Principal Activities of Tesco, Auditors Report and Its Importance - Essay Example

? Financial Information: work Assignment Financial Information: work Assignment Principal Activities of Tesco Plc.: Tesco Plc. Is one of the leading international retailers with its core business as in retailing of grocery. The company offers a huge range of products including food items, general merchandise, accessories, household items, and electrical products. In addition to its core business the company also provides financial services including insurance and retail banking. The company has also recently initiated its telecom and data manager and distributions business lines (Bloomberg 2012). The company sells its products and services through its physical stores and also online ecommerce solutions to its millions of customers worldwide. The company operates for achieving its visions that is “to create value for customers to earn their lifetime loyalty” (Tesco Plc., 2011) and deliver its values “no one tries harder for customers and treat people how we like to be treated” (Tesco Plc. 2011). Auditors Report and its Importance The auditors of Tesco Plc are from the London office of PricewarehouseCoopers LLP. The independent auditor’s report briefly provides the responsibilities of directors and auditors along with the scope of the audit of the financial statements. The opinion of the independent auditors indicated that the company’s financial statements have been prepared according to IFRSs, which have been adopted by the EU and the information provided by the company represents true and fair view of the company’s operations and other affairs. The opinion of the external auditors also indicate that the directors report has been prepared in accordance with the requirements under the Companies Act 2006 however there are certain exceptions which the auditors have noted and reported. These exceptions are related to certain disclosures of Director’s compensation that are viewed not to fulfil the requirements of the law and there are some elements of information which auditors did not receive from the company for completion of the audit. The importance of external auditors report is significant as they are viewed by shareholders and other stakeholders as responsible for checking the validity and completeness of the information provided by companies in their financial statements and other related documents and the report provided by external auditors provide means for assessing the company’s current financial standing by outside world. Financial Ratio Analysis The financial ratio analysis of Tesco Plc has been performed based on the financial information provided by the Group in its consolidated financial statements for the years ending February 2010 and 2011. The findings of the ratio analysis is presented in the following table: Ratio Expression 2011 2010 2011 2010 Industry Result Result Average ROE Net Profit / Total Equity 2671/16623 2336/14681 16.07% 15.91% 19%         Gross profit margin Gross Profit / Sales Revenue 5060/60931 4607/56910 8.30% 8.10% 10%         Net profit margin Net Profit / Sales Revenue 2671/60931 2336/56910 4.38% 4.10% 3%         Current ratio Current Assets / Current Liabilities 11,869/17,731 11,765/16,015 0.67 0.73 1.7 Inventory turnover period 365/(Cost of Sales/Inventory) 365/(55,871/3,162)) 365/(52,303/2,729) 21 19 50 days Payables’ turnover period 365/(Cost of Sales / Trade Payables) 365/(55,871/10,484) 365/(52,303/9,442) 68 66 20 days Gearing ratio Total Debt/ (17,731+12,852)/16,623 (16,015+15,327)/14,681 1.84 2.13 4% Total Equity P/E ratio Price per Share / Earnings per Share 401.90/33.10 419.70/29.33 12 14 9.0 x Share Price Source: (Yahoo! FInance, 2010-11) Financial information Source: (Tesco Plc., 2011) Horizontal Analysis Horizontal analysis is performed for the following financial items to indicate whether they have increased or decreased.   2011 2010 % Change Sales 60,931 56,910 7% Increase Operating Profit 3,811 3,457 10% Increase Share Price 401.9 419.7 -4% Decrease Discussion of Results The findings from both financial ratio analysis and horizontal analysis provide great insight into the company’s performance over a period of two years. The Group has been able to post a significant increase in its revenues that is 7% jump in 2011 as compared to 2010. This is mainly due to the overall growth in the company’s business both in the UK and international markets. The company’s operating profits are up by 10% in 2011 as the company was able to earn more profits on property related items and significant rise in sales revenue in the last one year. Poor economic conditions and weak sentiments prevailing in the UK capital markets have not pushed the company’s stock price significantly. However, a small decrement of 4% has been noted in its share price from 2010 to 2011. The financial performance analysis covered by the financial ratio analysis can be discussed under the following ratio categories headings. Profitability The company’s profitability position is assessed using three useful financial ratios. The results show that the company’s Return on equity (ROE) has improved slightly by only 0.16% in 2011 and currently stands at 16.07%. This is less than the industry standard of 19%, which implies that the Group must work on its profitable business segments to increase its earnings. The Group’s gross profit margin is 8.30% in 2011 as compared to 8.10% in 2010; however, it remains lower than the industry standard of 10%. Moreover, the Group’s net profit margin has also increased slightly in the year 2011. As compared to the industry average the company appears to be performing better. The overall profitability position of the company can therefore be suggested to be strong and the company has achieved great growth rates both in its domestic UK market and international markets particularly Asia and US. Liquidity The liquidity or short -term financial position of the company has been evaluated using current ratio. Current ratio is the ratio of the Group’s current assets to current liabilities and has a value of 0.67 in 2011 as compared to little higher value of 0.73 in 2010. This indicates a weak liquidity position of the company as the current ratio value is less than the psychological level of 1 (Ehrlich and Fanelli 2012) and also it is lower than the industry average of 1.7. Further analysis show that the Group is holding larger inventory and it has issued high value of loans to customers in 2011 as compared to 2010 which makes the overall position of the company less liquid and it could face financial difficulties if a major proportion of its current assets are not converted into sales or realized. Asset Management The company is able to convert its inventory into sales in just 21 days in 2011 as compared to 19 days in 2010. This makes the company quite efficient in comparison to the industry average of 50 days. On the other hand, the company is taking longer period to pay its payable liability holders. It took 68 days in 2011 and 66 days in 2010 whereas the industry average is just 20 days. Other The solvency position of the company is determined by the gearing ratio, which is the ratio of total debts to total equity. The ratio value is 1.84 in 2011, which is down from 2.13 in 2010. Although the company has made significant cut down in its dependency on external financing by reducing both current and non-current borrowings but the gearing of the company has remained weak. DuPont Analysis The company’s profitability ROE can be assessed using DuPont Ratio as follows: DuPont Ratio: (Profit margin)*(Asset turnover)*(Equity multiplier) DuPont Ratio: (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)= (Net Profit/Equity) The results for both 2011 and 2010 are provided below. DuPont Ratio: (2,671/60,931)*(60,931/(35,337+11,869))*((35,337+11,869)/16,623) =16.07% 2010 DuPont Ratio: (2,336/56,910)*(56,910/(34,258+11,765))*((34,258+11,765)/14,681) =15.91% These results coincide with the ratio values obtained via financial ratio analysis above. Based on the components of DuPont Ratio it could be suggested that major contributor of this ratio is the equity multiplier, which is the ratio of assets to equity. This implies that the company has high value of assets for the equity that the company has invested in its business. This signals a positive sign that the company has been able to accumulate assets over the years of its operations, which can be suggested to be majorly financed by the earnings that the company has achieved. Also it can be stated that the financial elements, which are include in the numerator of three different component ratios are of greater importance as the company must make higher sales from its assets to generate high net profits to be distributed to shareholders or invested back into the company. List of References Bloomberg., 2012. Tesco Plc (Tsco:London). [Online] Available from Bloomberg BusinessWeek: [Accessed on May 2, 2012] Sofat, R. and Hiro, P., 2008. Basic Accounting. New Delhi: PHI Learning Pvt. Ltd. Tesco Plc., 2011. Annual Report 2011. Cheshunt, Hertfordshire: Tesco Plc. Yahoo! FInance., 2010-11, February. Historical Prices: Tesco Plc. [Online] Available from Yahoo! FInance: [Accessed on May 2, 2012] Read More