Financial Analysis of Tesco and Wall-Mart - Coursework Example

? Financial Analysis This paper is a comparison of between Tesco Company, which is listed in the United Kingdom, and Wal-Mart Corporation which is listed in the United States of America. This paper is going to compare the two leading giants in their industry in terms of both financial and non-financial information and performance. The reason why the two companies were chosen for comparison is because they are the market leaders or giants in their respective home regions, whereby they have diversified range of products, as well as having intense global expansion. Both companies have substantially expanded beyond their mother countries’ borders are very big brands worldwide (MacLaurin, 2002, p.72). Tesco plc is a general merchandise retailer and a multinational grocery, which is has its headquarters in Cheshunt, UK. Perhaps it is the world’s third largest retailer in terms of revenues. The other retailers that are ahead of it are Carrefour and Wal-Mart, and it is also the second largest in terms of profit, whereby it comes after Wal-Mart. The retailer has branches in fourteen states across North America, Asia, and Europe. In the United Kingdom, it is the leader in the grocery market whereby it controls a market share of about thirty percent. It was established by Cohen Jack back in the year 1919 as a small market stalls group (MacLaurin, 2002, p.76). Interestingly, the company generates approximately eighteen billion pounds in sales, offer employment for around one hundred and eighty thousand people and earn about seven hundred million pounds in revenue from outside of the United Kingdom. Currently, the have about two thousand and twenty six stores running outside the United Kingdom. However, within the United Kingdom, the company runs two thousand, two hundred stores and offers employment for about two hundred and eighty five thousand individuals. It became the first ever company to launch the Clubcard in the year 1995 with the aim of understanding its clients. The leading loyalty card program in the world has approximately fifteen million cardholders that are active (Simms, 2007, p38). On the other hand, Wal-Mart is the world’s largest retailer whereby it has sales revenue of over four hundred billion pounds from more than eight hundred retail stores that serve over one hundred and seventy six million clients a year. The company employs around two million, one hundred thousand people from all over the world. The company has operations or presence in over ten states, which include China, Brazil, Argentina, Honduras, Nicaragua, Canada, Costa Rica, United Kingdom, Japan, India, El Salvador, Mexico, Chile and Guatemala (MacLaurin, 2002, p.26). They earn around one hundred billion dollars from stores that are located outside the United States, approximately twenty five percent of the total revenue. They run over eight thousand, four hundred stores across the globe. The company operates on a model of price leadership. Clients are aware that the company can offer them the lowest process for what they need. Unlike Wal-Mart, we find that Tesco Corporation decided to adopt a kind of approach that is multiple format not only in its native market but also in the global operations. Whereas the company managed to be successful in all the twelve international markets that it ventured in, Wal-Mart did not manage to be successful; that is it was not able to make a its presence felt in a number of markets (Simms, 2009, p.45). Nevertheless, after strongly managing to establish itself or making a mark in the emerging markets, in the year 2007, Tesco Corporation entered into the United States market after carrying out thorough and comprehensive groundwork. Tesco Company came out with a one of its kind novel convenient store approach, which is ‘Fresh & Easy’ based on its comprehensive market research and after a very short time, the approach proved to be a great success and considerably gained an extensive acceptability and was embraced by most of the consumers in the United States. The Wal-Mart Company felt threatened by its major rival, and thus decided to that is was important if it joined the fray, which was a very new thing to them since inception (Lichtenstein, 2012). The biggest headache to the company was to choose between whether to do it the Tesco way or make some adjustments to its present business model. Some other questions that the company had to answer were whether the format war sustainable considering that there was an economic crisis, and whether Tesco would be in a position of sustaining and succeeding against the intense competition that it was facing from a serious competitor. Profitability from the company viewpoint The ROCE (Return on Capital Employed) is the comparison of the revenues with the capital invested in the company and helps in measuring its performance. In comparing the ROCE of Tesco and Wal-Mart, we find that: Wal-Mart’s ROCE in the year 2010 and the year 2011 is twenty percent and twenty one percent whereas that of Tesco in the year 2011 is twelve percent. The higher Wal-Mart’s ROCE implies that the organization gains by having a high number of assets as compared to Tesco. On the other hand, the Tesco’s lower ROCE suggests that the company is also making gains from its assets even though it is losing out due to its high liabilities (Lichtenstein, 2012). Profitability from the viewpoint of shareholder ROE (Return on Equity) is the measurement of the rate of return on the equity of the shareholder of the common stock holders. In addition, it shows how well an organization makes use of the investment funds in the generation of earnings growth. However, A ROE that ranges from fifteen to twenty is regarded desirable. Therefore, in comparing both Tesco and Wal-Mart’s ROE to establish the profitability from the perspective of the shareholder, we find that that of Wal-Mart in the year 2010 and the year 2011 is 20.54 percent and 20.27 percent whereas that of Tesco in the year 2011 is 15.92 percent. From these figures, we can see that both Tesco and Wal-Mart use the equity of investor in generating revenues quite appropriately. Moreover, it should be noted that an extremely high ROE does not produce immediate profit for the investor. The earnings-per-share substantially impacts a company’s stock prices (Lichtenstein, 2012). Therefore, the share of Wal-Mart will approximately cost one and a quarter times higher than the one for Tesco Company even though it might have a higher ROE. Liquidity comparison CR (Current Ratio) is a representation of the ability of the company to fulfil the demands of the creditor by settling off its debts. In 2011, the CR value of Wal-Mart was 0.87 whereas that of Tesco Company stood at 0.71; this means that for each one dollar that is owed by Wal-Mart to its creditors, it has 0.87 dollars to repay whereas Tesco Company has 0.71 dollars to repay. QR (Quick Ratio) refers to the company’s ability to immediately settle its present liabilities. The Quick ratio of Wal-Mart for the year 2011 was 0.54 whereas that of Tesco Company stood at 0.27. This implies that Tesco is able to immediately settle its fifty four percent of its present liabilities while Wal-Mart is only able to settle twenty seven percent (Lichtenstein, 2012). Working capital efficiency comparison The Net Operating Asset Turnover and Net Asset Turnover of both Tesco Company and that of Wal-Mart has a very slight difference. Therefore, let us put our focus on the remaining three to find out whether it is possible to differentiate between the two leading companies in the industry. In the year 2011, the RCP (the Receivable Collection Period) was 3.74 days whereas that of Tesco Company stood at 12.12 days. This has an implication that the time he clients of Tesco take to settle payments is much higher than that of the customers of Wal-Mart, even though it is only around eight and half days more than that of Wal-Mart which is 3.74 days (Humby, et al 2011). Tesco’s PPP (Payables Payment Period) is around sixty six days in the year 2011 whereas that of Wal-Mart Company is about thirty seven days. Nevertheless, a high PPP is advantageous to an organization but then organization should also ensure that they do not destroy their relationship or connection with their suppliers (Lichtenstein, 2012). However, in Tesco’s instance, this might be a probability as the company takes over two months to pay. Wal-Mart Corporation’s Inventory Holding Period is surprisingly high at approximately forty days in comparison with the efficient nineteen days of Tesco. This has the implication that Wal-Mart Corporation has a longer inventory period and perhaps mush shell out much funds for the purposes of storing the inventory. Tesco, on the contrary keeps stock for a period of about nineteen days and its inventory is rotated very resourcefully (Lichtenstein, 2012). Net cash balance and operating profit of Wal-Mart Corporation In the year 2011, we find that Wal-Mart Corporation’s operating profit was twenty four billion dollars, approximately 1.15 billion dollars more than that of the previous year. This was as a result of the company being able to sufficiently control its sales costs. This is actually true considering that the sales of company rose from around one percent but the sales costs only had an increase of about 0.20 percent. It could have been possible for the operating profit to surpass the twenty four billion dollar mark if the ‘Memberships together with other income’ had been as much as the previous year (Humby, et al 2011). The company only managed to add six hundred and thirty two million dollars to the already substantial amount of money that it had of about 7.28 billion dollars. This is essentially because the company paid six hundred and eighty five million dollars more than the previous year for equipment and property. The company also bought around seven and a half billion dollars of company stock in the year 2011 while in the previous year is had only purchased three and half billion dollars worth of company stock (Humby, et al 2011). Net cash balance and operating profit of Tesco Corporation Tesco Corporation’s operating cost in the year 2011 was 3.467 billion pounds; approximately three hundred million pounds more than that of the previous year. The operating profit of the company could have been much more had the company been in a position of minimizing its sales cost. The company’s sales cost rose by 2.27 billion pounds when there was an increase in their sales cost of about three billion dollars (Humby, et al 2011). The cash reserve of the company took a hit and decreased by six hundred and ninety million pounds; after adjustments for the rates of exchange’s effects. The company paid around nine hundred million pounds more than the previous year towards repaying the borrowings. The company also put an investment of about seven hundred million pounds more in the short-term investments as compared with the previous year. In addition, they managed to sell around 1.221 billion pounds worth of equipment, plant and property in the year 2011, a considerable rise from the previous year (Humby, et al 2011). Comparability’s effect following differences in US GAAP and IFRS The differences in standards of accounting that are being followed in the United States of America and the United Kingdom can have serious effects on the comparability of the two organizations. Moreover, some differences might be perceived as more challenging due to the fact that they are likely to lead to differences seen between the information that is given between for a specific period of reporting in organization’s financial statements due to the standards of IFRS as well as the information that is given by those that do it in accordance with U.S. GAAP, which would actually be tricky to be compensated in the making of comparisons. Bibliographies Humby, C, et al 2011, Scoring points : how Tesco continues to win customer loyalty. London & Philadelphia: Kogan Page. Lichtenstein, N 2012, The Retail Revolution: How Wal-Mart Created a Brave New World of Business. Leeds: University of Leeds. MacLaurin, I 2002, Tiger by the Tail: A Life in Business from Tesco to Test Cricket. London: Pan Books. Nash, B 2006, Fair-Trade and the growth of ethical consumerism within the mainstream : an investigation into the Tesco consumer. Leeds: University of Leeds. Simms, A 2009, Tescopoly: how one shop came out on top and why it matters. London: Constable. Read More