Analysis of Tesco Firm - Assignment Example

Finance and accounting [Insert al Affiliation] Inter-firm comparisons The inter-firm comparison is the financial comparison of one company to the other but in the same operating industry. In making this comparison, the following ratios are used: liquidity ratios that measure the company’s ability to pay its debts. The ratios that are used include current ratio that reveals the number of times current assets can pay the current liabilities (Shimerda, 2013). Current ratio = from Morrison reformulated balance sheets; the company had total assets of 10,467 million and total liabilities of 3,004 million. The current ratio is computed as = 3.48. Conversely, Tesco plc’s reformulated balance sheets reveal that in the year 2014, the company had total assets of 46,489 million while the total liabilities of 24,156 million. Therefore, the company current ratio is = 1.92. The result shows that Morrison Company has a current ratio (3.48) which is much higher than that of Tesco plc. Company (1.92). This clearly indicates that Morrison plc. Company has adequate working capital while Tesco Company has a deficit in working capital that may lead to disruption in its operations and consequently leading to bankruptcy. The acid test ratio is a ratio that measures the firm’s capability to use more liquid assets to pay current liabilities (Singapore. (2007). Therefore in calculating the ratio, stocks are deducted because of inability to be converted into cash easily. Basing on the data from Morrison reformulated balance sheet, the total assets are 10467 million, total liabilities were 3004 million and inventories were 3576 million hence quick acid ratio equals to = 3.2. Tesco Company had total assets of 46489, total liabilities of 24,156 million and inventories of 3,576 million. The acid ratio of the firm is = 1.78. Again, it is clear that Morrison firm has an acid ratio of 3.2 as compared to Tesco that has 1.78. This then shows that Morrison firm has a higher ability to pay its liabilities than Tesco firm. Profitability ratios show the company’s earnings potential from its sales and investments (Ramsden, 2009). Gross profit margin =. The ratio indicates the degree of efficiency by the management to produce each unit of a product. From the Morrison reformulated income statement, he firm had sales of 17,680 million and generated 1,463 million. Gross margin = =8.27%. On the other hand, Tesco firm had revenue of 63,557 and a gross profit of 6,311 hence gross profit margin = = 9.92%. this result shows that even although Tesco firm has a low capability of paying its liabilities, it has a higher profit margin of 9.92% as compared to Morrison firm that has 8.27%. Tesco has a higher possibility of surviving in the industry, unlike Morrison firm. The net profit margin designates the degree of a firm to be in control of particular financing expenses (Logan, 2014). Morrison had a loss of 162 million from revenue of 17,680 million hence a loss operating margin = = 0.92%. Tesco firm, on the other hand, had 63,557 million revenue and 2344 million operating income. Operating profit of the firm is = 3.69%. This shows that Tesco Company is an excellent position to generate more profits in future hence operating in a going concern. Morrison firm had a loss of 0.92% from its sales hence trading in a dangerous track and had no future feasibility in the industry due to operating at a loss. Return on investment; this is the measure of profit returned from the investment (total assets). Morrison firm had net a loss of 162 million while it had total assets of 10467 million = 1.54 loss return on investment. Tesco firm had total operating assets of 46489 million and profit 2344 million. Return on investment = = 5.04%. It, therefore, clear that Tesco firm has a return on investment while Morrison has a loss return on investment. Return on Equity measures profit return on the shareholders equity that is usually contributed by shareholders (Mayes & Shank, 2015). Morrison firm had a shareholders’ equity of 4,692 million while net loss stood at 162 million hence = 3.45%. On the contrary, Tesco firm had shareholder’s equity of 14,715m and a net profit of 2,344m hence a return on equity of = 15.93%. Morrison firm returns loss to the capital contributed by shareholders while Tesco firm return a profitability of about 15.93% hence Tesco firm maximizes the shareholders wealth, unlike the Morrison firm. Asset turnover measures the revenue that is generated from the total assets. Asset turnover = revenue/total assets. Morrison revenue was 17,680 m while total assets were 10467 hence 17680/10467 = 1.69. Tesco firm generated revenue of 63,557 and total assets of 46489 leading to an asset turnover of 63,557/46489 = 1.37. Morrison firm has a higher generation of revenue from assets as compared to Tesco firm. Industry average comparison Morrison is trading had a return on operating assets of -2.81% while Tesco company had a return on operating assets of 10.03%. A Company like Sainsbury had a return of 10.96% while Ocado firm had a return of 5.78%. On average it is clear that Morrison performed poorly compared to the rest of the firms in the industry. Conversely, Tesco firm is ranked second performer in the industry as it performed better than Ocado firm. Basing on the operating profit, Morrison firm had -0.92% while Tesco had 3.69%. Other firms like Sainsbury and Ocado had operating profit margins of 3.44% and 1.74% respectively. It is clear that on average, Tesco firm is the leading profit generating firm and, therefore, investors can be attracted to invest. On the other hand, Morrison firm is the worst firm in the industry as it operates at a loss. Investors being risk averse, they cannot invest in such a firm. The asset turnover of Morrison firm was 238.0%, that of Tesco being 272.0%, Sainsbury had 318.0% and Ocado 332.4%. The two firms have a low return on assets hence they are not efficient in utilizing the assets to generate profits. However, Ocado firm is the best firm in utilizing its resources. The return on the equity for Morrison was 0%, Tesco firm had 12.22%, Sainsbury had 12.20% and Ocado had a return on equity of 3.47%. Tesco firm has the highest return on equity in the industry hence it is evident that the firm maximizes it value and that of shareholders. The firm, therefore, has a future in the industry. On the contrary, Morrison firm is the worst in the industry as it yields no returns to the equity. On average it is observed that Tesco is well performing in the industry while Morrison is the worst. Common size: Common size is the financial analysis of income statement items in reference to the firm’s sales/revenue (Laitinen, 2005). Common size of income statement Morrison firm The cost of sales of the company has been increasing over the years from 91.14% in 2010 to 91.73% by 2014. These costs are inclusive of the purchasing expenses and some direct expenses and have been increasing with an increase in sales. The profit of the firm dropped from substantially from 5.18% in 2013 to -0.56% in 2014. The decline is due to increase in the operating expenses that had increased. The firm’s stock increased from 7.16% in 2013 to 8.14% in 2014. The property and equipment declined from 84.0% in 2013 to 82.4% in 2014. On the other hand, accounts payable scaled down from 14.63% in 2013 to 13.72%. The cash equivalent dropped from 2.63% in 2013 to 2.50% in 2014. The long-term debt of the firm increased from 23.20% in 2013 to 23.69% in 2014. This increase in debt is because of the firm’s inability to finance its business through equity. This increases the financial risk of the firm. Common size of income statement Tesco firm The cost of sales dropped slightly from 90.10% in 2013 to 90.07% in 2014. This decrease in the cost of sales is due to efficient utilization of the resources by the firm. The operating expenses on the other side increased from 3.90% in 2013 to 5.07% in 2014. This increase was due to the increase in the direct and indirect expenses. The firm experienced an increase in the operating income from 0.60% in 2013 to 3.69% in 2014. The inventories dropped from 7.97% in 2013 to 7.69% in 2014. Property and equipment dropped slightly from 52.93% in 2013 to 52.70% in 2014. The long-term debt of the firm decreased from 21.43% in 2013 to 20% in 2014. This decrease is due to an internal generation of finances for the operation of the firm. Trend analysis: It is also referred to as the horizontal analysis. It is a financial analysis technique that shows the variance in the amounts of matching items financial statements over a certain span of time. Two or more periods grants a trend analysis. Trend analysis of Morrison’s reformulated income statement The first essential item of the income statement is the revenue. It can be clearly be seen that there has been an increase in the total revenue each year from 2010 -2014. When we express the above increase in revenues in terms of percentage with 2010 being the base year the following will be the percentage increases in the revenue (Hwang, 2011). The revenue increased from 15,410 in the year 2010 to 16479 in 2011. The percentage increase will therefore be ( (1069/1540)*100 = 6.94%. in the year 2012, the revenue increased to 17,663 hence an increased revenue of (17663-15410) =2253. Computed as a percentage increase revenue of (2253/15410)*100 = 14.62%. In 2013, the revenue generated was 18,116 leading to an increase of 2706 hence a percentage increase of (2706/15410)*100 = 17.56% from the base year. In the year 2014, the firm had total revenue of 17,680 which is an increase of 2270. Computed as a percentage increase, we get (2270/15410)*100 = 14.73%.It can clearly be seen that the revenue increased by 6.94% in 2011, 14.62% in 2012, 17.56% in 2013 and 14.73% in 2014. This shows that the revenue have increased over the year with an increasing rate though the revenue generation in the year 2014 did not keep the pace (Bull, 2008). 2014 2013 2012 2011 2010 ‘M’ ‘M’ ‘M’ ‘M’ ‘M’ Revenue 17680 18116 17663 16479 15410 14.73% 17.56% 14.62% 6.94% - It can be observed that the revenue have increased over the year with an increasing rate though the revenue generation in the year 2014 did not keep the pace. The second item of the income statement is the cost of sales as the variable that has a direct effect on the revenue generation of the firm (Icon, 2006). Basing on the year 2010, the cost of sales increased to 15,019 in 2011 from 14,044 in 2010. This is an increase of (15,019-14044) = 975. Calculated as a percentage, we get (975/14044)*100 = 6.94%. The cost increased to 16144 in 2012 hence an increase of (16144-14044) = 2100 hence percentage increase of (2100/14044)*100 = 14.95. In 2013, the cost of sales scaled up to 16546 hence an increase of (16546 – 14044) = 2502 computed as a percentage increase of (2502/14044)*100 = 17.82%. In 2014, the cost of sales was 16217 hence an increase of (16217-14044) = 2173 which is percentage increase of (2173/14044)*100 = 15.47%. This can be summarized in the table below 2014 2013 2012 2011 2010 M M M M M Cost of sales 16217 16546 16144 15019 14044 15.47% 17.82% 14.95% 6.94% - From the table, it can clearly be seen that the cost of sales increased at an increasing rate over the years but had a drop in the year 2014. The third item on the income statement is the operating expenses. From the reformulated income statement, the operating expenses were 619 m in 2010. The operating expenses increased to 628m in 2011, 653m in 2012, 700m in 2013 and 736m in 2014. The percentage increases in the expenses, were therefore, 1.45% in 2011, 5.49% in 2012, 13.08% in 2013 and 18.90% in 2014. This can be represented in a table form as follows. 2014 2013 2012 2011 2010 M M M M M Operating expenses 736 700 653 628 619 18.90% 13.08% 5.49%% 1.45% - The other item that can be analyzed is the operating income after tax of the firm. The operating income of the year 2010 was 631m and increased to 661m, 722m, 707m and -162m, in the year 2011, 2012, 2013 and 2014 respectively. This stipulates an increase of 4.75%, 14.42% and 12.04% from 2011 to 2013 and a decrease of 25.67%. The analysis of the balance sheet items The first key element is the total assets of the firm. It can be seen that the firm had operating assets of 8444 m in the year 2010. The operating assets increased to 8917m, 9616m, 10257m and 10467m in the year 2011, 2012, 2013 and 2014 respectively. Basing on the year 2010, the total operating assets increased by 473m, 1172m, 1813m and 2023m in the year 2011, 2012, 2013 and 2014 respectively. Computing the respective increase in operating assets, we get a percentage increase of 5.6% in 2011, 13.88% in 2012, 21.47% in 2013 and 23.95% in 2014. It can be observed that the operating assets have been increasing over the years at an increasing rate. 2014 2013 2012 2011 2010 M M M M M Operating assets 10467 10257 9616 8917 8444 23.95% 21.47% 13.88% 5.6% - Another key item on the balance sheet is the operating liabilities. The total operating liabilities were 2591m in the year 2010. The total operating liabilities increased to 2677m, 2747m, 2865m and to 3004 from 2011 to 2014. The increase in the operating liabilities can be computed by subtracting the subsequent operating liabilities from that of 2010 (base year) hence an increase of 86m, 156m, 274m, 413m from the year 2011 to 2014 respectively. Given the computation of the of the percentage increase in the operating liabilities, the following are the incremental percentages 3.32% in 2011 to 6.02% in 2012 to 10.58% in 2013 and finally to 15.94% in 2014. This can as well be tabled as below: 2014 2013 2012 2011 2010 M M M M M Operating liabilities 3004 2865 2747 2677 2591 15.94% 10.58% 6.02% 3.32% - The company had a long-term debt of 1022m in the year 2010. The debt increased to 1052m, 1600m, 2380m and finally 2480m in the year 2011, 2012, 2013 and 2014 respectively. This is an increase of 30m, 578m, 1358m and 1458m from the debt in 2010. The percentage increase in debt was 2.94%, 56.56%, 132.8%, and 142.67% from 2011 to 2014. This shows that the long-term debt has been increasing substantially at an increasing rate. 2014 2013 2012 2011 2010 M M M M M Long-term 2480 2380 1600 1052 1022 142.67% 132.8% 56.56% 2.94% - The trend analysis of Tesco firm Tesco firm had a total revenue of 56910m in 2010. The revenue grew to 60931 in 2011, 64539m in 2012, 64826m in 2013 and 63557m in 2014. This shows that the revenue scaled up by 4021m, 7629m, 7916m, and 6647m from 2011-2014. This is the percentage increase of 7.06% in 2011 to 13.41% in 2012 to 13.91% in 2013 and 11.68% in 2014. This shows that the revenue has been growing substantially at an increasing rate (Walsh, 2013). However, there was a decrease in total revenue in the year 2014 evidenced by a decrease from 13.91% in 2013 to 11.68% in 2014. 2014 2013 2012 2011 2010 M M M M M Operating income after tax 63557 64826 64539 60931 56910 11.68% 13.91% 13.41% 7.06% - The other key aspect is the cost of sales. The firm registered a cost of sales of 50814 in 2010. The cost of sales increased to 54495m, 57820m, 58409m and 57246m in the year 2011 to 2014. This is an increase of 3681m, 7006m, 7595m and 6432m respectively. The percentage increase in the cost of sales is, therefore, 7.24%, 13.79%, 14.95%, and 12.65% in the year 2011 to 2014. From this computation, it is clear that the firm experienced an increase in the cost of sales except in the year 2014 where it experienced a drop of 2.30%. 2014 2013 2012 2011 2010 M M M M M Operating income after tax 57246 58409 57820 54495 50814 7.24% 13.79% 14.95% 12.65% - The firm’s expenses were 3339m by 2010. The expenses decreased significantly to 2950m, 3016m, 2531m and 3224m from 2011 to 2014. This is a decrease of 389m in 2011, 323m in 2012, 808m in 2013 and 115m in 2014. This can be computed as a percentage decrease of 11.6%, 9.67%, 24.20% and 3.44%. This shows that the company experienced a substantial decrease in the operating expenses hence it means it has been efficient in minimizing the costs (Bragg, 2007). 2014 2013 2012 2011 2010 M M M M M Operating income after tax 3224 2531 3016 2950 3339 11.6% 9.67% 24.20% 3.44% - The comprehensive income generated by the firm in the year 2010 was 2327m. The subsequent incomes were 2655m in 2011, 2806m in 2012, 124m in 2013 and 1916m in 2014. This is an increase of 328m, 479m (2203) m and (411) m. computed as the percentage increase/decrease, we get 14.1%, 20.58%, (94.67%) and (17.66%). This shows that the income generation increased from 2010 to 2012 after that, decreased significantly to 2014. The trend analysis of the balance sheet items of Tesco firm The first key item is operating assets that were 41628m by the year 2010. The operating assets increased to 44118m, 47169m, 46979m and consequently 46489m from 2011 to 2014 respectively. The assets increased by 2490m, 5541m, 5351m and 4861m. The percentage increase of 5.98% in 2011to 13.31% in 2012 to 12.85% in 2013 and 11.68% 2014. 2014 2013 2012 2011 2010 M M M M M Operating assets 16217 16546 16144 15019 14044 11.68% 12.85% 13.31% 5.98% - The other item is the total liabilities. The firm incurred a liability of 18031m in 2010. The liabilities grew to 19460m in 2011, 21208m in 2012, 22576 in 2013 and 24156m in 2014. This is an increase of 1429m, 3177m 4545m and 6125m from the base year (2010). The percentage increase is therefore, 7.93%, 17.62%, 25.21% and 33.69%. References Bragg, S. M. (2007). Business ratios and formulas: A comprehensive guide. Hoboken, NJ: Wiley. Bull, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Oxford: CIMA. Byun, J. J. (2012). Horizontal and vertical intra-industry trade of Korea: A cross-country and industry analysis. Cafaggi, F. (2011). Contractual networks, inter-firm cooperation and economic growth. Cheltenham (UK: E. Elgar. Conrick, C. J., & Hanson, S. (2013). Vertical option spreads: A study of the 1.8 standard deviation inflection point. Hwang, L. A. (2011). An investigation of financial ratios in predicting firms future performance: An application of PRs methodology. Icon, G. 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