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Tesco Plc:

Tesco Plc is one of the most strongest and powerful retail players in the UK that has been growing at a significant pace, from the customers’ point of view. But when it comes to the investment decision, the investors have to go through from various elements and angles to analyze the financial performance of the companies and make decisions accordingly (Tesco Plc, 2010).

In the case of Tesco Plc, it is noted that that liquidity performance has been improving over the last three years. In the year of 2008, the company had £0.61 of assets to cover every £1 liability. In other words, it can be said that as compared to the total liabilities, the company had only 61% of assets. The ratio improved somewhat in the following years as in 2009 the ratio increased to 1:0.77 and in 2010 in reached to 1:0.73. Although there is a fluctuation too, but since it is a retail business, the companies have to utilize all the resources to generate high sales and profitability. Analyzing the competitor, Sainsbury’s, it is observed that it had rather stronger position in 2008, but due to economical and financial crisis, the company was unable to stabilize its liquidity performance (Tesco Plc, 2010).

When it comes to most liquidated assets, excluding inventories, the same trend is noted for Tesco, as above. As compared to 2008, the most liquidated assets increased in 2009, but again decreased in 2010. Again, it can be assumed that such firms have to keep huge inventories in stock therefore it is obvious that large amount of running capital is invested in these activities. The analysis of Sainsbury’s also seems to be likewise Tesco. But concluding the above analyses, it can be said that so far, the Tesco Plc is found to be much more effective and efficient and it is stronger too as compared to its competitors.

At the other end, it is also observed that Tesco Plc have generated the finances through various financing options. But the recent refinancing value of the bonds is £600 million which is due in 2014. In the following year, 2015, Tesco will have to mature the total of £600 million too, and so on. The maturity time and value of the bonds can be serious issues for the company because at one end it will have to ensure sustainability of its position through improving the financial performance and at the other end it will have to mature huge amount. But looking at the current financial position of Tesco Plc and its market value, it seems that there will not be major issue for the company, if things run smoothly (Forbes, 2009).

The above liquidity analyses and maturity time and value of the bonds, it seems that the situation can become complex for Tesco Plc to deal with. But as stated above, that the market position of the company does not reflect any negative picture of Tesco (Buckle & Thompson, 2004). And in case, if the economical crisis emerges again, and much harder, the company seems to be able to stabilize itself. Although the liquidity analyses and bond situation do not seem to be supportive, but it is also to note that since it is a retail business, it is rather effective for the company to keep low amount of current assets and increase current liabilities as it leaves the company with more cash flow to manage its operations. But it does not mean that the company is facing serious financial issues. As noted from the recent economical and financial crisis, that Tesco Plc managed to stay positive and efficient, it can be said that it has great potentiality to stay positive in the next economic and financial recession, if any (Tesco Plc, 2010).

From the current situation of Tesco Plc it can be said that as compared to its rivals and competitors it is at the strongest position. The increasing sales, profitability, business expansion, brand identity and effective core strategies represents that any investor would love to invest in Tesco because at one end, it has less chances to face the financial issues, and at the other end, it has been growing at a significant rate. Therefore it can be said that it can easily generate the finances from any resources. Although the banks and other financial institutes may not be able to invest in Tesco, but there are many other options that can help the company to generate the required finances and this may include bonds, shares, etc. (Tesco Plc, 2008).

While observing the cash flow statement of the company, it has been noted that the cash generated from operations are increasing. As compared to 2009, the cash flow from operations in 2010 increased by 19.50%. But in other activities, the company has been investing all the cash and the reason could be to generate the profitability. Therefore the net cash of the company is even showing the negative sign in 2010. But since the last year’s cash was maintained, the company invested its 2010 cash flow in different activities. This shows that Tesco Plc has been adopting every option after considering all the factors and ensuring that none of its activity can affect the other operations. It can therefore be said that although the company’s seems to have insufficient cash flow, but it still has positive and strong cash flow balance from various activities (Tesco Plc, 2010).

The stable profitability margin clearly shows the performance of the company. In the year  2008, the profit margin of Tesco Plc was recorded to be 5% which reduced by only 1% in the following year but maintained in 2010. This shows that even after the global economical and financial crisis, the company managed to maintain its profitability margin, which was effected by only 1%. While comparing the profitability margin of Tesco Plc with Sainsbury’s it is noted that Tesco is stronger because Sainsbury’s was generating 2% net income in 2008 and 2009 but increased by 1% in 2010. But it is still behind Tesco in terms of generating the profit as compared to the sales (Tesco Plc, 2010).

A part from this, when it comes to the fixed asset turn over, it can be noted that in the past two years the company has been generating the total of 169% and 166% of sales as compared to the total assets. Although the ratio has been reducing but comparing with sales it clearly shows that the company has been utilizing its total assets very efficiently and effectively to generate the sales. If trend remain same in the following year, it can be said that the company will improve at higher rates. At the other end, the Sainsbury’s fixed asset turnover ratio shows that it is utilizing its fixed asset more efficiently than Tesco, but again, it is not the sign of efficient performance and does not guarantee the long term sustainability too (Tesco Plc, 2001).

Moreover, when it comes to the total assets, the performance in 2009 declined as compared to 2008, but improved again in 2010. This clearly shows that although the current assets are insufficient to cover the current liabilities, but at the other end, the effective utilization of current assets, along with non-current assets are supporting the company to generate and increase sales every year (Tesco Plc, 2009).

Furthermore, looking at the ratio of return on assets, it is also observed that in 2008, the company generated 10% of profit excluding interest expenses as compared to the total assets (Tesco Plc, 2008). The performance declined in the following year but boosted again by 1% in 2010. It shows that total assets of the company are not just increasing the sales and revenue but also supporting the net income to be increased at significant rate. The debt to assets performance can also be noted from the ratio that shows that the total assets of Tesco Plc are much higher than total liabilities (Lee, 2006). And the trend remains same in the past three years. This shows that no matter what the other ratio reflect and highlight, but the main focus of the company is to improve its assets as compared to the total liabilities as it is a sign for long term sustainability. At the other end, the return on assets of Sainsbury’s is also the same as Tesco (Connor & Purves, 2009).

Observing the beta performance of Tesco Plc, 0.77 beta has been noted. This represents that the Tesco’s stock prices are less volatile while in relate to the market index movement in stock market. In general that shows investors will get low return because the risk rate is higher. But when it comes to the professional investors, the Tesco’s stocks are more effective because at one end, it has higher risks and at the other end it also offers the high return (Tesco Plc, 2010).

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A part from this above financial analyses which shows the positivity of Tesco Plc in terms of investments, it can also be noted that the business model of the company is very efficient and well designed. Initially the Tesco Plc was just focusing on supermarkets but currently, it is also setting up many convenient stores to beat the individual retail stores. Moreover, Tesco has also increased its product and service portfolio to the greatest range. It offers various ranges of products with various brands and this is the winning point of the company (Tesco Plc, 2009).

Above mentioned discussion clearly shows that Tesco Plc will surely outperform the industry because it has been expanding its business operations across the world. Unlike other retailers, Tesco Plc has not limited itself to the specific products, services and geographical locations and this is enabling the company to improve the financial performance and economical health. Therefore it can be concluded from the above discussions and analyses that it is beneficial for the investors to invest in Tesco rather than any other company in the same industry (Tesco Plc, 2009).

References:

Buckle M & Thompson J, 2004, The UK Financial System: Theory and Practices, Manchester University Press, Glasgow

Connor D & Purves B, 2009, Decision Making, Personhood and Dementia, Jessica Kingsley Publishers, GB

Forbes W, 2009, Behavioral Finances, John Wiley and Sons, Cornwall

Lee T A, 2006, Financial Reporting & Corporate Governance, John Wiley & Sons, UK

Sainsbury, 2010, Annual Report: 2010, Accessed on 29th December 2011, Available at: http://www.jsainsburys.co.uk/files/reports/ar2010_report.pdf

Tesco Plc, 2006, Annual Financial Statements: 2006, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/plc/ir/ar/archive/ar2006/arfs_06/4615306.pdf

Tesco Plc, 2007, Annual Financial Statements: 2007, Accessed on 29th December 2011, Available at: http://www.investis.com/tesco/ar/pdfs/TESCO_FULLlow.pdf

Tesco Plc, 2008, Annual Financial Statements: 2008, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/plc/ir/ar/archive/ar2008/arfs_08/2008_TESCO_REPORT_COMPLETE.pdf

Tesco Plc, 2009, Annual Financial Statements: 2009, Accessed on 29th December 2011, Available at: http://www.investis.com/tesco/pdf/repp2009.pdf

Tesco Plc, 2009, Five Year Record, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/annualreport09/storage/pdf/five_year_record.pdf

Tesco Plc, 2009, Key Performance Indicator, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/annualreport09/storage/pdf/key_performance_indicators.pdf

Tesco Plc, 2009, Report of the Directors: General Information, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/annualreport09/storage/pdf/general_information.pdf

Tesco Plc, 2010, About Us, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/plc/about_us/

Tesco Plc, 2010, Annual Financial Statements: 2010, Accessed on 29th December 2011, Available at: http://ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/tesco-annualreport.pdf

Tesco Plc, 2010, Interim Results, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/plc/ir/pres_results/results/r2011/

Tesco, 2010, Our History, Accessed on 29th December 2011, Available at: http://www.tescoplc.com/plc/about_us/tesco_story/

Appendices:

Tesco

Sainsbury's

RATIO ANALYSIS FOR THE YEAR OF

 

 

2008

2009

2010

2008

2009

2010

Note: All figures are in $'000

1

Current Ratio:

Current Assets

  6,300.00

  14,045.00

  11,765.00

  1,722.00

  1,591.00

  1,853.00

Current Liabilities

      10,263

       18,040

       16,015

       2,065

      2,929

       2,793

               1

                1

               1

              1

             1

              1

2

Quick Ratio

Current Assets - Inventories

        3,870

        11,376

       9,036

        1,041

         902

         1,151

Current Liabilities

      10,263

       18,040

       16,015

       2,065

      2,929

       2,793

              0

                1

               1

              1

             0

             0

3

Profit Margin

Net Income

        2,130

         2,166

       2,336

         329

         289

          585

Net Sales

      47,298

       54,327

      56,910

      17,837

      18,911

     19,964

5%

4%

4%

2%

2%

3%

4

Earning Per Share

Net Income

No. of Shares Outstanding

 26.95P

 27.50P

 29.33P

 19.1P

 16.6P

 32.1P

5

Debts to Total Assets

Total Debts

      18,262

       33,058

      31,342

       5,180

       5,657

       5,889

Total Assets

      30,164

       46,053

     46,023

       10,115

    10,333

      10,855

               1

                1

               1

              1

             1

              1

6

Fixed Asset Turnover

Revenue

      47,298

       54,327

      56,910

      17,837

      18,911

     19,964

Net Fixed Assets

     23,864

      32,008

      34,258

      8,393

      8,442

      9,002

              2

               2

              2

             2

             2

             2

7

Total Asset Turnover

Revenue

      47,298

       54,327

      56,910

      17,837

      18,911

     19,964

Total Assets

      30,164

       46,053

     46,023

       10,115

    10,333

      10,855

              2

                1

               1

             2

             2

             2

8

Return on Assets

Net Income + Interest expenses

        3,053

        3,432

        3,755

           611

         614

          881

Total Assets

      30,164

       46,053

     46,023

       10,115

    10,333

      10,855

10%

7%

8%

6%

6%

8%

9

Return on Equity

Net Income

        2,130

         2,166

       2,336

         329

         289

          585

Shareholder's Equity

          393

            395

          399

         499

          501

          532

               5

                5

              6

              1

             1

              1

10

Price to Book Ratio

Stock Price

              0

               0

              0

             4

             3

             3

Total Assets - Intangible Assets and Liabilities

        9,566

        8,968

      10,504

       4,770

       4,516

      4,822

              0

               0

              0

             0

             0

             0

Beta Analysis

Table 1

Table 2 - Returns

Month

Market Index

 Stock Price

Market Index

Stock Price

     61

   4,968.50

      305.25

     60

   4,894.40

      316.50

-1.49%

3.69%

     59

   4,801.70

      308.00

-1.89%

-2.69%

     58

   4,964.00

      313.00

3.38%

1.62%

     57

   5,113.20

      318.75

3.01%

1.84%

     56

   5,282.30

      325.50

3.31%

2.12%

     55

   5,296.90

      326.25

0.28%

0.23%

     54

   5,477.70

      309.50

3.41%

-5.13%

     53

   5,317.30

      300.75

-2.93%

-2.83%

     52

   5,423.20

      303.00

1.99%

0.75%

     51

   5,618.80

      331.50

3.61%

9.41%

     50

   5,760.30

      318.00

2.52%

-4.07%

     49

   5,791.50

      338.00

0.54%

6.29%

     48

   5,964.60

      330.00

2.99%

-2.37%

     47

   6,023.10

      319.50

0.98%

-3.18%

     46

   5,723.80

      320.50

-4.97%

0.31%

     45

   5,833.40

      334.00

1.91%

4.21%

     44

   5,928.30

      359.50

1.63%

7.63%

     43

   5,906.10

      377.25

-0.37%

4.94%

     42

   5,960.80

      360.00

0.93%

-4.57%

     41

   6,129.20

      393.50

2.83%

9.31%

     40

   6,048.80

      391.25

-1.31%

-0.57%

     39

   6,220.80

      404.50

2.84%

3.39%

     38

   6,203.10

      418.00

-0.28%

3.34%

     37

   6,171.50

      432.00

-0.51%

3.35%

     36

   6,308.00

      444.25

2.21%

2.84%

     35

   6,449.20

      462.50

2.24%

4.11%

     34

   6,621.40

      458.75

2.67%

-0.81%

     33

   6,607.90

      418.50

-0.20%

-8.77%

     32

   6,360.10

      407.75

-3.75%

-2.57%

     31

   6,303.30

      425.00

-0.89%

4.23%

     30

   6,466.80

      439.25

2.59%

3.35%

     29

   6,721.60

      488.00

3.94%

11.10%

     28

   6,432.50

      479.00

-4.30%

-1.84%

     27

   6,456.90

      477.25

0.38%

-0.37%

     26

   5,879.80

      417.00

-8.94%

-12.62%

     25

   5,884.30

      400.50

0.08%

-3.96%

     24

   5,702.10

      379.00

-3.10%

-5.37%

     23

   6,087.30

      429.00

6.76%

13.19%

     22

   6,053.50

      414.10

-0.56%

-3.47%

     21

   5,625.90

      369.30

-7.06%

-10.82%

     20

   5,411.90

      360.40

-3.80%

-2.41%

     19

   5,636.60

      381.50

4.15%

5.85%

     18

   4,902.50

      387.60

-13.02%

1.60%

     17

   4,377.30

      339.40

-10.71%

-12.44%

     16

   4,288.00

      295.30

-2.04%

-12.99%

     15

   4,434.20

      360.00

3.41%

21.91%

     14

   4,149.60

      358.20

-6.42%

-0.50%

     13

   3,830.10

      333.20

-7.70%

-6.98%

     12

   3,926.10

      333.40

2.51%

0.06%

     11

   4,243.70

      337.20

8.09%

1.14%

     10

   4,417.90

      364.90

4.10%

8.21%

       9

   4,249.20

      353.60

-3.82%

-3.10%

       8

   4,608.40

      367.35

8.45%

3.89%

       7

   4,908.90

      375.90

6.52%

2.33%

       6

   5,133.90

      399.60

4.58%

6.30%

       5

   5,044.50

      408.49

-1.74%

2.22%

       4

   5,190.70

      423.00

2.90%

3.55%

       3

   5,412.90

      428.00

4.28%

1.18%

       2

   5,188.50

      424.55

-4.15%

-0.81%

       1

   5,247.40

      419.70

1.14%

-1.14%