TESCO Plc - the Company's Ratios in Different Time Periods - Statistics Project Example

TESCO Plc: Finance & Accounting Table of Contents TESCO Plc: Finance & Accounting 1 Ratios Defined 2 Analysis 6 Comparison of ratios in different time periods 6 Comparison with Industry performance 11 Conclusion 15 Tesco, The company: An overview. Tesco is a big name in UK retail chain market, being the largest British retailer by both global sales and domestic market share. Currently Tesco is the third largest global retailer based on revenue, behind Wal-Mart and France's Carrefour, but second largest based on profit, ahead of Carrefour. Originally specializing in food and drink, it has diversified into areas such as financial services, non -food items and telecoms. The strategy to diversify was laid down in 1997 and has been the underpinning for its success in recent years. (Tesco, 2009) The income statement and balance sheet for this company have been shown in the work sheet attached herewith (Reuters, 2009). While analyzing the company financials certain parameters were kept in mind. The analysis is conducted in two segments .The first segment would focus on the comparison of financial ratios of the company among different periods. The later segment would be of the comparison of company financials vis a vis the ratios of the respective industry. The ratios those would take part in this analysis are briefly portrayed below. Ratios Defined Profitability of any company can be measured in many different traditions like gross profit margin, net profit margin, return on assets, return on equity etc. Gross Profit Margin: Gross Profit Margin is defined as the gross profit of per unit of revenue and is calculated as Gross Profit Margin =Gross Profit / Sales Net profit Margin: Net profit margin is often measured as Net profit Margin = Profit after tax/ Sales. While calculating for the above ratios ‘revenue figures’ represents ‘sales’.Net profit margin ignores the profit those are paid out to its debt investors as interest and because of it, this ratio is not so effective while comparing between firms having different capital structures . Return on Assets: Financial managers often measure the performance of the firm by the ratio named return on assets. Return on assets is measured as Return on assets = Net Income /Average total assets; A certain amount of high value is desirable. Although a low ROA ratio does not entail that the assets could have produced better results if invested elsewhere. Return on equity: Another way to look at the firm’s performance is return on equity. It can be measured as Return on equity (ROE): Net Income/Average Equity; Although equity holders like to see their firm earning high return on equity, consumers and regulators often assume high return as evidence that the company is charging high prices for their products. The liquidity ratios come next. It’s very much important for a firm to keep a certain level of liquidity in its portfolio, so that if needed it can lay its hand on the liquid assets. These ratios may change rapidly as its components i.e. both the short terms assets and liabilities can get easily changed over time periods. Current Ratio: Current ratio= Current assets / Current liabilities. Current assets consist of cash and other assets which can be turned into cash within very short period of time. Firm’s current liabilities consist of payments which is payable in near future. Thus current ratio tells us how much current assets is available to cover up the current liabilities. Quick ratio: Some assets are closer to cash more than other assets. In difficult times, these more liquid assets can be used to repay the current liabilities. These kinds of assets mainly consist of cash and cash equivalents, short term securities and receivables from customers. Thus quick ratio is measured as Quick ratio = (Cash+ Short term securities+ Receivables)/Current Liabilities. Financial analysts take up another ratio to judge how efficiently the firm is using its investment in current and fixed assets. Asset turnover ratio: Asset turnover ratio tells about how efficiently the firms’ assets are being put in use and can be précised as Asset Turnover Ratio= Sales/ Total Assets. (Revenue figures have been used as a replacement of sales figures in all calculations). Stock Turnover ratio: This is another ratio to measure the effectiveness of inventory management of a firm. Stock Turn Over Ratio= Cost Of Goods /Total Inventory. (Brealey,et al.,2007) Analysis Comparison of ratios in different time periods The calculations for key ratios of TESCO over the period of 2005 till 2008 are shown in the worksheet. Here are some snapshots of the same as well as diagrams to make the analysis more comprehensive. Below is the table to show the profitability ratios of the company. The company has maintained a consistent gross profit margin for the period of 4 years, though they have gradually increased on their net profit margin during this period. Operating efficiency might be comparatively high in the year of 2007as the ROA in this table is highest for the mentioned year. The equity holders of the company must be happy as a steady growth is maintained on the ROE. There is a very little difference in the results for the year 2007 and 2008. The following graph emphasis this fact as the lines depicting the 2007 and 2008 trends are almost indistinguishable. The table below takes care of the liquidiy ratios. Though the current ratios had dropped by a certain amount in 2006 but thereafter the company has taken care of the same. This is very much visible by the stable growth in current ratio from 2006 onwards,making the highest in 2008. From the line chart below, it can be seen that the quick ratio has dropped to a certain points in the year of 2007.But TESCO didn’t allow the ratio to drop further and took steps to recover the ratio back in the year, 2008. In 2008 though the current ratio was almost equal to the value in year, 2007,but the quick ratio has gone down compared to the value in 2007. Even it has been low from its value in 2006. The reason could be that Telco has decided on to cut on its most liquid assets and to invest more in other current assets like inventory. From the below mentioned table it seems to have some certainity. They have increased their inventory from 1309 million pounds to 2430 million ponds. Below mentioned table is a snapshot of the efficiency ratios for the company. Stock Turn over ratio was highest in year 2006 and lowest in 2008. The reason could be that in 2008 they have cut on their cost of sales for the year or they have increased on their inventory level. Their financial statement assertains the second rationale. Stock Turnover ratio is highest in 2006. If we have a look at the bars for asset turnover ratio,it becomes obviously visible that Tesco believes to have consistent asset turnover ratio for these four years .Though it seems that Tesco is maintaining a very low asset turnover ratio, but in later portion it has been found that the ratio is not as low as that of the overall industry. The figures almost double when compared with the industry value. Comparison with Industry performance The comparison between the company and the industry is produced in a tabular form as well as chart form. Regarding liquidity ratios it has been noticed that both the quick and the current ratio are quite high for the company when compared to the industry. One reason could be that this company prefers to have more current assets compared to that of the industry .Another reason could be the company prefers to have less current liabilities than that of the respective industry. From the profitability ratios it is visible that the gross margin is much higher for the industry .But the distance between the values of industry and that of the company has decreased for the net profit margin ratio. The rationale could be that Tesco has been able to cut on their interest expenses or on their tax expenditures which lessened the deductable amount from the gross profit. Return on assets and return on equity both have been higher for the company. The company prefers to use its assets to its optimum level. In this process it keeps on a high asset turnover ratio than that of the other competitors in the industry. ROE is quite high for this company. The ground could be that the company likes to have less total equity that it’s industrial counterparts. This company strives to provide the best possible return to its equity holders, more than others in the same league. But customers can look at it from different point of view and may think that TESCO is maintaining high prices for their products. The line of current ratio from the industry till the company is more steeper than that of the current ratio line. It seems that the company prefers to have more inventory, keeping a good amount of cash and cash quivalents. This rationale had found its base in the financials of this company. A look at the above bar graphs gives a feel of the deviation between the company and industry liquidity ratios. Now keeping more current assets in most liquid forms can have advantages as well as disadvantages. A distinct advantage is the ease with which TESCO would be able use these assets in time of distress. However, a high a liqidity ratio may mean that TESCO is not spending much on their fixed assets thus losing on productivity. The above figure also gives a comprehensive presentation of the various profitabilty indicators of the company and a side-by-side comparison with the industry statistics. The above snapshot is a graphical representation of both the asset turnover ratio and inventory turnover ratio for the company and the industry it is in. The steepness of the inventory turnover ratio trend is probably explained by the fact that the company is maintaining very low inventory when compared to its competitors. If this is the case then this can not be a good sign for the company. Conclusion This company is maintaining high liquidity ratios with reference to its industry values. So they may cut on their current assets a bit and invest in fixed assets more to increase the productivity. An important recommendation for the management team would be to look after their gross profit margin as that is very low in respect to the industry average. The reason could be that their cost of revenue is much higher. In this case they should look after their cost and let not allow it to increase after a certain level. Regarding inventory turnover, the company should calculate for their optimum inventory level and keep the same to optimize their profits. Hopefully, this will help TESCO to maintain its market share and industry position in years to come. Reference Brealey,A.R.,Myers,C.S.,Allen,F.& Mohanty,P.,2007,Principles Of Corporate Finance, New Delhi: Tata McGraw-Hill Publishing Company Limited. Reuters.2009. Income Statements: Tesco PLC.[Online] (Updated 12 Dec,2009) Available at (TSCO.L),http://www.reuters.com/finance/stocks/incomeStatement?stmtType=CAS&perType=ANN&symbol=TSCO.L [Accessed 12 Dec,2009] TESCO.2009.TESCO Plc.[Online] (Updated 12 Dec,2009) Available at http://www.tescoplc.com/plc/about_us/strategy/ [Accessed 12 Dec,2009] Read More