The Main Business Activities in Tesco Company - Essay Example

 Tesco Company Table of Contents Table of Contents 1 Introduction 2 The Main business activities 2 Assets and Liabilities 3 The disclosures 3 The gross profit percentage 4 Revenue recognition 5 The inventory system 5 The depreciation methods 6 The liabilities, contingencies, current and debt ratio 6 Profitability and liquidity 7 References 8 Introduction This report is entirely about Tesco PLC. The company’s annual report has relied upon to provide answers to the following issues: the company's main business, assets and liabilities, financial statement disclosures, the gross profit percentages, investment report, revenue recognition, the inventory system, the method of depreciation, research and development expenditures, the nature of the company's liabilities and analysis of the company's profitability and liquidity. The analyses are intended to cover two financial periods (2012 and 2013). The Main business activities Tesco PLC is a Supermarket chain store located in the United Kingdom. The business was established in 1919 by Jack Cohen. The industry in which the company operates is food retail. The Supermarket provides both fresh and ready-made foodstuff that comes in varieties. The business operates in twelve countries globally with over 530,000 employees. The Company has more than 6,351 supermarkets spread in 12 countries across the globe. Tesco changed its core purpose from "more is better" to "making what matters better". This company's new core of purpose has created a new customer perspective, that is "caring for the customer's well-being". Therefore, this is a positive perspective that has greatly contributed to the company's success. Tesco PLC has a market share of around 30 %. It is the second largest supermarket in terms of revenues after Walmart. The company targets the general public with its goods and services. It made an expansion and is currently offering financial services via Banking. The bank is known as Tesco Bank. Lastly, Tesco company is a publicly traded Company on the London Stock Exchange. The company’s share prices for 2011, 2012 and 2013 were £ 425, £ 391and £ 336 (Tesco annual report, 2013). Assets and Liabilities According to the company’s balance sheet, the following are the tangible non-current assets, property, plant and equipment; investment property; investments in joint ventures and associates; other investment; loans and advances to customers; and deferred tax assets. On the other hand, the company’s intangible assets are goodwill and other intangible assets. In addition, the company holds the financial intangible asset, which is the derivative financial instruments. The second classification of assets is the current assets. The company's current tangible assets are inventories, current tax assets, short-term investments and cash and cash equivalent. On the other hand, the current tangible assets are trade and other receivables, loans and advances to customers and derivative financial instruments (Tesco annual report, 2013). Liabilities of the company are divided into two, that is, long-term and current liabilities. According to the company's balance sheet, the long-term liabilities are as follows: Financial liabilities (borrowings and derivative financial instruments and other liabilities); post-employment benefit obligations; deferred tax liabilities and provisions. On the other hand, current liabilities included trade and other payables, financial liabilities (borrowings, derivative financial instruments and other liabilities, and customer deposits and deposits by the bank), current tax liabilities and provisions (Tesco annual report, 2013). The disclosures According to the company’s annual report, the following are the disclosures made: the accounting policies that guided the financial statement preparation; the segmental report (the financial performance of each of the four segments, that is, U.K, Asia, Europe and Tesco bank); the income and expenses as per the company's continued operations; the information concerning the employment costs such as the director's remuneration; the finance income and expenses (the interest payables and receivables); the information on taxation; the information concerning the discontinued operations and non-current assets classified as held for sale; the information on dividends; earning per share and diluted earnings per share; information on goodwill and other intangible assets; the information regarding property, plant and equipment; disclosure on the investment property; information on group entities; disclosure of information concerning other investment; information regarding the company's inventories; the information regarding the company's trade and receivables; information on loans and advances to customers; disclosures on cash and cash equivalents; information on trade and other payables; the information regarding borrowings; information regarding the company’s financial instruments; disclosures on the financial risk factors (Tesco annual report, 2013). A continuation of the disclosures include the information regarding customer deposits and deposits by banks; the information about the provisions; disclosures on share-based payments; the information concerning post-employment benefits; information about called-up share capital; information regarding related party transactions; disclosures concerning the reconciliation of profit before tax to cash generated from operations; the analysis of changes in net debt; business combination and other acquisitions; information regarding commitments and contingencies; the information regarding capital resources; and the leasing commitments (Tesco annual report, 2013). The gross profit percentage The gross profit percentage or in other words, the gross profit margin is obtained by dividing the company’s gross profit by sales. For the financial years 2012 and 2013, the gross profit percentages were 8.44% and 6.31% respectively. The company’s total revenue increased in 2013 by 1.42% as compared to that of the previous year. However, the gross profit decreased by 24.2%. The decrease is attributed to an increase in the cost of sales. The company did not invest in any marketable securities (Tesco annual report, 2013). Revenue recognition Revenue from goods are recognized when the significant risks and rewards of ownership of the goods have been transferred to the buyer and the amount of the revenue can be measured reliably. On the other hand, revenue from the provision of services is recognized when the service is provided and the revenue can be measured reliably, based on the terms of the contract (Tesco annual report, 2013). Trade receivables collection period – this ratio shows the period it takes a company to collect all the accounts receivables. It can also be referred to as the period within which all the company’s debtors must pay their dues. Generally, the shorter the period, the more the cash collected (Sarngadharan & Kumar, 2011). Concerning Tesco PLC, the ratios for 2012 and 2013 are 15 days and 14 days respectively. For the two years, the company’s debtors had up to 15 days to pay the amount owing. Therefore, more accounts receivable were being collected in both years due to the company’s strict debt policy. The company’s allowance for uncollectible accounts (bad debts) for the current year reported was £ 51 million (Tesco annual report, 2013). The inventory system The company's inventories comprise goods and properties held for resale and properties held for, or in the course of, development with a view to selling. It uses the weighted average method in handling its inventories. The inventories are valued at the lower of cost and fair value fewer costs to sell. The value of the inventory reported in the current year is £ 3,744 million. It is not stated in the company’s annual report the frequency with which the company counts the inventory (Tesco annual report, 2013). Inventory turnover- this ratio indicates the number of times a company's inventory was converted to sales in a financial year. Generally, a higher inventory turnover reflects higher sales thus, possible high revenue levels. The company's inventory turnover for 2012 and 2013 are 16.3 times and 16.2 times respectively (Sarngadharan & Kumar, 2011). The depreciation methods The company exercises judgment to determine useful lives and residual values of property, plant and equipment and investments. These assets are depreciated down to their residual values over their estimated useful lives using a straight-line basis. The company does not have any research and development department. Therefore, there are no costs related to the department (Tesco annual report, 2013). The liabilities, contingencies, current and debt ratio The company has both short-term and long-term liabilities. The following are the loans, interest and their maturity periods: 5% MTN that matures in at the end of 2014; a 2% USD bond that matures in at the end of 2014; a 5.125% MTN that matures in 2015; a 4% RPI MTN that matures in 2016; a 5.875% MTN that matures in 2016; a 2.7% USD Bond that matures in 2017; a 5.5% USD Bond that matures in 2017; a 5.2% Tesco Bank Retail Bond that matures in 2018; a 3.375% MTN that matures in 2018; a 5.5% MTN that matures in 2019; a 1% RPI Tesco Bank Retail Bond that matures in 2019; a 5% Tesco Bank Retail Bond that matures in 2020; a 6.125% MTN that matures in 2022; a 5% MTN that matures in 2023; a 3.322% LPI MTN that matures in 2025; a 6% MTN that matures in 2029; a 5.5% MTN that matures in 2033; a 1.982% RPI MTN that matures in 2036; a 6.15% USD Bond that matures in 2037; a 4.875% MTN the matures in 2042; a 5.125% MTN that matures in 2047; a 5.2% MTN that matures in 2057; other MTNs, Loans and leases with no indication of interest and the maturity period (Tesco annual report, 2013). The company faces financial risk factors as follows: the interest rate risk, credit risk, liquidity risk, foreign exchange risk, capital risk and insurance risk. Current ratio – this ratio measures the ability of a business to meet its current obligations using the current assets. Generally, it is advisable for the ratio of current assets to current liability to be 2: 1. Concerning Tesco PLC, the company’s current ratio for 2012 and 2013 were 0.67 and 0.69 respectively. The ratios clearly show that the company is not liquid enough to sufficiently settle its short-term obligations using the current assets. Debt ratio – this ratio indicates the proportion of a company's total assets that have been financed by the total liabilities. It also shows the value of assets that creditors would claim in case of liquidation. Concerning Tesco Company, the ratios for 2012 and 2013 are 64.9 % and 66.76 % respectively. Both ratios show a high dependency on debt to finance the company's assets with 2013 having the biggest percentage. Net profit margin before tax– this ratio shows how well a company manages its operating expenses. The lower the ratio, the higher the operating expense, consequently, a lower level of profitability. The ratio for 2013 is 3.4%. The interpretation shows that only 3.4% of Tesco's revenue was net profit before tax, whereas, the remaining 96.6% were consumed by operating expenses (Sarngadharan & Kumar, 2011). Profitability and liquidity Based on the current ratio and the net profit margin before tax, Tesco company exhibits poor liquidity and thus cannot meet its current obligation using the current assets. The profitability analysis shows a high level of the company’s operating expenses thus a lower level of profits expressed as a percentage of the total revenue (Tesco annual report, 2013). References Tesco annual report (2013). Retrieved from http://www.sec.gov/edgar/searchedgar/companysearch.html. Sarngadharan, M., & Kumar, R. S. (2011). Financial analysis for management decisions. NY: Wiley. Read More