You will select a company from this list, http://fortune.com/fortune500/ and you will analyze the companys financial performance, highlighting accounting principles and methods learned in this course. This project requires you to present, review, and anal - Essay Example

Financial Analysis – Tesco PLC Financial Analysis – Tesco PLC The company selected for financial review in this report is Tesco PLC, which is ranked at 63rd position in Fortune 500 companies list. The company is one of the leading global retail companies, which has its head office in the UK and operates retail stores in UK, China, and Europe. The current report discusses basis for preparation of financial statements and the company’s financial performance using financial ratio analysis and trend analysis is evaluated.

It also indicates the use of financial information by different stakeholders. To support the discussion, a review of internal controls of Tesco is included. The company records and reports its financial statements “in accordance with International Financial Reporting Standards (IFRS), IFRS Interpretation Committee (IFRIC) and the Companies Act (2006)” (Tesco Annual Report 2014, 2014, p.72). The company prepares financial statements on a consolidated basis including financials of the parent company and its subsidiaries and joint ventures and associates.

It allows stakeholders to have a complete view of the company’s performance in all segments of market and business functions. The company uses historical cost method for determining values of its assets and liabilities. The company records its assets, liabilities, and equity on an accrual basis. The company to record certain assets and liabilities at their fair values uses IAS 13 “Fair value measurement”. The company record inventory of goods and properties held for sale at the lowest of their cost or fair value (Tesco Annual Report 2014, 2014, p.76). It also records sale of goods upon transfer of risk and reward of ownership to the buyer and realizes revenues generated from such transactions.

There are various reporting standards such as IFRS 10, IFRS 11, IFRS 12, etc. that the company did not use that could affect its current reported financial statements (Tesco Annual Report 2014, 2014, p.79). The company’s accounting policies are helps users of financial information including creditors, lenders, tax and regulatory authorizes, and shareholders to understand basis of financial statements. It increases the comparability and transparency of financial information of different companies operating in the same or different industries.

The segmental reporting included in notes to the group financial statements indicated that UK is the largest market of the company. However, the company generates highest trading margin from its operations in Asia. In addition to the company’s retail business it also operates a bank i.e. Tesco Bank (Tesco Annual Report 2014, 2014, p.80). Such information helps users to identify weaknesses of the business in different markets and explore its strategies to limit its losses. In case of Tesco, its poor performance in North America market was subjected to heavy criticism by shareholders.

The company has a formal and well-defined Code of Conduct and internal policies that are aimed at protecting employees and customers of the company. The company’s governance committees ensure that the company’s operations and management comply with the Code of UK Corporate Governance (Tesco Annual Report 2014, 2014, p.19). The company has executive and non-directors on its board of directors. The company provides fees, bonuses, and share options to directors. The details of remuneration are provided in the company’s annual report.

The board of directors is responsible for implementing and ensuring compliance with risk management and internal control policies and procedures. The company has a comprehensive system for estimating risks and their impact on the continuity of the business. The company’s internal control framework assigns responsibilities to individuals and business functions to deal with different forms of risks. The Audit Committee performs regular reviews of the company’s risk management and internal controls in order to keep these abreast to address any new issues and risks that the company may face.

The company’s external auditors (PricewarehouseCoopers) review information related to the internal control and compliance with the code of to affirm going concern of the business. The disclosure pertaining to corporate governance, risk management and internal controls is useful for shareholders who have limited access to the company’s internal documents and therefore, audited information is highly valuable in order to assess the business ability to serve monetary interests of the company’s shareholders.

The company’s financial performance during the last two reported years is analyzed by financial ratio and trends analyses. The company’s liquidity position measured by current ratio and quick ratio indicates weak position of the business. The values of ratios remained below one in both years. However, these are in line with the trends of the retail industry as businesses tend to hold large inventories held for sale in their stores to avoid disruptions in their supply chain. The company’s remained efficient in terms of collection of its receivables in a short period of 14 and 12 days in 2013 and 2014.

However, the slow movement of inventory could be of concern for the management as it held up a large proportion of the company’s cash. The company’s asset turnover indicated that the company only generated £1.26 and £1.27 per £1 invested in the company’s assets. It indicated that the company had high value of assets generating low value of sales. The management report supported this finding as the company future strategic plans are aimed at closing down large stores yielding low returns and are focused on improving the company’s online store and smaller stores network (Tesco Annual Report 2014, 2014).

The company’s capital structure indicated that the company had a high level of external borrowing. Total debt ratio values were 2.01 and 2.41 in 2013 and 2014. Majority of the company’s borrowing was in the form of long-term debentures issued by the company. It was indicated by long-term debt to equity ratio values of 0.60 and 0.63 in 2013 and 2014. Although the company generated sufficient operating profits to meet its interest obligations, the shareholders may be concerned about high level of gearing.

It is because the company would have to make payments of principal and interest charge before earnings could be distributed to shareholders. The company’s profitability remained very low in both 2013 and 2014. The lack of focus in the UK market by the company in the recent years had put the company in a weak position in comparison to its competitors such as Sainsbury’s, Aldi etc. Lower profitability could affect investment by shareholders in the company. It could create problems for the company that is already faced with a slowdown in its growth and declining market share.

The company only generated ROE of 0.14% and 6.59% and ROA of 0.05% and 1.94% in 2013 and 2014 respectively. The company’s EPS slightly improved from 19.06p in 2013 to 23.72p in 2014. The P/E ratio values were at the end of each year were 16.88 and 14.52 in 2013 and 2014 as the company’s stock price declined due to poor sentiments in the equity market related to the company’s results in the UK market and reduction in its market share. The trend analysis indicated major improvement in the company’s profits in 2014.

The trend analysis and key financial ratio values can also assist management in order to identify weak areas of the business. In fact, managers can use real time information from different business functions to carry out the analysis on a regular basis and undertake measures to improve the strategic direction of the business. It would help in improving the business performance and achievement of corporate objectives. References Tesco Plc. (2014). Retrieved December 13, 2014, from https://uk.finance.yahoo.com/q/hp?s=TSCO.

L&b=21&a=01&c=2013&e=22&d=01&f=2013&g=d Maynard, J. (2013). Financial Accounting, Reporting, and Analysis. Oxford: Oxford University Press. Tesco Annual Report 2014. (2014) London: Tesco Plc. Tesco Plc. (2014a). History. Retrieved December 13, 2014, from http://www.tescoplc.com/index.asp?pageid=11 Liquidity Ratios 2013 2014 Current Ratio Current Assets/Current Liabilities 0.70 0.77 Current Assets 13,096 15,572 Current Liabilities 18,703 20,206 Quick Ratio Current Assets-Inventory/Current Liabilities 0.50 0.59 Current Assets 13,096 15,572 Inventory 3,744 3,576 Current Liabilities 18,703 20,206 Efficiency Measures 2013 2014 Receivables Turnover Sales/Accounts Receivables 25.11 29.02 Sales 63,406 63,557 Accounts Receivables 2,525 2,190 Receivables Turnover Period 365/Receivables Turnover 14.54 12.58 Receivables Turnover 25.11 29.02 Inventory Turnover Cost of Sales/Inventory 15.83 16.65 Cost of Sales 59,252 59,547 Inventory 3,744 3,576 Inventory Turnover Period 365/Inventory Turnover 23.06 21.92 Inventory Turnover 15.83 16.65 Asset Turnover Sales/ Total Assets 1.26 1.27 Sales 63,406 63,557 Total Assets 50,164 50,129 Leverage Measures 2013 2014 Long Term Debt Ratio Long Term Debt/Total Assets 0.20 0.19 Long Term Debt 10,068 9,303 Total Assets 50,164 50,129 Long Term Debt to Equity Ratio Long Term Debt/ Total Equity 0.60 0.63 Long Term Debt 10,068 9,303 Total Equity 16,661 14,722 Total Debt Ratio Total Debt/Total Equity 2.01 2.41 Total Debt 33,468 35,442 Total Equity 16,661 14,722 Times Interest Earned Operating Profit/Interest Expense 4.61 4.66 Operating Profit 2,382 2,631 Interest Expense 517 564 Profitability Ratios 2013 2014 Operating Profit Margin Operating Profit/Sales 3.76% 4.14% Operating Profit 2,382 2,631 Sales 63,406 63,557 Net Profit Margin Net Profit / Sales 0.04% 1.53% Net Profit 24 970 Sales 63,406 63,557 Return on Assets Net Profit / Total Assets 0.05% 1.94% Net Profit 24 970 Total Assets 50,164 50,129 Return on Equity Net Profit / Total Equity 0.14% 6.59% Net Profit 24 970 Total Equity 16,661 14,722 Return on Capital Net Profit / Total Capital 0.03% 1.36% Net Profit 24 970 Total Capital 69,149 71,528 Market Ratios Diluted EPS   23.72 19.06             P/EPS Price / EPS 14.53 16.88 Price per Share 344.55 321.79 EPS 23.72 19.06 Group income statement - Horizontal Year ended 22 February 2014 52 weeks 2014 £m Change £m Change % 52 weeks 2013 (restated*) £m Continuing operations         Revenue 63,557 151 0.

24% 63,406 Cost of sales (59,547) 295 -0.50% (59,252) Gross profit 4,010 (144) -3.47% 4,154 Administrative expenses (1,657) 175 -11.81% (1,482) Profits/losses arising on property-related items 278 568 -195.86% (290) Operating profit 2,631 249 10.45% 2,382 Share of post-tax profits of joint ventures and associates 60 (12) -16.67% 72 Finance income 132 12 10.00% 120 Finance costs (564) (47) 9.09% (517) Profit before tax 2,259 202 9.82% 2,057 Taxation (347) 182 -34.40% (529) Profit for the year from continuing operations 1,912 384 25.

13% 1,528 Discontinued operations         Loss for the year from discontinued operations (942) 562 -37.37% (1,504) Profit for the year 970 946 3941.67% 24           Attributable to:         Owners of the parent 974 946 3378.57% 28 Non-controlling interests (4) - 0.00% (4)   970 946 3941.67% 24 Group income statement – Vertical Year ended 22 February 2014 52 weeks 2014 £m Proportion 52 weeks 2013 (restated*) £m Proportion Continuing operations         Revenue 63,557 100% 63,406 100.

00% Cost of sales (59,547) -94% (59,252) -93.45% Gross profit 4,010 6% 4,154 6.55% Administrative expenses (1,657) -3% (1,482) -2.34% Profits/losses arising on property-related items 278 0% (290) -0.46% Operating profit 2,631 4% 2,382 3.76% Share of post-tax profits of joint ventures and associates 60 0% 72 0.11% Finance income 132 0% 120 0.19% Finance costs (564) -1% (517) -0.82% Profit before tax 2,259 4% 2,057 3.24% Taxation (347) -1% (529) -0.83% Profit for the year from continuing operations 1,912 3% 1,528 2.

41% Discontinued operations   0%     Loss for the year from discontinued operations (942) -1% (1,504) -2.37% Profit for the year 970 2% 24 0.04%           Attributable to:         Owners of the parent 974 2% 28 0.04% Non-controlling interests (4) 0% (4) -0.01%   970 2% 24 0.04% Group balance sheet - Horizontal   22 February 2014 £m Change £m Change % 23 February 2013 £m Non-current assets         Goodwill and other intangible assets 3,795 (567) -13.00% 4,362 Property, plant and equipment 24,490 (380) -1.

53% 24,870 Investment property 227 (1,774) -88.66% 2,001 Investments in joint ventures and associates 286 (208) -42.11% 494 Other investments 1,015 197 24.08% 818 Loans and advances to customers 3,210 745 30.22% 2,465 Derivative financial instruments 1,496 (469) -23.87% 1,965 Deferred tax assets 73 15 25.86% 58   34,592 (2,441) -6.59% 37,033 Current assets         Inventories 3,576 (168) -4.49% 3,744 Trade and other receivables 2,190 (335) -13.27% 2,525 Loans and advances to customers 3,705 611 19.

75% 3,094 Derivative financial instruments 80 22 37.93% 58 Current tax assets 12 2 20.00% 10 Short-term investments 1,016 494 94.64% 522 Cash and cash equivalents 2,506 (6) -0.24% 2,512   13,085 620 4.97% 12,465 Assets of the disposal group and non-current assets classified as held for sale 2,487 1,856 294.14% 631   15,572 2,476 18.91% 13,096 Total Assets 50,164     50,129 Current liabilities         Trade and other payables (10,595) 499 -4.50% (11,094) Financial liabilities:   - #DIV/0!

  Borrowings (1,910) (1,144) 149.35% (766) Derivative financial instruments and other liabilities (99) 22 -18.18% (121) Customer deposits and deposits from banks (6,858) (843) 14.01% (6,015) Current tax liabilities (494) 25 -4.82% (519) Provisions (250) (62) 32.98% (188)   (20,206) (1,503) 8.04% (18,703) Liabilities of the disposal group classified as held for sale (1,193) (911) 323.05% (282) Net current liabilities (5,827) 62 -1.05% (5,889) Non-current liabilities         Financial liabilities:         Borrowings (9,303) 765 -7.

60% (10,068) Derivative financial instruments and other liabilities (770) (11) 1.45% (759) Post-employment benefit obligations (3,193) (815) 34.27% (2,378) Deferred tax liabilities (594) 412 -40.95% (1,006) Provisions (183) 89 -32.72% (272)   (14,043) 440 -3.04% (14,483) Net assets 14,722 (1,939) -11.64% 16,661 Equity         Share capital 405 2 0.50% 403 Share premium 5,080 60 1.20% 5,020 All other reserves (498) (1,183) -172.70% 685 Retained earnings 9,728 (807) -7.66% 10,535 Equity attributable to owners of the parent 14,715 (1,928) -11.

58% 16,643 Non-controlling interests 7 (11) -61.11% 18 Total equity 14,722 (1,939) -11.64% 16,661 Total Liabilities and Equity 50,164     50,129 Group balance sheet - Vertical   22 February 2014 £m Proportion % 23 February 2013 £m Proportion % Non-current assets         Goodwill and other intangible assets 3,795 7.57% 4,362 8.70% Property, plant and equipment 24,490 48.82% 24,870 49.61% Investment property 227 0.45% 2,001 3.99% Investments in joint ventures and associates 286 0.57% 494 0.

99% Other investments 1,015 2.02% 818 1.63% Loans and advances to customers 3,210 6.40% 2,465 4.92% Derivative financial instruments 1,496 2.98% 1,965 3.92% Deferred tax assets 73 0.15% 58 0.12%   34,592 68.96% 37,033 73.88% Current assets   0.00%   0.00% Inventories 3,576 7.13% 3,744 7.47% Trade and other receivables 2,190 4.37% 2,525 5.04% Loans and advances to customers 3,705 7.39% 3,094 6.17% Derivative financial instruments 80 0.16% 58 0.12% Current tax assets 12 0.02% 10 0.02% Short-term investments 1,016 2.03% 522 1.04% Cash and cash equivalents 2,506 5.

00% 2,512 5.01%   13,085 26.08% 12,465 24.87% Assets of the disposal group and non-current assets classified as held for sale 2,487 4.96% 631 1.26%   15,572 31.04% 13,096 26.12% Total Assets 50,164 100.00% 50,129 100.00% Current liabilities         Trade and other payables (10,595) 21.12% (11,094) 22.13% Financial liabilities:         Borrowings (1,910) 3.81% (766) 1.53% Derivative financial instruments and other liabilities (99) 0.20% (121) 0.24% Customer deposits and deposits from banks (6,858) 13.

67% (6,015) 12.00% Current tax liabilities (494) 0.98% (519) 1.04% Provisions (250) 0.50% (188) 0.38%   (20,206) 40.28% (18,703) 37.31% Liabilities of the disposal group classified as held for sale (1,193) 2.38% (282) 0.56% Net current liabilities (5,827) 11.62% (5,889) 11.75% Non-current liabilities         Financial liabilities:         Borrowings (9,303) 18.55% (10,068) 20.08% Derivative financial instruments and other liabilities (770) 1.53% (759) 1.51% Post-employment benefit obligations (3,193) 6.

37% (2,378) 4.74% Deferred tax liabilities (594) 1.18% (1,006) 2.01% Provisions (183) 0.36% (272) 0.54%   (14,043) 27.99% (14,483) 28.89% Net assets 14,722 29.35% 16,661 -33.24% Equity         Share capital 405 0.81% 403 -0.80% Share premium 5,080 10.13% 5,020 -10.01% All other reserves (498) -0.99% 685 -1.37% Retained earnings 9,728 19.39% 10,535 -21.02% Equity attributable to owners of the parent 14,715 29.33% 16,643 -33.20% Non-controlling interests 7 0.01% 18 -0.04% Total equity 14,722 29.

35% 16,661 -33.24% Total Liabilities and Equity 50,164 100.00% 50,129 -100.00%