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The major objective of preparing this individual report is to analyse and interpret the financial statements of Tesco Plc, a British multinational corporation. The analysis consists of two parts, namely the ration analysis and the trend analysis. For these analysis, the annual reports of the entity for a period ranging five years have been downloaded from the website (Tescoplc.com. 2019). Ratio Analysis is conducted to measure the activity, efficiency, profitability and the liquidity of the company. Trend Analysis is conducted to understand the important trends observed from the financial statements of the company. They are a good measure where the organisation is heading in the short run (Wahlen, Baginski and Bradshaw, 2014). Tesco is a British multinational organisation involved in selling general merchandise and groceries. After undertaking significant cost cutting and loss-avoiding measures in 2015, the company has been rebuilding its overall profitability and has reached good levels in 2019.
The data required for conducting the ratio and trend analysis of the company has been collected from the Annual Reports of Tesco from 2015 to 2019.
These ratios have been selected to measure the turnover that is being achieved by the company with the assets and working capital available with it. As the company has large amounts of assets and working capital in recent years, the asset turnover and working capital turnover ratio have been selected (Agha 2014). The results suggest an improvement in the asset turnover of the company from 1.28 to 1.30. The assets are better utilised by the company. The working capital is being put to much better use as it has improved from 6.9 to 13.7. This means that the short term growth of the company is being funded with the immediate funds available to it.
These ratios are a measure of the liquid funds available with the company. A retail business needs to have sufficient level of liquidity to make immediate payments. Hence, the current ratio and acid test ratio have been selected. These measure the ability of the company to immediately meet its liabilities (Babalola and Abiola 2013). The current ratio has declined from 2.5 to 1.58. This is because of the use of short term loans by the company. The Acid Test ratio has also improved from 2.09 to 1.25. The entity is able to maintain a good liquidity while also utilising more debts. The operations of the company are profitable.
Leverage refers to the debts taken by the company to fund its business operations. Due to the lower overall cost of capital, some entities tend to prefer this form of financing. However, a good balance needs to be maintained to ensure that the company does not face bankruptcy (Wood, Wrigley and Coe 2016). The debt ratio of the company has come down from 0.77 to 0.70. Increased care needs to be taken to reduce the dependency on liabilities. The debt-to-equity ratio has decreased from 1.17 to 0.82. This is because of the repayment of the long term debts by the company and increased equity capital.
As the main purpose of any business is to make profits, these ratios are an important measure of the strength of a business. The gross profit margin indicates how much of the cost of the goods are being recovered by the company. This ratio has improved from 5.83% to 6.48%. The operations have become more efficient in the current year. The overall profitability of the company has come down from 2.10% to 2.07%. This suggests an inability to control the overall expenditure. The focus should increase on reducing the indirect costs.
Due to the recent expansion undertaken by the company, it is important that it provides satisfactory returns to the new investors. This makes sure that the stock levels of the company and its financial health are in good condition. The dividends paid by the company have come down from 3.09% to 1.42%. The overall dividend paid by the company from net profits has also come down from 29% to 6.21%.
A horizontal analysis of the important aspects of the financial statements suggests that the company has recovered well from 2015 when it was making huge losses. Its sales and gross profit have improved significantly along with the value of the assets. However, the dependence on short term liabilities has increased and the long term debts are being repaid at an increased rate. The overall profitability, however, has improved.
A trend analysis of the financial statements and ratios of the company over the past five years indicates a significant development in the performance levels of the company. At the beginning of 2015-16, the company consisted of significant loss making entities which reduced its efficiency and resulted in huge losses. It also owned vast amounts of unproductive properties which involved lots of investment. The amounts spent on the development of these properties did not provide any returns. However, the restructuring measures undertaken at this point improved the results. Investments in assets increased in F.Y. 2016-17 and huge amounts of debt were repaid in this year. The loss making assets in South Korea and Asia were also sold off to cut down on the losses. The company proceeded in a similar manner and stabilised its operations in 2017-18. In recent years, the company has continued to reduce its long term debt while depending more on the short term sources of financing. The operating cash flow available with the company has declined in 2019 by 10% because of the failure by a key supplier, Palmer & Harvey. The working capital initiatives of the company were also postponed due to the political uncertainty existing in the UK. The gross profit has improved because of the reduction of the prices by a third by the company, especially in the Central European region. 90 of the fresh food counters were also closed due to the lack of profitability. The profits from investment properties have also been maximised in recent years without any further investments in unproductive properties.
The latest activity undertaken by Tesco as a part of its growth strategy is its merger with Booker which was proposed in 2017. Due to this merger, the company has been able to generate synergies worth £79 million in the first year. The company expects to generate total synergies worth £200 million a year from the third year. This is in stark contrast to 2015, when the company was undergoing an extremely difficult period in terms of maintaining profits (Annualreports.com. 2019). Due to the highly competitive nature of global retail sector, the loss making activities of the entity made it lose its core competency in the United Kingdom itself. Hence, there was a pressing need for improving the efficiency of the operations and renew the operations of the entity. The first steps towards this were taken in 2016. The company sold its Homeplus business in South Korea and generated surplus funds of £3.3 billion (Annualreports.com. 2019). This also reduced the losses earned by the company. The increased lease costs and inflation burden were also reduced by buying back around 70 stores around the world. The company also employed 9000 new people who were involved in customer facing roles. All of these activities stabilised the business in the UK. It also created a platform for the company to grow on in the foreseeable future. The scale of operations also improved in 2018 and 2019. The strategy of the company in the recent years was initially aimed at getting rid of the loss making entities. After which, the focus shifted towards regaining the core competency in the core market (Annualreports.com. 2019). In the present years, it is focussed on improving the scale of the business in wider markets while also ensuring that the level of efficiency is not compromised like in the past.
The required data has been collected from annual reports relating to a particular day in a year. Events occurring after that date tend to deem the results of the annual reports irrelevant. Hence, the results of the ratios and trend analysis are not completely accurate (Sultan 2014). They are a general measure of the situation of the company and should be used as an analysis of the overall position of the entity.
Based on the above discussion, it can be suggested that the company is growing in terms of size and scale of profitability. The operating margin is also improving. However, the repayment of a large amount of debt by the company makes it difficult for the entity to maintain higher levels of profitability. Hence, the company should take care of making higher payments to the shareholders and also reduce its reliance on the short term funds.
Agha, H., 2014. Impact of working capital management on profitability. European Scientific Journal, 10(1).
Annualreports.com. (2019). [online] Available at: http://www.annualreports.com/HostedData/AnnualReportArchive/t/LSE_TSCO_2017.pdf [Accessed 5 Nov. 2019].
Annualreports.com. (2019). [online] Available at: http://www.annualreports.com/HostedData/AnnualReportArchive/t/LSE_TSCO_2016.pdf [Accessed 5 Nov. 2019].
Annualreports.com. (2019). [online] Available at: http://www.annualreports.com/HostedData/AnnualReportArchive/t/LSE_TSCO_2015.pdf [Accessed 5 Nov. 2019].
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), pp.132-137.
Sultan, A.S., 2014. Financial Statements Analysis-Measurement of Performance and Profitability: Applied Study of Baghdad Soft-Drink Industry. Research Journal of Finance and Accounting, 5(4), p.4956.
Tescoplc.com. (2019). [online] Available at: https://www.tescoplc.com/media/476422/tesco_ara2019_full_report_web.pdf [Accessed 2 Nov. 2019].
Tescoplc.com. (2019). [online] Available at: https://www.tescoplc.com/media/474793/tesco_ar_2018.pdf [Accessed 5 Nov. 2019].
Wahlen, J.M., Baginski, S.P. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.
Wood, S., Wrigley, N. and Coe, N.M., 2016. Capital discipline and financial market relations in retail globalization: insights from the case of Tesco plc. Journal of Economic Geography, 17(1), pp.31-57.
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