Evaluation Of Financial Performance Of Tesco PLC Essay

Question:

Discuss about the Evaluation Of Financial Performance Of Tesco PLC.

Answer:

Introduction:

This report deals with the evaluation of financial performance of Tesco plc. which was founded in year 1919. It is a British Multinational Corporation dealing in the retail business of groceries and other general merchandises. The company is headquartered at Hertfordshire, England. It is one of the largest retailers in the world with large workforce. Along with its subsidiaries, Tesco also serves banking and insurance facilities. The company is operating in several countries like United Kingdom, Poland, Ireland, Hungary, Malaysia etc. Tesco has 6809 physical stores and also it serves its customers.

The financial performance of business of Tesco will be analysed using the key technique of financial management viz. Ratio Analysis. Along with the assessment of Tesco’s financial results, the financial performance of Benedict Co., which is one of those companies that have tendered the contract of supplying some important components, will also be evaluated using the certain key financial rations. Further, as a part of this report, the soundness of corporate governance structure of the Tesco also will be examined. For the purpose of commenting on the Tesco’s performance in terms of its corporate social responsibilities, the annual report for the year ending 2016 will be studied thoroughly.

Who are stakeholders of the company?

The word ‘stakeholders’ itself suggests its meaning. The parties that holds the stake i.e. interest in the company are called its shareholders. The term ‘stakeholder’ covers a range of individuals or groups of individuals who are influenced by the company’s good or bad performance as they are directly or indirectly associated with the company in different manners. Different stakeholders have different interests in the company. The financial as well social performance of the business affects the decision making process of its shareholders in relation to the areas where they are linked with the company. A company can have stakeholders from both its internal as well as external environment. The stakeholders who functions within the entity are its internal stakeholders and these stakeholders are directly involved in the business operations of the company. The employees, board of directors, managers of the company are therefore recognised as its internal stakeholders. However, external stakeholders of the companies are those parties which are not directly involved in the basic business operation, yet they rely on the company’s performance to make informed decisions related to the concerned company. There can be different stakeholders of the company from its outer world such as its sta

keholders, trader creditors, customers, local community, suppliers and various governmental bodies. When an individual or group of individual is recognised as the key stakeholders of the company, then it simply signifies that those persons are among the top stakeholders of the business of that particular company.

Key stakeholders of Tesco Plc.

The shareholders that have been identified from the Tesco’s annual report are its shareholders, customers and employees.

Shareholders:

Shareholders are the external parties who own Tesco, as they are given the voting rights in deciding about the important matters in relation to the company. The right to vote in various matters is given to the shareholders in consideration of their share of investment in company’s seed capital. The company has raised funds to funds its assets and operations of business, through the issue of share capital. At the year-end 2016, Tesco had issued 8,141,083,114 shares till date, to the potential shareholders to generate funds for the various business related activities (Tesco, 2016). These shareholders are entitled to receive certain amount of dividend from the company. Dividend can only be paid in the situation when company is generating sufficient profits from its business. Therefore, the financial results of Tesco are quite relevant to its existing and other potential investors to decide about their investments in the company. If the financial statements of Tesco are not depicting its sound profitability position, then it may cause dissatisfaction in the eyes of the investors of the company and they may start withdrawing their invested monies from company’s capital to invest them in its competitors or other corporation in the expectations of higher returns in the form of dividend. The major shareholders of Tesco in the recent times are Blackrock Inc. (6.64% shareholding) Norges Bank (4.49% shareholding) and Schroders plc. (4.49% shareholding) (Tesco, 2018).

Banks and financial institutions:

At the year-end 2016, the company had borrowings from various banks and financial institutions for the amount of $ 845 million, which is a significant amount (Reuters, 2016). The sound financial position of the company is quite important for these providers of finance. As these financial bodies has already lent considerable quantum of funds to Tesco, it is necessary for them to keep a continuous track of company’s solvency position. Its solvency position can only be depicted from the annual report. Therefore, these lenders of funds to the Tesco are its key stakeholders. Also, the potential lenders who are willing to fulfil the further funding requirements of the company are also concerned about knowing its true financial position so that they can assess its credit worthiness in the market before lending huge sums of money. Credit worthiness of an entity can be clearly assessed using the annual reports of last few years. Since, these providers of finance are not involved in the day to day operations of the company it is necessary for them to be acknowledged about the company’s financial health. Annual report serves the best medium to determine the true picture of company’s financial position.

Employees:

These are the parties that belong to the company internally. They are actually involved in the daily and immediate operations of the Tesco. Hence, their concern about company’s sound financial health matters to a great extent. If the company does not perform well in various terms, its employees will be afraid of their association with the company as in the cases of loss or insolvency, Tesco might not be able to serve them in accordance with their expectations in return to their work commitments towards company. From the annual report it is clear that Tesco is continuously making efforts to make its employees not just the top management, its shareholders so that they can receive the dividend income from the company. At the year-end 2016, Tesco had around 482152 employees on average basis which working with the company (Tesco, 2016). If the company does not pay them the sufficient remunerations and is expected to make losses in the future, the employees will tend to leave the company and also the weak financial position of the company will not be able to attract potential candidates towards the company (Gottschalk, 2011).

The environmental and social review report:

The environmental and social review report of Tesco Plc. provides that the company deals with all the social and environmental challenges that it meets while operating its business in the community, in the most effective manner. It ensures that the community to which it belongs does not get adversely affected from its existence. Tesco functions on certain values and principles. They are ‘Every little help makes a big difference’ and ‘No one tries harder for customers’ and ‘We treat people how they want to be treated’. These principles signifies that the company’s activeness towards its employees and business communities. This report determines the status of company’s performance in regards to its corporate social responsibility. As per this report, Tesco has become the signatories of United Nations Global Compact (UNGC) in year 2016. This is an initiative of the company to encourage its businesses across the world to adopt such sustainable and social responsibilities that enhances the well-being of the business society as a whole (Tesco, 2016). The said initiative revolves around on the commitment to the major principles in context of human rights, environmental protection, labour rights and anti-corruptive business practices. Becoming the signatory of UNGC signifies the company’s commitment towards its social responsibility.

Further, the governance report of the company clearly shows the soundness and robustness of its framework of governance towards its social responsibility. The company is fulfilling is Corporate Social Responsibility efficiently and effectively through the two ways: internally through its committees of board and externally through the critical advices and feedbacks from the business communities and its regulators (Haynes & Murray, 2013). To serve the business society in the best possible way, Tesco has formulated its CSR committee which is chaired by John Allan. The reports also set out company’s practices towards the protection of the human rights of its employees, customers, suppliers and the colleagues working with it. The company is totally committed to the safeguarding of basic human rights and for this purpose it is absolute support of UN’s Universal Declaration of Human Rights, International Labour Organization Core Conventions and the Guiding Principles on Business and Human Rights (IBS Center for management research, 2018). Moreover, Tesco is the founding member of Ethical-Trading Initiative. These initiatives of the company enable it to follow the best ethical practices towards all its stakeholders. Furthermore, Tesco has adopted a company-wide business’s code of conduct under which it provides adequate training to its associates to follow the core values of business. The company aims to provide a healthy life to its employees and customers and therefore it has already created partnerships with the key health experts such as Diabetes UK and British Heart Foundation (Dudovskiy, 2016). The company is also running a project named as Tesco Eat Happy Project to prevent and cure the health challenges faced by it. Additionally, the company is also paying required attention to its emission of greenhouse gases in the environments harming it typically. From the annual report it can be clearly observed that company is striving to lower down its carbon emission since last few years and already reduced it by 41.7% since 2006-2007 (Tesco, 2016).

The corporate governance report of Tesco is aimed at providing its shareholders the clear insights of company’s corporate governance structure and its appropriateness in accordance with the Corporate Governance Code of United Kingdoms. The report depicts that Tesco has complied with the code in full terms throughout the year. The said report also suggests that the company has taken necessary and sufficient steps to promote a culture of positive work environment and to deal with unfavourable practices of its business (Fernando 2012). It has re-launched its code of conduct in 2015, to incorporate the required changes for the promotion of responsible and ethical business practices across all the business levels. The governance framework of Tesco ensures that effective decisions are taken at the right time by the right people at the right level. Tesco’s corporate governance framework also intends to instil more transparency and trust in company’s business operations and the results thereupon for its shareholders and other stakeholders. It also promotes the relevance of concept of diversity of workforce at an organisation for its overall growth (Bajpai, 2016).

Purpose and relevance of chosen ratios for evaluation of company’s financial performance

To evaluate the effectiveness of deal with Benedict Co. for the supply of certain components for the business of Tesco, certain ratios have been chosen and they have been analysed in context of average results of other firms operating in the same industry. Following rations are chosen:

  • Current Ratio: It is used to determine the liquidity position of the company. The ability of firm to utilise its current assets in managing its short term obligations tells about its liquidity position. This ratio can be used by the suppliers of Benedict Co. This ratio is also relevant to the lenders of the company to decide the short term credit worthiness of the company (Finch, 2010).
  • Quick Ratio: Quick assets includes all the current assets of the company except its inventory as inventory is that type of current asset that is generally not quickly convertible into cash as and when required through the immediate sales. This ratio also helps the suppliers of the firm to decide whether it is suitable to allow credit sales to the company.
  • Trade Receivables Days: This ratio depicts the number of days a business takes to convert its trade receivables into cash. This ratio is important for the customers of the company as it gives them the idea of how long credit period can the company allow them for the sales made by it to them (Jenter & Lewellen, 2015).
  • Inventory Days: This ratio tells how long business of the company takes to convert its inventory into sales. This ratio helps the suppliers of the company to determine the number of days for which the credit shall ideally be given.
  • Trade Payables Days: It also helps the suppliers of the company to set the credit period for the purchases made by the company from it. It tells about the number of days a business takes to convert its trade payables into cash payments for its suppliers (Higgins, 2012).

Analysis of reasons for the movement in the chosen ratios in the two years

The current ratio of Benedict Co. for the year 2001 is 1.19: 1 and that of 2000 is 1.25: 1. It is observed from the calculation that though there is a considerable in current assets of the company in 2001 but along with it, the current liabilities are also increased and this increase in short term obligations is proportionately higher than the increase in current assets. This has ultimately caused decline in the current ratio of company in 2001 since the year 2000.

The quick ratio of the company in 2001 is also declined in comparison to 2000 because of the fact that though the trade receivables have increased in 2001 but the current liabilities have increased in higher proportion as compared to increase in current assets and this has caused slight decline in the quick ratio of 2001 in relation to 2000.

The trade receivables days of the company has increased by 19 days in 2001 as compared to 2000 because of significant increase in the trade receivables in 2001 and with the increase in trade debtors of the company it might have become difficult for the company to manage them by converting the receivables quickly into cash.

Due to increase in the quantum of inventory in 2001, it had become difficult to effectively manage the large number of inventory units effectively. Therefore, the inventory days in 2001 has increased by 28 days in comparison to that of year 2000.

Further, there is an increase in the trade receivables days of the company, for about 25 days. This increase in the trade payables days is due to increased quantum of credit purchases made by the company in 2001 as compared to 2000. The increase in the trade payables has made it hard for the company to manage effectively and efficiently its current liabilities in the form of trade payables.

Areas deserving higher concern:

The current ratio and quick ratio of Benedict Co. is lower than that of average ratio of other firms of the same sector and this shows that the company has not achieved the sound liquidity position in the market. Moreover, it is generally observed that the ideal current ratio of any industry is 2:1. But, in the present case of Benedict Co. the current ratio is not as per the ideal standards hence it can be said that the firm is not liquid enough to face the competition in the market. Further the number of trade receivables and inventory days of Benedict Co. are quite higher than those of its industry. It indicates that the company is unable to manage efficiently its current assets such as inventory and trade receivables. Further, the trade payables days of Benedict Co. are quite higher than the average days used by the similar companies of the same sector and hence it can be said that company is not able to manage its trade payables effectively.

The management of trade payables for Benedict Co. is the major issue that draws the concerns of the users of report as there is a difference of around 34 days in the industry standards and Benedict’s actual performance in the areas of management of its short term debt obligations i.e. the trade payables (Bragg, 2012).

Critical evaluation of financial ratios:

Financial ratios are the results of the performance of business of the company which are expressed in the financial terms to enable the users of report to understand the financial performance of the business in context of its profitability, liquidity, solvency and efficiency position in the market (Saleem & Rehman, 2011). These ratios helps in measuring and interpreting the financial results of the company taking into account the significant components of entity’s business such as its total assets, liabilities, equity (Bragg, 2012). However, there are certain situations where the financial ratio analysis does not serve the basic purpose of undertaking it. Not all the financial ratios of an entity gives the realistic results from which the financial performance of the company can be depicted. Moreover, there are certain ratios that are complex enough to be interpreted by the normal users of this technique of financial management (Kimmel, Weygandt & Kieso, 2010). Also, some financial ratios are calculated taking into account the historic value of the assets and other components and fails to provide the accurate financial results. Rather, such ratios end up offering absurd results that creates confusion (Pandey, 2015).

Conclusion:

From the above report, it can now be stated that Tesco. Plc. is effectively fulfilling its corporate social responsibility in the areas of protection of interests of its employees as well as its society in which it is operating. The social and environmental report of the company has clearly suggested that company is continuously making adequate amount of efforts to safeguard its stakeholder’s interests in the company whether they are its employees, customers, suppliers, its business community, governmental bodies, shareholders and other providers of finance. However, the decision of accepting the tender from Benedict Co. which is its potential supplier is not justified due to the weak financial performance of Benedict. From the ratio analysis carried in the report it can be argued that Benedict is not performing better than the other tendering companies of Tesco for the supply contract. Therefore, the company must not accept the quotations of Benedict Co.

References:

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