The report has been prepared to evaluate the financial position and financial performance of the Tesco plc in recent environment. The report focuses on the financial changes in the company in last few years and it also predicts few financial changes in the company in near future. Financial performance and position analysis of the company makes it simple for the stakeholders to estimate the position of the business in the industry and the market. It also depicts the profitability, liquidity and efficiency level of the company.
For the report, economical position and recent development in financial market of the country has been estimated and the financial and management strategy of the company has also been evaluated. The financial position of the business has been evaluated on the basis of annual report of the company and the financial statement of the company of last 2 years. The report explains about the strategy effect and financial market effect on an organization.
Company overview:
Tesco plc is a British company which is running its business in retail industry. The company has diversified its market into various countries and currently, company owns 6553 stores. The company has been founded in 1919 in UK. Tesco plc is third largest company in global retail industry. The company has its operations in 12 countries across Europe and Asia. In UK market, the share of the company is 28.4% which is highest in retail industry. Main products and services of the company are supermarket, superstores and hypermarkets. Currently, 4,76,000 people are employed by Tesco plc. The company is operating its business into various areas such as financial services, internet services, telecoms, toys, petrol, software, furniture, books, clothing, electronics etc (Tesco, 2018). It is listed on London stock exchange (LSX) as well as it is a constituent of FTSE 100 index.
Recent development impact on organization:
The global financial environment explains about various changes in last few years. The major change was financial crisis in UK market in 2014. The financial crisis has impacted entire financial market worldwide. Due to the financial crisis, 2014, Tesco plc had to face various issues (Atrill and Mc Laney, 2017). Though, few developments have also been seen in the global financial market in last few years such as globalization and liberalization. The main changes are liberalization of markets and continuous changes in the technology. These have enhanced the financial opportunities and investment decisions of the investors. The easier access for the inventors to global financial market is also one of the financial developments. Due to these developments, Tesco plc’s stock price has been enhanced as foreign investors are showing their interest in the company (FT, 2018). The company has expanded its market into foreign countries to enhance the future growth in the retail industry and this has helped the company to grab more market share and the investment has also been enhanced in the company. Further, it has been found that the overall strategy of Tesco plc is growth and the recent developments have helped the company to achieve it (Madhura, 2011).
The global financial development made it easy for the company to run its business overseas. Company has invested into various new projects and diversified its business into new industry due to huge investment which has been possible due to recent development in the financial market. Annual report of the company briefs that the position of the company have been better in last few years. It has also impacted on non financial growth of the company (Lord, 2007). The economical position of UK has been better due to recent development into financial market and hence, the profitability level of Tesco plc has also been better. It explains that the financial development impacts various positive changes in an organization.
Further, it has been evaluated that these continuous improvement and development in the financial market would enhance the financial and non financial position of Tesco plc in the market. It explains that the more financing would be available for the Tesco plc. Further, the more market opportunities would be there for the company to diversify its market and grab the market share. The technology of the company would also enhance and it would reduce the cost level of the company.
Financial performance of the company:
Financial performance of an association could be evaluated on the basis of financial statements of the company. Financial performance is a process which evaluates about the recent changes into the financial performance of the company as well as the financial position of the company in the market. Financial presentation of Tesco plc has been evaluated to identify the performance of the company in last 2 years. For evaluating the financial performance, ratio analysis study has been conducted. Ratio analysis briefs about the financial statements of the company (Kaplan and Atkinson, 2015).
Firstly, profitability ratios have been calculated. Profitability ratios evaluate the position and the capability of the company to generate the profits (Hillier, Grinblatt and Titman, 2011). Following is the calculation of profitability ratio of Tesco plc:
|
Description |
Formula |
Tesco plc |
|
|
|
|
2017 |
2016 |
|
Profitability |
|||
|
gross profit |
Gross profit / revenue |
5.19% |
5.24% |
|
Net margin |
Net profit/revenues |
-0.07% |
0.25% |
(Morningstar, 2018)
Gross profit ratio determines the gross profit and revenue relationship. Calculations of Tesco plc briefs that the gross profit level of the company has been reduced by some points from last year due to high raw material price. Further, net profit evaluates about the net profit generation capability of the company, it briefs that the net profit of the company has been negative in 2017 due to current investment and new funds of the company (Brown, Beekes and Verhoeven, 2011).
Further, liquidity ratios have been calculated. Liquidity ratios evaluate the position and the capability of the company to pay its short term debt obligation. Following is the calculation of liquidity ratio of Tesco plc:
|
Description |
Formula |
Tesco plc |
|
|
|
|
2017 |
2016 |
|
Profitability |
|||
|
Quick ratio |
Quick assets / current liabilities |
0.68 |
0.63 |
|
Current ratio |
Current assets /current liabilities |
0.79 |
0.75 |
Current ratio determines the current assets and current liability relationship. Calculations of Tesco plc briefs that the current ratio level of the company has been enhanced from last year. Further, quick ratio evaluates the instant debt obligation capability of the company (Higgins, 2012). It briefs that the quick position of the company has also been better from last year and express the less risky position of the company.
Lastly, efficiency ratios have been calculated. Efficiency ratios evaluate the position and the capability of the company to manage its working capital and efficiency to run the business. Following is the calculation of efficiency ratio of Tesco plc:
|
Description |
Formula |
Tesco plc |
|
|
|
|
2017 |
2016 |
|
Profitability |
|||
|
Receivables collection period |
Receivables/ Total sales*365 |
39.15 |
35.12 |
|
Payables collection period |
Payables/ Cost of sales*365 (Bekaert and Hodrick, 2016) |
61.10 |
32.16 |
Receivable collection period determines the total time to receive the debtors amount. Calculations of Tesco plc briefs that the Receivable collection period ratio level of the company has been enhanced from last year. Further, Payables collection period evaluates the payment turnover days of the company (Hill, 2017). It briefs that the payment turnover days of the company has been lesser which explains that the company is required to invest more capital for its daily operations.
Hence, the evaluation on the financial position of the company briefs that the financial performance of the company has been worst from last year. The profitability ratio depicts about the huge losses which have been faced by the company in last 2 years. It explains about the bad position of the economy and the impact of financial crisis on the position of the company. Further, the liquidity ratio briefs that the liquidity position of the company has became better from last year due to the changes into the strategies and huge current assets of the company. Hence, it expresses the less risky position of the company. Lastly, the efficiency ratios of the company explain that the company is required to invest more capital for its daily operations. Hence, the entire performance of the company explains that the financial performance of the company has been worst from last year financial performance of the company has been worst from last year.
Financial strategy and its affect on financial performance:
Further, few financial strategy of the company has been evaluated along with their impact on the financial position of the company. Capital structure, source of finance and dividend policy of the business has been estimated to recognize the performance of the company. Firstly, source of finance strategy of the company has been evaluated to identify the performance of the company. Source of finance is a way to meet the organizational needs the financing (Brown, Beekes and Verhoeven, 2011). It could be short term as well as long term. The source of finance of Tesco plc is as follows:
|
Source of finance |
|
|
Price |
|
|
Long term debt |
9,330 |
|
Short term debt |
2,549 |
|
Equity |
6,438 |
It explains that the company has raised its short term funds through short term debt and the long term funds have been financed through long term debt and the equity. These sources of finances have been used by the company to maintain the risk and cost of the company. It has impacted on the total cost of capital of the company (Ward, 2014).
Further, capital structure of the company has been evaluated. Capital structure evaluates the source of finance as well as associated risk and cost of the sources. Following is the capital structure of the company:
|
Capital structure of Tesco plc |
||||
|
Price |
Cost |
Weight |
WACC |
|
|
Debt |
11,879 |
5.60% |
0.64852 |
0.03632 |
|
Equity |
6,438 |
6.07% |
0.35148 |
0.02134 |
|
18,317 |
Kd |
5.77% |
||
|
Calculation of cost of debt |
||||
|
Outstanding debt |
11,879 |
|||
|
interest rate |
8.00% |
|||
|
Tax rate |
30.0% |
|||
|
Kd |
5.60% |
|||
|
Calculation of cost of equity (CAPM) |
||||
|
RF |
2.40% |
|||
|
RM |
6.00% |
|||
|
Beta |
1.02 |
|||
|
Required rate of return |
6.07% |
(Watson and Head, 2016)
Above table explains that the debt level of the company is quite higher than the equity level. It explains that the company has raised more funds through debt due to less cost of debt. This states that the capital structure strategies of the company have helped the company to manage the risk and the cost of the company (Bender, 2013).
Lastly, the dividend policy of the company has been evaluated. Dividend policy of a company briefs the approach of the company to pay its profits to the stockholders of the company. Through the annual report (2017) of the company, it has been found that the Tesco plc is following the relevant divided policy which means most of the profits are given to the stakeholders as dividend. This policy has helped the company to generate more investment as well as the stock price of the company has also been enhanced due to the policy.
Hence, it has been evaluated that the financial strategies of Tesco plc are quite strong. The company has managed the capital structure in a better way. The capital structure strategies of the company explain that the company is managing the risk and the cost of the company in a better way. Further, the dividend policy of the company explains that the company is generating more investment as well as the stock price of the company has also been enhanced due to the policy.
Key management strategy:
Lastly, the risk mitigation strategies of the company have been evaluated. Risk mitigation strategies are quite essential for every business. It assists the company to save from various sudden risks. An organization always manages huge fund and propose various new strategies to manage the business performance of the company. The risk mitigation strategy and model is as follows:
The above diagram explains the risk management model. The risk mitigation plan of Tesco plc has been evaluated further according to the current position of the company and the current strategies of the company. The company could follow the given risk management techniques to mitigate the risk:
Company should follow the better liquidity plans to manage the sudden risk related to the funds and the obligations. The liquidity could be managed by the company through managing the better portion of quick assets, retained earnings, debt capital market issues, disposals of assets, bank borrowings, leases, cash etc. Liquidity risk is managed by the companies by managing the long term cash flow and short term cash flow forecast (Lumby and Jones, 2015). These changes could be done by the company through organizational design, cost reduction, supplier relationship etc. this transformation model would assist the company to mitigate the risk and generate higher profits.
Further, company should also follow the better policies of transformation of economic model as economic changes make huge impact on the financial and non financial performance of the company. Thus, the company should process of transforming the business and its operations to drive better performance and improvements (Bloomberg, 2018). These changes could be done by the company through organizational design, cost reduction, supplier relationship etc. this transformation model would assist the company to mitigate the risk and generate higher profits.
Lastly, company should also follow the better policies to manage the currency risk changes and the changes into the money market. Thus, the company should process of managing some provisions and must diversify its market into different countries (Financial risk, 2018). These changes could be done by the company through organizational design, cost reduction, supplier relationship etc. this transformation model would assist the company to mitigate the risk and generate higher profits.
Hence, the evaluation on the key management strategies of the company briefs that the company is required to manage few changes into its current and daily operations to manage the performance. The financial and currency strategy of the company briefs that the company is required to manage the new changes to save the profitability position of the company from the sudden changes and the risk. These strategies would help the company to mitigate the risk and enhance the performance of the company.
Conclusion:
To conclude, the financial performance of the company is not better as the profitability position of the company has been lower by a great level. the company has faced huge losses in current year. Though, the non financial position of the company is quite strong as the current economical position and the position of the industry is helping the company to enhance the market and grab the opportunity. Hence, company is required to manage some new policies and strategies to manage the process of the company. This would help the company to grow its business more rapidly and generate more business.
References:
Annual Report. (2017). Tesco Plc. [Online]. Available at: https://www.tescoplc.com/media/392373/68336_tesco_ar_digital_interactive_250417.pdf [Accessed as on 15th Mar 2018].
Atrill, P., and Mc Laney E. 2017. Accounting and finance for non-specialists. 10th Edition. Harlow: FT Prentice Hall.
Bekaert, G. J., and Hodrick, R.J., 2016, International Financial Management, 2nd Ed., Pearson, London.
Bender, R. 2013. Corporate financial strategy, 4th ed. London: Routledge.
Bloomberg. 2018. Tesco Targets Cheaper, Healthier Food to Get Back in Game. [Online]. Available at: https://www.bloomberg.com/news/articles/2017-06-16/tesco-u-k-sales-beat-estimates-as-grocer-holds-line-on-prices [Accessed as on 15th Mar 2018].
Brown, P., Beekes, W., and Verhoeven, P. 2011. Corporate governance, accounting and finance: A review. Accounting & finance, 51(1), 96-172.
Financial Risk. 2018. Tesco Plc. [Online]. Available at: https://www.tescoplc.com/investors/debt-investors/financial-risks/ [Accessed as on 15th Mar 2018].
Tesco Plc. [Online]. Available at: https://markets.ft.com/data/equities/tearsheet/summary?s=TSCO:LSE [Accessed as on 15thMar 2018].
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hill, C. W. L. 2017. International business. 11th ed. New York: Pearson.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley & Sons.
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.
Lumby, S. and Jones, C. 2015. Corporate finance: theory and practice. 9th ed., London: Cengage. Jacque, L. 2014. International corporate finance. London: Wiley.
Madura, J. 2011. International financial management. Cengage Learning.
Morningstar. 2018. Tesco Plc. [Online]. Available at: https://financials.morningstar.com/cash-flow/cf.html?t=TSCO®ion=gbr&culture=en-US [Accessed as on 15th Mar 2018].
Tesco. 2018. Tesco Plc. [Online]. Available at: https://www.tescoplc.com/ [Accessed as on 15th Mar 2018].
Ward, A. M. 2014. Finance: theory and practice. 3rd ed. Dublin: Chartered Accountants Ireland.
Watson, D. and Head, A. 2016. Corporate finance 7th ed. New York: Pearson.
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