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You have recently attended a workshop aimed at improving your understanding of company Annual Reports using Tesco’s report as an example. During the workshop you looked at the following sections of Tesco’s annual report: The Strategic Report including the Environmental and Social Review, The Corporate Governance Report and, The Group Statements of: ‘Income’ (also sometimes referred to as the Statement of Profit and Loss) ‘Balance Sheet’ and ‘Cash-Flows’.
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Chapter 1 ……………………………………… 2 1.0 Introduction 1.1 Methodology 1.2 Structure of report Chapter 2 (Part 1) ……………………………………… 3 2.1 TESCO AND STAKEHOLDERS
2.1.1 Tesco’s Customers 2.1.2 Tesco’s Colleagues 2.1.3 Tesco’s Suppliers 2.2 Evaluation of Corporate and Social Responsibilities performance of Customers and Suppliers 2.2.1 Employees’ diversity report 2.2.2 Order Transparency for Suppliers 2.2.3 Inspiring better Suppliers business operations through innovation Chapter 3 (Part 2) ……………………………………… 6 3.0 BENEDICT CO CORPORATE STRATEGIC FINANCIAL ANALYSIS 3.1 ANALYSIS OF BENEDICT CO’S FINANCIAL STATEMENT USING FINANCIAL RATIO MIX 3.1.1 Profitable Ratios 3.1.2 Liquidity Ratios 3.1.3 Leveraging Ratios 3.1.4 Resources Management Ratios 3.1.5 Investors Ratios 3.2 Final deductions and conclusion TABLES Table 1.0 Financial ratio mix and Relevance to stakeholders …………………………….. Table 2.0 Profitability ratios Table 3.0 Liquidity ratios Table 4.0 Leveraging ratios Table 5.0 Use of resources ratios Table 6.0 Investor ratios APPENDIX Calculation breakdown 1.0 – 4. Reference Chapter 1 1.0 Introduction We live in an information world where the necessity to accurate behaviour and response from companies is demanded in the marketplace. Companies are under more scrutiny to stay transparent about their performance in public. This essay is divided into 2 parts (chapter 2 and 3) as described below. Part 1) The analysis of Tesco PLC 2016 annual report. Covering discussions about the business’s stakeholders and how the report clearly links its responsibilities towards the various key stakeholders in terms of its Environmental and Social review alongside its Corporate responsibilities.
Over the years, Stakeholders management has become an imperative interface between the demands of an organization and its strategic goals (Ackermann and Eden, 2011). It's become a major practise among big and small organizations. Freemanand Reed (1983) defines a Stakeholder as ‘those groups without whose support from the organization would cease to exist’. Soon this definition was expanded into those who also have an influence on the organization e.g. internal staff and board of Directors (Bryson et al, 2002). Other research documents have gone a step further in identifying the different stakeholders as the external or internal individuals or group of people with common interest in determining the survival of the business; making it more dependent on the type of business in question (Preston 1995). Image 1.0 source: https://stakeholderengagementnz.wordpress.com/2011/04/11/stakeholder- mapping-part-2/ In the Tesco 2016 annual report, the stakeholders of the business are categorized into 3 units- customers (shoppers), colleagues and suppliers (Tesco annual report pg 17). 2.1.1 Tesco’s Customers Customers are also described as Shoppers, these are the people who shop at Tesco and recommend the experience to the individual’s peer. The report ranks the growth in loyalty at +1.2%, which reflects an increase in their weekly spend and frequency of footfall/traffic at their online and offline stores (Tesco annual report, 2016). 2.1.2 Tesco’s Colleagues Colleagues, these constitute every team member that works at Tesco referred to as Tesco employees, working hard to deliver the best service according to the business’s standard. Unlike the Customers, these groups are categorized as internal stakeholders and the report shows that the measurement used to track their satisfaction during the course of stakeholder management is their willingness to recommend Tesco to other talents outside the business, this has increased by 11% (Tesco annual report, 2016). 2.1.3 Tesco’s Suppliers Lastly, the Suppliers, these are the business’ vendors that help in providing products and add-on services to the Tesco business towards nurturing the business’s value creation cycle. Recommendation as a great place to work. This could be attributed to the more favourable working conditions Management offers the employees such as flexible working hours, enhanced training
opportunities and more transparent way of working (Tesco PLC Annual report and financial statements 2016, pg 21). Other stakeholders referred to in the report include, local and foreign markets’ labour unions, consumer regulatory and advisory bodies such as British health & nutrition body, Public Shareholders and Government bodies within the business’s operating Countries. 2.2 Evaluation of Corporate and Social Responsibilities performance of Customers and Suppliers Tesco has demonstrated a strong commitment towards the satisfaction of its stakeholders, with the help of the activities described under the corporate and social responsibilities, the correlation between the performance of the business’s relationship with Suppliers and Employees is made clear. Also, by adopting specific reporting structures for internal and public use, the business has successfully integrated its performance in this area through addressing issues of management, accountability from the Leadership point of view, effectiveness and transparency. These impacts were measured with financial and non-financial objectives in the report; the performance measures and strategy and Audited annual bonus performance against targets helped to demonstrate the remuneration policy as part of its transparency commitment (Tesco annual report, 2016,pg 8, 12-13, 39, 51 and 126). Below are two examples of how Tesco engages their suppliers and employees with its corporate and social responsibility governance. 2.2.1 Employees’ diversity report For the Employees, the business has long committed to address societal issues of gender inequality especially in two areas- gender pay gap and ratio of female talents to male. This was clearly portrayed in the diversity report showing a balance split of 43% to 57% male to female in the workforce. 2.2.2 Order Transparency for Suppliers The business has made an improvement in its stock report to the food suppliers to control food waste at the end of every market day, this Tesco has achieved by trailing flexible ordering where a range of volumes is requested for supply. At the end, food waste within the daily operations is donated to local food welfare centres for community under the umbrella of Tesco’s Community Food Connections (CFC). 2.2.3 Inspiring better Suppliers business operations through innovation In general, Tesco has capped out over 4.6 billion calories and 1,480 tonnes of sugar off soft drinks sold across, this simple act demonstrates its commitment to the health lifestyle of the consumers. Encouraging shoppers to make better food choices. In addition, the business invests in shop floor experience among employees (retail and non retail staff) towards designing and improving the consumers shopping experience. At the end, the suppliers are happy to associate with the business as they look more socially responsible in their offerings. In summary, the report demonstrated that the corporate governance and social review performance has a direct impact on all its stakeholders, financial and non-financial objectives. What is also
equity. In other words, the ROE reflects the generated income from the investors’ equity financing. Lenders Equity ratio also known as solvency ratio. = Total Equity (Liabilities + Assets) Total Assets Equity ratio performance is highly benchmarked by industry standards, this shows the portion of company resources is funded by its shareholders and earnings. The higher (50%)the equity the more conservative it ranks while the companies with opposite rankings are referred to as Leverage companies that pay more interest on loans. Compared to conservative companies, they offer more dividends to shareholders. Suppliers Cash flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure Liquidity using Current ratio = Current Assets Current Liabilities Operating Cash flow = Operating cash flow Current liabilities Cash flow- deduce the amount of money the company generates from its operations over a period (weekly, quarterly or a year). This gives an indication of the value. Liquidity ratio consists of current ratio. Helps the supplier to know if the business can pay off their debts over a period. However, if the ratio is too high it may be an indication of poor asset management. Customers Liquidity ratio and Use of resources ratios (creditor days, cash conversion cycle, stock days and debtor days Similar to that of Suppliers’ stake, for the customer, information about the level of liquidity the company can help stir up confidence and peace in the mind of the customer. Higher liquidity commands more assurance that the company will always have the required operations cash flow to fulfill demands. 3.1 ANALYSIS OF BENEDICT CO’S FINANCIAL STATEMENT USING FINANCIAL RATIO MIX 3.1.1 Profitability ratio mix Table 2.0 Profitability ratios
A) Gross profit margin % Benedict Co showed an increase in profit margin by about 7% by year 20X1, showing an increase in sales and revenue; this is a sign of fluctuation in profit margins which may be a signal of improved management such as a slight change in operational structures which could be a temporary impact. The present of previous years’ gross profit could help paint a clear picture of the stability of the business’s profitability better than the two years presented in this report. B) Net profit margin % This shows the ratio of net profit to revenues, there was a drop in net profit by 10% by year 20X1, which contradicts the positive gross profit margin. As shown in table 2.0 above, there was a drop in the profit before tax in year 20X0 which was linked to the changes in operating expenses with over 200% increment as demonstrated in an increase in operational ratio from 1.07 to 1.2 year 20X1. This reflects the company is inadequately managing their resources as the expense increased in one year. However, there are some external factors that could be responsible for this such as increase in cost of acquisition and economic trends not clearly stated in the company’s financial report. C) Net Asset Turnover There is an increase in the ratio of the turnover over capital employed from year 20X0 (0.73) to 20X1 (0.77), meaning there was a higher sales over the capital invested in the business. This shows progression in the business performance and could be an attractive business case for Investors, as the business has demonstrated efficiency in generating revenue from capital deployed yearly. D) Return on Capital Employed ratio We observe a decrease in the ROCE as the profit before tax decreases ( from 8.3 million dollars to 8.7million dollars in 20X1) while an increase in current liability(from 33.9 million dollars to 40million dollars in 20X1). This spurs up concerns over the depreciating effective management style of the business towards liabilities in yielding maximum profit. Researches have argued the use of ROCE as a planning and monitoring tool for business profitability, In a 2005 publication, Enyi highlighted the missing correlation of ROCE calculation with the exact impact from capital employed, since the capital employed in the report is static for 1 year, but it takes more than 1 year capital employment to influence the revenue stream of the company over time.
B) Debt ratio A ratio of total debt to total equity, in concordance with the Gearing ratio, there is also an increased debt ratio, reflecting higher long term debt than its stock capital and reserves. Expressing the amount of commitment made by Suppliers, Lenders and Creditors versus that of the shareholders.The standard ratio is subjective to industry standard. C) Interest cover ratio The is a deterring result for Creditors as the interest rate is observed to have decreased more than 60%. Indicating a reduction in the profit to service outstanding debt effectively. It’s important for Customers, Investors and Suppliers that Benedict Co optimize the cost of operation either through investment in new products, technologies or service structure in order to increase profit margins from its revenue. 3.1.4 Resources Management Ratios Table 5.0 Use of resources ratios A) Creditors and Debtors days ratios There is a relationship between both ratios as it unravels the payment cycle within the business operation between the Company and Customers (creditors) versus Company and Suppliers (debtors). The increase in Creditors days by 43.31 days (slows down the speed of response for Benedict Co to pay up Debtors (such as suppliers) by about 34 days. According to a research article by Peel et al, (2000), there should be a balance between the Creditor days and Suppliers trade terms to protect the business from impeding the business’s supply efficiency, as the current state of the Benedict Co ratios makes it discouraging for our business to sign a reliable contract with their Benedict Co. B) Cash Conversion Cycle Ratio This is a metric that best calculates the time (days) it takes a company to convert its inventory investment and other assets into cash flows resulting from sales. In relations to the discussion under the Creditors and Debtors ratios, it is interesting to observe a connecting trend that the cash conversion cycle increases from 20X0 by approximately 41 days. Showing off the underperformance of the business in turning stock to cash in year 20X1. C) Stock Days Ratio Also referred to as days sales of inventory, indicating the number of days that a company takes to turn its inventory into sales (receivables and outstanding payment). In 20X1, an increase in the
number of stock days indicates a slow sales turn around for Benedict Co. This could be linked to mis calculation of demand, a lag in sales operations or simply a lack of overall efficiency. 3.1.5 Investors ratios Table 6.0 Investor ratios A) Return on equity Return on equity measures the financial performance through the ratio of net income to shareholders’ equity, showing off how the company’s asset is managed to maximize profits. Benedict Co has performed poorly in year 20X1 as it experienced a drop in its ROE by 4%. B) Dividend yield Following the ROE analysis it is no surprise that there is also a noticeable descrease in the Dividend yield for shareholders. This requires the division of annual dividend by stock price which increased from $3.6 per share to $5.6 per share. C) Earnings per Shares and per yield The EPS of Benedict Co over the reported period indicates how much value investors will pay for a company with more profits. The EPS and EPY are observed as tending towards zero which can be interpreted as a deteriorating earnings without a record of increase as we move between both years 20X0 and 20X1. 3.2 FINAL DEDUCTIONS AND CONCLUSION The gross profit margin result show an increase from previous year (20X0) which is a positive signal for suppliers and creditors as they engage with Benedict Co business due to its stable profit growth; although a more detailed trend of the gross margin analysis from previous years will help address some of the assumptions made in this analysis. The net profit margin clearly demonstrated a contradictory report as we see a decline in profit in Table 2.0. Regarding the company’s inadequacy in managing resources over the two years as analyzed in section 3.1.1 However, it is not clear if there are other external factors such as economy or industry challenges influencing the observed profit fluctuations in section 3.1.1 and 3.1.2 The over dependence on working capital from stakeholders over optimizing its Operations cash flow and resources management puts Benedict Co’s business performance at the verge of a risky and unstable business to partner with.
Bryson, J.M., Cunningham, G.L., Lokkesmoe, K.J., (2002). “What to do when stakeholders matter: the case of problem formulation for the African American men project of Hennepin county”, Minnesota. Public Administration Review 62 (56) pp. 584 Enyi, E. P. (2005), “How Useful is the Return on Capital Employed (ROCE) as a Performance Indicator”, AAFM Journal, 8(1) pp. 1- Freeman, R. E., Reed, D. L., (1983). “Stockholders and shareholders: a new perspective on corporate governance”. California Management Review (25) pp. 88- Gibson, C. H. (2009), “Financial Reporting and Analysis”. 11th ed. Mason, OH, México: Cengage Learning. Online source. https://epdf.pub/financial-reporting-and-analysis-eleventh-edition.html Peel, M. J. Wilson, N. and Howorth, C. A. (2000). “Late payment and Credit management in the small firm sector: Some Empirical Evidence”, International Small Business Journal 18(2) pp. 52- Tesco PLC Annual report and financial statements 2016. Online source. https://www.tescoplc.com/ media/264194/annual-report-2016.pdf University of South Wales, UK. AF4S31N 2016-17 Assignment 1 V2.pdf Ohlson, J. A. and Juettner-Nauroth, B. E. (2005). ‘Expected EPS and EPS growth as Determinants of Value In’: Review of Accounting Studies. pp. 349-
