Analysis of Financial Statements

Analysis of Financial Statements

Introduction

Financial ratio analysis are considered as very crucial and important factor in the context of the businesses as the figures would indicate the measures and strategies that are required to be incorporated for the business(Barth, et al., 2010). Due to the improvement of infrastructure, the firms have used computing system to formulate different forecasting techniques whose basic is grounded in the financial ratios. The regular business processes has been executed through performing different tasks and expenses related to the process need to be recorded. The alignment between the goal of business and financial data has been demonstrated through the ratios which are important indicating factor for managers.

The financial analysis for business data has provided the managerial body an opportunity to reflect on the in-sight related to the business process for maintaining its continuous execution without facing any concern. The perspective of shareholders and investors are also maintained through indicating the growth or delineation of businesses. Tesco is considered as the leading retail firm in UK which specialises in focusing on delivering the quality items at justified pricing(Tescoplc, 2019). The company has earned total profit of £57.5 billion in 2019 with acquiring highest market share in UK retail industry(Theguardian, 2018). Marks and Spencer is also considered as the retail firm which has specialised in delivering clothing product. The cash flow for the business has also been maintained through focusing on financial ratio of the company. According to that, suitable strategies has developed for improving the profitability through refining the operational system. The market verdict has researched and analysed from the P/E ratio for gaining insight related to aspects of secondary articles, shareholders and analysts.

Profitability ratios

Profitability ratio is defined as the financial metrics class that are mainly interpreted for demonstrating the ability of business to maximise the profit generation. The profit margin of business in overall manner and subtracting with expanses are described through the ratios which provides balance among liabilities and assets(Brusca, et al., 2016). The efficiency ratio is indicated through turnover ratio of debtors with ratios of accounts receivable along with average sales collection in a scheduled time. The profitability ratio has been described through margin of operating profit, gross profit, equity return and net profit generation. The comparison of the data of Marks & Spencer with that of Tesco are described in this section.

Tesco Plc. 2018 2017 2016 2015
Gross profit % 5.83 5.19 5.27 -3.87
Operating profit % 2.72 2.09 1.87 -6.84
Net income % 2.1 -0.07 0.26 -10.09
Equity return % 14.85 -0.49 1.7 -50.02

Gross profit

Gross profit margin is defined as the framework which indicates the raw profit of business after completing scheduled timeframe(Bolton, 2014). It has been demonstrated as gross profit generation divided by the overall revenue generation of business. The gross profit was reduced with that of the figures in 2014 which is compensated through focusing on the quality deliverables of business. The gross profit percentage has increased to 5.83% in 2018from 5.19% in 2017.

Operating profit

The operating profit percentage is demonstrated through the operating income divided by overall revenue generation for the firm. The operational efficiency of the business has reflected through the aspects of operational profit percentage(De Koning, et al., 2008). The improvement in change in operationalprofit has reflected through the table. The operational profit has shifted from 1.87% change in 2016 to 2.72% change in 2018.

Net profit

Net profit margin is described as the overall income of the business by its revenue generation. In 2015, the net income for the business has reduced with compared to the expanses which demonstrated loss for the business. The formulation of net profit generation has raised to 2.72% in 2018 from 2.09% in 2017 which demonstrated the growth figure for business and reflect the success criteria.

Equity return

Return on equity is reflected as the net income for the common stockholders which is divided into the total equity of shareholders over a particular period of time(Finkler, et al., 2018). The return on equity of the business has raised speedily through rising the gross profit margin of the business to a higher value. The return on equity for Tesco was -0.49% in 2017 which has been modified to 14.85% in 2018 which demonstrates the improvement in financial performance of business.

Profitability: Comparison with the competitors

Marks & Spencer is considered as the competitors as both the firms have operated in UK retail market(Reuters, 2019). Due to having large employee base and high experience, the firm has managed to maintain their suitable profit generation with respect to the investment values. From the figure, it has been indicated that the gross profit margin has raised for M&S due to spending less amount of financial volume with respect to sales. It also indicates the ability for the business to overcome the market share.

From the below figure, the comparison of net margin with Marks and Spencer along with Tesco are demonstrated. As the gross profit margin for M&S has risen, the firm has also expected to indicate rising valuation which is justified from the figures of 2017 and 2016(Gurufocus, 2018). The net profit margin has raised for Tesco Plc. with compared to M&S which indicates the financial stability for the business. The firm has also added value to their shareholders as the return on equity has also raised due to the improved financial performance for the business.

Efficiency ratios

Efficiency ratio is characterised as the financial measure which is mainly calculated for demonstrating the business capabilities to compensate regular liabilities(Oyewumi, et al., 2018). The receivables turnover of the liabilities and the equities are calculated for demonstrating the efficiency ratio of business. The efficiency ratio of the business has been demonstrated through the comparison of receivable days and payable days along with its comparison with Marks and Spencer.

Receivable days vs. payable days

The cash flow cycle of the business has been circulated through focusing on the assets which would come for the business and the cost that is needed to be addressed by the business. The receivable days vs. payable days has demonstrated the capability of business for compensating the short and long term liabilities of business(Potter, et al., 2019). Tesco has maintained structured receivable days lower than the payable days for maintaining regular business process whereas the figures for 2018 has exceeded. The receivable days for the business has raised from 47.28 in 2016 to 61.38 in 2018 whereas the payable days has reduced from 61.1 in 2017 to 60.63 in 2018. The improved business capability is also reflected from the growth of receivable days and the ability for continuing the business process without facing any concern. So, the financial stability and improvement has demonstrated through the figures.

Efficiency: Competitor comparisons

The efficiency ratio for the businesses has been demonstrated through the inventory days which has measured average days hold by the businesses before selling the product. From the below table, it has been identified that the inventory days for Tesco has raised with compared to Marks & Spencer(Tesco, 2018). The inventory days for Tesco Plc. Was 17.35 in 2015 which has raised to 25.05 in 2018. The growth has clearly reflected the success factor for the business process without facing any concern. On the other hand, Marks and Spencer’s has dealt with less volume of inventories due to the limited business process whereas the span of Tesco is higher than M&S.

Inventory days 2018 2017 2016 2015
Tesco Plc 25.05 20.88 18.23 17.35
Marks & Spencer 9.16 7.77 7.85 7.28

 

Liquidity ratios

Liquidity ratio of the businesses are demonstrated through the capability of firm to meet their long-term financial obligations which demonstrated the growth of the business(Fletcher Jr & Rose, 2019). The liquidity ratio of the business has demonstrated through the figures of current ratio and acid-test ratio.

Acid-test ratio and current ratio

The current ratio has been described through the utilisation of business resource for paying all of their debts within the scheduled timeframe(Bessler, et al., 2016). The efficiency for the business has also been reflected through current ratio where the current assets and liabilities are compared which clearly demonstrated the financial stability and efficiency. The current ratio has taken into the inventory account which has described the financial capability of firm. Acid-test ratio or quick ratio is characterised as the comparison of short-term assets to short-term liabilities of business for demonstrating the capability of paying all the liabilities(Coleman, et al., 2016). From the below table, it has been identified that the current ratio of business has reduced from 0.82 in 2016 to 0.71 in 2018. The valuation of current assets has decreased slightly which has reduced the current ratio(Gurufocus, 2018). On the other hand, the acid test ratio has also reduced with compared to the figure of 2016. Slight fluctuation has demonstrated as the quick ratio has reduced from 0.69 in 2016 to 0.6 in 2018.

Tesco Plc. 2018 2017 2016
Current ratio 0.71 0.79 0.82
Acid test ratio 0.6 0.68 0.69

 

Liquidity: Competitor comparison

The current ratio for Tesco is higher than that of M&S in the year of 2016 and 2017 whereas the figure has slightly less which is also not considerable. The current ratio for Tesco Plc is reflected through 0.82 I 2016 which has reduced to 0.71 in 2018. It clearly reflects the decline in figure which is identified as the potential field of improvement for raising the concern. On the other hand, the current ratio for Marks and Spencer is also decreased from 0.69 in 2016 to 0.72 in 2018. It has also reflected the less volume of assets for M&S and higher profit generation which is required to be addressed for continuing the business process(Gurufocus, 2018). The acid-test ratio of Marks and Spencer has reduced from 0.41 in 2017 to 0.29 in 2018. The figures for quick ratio has raised with compared to that of Marks & Spencer’s.

From the below graph, it has been analysed that the current ratio and quick ratio has presented with compared to both the companies along with industry standard value. The average industry valuation of quick ratio has increased with compared to the figures for current ratio and quick ratio. The industry standard for both the ratio has increased over time which demonstrates the analysis of financial data.

Solvency ratios

Solvency ratio is defined as the key metrics that is mainly applied for measuring the ability for business to meet their obligations and it is mostly used by the business leaders. Solvency ratio has indicated the sufficient cash flow for meeting their short and long term liabilities of business(Lins, et al., 2017). The profitability ratio has increased which has reduced the solvency ratio for the business. Higher solvency ratio has caused the risks associated with financial data and progress which is to be considered. Solvency ratio for the business has demonstrated through the debt to equity ratio which has focused on the return for the investors.

Debt to equity

Debt to equity ratio is defined as the division of the total liabilities of business by its equity of shareholder. The debt-equity ratio of the business has reduced for the business which indicates rising volume of business liabilities with compared to the assets and revenue generation(Barth, et al., 2010). The debt-equity ratio has decreased for the business which indicates the decline in the profit generation for the business process. The debt-equity ratio for the business has increased from 1.57 in 2016 to 1.86 in 2017 which demonstrated the improved financial capability of business whereas the ratio has reduced from 1.86 in 2017 to 0.82 in 2018(Tescoplc, 2018). The figures for debt-equity ratio has been considered as the crucial component for investors to evaluate the company context for making investment into the operational field for the business.

Solvency ratios: Competitor comparisons

From the below figure, it has been presented that the solvency ratio for Tesco has been considered as higher with respect to that of Marks and Spencer. The industry standard valuation for the solvency ratio has been considered as 0.53 whereas the figures for Tesco Plc. has raised to 0.82(Theguardian, 2018). It reflects the improved financial capability of business to fulfil their liabilities and execute the business goal. The positive approach for the investors has also been demonstrated through focusing on the output exerted by business to the investors which has added value to the executives. The debt to equity ratio for Marks and Spencer’s is considered as 0.61 which has been higher than that of average valuation and Tesco Plc.

Investment ratios

Investment ratios are mainly applied for indicating the suitability of business in terms of investing which is demonstrated through final return after scheduled timeframe(Brusca, et al., 2016). The investment ratios are demonstrated through earnings of business per share and ratio of price earnings which clearly demonstrate the indication for the financial improvement of business. The future share price has also been calculated through describing about investment ratio.

Price earnings ratio and Earnings per share

The current market capital of Tesco is demonstrated as £22.90 billion whereas the last trade share price for the company is 233.80 p. which indicates the suitability of the business for investment(BBC, 2018). The price earnings ratio is identified as the earning of the shareholder of the business according to the terms and conditions of business whereas earnings per share is applied for the debt shareholders for compensating their financial requirements. The earnings per share for the firm has reduced from 0.07 in 2016 to -0.02 in 2017 whereas the figure has increased very rapidly to reach 0.62 in 2018(Gurufocus, 2018). On the other hand, the P/E ratio of business has decreased from 106.51 to 0 in 2017 which has later increased to 14.31 in 2018. Thus, the firm is not consistent in providing satisfactory return to the shareholders which is need to be addressed.

Investment ratio: Competitor comparisons

The investment ratio of Marks & Spencer’s has also demonstrated through the below tabular format which represents the EPS has reduced from 0.67 in 2016 to 0.17 in 2017. The EPS of Marks and Spencer’s was higher than that of Tesco which has reduced in 0.04 in 2018(Financial Times , 2018). On the other hand, the P/E ratio has increased to 169.19 in 2018 from 46.81 in 2017 which demonstrated the higher ratio than that of Tesco. The earnings per share for the firm has reduced from 0.07 in 2016 to -0.02 in 2017 whereas the figure has increased very rapidly.

Tesco  Plc Investment ratios 2016 2017 2018
EPS 0.07 -0.02 0.62
P/E ratio 106.51 0 14.31

 

Marks & Spencer  Plc Investment ratios 2016 2017 2018
EPS 0.67 0.17 0.04
P/E ratio 16.39 46.81 169.19

 

Initiative for improving future profitability

In the contemporary era, the businesses has shifted their operational medium into digital mode for quick and successful execution of wide range of business process. The profitability of the business has increased through adding more value to the deliverables which completely deals with price of the products and services. The managerial body of the firm has got the overview of potential filed of improvement which assists in cost reduction for the operational sector of business(De Koning, et al., 2008). The consistency in profit generation has also supported through focusing on the integration of forecasting techniques with supply and demand for the products in the business. As the business has expanded its operations into wide area, diversified type of strategies are developed for making the products attractable to the customers.

The return on shareholders has also assured through rising the margin and investment for long-term which would provide the business an opportunity for utilising in the financial growth of business(Coleman, et al., 2016). The business has also added value to their shareholders through adapting the strategies which are suitable for long-term prosper of business. The amount of dividend and equity share has increased as the figures of reliable gross margin and equity return are reported. However, reduction in operational cost for Tesco has also improved their gross margin which is beneficial from the perspective of shareholders. Thus, the business efficiency has also been improved through compensating the liabilities in scheduled timeframe with controlled aspect. The company has also need to focus on investment of marketing campaign and public relation platform which would attract both the customers and investors due to rising brand image(Tesco, 2018). Moreover, the business has operated in the market for more than 80 years which would provide an opportunity to gain brand loyalty and stable customer base.

Future prospects of Market Verdict of Tesco

The market verdict of Tesco has reflected through share price of 2.73 Euro which has increased by 0.06% from last month. The price earnings ratio and earnings per share of the business has been demonstrated as the main perspective which are described for identifying its market opportunities. Earnings per share for the business is not consistent whereas the profitable share has also been assured which is indicated from the figure(Bolton, 2014). The earnings per share for the firm has reduced from 0.07 in 2016 to -0.02 in 2017 whereas the figure has increased very rapidly to reach 0.62 in 2018. On the other hand, the P/E ratio of business has decreased from 106.51 to 0 in 2017 which has later increased to 14.31 in 2018. Due to operating in retail sector for more than 50 years, the investors are attracted towards the firm for their rising brand image in the context of business. The forecasting values has also prescribed the growth of revenue generation of business which is assured through wide range of financial calculation over time period.

Market to book ratio is considered as the financial valuation for evaluating the current market valuation with respect to the booking value. So, the ratio of market capitalisation and book value has been demonstrated through the ratio. The market to book ratio for Tesco has reduced from 2.84 in 2015 to 1.67 in 2016. Due to rising market capital, the ratio has also increased with respect to the previous year and then it reduced to 1.61 in 2018(Tescoplc, 2018). So, the assurance for higher market capitalisation is demonstrated through focusing on particular issues or approaches. In the financial year of 2018, the growth rate of average book valuation is considered as -3.10% in each year. These ratios and figures are calculated on regular basis for identifying the potential field of improvement and adapt suitable strategy. Focusing in any particular sector of business has assisted the managerial body to improve their continuous function without facing any concern(Brusca, et al., 2016). Tesco has capitalised on business size and customer loyalty for gaining profit in selling retail goods for the business. The enhancement in business profit generation has assured through investing in the operations at the preliminary stages.

The trends for the business has also considered as favourable for the businesses as the firm has initiated selling products through digital medium. Due to globalisation, the businesses would get an opportunity for expanding their regular processes without facing any concern whereas the customer orientation towards healthy and fresh products has also increased(BBC, 2018). The businesses has transformed their medium into digital manner for diversifying their opportunities and the range of suppliers has also raised for assuring quality deliverables in controlled pricing.

Conclusion

The financial ratio calculation would provide an insight to the business stakeholders for being adopted with the firm’s operations. The profit margin of business in overall manner and subtracting with expanses are described through the ratios which provides balance between assets and liabilities. It has been demonstrated as gross profit generation divided by the overall revenue generation of business. In 2015, the net income for the business has reduced with compared to the expanses which demonstrated loss for the business. Due to having large employee base and high experience, the firm has managed to maintain their suitable profit generation with respect to the investment values.

The current ratio has taken into the inventory account which has described the financial capability of firm. Slight fluctuation has demonstrated as the quick ratio has reduced from 0.69 in 2016 to 0.6 in 2018. The managerial body of the firm has got the overview of potential filed of improvement which assists in cost reduction for the operational sector of business. These ratios and figures are calculated on regular basis for identifying the potential field of improvement and adapt suitable strategy.

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