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A FINANCIAL ANALYSIS OF THE TESCO BUSINESS

Tesco financial performance listed on the bases of London stock exchange, with the symbol of TESCO the London stock market is listed. Tesco financial performance of last five years is as fallows.

The financial performance includes

Turnover(£m)

Profit before tax(£m)

Profit for year(£m)

Basic earning per share(p)

Years

Turnover(£m)

Profit before tax(£m)

Profit for year(£m)

Basic earning per share(p)

February 2010

62,500

3,200

3,090

29.02

February 2009

54,300

3,128

2,130

28.92

February 2008

47,298

2,803

1,899

26.95

February 2007

46,600

2,653

1,576

22.36

February 2006

38,300

2,210

1,366

19.70

The fallowing is the financial performance of the Tesco from last five years. Tesco is the fourth largest retailer in the world at the end of 2006. In the year 2007, Tesco moved ahead by home depots professional supply division. In 2007 February Tesco operated more than 1,988 stores in UK. Tesco made record profits for a British company in the year 2009 and 2010 February. Underlying per tax increased 10.1% to £3.4 billion. Tesco is trying to offer more than 16,000 new jobs in which 9000 will be in UK. Tesco share of the UK grocery market increased between the periods of December 2008 to December 2009 the share is 30.1% in 2009 market share up 0.1% in 2008 December.

RATIO ANALYSIS:

The ratio analysis contain five types they are

Profitability ratio

Gearing ratio

Liquidity ratio

Investor ratio

Advanced investor ratio

Profitability ratio:

In the ratio analysis the profitability contain

Grows profit margin

Net profit margin

Gross profit margin:

The equitation of grows profit margin is

Gross profit margin = Gross profit / Turnover *100

Turnover = sales

Gross profit = turnover – cost of sale

Gross profit=62500-42.3=62457.7

Sales=4.2%

62457.7/42,254*100 =147.8

The gross profit margin ratio tells us about the profit of a business makes on its cost of sales or cost of goods sold. It tells about the how much gross profit for £1 turnover business is earning. Gross profit is the profit we earn before we leave any administration costs and selling costs. The gross profit margin should be much higher than the net profit margin.

Net profit margin:

Net profit margin = Net profit / Turnover *100 (or)

Net profit margin= profit before interest and taxation / turnover *100

Net profit = gross profit – expenses

Net profit/turnover*100 = 42254/62500*100 = 67.6064

The amount of net profit per £1 of turnover business earned is calculated by the net profit margin. The cost of sales, administration costs, the selling and distribution costs; in these they will pay the tax.

TESCO PLC

Profitability

2009

2010

Gross profit margin

4,185

4,607

Net profit margin

Sales

42,254

(http://ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/Full-Review.pdf)

Gearing ratio:

Gearing = long term liabilities/ equity share holders funds

Gearing is the concerned as the relationship between the long terms liability that a business as and capital employed. The idea is to balance the shareholder funds being significantly larger than long term liabilities.

Gearing

Creditors

14,107

21,033

Equity shareholders funds

436,758

44,190

Liquidity ratio:

Liquidity ratios are

Current assets: current liabilities

(Current assets - stocks): current liabilities

The current ratio and the acid test ratio are the important ratios in the ratio analysis.

Current ratio:

It is also called as the working capital ratio and it is a real ratio.

Formula of current ratio is

Current assets / current liabilities

Current ratio

2009(£m)

2010(£m)

Current assets

12,906

14,681

Current liabilities

4,116

4,250

Current assets / current liabilities = 14,681/4,250 = 3.454353

Acid test ratio:

It is also called as the quick ratio. The main idea of the ratio is the sales of products will not sale quickly and some of the items will sale quickly. The stocks are sometimes sale quickly and some times will not sale quickly it should not be more than 4 to 5 days that is a good market.

The formula for the acid test ratio is

Current assets – stock: current liabilities

Acid test ratio

2009(£m)

2010(£m)

Current assets-stocks

13,479

11,765

Current liabilities

4,116

4,250

Current assets-stock/current liabilities =11,765/4,250 = 2.768235

Investor ratio:

The investor ratio contains five basic five ratios they are

Earning per share

Dividends per share

Divided yield

Dividend cover

Price earning ratio

Earning per share:

The formula for the earning per share is as follows

Earning per share = profit available to equity shareholders/average number of issued equity shares

The car phone warehouse consolidate profit and loss account

Year 2010(£m)

Year 2009(£m)

Profit for the financial period(£)

2,138

2,336

Weighted average number of issued shares

33

110

2138/33 = 64.78

Basic 29.33p in 2010 and 27.14p in 2009

Diluted 29.19p in 2010 and 26.96p in 2009

Dividends per share:

Earning per share shows shareholders earned way of profit for a period. Dividends per share show how much the shareholders were actually paid by way of dividends.

The formula for dividends per share is

Dividends per share = dividends paid to equity shareholders/average number of equity shares

Tesco consolidated profit and loss account

Year 2010(£m)

Year 2009(£m)

Equity dividends(£)

14,681

12,906

Weighted average number of issued shares

33

110

14681/33 = 444.87

Dividend yield:

Dividend yield allows investors to compare the latest dividend they received with current market values of the share as indicators return they are earning on there shares. By taking the last two years ratio we will observe that the ratio will be grown high or low. It will clearly show the latest share price

The formula fore the dividend yield is

Dividend yield = Latest annual dividends / current market share price.

Food retailers

Dividend yield

Budgens

2.0

Dairy frame international

1.1

Morrison

1.1

Safeway

4.4

Sainsbury

4.6

Thornton’s

5.8

These are the some of the examples dividend yields.

Tesco dividend yield

Latest annual dividend

9.1%

Current market share price

427.75

9.1/427.75= 0.0212

Dividend cover:

It tells about how easily a business can pay its dividends from its profits. High dividend cover means that the business can pay easily and low dividend cover means the business have difficulty in paying the dividend.

The formula for the dividend cover is

Dividend cover = net profit available to equity share holders / dividends paid toe equity shareholders

Tesco profit and loss account

Year 2010(£m)

In year 2009(£m)

Profit for the financial period

3,607

3,615

Dividends

968

883

3607/968 = 3.7262

Price earning ratio:

Price earning ratio is a vital ratio for investors. It gives the induction of the business. Price earning ratio of 1 show little confidence in business and of 20 express a great deal of optimism about the future of the business.

Formula for the price earning ratio is

Price earning ratio = current market share price / earning per share

The car phone warehouse

Pence

Price earning ratio

Current market share piece

76.0

16.52

Earning per share

4.6

16.52

76.0/4.6 = 16.52

Advanced investor ratio:

The interest cover ratio and dividend pay out ratio are equal and it is calculated in the same manner.

The formula for the interest cover ratio is

Interest cover = net profit before interest / interest paid

Interest cover is the safety margin for the business. High interest cover ratio means the business is easily meet the interests from profits and the low interest cover means the business is difficulty to meet the interest from profits.

Year 2010(£m)

Year 2009(£m)

Profit before interest and taxation

3,176

2,917

Net interest receivable

690

562

Referred from World Wide Web (http://www.bized.co.uk/cgi-bin/ratios/ratiodata.pl)

3176/690 = 4.60

Tesco in 2010:

The basic chart of Tesco in 2010

(http://uk.finance.yahoo.com/q?s=TSCO.LHYPERLINK "http://uk.finance.yahoo.com/q?s=TSCO.L&ql=0"&HYPERLINK "http://uk.finance.yahoo.com/q?s=TSCO.L&ql=0"ql=0)

The following chart shows the finance behaviour of Tesco in the year 2010.

Group sales:

The group sales have been increased year by year. From the following figure we can assume the development of Tesco year by year in group sales.

The group sales in 2010 62.5£bn. in the year 2006 it is 43.1£bn, in 2007 it is 46.6£bn, in 2008 it is 51.8bn, in 2009 it is 59.4£bn (http://ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/Full-Review.pdf).

Financial highlights of Tesco:

Group sales (including vat)

+6.8%

Underlying profit before tax

+10.1%

Group profit before tax

+10.4%

Underlying diluted earning per share

+9.1%

Diluted per share

+9.8%

Dividend per share

+9.1%

Tesco in UK CORE

Sales

£42.3bn

Sales up

4.2%

Trading profit

£2.4bn

Trading profit up

6.7%

UK results

£m

% growth

Sales

42254

4.2%

Trade profit

2413

6.7%

Trade margin

6.2%

0.1%

(http://ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/Full-Review.pdf)

Recommendations:

Tesco is the world’s largest retailer it has to plan for the development of the company not only in the UK but also in the other countries like US. As we know Tesco is in the high position in the UK market and it should develop the stores in the other countries and should be competitor for the other companies in the world.

As a global player Tesco operates in 12 countries, Tesco’s arrival in US can be influence the directions of the US glossary business in such areas as labour, environment, health, and food system.( http://departments.oxy.edu/uepi/publications/exec_sum.pdf)

Activates types under taken by the business should be extended because one area is struggling with profit then the other area can be profitable and this is called diversification.

In the specialization activates should be reduced because the making loss and some of the items are too high.

Tesco is expanding its business in order to keep up competition to a very high level. Tesco should invest in new services and products so they can fulfil the customer’s demands. Tesco customer is the one the imperative stakeholders of Tesco. The actions of the customers can directly affect the business so the customers are the stakeholders.

Tesco have two choices of recommendations diversifying and specialization. It can diversify their commerce or it can specialize in their current business. The business need to reduce their types of activities due to loss of profit in commerce. (http://bizcovering.com/international-business-and-trade/tesco-2/)

The health and safety should be must the entire employee should be healthy and should be in care. And we recommend Tesco to develop the stores in other countries and maintain the health and safety and Tesco should be grow up more faster and should develop the share price and market values. In the future Tesco should be in the top position in the world not only in the UK but also in the other countries like US the Tesco should develop the store and maintain the good products.

Conclusion:

Tesco is the largest retailer from the last five years and it has faced competitions from the companies like Sainsbury, ASDA and Morison and stud in the top position from the last five years. The financing market is grown up yearly and day by day. The stores has developed and increased. The group sales have been increased year by year and it became the leading retailer. Comparing to the last five years Tesco have developed and improved in store and sales of the products. Tesco improved it self by increasing the stores and sales from past five years the Tesco is the leading retailer and it has over taken the companies like Sainsbury. Sainsbury is also the leading retailer and it became competition for Tesco. Tesco trashed Sainsbury in past five years and rose up to overtake Sainsbury

Tesco should develop the stores in other countries like US. As we know the Tesco is top in UK market and it is in the leading retailer in the 17 countries but it should develop its store and share price. It has les stores in US it should develop the store in US and should become worlds leading retailer. It should develop its group sales and share price and should be in top position in coming five years. It should implement new elements.

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