Financial Statement Analysis Of Tesco And Next Plc: Revenue Growth And Liquidity Ratios

Revenue Growth

Question:

Describe about performance, ratio analysis and Non Financial Performance of the Tesco and Next plc company?

According to the overall analysis of the financial statement analysis of the companies Tesco and Next plc are listed over the London stock exchange. There are certain criteria after analysis of those we can easily identify the current market performance of both the companies Tesco plc and Next plc (Fridson and Alvarez, 2011). Next plc is an UK based company which is based on the certain criteria of the organization. The company generally deals with the household products like cloths, footwear, accessories and home products.

There are 500 stores in the different countries in all around the world. As per the based on the market performance the company next plc is performing well in the market as company is having huge number of customer base. After the overall analysis of the stock performance of the next plc company is performing well in the market. The revenue of the company Tesco plc is around 62,284 million as Tesco Company has been declined due certain market impact on the business strategies of the company is showing that company is reducing -2.40% every year. The revenue growth rate of the company Tesco is also declined by -1.10% whereas in the last 10 years average revenue share data shows that company is growing with the rate of 11.80%  every year. For next plc company revenue is around 4000 million whereas the revenue of the company is around 13.66 million. As per the growth rate of the company next plc which is showing that company is growing with the different abilities where the organization is growing in next 10 years. The average revenue growth of the company is growing by 10% every year of the growth rate 8.70% which is approx showing that average revenue per share growth of the company is around 8.10% respectively.

As per the annual report of the company Tesco, it is seen that the revenue growth has decreased from 2012 to 2013 and has increased from the 2013 to 2014. The revenue growth rates of Tesco are -0.80% in 2013 and 0.24% in 2014 (Bekaert & Hodrick, 2009). In case of the company Next Plc, the revenue growth rates are 3.54% in 2013 and 4.97% in 2014. So, the growth rate of revenue of Next Plc is improving. The following graphs shows the revenues and growth of both companies.

Chart 1: Revenues of Tesco

Chart2: Growth Rate of Revenues of Tesco

 

Chart 3: Revenues of Next Plc

Chart4: Growth Rate of Revenues of Next Plc

Liquidity ratio

Liquidity is the ability of an organization to fulfill the debt obligations of short period. Liquidity ratios determine the present position of an organization to meet the short-term obligation. It also shows how company is efficient to maintain the liquid assets to cover the short-term obligations.

(a) Current Ratio

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Current Assets	12,353	12,465	13,085	1,139.9	1,207.8	1,468.1
Current Liabilities	19,180	18,703	20,206	742.4	816	834.5
Current Ratio	0.644056	0.666471	0.64758	1.535426	1.480147	1.759257

Current ratio determines the financial performance of an organization in terms of liquidity. It indicates the ability of an organization to fulfill the sort-term liabilities with available short-term assets. The standard norm of current ratio is 2 or 1.

Liquidity Ratios

According to the calculation, it is seen that the current ratio of the Tesco is below 1 but it is stable over the period (Eun & Resnick, 2009). The current ratios of the Tesco are 0.64, 0.67 and 0.65 in the year of 2012, 2013 and 2014 respectively. On the other side, the current ratios of Next Plc are 1.53, 1.48 and 1.75 in the year of 2012, 2013 and 2013 respectively. The current ratios of Next Plc are greater than 1 and near to 2 and are not stable over the period. It has decreased from 2012 to 2013 and has increased from 2013 to 2014.

(b) Quick Ratio

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Current Assets	12,353	12,465	13,085	1,139.9	1,207.8	1,468.1
Current Liabilities	19,180	18,703	20,206	742.4	816	834.5
Inventory	3,598	3,744	3,576	371.9	331.8	385.6
Quick Ratio	0.456465	0.466289	0.470603	1.034483	1.073529	1.297184

Quick ratio of an organization indicates the ability to cover the short-term obligations through utilizing of most liquid assets. The standard norm of quick asset is generally 1.

Here, the quick ratios of Tesco are 0.45, 0.46 and 0.47 in the year of 2012, 2013 and 2014 respectively. On the other side, the quick ratios of Next Plc are 1.03, 1.07 and 1.29 in the year of 2012, 2013 and 2014 respectively. The quick ratio of Tesco is below the standard but it is stable over the period (Vance, 2009). In case of Next Plc, the quick ratio covers the standard. So, it can be said that the company Next Plc able to maintain adequate quick assets to cover the short-term obligation.

(c) Net Working Capital

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Current Assets	12,353	12,465	13,085	1,139.9	1,207.8	1,468.1
Current Liabilities	19,180	18,703	20,206	742.4	816	834.5
Net Working Capital	(6,827)	(6,238)	(7,121)	398	392	633.6

Net working capital is determined by deducting the current liabilities from the current assets. The net working capital of Tesco is negative. So, it can be said that the company is not efficient to maintain working capital to run operational activities or the company is not maintain adequate level of capital to meet the expenses related with the operational activities (Robinson, 2009).

Profitability ratio of a company helps to describe the profitability situation of the company. Profitability ratios are very helpful to determine the efficiency and overall performance of an organization. Here, three profitability ratios are selected for the identifying and measuring the profitability situation of the chosen two companies (TESCO and Next Plc). These ratios are explained below:

(a) Gross Profit Margin

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Gross profit	5,397	4,089	4,010	1,045.3	1,125.8	1,240.1
Sales	63,916	63,406	63,557	3,441.1	3,562.8	3,740
Gross profit margin	0.084439	0.064489	0.063093	0.303769	0.315987	0.331578

Gross profit margin describes the earning capability of an organization against the costs which are incurred for the producing of product and services. It implies how the company is able to achieve at basic level and how much the organization is efficient to utilize the available resources. It also determines the ability of an organization to maintain and control the costs associated with the production. Gross profit margin helps to measure the manufacturing and distribution efficiency of the company during the production process (Penman, 2010). The higher gross profit margin indicates that organization is more efficient to obtain the profit against each unit of sales. The profitability performance of two companies can also be compared as per the gross profit margin.

According to the analysis, it is found that the company Next Plc is more efficient to earn the gross profit than the Tesco. The gross profit margins of Tesco are 8.45%, 6.45% and 6.30% in the year of 2012, 2013 and 2014 respectively. So, it indicates that it is decreasing over the period. On the other side, the gross profit margins of Next Plc are 30.37%, 31.59% and 33.15%. So, the gross profit margin of Next Plc has improved over the period which is good signal for the company. According to the gross profit margin, it can be said that the profitability position of Tesco is poor comparing to the Next Plc.

Current Ratio

(b) Operating Profit Margin

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Operating profit	4,182	2,382	2,631	601.8	695.1	722.8
Sales	63,916	63,406	63,557	3,441.1	3,562.8	3,740
Operating profit margin	0.06543	0.037567	0.041396	0.174886	0.195099	0.193262

Operating profit margin helps to determine the ability of an organization to earn the profit after incurring the production and operating expenses but before interest expenses and tax.

From the calculation, the operation profit margins of the company Tesco are 6.53%, 3.75% and 4.13% in the year of 2012, 2013 and 2014 respectively. On the other side, the operating profit margins of the company Next Plc are 17.48%, 19.50% and 19.32%. As per the graph, it is found that the operating profit margin of company Tesco is falling over the period(McCue & Nayar, 2009). On the side, the operating profit margin of the company Next Plc is stable over the period.

(c) Net Profit Margin

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Net profit	2,814	24	970	474.8	508.6	553.2
Sales	63,916	63,406	63,557	3,441.1	3,562.8	3,740
Net profit margin	0.044027	0.000379	0.015262	0.137979	0.142753	0.147914

Net profit margin of an organization finds out the each amount earned against the revenue after covering the all the expenses associated with the business operation. This ratio is considered is considered as the key ratio to measure the profitability position of an organization (Higgins, 2009). An organization said to be more efficient if the organization achieves higher net profit margin.

According the analysis, the net profit margins of the company Tesco are 4.40%, .03% and 1.52% in the year of 2012, 2013 and 2014 respectively. On the other side, the net profit margins of the company Next Plc are 13.79%, 14.27% and 14.79% in the year 2012, 2013 and 2014. So, it indicates the performance of Tesco is very poor comparing to the Next Plc. It may be the company Tesco is not able to main the costs. The net profit margin of Tesco was very poor in 2013.

(i) Inventory Turnover

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Cost of goods sold	58,519	59,317	59,547	2,395.8	2,437	2,499
Inventory	3,598	3,744	3,576	371.9	331.8	385.6
Inventory Turnover	16.26431	15.84322	16.65185	6.442054	7.344786	6.480809

Activity ratio is generally based on the overall financial rotation activities done within a organization for the certain period of time (Gibson, 2012). The more frequent turnover shows the higher efficiency of the organization.  Here in this organization Tesco and Next plc for the last three financial years 2012 to 2014 is mainly based on the financial abilities of the company to convert their production activities into sells to generate revenue for the organization. Here Tesco plc is showing that inventory turnover of the organization is increasing year by year from the financial year 2012 to 2014 whereas the company Next plc is fluctuating with their inventory turnover ratio which is showing that company is not able to generate as much as turnover from flexibility of inventory than Tesco company.

(ii) Account Receivable Turnover

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Sales	63,916	63,406	63,557	3,441.1	3,562.8	3,740
Account Receivable	2,657	2,525	2,190	699.1	718.1	808
Account Receivable Turnover	24.0557	25.11129	29.02146	4.922186	4.961426	4.628713

Account receivable turnover is calculated generally on the basis of the credit sales from the debtors converted into sells for the organization. Here the retail company Tesco is showing that company is having lower amount of the days to generate cash for the organization within given period of time which is quickly done in compare to their competitors. There are certain activities are mainly based on the financial status of the debtors of the organization (Gibson, 2012). On the other hand the company Next plc is showing days to convert their sells into cash activities. As per the overall analysis of the companies is showing that turnover of the Next plc is doing well in the market as per the debtor convertibility in the market.

Quick Ratio

(iii) Total Assets Turnover

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Sales	63,916	63,406	63,557	3,441.1	3,562.8	3,740
Total Assets	12,863	13,096	15,572	1,854.2	1,893.6	2,144.6
Total Assets Turnover	4.968981	4.841631	4.081492	1.855841	1.881496	1.743915

As per the assets turnover of the company is showing that company’s revenue generating activities which is mainly based on the financial activities of the company while acquiring the assets of the organization (Fridson & Alvarez, 2011). As per the assets turnover ratio of the company Tesco and next plc is showing that company Next plc is more efficient to convert their assets into cash liquidity of the organization at the time of the requirement. There are also showing that company Tesco is having 4.84 in the financial year 2013 and which decreases in the financial year 2014 are. As per the overall analysis of the turnover of the assets for both the company is showing that both the company is performing well in terms of controlling of their assets turnover time period activities.

(i) Interest Coverage Ratio

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
EBIT	4,038	1,960	2,259	608.4	695.5	723.5
Interest Expenses	114	317	143	28.9	29	28.3
Interest Coverage Ratio	35.42105	6.182965	15.7972	21.0519	23.98276	25.56537

According to the analysis, it is found that the interest coverage ratios of Tesco are 35.42, 6.18 and 15.79 in the year of 2012, 2013 and 2014 respectively. It has decreased at very high rate from 2012 to 2013. Then, it has increased from 2013 to 2014(Fabozzi & Peters, 2009). On the other hand, the interest coverage ratios of Next Plc are 21.05, 23.98 and 25.56 in the year of 2012, 2013 and 2014 respectively. So, it indicates that the interest coverage ratio of Next plc is improving over the period. Therefore, in overall, it can be said that the interest expenses of the company Tesco is fluctuating.

(ii) Long term Debt to Asset Ratio

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Long term Debt	1,838	766	1,910	656.5	566.8	801.7
Total Assets	12,863	13,096	15,572	1,854.2	1,893.6	2,144.6
Long term Debt to Assets Ratio	0.14289	0.058491	0.122656	0.354061	0.299324	0.373823

Long-term debt to assets ratios of Tesco are 0.14, 0.05 and 0.12 in the year of 2012, 2013 and 2014 respectively (Eun & Resnick, 2009). On the other side, long-term debt to assets ratios of Next Plc are 0.35, 0.29 and 0.37 in the year 2012, 2013 and 2013 respectively. So, it indicates the proportion of long-term debt and total assets of Tesco are lower than the Next Plc. This ratio is fluctuating for both the companies.

(iii) Equity Multiplier

Particulars	Tesco	Next Plc
2012	2013	2014	2012	2013	2014
Total Assets	12,863	13,096	15,572	1,854.2	1,893.6	2,144.6
Shareholder’s Equity	402	403	405	222.7	285.6	286.2
Equity Multiplier	31.99751	32.49628	38.44938	8.325999	6.630252	7.493361

Equity multiplier describes the efficiency of an organization to convert the operational activities into assets. The equity multipliers of Tesco are 31.99, 32.49 and 38.44 in the year of 2012, 2013 and 2014 respectively. On the other hand, the equity multipliers of Next Plc are 8.32, 6.63 and 7.49 in the year of 2012, 2013 and 2014 respectively. So, it is seen that the ratio of Tesco is higher than the Next Plc. So, it can be said that the company Next Plc is more flexible in assets converting activities (Bekaert & Hodrick, 2009).

The basic guide focused around fundamentals of Tesco Plc and what all should I look at. The focus was on quality of management and the enhancements and module work which Tesco Plc is attending to.  The mentor guided me that skills and learning Assessment and TESCO Plc leaders should work with business leaders to make the necessary investments in TESCO Plc data and process standardization, analytical tools, TESCO Plc skills in using data to support decision making and change management among business leaders, so to achieve business impact with workforce analytics.

Net Working Capital

The human resources function has long struggled to move from being predominantly an administrative function to one that can seamlessly deliver both administrative processes and strategic business value. While human resources will always remain a support function, its overall mission is to enable the business to evaluate workforce-related risk and select the best approach in terms of organization and staffing, skills development, employee retention, and company culture in order to meet strategic objectives.

Workforce analytics is one of the most impactful ways for TESCO Plc professionals to engage with business leaders across the organization to evaluate their business practices and business performance from a workforce perspective. In “Defining Workforce Analytics,” Gartner presents workforce analytics as the usage of data and metrics based on TESCO Plc data to support workforce-related business decisions: at the individual operational level, as it relates to specific TESCO Plc processes, within strategic KPI frameworks monitoring the execution of strategy, or at the most strategic level in evaluating strategic investment options.

Business performance metrics and analytics across sales, marketing and finance organizations are frequently an integral part of tracking and examining how well any business is able to forecast and meet targets in order to deliver sustainable added value for stakeholders. Other business operations metrics around volumes, efficiency, costs, timeliness, satisfaction levels, among others, are a widely accepted part of the running of any business. Measurement and monitoring is seen as an important part of ensuring strong execution to meet long-term strategic business objectives. When it comes to workforce-related metrics, however, most business leaders in many organizations do not look beyond a core set such as head count, employee engagement scores per annual or biannual surveys, and employee turnover or attrition.

According to the overall analysis, it can be said that the profitability position of Tesco is poor comparing to the Next Plc. The company is not efficient and able to control and manage the both the direct and indirect expenses. So, the company should focus on expenses and should take necessary steps to improve the profitability position.

Reference

Bekaert, G., & Hodrick, R. (2009). International financial management. Upper Saddle River, N.J.: Pearson Prentice Hall.

Eun, C., & Resnick, B. (2009). International financial management. Boston: McGraw-Hill Irwin.

Fabozzi, F., & Peterson Drake, P. (2009). Finance. Hoboken, N.J.: Wiley.

Fridson, M., & Alvarez, F. (2011). Financial statement analysis. Hoboken, N.J.: Wiley.

Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.

Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.

Higgins, R. (2009). Analysis for financial management. Boston: McGraw-Hill Irwin.

McCue, M., & Nayar, P. (2009). A Financial Ratio Analysis of For-Profit and Non-Profit Rural Referral Centers. The Journal Of Rural Health, 25(3), 314-319. doi:10.1111/j.1748-0361.2009.00236.x

Penman, S. (2010). Financial statement analysis and security valuation. New York: McGraw-Hill/Irwin.

Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.

Vance, D. (2009). Ratios and other tools for analysis, control and profit. Cranbrook, Kent: Global Professional Pub.

Higgins, R. (2012). Analysis for financial management. New York, NY: McGraw-Hill/Irwin.

Huber, C. and Scheytt, T. (2013). The dispositif of risk management: Reconstructing risk management after the financial crisis. Management Accounting Research, 24(2), pp.88-99.

Dou, X. (2013). Artificial Neural Network Models Based Financial Risk Forewarning Management and Analysis of Listed Company. AMM, 446-447, pp.1381-1386.

Dimpfl, T. (2014). A note on cointegration of international stock market indices. International Review of Financial Analysis, 33, pp.10-16.

Bezborodova, Y. (2013). The analysis of financial statements as approach to the assessment of financial stability of the enterprise. The Russian Academic journal, 24(2).