Business Activity of Tesco Plc - Coursework Example

Tesco Plc The main business activity of Tesco Plc is the retail business and other associated business which it carries out in places of China, United Kingdom, Ireland, India, Japan and Malaysia etc. The Tesco Group is also involved in the provision of banking services as well as insurance related services through its various subsidiaries. Auditor’s Report The auditor’s of the company are PricewaterhouseCoopers LLP who have audited the account of the company in the year ended 27 February 2010 along with the group financial statements. (Plc) The auditor’s have expressed an unqualified opinion on the financial statements and have provided the statement that the financial statements of Tesco plc, i.e. the statement of financial position, statement of comprehensive income, cash flows, statement of changes in equity and the notes to the financial statements, are prepared in accordance with the obligations that are put forward by the Companies Act 2006 and the regulations set by the International Accounting Standards. They have stated that the report presents fairly and truly the group’s affairs and can be relied upon. There is immense importance of the auditor’s report with respect to the financial statements as it provides reliance upon the business which is conducted by the company during the year and the user of the financial statement, which can be a shareholder, lender, prospective investor or even employee of the company, can place faith in the fair statement of the affairs presented in it. Ratios The ratios of the company, that summarize the performance of the company during the year and previous year, are provided and an in-depth analysis over the results based on the calculated ratios is carried out. Ratio Expression 2010 2009 2010 result 2009 result Return on equity Net Profit after tax Equity 2,336 14,681 2,138 12,906 15.91% 16.48% Gross profit margin Gross profit*100 Sales 4,607 56,910 4,185 53,898 8.1% 7.76% Net profit margin Net profit*100 Sales 2,336 56,910 2,138 53,898 4.1% 3.96% Current ratio Current Assets Current Liabilities 11,765 16,015 13,479 17,595 0.74 0.766 Inventory (stock) turnover period Average Inventory *365 Cost of goods sold 2,729 52,303 2,669 49,713 20 days 19 days Trade payables’ (creditors’) turnover period Average Accounts Payables *365 Purchases 9,442 52,303 8,665 49,713 66 days 64 days Gearing ratio Total debt Total Equity 11,744 14,681 12,391 12,906 0.8 0.96 Price earnings ratio Price per share Earnings per share 4.2 0.2933 3.33 0.2714 14.31 12.27 Profitability: The company has maintained its ratio of profitability since the last year as the company had a gross profit and net profit margin of 7.76% and 3.96% last year respectively which was increased marginally to 8.1% and 4.1% respectively. This shows that the company is showing a good bit of increase in its already good profitability. The company has managed a good return of equity as a return of 15.91% and 16.48% was noticed in the two years respectively but the return on equity has declined as compared to last year. Liquidity: The liquidity management of the company is in good health if we consider the particular industry to which the company belongs to as the retail business sector operates with low liquidity. The company has maintained a current ratio of around 0.75 in both the years. Asset Management: The asset management practice is not as satisfactory as compared to the industry trends as the company pays off its creditors in almost 20 days. Others: The gearing ratio is quite satisfactory as the company has managed to keep the gearing debt to equity ratio below the standard 1 which indicates that the company is more dependent on equity finance as compared to debt finance which is a good sign for any company. The price earnings ratio of Tesco is also good as it is generating healthy earnings for its shareholders. Change in Sales, Cost of sales and Share price The relative change in the sales, cost of sales and the share price is calculated and is assessed. Change in sales: The sale in the year 2010 was £62.5 billion compared to the £59.4 billion in the previous year for the whole group including VAT. This shows that the sale has increased by £3.1 billion. Change in percentage of sales = Increase in sales x 100 Sales for the current year Change in percentage of sales = £3.1 billion x 100 £62.5 billion Change in percentage of sales = 4.96% This indicates that the increase in the sales of the company as compared to last year was almost 5%. Change in cost of sales: The cost of sales of the company amounted to £52.3 billion for the year 2010 while in 2009 the cost of sales was £49.7 billion. Change in percentage of cost of sales = Increase in sales x 100 COS for the current year Change in percentage of cost of sales = £2.6 billion x 100 £52.3 billion Change in percentage of cost of sales = 4.97% The increase in the percentage of sales was in line with the increase in sales showing that there were no incremental expenses. Change in share price: The share price of the company at the end of the current financial year was £4.2 per share while the share price at the end of the 2009 financial year was £3.33 per share. Therefore the increase in the share price since then is over 20%. Change in share price = Increase in share price x 100 Share price for the current year Change in percentage of share price = £0.87 x 100 £4.2 Change in percentage of share price = 20.7% DuPont analysis Through the DuPont analysis, if we calculate the return on Equity for both years i.e. 2010 and 2009, it will equal to the following: Return on Equity = Net Income x Revenue x Assets Revenue Assets Shareholder’s Equity ROE 2010 = 2,336 x 56,910 x 46,023 = 0.041 x 1.24 x 3.13 = 15.91% 56,910 46,023 14,681 ROE 2009 = 2,138 x 53,898 x 45,564 = 0.0396 x 1.18 x 3.53 = 16.49% 53,898 45,564 12,906 The return on Equity has declined marginally in the year 2010 as compared to 2009 even though the profit margin of the company has increased. The main cause of the decline is the decline in the Assets leverage. The assets of the company have increased but not in the same proportion as compared to last year. If the Return on Equity is calculated by ignoring the equity multiplier, it drops to 5.08% and 4.66% for 2010 and 2009 respectively. This shows that if the completely debt free, its earnings will drop considerably by around 10-12% for both the years. This shows that the company is dependent on the equity multiplier. Even though the assets turnover has increased but the decline in the equity multiplier and net profit margin has led to the fall in the Return on Equity. Works Cited Plc, Tesco. "Annual Report 2010." Annual Report. 2010. Read More