LIVERPOOL JOHN MOORES UNIVERSITY
4006 BUSM
Analysis of the Financial Performance of Tesco PLC (00445790)
Lucas Davidson
09 March 2016
Table of Contents
1 Introduction; 3
1.1 Introduction to Tesco PLC 4
2 Profitability 4
2.1 Gross Profit Margin 5
2.1.1 Analysis of Gross Profit Margin 5
2.2 Return on Capital Employed (ROCE) 5
2.2.1 Analysis of ROCE 6
3 Efficiency 6
3.1 Sales Revenue per Employee 6
3.1.1 Analysis on Sales Revenue per Employee 7
3.2 Sales Revenue per Capital Employed 7
3.2.1 Analysis on Sales Revenue per Capital Employed 8
4 Liquidity 8
4.1 Current Ratio 8
4.1.1 Analysis on Current Ratio 9
4.2 Acid Test Ratio 9
4.2.1 Analysis of Acid Test Ratio 10
5 Financial Structure 10
5.1 Gearing Ratio 10
5.1.1 Analysis of Gearing Ratio 11
5.2 Interest Cover 11
5.2.1 Analysis of Interest Cover 12
6 Investment Measures 12
6.1 Price Earnings Ratio 12
6.1.1 Analysis of Price Earnings Ratio 13
6.2 Dividend Yield Ratio 13
6.2.1 Analysis of Dividend Yield Ratio 14
7 References 14
1 Introduction;
This report will look at Tesco PLC and their Financial Ratios from the Years 2013 and 2014 respectively. Therefore I will be conducting analysis and evaluation on how Tesco has been performing in these two years, to get a grip of what has happened in 2013 and 2014 we have to understand that in 2012 Tesco announced its first fall in Profits in over 20 Years (Guardian, 2012) and also that Tesco Price Share dropped below 30% for the first time in 7 years (BBC, 2012). This allows us to see that Tesco was starting to see the pinch of recession and allows us to see what 2013 and 2014 will be like for the Superstore Giants.
1.1 Introduction to Tesco PLC
Tesco PLC was first created by Jack Cohen in 1919, Mr Cohen was in the Royal Flying Corps and was demobilised after World war one and with his pay of £30 he began to by surplus NAAFI supplies and began to sell them in a market, after Initial sales of £4 on the first day he went home with a profit of £1. Ever since then the business began to expand and became a PLC on 1947. (History, 2014). With expansion ever present on the mind of Tesco, it has already tried to expand into America with its Fresh and Easy Brand, proving that you don’t just need the capital and products to expand into these markets but also the cultural knowledge to succeed. With China becoming the world’s largest grocery market it will become a market that Tesco will wish to expand into, although this can’t come at the cost of the stores in the UK (BBC, 2012). In 2012 (with a new CEO Philip Clarke) announced that Tesco PLC would have a 1 billion pound revamp that would include the hiring of 8,000 new staff, this was due to a lack of interest the business had in its UK Tesco stores and had been concentrating on overseas expansion. Philip Clarke announced the revamp as well as another strategy of less Superstores and more small convenience stores peppered around the country. (Enoch, N.andPoulter, S, 2012). In this revamp Tesco also announced another 700 click and collect pick up points across the UK, this is to try and challenge its rivals such as Asda and create its own USP. The increase in staff is the major strategic ploy by Tesco who in the years previously has lost the amount of staff per 1000 sq. feet of sales space from 6.3 to 4.8 in 2012 which put it at a disadvantage to competitors such as ASDA (BBC, 2012). With any Business such as Tesco PLC there are ratios, these ratios can be analysed to find how successful the business has been that year. These can be broken down into various different categories such as Profitability, Efficiency, Liquidity, Financial Structure and Stock Market Measures.
2 Profitability
The profitability of a business is the primary purpose of any business especially Tesco PLC, these ratios show the profits being created in comparison to other key figures in the financial statement. (Atrill, P.andMcLaney, E., 2000)
2.1 Gross Profit Margin
Gross Profit Margin is a profitability ratio which calculates how much profit is earned in that certain year without consultation of the indirect costs that a business will have.
2.1.1 Analysis of Gross Profit Margin
During the two years that I have completed the Gross Profit Margin ratio for you can see above that the percentage has stayed the same and the only conclusion for this even with a fall in Sales Revenue and Gross Profit in 2014. My analysis is that in 2014 more of Tesco’s customers were purchasing premium goods which could lead to this continual level of Gross Profit Margin.
2.2 Return on Capital Employed (ROCE)
ROCE is a ratio that will show the business and shareholders how much of each pound of capital that is employed will then generate a pound of profit and how efficiently this is. That is if the business is turning a profit (Reserved, A.R., 2015).
2.2.1 Analysis of ROCE
With the above ratios complete for the two years you can see that in 2013 the ROCE was 6.29 and this rose to 7.85 in 2014, this can be down to the actions that the new CEO Philip Clarke has put in place in 2012 by the 1 Billion pound revamp and increase of staff seem to having a dramatic effect of the Operating Profit as before as in 2012 and 2013 profits were being re-invested into Tesco’s for the revamp and this was a direct result due to the recession.
3 Efficiency
Efficiency Ratios are used by businesses such as Tesco so to show the how efficiently they are managing their resources within the business and so they can see where to improve (Atrill, P.andMcLaney, E.2000).
3.1 Sales Revenue per Employee
This is ratio would be used by Tesco to try and examine and predict how much productivity their workforce has had on the previous year (Atrill, P.andMcLaney, E., 2000). This could be very relevant to Tesco PLC as in 2012 they announced their plan to hire a further 8,000 staff which will have a direct effect on this ratio. (Enoch, N.andPoulter, S, 2012)
3.1.1 Analysis on Sales Revenue per Employee
The number of employees dropped between 2013 and 2014 by 24,573 staff and this had a dramatic effect on the Revenue per Employee in an adverse way it increased by £6,523. This wasn’t due to increase Revenue but rather that Staff at Tesco were more motivated and were pushing to improve this may have had something to do with the new chairman who at the time was pushing for integrity from staff and suppliers which may have made Managers push their staff harder (Ahmed.K2014).
3.2 Sales Revenue per Capital Employed
This is when a business such as Tesco would see how they effectively their assets are being used to increase their Revenue.
3.2.1 Analysis on Sales Revenue per Capital Employed
From the above Data you can see that from 2013 to 2014 that there was a drop of 0.04 and this could be because of the discontent within Tesco at this time due to the lack of organisation and management from the Senior Positions within Tesco, at one time during 2014 there was no CEO and Chief Financial Officer and this can lead to lack of working and confusion within the Business (Ahmed.K, 2014).
4 Liquidity
The liquidity that would affect Tesco would be that they need to see how liquid their resources would be to meet the needs of the Business and any agreements for the future. (Enoch, N.andPoulter, S, 2012) (Investopida.com, 2003)
4.1 Current Ratio
This ratio compares Liquid assets against Short- Term Liabilities that will be due in the next Year or sooner so to see if there will be a short fall. (Barnes, S.2012)
4.1.1 Analysis on Current Ratio
The fact that Tesco doesn’t have a high Current Ratio isn’t bad, as shops usually have quite a low Liquidity as they only hold fast moving stock that is already complete and has high amounts of cash sales (Enoch,N.andPoulter,S,2012). Although the difference here does mean that Tesco are taking on more Liabilities and having less assets to cover which may be down to the £250 Million accounting problem that occurred in 2014 and could be why Tesco are covering more (Ahmed.K,2014).
4.2 Acid Test Ratio
It’s a more stringent test of liquidity, to show how liquid the business is. (Atrill, P.andMcLaney, E., 2000)
4.2.1 Analysis of Acid Test Ratio
The reason for the drop from the 2013 of 0.49 to the 2014 result of 0.44 is that of the crisis inside of Tesco Management at the Time (Ahmed, K. 2014) and then also the recession is still in full swing and will be making Tesco have a hit. It’s not uncommon for Businesses such as Tesco with such a large Cash Flow to have their result below the recommended result of 1.0 and so Tesco’s result of 0.49 or 0.44 is normal for a supermarket of this size.
5 Financial Structure
The financial structure is a combination of Long term debt and Equity, and is used to decide how much to borrow against the risks and equity of the business.
5.1 Gearing Ratio
The Gearing Ratio is used to see how much risk that the business can be put under against the Long Term Debt.
5.1.1 Analysis of Gearing Ratio
I believe the reason for the dramatic increase is due to the dramatic increase in Overdrafts and Loans that Tesco took out but they took out these Loans but also the major decline in Tesco on the Stock market from 320.20p per share to 164.8p per share on 15th of December 2014 will have led to major change in the Gearing Ratio. (PLCmL.s.e, 2015)
5.2 Interest Cover
This is to measure how much of the profit that the business is making is able to cover interest that needs to be paid.
5.2.1 Analysis of Interest Cover
The increase of 0.90 between the years of 2013 and 2014 will have occurred due to new strategies that will have been put in place and this means there can’t be a large drop in profit before the business will struggle to repay its debts.
6 Investment Measures
Investment measures will help the investors of Tesco PLC assess how much return they will be getting on their investment or how much of a loss for that year.
6.1 Price Earnings Ratio
This ratio will relate the Market value of each share to how much each share will earn you each year.
6.1.1 Analysis of Price Earnings Ratio
You can see that in 2013 the price earning was 28.35 times higher than the current level of earning, and that in 2014 it dramatically dropped to 12.31, this is not good as it doesn’t give further confidence but also it was due to the missing money and financial situation that was happening within Tesco during 2014. (Ahmed, k. 2014)
6.2 Dividend Yield Ratio
The proportion of Cash that will be returned to its Current Market Value, helps assess cash return on their investment in Tesco. (Barnes, s. 2003).
6.2.1 Analysis of Dividend Yield Ratio
This shows us that the cash return that investors would be receiving on those dates would be very low and this is mainly down to the recession but also the faults inside the business but this would be very off putting for any investor in the future.
7 References
7.1.1.1 Bibliography
Ahmed, K. (2014) Tesco, what went wrong? BBC Business, [online] 22 October, . Available from: <http://www.bbc.co.uk/news/business-29716885> [accessed 6 March 2016].
Atrill, P. and McLaney, E. J. (2000) Accounting and finance for non-specialists. 2nd ed. New York: FT Prentice Hall.
BBC (2012) Tesco market share dips below 30%. BBC Business, [online] 31 January, . Available from: <http://www.bbc.co.uk/news/business-16817254> [accessed 5 March 2016].
Barnes, S. (2003) Integrating business studies. London: Hodder & Stoughton.
Cole, G. A. (2000) Management: Theory and practice. 5th ed. London: Continuum International Publishing Group.
Enoch, N. and Poulter, S. (2012) Embattled Tesco announces £1bn plan for major revamp after UK profits plunge. Daily Mail, [online] 18 April, . Available from: <http://www.dailymail.co.uk/news/article-2131427/Tesco-announces-plans-major-revamp-UK-profits-plunge.html> [accessed 5 March 2016].
History.com (2014) Tesco history [online]. Available from: <http://www.tescohistory.com/> [accessed 5 March 2016].
Investopedia.com (2003) Liquidity, In: vol. Investopedia
Investopedia.com (2011) Financial structure, In: vol. Investopedia
Reserved, A. R. (2015) Return on capital employed ROCE | analysis | formula | example [online] My Accounting Course. Available from: <http://www.myaccountingcourse.com/financial-ratios/return-on-capital-employed> [accessed 6 March 2016].
Wood, Z. (2016) Tesco profits fall for first time in almost 20 years. The Guardian, [online] 18 January, . Available from: <http://www.theguardian.com/business/2012/oct/03/tesco-profits-fall-uk-supermarkets> [accessed 5 March 2016].
plc, L. S. E. (2015) TESCO share price (TSCO) [online]. Available from: <http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB0008847096GBGBXSET0.html> [accessed 7 March 2016].
Citations, Quotes & Annotations
Ahmed, K. (2014) Tesco, what went wrong? BBC Business, [online] 22 October, . Available from: <http://www.bbc.co.uk/news/business-29716885> [accessed 6 March 2016].
(Ahmed, 2014)
Atrill, P. and McLaney, E. J. (2000) Accounting and finance for non-specialists. 2nd ed. New York: FT Prentice Hall.
(Atrill and McLaney, 2000)
BBC (2012) Tesco market share dips below 30%. BBC Business, [online] 31 January, . Available from: <http://www.bbc.co.uk/news/business-16817254> [accessed 5 March 2016].
(BBC, 2012)
Barnes, S. (2003) Integrating business studies. London: Hodder & Stoughton.
(Barnes, 2003)
Cole, G. A. (2000) Management: Theory and practice. 5th ed. London: Continuum International Publishing Group.
(Cole, 2000)
Enoch, N. and Poulter, S. (2012) Embattled Tesco announces £1bn plan for major revamp after UK profits plunge. Daily Mail, [online] 18 April, . Available from: <http://www.dailymail.co.uk/news/article-2131427/Tesco-announces-plans-major-revamp-UK-profits-plunge.html> [accessed 5 March 2016].
(Enoch and Poulter, 2012)
History.com (2014) Tesco history [online]. Available from: <http://www.tescohistory.com/> [accessed 5 March 2016].
(History.com, 2014)
Investopedia.com (2003) Liquidity, In: vol. Investopedia
(Investopedia.com, 2003)
Investopedia.com (2011) Financial structure, In: vol. Investopedia
(Investopedia.com, 2011)
Reserved, A. R. (2015) Return on capital employed ROCE | analysis | formula | example [online] My Accounting Course. Available from: <http://www.myaccountingcourse.com/financial-ratios/return-on-capital-employed> [accessed 6 March 2016].
(Reserved, 2015)
Wood, Z. (2016) Tesco profits fall for first time in almost 20 years. The Guardian, [online] 18 January, . Available from: <http://www.theguardian.com/business/2012/oct/03/tesco-profits-fall-uk-supermarkets> [accessed 5 March 2016].
(Wood, 2016)
plc, L. S. E. (2015) TESCO share price (TSCO) [online]. Available from: <http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB0008847096GBGBXSET0.html> [accessed 7 March 2016].
(plc, 2015)