The purpose of this study is to analyze the financial performance of Tesco PLC. It will give clear understanding of the financial performance of Tesco PLC to decision makers. The financial ratios (Profitability, Efficiency, Liquidity, Solvency and Financial Gearing Ratios) applied to measure the financial performance of Tesco PLC. These ratios are applied on financial statements of the company directly taken from company's website for the financial year 2011-2012. The various financial ratios and have been used to make the comparison. In ratio measures the financial performance of Tesco PLC is stable enough because of its quality based strong strategic plans. From above results we can conclude that there is not big difference in analyzing their performance because during this financial period, the Group announced its decision to sell its operations in Japan. Accordingly, these operations have been treated as discontinued in 2012. The 2011 statistics have been re-presented to be consistent with 2012. Prior years have not been re-presented.
Introduction
Tesco PLC is one of the world's largest retailers with operations in 14 countries, employing almost 520,000 people and serving millions of customers every week. The secret behind this is their strong quality based strategic plans.
Many entrepreneurs or companies are highly skilled in some aspects regarding technology, skilled workers, marketing or sales, but are less savvy in financial matters. The goal of this study is to become familiar with some of the most powerful and a widely-used tool for analyzing the financial health of the company, as Tesco PLC is.
The Financial Statements are used for the financial years 2011-2012The. The financial year represents the 52 weeks ended 25 February 2012 (prior financial year 52 weeks ended 26 February 2011). For the UK, the Republic of Ireland and the US, the results are for the 52 weeks ended 25 February 2012 (prior financial year 52 weeks ended 26 February 2011). For all other operations, the results are for the calendar year ended 29 February 2012 (year ended 28 February 2011). (Tesco, 2012)
Objective of the Study:
As such, the purpose of this study is to review the various aspects of Tesco PLC for analyzing their Financial Performance. More specifically the objectives will be:
Analyzing financial performance by using financial ratios.
Comparing company's performance to earlier periods of time.
Methodology:
This study is basically descriptive in nature, which explore & review the research done on financial performance of the company. This research work used data collection direct from the financial Statements of the company. In analyzing financial performance, ratio measures have been used. The method is not a new way to Measure Company's performance. This methodology shows various positive aspects.
The use of financial ratios is a time-tested method of analyzing a business. Financial ratio analysis can be used in two different but equally useful ways. We can use them to examine the current performance of our company in comparison to past periods of time. Frequently, this can help us to identify problems that need fixing. Even better, it can direct your attention to potential problems that can be avoided. In addition, you can use these ratios to compare the performance of your company against that of your competitors or other members of your industry.
The Financial Statements are used for the financial years 2011-2012.The Following Ratios applied for financial performance analysis:
Profitability Ratio
Profit Margin
Return on Assets(ROA)
Return on Equity(ROE)
Efficiency Ratio
Account Receivable Turnover
Fixed Asset Turnover
Liquidity Ratio
Current Ratio/ Cash Ratio/ Cash Asset Ratio
Solvency Ratio
Financial Gearing Ratio
Debt-to-equity Ratio
Equity Ratio
Debt Ratio
Performance Measures
Profitability Ratio:
Such ratios are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a previous period is indicative that the company is doing well. (Investopedia, 2012)
Some examples of profitability ratios are profit margin, return on assets and return on equity.
Profit Margin:
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit Margin= Net Profits/ Sales
A higher profit margin indicates a more profitable company that has better control over its costs compared to previous year.
Return on Assets
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".
Return on Assets = Net Income/Total Assets
Return on Equity
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Also known as "return on net worth" (RONW). ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
Calculations:
Performance Analysis (Period 2011-2012)
Ratios
2011
2012
Profitability Ratios:
Profit Margin
3.98%
3.90%
ROA
5.84%
4.88%
ROE
1.658%
1.392%
Graph:
Interpretation:
The profit margin ratio indicates stable position in both years. During this financial period, the Group announced its decision to sell its operations in Japan. Accordingly, these operations have been treated as discontinued in 2012. The 2011 statistics have been re-presented to be consistent with 2012. Prior years have not been re-presented.
The return on asset ratio (ROA) & return on equity ratio (ROE) shows better position in year 2011 as compared to 2012, the reason behind this is discontinuing operations in this financial period.
Efficiency Ratio:
Ratios used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities and the general use of inventory and machinery. Fixed asset turnover is one of the examples of efficiency ratio. These ratios are meaningful because an improvement in the ratios usually translates to improved profitability (Investopedia, 2012).
Fixed Asset Turnover:
A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.
Fixed Asset turnover = Net Sales/ Fixed Assets
Calculations:
Performance Analysis (Period 2011-2012)
Ratios
2011
2012
Efficiency Ratios:
Fixed Asset Turnover
1.907
1.899
Graph:
Interpretation:
By using fixed asset turnover ratio we easily predict company's Efficiency. Higher the ratio the more it would be effective for generating revenues. There is slightly difference for this financial period because of discontinuing operations in this financial period
Liquidity Ratio:
A liquidity ratio that measures company's ability to pay short-term obligations. Also known as "current ratio", "cash asset ratio" and "cash ratio". (Investopedia, 2012)
Liquidity Ratio = Current Assets/ Current Liabilities
The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).
Calculations:
Performance Analysis (Period 2011-2012)
Ratios
2011
2012
Liquidity Ratio:
Current/ Cash Ratio
65.46%
64.4%
Graph:
Interpretation:
The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.
Solvency Ratio:
Solvency ratios used to measure a company's ability to meet long-term obligations. (Investopedia, 2012)
Solvency Ratio = After Tax Net Profit + Depreciation / Long Term Liability + Short Term Liability
Calculations:
Performance Analysis (Period 2011-2012)
Ratios
2011
2012
Solvency Ratio:
Solvency Ratio
20.78%
20.49%
Graph:
Interpretation:
Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. On basis of this we clear sees company's performance which is effective much in this context.
Financial Gearing Ratio:
Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. Also known as the Net Gearing Ratio. The best known examples of gearing ratios include the debt-to-equity ratio, equity ratio, and debt ratio (Investopedia, 2012).
Debt-to- Equity Ratio
Debt to Equity Ratio = Total Debt / Total Equity
Equity Ratio
Equity Ratio = Equity/ Assets
Debt Ratio
Debt Ratio = Total Debt / Total Assets
Calculations:
Performance Analysis (Period 2011-2012)
Ratios
2011
2012
Financial Gearing Ratio:
Debt-to-Equity Ratio
1.12%
1.13%
Equity Ratio
0.352%
0.351%
Debt Ratio
0.39%
0.396%
Graph:
Interpretation:
The higher a company's degree of leverage, the more the company is considered risky. Tesco company is stable enough to bear any loss if happens. The consistency in both years is because of discontinuing operations in this financial period.
Overall Analysis of Performance Measures
Financial Performance of Tesco PLC (2011-2012 Period)
Ratios
2011
2012
Profitability Ratios:
Profit Margin
3.98%
3.90%
ROA
5.84%
4.88%
ROE
1.658%
1.392%
Efficiency Ratios:
Fixed Asset Turnover
1.907%
1.899%
Liquidity Ratio:
Current/ Cash Ratio
6.54%
6.44%
Solvency Ratio:
Solvency Ratio
20.78%
20.49%
Financial Gearing Ratio:
Debt-to-Equity Ratio
1.12%
1.13%
Equity Ratio
0.352%
0.351%
Debt Ratio
0.39%
0.396%
Limitations of Ratio Analysis:
A very common application used in business world to check their performance is through Ratio Analysis. Team of Financial and Investment analysts kept their eye on overall performance of the company especially for assessing financial performance. Ratio analysis encourages analyzing performance through a very strong systematic approach. However, it is also important to remember some of the limitations of ratio analysis. (Riley & Peavler, 2012)
Ratios deal mainly in numbers - they don't address issues like product quality, customer service, employee morale and so on (though those factors play an important role in financial performance)
Ratios largely look at the past, not the future. However, investment analysts will make assumptions about future performance using ratios. Ratio analysis explains relationships between past information while users are more concerned about current and future information
Ratios are most useful when they are used to compare performance over a long period of time or against comparable businesses and an industry - this information is not always available
Financial information can be "massaged" in several ways to make the figures used for ratios more attractive. For example, many businesses delay payments to trade creditors at the end of the financial year to make the cash balance higher than normal and the creditor days figure higher too.
Different companies operate in different industries each having different environmental conditions such as regulation, market structure, etc. Such factors are so significant that a comparison of two companies from different industries might be misleading.
Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations.
Reported values on balance sheets are often different from "real" values. Inflation affects inventory values and depreciation, profits are affected. If you try to compare balance sheet information from two different time periods and inflation has played a role, then there may be distortion in your ratios.
Another issue is depreciation. Different companies use different depreciation methods. The use of different depreciation methods affects companies' financial statements differently and won't lead to valid comparisons.
Ratio analysis is based entirely on the data found in business firms' financial statements. If the financial statements for a company are not good, the company may use window dressing to manipulate the data in the financial statements which is against financial and business ethics. In window dressing the company will perform some sort of transaction at the end of its fiscal year to show desirable financial statements
Accounting Principles for Preparation of Financial Statements:
Different countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as Generally Accepted Accounting Principles (GAAP), these set of guidelines provide the basis in the preparation of financial statements, although many companies voluntarily disclose information beyond the scope of such requirements.
Companies use GAAP to standardize their financial statements so that investors can better use those statements to analyze a company for investment purposes. GAAP covers things such as revenue recognition, balance sheet item classification, and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data in their financial statements. If a financial statement is not prepared using GAAP principles, investors should be very wary! That said, GAAP is only a set of guidelines, and that leaves plenty of room for interpretation by unscrupulous accountants to distort figures. Thus, even with GAAP, one should not put complete faith in the numbers companies report. (Thompson, 2006)
Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board ("IASB"). IASB develops International Financial Reporting Standards that have been adopted by Australia, Canada and the European Union (for publicly quoted companies only), are under consideration in South Africa and other countries. The United States Financial Accounting Standards Board has made a commitment to converge the U.S. GAAP and IFRS over time (Wikipedia 2012). Tesco's financial statements are in accordance with U.S. GAAP but evaluate their performance based on non-GAAP measures. (Quintana, 2012)
Basic assumptions behind US GAAP (Thompson, 2006)
Economic Entity Assumption: Assumes that business functions and records are kept separate from the owner's private and personal financial transactions.
Going Concern Assumption: Assumes that a business is to be in operation for a long time.
Monetary Unit Assumption: Assumes that money provides an appropriate basis for accounting measurement and research.
Time Period Assumption: Assumes that a business will divide its financial reporting records into artificial time periods. Most companies typically use quarterly and annual time periods for reporting purposes.
Principles behind US GAAP
Cost Principle: This principle requires that assets and liabilities be recorded at their acquisition price. Note, however, that recently a fair market value has been playing a significant role in valuing assets and liabilities.
Revenue Recognition Principle: This principle requires revenue to be recorded when it is earned and realized or realizable.
Matching Principle: This principle states that expenses must be recorded in the same period as the revenues associated with those expenses.
Disclosure Principle: This principle requires all companies to fully disclose information that may impact decisions of users of financial information.
Constraints of US GAAP
Materiality: Whether a particular transaction must be recorded strictly in accordance with GAAP depends on its materiality. An item is material when its omission or inclusion would influence or change the judgment of a reasonable person. If an item is not material, then its recording may deviate from GAAP without jeopardizing usefulness of the financial statements.
Cost-Benefit Relationship: In establishing GAAP, it is important to consider the costs it will take for companies to prepare such information and the benefits that users will derive from it.
Industry Practices: Financial statements of companies in certain industries do not follow the accounting standards fully. This should be taken into consideration because that particular industry may have its peculiarities where deviations from GAAP are warranted.
Conservatism Principle: When in doubt about accounting treatment of certain transactions, a company should choose the treatment which will not overstate assets and revenues and will not understate liabilities and expenses.
Accounting Policies Referring Tesco PLC financial statements
Cash and cash equivalents
In Tesco PLC financial statements, cash and cash equivalents in the Group Balance Sheet consist of cash at bank, in hand, demand deposits with banks, loans and advances to banks, certificate of deposits and other receivables together with short-term deposits with an original maturity of three months or less. Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through sale rather than continuing use. (Disclosure Principle)
Taxation
The tax expense included in the Group Income Statement consists of current and deferred tax.. Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set-off current taxation assets against current taxation liabilities and it is the intention to settle these on a net basis. (Industry Practices)
Provisions
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. (Matching Principle & Revenue Recognition Principle)
CONCLUSION:
This study concludes the efficiency of Islamic banks in Pakistan. The various financial ratios and have been used to make the comparison. In ratio measures the financial performance of Tesco PLC is stable enough because of its quality based strong strategic plans. From above results we can conclude that there is not big difference in analyzing their performance because during this financial period, the Group announced its decision to sell its operations in Japan. Accordingly, these operations have been treated as discontinued in 2012. The 2011 statistics have been re-presented to be consistent with 2012. Prior years have not been re-presented.
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Peavler, Rosemary. 2012. About.com Guide, viewed 26 November 2012, http://bizfinance.about.com/od/financialratios/tp/limitations-financial-ratio-analysis.htm.
Riley, Jim. 2012. Accounting rations-Limitations, viewed 26 November 2012, http://www.tutor2u.net/business/accounts/ratio_limitations.html
Tescocorp. 2012. Tesco corporation reports. Retrieved 26 November 2012, http://www.tescocorp.com/bins/content_page.asp?cid=8-1337
Tesco, 2012. tesco_annual_report_2012_financials. Cheshunt: Tesco House.
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