The primary purpose of this report is to review and analyse the financial statements of the company from a viewpoint of customer with the help of financial ratio analysis. The firm that has been mentioned in assignment is “Benedict Company”. In order to meet the needs of investors, lenders, suppliers, and potential customers the Benedict Co. is analysed or evaluated by making use of the relevant financial ratios. However, the relevance and purpose of the selected financial ratios and the company’s aspects which will give cause for a concerned have been discussed in this report. The financial ratios applications are being evaluated by measuring and interpreting the company’s performance. Hence, on the basis of overall discussion and analysis, an overall recommendation has been provided.
Furthermore, the definition of “stakeholder” has been explained and it also recognises the different types of stakeholders of the company (Tesco). While on the other hand, how the Social & Environmental Review and the Report of Corporate Governance assist Tesco in demonstrating its performance with respect to its social and corporate responsibilities of the stakeholders that is being identified earlier. Lastly, an overall conclusion has been delivered based on the discussion that has been made in this report.
A stakeholder refers to an entity or person that has an interest or significance in the project or business. Thus, stakeholders may have a considerable impact or influence on the decisions with respect to the organization’s finances and operations. Instances of stakeholders are creditors, employees, local community, and even the investors. An entity’s stakeholder may be both external or internal to the organization. Internal stakeholders refer to an individual whose interest in the firm comes through the straight relationship like ownership, investment and employment (SUTHAR 2018). While on the other hand, external stakeholders refer to those people who do not fucntion directly with the organization but are influenced by the business outcomes and actions. Suppliers, public groups, and creditors are considered as an external stakeholder.
The following three major types of stakeholders of “Tesco” that has been identified are mentioned and discussed below:
The three strategic priorities of Tesco as per its risk management framework are mentioned below:
Two stakeholders which are customers and colleagues have been selected for which the company has identified or recognized risk and the key controlling & mitigating factors have been implemented. The following are mentioned and discussed below:
Customer Proposition (Customers): In order to fulfil the strategic priorities number one and three, the company mainly focuses on the customer proposition. Failure to hear to their customers & to comprehend the altering marketplace leads to a market share loss because customer purchases or acquisitions are made with the competitors. Hence, the company are not able to sustain and build loyalty causing an adverse influence on their financial results. While on the other hand, Tesco is addressing the test of changing customer wishes and inflated customer choice as an outcome of intensifying competitive activity. The requirement of customer is central to their decision-making. With respect to this, the company has also implemented mitigating factors and key controls. They have developed a strategic plan in order to improve their understanding of their customer requirements. Moreover, customer insight or vision supports development or growth of customer-focused plans across every market and they have also developed profiles of strategic customers so that they can understand the particular market expectations.
People (Colleagues): The company’s failure to motivate, retain, and attract the most able colleagues and form the required behaviours, leadership, and culture in order to meet their purpose or objective, causing an inability to accomplish their business objectives. Regarding this, their people are the most valuable or precious asset. Hence, they continue to manage & consider inclusion and diversity and colleague engagement. Furthermore, the mitigating factors and key controls that has been taken concerning this is that standardized recruitment processes and policies have been ascertained and a Board supported people strategy or plan that is being implemented in order to retain and attract the best people. Inclusion and diversity are the key components of their people agenda. Succession planning and remuneration policies are subject to intermittent benchmarking to approve that they remain appropriate or suitable for the group. In addition, they also provide ongoing opportunities for professional and personal development through their graduate programmes and established leadership programmes.
Safety (Customers & Colleagues): In relation to product or workplace, illness, or injury to customers, resulting in death, third parties, or colleagues, Tesco do not meet or cover safety standards. Hence, they persist to focus their attempts on controls in order to ensure product safety and workplace. The key controls & mitigating factors that has been taken regarding this is that for workplace safety, controls contain group safety procedures & policies, group safety standards and rapid intensified incident-reporting to CEO. Thus, implementation is pushed by a devoted “Group Safety Function”, delivering guidance on safety matters around layouts to the group. Moreover, a framework has also been developed with respect to the safety risk assessments.
Financial ratio analysis refers to a quantitative technique of gaining insight or vision into an organization’s liquidity, profitability, & operational efficiency by studying or reviewing its financial statements like income statement & balance sheet (Christiana, Purnama and Ardila 2020). It is a foundation of basis equity analysis. Additionally, it is a valuable management tool that would enhance the grasp of financial trends & results over time & provide key pointers of organizational performance. Managers would use ratio analysis in order to pinpoint weaknesses and strengths from which initiatives and strategies can be developed. Funders might utilize financial ratio analysis in order to assess against other firms or make judgements with respect to mission impact and management effectiveness (Raki?evi? et al. 2016).
The following financial performance of Benedict Co. is analysed or examined below:
Liquidity Ratios
Benedict’s liquidity positions are determined by analysing or reviewing three major types of liquidity ratios for 2021 and 2020.
Current Ratio
Current ratio refers to a liquidity ratio that assesses the company’s ability to cover short-term obligations & dues within a stipulated period of time (Dance and Imade 2019). On the basis of financial computation, the Benedict’s current ratio for 2021 and 2020 is 1.19 times and 1.25 times, indicating that the group is having sufficient cash and liquid assets to pay all short-term dues or obligations in current year as compared to previous year as the value of total current assets surpasses the value of total current liabilities (Muli 2019). Higher the metric, the more ability an organization has in paying its short-term implications.
Quick Ratio
Quick ratio measures the organization’s skill to cover its current debts without requiring to sell its stock or obtaining additional financing. On analysing or reviewing the Benedict’s quick ratio, it has been observed that quick ratio reduced to 0.70 times in 2021 from 0.75 times, suggesting that the group’s current asset is mainly reliant on its stock in terms of paying the current liabilities. Hence, it is important to treat it with caution or carefulness. The two most important ways to enhance the quick ratio are increasing inventory turnover and net sales (Easton et al. 2018).
Working capital turnover ratio measures how effectively an organization is utilizing its working capital in order to support sales & growth. However, the company’s working capital turnover ratio pertaining to 2021 and 2020 is calculated at 15.40 times and 19.15 times. It can be seen that there is a significant reduction in the metric which implies that Benedict is not able to generate larger amount of net sales and is not that much efficiently in utilizing a firm’s short-term liabilities and assets for supporting sales in the current year as compared to previous year.
Benedict’s overall profitability position is determined by examining the different types of profitability ratios for the financial years 2020 and 2021 (Jackson 2021).
Net Profit Margin
Net profit margin evaluates how much net profit or income is produced as a % of net revenue. This metric is considered to be the significant indicators of the firm’s overall financial health (Kourtis, Kourtis and Curtis 2019). The net profit margin of Benedict decreases to 21.43% in 2021 from 28.11% in 2020, indicating that less amount of net profit has been generated from its net revenue and is also not utilized it efficiently. This might happen because of the higher cost or lower sales price. Moreover, the company is also not efficient at converting net sales into actual net profit.
Gross Profit Margin
Gross profit margin refers to an analytical measure which is utilized in assessing the firm’s financial performance by computing the money which is left over from the product sales after deducting the COGS. Based on the ratio calculation, the gross profit margin pertaining to 2021 and 2020 is 48.05% and 41.77%, indicating that the company has make a reasonable net profit on its net sales and has also utilized it efficiently. It is always better to have a higher ratio which implies a favourable trend.
Return on Equity
ROE refers to a financial performance measure which is computed by dividing the net income by its shareholders equity (McGrath and Whitty 2017). It is a measurement of an organization’s profitability and how effectively it creates those net profits. On the basis of financial ratio calculation, Benedict’s ROE decreases to 23.57% in 2021 from 27.03% in 2020, indicating that Benedict has become less effective at generating net profits and in increasing shareholder value. In addition, less amount of net profits is created in the net profit from its shareholder’s equity and the management is making poor or unfavourable decisions on reinvesting net capital in the unproductive assets.
Benedict’s operational efficiency is determined by examining three different types of efficiency ratio for 2021 and 2020.
Accounts receivable days demonstrates a number of days an organization takes to gather cash from the credit sales (Miles and Ringham 2018). Thus, it shows how efficiently an organization is collecting cash from its clients and whether the organization is effective or not. On analysing the trade receivable days, it can be seen that the metric has increases significantly to 90.06 days in 2021 from 55.70 days in 2020, implying that the company is not effective in collecting all the dues from its clients in the current year as compared to previous year (Miles 2017). In addition, the company may enhance this metric by emphasizing on the credit estimations of its clients and by proposing expense incentive to the customers.
Trade Payable Days
Trade payable days refers to a financial metric that implies the average time that an organization take to clear all the invoices and bills to its creditors which might contain financiers, vendors, or suppliers. Based on the calculation, the company’s trade payable days pertaining to 2021 and 2020 is 155.13 days and 108.24 days, indicating that Benedict is paying their suppliers quite slowly, and might be a pointer of deteriorating the financial condition. However, the main reason behind this is due to an inventory purchase and it has extra cash that may be utilized for the purpose of short-term investment.
Inventory Days
Inventory days refers to an average time an organization keeps its stock before it is marketed or sold (Monahan 2018). It is a ratio that analysts utilize to decide the net sales effectiveness. On the basis of calculation, the company’s inventory days increases to 118.63 days in 2021 from 65.45 days in 2020, suggesting that Benedict is not managing or handling its inventory properly or maybe it has stock that is quite complex to sell. In addition, the company cannot turn its inventory into net sales quickly.
Benedict’s investors position is determined by analysing or examining the different types of investors ratio for the financial years 2021 and 2020.
Earnings Per Share
Earnings per share refers to organizations net profit which is divided by the outstanding shares it has (Zhongming et al. 2021). This metric implies how much amount an organization makes for every share of its inventory. On analysing Benedict’s EPS, it can be observed that the metric decreases to $366.67 in 2021 from $388.89 in 2020, indicates lower value because investors would not be ready to pay more for the shares of a company if they believe that Benedict has lower net profits comparative to the share price.
Price to Earnings Ratio
P/E is the metric for valuing an organization that evaluates its recent share price comparative to its EPS. Sometimes this metric is also referred as the earnings multiple or price multiple. Therefore, Benedict’s P/E ratio for 2021 and 2020 is calculated at $0.02 & $0.01, indicating that the investors are willing to paying higher share price due to growth expectations or outlooks in the future. Hence, higher the price earnings ratio, the more one is paying for every dollar of earnings.
Dividend Yield Ratio
Dividend yield ratio refers to a financial metric that demonstrates how much an organization pays out in the dividends every year comparative to its price of the stock. On the basis of calculation, Benedict’s dividend yield ratio for 2021 and 2020 is calculated at 80.36% & 100%, indicating that there is room for the future growth or development in the dividend payments. Generally, investors must look for firms whose dividend are more considerable as it tells that the firms can deliver consistently.
Conclusion
On the basis of above discussion, it can be concluded that financial ratios have been utilized to analyse or examine the financial performance of Benedict Co. Thus, financial ratios are significant for the organization to examine its liquidity, profitability, operations effectiveness, risk, solvency, and funds proper utilization. From the above analysis, it can be observed that the financial performance of the company is deteriorated in 2021 as compared to 2020, it is quite important for the company to handle its liquidity position and profitability position because it would influence the business operations in the future. Furthermore, efficiency positions are also needed to be improved so that the company can clear all of its bills and invoices rapidly.
References
Christiana, I., Purnama, N.I. and Ardila, I., 2020. Financial ratio in the analysis of earnings management. International Journal of Accounting & Finance in Asia Pasific (IJAFAP), 3(1), pp.8-17.
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Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.
Jackson, A.B., 2021. Financial statement analysis: a review and current issues. China Finance Review International.
Kourtis, E., Kourtis, G. and Curtis, P., 2019. An integrated financial ratio analysis as a navigation compass through the fraudulent reporting conundrum: a case study.
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