Unit 15 Financial Management Assignment - Tesco

Unit 15 Financial Management Assignment - Tesco

Part 1

Introduction of companies selected

The financial management to the team manager as an intern of Stokes Mann Investments in order to report on potential investment opportunities the two companies have been selected from the consumer retail sector. They are Marks & Spencer and Tesco. Both are consumer retail stores established in the nature of supermarkets. The companies belonging to consumer retail sector have been chosen since it is the growing industry in the world markets and has profit potential not only through physically located retail stores but also online trading and e-commerce. Also both teh companies are in same industry and are competitors of each other therefore the analysis and comparison of performance of both the companies will be helpful in identifying the bestr investment opportunity along with the individual investment potential of each of the two companies. The brief introduction about these companies and rationale for their selection in terms of analysing investment potential is as follows:

The company is the largest retailer in the world with staff of more than 476,000 people and branches located in 11 countries all over the world. The company operates through retail stores as well as online platforms. The operations in UK are largest among the group. The first supermarket was established by the company in the year 1950. The mission and vision of company aims at achieving customer loyalty by providing them with high quality products and better and easier way of living. The tour operations of business of the company focuses on the sharper prices, improved quality, stronger ranges and better services. This company has been selected for analysing the investment potential since it is the largest supermarket chain and has expanded its area of operation in 11 different countries located at different parts of the world. Thus there are ample of opportunities with this company and wider scope of investment. Inspite of some downfalls and declining profits in the past few years which was a crucial time for teh company, it has revived with increasing profits and achieved sound financial position.

Marks & Spencer

The company was founded in the year 1884 and has grown from the single market stall to an international multi-channel retailer. The company sells high quality merchandise and has 32 million customers which are served through 914 stores in UK and 1,382 stores all over teh world and branches in many other countries including Australia, India etc along with the e-commerce platform. This company has been selected for the analysis of investment potential since it is the oldest retail company having retail stores throughout the world established with various business strategy such as owned, franchised and joint venture. The major areas of business include food, clothing, and general merchandise where the food turnover accounts for more than 58% of the total turnover. The company has highly experienced and quality people who perform the operations with expertise and for the purpose of achieving profitability through customer satisfaction and growth. Thus there are indicators of growth and profitability potential with the company which is the core area of consideration in terms of investment potential.

Calculation of Ratios:

Efficiency

Asset Turnover Ratio = Net Sales/ Average Total Assets     

Inventory Turnover Ratio = Cost of goods sold/ Average Inventory

Profitability:

Profit margin ratio = Net Income/ Net Sales

Return on Equity Ratio = Net Income / Shareholders Equity

Liquidity:

Quick Ratio = Total Current assets – Inventory – Prepaid expenses/ Total Current Liabilities

Current Ratio = Current Assets/ Current Liabilities

Solvency:

Debt to Equity Ratio = Total liabilities/ Total Equity

Investment:

P/E Ratio = Price per share/ Earnings per share

Dividend yield = Dividend per share/ Price per share

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Part 2(b) – Business Report

Introduction of Report

This financial management aims at conducting detailed financial resources as well as performance analysis of the companies with a large market share effectively placed in the industry. The main objective is to make interpretation of financial statements accurately and using the findings from the interpretations to conduct an analysis about the performance of the companies individually as well as in comparison with each other. The two companies belong to consumer retail sector and both have expanded operations worldwide through physically located retail stores and online platforms. Although both the companies are competitors of each other but Tesco has higher turnover and market share as compared to Marks & Spencer on consolidated basis. 

Approach and methodology for analysis and interpretation

The extraction of information for the analysis of financial performance of the company has been done from the annual report of the two companies for last three years from 2013 to 2015. The interpretation of the financial information extracted from the financial statements and the annual reports of the company will be based upon the financial reporting framework, International Financial Reporting Standards, Generally Accepted marketing principles and other accounting and reporting framework and regulations that are applicable on the two companies as well as consumer retail industries of UK. This is the secondary data which will be used as part of research and research of analysis and comparison of financial performance individually as well as with the competitors. The methodology and approach will follow sequential tasks starting from research of secondary information from online publications, annual reports and other articles and publications related to the selected companies and industry within which they are placed. The next step will be to interpret the data by applying logics and techniques and analysis of data by drawing tables, graphs and charts. The next step will be to draw conclusions from the analysis and calculations and make recommendations to the team manager.

In order to evaluate the performance of the two companies selected the ratio analysis method and analytical comparison theory will be used since itr is best method to analyse the performance of the company for many periods and determine the trends in performance by comparing the past performance with the present.

Company performance

The following table represent the key financial ratios calculated for the two companies for last three years:

Asset Turnover –This ratio is used to measure the efficiency of a business to genearet sales from using its assets. A higher asset turnover ratio is more favourable since it indicates taht the business uses its assets efficiently and vice versa. It quantifies the measurement of amount ofg sales in relation to amount invested in assets. This gives the creditors and debtors of company an idea about teh capability of assets to increase revenues. The asset turnover ratios of Tesco has increased during the three years whereas the asset turnover ratio of Marks & Spencer has declined for all the periods which means that its efficiency to use assets to generate revenue is deteriorating as a result of deficiencies in internal operations.

Inventory Turnover- This ratio is used to measure the level that how effectively a company manages its inventory. This ratio shows the flow of inventory that how successfully a company sells its inventory and this ratio shows how easily a company can turn its inventory into cash so it is important for a company to have a high turnover. The inventory turnover ratio of Tesco has increased during the three years this shows that the company is not retaining the inventory with it and selling it effectively whereas the inventory turnover ratio of Marks & Spencer has not maintained a particular trend which shows that the company is not that much efficient in selling its inventories.

Profit margin ratio- This ratio is used to measure the amount of profit which is produced at a certain level of sales. Companies are strive to achieve higher ratios which can be achieved by generating higher revenues and constant expenses or constant revenues and lowering the expenses. The profit margin ratio is usually calculated for measuring the past performance of the company. The profit margin ratio of Tesco has not maintained a particular trend during past three years and even in 2016 it is negative this means company has spent more than it has earn whereas the profit margin ratio of Marks & Spencer has increased in the year 2013-2014 and has decreased in 2015.

Return on Equity ratio- This ratio is used to calculate the amount of profit which the company has earned from the money of its investors. It a profitability ratio from investor’s point of view to see the return of their money invested in the company. The return on equity ratio of Tesco has increased in 2014 and 2015 and is negative in 2015 which shows that company has not earned good return on investor’s money whereas return on equity ratio of Marks & Spencer has maintained a good return in 2013 and 2014 and has decreased in 2015.

Debt to equity ratio-This ratio signifies the stake of debt and equity in the assets of the business. A debt-equity ratio of 1 implies that there is equal contribution of both debt and equity in the assets of the company. When this ratio is lower than 1, it became more financially preferable. Companies with higher debt-equity ratio are considered risky to the investors and creditors. The debt-equity ratio TESCO has increased from last three years whereas marks and spencer ratio has has shown a unstable trend. Currently its debt-equity ratio has increased which shows that  company creditors and investors are vulnerable to risk.   .