Tesco and Wal-Marts Financial Analyses - Case Study Example

A report Task Table of Contents A report Table of Contents 2 Tesco and Wal-Mart’s financial analyses 3 Profitability ratios 3Liquidity ratios 5 Efficiency ratios 5 Gearing ratios 7 Investors’ ratios 8 List of References 9 Appendix 1: Ratio calculations 10 Appendix 2 : Extracts of financial statements 11 Introduction Tesco PLC is a Supermarket chain store located in the United Kingdom. Jack Cohen established the business in 1919. 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 PLC has a market share of around 30 %. It is the second largest supermarket in terms of revenues after Wal-Mart. The company targets the 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. The company is a publicly traded on the London Stock Exchange. On the other hand, Wal-Mart, a competitor to Tesco PLC, has its headquarters in the United States and has a chain of stores spread across the Globe. Wal-Mart founded in 1962 by Sam Walton, was established in 1969.Wal-Mart is considered the biggest private employer as it provides employment opportunities for more than a million employees. It has more than 11,000 stores in 27 countries. For this reason, its market share is more than 30%. This report contains two-year financial analyses of Tesco Company (2012 and 2013) and a comparison between Tesco and Wal-Mart in 2013. Tesco and Wal-Mart’s financial analyses The following ratios are covered: profitability ratios, efficiency ratios, liquidity ratios, gearing ratios and investor ratios. The ratios have been chosen to aid a comprehensive analysis of the financial performance of the two companies. Profitability ratios Gross profit margin – the ratio indicates a company’s financial health after meeting the cost of sales. It also indicates the company’s ability to pay for future operating costs. Concerning Tesco PLC, the ratio for 2012 and 2013 are 8.4% and 6.3% respectively. This means that in the year 2013, 6.3 % of the total revenue were gross profit, whereas, the remaining 93.7% of sales were consumed by costs related to sales. The ratio is a decrease compared to that of the previous year. The decrease is attributed to a reduction in the gross profit and an increase in revenue. From this analysis, it can be concluded that the level of production efficiency for Tesco is low. To rectify the decrease, the company should focus more on reducing the costs related to sales. Comparatively, the gross profit margin for Wal-Mart in 2013 is 24.86 %. Wal-Mart has a higher level of gross profit as compared to Tesco PLC. This difference shows that Wal-Mart is better at managing costs related to sales than Tesco PLC (Sarngadharan & Kumar 2011, pp. 121-135). Net profit margin before tax – this ratio shows how well a company manages its operating expenses. The higher the ratio, the lower the operating expenses of a company. The opposite is true. Concerning Tesco PLC, the margin before tax for 2012 and 2013 are 6.5% and 3.4%. This means that in 2013, only 3.4% of Tesco’s revenue were net profit before tax, whereas, the remaining 96.6% were consumed by operating expenses. The ratio is a decrease from 6.5% of the year 2012 due to a decrease in EBIT. The decrease in EBIT is due to high levels of operating expenses and other expenditures. To rectify the decrease, the company should implement more stringent cost control methods starting with the cost of sales. The level of gross profit determines the profit level and thus, gross profits should be high to ensure a high net profit assuming a low level of operating costs. Comparatively, the same ratio for Wal-Mart in the year 2013 is 5.5 %. This is higher than Tesco’s 3.4 %. The reason for this difference is Wal-Mart’s higher gross profit margin than Tesco’s. This signifies that Wal-Mart had more efficient operating cost management methods than Tesco’s (Sarngadharan & Kumar 2011, pp. 121-135). Liquidity ratios 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. Using the ratio for the year 2013, the company had £ 0.69 of current assets to cover every £ of current liabilities. The ratio clearly shows that the company was not liquid enough to sufficiently settle its short-term obligations using the current assets. This conclusion applies for both years. To rectify the poor liquidity, the company should invest more in the current assets such as cash and other marketable securities. Comparatively, the same ratio for Wal-Mart in 2013 is 0.83. This means that Wal-Mart’s liquidity level was slightly higher than Tesco’s but was not sufficient to cover the current liabilities (Khan & Jain 2007, 6-40). Acid test – the ratio is concerned with immediate liquidity therefore ignores the inventory. It measures the ability of a company to meet the short-term obligations using highly liquid assets. A highly liquid asset is that which is easily converted into cash. A company is considered well off if this ratio is 1. Concerning Tesco PLC, the quick ratio for 2012 and 2013 are 0.48 and 0.49 respectively. From these ratios, the company’s liquidity is low. Therefore, Tesco PLC cannot meet its short-term obligations using the immediate liquid assets. The liquidity problem can only be solved by investing in more liquid assets like cash and marketable securities. Relatively, the same ratio for Wal-Mart in 2013 is 0.22. Wal-Mart’s liquidity as measured by this ratio is worse than Tesco’s. Therefore, it is strongly advisable for both companies to increase their investments in liquid assets (Khan & Jain 2007, 6-40). Efficiency ratios Net asset turnover – this ratio indicates the efficiency with which the net assets are utilized to generate revenue. Concerning Tesco PLC, the asset turnover for the year 2012 and 2013 are 2.02 and 2.06 respectively. This means that in the year 2013, a pound invested in the net assets was utilized to generate £ 2.06 toward the company’s revenue. The ratio increased in the year 2013 as compared to the previous year’s ratio. The increase is attributed to the decrease in the net assets and an increase in revenue. From this ratio, it can be concluded that Tesco Company efficiently utilizes its net assets. Comparatively, the same ratio for Wal-Mart in 2013 is £ 3.57. Consequently, in 2013, Wal-Mart utilized is assets more efficiently than Tesco PLC for the reason that Wal-Mart generated more revenue from every pound invested in assets as compared to Tesco PLC (Khan & Jain 2007, 6-40). Inventory holding period – this ratio indicates the number days it takes for a company to sell its entire inventory. Generally, the shorter the period, the faster the inventory sells thus, more revenue is being generated. Concerning Tesco PLC, the ratio for 2012 and 2013 is 22 days. This means that in both years, it took 22 days for the company to sell all the available stock. The period is short enough to allow more cash generation from sales. Comparatively, Wal-Mart’s inventory holding period for 2013 is 46 days. The difference is due to a higher inventory level for Wal-Mart than Tesco PLC, thus more time was required to make a complete sale (Khan & Jain 2007, 6-40). Trade receivables collection period – this ratio shows the period it takes a company to collect all the accounts receivables. It is 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. 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 strict debt policy. On the other hand, the same ratio for Wal-Mart in 2013 is 5 days. Therefore, Wal-Mart had a shorter collection period, indicating a stricter debt policy compared to Tesco’s (Khan & Jain 2007, 6-40). Trade payable payment period – this ratio shows the period it takes for a company to pay its debts (accounts payable). The shorter the period, the quicker the company pays its debts. A quick response to payables is an attraction strategy for potential creditors. In addition, it also invites credit discounts. Concerning Tesco Company, the ratio for 2012 and 2013 are 70 days and 67 days respectively. Therefore, the company’s payable period is longer as compared to the debtors’ period. Either Tesco PLC has difficulties in paying the creditors or it decided to hold on cash. Comparatively, in 2013, it took Wal-Mart 39 days to pay its debts. This period is shorter than 67 days for Tesco PLC. Consequently, Wal-Mart exhibits a faster response to liabilities than Tesco PLC (Khan & Jain 2007, 6-40). Gearing ratios Debt/equity - ratio indicates the proportion of fixed charge capital in the capital structure of a firm. Concerning Tesco Company, the ratio for 2012 and 2013 are 55.7 % and 60.4 % respectively. For instance, in 2013, 60.4 % of the company’s capital was fixed charge capital. The increase from 55.7 % to 60.4 % was due to an increase in the level of debt and a decrease in the shareholders’ equity. From the analysis, the company’s leverage level is high. To maintain a low debt level, the company should utilize other sources of finance other than debt. On the other hand, the same ratio for Wal-Mart in 2013 is 47 %. Only 47 % of the Wal-Mart’s capital structure is debt. For this reason, Wal-Mart’s leverage level is lower than Tesco’s. Consequently, Wal-Mart faces lesser debt risk than Tesco PLC. (Bowhill 2008, pp. 265-284). Interest coverage ratio – this ratio evaluates a company’s ability to meet interest payments. It also indicates a company’s possibility of taking on more debt in the future. Generally, the higher the ratio, the greater the company’s ability to pay interest charges. Concerning Tesco Company, the ratios for 2012 and 2013 are 9.8 times and 4.3 times respectively. In 2013, the company could pay interest 4.3 times using the EBIT. The ratio decreased due to a decrease in earnings before interest and tax. The decrease means that the capacity to pay interest also decreased. Comparatively, the same ratio for Wal-Mart in 2013 is 12.5 times. This indicates that Wal-Mart was more capable of paying the cost of capital from its earnings than Tesco. The difference is due to a higher level of Wal-Mart’s earnings before interest and tax than Tesco’s. (Bowhill 2008, pp. 265-284). Investors’ ratios Dividend cover – this ratio indicates the number of times that dividends can be paid from earnings per share. The higher the ratio, the greater the ability of a company to pay its dividend from the EPS. Concerning the Tesco Company, the dividend cover for 2012 and 2013 are 3.45 times and 0.152 times. The ratio decreased in 2013 due to a sharp decrease in EPS. To rectify the decrease, the company should manage its operating costs in order increase the profitability level. On the other hand, the same ratio for Wal-Mart in 2013 is 3.57 times. In 2013, Wal-Mart had a greater ability to pay dividends from its EPS than Tesco PLC. The reason for the difference is a lower Wal-Mart’s DPS than Tesco’s (Currie 2011, pp. 100-120). Earnings per share – the companys basic EPS for the years 2012 and 2013 are £ 34.98/ share and £ 1.54/ share. EPS is another criterion for measuring a company’s profitability. Tesco’s EPS decreased in the year 2013 to £ 1.53/share due to a decrease in the operating profit by more than 50%. To rectify the decrease, the level of net profit should be maintained high by reducing the Company’s operating costs. Comparatively, the same ratio for Wal-Mart in 2013 is 1.68. The difference between 1.68 and 1.54 for Tesco is insignificant. The reason for the difference is a higher Wal-Mart’s profit after tax than Tesco’s (Currie 2011, pp. 100-120). List of References Bowhill, B 2008, Business planning and control: integrating accounting, strategy, and people, Wiley, Chichester, England. Currie, M 2011, The search for income: an investors guide to income-paying investments, Harriman House Ltd, Hampshire, England. Khan, M. Y., & Jain, P. K 2007, Financial management, Tata McGraw-Hill, New Delhi. Sarngadharan, M., & Kumar, R. S 2011, Financial analysis for management decisions, Wiley, NY. Appendix 1: Ratio calculations TESCO COMPANY WAL-MART ITEMS 2013 2012 2013 Gross profit margin (Gross profit/sales) 6.30% 8.40% 24.86% NPM(before tax)(EBIT/Sales) 3.40% 6.50% 5.50% EPS (EAT/No of share) £1.54 £34.98 1.68 Net asset turnover (Sales/net assets) £2.06 £2.02 £3.57 Current ratio (CA/CL) 0.69 0.67 0.83 Price/earning ratio (MPS/EPS) 223 9.29 48.3 Acid test (CA-Stock/CL) 0.49 0.48 0.22 Inventory holding period 22 days 22 days 46 days Receivables collection period 14 days 15 days 5 days Payables payment period 67 days 70 days 39 days Debt /equity ratio (debts/Total equity) 60.40% 55.70% 47% Interest coverage ratio (EBIT/Interest charges) 4.3 times 9.8 times 12.5 times Divident cover (EPS/DPS) 0.152 3.45 3.57 Appendix 2 : Extracts of financial statements Tesco Company Wal-Mart ITEMS 2013 £ m 2012 £ m 2013 £ m Sales 64,826 63,916 279,668.40 Cost of sales 60,737 58,519 211,492.80 Gross profit 4089 5397 68,175.60 Current assets 13,096 12,863 35,964 Current liabilities 18,703 19,180 43,090.80 EBIT 2,188 4,182 16,680.60 EAT 120 2,814 10,199.40 Net assets 31,426 31,601 131,287 stock 3,744 3,598 26,281.80 Receivables 2,525 2,657 4,060.80 Payables 11,094 11,234 22,848 Debt 766 1,838 23,036.40 Equity 16,661 17,801 49,042.80 Interest 459 411 1,238.40 Read More