Business Finance - TESCO - Assignment Example

Tesco Plc. Factors to be considered when preparing projected financial statements Preparing profoma -financial statements is of critical important to the success of the business organization. According to (Thomas and James, 2006), the projections are important in that they guide the management in planning the business growth. The following are some of the factors that should be considered in preparing the projected statements. a) Prior financial statements The statements reflect how the business has been performing in the past. The rate of growth reflected by these statements will be of great importance in projecting the future growth of the business. From these statements, one uses sales and levels of revenue, various business ratios, average expenses and any information regarding payables and receivables in projecting the future figures. The prior financial statements should show the financial improvement for the business for each year under consideration. b) Internal factors The status of the firms operations is of paramount importance in preparing the projected statements. For instance consideration must be made on whether the firm needs to relocate owing to expansion or whether the firm requires replacing the existing assets due to improvement in technology. One also needs to consider the level of competition that the business faces and the strategies that need to be implemented in order to deal with the competition. One also needs to consider whether the firm requires to hire additional personnel or to train the existing. c) External factors In preparing the projected statements, one needs to consider the status of the country’s economy as well as the status of the global economy. The trends of the industry in which the business falls also needs to be considered in order to know whether the projected sales revenue levels as well as profitability will be achieved. The business must also consider the reliability of the sources of raw materials as well as changes in technology (Peter, 2008). Other factors to consider include whether the company is performing as expected (up to the mark); the company’s current financial status; the stage of growth the market is; the management’s role in the company’s growth as well as the risks associated with the company’s operating activities. Calculation of annual growth rate for various elements of the projected financial statement NB/ calculations of the values of the various projected financial statement items are contained in the excel sheet attached. Income statement items Year 2005 2006 2007 2008 2009 Sales in £m 33866 39454 42641 47298 54327 Cost of sales 31231 36426 39401 43668 50109 Gross profit Admin expense 732 825 907 1027 1248 Profit from property Related items 49 77 92 188 236 Operating profit Share of π of joint vent- -ures and associates 74 82 106 75 110 Finance income 103 114 90 187 116 Finance cost 235 241 216 250 478 Profit before tax Taxation 541 649 772 673 788 Π for the period for Continuing operations 1353 1586 1881 2130 2166 Π attributable to share Holders 1344 1570 1892 2124 2161 Minority interest 3 6 7 6 5 Balance sheet items Goodwill & intangible Assets 1408 1525 2045 2236 4027 Property, plant & Equipment 14521 15882 16976 19787 23152 Investment property 565 745 856 1112 1539 Investment in join t ventures And associates 416 476 314 305 62 Other investments 7 4 8 4 259 Derivative financial Instruments 216 1478 Deferred taxes 14 12 32 104 21 Inventories 1309 1464 1931 2430 2669 Trade and other Receivables 769 892 1079 1311 1798 Derivative financial Instruments 70 108 97 382 Current tax assets 8 6 9 Cash 1146 1325 1042 1788 3509 Non-current assets Held for sale 168 408 308 398 Trade and other payables 4974 5083 6046 7277 8522 Financial liabilities Borrowings 482 1646 1554 2084 4059 Derivative financial Instruments 239 87 443 525 Current tax liabilities 221 462 461 455 362 Provisions 3 2 4 4 10 Current liabilities Financial liabilities Borrowings 4563 3742 4146 5972 12391 Derivative financial Instruments 294 399 322 302 Post employment Benefits Obligations 735 1211 950 838 1494 Other non current Payables 21 29 29 42 68 Differed tax liability 496 320 535 802 696 Provisions 6 5 25 23 67 Net assets Share capital 389 395 397 393 395 Share premium 3704 3988 4376 4511 4638 Other reserves 40 40 40 40 40 Retained earnings 4470 4597 5693 6871 7865 Equity attributable To share holders 8603 9380 10506 11815 12938 Minority interest 51 64 65 87 57 Notes to the projected financial statements 1. Taxation The amount of taxation has been calculated using an assumed corporation taxation rate on the projected profit before taxation as follows Projected profit before taxation £ (m) 3301 Rate used 26.2% Taxation amount 865 The assumption has been necessitated due to the fact that the company operates in many countries which apply different rates of taxation and hence the need to use a common rate. This is the effective tax rate. 2. Finance income The amount of finance income is expected to rise slightly because of the projected rise in cash and cash equivalents hence a higher interest receivable. Similar increase in interest receivable is anticipated to come from the small raise in financial instruments. An average rate of growth has been used to determine the projected finance income 3. Finance costs It is projected that finance costs will also increase slightly. Mainly, this will be accredited to the projected increase in borrowing resulting from increased financing needs. Similarly, an average rate has been used in projecting the finance cost. 4. Exceptional items There are no exceptional items that have been projected to occur during the period and hence they have not been listed in the statements. 5. Computation of earnings per share This has been calculated dividing the projected profit attributed to shareholders with the weighted average number of ordinary shares in issue Basic dilutive share options diluted Profit (£m) 2433 2433 Weighted average no. of shares 7859 53 7912 Earnings per share 31pence (0.25) 30.75 6. Dividend per share The projected dividend per share has been set at 10 percent higher than the last year’s dividend t in order to reflect the increase in earnings. I.e. 13.16 pence per share. 7. Sales The group sales are projected to increase at a rate to £m 61140 during the year. This figure has been computed using the Compounded annual growth rate for the last five years. 8. Profit before taxation The profit before taxation has been projected to increase at a rate of 12 percent to £m3301. TESCO PLC REPORT OF THE ANALYSIS OF THE COMPANY’S FINANCIAL POSITION AND PERFORMANCE FOR THE PREDICTED YEAR TO 28 FEBRUARY 2010 Introduction The company is projected to continue with its improved performance during the year ending 28th February 2010.The enhanced performance is accredited to the reason that the world economy is expected to improve. Furthermore, the company is projected to increase its trading activities and hence improve on the level of revenue achieved during the year ended 28th February. The company is also expected to acquire more assets in order to cope with the improved level of performance. The company will also increase its level of borrowing slightly in order to effectively finance the improved level of performance. The corporate taxation rate is also expected to decrease from 28 percent to about 26 percent in the year ending 28th February 2010. The following is an analysis of the company’s financial position and performance for the year ending 28th February 2010; a) Profitability The company’s is expected to report a higher profit during the year compared to the previous year. The gross profit is expected to improve from £m 4218 reported during the year ended 28th February 2009 to £m4745 in the year ending 28th February 2010. Tesco’s net income is also projected to improve from £m 2954 to £m3301. Also, sales are also projected to improve from £m54327 to £61140. The cost of sales has also been projected to increase from £m50109 to £m 56395. However, although the company is expected to report higher profits, the profit margin is not expected to improve due to the increase in the cost of sales. Therefore the gross profit margin ratio will remain at 0.77 while the net profit margin will also remain constant at 0.54. b) Liquidity It is projected that the company’s level of liquidity will improve during the year ending 28th February 2010. The current ratio is projected to improve slightly from 0.75 to 0.79 while the quick ratio is projected to improve from 0.60 to 0.65. The improvement in the company’s liquidity will result from the expected increase in the level of assets. However, the company’s level of liquidity is still expected to be lower than the acceptable level of 1. This is accredited to the high amount of current liabilities. The company should come up with ways of reducing the level of current liabilities in order for its level of liquidity to improve. c. Activity level Inventory turnover –this is an activity ratio that shows the amount of times inventory is created and turned over during the year. The level of inventory turnover is expected to reduce slightly from 0.51 to 0.48. This is accredited to the raise in the amount of inventory. Accounts receivable turnover- this is a ratio that indicates how fast credit sales are generated and paid. The accounts receivable turnover is expected to decrease slightly from 0.82 to 0.75. This is attributed to the projected increase in the level of accounts receivable. d) The company’s financial leverage This is an indication of the extent to which the company is reliant on debt financing. It measures the level of risk the company is exposed to due to debt financing (Jim, M2007). The company’s debt ratio expected to increase from 0.71 to 0.74. This is attributed to the increased level of debt compared to the increase in the level of the company’s assets. e) Shareholders ratios The company’s earnings per share are expected to improve from 27.50 pence to 31 pence the diluted earnings per share is also expected to improve from 27.31 to 30.5. The company’s divided payout ratio is also projected to increase from 0.4 to 0.42. The expected improvement in the shareholder’s ratio is expected to result from the increase in the level of earnings attributed to the company’s shareholders. f) Coverage financial leverage ratios This is a ratio that measures the level of income available to pay the company’s obligations to pay interest (Leopold, 2005). The company’s ability to meet obligations to pay interest is projected to improve from a ratio of 6.1 to 6.3. This will result from improved profitability of the company. Conclusion As already stated above, the company’s financial performance is projected to improve. The company’s profitability is expected to improve. However, the cost of sales are still expected to be high hence making the company not to achieve a high level of profitability. Tesco should device methods of reducing its liabilities in order to improve its liquidity status and also reduce the level of leverage risk. The achievement of the performance projected in the statements to the year ending 28 February 2010 however may be affect by internal or external environmental factors. Such factors include changes in government policies and changes in the global economy owing to the fact that the company operates in many countries. It is hoped that any environmental changes will not adversely affect the projected financial statement. References Tesco plc .com 2009, Tesco plc, Viewed 23 July 2010, http://www.google.com/search?hl=en&q=Tesco+PLc+goup+annual+reports+for+2009&btnG=Se arch&aq=f&aqi=&aql=&oq=&gs_rfai=. Tesco plc.com 2006, Tesco annual report and financial statements for 2006, viewed 23 July 2010, http://www.tescoplc.com/plc/ir/ar/archive/ar2006/arfs_06/4615306.pd.f. Zero million.com 2010, financial ratio analysis, viewed 23 July 2010, http://www.zeromillion.com/business/financial/financial-ratio.html. Peter, A2008, Financial management for decision makers, London: prentice hall. Thomas, G & James, P 2006, Financial and business statements, London: Routledge. Jim, M 2007, Financial management: an introduction, London Routledge. Leopold, A 2005, Analysis of financial statements, New York: McGraw-Hill Read More