and Executive Committee, viewed 7 September 2017, <https://www.tescoplc.com/about-us/board-and-executive-committee/board/>.
Tesco 2016, Annual Report and Financial Statements 2016, viewed 7 September 2017, <https://www.tescoplc.com/media/264194/annual-report-2016.pdf>
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