The purpose of this report is for potential investors who are considering buying shares in Tesco plc. The report creates an overall picture of Tesco’s financial position and provides an assessment of Tesco’s performance over the last three years. The information used to assess the financial position of Tesco was gathered from the Annual report of the last three years. This information was downloaded from the official Tesco website. From that, the ratios were calculated from the financial statements within the report.
The aim of this report is to provide an assessment of the company’s performance over the three year period to a group of potential investors in the company. So this report will use nine financial ratios which are useful for the investors to help them to identify and highlight area of good and bad performance of the company and area with significant change. Therefore this report will consist: brief overview of the history of Tesco and Then it will analyse the profitability, liquidity, investment analysis of Tesco plc. The report will also advice potential investors on whether shares in this company would be a good investment.
It is best known that Tesco Company is the leading retailer in the UK and one of the largest food retailers in the world. The retail industry is a highly competitive market. Tesco competes with a wide range of retailers with a wide range sizes and there face increased competition from UK retailers as well as international operators. Tesco also sell non food goods such as electrical goods and clothing. In general Tesco is a successful profitable company which attract investors to invest in the company.
It is well known fact that the financial ratios become important for investors to help them whether they should buy shares in the business, sell them, or hold on shares which already own them. Therefore ratios analysis helps investors to identify and highlight area of good and bad performance of the company and area with significant change. In addition, financial ratios explain the relation between different figures in the financial statements consequently we could calculate hundred of ratios fro a set of financial statements, because of this we need to know which ratio provide a good and useful information for the investors , the ratios which are applied incorrectly they may be completely useless and misleading. However if they are used correctly they are useful for understanding the performance of the company and interpreting the company account. Ratios describe the relationship between different items in the financial; however the relative usefulness of each ratio depends on what aspects of a company’s business affairs are being investigated. In this case of Tesco plc, there are four elements of ratios that are been analysed. These are Profitability, Liquidity and Investment analysis. Return on Capital Employed (ROCE): The ROCE is an important measure of the profitability of a company. This is because it is a popular indicator of management efficiency by contrasting the net profit generated by the company with the total capital employed (traditionally, total capital employed in this case has been taken to be the long term funding). It does not only incorporate the funds the shareholders have invested, but also funds invested by banks and other lenders, and therefore shows the productivity of the assets of the group.
These calculations show that the return on capital employed has been on steadily increasing for the past three years. For 2006, the ROCE is 17.29% which is 1.94 % above the average for the three years. This indicates that Tesco is using its invested resources more efficiently and that by comparing with other leading retailers, they ROCE are higher. This shows that this figure is more likely to be acceptable to potential investor.
Potential investors who want to buy shares in a company want to be able to have the information they require to compare the benefit from their investment. There are two measures of benefit to the investor: One is the profit of the period (usually referring to the profit available for the ordinary shareholders). The other is the dividend, which is the amount actually paid to the shareholders. Earning Per Share (EPS) EPS is a widely used measure of business performance and progress, and importantly the percentage change from year to year should be monitored for the trend. It explains to an investor the kind of return they could receive for each share during the accounting period. Therefore, it is important ratio as earning per share works out the average amount of profits earned per ordinary share issued. ‘In accordance with FRS 14 Earnings per share, EPS must be disclosed on the face of the income statement’. This means that when producing financial statements companies must disclose the EPS figures for investors to see. EPS = Earnings (profit)
The dividend cover ratio is another important ratio for potential investors as it measures the proportion of available profits which are issued to shareholders and the amount which is reserved by the company. In another words, the dividend cover ratio tells the investor how easily a business can pay its dividend from its profit. Dividend Cover = Profit after tax Ordinary dividend
The measure of dividend cover ratio of Tesco plc for the last three years has shown a steady increase. It increased slightly from 2004 to 2005 and again in 2006. A high dividend cover means that a company can easily afford to pay dividend. For the last year (2006), the dividend covers shows that for every £2.57 made in the profit, £1 was issued to the shareholders
Sales have risen by 14.94 %to £39,454m Pre-tax profits are up by 24%, with earning per share increasing by 25% in 2006 from 2004. This result shows the excellent performance from all aspects of Tesco strategy. This is an extract from the Directors report for 2006: ‘The directors recommend the payment of a final dividend of 6.10p per ordinary share, to be paid on 14 July 2006 to members A¢â‚¬A¦. Together with the interim dividend of 2.53p per ordinary share paid in December 2005, the total dividend for the year will be 8.63p compared with 7.56p for the previous year, an increase of 14.2%’ This shows that Tesco plc strong performance is been implemented in dividend as can be seen in the increase of payment. Tesco faces strong competition from other leading supermarket, however with the management strategy implemented by Tesco and their huge experience which has given them good image (every little help!) and trust in the market as a leading retailer. Therefore, it will be worthwhile investment for those who are interested in earning money through share price fluctuations to invest in Tesco.
This report has used nine ratios to analyse and interpret the financial position of Tesco plc. There are many other ratios that could be used and will also assist in the interpretations of the financial accounts. Although there are limitations to ratio analysis such as; ratios are based upon past performance and hence there are historical data. However ratio analysis is one of the best ways to analyse the financial performance of a company. This is because, it allows managers to spot any problems and therefore concentrate resources on that area. If ratio analysis is interpreted the right way then it can be useful tool of results which can be understood by accountants and non-financial users such potential investors.
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