Financial Analysis Assignment Sample
Assessment Task 2 – Individual Assignment
FINANCIAL ANALYSIS- Tesco
Introduction
Stock investment necessitates a thorough examination of financial information in order to determine a firm’s genuine value. Tesco Plc is based in UK and a multinational grocery store as well as general commodities retailer headquartered in the United Kingdom. It is the 3rd largest supermarket chain in respect of total sales, as well as the country’s ninth major trader in terms of revenue. The firm has been formed in 1919 by Jack Cohen. Considering the general performance of the firm, it is being identified that the revenue of Tesco as of 2021 was around £57.887bn with net income of £6.147bn. The firm has around 367321 workers that putting continuous effort in accomplishing the vision of Tesco.
In this case, an analysis will be done on Tesco’s financial performance based on 4 year financial records and compared with M&S to evaluate that whether the client can invest in Tesco, M&S or neither in both. In order to giving the final conclusion, the study will assess the earnings and dividend ratios in the context of Tesco which will help in understanding its performance and evaluate its operations, strategic context for recommending Mr. And Mrs. Khan regarding their investment choices.
Task 1- Brief of Tesco’s performance
Ratio analysis of Tesco
The current market share of Tesco is 27% as of 2020. Investor related ratio analysis will provide an insight of the performance and growth of Tesco. The main focus will be on different earnings and dividend ratios, but the basic financial position will also be considered to understand the position.
Dividend yield ratio
Tesco has seen a significant growth in dividend yield. As of 2018, the dividend yield ratio of the firm has been identified as 1.68% and in 2021 after 4 years; it is being calculated as 4.9% (Simply Wall ST, 2022). In this context, it is important for the investor to note that dividend rates of 2% to 4% is generally regarded excellent, while anything more than that might be a wonderful investment, however the risk is also high.
| Date | Dividend per share | Average Yield (%) |
| May 2021 | 0.116 | 4.857 |
| May 2020 | 0.116 | 4.315 |
| April 2019 | 0.073 | 2.421 |
| April 2018 | 0.051 | 1.686 |
Figure 1: Dividend Yield Ratio of Tesco
(Self-created)
Liquidity ratio
Liquidity ratios use indicators to calculate a firm’s capacity to meet debt commitments as well as its safety margin. In consideration with current ratio, Tesco’s CR as of 2018 was 0.62 and in 2021 it has been calculated as 0.76. It is not up to the mark as evaluated that the good rate of current ratio should be between 1 and 3 (Husna& Satria, 2019).
Price to earnings ratio
Tesco has a P/E rating of 19.0 that is similar to the 18.5 industry standard in the United Kingdom, currently.As of 2018 the PE ratio of Tesco was 26.34 in Feb and has been declined unexpectedly as it was around14.27 as of March, in 2019, the PE of Tesco was 16.69, in 2020, it was around 20.77 and in 2021, it was around 22.19 (YCharts, 2022).
Earnings per share
The profit margin of a corporation is split by the amount of outstanding shares it does have issued to calculate earnings per share (EPS) (Arsyadet. al.2021). It is important to consider before investing in the company. Tesco’s yearly Earnings per share for 2020 amounted $0.48, down 29.01 percent over the year 2019. The firm’s yearly EPS for 2019 amounted $0.68, decreased 7.62 percent over the year 2018 (MacroTrends, 2022). Therefore, it can be stated that from past four years a significant decline can be seen in EPS. The greater a firm’s EPS, the more profitable it is. Because the amount of shares issued might fluctuate throughout period, it is indeed best to utilise the balanced ratio when computing EPS.
Trends and implications of ratios
The ability to assess a corporation’s future requires comparing its ratios across time as interpretation and implication assessment. In the context of Tesco 4-year financial statement, following are the interpretation and implication of financial ratios
Dividend yield ratio
Tesco’s maintains a median of 22 days’ supply of goods at any specified instant, according to the statistics. Low inventory cycles might be viewed as a benefit because it demonstrates the firm’s ability to sell its products rapidly (Hoffmann& Marriott, 2019). In comparing the 4 financial years, it is being interpreted that there is significant growth the firm had seen in these four years in dividend yield ratio. As 2%-4% is considered as good ratio, but as of 2021, the firm has DYR of 4.69% which is slightly higher than the average ratio.
It indicates that investing in Tesco would be a good return surety.In the context of investment, it can be understood through the example consider a buyer who purchases $10,000 value of a stock with a 4% dividend yield at a cost of $100 per share. The buyer holds 100 shares, each of which pays a $4 dividend (Krummel, 2022). This can be calculated as 100x$4 = $400 total which is considered to be worth of investment.
Liquidity ratio
In comparing the 4 financial years, it is being interpreted that the liquidity ratio is being increasing for the Tesco from 0.62 in 2018 and 0.76 in 2021.Anything larger over one is a healthy liquidity ratio. This means the business is in excellent fiscal shape which is less prone to undergo money problems (Simamora& Hendarjatno, 2019). However, the ratio of Tesco is lower and basis on this it can be interpreted that a low current ratio indicates that the firm may have difficulty meeting short-term commitments. Based on the trend, the current ratio is a big no-no for the investors make their investment in Tesco.
Price to earnings ratio
A higher PE ratio beyond which may be regarded negative, whereas a lesser PE ratio might be rated better. The global median P/E ratio now runs between 20 and 25. On the basis of this general theory, it can be stated that the price to earnings of Tesco is considered to be stable and positive for the shareholders (Freihat& Razaq, 2019). In comparing the 3 financial years, it is being interpreted that the earnings are being increasing for Tesco.
Earnings per share
In comparing the 4 financial years, it is being interpreted thatthe current value of a corporation’s stock may increase if its profits per share are high. Buyers may have a favourable opinion of the company’s goods like a consequence of the rising stock value, leading in improved desire, sales, as well as profitability (Almeida, 2019).Tesco PLC’s net earnings fell 75.13 percent each year, from 5.95 billion to 1.48 billion, notwithstanding the 5.97 percent growth in earnings from 57.89 billion to 61.34 billion. Although increased revenues, the company’s net profitability fell due to a rise in selling, administration, including operational expenditures as a proportion of purchases from 3.05 % to 3.23 % (Tesco PLC, 2022). The decline in earnings and earnings per share implications on the investor choice will have negative effect.
Factors influencing ratios
From the past 4 years a change in every kind of ratio has been analysed. The change can be caused by variety of factors in the context of Tesco that will be identified as below;
Financial factors– Total revenues, revenue earnings, as well as goods expenses are by far the most prominent, clearly spotted, as well as broad statistics which determine company earnings. On the other hand, stock buybacks or splits, restructuring, partnerships, and accounting policies can all influence revenue, equity transfers, and the common shares distributed (Krummel, 2022). Furthermore, the amount of goods sold is a crucial element that has a significant impact on the firm’s solvency ratios.
Therefore; the profit margin and revenue from the overall sales will be the first financial factor, the second is stock buybacks and the third factor is amount of goods sold that are contributing in the change of earning per share ratio.
Non-financial factors-The development of internal skills is also a key determinant. The extent to which a firm may grow might well be limited, at least temporarily, by factors such as scalability, production capability, and other factors. If it develops its company too quickly, it could be concerned about its power to enhance productivity adequately to meet expanding demand (Simamora& Hendarjatno, 2019).The key factor influencing profits as well as payout ratios is long term strategy. Tesco’s dividends plus profitability could rise as a consequence of a shift in its corporate strategy which leads it to spend little of the operational earnings on advancement, enabling a larger part of revenues to be transferred to equity owners throughout the form of dividends.Another non-financial aspect which might alter the proportion is customer satisfaction. For a number of reasons, the firm may choose to devote a smaller portion of its profits on social and economic development projects. Client happiness as well as excellence has a direct influence on earnings and ratio.
Therefore, three non-financial factors that can contribute in the change of financial ratio in Tesco are; Lon-term strategies, client satisfaction and development of internal skills.
Task 2- Comparison between Tesco and M&S
The chosen competitor for analysis is M&S that is a leading clothing brand that manufactures designs and sells apparel throughout the globe. The choice of competitorM&S is listed on FTSE 250 and is considered to be biggest competitor in the retail category for Tesco in terms of investment and food market.
The comparative analysis between Tesco and M&S financial ratios are as follows;
Dividend yield ratio
As of 2018, the dividend yield ratio of the firm has been identified as 1.68% and in 2021 after 4 years; it is being calculated as 4.9%. In comparison, the ratio of M&S is being identified as 5.20% as of 2019 and in 2020, it has been amounted as 3.90% (MacroTrends, 2022). In compare to both statistics, it can be identified that M&S would have more reliable for investor because it has much significant growth. However, the sudden decline from past 2 years indicates the investor should select Tesco because of the constant growth. Despite its high revenues, M&S still has a low dividend payment percentage when compared to Tesco (Grennan& Michaely, 2021).M&S inventory turnover is almost unchanged, indicating that they are still competent at using their assets to produce revenue.M&S has a falling share churn rate than Tesco and Tesco’s large sales quantities as well as market dominance account for this.
Liquidity ratio
Tesco’s CR as of 2018 was 0.62 and in 2021 it has been calculated as 0.76. On the other hand, in 2018 M&S current ratio was 0.72 that is in comparison of Tesco was higher. However, in 2021, the current ratio of M&S is 0.70 which is lower than Tesco’s CR. Basis on the comparison, it can be stated that M&S has a weak current ratio, putting them at threat in relation to liquidity (AREAS, 2018). Therefore, Tesco will be considered as excellent fiscal shape which is less prone to undergo money problems than the competitor if the revenues and earning can be increased from the strategic and company’s investment decisions.
Price to earnings ratio
In 2018, the PE ratio of M&S was 30.65 that have been increased in the next year with 219.09, in 2020, it was 43.86 and in 2021, it was 99.11. As identified that a higher PE ratio beyond which may be regarded negative, whereas a lesser PE ratio might be rated better. In comparison of M&S and Tesco, it is being identified that there has been uncontrollable shift in the PE ratio in M&S that will be not suitable for the criteria of investment (Ausloos, 2020). As identified that Tesco has a P/E rating of 19.0 that is similar to the 18.5 industry standard in the United Kingdom, currently. This is lower than M&S which makes the firm favorable for investor choice over the competitors in the retail industry.
Earnings per share
Tesco’s yearly Earnings per share for 2020 amounted $0.48, down 29.01 percent over the year 2019. While the EPS of M&S in 2018 was $0.04 and in 2021, it was nearly $-0.26 that is considered to be significant decrease than Tesco (YCharts, 2022). In comparison, it can be stated that the rise indicates that Tesco generated more revenue from the investment invested in the preceding year.It is since Tesco’s produced better operational profits despite using less investment and demonstrates the firm’s ability to create revenue (Almeida, 2019).
Considering the financial ratio comparison, it is evident that Tesco is considered to be more favourable than M&S.
M&S (LSE: MKS) became a high-street favourite throughout the United Kingdom. Nevertheless, the corporation had made major tactical missteps in current history, as well as its influence is currently waning.Some market swings throughout the company might provide investors with a better ability to introduce the share as well as perhaps purchase at a cheaper cost.Because MKS is now discounted, it might be a good time to increase existing position throughout the stock (Freihat & Razaq, 2019). With a bright future ahead, it appears that this development has not even been properly included into the share value. There seem to be, however, alternative elements to examine, including asset base that might justify the present loss in value.
On the other hand, Tesco has grown its EPS at a rate of 31% each year for the past five years. This EPS development is larger than the stock price’s yearly rise of 2%. As a corollary, someone might argue that the wider marketplace is becoming warier of the company.Tesco has compensated investors with a cumulative shareholder yield of 22% over the previous 12 months, which is commendable (Simply Wall ST, 2022). By obviously, the dividend is included. It is more than the firm’s five-year yearly yield of 10%, showing that it’s been performing better lately. Throughout the best situation, it might indicate actual company growth, indicating now would be a good time to investigate more. It is also necessary to understand the many effects that marketplace circumstances could have on the stock value, there are several other aspects that are far more crucial (Ren, 2021).
Task 3- Recommendations on investment
Based on the findings of financial analysis that indicated that Tesco has high dividend yield, stable liquidity ratio, low earning per share ratio and Tesco has compensated investors with a cumulative shareholder yield of 22% over the previous 12 months, which is commendable. Further, the study identified that the profit margin and revenue from the overall sales will be the first financial factor, the second is stock buybacks and the third factor is amount of goods sold that are contributing in the change of earning per share ratio.Three non-financial factors that can contribute in the change of financial ratio in Tesco are; Lon-term strategies, client satisfaction and development of internal skills.
Mr and Mrs Khan is suggested to invest in Tesco not in M&S as the firm establish good relation with their stockholders and provide greater return. It is being identified that
Based on the competitor analysis, Tesco is suggested to keep such stocks with significant profits, even while they are not matured capable of providing revenue for the firm; however, as component of the firm’s profits, there is really no damage.
Ultimately, my recommendation is to change the aforementioned financial derivatives depending on its return assessment. The resources are considered to be major growth driver of the firm. Tesco considers assets to be a crucial component in running its commercial activities efficiently. Technical, fiscal, human capital, as well as advertising capabilities is all available.Tesco, that has grown to become one of the world’s largest supermarkets, has several chances to use its worldwide business expertise as well as skills to extend its world markets into new nations and locations, hence increasing income. Based on the growth strategy, the investors are being suggested to start with low investment risk and increase the amount every year.
As a result, the geometrical interest rate is favourable, that is better for the firm’s operations and growth. Furthermore, risk mitigation must be improved; including such determining if the organisation confronts tail risks. Tesco must undertake safeguards despite the fact that it seldom encounters major industry shifts in varied market settings.Throughout the best situation, it might indicate actual company growth, indicating now would be a good time to investigate more. It is also necessary to understand the many effects that marketplace circumstances could have on the stock value, there are several other aspects that are far more crucial
Conclusion
From the analysis of Tesco’s financial ratios by comparing the 4 financial years, it is being interpreted that there is significant growth the firm had seen in these four years in dividend yield ratio. It indicates that investing in Tesco would be a good return surety.On the other hand, the liquidity ratio of Tesco is lower and basis on this it can be interpreted that a low current ratio indicates that the firm may have difficulty meeting short-term commitments.
On the basis of this general theory, it can be stated that the price to earnings of Tesco is considered to be stable and positive for the shareholders. The decline in earnings and earnings per share implications on the investor choice will have negative effect. The profit margin and revenue from the overall sales will be the first financial factor, the second is stock buybacks and the third factor is amount of goods sold that are contributing in the change of earning per share ratio.Three non-financial factors that can contribute in the change of financial ratio in Tesco are; Lon-term strategies, client satisfaction and development of internal skills.
Further, in comparison of M&S and Tesco, Tesco is considered and recommended to the investors as good choice and future growth.
References
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