In this report I have tried to analyse the annual report of TESCO Plc, for the year 2008 and 2009 using Profitability ratios, Liquidity ratios, Working Capital Position ratios, Liquidity ratios and Long- term Solvency ratios.
TECSO'S PLC INTRODUCTION:
It is mainly a public company which was founded in East London by Jack Cohen in 1919 and later got incorporated as Tesco Stores Ltd. in the year 1932. Tesco Plc is a International grocery and merchandising retail chain all over United Kingdom and worldwide. It has its branches in the US, Republic of Ireland, Hungary, Czech Republic, Poland, Turkey, Slovakia, India, China, Thailand, South Korea, Malaysia and Japan. It is largest retailer in UK in global sales and domestic market. The company has more than 470000 employs working overall. The Ticker symbol of Tesco Plc is TSCO. The company owns 445110 supermarkets and other grocery stores, around 447110 gas stations with convenience stores, and also has around 524120 direct insurance except for health life and medical.
The main of the company is that "To create value for customers, to earn their life time loyalty". They serve is with their value " No one tries harder for customers" and "Treat people how we like to be treated".
Tesco Plc is one of the largest retailers in the world. Tesco's production starts in Britain, the company ranks as the largest private sector employer in the United Kingdome and is also the largest food retailer.
The total group sales of Tesco Plc is £59.4bn. There are around 4331 stores of Tesco all over the world. It is spread over 14 Countries and is the third largest grocery retailer in the world, are about 470000 employs.
FINANCIAL RATIOS:
Financial ratios are mathematical relationship between two different quantities. There are many different types of ratios such as those that evaluate a business entity's liquidity, solvency, return on investment, operating performance, asset utilization and market measures. Example of ratio is that the earnings yield that equals dividend per share divided by market price per share. Whereas the ratio computation of a ratio is basic arethematic operation and where as its analytical interpretation is more complex. These ratios also help us to examine the financial conditions of a business on a very simpler type.
1.0 PROFITABILITY RATIOS:
For a business it is very important that it makes profit rather than loss. In other words, we can say that the ability of a company to generate income on a continuous basis is also known as profitability ratios. The ratio of net profit by capital employed is profitability.
They are also known as performance ratio. These compare profit at different levels with other figures and are also known as performance ratios. (CIMA Paper C2 Financial Accounting Fundamentals, 2004.)
1.1 RETURN ON CAPITAL EMPLOYED:
A measurement of return on investment needed for a business to function is otherwise known as capital employed. It is used to show business health, specifically showing how efficiently its investments are used to create a profit. A good Rate On Capital Employed is one that is greater than the rate at which company borrows. It shows how efficiently business is using its resources. (CIMA Paper C2 Financial Accounting Fundamentals, 2004).
Return on capital employed = Operating Profit/ Capital employed * 100
1.2 GROSS PROFIT MARGIN:
What remains from sales after a company pays out the cost of goods sold, to obtain gross profit margin, divide gross profit by sales. Gross profit margin is expressed as a percentage.
For the year 2009, the sale as compared to cost of sales exceeds 8.31%, where as, the sale as compared to cost of sale for 2008 has increased by 8.31%. Thus, it appears from the financial statement that revenue for the year 2009 is greater than the revenue for the year 2008. Here in the financial statement it is seen that, cost of sale for the year 2009 exceeds by 14.74% as compared to 2008. Also the sales for the year 2009 exceeds by 14.86% as compared to the year 2008. Therefore we are observing that inspite of increasing cost of sales for the year 2009, there has been a substantial increase in the sales for the year 2009, which is quite greater than the cost of sales for the year 2009. Due to all these reasons, the gross profit margin for the year 2009 is greater by 0.09% as compared to gross profit margin for the year 2008.
Gross profit margin = Gross profit/ Sales revenue * 100
1.3 NET PROFIT MARGIN:
Net profit divided by net revenues often expressed as a percentage. This number is an indication of how effective a company is at cost control.
From the observation of financial statement of Tesco Plc it is been observed that inspite of increase in administrative expenses for the year 2009 as compared to the year 2008, the difference between the profit margin for the year 2009 and 2008 is set off by gross profit for year 2009.Due to this, the profit margin for the year 2008 and 2009 are similar ie. 5.90%.
Net profit margin = Net profit/ Sales revenue * 100
2.0 LIQUIDITY RATIO:
Liquidity ratios that come off the balance sheet and hence measure the liquidity of the company as on a particular day, ie the day the balance sheet was prepared. These ratios are important in measuring the ability of a company to meet both its short term and long term obligations.
2.1 CURRENT RATIO:
The ratio is mainly used to give an idea of the company's ability to pay back its short term liabilities (debts and payables) with its short term assets (cash, inventories and receivables). The higher the current ratio, the more is the company to pay its obligations. Normally 2:1 is treated as standard ratio.
It is derived from the ratios for the year 2009 that the current ratio is adverse. Though as compared to year 2008, it is having a better current ratio, but not satisfactory. Thus it can be concluded that the current assets are quite insufficient to pay off the current liabilities for the year 2009 of Tesco Plc.
Current ratio = Current assets / Current liabilities
2.2 ACID TEST RATIO:
This ratio is also known as quick ratio.The ratio of current assets less inventories to total current liabilities. This ratio defines how well a company is covering its short term obligations, since the ratio only considers that part of current assets which can be turned in cash immediately. The ratio tells the creditors how much of the companies short term debt can be met by selling all the companies liquid assets at a very short notice is known as acid test ratio.
Thus from the ratios for the year 2009 and 2008, it is to been seen that for both the years the quick ratios are adverse. But as compared to the year 2008, the quick ratio for the year 2009 is quite better, though not satisfactory. Thus it indicates that the quick assets of Tesco Plc annual are insufficient to honour its immediate claims.
Acid test ratio = Current assets - Inventories/ Current liabilities: 1
3.0 EFFICIENCY RATIO:
Efficiency ratios are the financial statements ratios that measure how effectively a business uses and controls its assets. It is also known as a way of measuring the proportion of operating revenues or fee income spent on overhead expenses.
3.1 INVENTORY DAYS:
Average number of days goods remains in inventory before being sold. It actually is the stock which is left with us before it is sold.
From the ratios calculated for the year 2009 and 2008, it seems that the efficiency ratio for the year 2009 is low as compared to year 2008. Thus we can conclude that the inventory had been held by the company for less number of days. Thus we can say that the efficiency ratio for the year 2009 is good as compared to the year 2008.
Inventory day = Inventory / Cost of sale * 365
3.2 RECIVABLES (DEBTORS) DAY:
A measure of the average time a company's customers take to pay for purchases, equals to accounts receivable divided by annual sales on credit times 365.
Thus we can see here that the receivable debtor's day for the year 2008 is comparatively lower than ratios for 2009. Therefore the average time that the company's customer takes to pay for purchases for the year 2009 is quite high.
Receivables (Debtors) day = Trade receivables / Sales * 365
3.3 PAYABLES (CREDITORS) DAY:
A measure of the average time a company takes to pay vendors, equals to accounts payable divided by annual credit purchases times 365.
Thus we can see from the financial statements of Tesco Plc that the payable creditors day ratio for the year 2009 is higher than the year 2008. It signifies that the company has got a longer credit period to pay off its dues. Thus we can say that for the year 2009 the company can maintain a good amount of liquid funds to meet its immediate obligations.
Payable (Creditors) day = Trade payables / Cost of sale * 365
4.0 LONG- TERM SOLVENCY RATIO:
One of many ratios used to measure a company's ability to meet its long-term obligations. The solvency ratio measures the size of company's after-tax income, excluding non cash depreciation expense, compared with the firms total debt obligations. It provides a measurement of how likely a company can continue to meet its debt obligations. This is known as long-term solvency ratio.
4.1 GEARING RATIO:
The gearing ratio measures the contribution of long-term lenders to the long term capital structure of a business. This ratio reveals a level of gearing that would not normally be considered to be very high.
Peter Atrill 3rd edn
Gearing ratio = Long term debt + Preference share capital / Share capital + Reserves + long term debt * 100
OR
Gearing ratio= Debt / Equity + Debt * 100
4.2 INTEREST COVER RATIO:
The interest cover ratio measures the amount of profit available to cover the interest payable. This ratio shows that the level of profit is considerably higher than the level of interest payable. (Peter Atrill 3rd edn)
The interest cover ratio of Tesco Plc for the year 2009 is quite low as compared to the year 2008. Thus it signifies that it had adequate profit in the year 2008 to cover the interest payable to the lenders. While the position in year 2009 is unsatisfactory as compared to the year 2008, which means that profits for the year 2009 are quite low to meet the finance cost of the company.
Interest cover= Profit before interest and tax / Interest payable
CHART FOR RATIOS OF TESCO PLC FOR THE YEAR 2008 AND 2009:
RATIOS
2008
2009
1.0 PROFITABILITY RATIOS
1.1 RETURN ON CAPITAL EMPLOYED
14.02%
11.44%
1.2 GROSS PROFIT MARGIN
7.67%
7.76%
1.3 NET PROFIT MARGIN
5.90%
5.90%
2.0 LIQUIDITY RATIOS
2.1 CURRENT RATIO
0.58:1
0.75:1
2.2 ACID TEST RATIO
0.34:1
0.60:1
3.0 EFFICIENCY RATIO
3.1 INVENTORY (STOCK) DAY
20.31
19.44
3.2 RECEIVABLES (DEBTORS) DAY
10.12 days
12.08 days
3.3 PAYABLES (CREDITORS) DAY
60.82 days
62.08 days
4.0 LONG TERM SOLVENCY RATIO
4.1 GEARING RATIO
33.41%
48.81%
4.2 INTEREST COVER RATIO
11.16
6.70
ASSESSMENT OF CORPORATE GOVERNANCE
Corporate governance deals with the way in which suppliers of finance to corporations assure themselves of getting a return on their investments. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest in bad projects? How do suppliers of finance control managers?
It is defined as a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated and controlled. The term can refer to internal factors defined by the officers, stakeholders or constitutions of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
DIRECTORS REPORT ON CORPORATE GOVERNANCE:
Tesco Plc is committed to the highest standards of corporate governance as it recognises that good governance is crucial in helping the business to deliver its strategy, generating its shareholders value and safeguarding its shareholders long term interests.
(Tesco Plc annual report 2009)
COMPLIANCE WITH COMBINED CODE:
The combined code on corporate governance sets out guidance in the form of principals and provisions on how companies should be directed and controlled to follow better governance practice. The Financial service authorities (FSA) requires companies listed in the UK to disclose, in relation to section 1 of the combined code, how they have applied the principals and whether they have complied with its provisions throughout the financial year. Where the provisions have not been compiled with the companies, then they need to provide an explanation for this.
THE CHAIRMAN
Clear division of accountability and responsibility exists and operates effectively for the positions of Chairman and Chief Executive. The Chairman has the responsibility for running the board, while the Chief Executive has executive responsibility for the operations and the results of the groups and making proposals to the board for strategic developments.
SENIOR INDIPENDENT DIRECTORS
The Board has appointed one Non-executive Director, Rodney Chase, to act as Senior Independent Director. The Senior Independent Director is available to shareholders to assists in resolving concerns. The Senior Independent Director is also required to lead discussions in relation to assessing the effectiveness of Chairman's performance.
NON- EXECUTIVE DIRECTORS
The Non-executive Directors bring a wide range of skills and experience, as well as independent judgement on strategy, risk and performance to the company.
BOARD RESPONSIBILITIES
The Board has set out a clear Schedule of Matters Reserved for Board Decision in order to ensure its overall control of group affairs. That includes the approval of Company's strategic and operating plans, annual and interim financial statements, major aquisations and disposals, authority level for expenditure, treasury policies, risk management and internal control systems, group governance policies, succession planning for senior executives.
NOMINATION COMMITTEE
The nomination committee leads to the process for board appointments and the re-election and succession of Directors, as well as making the recommendations for the membership of statutory committees. The Nomination committee met four times in the year to discuss the ongoing shape and capability of the Board. As well as reviewing the performance and development of the Executive Directors and the senior executive levels below the Board, the committee also reviews the Board structure, size, composition, working arrangements and capability, and consider succession plans for Executive and Non-executive Directors.
REMUNERATION COMMITTEE
The main role of this committee is to determine and recommend to the Board the remuneration of the Executive Directors. It also monitors the levels and structure of remuneration of senior management and seeks to ensure that the remuneration arrangements are designed to attract, retain and motivate the Executive Directors needed to run the company successfully.
AUDIT COMMITTEE
They reports to the Board each year on its review of the effectiveness on the internal control systems for the financial year and the period to the date of approval of the financial statements. Throughout the year the Committee receives regular reports from the external auditors covering topics such as quality of earnings and technical accounting developments. The committee also receives updates from Internal Audit and has a meeting with senior managers on their responsibilities. It should be understood that such systems are designed to provide reasonable, but not absolute, assurance against material misstatement and loss.
RISK MANAGEMENT
The group maintains a Key Risk Register. The Register contains the key risks faced by the Group including their impact and likelihood as well as the controls and procedures implemented to mitigate these risks. A balanced approach allows the degree of controllability to be taken into account when we consider the effectiveness of mitigation recognising that some necessary activities carry inherent risk which may be outside the Groups control. Risk management process recognises there are opportunities to improve business to be built to future plans.
CONCLUSION
To conclude from my analysis on Tesco's, I would like to say that the financial position for the year 2009 against 2008 comparing financial ratios such as Profitability ratios, Liquidity ratios, Efficiency ratios and Long- Term Solvency ratios. We can easily conclude that despite the recession and down trend in the retail market, Tesco has managed to cope up all its financial challenge to cope up with its competitors, and still manages to be on the top position in the UK retail market.
APPENDIX
All the calculations and tables for the ratios have been put in the appendix. Here we have used the following formulas for the Profitability ratios, Liquidity ratios, Working Capital Management ratios and Long-Term Solvency ratios for Tesco Plc with their annual report:
Calculations of ratios for Tesco Plc.
FINANCIAL RATIOS FOR TESCO PLC.
2008 2009
1.0 PROFITABILITY RATIOS
2008 2009
2.0 Liquidity Ratios:
2008 2009
3.0 Efficiency Ratio:
2008 2009
4.0 Long Term Solvency:
OR
2008 2009
STUDENT REFLECTIVE JOURNALS
What did I learn from producing the coursework ?
My name is Nahush Trimal. I don't have any finance background and knew very little about the subject. My research techniques were like most of the things George Sir told us in the class, and he also told us many new links to get new information related to many different topics.
What problems did I encounter when completing the assignment (if any) ?
Firstly I wasn't sure with the format in which we had to write the assignment, but then George Sir told us that he needs it in a report format.
What would I do differently next time and what would have enabled me to do a better job ?
I would do more of research and try to get to the bottom of theory.
When completing the assignment, which learning outcomes did I find easiest / perform best at ? (you may give reasons for this)
There was nothing as easy, but when doing an assignment we should always keep in mind that there should be no copy paste from the internet. You can say books are easy to use and we know where what information we have and we know what exactly we want.
When completing the assignment, which learning outcomes did I find most difficult / perform worst at ? (you may give reasons for this)
The most difficult thing while doing an assignment is that when we are been told to use journals, there are so many of them that I was not able to judge like which one is to be taken.
Do I honestly believe that I have performed to the best of my ability ?
I personally don't feel that I have given my best shot, because back in India, we never had this pattern of studies and this is all together a new concept, though I have tried very hard of getting through and completing the assignment.
Optional - You may wish to estimate the overall alphanumeric grade that you will be awarded for the assignment.
