Topic which I have selected is "The business and financial performance of an organization over a 3 year period" and this will be carried on TESCO PLC in reference to its current and potential shareholders who are interested in TESCO PLC current and future performance.
Reason for Choosing Topic
Being a student of ACCA choosing this topic is very good opportunity for me to express myself in that field. By doing an in depth business and financial analysis of a business gives you a clear idea about the goals, prediction, trends and forecast. Not only that you can also see that whether the required forecast is met or not and if not what are the corrective measures taken.
Organization and reason for choosing organization
Choosing TESCO PLC as a research organization has more than one reason. Firstly it is the organization where I am currently working so I can assess some internal data such as interview with the managers and so on. Other main reason is the market capitalization of TESCO PLC compared to its rivals. TESCO PLC is having a market share of 30.3% in total UK grocery market (kamcity.com 20 February 2011).As we all know about the recession in the world so there is a chance to look at the effects of recession on such a big organization. With TESCO going internationally this will have some international prospect such as comparing sales of UK with other countries. At the end it makes the TESCO a very interesting research organization to work on it.Assesing a company performance is not easy if no competitive is there so that is why I choose Sainsbury for comparison.
Aims and objectives
Main aim of my project as I mentioned above is to look at the performance in respect of shareholders. Shareholders are not only interested in return but also interested in the risk which they took for getting the required return. So the things to consider are dividend policy and also assessing risk (financial and business). Objectives are as under
To look at the business and financial performance of TESCO PLC till 2010.
Look at the year by year performance and forecasts with a view to check its fulfillment.
To review the performance of TESCO with other retail businesses in same field and also with the industry averages.
Also review at the main purpose of a PLC organization which is maximizing the shareholder's wealth
Looking business performance by doing internal and external analysis
Research Questions
How effective is the TESCO financial and business strategies?
How TESCO cope with recession and other political and economic factors in comparison to its rivals?
How TESCO is performing year by year in comparison to its competitors?
What is the company gearing position in every single year for 3 years?
How TESCO is coping with business and financial risk?
Whether going international is beneficial for TESCO or not?
How do TESCO financial ratios in comparison with other competitors and industry averages?
Whether shareholders receiving enough dividend and also capital gains on share prices?
How well TESCO is performing in food and non-food items comparison to competitors?
What are the company strong points and also opportunities which TESCO can avail in future?
Accounting and business techniques
As per the topic business and financial performance of TESCO PLC over a three year period there are different models and methods for evaluating both business and financial performance. These are explained below….
Financial performance
Financial performance can be done through assessing the items appearing in financial statements such as Statement of financial position and income statement. As for as financial performance is concerned my process of looking at it is through ratio analysis.
Ratio analysis
Financial statements are very important for decision making for all the stakeholders of the company but the bare figures made not much sense to the stakeholders until these
Figures are compared. Ratio analysis is normally used for that comparison and that comparison is with last years, competitors in the same field of business and also with industry averages. Broad categories of ratios are as under
Profitability and return ratio
Company's main objective is to increase the shareholder's wealth which can be increased by increasing the ultimate figure of profit because the dividend and share price is dependent on it so in this respect these are very important ratios. They are not only looking at the current profitability but also future growth potential of the business. Most important of them is as under
Return on capital employed
Profit margin
Gross profit margin
Asset turnover
Long term solvency and stability
There are two types of risks business and financial by calculating these ratios we can know about the financial risk which company is facing and by comparing it with its competitors or industry averages we can conclude that whether it is appropriate or not. So in this regard it is very important because it shows us that how much debt company have to pay regardless of its cash flows.
Debt/Equity ratio
Gearing ratio
Interest cover
Short term solvency and liquidity
Liquidity ratio is a class of ratio it determines the company ability to pay off its short term debts as and when they fall due and also its ability to turn assets in to cash. Higher the ratio better for the business because it increases the margin of safety. Recession in the world economy makes it very vital for the investors to look at it before investing. Some of them are as under
Current Ratio
Quick ratio
Account Receivable turnover ratio
Account Payable ratio
Efficiency ratio
As its name suggests it looked at company efficiency in respect of inventory, account receivables and asset turnover. Efficiency in respect of inventory means that company should stock only that much which is balanced means not too high so to pay holding costs and also not too low to face shortage of materials. Efficiency in receivable is very important because it is the most important source of cash flow to the company so if company's receivable days are increasing then it may face liquidity problems in near future. Ratios relating to that are as under.
Collection period
Payable days
Inventory turnover
Inventory turnover days
Shareholder's Investment ratio
It is more likely of investment measures rather than performance measures. It can be seen as how much dividend is paid out in the profits and also how much one shareholder's wealth is increased by that dividend.
Dividend Yield
Dividend Cover
P/E ratio
Earning Yield
Net asset per share
Business Performance
PESTEL
It focuses on factors in macro environment and their effects on the decisions made by the organization. Macro factors are mainly Tax rates, laws, changes in Govt. polices and etc. PESTEL stands for Political, Economic, Social, technological, ecological and legal. These are also main six elements on which it is focused on.
SWOT
Most simple, it is easy to understand and also most effective strategic analysis framework. It is used to evaluate the company's strength, weakness in respect of their opportunities and threats.
Internal environment such as production, operating systems and staffs company have a control over them but on the other hand the external environment (demand, market situation,Govt. polices) have lesser control over them. It is not only be used for overall company but can be used for products and it is also very useful when you are assessing the company's ability to deal with its environment.
Google.co.uk/images
Porter's 5 FORCES
As the name suggests it associated with Michael porter. It takes in to account the structure of competition in which the business operates. Five forces are as under
Threat for substitute products.
Threat of potential entrants.
Power of suppliers.
Power of customers.
Segment Reporting
Key performance indicators
Key performance indicators provides investors, management and other stakeholders current performance of the company and how the business will most probably perform in long run.
Information gathering
In doing a research project you need a wide range of data which should be independent, reliable and free from any biasness. Two main sources of information gathering are
Primary and secondary.
Sources of information
Main source for gathering the financial data are the financial data about an organization is their financial statements of the period you are researching on. So in this context financial statements of TESCO PLC and J Sainsbury PLC provided me with a lot of financial information about the companies and pattern over the period.
I did not use the primary data because in such a competitive business environment it is very difficult that you will get the sensitive information about the company from inside source.
Methods of gathering information
There are so many different methods of getting the secondary data so I used some of them for my research project purpose and are as follow
Word wide Web (www)
As level of information and their sources are increasing day by day internet is the easiest way of collecting that information. A poll in USA suggests that internet is the most popular for information gathering even more than television and newspaper (reuterrs.co m).
Before starting my research project I need the information about the requirement, pattern and also procedures of submission which I got through the help of internet by downloading basic information pack for oxford brooks BSc rap project.
I got the financial statements of the companies I am researching on through www.j-sainsbury.co.uk and www.tescoplc.com.
Encyclopedias (Wikipedia.com) available online gave me very useful information about the history of companies. Blogs, surveys and reports assist me in doing the strategic analysis.
Annual reports of TESCO PLC and j-Sainsbury PLC
Annual reports have both financial and non-financial data about that organization. These are the primary source of information for both existing and future investors because it contains a lot of things such as comments by management, risk reports, chairman statement, financial review and key performance indicators.
It also provides you the future strategy of the business in respect of its competitors.
Library and in home books search
British library and London city library are one of the best on my topic so I went there and got a lot of material on the topic which is very helpful.
Newspapers/journals
News achieves available online gave me an independent view about the companies and websites used are
Result, analysis, conclusion and recommendation
Financial performance
Revenue Growth
Table (TESCO plc.)
Years
2007/2008
2008/2009
2009/2010
Sales £ m
47298
54327
56910
Growth from last year
10.92%
14.86%
4.75%
Table (Sainsbury plc.)
Years
2007/2008
2008/2009
2009/2010
Sales £ m
17837
18911
19964
Growth from last year
4%
6.02%
5.57%
Graph of Growth
Profitability ratios
Gross profit margin
Table
Years
2007/2008
2008/2009
2009/2010
Tesco Plc.
7.67%
7.64%
8.09%
Sainsbury Plc.
5.62%
5.48%
5.42%
Graph
Net profit margin
Table
Years
2007/2008
2008/2009
2009/2010
Tesco Plc.
5.90%
5.90%
6.07%
Sainsbury Plc.
2.97%
3.56%
3.56%
Graph
Return on capital employed
Table
Years
2007/2008
2008/2009
2009/2010
Tesco Plc.
Sainsbury Plc.
SWOT Analysis
Overview
TESCO PLC is having a market share of 30.3% in total UK grocery market (kamcity.com 20 February 2011). TESCO is at No.1 position in BIG4 grocers of UK. Its main competitor is Sainsbury having a market share of 16.9%, so as the figures showing TESCO PLC is the largest retailer by a big margin. Tesco not only grow in respect of products but also spread its operations in different countries such as China, France, Japan, Thailand, Turkey, USA and many others. As the world change in technology TESCO cope with change before any other by introducing online shopping division first time before any of its competitors.
Strengths
Increasing its product range and operations
Diversification in products is a good measure to reduce business risk. Offering nonfood items with food ones creates that diversification. TESCO is not only dealing in one product but different products such as food, banking, telecom, fuel, film making and many others and now as daily telegraph reported that TESCO buys video-on-demand company Blinkbox which means that video-on-demand services is also going to start in near future.
International growth
By going internationally was a big initiative taken by TESCO as the recent result shows
TESCO profit in Asia are jumped up which is higher than its own forecast. (Daily
Telegraph).
Own labeled products
Rising sales in own/private labeled products is creating more profits because their
Production costs are low and also used as marketing/advertising strategy.
Number of Stores in UK
Tesco have in total 2715 stores across the UK acquiring 36,722,000 areas (sq. ft.)which is far more than any of its competitors(Wikipedia.com).
Weaknesses
Product withdrawals
Product withdrawals show that company's quality control process is not up to the mark which is affecting company goodwill in such a competitive industry. Some of these products withdrawals are Tesco spicy cups, Baby Boutique Sequin Dress and own brand sponge cakes.
Consistent loss in USA
Opportunities
Online shopping
Order from home and also get it in home (online shopping) is growing in popularity
Because it saves the time. As per the EU's report the increase in consumers buying at
Least Products are available online through Tesco direct. In this booming online
Shopping trend Tesco has the opportunity to increase its market share and profit margins.
Threats
Competition/price war
Recession
Counterfeit Products/Look alike
PESTEL analysis
Political factors
As Tesco operations are widely spread in Europe, Asia and also in USA so the political situation in a particular part region can severely influence its performance.
In certain parts there are restrictions or procedures to follow such as relating to employment. These procedures can be to give job jobs to students, disabled, elderly people and others so that boosting the economy by decreasing the unemployment rates.
Environmental factors
Day by day there is an increased pressure on all organizations to care for the environment. As one of largest retailer in the world Tesco is supporting carbon reductions and also using energy efficient equipment's so that it will save the environment which is very important in maintaining the goodwill. Tesco creates a large amount of fund for that purpose.
Social factors
Economic factors
Technological factors
Legislative factors
Conclusion
