Tesco Plc- Ratio Analysis of Both Latest and Previous Years, Working Capital Management - Example

Tesco Plc February 17, Tesco PLC Executive Summary The financial ments of the company show Tesco Plc fared financially better in 2012 than 2013. Specifically, the company’s gross profit dropped 24 percent in 2013. The company’s operating profit decline by 48 % in 2013. Lastly, the company’s net profit significantly dropped to 96 % (£ 120,000).The financial performances of competitors like ASDA and J. Sainsbury fared better than Tesco Plc during 2013 alone. The high cost of sales triggered the lower gross profit, net profit before tax, and consequent net profits after tax. Table of Contents Introduction Jack Cohen’s Tesco Plc is one of the top grocery chains in the United Kingdom. Its competitors include ASDA, Morrisons Plc, and J. Sainsbury Plc. The Chesthunt, England grocery chain has branches in 14 countries in Europe, U.S. as well as Asia. The company ranks second to Wal-mart in terms of worldwide grocery sales. The financial statement analysis shows the company fared well in 2013. 1. Comparison of Latest year results with Previous year results; Table 1 Comparison of Latest Year’s results with Prior Year’s results. Ratio (Year Ending Feb 23, 2013) 2012 (in GDP million) 2013 (in GDP million) Change (Percentage) Revenue 63,916 64,826 1 % Gross Profit 5,397 4,089 -24 % Operating Profit 4,182 2,188 -48 % Profit before Tax 4,038 1,960 -51 % Net Profit 2,814 120 -96% Current Assets 12,353 12,465 1 % Noncurrent Assets 37,918 37,033 -2 % Noncurrent Liabilities (13,731) (14,483) 5 % Current Liabilities (6,386) (5,889) -2 % The above table clearly shows that there are variances in the operating performance between 2012 and 2013. The revenue decreased by 1 percent due to unexpected economic conditions in 2013. The company’s gross profit, operating profit, profit before tax, and net profit accounts unfavorably declined during 2013. The higher cost of sales figures and higher operating expenses contributed to the unfavorable picture (Sollenberger, 2008). The above picture also shows that the 2013 current assets increased due to additional investments in these areas. Likewise, the noncurrent assets declined in 2013 possibly due to depreciation or disposition. The company’s noncurrent liabilities increased in 2013, increasing purchases. The company’s current liabilities declined in 2013 indicating the company paid some of its currently maturing debts (Hilton, 2011). 2. Ratio analysis of both Latest and Previous years (show all workings and
provide detailed reference of data sources); a. Liquidity, Table 2 Liquidity Ratios Ratio 2012 2013 Difference s Current Ratio 64% 67% 3 % Quick Ratio 46% 47% 1 % Cash Ratio 9 % 8% -1 % The above table clearly shows the solvency performance of the company for 2013. The company’s current ratio increased in 2013 indicating that the company has more current assets available to pay the currently maturing debts. The Quick ratio shows that there are enough company’s cash, cash equivalents, receivables, and marketable securities available to pay the currently maturing debts, an increase in 2013. The 2013 higher cash ratio shows the company has more than enough cash, cash equivalents, and marketable securities available to pay the currently maturing debts (Wickramashinghe, 2012). b. Solvency, Table 3 Solvency Ratio 2012 2013 Difference Gearing Ratio 56 % 60% 4 % Acid Test (liquidity) Ratio 46% 47% 1 % Current Liabilities/Inventory Ratio 9 % 8% -1% The above table clearly shows that the company’s gearing ratio unfavorably increased in 2013 (Wickramashinghe, 2012). This shows that there are more total debts compared to stockholders’ equity in 2013 than the prior year. The acid test ratio shows a favorable increase in the company’s 2013 performance. There are enough cash, cash equivalents, receivables and marketable securities ready to pay the matured current liabilities. The current liabilities to inventory ratio shows the company fared better in 2013 than 2012, with more payables. c. Working capital management, Table 4 Working Capital Management Ratio 2012 2013 Difference Working Capital Ratio (Current Assets –Current liabilities) £-5,889 £-6,386 £ 497 Stock turnover ratio: Inventory end/cost goods sold x 365 21 days 22 days 1 day Debtor Collection Period: Receivables /Credit Sales x 365 15 days 15 days none Creditor payment Period: Liabilities/Credit Purchases x 365 71 days 67 -4 days The working capital ratio clearly shows 2013 fared better than 2012 (Epstein, 2012). The company increased the excess of the current assets over current liabilities in 2013 by £ 497. The company’s stock turnover ratio shows the company unfavorably increased the inventories’ conversion into cash by an unfavorable 1 day. The company’s 2013 debtor collection remained 15 days during 2013. The company should lower the number of days collection to get a better company financial picture. The company’s creditor payment unfavorably decreased to by days. The company should prolong the creditor payment days to create a better picture of the company. d. Profitability, Table 5 Profitability Ratio Ratio 2012 2013 Difference Operating Profit Margin: Operating profit/ Revenue 7 % 3% -4% Net Asset Turnover: Revenues/ Net Assets 4 times 4 times none Return on Equity 16% 0.7 % - 9 % Return on Net Assets: Net Profit before interest and taxes/ net assets 23 % 13% -10% The company’s operating profit margin shows an unfavorable picture of the company because of the 4 percent decline. The company must strive to increase its revenues in order to improve the ratio. The company’s net asset turnover, return on net assets, and return on equity ratios shows the ratio is unchanged. The company should increase its revenues in order to improve the three ratios (Hilton, 2011). e. Asset efficiency, Table 6 Asset Efficiency Ratio 2012 2013 Difference Receivables Turnover ratio 31 times 30 times -1 times Inventory to Sales ratio: Inventory end/Sales 5.6 % 5.8 % 0.2 % Inventory turnover: (Inventory x365)/ Revenues 21 days 22 days 1 day The above table shows the company’s unfavorable receivables turnover performance in 2013 than 2012. The company took one more day to collect its receivables in 2013 than 2012. The company fared better in 2013 than 2012 in terms of inventory to sales ratio. There are lesser inventories sold to generate the revenues. The company’s inventory turnover ratio for 2013 is unfavorable compare to 2012, one more day to convert. The company took one more day to convert inventory to cash (Sollenberger, 2008). 3. Comparison with industry average figures as available; Table 7 Industry Average Ratio Revenue Increase difference Operating Profit difference Net Profit difference Tesco 1 % -1.28 % -0.96 % ASDA 5% 1% -9 % J. Sainsbury 5 % 3 % 3 % The above table shows ASDA and J. Sainsbury fared better than Tesco. Both company’s 5 % revenue increase differences were higher than Tesco’s 1 % revenue increase difference. Tesco fared the worst of the three grocery line companies in terms of operating profit difference, with only a -1.28 % difference. In terms of net profit difference, Tesco fared the worst of the three competitors, with only -0.96 % difference. The table clearly shows that the revenues of ASDA and J. Sainsbury are definitely higher than Tesco Plc (Epstein, 2012). 4. Measurement against the organisation’s KPIs; Graph 1 Key Performance Indicators: Tesco Plc The above graph clearly shows the key performance indicators of Tesco for the years 2012 and 2013. The above indicators indicate that the company was able to focus its strategy to surpass its annual goals, thereby enhancing the company’s overall performance. The key performance indicators help investors comprehend the company’s annual operational performances (Epstein, 2012). 5. Evaluation of the uses of KPIs in assessing organization performance; The Key performance indicators are effective in assessing Tesco’s operational performance. The managers of Tesco can use the key indicators as a starting point for the next accounting period’s management and marketing strategies, plans, and goals (Spalton, 2010). For example, the managers will observe that the above indicators show that the company performed better than 2013 in some accounts. The accounts are Sales, Current Assets, Current liabilities, and noncurrent liabilities. These indicators give a favorable picture of the company. The same key indicators also show that 2012 fared better than 2013. These accounts are the Gross profit, Operating profit, net profit before tax, net profit, noncurrent assets, and Stockholders’ Equity accounts. These indicators prod Tesco management to institute strategies that will improve the 2014 key performances over the 2013 key indicators of these unfavorable performing accounts. In addition, the company’s return on equity’s 9 percent decline shows that the company should increase its revenues in order to improve the 2014 return on equity ratio (Hilton, 2011). 6. Discussion and explanation of your results; Tesco Plc had a difficult year in 2013, compared to 2012. The reasons include the change in the customer’s tastes. Tesco was not fast enough to cater to the changing needs of the customers. Tesco’s entry into online sales, drive through click and collect grocery, clubcard, and dunnhumbly strategies were not fast enough to outmaneuver the competitors in the U.K. grocery chain market segment. The industry analysis shows ASDA and J. Sainsbury fared significantly better than Tesco. Tesco must change its marketing and management strategies by spying on the competitors’ current marketing strategies (Sollenberger, 2008). The company’s current customer-based marketing strategies must be injected with additional funding and research. The feasibility studies will show why the customers prefer the products from ASDA, Morrisons, J. Sainsbury and other competitors. The company will use the feasibility study results to craft a timely marketing strategy that will literally grab huge portion of the competitors’ grocery market segment pie (Spalton, 2010). 7. Discussion of the advantages and limitations of the analysis techniques
you have used. There are advantages of the analysis techniques. First, historical data is a good input to improving decisions. Second, the analysis techniques allows management to allocate scarce resources to areas that need priority, such as low revenues in one product line or low revenues in one Tesco branch. The company can allocate the remaining time and resourced to products lines and Tesco branches generating higher revenues, operating profits, and net profits. Second, the analysis simplifies the financial data presented in the balance sheet and income statement. The analysis helps determining product trends (Epstein, 2012). There are disadvantages to the analysis techniques. First, the analysis deals with factors that occurred in the past. The economic depression of 2008 confronts the managers that past factors of business may not 100 percent accurate. Second, accounting standards may hinder the preparation of realistic reports since accounting reports are based on assumptions, not realities. Lastly, different companies operate in different industries, locations, and other economic conditions, making financial statement analysis unrealistic (Hilton, 2011). References: ASDASainsbury, (2013).Financial Statements. Retrieved February 23, 2013 from Epstein, M., 2012. Advances in Management Accounting. London: Emerald Press. J. Sainsbury (2013). Financial Statements. Retrieved February 23, 2014 from Hilton, R., 2011. Managerial Accounting. London: McGraw-Hill Press. Sollenberger, H., 2008. Managerial Accounting. London: SouthWestern Press. Spalton, P., 2010. Marketing. London: Collins Press. Tesco Plc. (2013). Financial Statements. Retrieved February 23, 2013 from Wickramashinghe, D., 2012. Managerial Accounting. London: Routledge Press. Appendix Ratio 2012 2013 Current Ratio 12353/19180x100=65% 12465/18730x100= 67% Gearing Ratio (+2339+120)/5424x100=56% (2617+137)/5629x100=60% Inventory (stock) turnover ratio 3598/63916x365=21days 3744/684826x365=22days Liquidity (Acid test) ratio (1708-812)/2942x100=46% (12465-3744)/1873x100=47% Creditor Collection Period 1123458519x365=71 days 11094/60737x365=67 days Debtor Collection Period 2657/64826x365=15 days 2529/64826x365=15 days Cash ratio 1728/19249x100=9% 1457/18985=8% Ratio 2012 2013 Operating Profit ratio 182/63916/100=7 percent 2188/64826/100=3 percent Return on net Assets 4182/17801*100=23 percent 2188/16661x100=13 percent Working capital 19249-12863= 6,386 18985-13096= 5,889 Return on Stockholders’ Equity 2806/17801= 16% 124/16661= 7 % Read More