Assesment Essay 1
Analysis of Tesco annual report and Benedict Co. financial statements
Mostafa Omar
R1910D9476115
Strategic Financial Management – AF4S31
Dr. Mary Nanyondo Byaruhanga
30 August 2020
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Financial Analysis of Benedict Co. for Potential Supplier Evaluation, Essays (university) of Financial Management
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Assesment Essay 1
Analysis of Tesco annual report and Benedict Co. financial statements
Mostafa Omar R1910D Strategic Financial Management – AF4S Dr. Mary Nanyondo Byaruhanga 30 August 2020
Abstract
This report consists of two separate parts. In the first part, the author attempts to analyze Tesco PLC, one of the world’s largest retailers. The analysis is focused on the stakeholders of Tesco by studying their annual report published in 2016. The second part of the report analyses Benedict Co., a potential supplier for the upcoming tender to supply a component required in our business’s production. Financial statements of Benedict Co. have been reviewed, and ratios calculated to evaluate the fit of this supplier to be considered for the task. Each section of the report ends with a short conclusion highlighting the main points discussed followed by brief recommendations where appropriate.
- Abstract
- Chapter 1: Tesco Stake Holder Analysis
- Introduction and Methodology
- Stakeholder Analysis
- Conclusion
- Chapter 2: Benedict Co. Financial Position Evaluation
- Introduction and Methodology
- Profitability Ratios
- Resource Utilization Ratios...................................................................................
- Liquidity Ratios
- Gearing Ratios
- Investor Ratios
- Conclusion
- References
- Appendix A – Benedict Co. Financial Statements
- Appendix B – Calculations
- Table 1 - Benedict Co. Profitability Ratios List of Tables
- Table 2 - Benedict Co. Activity Ratios
- Table 3 - Average Industry Activity Ratios................................................................
- Table 4 - Benedict Co. Liquidity Ratios
- Table 5 - Average Industry Liquidity Ratios
- Table 6 - Benedict Co. Gearing Ratios
- Table 7 - Benedict Co. Market Value Ratios
Chapter 1: Tesco Stake Holder Analysis
Introduction and Methodology
Tesco was founded in 1919 as a stall in the east end market of Brixton in London by Mr. Jack Cohen. The brand became more visible five years later when Mr. Cohen bought a shipment of tea from Mr. T.E. Stockwell, by combining the initials of both gentlemen Tes-co to open a flagship Tesco store in North London. The company became a private limited company in 1932 and in 1947 Tesco stores stocks were at the top of stocks market (UKEssays, 2018). Today, Tesco is the world’s third biggest retailer following Walmart and Carrefour (Reuters, 2011). The company also expanded to clothing, banking, and telecommunications industries where it owns F&F clothing brand and has its own Tesco bank and Tesco Mobile services operating at different regions of Europe (Tesco, 2020). This section of the report attempts to analyse Tesco’s stake holders by studying its 2016 annual report. The author examines the environmental and social review and the corporate governance sections of the report to identify three categories of Tesco’s stake holders and how Tesco demonstrates its performance to two of these stakeholder groups.
Stakeholder Analysis
Actors are people or parties participating in the decision-making process regarding problems and possible solutions facing an organization. Stakeholders are actors that
struggling with this subject daily. Tesco also followed the government’s levy on plastic bags and initiated ‘Bags of Help’ where customers buy reusable bags for their groceries and the funds raised are reinvested to renovate local outdoor areas. Tesco was able to raise £11.5 Million under this project. Tesco is also pursuing food waste control under the project ‘Community Food Connection’ where it partnered with several UK charity organizations to organize donations of excess food to be delivered to those who need it. The company is continuously analysing areas of food waste to reduce it and plan its stocking strategies accordingly (Tesco, 2016). This shows evidence that Tesco is aiming to make a difference in the everyday lives of its customers.
The company also published its salary and bonus structures in its report which mentions that they have redistributed their bonus calculation structure to carry 20% weight towards employee’s success with customers. This shows how Tesco is shifting focus towards the customer and customer’s experience in their stores.
The second stakeholder being considered is the employees of Tesco. The report demonstrates the company’s plans towards employee’s developments and wellbeing. For instance, the report focuses on the fact that Tesco’s wages are above National minimum and that the company pays everyone equally regardless of age. The company also goes the extra mile by allowing employees to chose between cash and benefits to customize a package that suits their requirements. Another point demonstrated in the report is the fact that Tesco encourages employees to own shares in the company through share incentives and saving plans they employ. This sense of ownership encourages employees to give their best at their work. Tesco also highlights employees’ pension and retirement savings benefits enjoyed by its staff. Finally, the
company’s bonus scheme is designed to ensure that the success of the business results in mutual benefits to Tesco’s shareholders and its employees as well. 70% of the bonus is based on financial success of each year and annual bonus goes up to 250% of the base salary. This means that financial benefits are fairly distributed between owners and employees. The result is a workforce dedicated to the success of the organization as they have a taste of the benefit as well. The balance 30% of the bonus is based on individual performance with 20% aimed at interactions with customers, suppliers, and fellow colleagues. This also encourages employees to work towards the brand image of Tesco and enhance its position with its customers and suppliers (Tesco, 2016).
Conclusion
Tesco has successfully demonstrated its efforts towards achieving benefits of its stakeholders in financial and non-financial aspects by highlighting what matters to each category of stakeholders. The company acts responsibly towards its society and environment and continues to work towards its long-term goals by building trust and transparency with a wide range of stakeholders. It can be concluded from this report that Tesco made sure its customers and employees are aware of the efforts being made to improve their experience both in the store or workplace and in their personal lives. This in turn builds more trust towards the brand and strengthens customers and employees’ loyalty towards Tesco.
This section of the report studies Benedict Co. that was established in 1983 with the aim of buying and selling damaged and salvaged goods. The company has its headquarters in Maryville, Tennessee USA and operates nationwide to support affected parties by helping them get the best price for their damaged goods to recover part of their loss. It also offers warehousing and distribution services to its clients (Benedict Co., 2020).
The analysis is made through studying the income statement and balance sheet of Benedict Co. for the years 20X0 and 20X1. The information provided is used to calculate different financial ratios to be able to compare how the company has progressed in this two-year period. In addition, some of the ratios calculated for the year 20X1 are compared to industry average to understand the position of Benedict Co. in comparison to other competitors in its market. Finally, some concluding points are mentioned at the end of the report to act as a recommendation for the choice of this company as a vendor for the upcoming tender contract.
Profitability Ratios
Profitability is the ability of a business to generate profits as a return on initial investments. This reflects a company’s success or failure in terms of competitive situation and quality of management (Saleem and Rehman, 2011). The following table demonstrates changes in profitability ratios of Benedict Co. in the years 20X0 and 20X1.
Benedict Co. Profitability Ratios Ratio 20X1 20X0 Observation Return on Capital Employed (ROCE) 24.00% 27.14% Decreased Gross Profit Margin 48.05% 41.77% Increased Operating Profit Margin 31.17% 36.95% Decreased Net Assets Turnover 77.00% 73.45% Increased Fixed Assets Turnover (^) Table 1 - Benedict Co. Profitability Ratios 81.05% 76.38% Increased
Gross profit margin of Benedict Co. improved in 20X1 indicating higher pricing policies or better advantage over competitors on cost of products sold. However, operating profit margins saw a decline indicating higher operating expenses. The company is experiencing a hike in cost of operations which needs to be controlled to realize the benefits of higher gross profits. Return on capital employed has also decreased due to the increase in long-term liabilities incurred by the company through obtaining $4 Million more bonds. However, overall asset utilization of the company has improved due to higher turnover in 20X1.
Resource Utilization Ratios
Resource utilization or activity ratios are concerned with the efficiency of an organization to manage its various activities and assets. They are an indicator about ongoing operational performance reflecting the efficient management of working capital and long-term assets (Robinson et. Al., 2009).
The below table summarizes activity ratios computed from Benedict Co. financial statements. The table compares the company’s performance in years 20X1 and 20X as well as compares the results of year 20X1 with the industry average to evaluate the
Liquidity Ratios
Liquidity management is crucial for any business to be able to pay its current obligations on business such as operating and short-term financial expenses. These ratios compare cash and near-cash assets of a firm with its payment obligations. If the covering of the available cash is insufficient, a business might face difficulties in meeting its short-term financial obligations. This can in turn affect the firm’s profitability. In general, there is a trade-off between liquidity and profitability as acquiring more of one translates to losing some of the other (Saleem and Rehman, 2011).
Table 4 summarizes liquidity ratios of Benedict Co. and is highlighted in the same manner as the previous section to indicate how the numbers are compared to the rest of the industry.
Benedict Co. Liquidity Ratios Ratio 20X1 20X0 Observation Current Ratio 1.19 1.25 Decreased Quick Ratio 0.70 0.75 Decreased Cash Conversion Cycle (^) Table 4 - Benedict Co. Liquidity Ratios 53 days 13 days Increased Average Industry Liquidity Ratios Ratio 20X Current Ratio 1. Quick Ratio Table 5 - Average Industry Liquidity Ratios 1.
Current ratio compares current assets to current liabilities. The higher the ratio, the better is a business’s liquidity (Robinson et. Al., 2009). Overall, Benedict Co.’s ratios are above 1.0 which indicate that they can easily cover their short-term liabilities. However, the ratio has slightly decreased in 20X1 due to rise in the company’s current liabilities by more than four folds which was partially covered by increase in inventory
levels and receivables. Quick ratio which excludes stocks from the calculation has also decreased due to the higher inventory in 20X1 which is also believed to be slow moving. Overall, both numbers are lower than industry average by 25%-30% which indicates that Benedict Co. position is worse than competitors when it comes to liquidity. The current condition has caused Benedict’s cash conversion cycle to increase from 13 days in 20X0 to 53 days in 20X1 which implies some difficulties in terms of liquidity for Benedict at the time of writing this report.
Gearing Ratios
Gearing ratios are also known as solvency ratios. They are concerned with the ability of a business to repay its long-term debts including principal payments and their benefits. These ratios provide a general idea about debts in a company’s capital structure and the ability of cash flows to cover interest expenses as well as fixed costs. In other words, gearing ratios represent the financial structure of a company (Abdul, 2017).
Benedict Co. Gearing Ratios Ratio 20X1 20X0 Observation Capital Gearing ratio 30.00% 23.60% Increased Debt/Equity ratio 42.86% 30.89% Increased Interest cover (^) Table 6 - Benedict Co. Gearing Ratios 7.38 18.4 Decreased
As observed in table 6, Benedict Co.’s Capital Gearing and Debt/Equity ratios have increased which indicates that the company’s solvency position is weaker in 20X resulting in higher risks bared by the company. At the same time, their interest cover
overall decrease of ROE. As the number of shares remained the same for 20X0 and 20X1, the company’s Earnings per share decreased with profits. An increase in dividend distribution has caused an increase in dividends per share and dividends pay-out ratios. The increase in pay-out ratio will increase the interest towards the company’s shares and can lead to a further increase in its stock value. This is reflected in the price/earning ratios where investors are ready to pay an additional $5.9 per dollar of earnings of Benedict Co. Dividend cover ratio decreased due to lower income in 20X1. Dividend yield and earning yield have also decreased due to the increase in market value of the company’s shares.
Conclusion
By looking at Benedict Co.’s Activity ratios, it can be concluded that Benedict Co. would offer favorable credit terms as part of their proposal in the upcoming tender. Liquidity ratios are lower than market average which indicates lower ability of Benedict Co. to pay its suppliers on time. This can cause some delays in the delivery of the components under consideration. Benedict Co. risk factors are showing an increase demonstrated by its gearing ratios signaling lower ability to pay its long-term debts as well. Recommendations are to proceed with Benedict Co. cautiously and to add a penalty clause for delays in delivery to stress the importance of on time supply.
In terms of investors, profitability ratios are giving mixed signals. Gross profit margins increase translates to better control on cost of inventory. However, lower operating profits and net profits show that the company lacks control on its daily operating expenses. The company’s share prices increased as the company is paying more
dividends to its shareholders making the market optimistic about its stocks. However, Benedict Co. needs to control operating expenses to improve profitability and ROE and realize the benefit of savings on cost of sales. Buying shares could be advantageous for investors given the fact that Benedict Co. payout ratios are increasing but lower profits due to higher operating costs would eventually have a negative impact on dividends distributed.
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