Accounting Research Paper on Company Overview: Financial Analysis of Tesco

Company Overview

Tesco PLC is the largest retail services company in the UK and the second largest in the world with operations in 14 countries around the globe. The company employs over 520,000 people.  The company operates over 3,200 stores worldwide, which delivered a cumulative profit of over 1 billion. Its core business is in large format stores dealing in food and other convenience products. Additionally, Tesco deals in telecom services such as mobile and broadband and also offers financial services. The financial services sector offers services in household and motor vehicle insurance, personal loans, and credit cards.

Tesco currently operates in the following international markets: Republic of Ireland, Poland, Hungary, Czech Republic, Slovakia, Turkey, South Korea, Thailand, China, Malaysia, Japan, India and the US.

Tesco PLC is a global store dealing in groceries and general merchandise. The company is headquartered in Chesnutt, United Kingdom and it is the world’s third largest retailer measured in revenue terms after Walmart and Carrefour. It comes only second to Walmart measured by profits.

Financial Analysis of Tesco

For purposes of analyzing the financial performance of Tesco PLC, we will review the company’s financial statements and observe some key trends over the last few years. The financial statements of a company show the company’s financial performance over a given period and they are therefore widely used by both internal and external parties to assess and evaluate the financial strength of the company. We will consider the three most important financial statements for Tesco namely the statement of comprehensive income (income statement), the statement of financial position (balance sheet), and the statement of cash flows. Further, we will look at Tesco’s key financial ratios and compare them with the performance of the industry to determine the company’s ratings in the industry and how well the company compares with its key competitors.

Income Statement

Table I below shows the Income Statement of Tesco PLC over the last four years.  The company had experienced a steady growth in its net income from £2.3 billion in 2010 to £2.6 billion in 2011, to £2.8 billion in 2012, only for this net income to fall sharply to only £124 million in 2013. 

Table 1: Tesco Income Statement

Currency in
Millions of British Pounds As of:
Feb 27
2010
£
Feb 26
2011
£
Feb 25
2012
£
Feb 23
2013
£
Revenues 56,910.0 60,455.0 63,916.0 64,826.0
TOTAL REVENUES 56,910.0 60,455.0 63,916.0 64,826.0
Cost of Goods Sold 52,198.0 55,330.0 58,519.0 60,242.0
GROSS PROFIT 4,712.0 5,125.0 5,397.0 4,584.0
Selling General & Admin Expenses, Total 1,575.0 1,658.0 1,594.0 1,510.0
OTHER OPERATING EXPENSES, TOTAL 1,575.0 1,658.0 1,594.0 1,510.0
OPERATING INCOME 3,137.0 3,467.0 3,803.0 3,074.0
NET INTEREST EXPENSE -417.0 -334.0 -297.0 -320.0
Income (Loss) on Equity Investments 33.0 57.0 91.0 54.0
Other Non-Operating Income (Expenses) 151.0 19.0 44.0 -14.0
EBT, EXCLUDING UNUSUAL ITEMS 2,904.0 3,209.0 3,641.0 2,794.0
Impairment of Goodwill -131.0 -495.0
Gain (Loss) on Sale of Assets 377.0 432.0 397.0 -339.0
Other Unusual Items, Total 26.0
EBT, INCLUDING UNUSUAL ITEMS 3,176.0 3,641.0 4,038.0 1,960.0
Income Tax Expense 840.0 864.0 874.0 574.0
Minority Interest in Earnings -9.0 -16.0 -8.0 4.0
Earnings from Continuing Operations 2,336.0 2,777.0 3,164.0 1,386.0
EARNINGS FROM DISCOUNTINUED OPERATIONS -106.0 -350.0 -1,266.0
NET INCOME 2,327.0 2,655.0 2,806.0 124.0
NET INCOME TO COMMON INCLUDING EXTRA ITEMS 2,327.0 2,655.0 2,806.0 124.0
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 2,327.0 2,761.0 3,156.0 1,390.0

Source: Tesco Annual Reports

Balance Sheet

The management of Tesco PLC employs a reasonable level of debt in the company’s capital structure which is well in line with industry norms. In addition, although the company lacks enough liquid assets to meet its current obligations, it has sufficient operating profits to service its debts as and when they fall due. The company’s receivables do not compare favorably with the industry, being far below the industry average. Tesco has 2.42 days worth of outstanding sales. This signifies the fact that the company is not efficient enough in the collection of its revenues. As far as inventory management is concerned, Tesco PLC has a good rating since the Inventory Processing Period compares favorably with the industry average at 22.18 days.

Table 2: Tesco PLC Balance Sheet

Currency in
Millions of British Pounds As of:
Feb 27
2010
£
Feb 26
2011
£
Feb 25
2012
£
Feb 23
2013
£
TOTAL CASH AND SHORT TERM INVESTMENTS 3,929.0 2,744.0 2,968.0 1,979.0
TOTAL RECEIVABLES 1,557.0 1,947.0 2,244.0 2,118.0
Inventory 2,729.0 3,162.0 3,598.0 3,744.0
Prepaid Expenses 337.0 387.0 420.0 417.0
Finance Division Loans and Leases, Current 2,412.0 2,514.0 2,502.0 3,094.0
Finance Division Other Current Assets 204.0 706.0 580.0 1,055.0
Other Current Assets 597.0 579.0 551.0 689.0
TOTAL CURRENT ASSETS 11,765.0 12,039.0 12,863.0 13,096.0
Gross Property Plant and Equipment 31,783.0 32,570.0 34,772.0 35,643.0
Accumulated Depreciation -7,580.0 -8,172.0 -9,062.0 -10,773.0
NET PROPERTY PLANT AND EQUIPMENT 24,203.0 24,398.0 25,710.0 24,870.0
Goodwill 3,337.0 3,316.0 3,449.0 2,954.0
Long-Term Investments 152.0 316.0 423.0 494.0
Finance Division Loans and Leases, Long Term 1,844.0 2,127.0 1,901.0 2,465.0
Finance Division Other Long-Term Assets 863.0 938.0 1,526.0 818.0
Deferred Tax Assets, Long Term 38.0 48.0 23.0 58.0
Deferred Charges, Long Term 559.0 628.0 677.0 739.0
Other Intangibles 281.0 394.0 492.0 669.0
Other Long-Term Assets 2,981.0 3,002.0 3,717.0 3,966.0
TOTAL ASSETS 46,023.0 47,206.0 50,781.0 50,129.0
LIABILITIES & EQUITY
TOTAL CURRENT LIABILITIES 16,015.0 17,731.0 19,249.0 18,985.0
TOTAL LIABILITIES 31,342.0 30,583.0 32,980.0 33,468.0
TOTAL COMMON EQUITY 14,596.0 16,535.0 17,775.0 16,643.0
TOTAL EQUITY 14,681.0 16,623.0 17,801.0 16,661.0
TOTAL LIABILITIES AND EQUITY 46,023.0 47,206.0 50,781.0 50,129.0

Source: Tesco Annual Reports

Cash Flows

A company’s cash flow statement provides information on the company’s cash receipts and cash payments over a given accounting period.  This financial statement also has a secondary objective which is to provide information on cash basis on the company’s operating, investing, and financing activities.

The cash flow statement gives information about Tesco PLC’s cash receipts and cash payments during an accounting period, showing how these cash flowscan be link the closing cash balance to the opening balance as shown on Tesco’s statement of financial position.

Table 3: Tesco PLC Statement of Cash Flows

Currency in
Millions of British Pounds As of:
Feb 27
2010
£
Feb 26
2011
£
Feb 25
2012
£
Feb 23
2013
£
NET INCOME 2,327.0 2,655.0 2,806.0 124.0
Depreciation & Amortization 1,107.0 1,217.0 1,255.0 1,304.0
Amortization of Goodwill and Intangible Assets 174.0 191.0 191.0 111.0
DEPRECIATION & AMORTIZATION, TOTAL 1,281.0 1,408.0 1,446.0 1,415.0
Amortization of Deferred Charges 103.0 121.0
(Gain) Loss from Sale of Asset -372.0 -429.0 -392.0 245.0
(Gain) Loss on Sale of Investment -5.0
Asset Write-down& Restructuring Costs 105.0 -13.0 75.0 1,124.0
Other Operating Activities -63.0 -43.0 388.0 1,068.0
(Income) Loss on Equity Investments -33.0 -57.0 -91.0 -54.0
Net Cash from Discontinued Operations -34.0 -251.0 -884.0
Change in Accounts Receivable 124.0 -238.0 -417.0 255.0
Change in Inventories 34.0 -467.0 -461.0 -94.0
Change in Accounts Payable 453.0 1,756.0 1,035.0 684.0
Change in Other Working Capital 545.0 -519.0 150.0 -1,220.0
CASH FROM OPERATIONS 4,745.0 4,239.0 4,408.0 2,837.0
Capital Expenditure -2,855.0 -3,178.0 -3,374.0 -2,619.0
Sale of Property, Plant, and Equipment 1,820.0 1,906.0 1,141.0 1,351.0
Cash Acquisitions -65.0 -89.0 -65.0 -72.0
Sale (Purchase) of Intangible Assets -159.0 -370.0 -334.0 -368.0
Investments in Marketable & Equity Securities -689.0 -138.0 -816.0 1,337.0
CASH FROM INVESTING -1,877.0 -1,873.0 -3,183.0 -278.0
Long-Term Debt Issued 862.0 2,217.0 2,905.0 1,820.0
TOTAL DEBT ISSUED 862.0 2,217.0 2,905.0 1,820.0
Long Term Debt Repaid -3,642.0 -4,195.0 -2,765.0 -3,054.0
TOTAL DEBT REPAID -3,642.0 -4,195.0 -2,765.0 -3,054.0
Issuance of Common Stock 167.0 98.0 69.0 57.0
Repurchase of Common Stock -24.0 -31.0 -303.0
Common Dividends Paid -968.0 -1,081.0 -1,180.0 -1,184.0
TOTAL DIVIDEND PAID -968.0 -1,081.0 -1,180.0 -1,184.0
Other Financing Activities -2.0 -2.0 -92.0 -4.0
CASH FROM FINANCING -3,607.0 -2,994.0 -1,366.0 -2,365.0
Foreign Exchange Rate Adjustments 49.0 -46.0 24.0 26.0
Miscellaneous Cash Flow Adjustments -6.0 -19.0
NET CHANGE IN CASH -690.0 -674.0 -123.0 201.0

Source: Tesco Annual Reports

From the above table, the company’s cash flow from operations fell from £4.4 billion in 2011 to £4.2 billion in 2012 but then improved again to £4.8 billion in 2013.  This is an indication of improvement in the company’s operations.

Ratios

Table: Tesco PLC Key Financial Ratios

Period Ending: 12/31/2012 12/31/2011 12/31/2010 12/31/2009
Liquidity Ratios
Current Ratio 306% 234% 309% 357%
Quick Ratio 189% 145% 228% 232%
Cash Ratio 21% 18% 83% 67%
Profitability Ratios
Gross Margin 22% 20% 19% 10%
Operating Margin 14% 8% 4% 4%
Pre-Tax Margin 13% 8% 4% 5%
Profit Margin 9% 5% 2% 1%
Pre-Tax ROE 16% 10% 4% 5%
After Tax ROE 11% 7% 2% 1%

Source : http://www.nasdaq.com/symbol/teso/financials?query=ratios#ixzz2t6kqijcs

Profitability ratios are used to measure a business’s ability to generate profit as compare to its expenses and other relevant cost during a specific period of time. It is a projection of how productively a firm can cope with its assets and debts. Tesco’s profitability ratios have improved over the last three years which shows that the company’s profit generating ability is improving (Troy 59).

Liquidity ratios indicate entity’s ability to meet short term liabilities from current assets available. There will be a going concern implications if company unable to meet its liabilities. Tesco’s liquidity ratios show that the company will be able to meet its liabilities as and when they are due.

     
Conclusion The above financial analysis of Tesco PLC has revealed that despite the economic slowdown in the United Kingdom and other Western economies where the company runs operations, the company continues to flourish and to grow its market share. The ratio analysis on the company has revealed that that the company’s has had an improvement on its returns on investment which can be attributed to effectiveness and efficiency in working capital management. The company’s profit margin also continues to improve which is an indication of improving profitability hence increased returns to shareholders.    

Works Cited

Brigham, Eugene F, and Joel F. Houston. Fundamentals of Financial Management. Mason, OH: South-Western Cengage Learning, 2009. Print.

Bull, Richard. Financial Ratios: How to Use Financial Ratios to Maximise Value and Success for Your Business. Amsterdam: Elsevier/CIMA Pub, 2008. Internet resource.

Troy, Leo. Almanac of Business and Industrial Financial Ratios. Chicago, IL: CCH, 2008. Print.

NASQAQ. TESO Company Financials. http://www.nasdaq.com/symbol/teso/financials?query=ratios#ixzz2t6kqijcs

Tesco Financial Statements .