Tesco Financial Analysis
The following report contains a financial analysis of Tesco PLC and its current trading position for the financial year ending February 2010.
The data that has been analysed will be compared with the previous year’s finances. It will include information such as performance, the businesses liquidity, and Tesco’s efficiency. It will also show the extent to which Tesco may or may not appeal to potential investors after the past financial year.In the current economic situation facing the country it’s natural to expect that there has been a downturn in performance due to most people feeling the effect of the recession for most of the year, therefore having less disposable income. The data that has been collected and used will be shown in an appendix at the end. Efficiency The company’s debtor days in 2010 has fallen from 12.
3 days to 12. 1. This shows that the company has made a small reduction to the time it takes to receive payments of customers using credit.To ensure this figure keeps reducing a steady cash flow must be maintained, with money that is owed to them coming into the businesses quickly. The creditor days for Tesco went from 65. 9 days in 2009 to 63.
6 days in 2010. From a business point of view this can be viewed as a negative. This is because a higher number means the business has more time to pay its debts to suppliers. With Tesco being such a large organisation this won’t be too much of a problem and it can be put down to the effect of the current economic climate.With companies struggling to afford to pay their debts they will need to claim debtors earlier to help them cope. This problem will be seen throughout the economy.
Inventory cover shows the amount of time inventories are being held in storage not doing anything. The inventory turnover for the company was 19. 2 times in 2010, this was an increase on the figure the previous year which was 18. 7 times. This increase can be seen as a negative even though the change isn’t that large. Again this change can be put down to the current economic situation.
Once the recession ends and people have more disposable income the number will most likely reduce. However this figure is not a true representation of Tesco as a lot of their products are inelastic meaning there is always going to be a demand for their products. Tesco are predominantly a food supplier therefore will have a lower inventories turnover due to food going out of date. But Tesco have now started selling products in different areas such as cameras, cloths and televisions which will balance out their inventory turnover.Performance Tesco’s performance for 2010 can be seen as impressive in the current economic climate with a lot of the figures only fluctuating slightly.
Tesco’s gross profit margin rose from 7. 8% in 2009 to 8. 1% in 2010. This means that their profit before tax has increased showing Tesco must have taken measures to ensure their sales continue to rise even with being in a recession. This could be by increasing prices or buying inventory at a cheaper price.Return on capital employed or ROCE is seen as one of the best ratios for judging a company’s performance; it is a measure of how well the money invested in the business is providing a return for its investors.
In 2009 Tesco’s return on capital employed was 12. 8% and in 2010 this figure had been reduced to 12. 1%. This shows the company’s profits have fallen in the past year but this is to be expected at this current time and with Tesco expanding into new countries the reduction is fairly small.The operating profit is a ratio used to show the profit from trading operations before taxation. Tesco’s operating profit increased to 6.
1% in 2010 a slight increase on the previous year which was 5. 9%. The increase shows Tesco have taken advantage of the economies of scale by keeping their prices as low as possible but still provide the best quality products and prices to its customers. Liquidity The quick ratio shows a fall in 2010 from 0. 6:1 to 0. 5:1.
This means that Tesco had fewer assets that could be into cash quickly.This shows a slight negative compared with the previous year, as being to obtain cash quicker means the business is more liquid and therefore has a better cash flow. The current ratio is a financial ratio that measures whether a firm has enough resources to pay its debts over the next 12 months. It compares a firm’s current assets to its current liabilities. The businesses current ratio showed the same figure of 0.
7:1 in 2009 as well as 2010. This won’t be a concern to Tesco with them selling food products they will not hold onto stock for very long due to the fact it will go off.So this low figure just represents the sort of market Tesco operates in. Gearing Gearing represents the percentage of a business that has been financed from borrowing money rather than from investors or shareholders. In 2009 Tesco’s gearing was 74% but this was reduced significantly in 2010 to 54%.
Being highly geared is often seen as being a problem so the figure seen in 2009 can be viewed as a negative. However in 2009 Tesco underwent a huge expansion process into different countries which is a large venture and would therefore require a lot of financial backing for it to actually work.This point shows why the figure in 2009 was so high as borrowing money would be a good way of providing the financial backing needed to get up and running in the various different places. In 2010 the figure falls to 54% a significant decrease which shows during that year Tesco must have been very profitable to be able to reduce this. With the business being highly gearing in 2009 this will not prove to be a problem as Tesco has very good cash flow to counteract this.
Investors When investing in a business you want your investment to be a safe one that will bring you a good return on your money.To show this the earnings per share ratio is used so investors can see the potential profit that can be earned on their investment. Over the past three years the earnings per share have risen steadily, in 2008 the figure was 27. 02p, this rose to 28. 87p in 2009 and finally in 2010 the figure was 31. 66p.
With these figures constantly rising it shows that investing in Tesco PLC is a very secure, solid investment. If the figures continue to rise shareholders will be earning more profit further proving to potential investors the rewards that can be earned from investing in the company.Conclusion After my analysis of Tesco using various ratios it is clear that the business has performed well. This is very impressive due to the current economic situation it finds itself operating in. The economic state has only noticeably affected Tesco’s gearing and operating profit margin but this can also be put down to its expansion into new countries.
Once the expansions are complete these figure should return back to a more appropriate figure. However a lot of the other figures that were found show a positive for Tesco.The earnings per share figures are a good representation of this with it increasing steadily for the past 3 years making Tesco a very good investment option. Other positives can be seen from the gross profit which rose from 74% in 2009 to 81% the following year showing an increase in sales as well as profit for the year. Overall for Tesco’s financial figures to still show a lot of positives during a recession are extremely impressive. They have managed to still produce a profit and grown as a business making them a very appealing investment option and meaning they have been able to satisfy their current shareholders.