Tesco Financial Analysis Essay

Introduction

Tesco Plc is the largest retailer in UK and fourth largest retailer in the world (after Wal-Mart, Carrefour, and Metro) and is the market leader in terms of Market share, profits, and turnover for the last five years in UK. It is a common perception that Tesco is a food retailer and it is a great competitor of other retailers such as Sainsbury and Asda.

Tesco Plc has been operating around 2300 stores around the world out of which 1900 stores are being operated in United Kingdom. The company ranked as the second largest online Super market operating in the world after Wal-Mart.

Tesco Plc is great in diversity of its business in various areas and expanded in to global operations and making its own mark in a saturated retail market with its innovative techniques in operations, marketing activities, strategic tie ups and various other areas

Tesco Plc has shown a growth beyond the market even the industry growth is marginal. The reasons behind the great market share are its offering better value for money than its competitors and offering its product range cheaper than its competitors and finally its most loyal and committed staff

2. Background

Tesco was started as a small business in the year 1919 by Jack Cohen, who was associated with Royal Air Force during the First World War with a capital of 30 pounds and opened a small store in East London. On first day he had four pounds turnover and one pound profit. Later his business started growing little by little and expanded to all the London

The name Tesco came from the initials of Mr. T.E.Stockwell, the one who supplied the firm Tea, and the remaining initials are from the owner of the company Jack’s surname Cohen. The name Tesco was first displayed on a shop in the main street in North London (Burno Oka, Edgware) in the year 1929

Tesco expanded its branches to 50 by the year 1932 and become a private limited company, that is in the span of three years and bought their own land for the head office functions and ware house functions in the North London (Angel Road, Edmonton). And soon by the year 1939 the number of shops was reached to one hundred

Since then till now it continued its growth strategies and made its mark in the retail sector as an outstanding success. To consider few noticeable land marks of Tesco Plc in the last 10 years we can quote the following.

Tesco was the first company to launch its e business operations in UK apart from traditional stores through the web site Tesco.com in 2001

In October 2003 it has entered in to Telecom sector in UK

In 2007 due to bomb scare Tesco closed temporarily 14 stores across UK

As of December 2009 Tesco had 30.5%market share in UK and its nearest competitor is Asda with 16.9% share

It emerged as the market leader in UK, Malaysia and Thailand by the end of 2009, and expanded its operations to 14 countries across Asia, Europe and North America

In April 2010 Tesco bagged the deal of UK’s official foot ball sponsor for the duration of world cup

3. Absolutes and Ratio Analysis

Interpretation of the Ratios

Return on capital employed

From the above Table we can say that Capital employed by the company has increased its capital employed from 5% to 5.57%, this indicates the performance of the company in terms of capital employment has enhanced. This is a positive sign to the growth of the company and its future global expansion

The Operating Profit Margin

This Ratio indicates an increase in operating profit margin from 5.90% to 6.07%, from 2009 to 2010. This clearly indicates that the company has effectively controlling the costs and expenses associated with the business operations like expansion and other areas and making remarkable profits. This shows the good sign for the company for its future prospects

From the above graph we can say that Tesco from its peer competitors making a big difference in Operating profit margin, only the W.M.Morrison is the nearest competitor for it and the other companies are far away from it. It indicates its proportionate marginal performance from its competitors

The Asset Turnover which gives us the information on how the assets are being used to produce the revenues. It has made no remarkable difference than the year 2009 to 2010. But it was observed that the use of assets is very good and the productivity is more than 1.6 in both years, this reveals that the company is using its assets in an effective manner.

Cost of sales:The performance of the company since the last balance sheet in respect to cost of sales is not improved. It is 4.19 in the year 2009 but it decreased to 3.89 in the year 2010. It reveals that the company performance in respect to Cost of sales has been deterred and it has to be improved. The main reasons for the depreciation in sales are some future investment has been involved in this rather than sales. It is true that capital employed and sales has greater relation but sometimes it is not only the factor to be considered.

The Stock Turnover in Days gives us the idea as how many times over the business has sold the value of its stocks during the year. And it is clear that the number of days taken for the flow of stocks in 2009 was better compared to that of the present year i.e. ., 2010.

Debtor turnover in days are the period required to get the amount back from the dealers and retailers to the company for the stock. The debtor days was 08 in 2010 where as it is 07 in 2010. There is a increase in the debtor days which is a bad sign when it comes to paying the debt.

Creditor turnover in days are the period required for the company to repay the debts to the creditors. The creditor days was 5 in 2010 where as it is 15 in 2009. The decrease in creditor days is going to be a disadvantage to the company. Management should take necessary steps to increase the creditor days.

The fixed assets are key assets for any company in long run and a decrease in this field can be noticed in the year 2010 compared to the previous year 2009 which is a negative sign.

The sales per employee provides the information regarding a measure of productivity, though a high figure can indicate either good personnel management or good equipment. In the year 2009 the sales per employee has increased from 0.10 to 0.53 from the last year. This is a good sign to the company in terms of sales per employee

The Current Ratio can be used to check the availability of liquidity in short term we use current ratio. We can check the fast moving of stock. If the ratio is greater than 1.5 then the company has ability to pay off all its liabilities on time. This ratio was 0.77 in 2009 where as it is 0.73 in 2010. So there’s a decrease in the current ratio can be observed.

The Quick Ratio is a measure to find a company’s liquidity and ability to meet its obligations. In this ratio the current assets are lessened from the stocks and divided upon the current liabilities. And if this ratio is greater than 1.0 then the company can pay off its obligations. Here the quick ratio is 0.56 in the 2010 and 0.63 in the year 2009. So both the years the quick ratio is bad.

The Gearing Ratio can be used to check the performance in long term. This ratio is mainly depended upon debt and equity. This ratio should be less than 50% in normal. In 2008 the ratio was 22.7% and in 2009 it is 30.3%. So the Gearing ratio is normal and improved.

Return on Equity lets the common shareholders know how effectively the funds invested are being utilized during a specific period. This ratio was 7.85% in 2009 and is 7.85% in 2010. This decrease of the return on equity would be a disadvantage to the company.

The Dividend Yield financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. We can see from the table in 2010 the ratio is 9.1% and in 2009 it was 9.6% it decreased compare to last year so it is a bad sign for the company.

Dividend Cover ratio shows that how much dividend company have to pay to their share holders. We can see from the table in 2010 the ratio is 2.41 and in 2009 it was 2.45 so its decrease so it’s not good for the company because the profit will also decrease compare to last year.

A Price Earning valuation ratio of a company’s current share price compared to its per-share earnings. In above table in year 2009 it was 10.19 and in year 2009 it was 38.47 so its decreased so it is bad for company.

Earning Yield ratio is calculated by earning per share divided by share price. In 2010 the ratio is 9.8 and in year 2009 it was 2.5 so it decreases and this is good for the company.

4. The Impact of Current Events Since The Last Balance Sheets

Tesco Has made a very good progress when compared to its peer competitors in a very saturated market environment, reflecting the ongoing developments across the world and expanding its business areas to various other sectors, and continuing its growth strategy, while benefiting from a strong and robust balance sheet

Recovery to Growth

The above table reveals that it is falling between the 3rd best dividend yielding company in the industry

The Tesco’s strong base in the UK helped it to reach the annual targets but there is no growth seems in the overseas turnover since last balance sheet. So the company need to concentrate on strengthening its position in overseas especially in Asian countries

Strong brand heritage of Tesco PLC helping to its global expansion this year

Tesco abandoned its discounted format with its down market image and continuing on building brand value

Quality and value of food offer continues to provide differentiation from major competitors

Continued development of non-food offer: TU clothing bought by over 40 per cent of customers

Sainsbury’s Bank delivering profit from good income growth and cost control

Tesco’s group sales has increased at 6.8% it is better than the preveious year growth rate 5.2%

Accelerated growth of group profit before tax at a rate of 10.4

Over £750 million of gross property transactions completed

In April 2009 Tesco announced that it had released a Tomato that it dosent leak called super Tomato, this tomato was grown in Holland and it stated that it gives good taste and better results for sadwitch and other food items and helps to preserve for long time

On April 2010 after a great competition Tesco bagged the deal of official sponsure ship of Foot ball team of england, and it hopes that it will build the image of Tesco PLC.

Tesco in 2010 cameup with a slogan “Every Little Helps” and tried to promote it through out the media and made it popular by all means, and this helped to build the brand image of Tesco

5. Conclusions and Recommendations:

Tesco need concentrate more on the Green values and initiatives: the future of the business mostely depends on the green practices of the companies so it is allways suggestable to make its image as a eco fiendly and promote the green values will build the Image of Tesco PLC more

Tesco stood first in the revenue employed and prodit making, turnover and profit making but it should also concentrate on the Dividend yield to the share holders as its is important to them to build the image of the company in the public for its future growth to the overseas

Maintaining the data base of customers especially prospective customers is one of the important activity in the business, as the business grows the company has to make the necessary alternatives to preserve the prospective customer data and using it for its future expansion is very essential.

Company need to be more strengthen in the Asian countries, as the profit shoes that most of it is coming from European union (UK and USA), it needed to make some strategic tie-ups to strengthen its base in the Asian countries