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This report provides a strategic financial analysis of Tesco, focusing on stakeholder analysis and a comparison of financial ratios between Tesco and Benedict Co. Tesco's stakeholder identification, performance analysis, and corporate social responsibility. It also includes a financial position analysis of Benedict Co., with a focus on profitability, liquidity, and investors ratios.
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TESCO Stakeholders Analysis and Benedict Co. Financial Evaluation
Tesco Corporate Social Responsibility, Environmental and Social Review and Corporate
Nutt, Backoff and Bryson, do accept Freeman’s definition, while also they advocated for importance of adding organization in the definition, which is why it is evident in the definition provided by the business dictionary (Bryson, 2004). In his work, Bryson believes that stakeholders are key actors that should be in the consideration of any company’s management that is why while reviewing Tesco’s report the author will pay attention to organizations involved (Bryson, 2004). According to Clarke and Clegg, there are four classifications to stake holders; Primary Social Stakeholder, Secondary Social Stakeholders, Non-Social Stakeholders and Secondary Non-Social Stakeholders commonly known as the Clarke and Clegg model (Clarke and Clegg, 2000). By following this model, we can identify three main stakeholders under the primary social classification, who will be the ones the author will analyse such as Customers, Employees and Suppliers (Clarke and Clegg, 2000). In a simpler form of categorization, Stakeholders are classified into internal (within the company) and external stakeholders (outside the company). By following this classification, the main internal stakeholders for Tesco are the Employees (also known as Colleagues in all of the company’s communication) and the external stakeholders to be Customers and Suppliers (Clarke and Clegg, 2000). In its report, Tesco followed the later form of categorization of stake holders and added another which is Connected Stakeholder that is why we will follow this categorization in our analysis. 2.1 Tesco Stakeholders Analysis 2.1.1 Customers Customers are individual or entities who purchase a product or service from a company, with frequent purchases and brand advocacy (SANGWA, 2018).
cash payments to their suppliers in an effort to create a trusted and transparent relationship with them (Tescoplc.com, 2016). They have also set up The Supplier Network with its own dedicated helpline to tackle problem, issues and concerns as they arise. With the changes that have been applied Tesco has seen positive reactions from the suppliers and increase supplier satisfaction index, treating them more like partners of success rather than a supplier of goods (Tescoplc.com, 2016). 2.1.3 Colleagues Tesco considers their staff as colleagues, the company invests a lot in the care of its colleagues as to create a great working environment that will at the end help maintain a healthy relationship with the partners and provide the customers with the level of service they deserve (Tescoplc.com, 2016). With Tesco offering competitive benefits such as Employee Share Schemes, additional discounts on merchandises, housing options and many more helps Tesco keep a good retention rate and maintain a good employer score which is evident in Tesco’s NPS (Net Promoter Score) dubbing it a great place to work (Tescoplc.com, 2016). 2.2 Tesco Corporate Social Responsibility, Environmental and Social Review and Corporate Governance 2.2.1 Environmental and Social Review For the longest time, Tesco has made it clear that it takes corporate social responsibility seriously. Whether by being an active part of the local community, by taking part or leading initiatives that enriches that surrounding community. To be able to capture the impact and the significance of the work that they have achieved so far, we can start by reviewing what they have been doing locally regarding increasing wellness and health of their colleagues and partners by looking into their annual report where it was they started “creating partnerships with health experts like Diabetes UK and the British Heart Foundation that support prevention and cure for the biggest health challenges we face. By working together, we’re combining the charities’ expertise in health with Tesco’s ability to reach people in local communities across the
UK. This gives us a unique opportunity to encourage the nation to make healthier choices in the way they live their lives. This year we have raised £7.89m and this is going towards prevention projects and important health research.” (Tescoplc.com, 2016). Their programs also included “Tesco Eat Happy Project”, “Lets Cook” courses and “Farm to Fork” trails that have so far impacted 1.3 million children, the purpose of these programs to teach the children to make healthier choices and be more active in the selection and the cooking of their meals (Tescoplc.com, 2016). Tesco also pays attention to the feedback given by their customers, for example they replaced the sweets and chocolate snacks from the check out and replaced it with more healthier options, they have also taken it a step further, to ease the shopping trips on parents they are providing kids with free fruits to consume through the shopping trip (An update on our Corporate Responsibility commitments, 2016). They have also actively reformulated the ingredients in their products to reducing the amount of salt, fat, saturated fat and sugar, especially in their soft drinks where they mention in their updated corporate sustainability report “4.5 billion calories and 1,400 tonnes of sugar we have already cut from the range.” (An update on our Corporate Responsibility commitments, 2016). Tesco also, have been working on food waste program which is “Farm to Fork” and have been applying it whether with its suppliers and in its own operations. With the suppliers, Tesco has dedicated its efforts to prevent the waste of edible food that is why in “In March 2016 we widened our specification and introduced our Perfectly Imperfect range which includes parsnips, potatoes, strawberries and apples. This enables us to take more of the crop than ever before and reduce food waste on farms. We are making links between our growers and our fresh and frozen suppliers to help tackle waste too. For example, we are supporting our potato supplier, Branston, to supply one of our own-brand manufacturers, Samworths, with unsold potatoes for mashed potato products – increasing crop usage and reducing waste.” (An update on our Corporate Responsibility commitments, 2016). Regarding its own operation, Tesco has launched “The Community Food Connection” program, in partnership with Fare Share Food Cloud, this program “aims to deliver
the audit committee and the company’s relationship with shareholders, including institutional investors.” (Watson and Head, 2010). By analysing the report (P.31), Tesco’s Non-executive Chairman John Allen announces that “fully compliant with the UK Corporate Governance Code this year.” (Tescoplc.com, 2016), this to commemorate their strong belief; that having a strong corporate governing framework is key for rebuilding trust and transparency (Tescoplc.com, 2016). That they have undergone varies initiatives with their suppliers, creating succession plans as well as improve opportunities of ascension to senior and non-executive ranks for their colleagues especially women This includes mentoring and development programmes and circle networks to allow women of different levels of seniority to connect across the business, in an effort to support talent and diversity (Tescoplc.com, 2016). By examining Tesco’s Framework in the report (P.31), they show that they have created a “clear direction on decision making without creating burdensome processes that could impede progress. We retain the agility to get on with running our business whilst maintaining high standards of governance that support our aim of rebuilding trust and transparency.” (Tescoplc.com, 2016). This shows that they are leaving no room for an “Agency” problem to take effect between the company’s management and the company’s stockholders. In accordance to the code, the company’s framework shows compliance to the creation of committees to account the CEO and the CFO for their actions “the Board operates through a number of Committees, each made up entirely of members of the Board. Each Committee meets separately to the Board during the year, providing time to focus in depth on the particular key matters of audit, remuneration, nominations and corporate responsibility.” (Tescoplc.com, 2016). The committees will actively work on keeping the operations whether internally in check (such as keeping any duality problems at bay) or externally to maintain the company’s public image and operations intact.
The amount of detail that is presented in the framework, with the composition, the committees created and the intricate structure, shows Tesco’s commitment towards transparency and establishing trust in both Stakeholder and Shareholders as well. 3.1 Introduction As mentioned earlier (Introduction chapter) Benedict Co. is a leading UK retailer salvage company specializing in salvaging damaged cargos, abandoned freight, casualty losses (Benedictcompany.com, 2019). In this chapter, the author will attempt to analyse the financial situation of the company and its eligibility for an upcoming contract tender, by analysing the financial years 20X0 and 20X1 materials that will provide the author with information on the company’s relevant ratios. 3.2 Methodology In this analysis the author will be utilizing a series of financial ratios and calculations that will aid in the evaluation of the financial position of the company. Below are the ratios and their relevance to the company’s stakeholder: a. Profitability ratios: To be applied on customers, lenders and suppliers (Scicluna, 2019). b. The Use of Resources ratios: Creditor days, stock days, debtor days and cash conversion cycle (Supplier Performance) (Scicluna, 2019). c. Liquidity ratios: quick and current ratio (Customers and Suppliers) (Scicluna, 2019). d. Gearing ratios: Debt, equity and interest cover (Lenders) (Scicluna, 2019). e. Investor ratios: Return on equity, dividend and earnings yield, dividend and earnings per share, etc.(Investor Performance) (Scicluna, 2019) CHAPTER THREE: BENEDICT CO. FINANCIAL POSITION ANALYSIS
Gross Profit Margin: Showing an increase of almost 6% from 20x0 is considered a good sign for the company, this could be interpreted as a result of an increase in sales and low cost of sales. Net asset turnover: This show how the company utilizes their assets and manage their current liabilities to generate sales, this slight increase from 20x0 shows that the company is getting better at allocating it capital to generate revenues from sales (Scicluna, 2019). 3.3.2 Uses of Resources Ratios Ratios 20X1 20X0 Observations Stock days 118.625 65.45 Increased Debtor days 90.064 55.702 Increased Creditor days 155.125 108.241 Increased Cash conversion cycle 53.564 12.901 Increased Stock days : In 20x0 they showed a five days increase over than the industry average (60), however, in 20x1 they almost needed double of the normal average to sell their stock, this indicates problems in how they are utilizing their resources to accelerate the trading of their stock, maybe their marketing schemes or other operational activities. Debtor days: This calculation is used to see how many days it takes the company to be able to collect money from the debtors, as shown in the calculations, the debtors needed almost 45 days more in order to pay Benedict Co, which means that the company is not efficient in the collection of their money and that the debtors now have more bargaining power over the company which is risky especially if those debtors are
suppliers. The company can offer discounts, promotions on early payments to decrease debtor days. Creditor days: From the table we see that Benedict Co. also take a long time to pay of its creditors, it took them almost 47 days more in 20x1 to payoff, this ratio is of a delicate balance, it is about keeping a good relation with your creditors (suppliers) and not to lose privileges such as early payment promotion, discounts and to maintain some capital to buy more stock. Benedict co now find themselves in a risky situation, as now suppliers may not accept to supply them due to their long creditor days, also sheds light on why debtors take more time to pay Benedict Co. in return. This is an indicator of an unhealthy financial relationship with can be problematic for Benedict Co. on the long run. Cash conversion cycle: In 20x0 Benedict Co had a shorter conversion cycle that that of 20x1, where the later showed an increase of almost 41 days to generate cash from their operations, this could be an indicator of shortage of liquidity (which may vary regarding the industry) which can be problematic when carrying out their day to day operations. 3.3.3 Liquidity Ratios Ratios 20X1 20X0 Observations Current ratio 1.185^ 1.254^ Decreased Quick ratio 0.703 0.745 Decreased Current Ratio: Despite showing a decrease from 20x0, and not measuring up to the industry average of 1.6, yet Benedict Co. still find themselves in the silver lining of being able to at least
3.3.5 Investors Ratios Ratios 20X1 20X0 Observations Return on equity 23.571% 27.027% Decreased Dividend per share (DPS) 0.25 0.2 Increased Earnings per share (EPS) 36.666 38.888 Decreased Dividend cover 146.664 194.44 Decreased Payout ratio 68.181% 51.428% Increased Price/earnings ratio 15.273 9.257 Increased Dividend yield 4.464% 5.555% Decreased Earnings yield 654.75% 1080% Decreased Return on Equity: A decrease in the ROE shows that the company’s profits after taxation is decreasing in comparison with the equity invested, meaning that the shareholders share in the profits will also decrease by time, this is an indicator that the company’s operations are not generating enough profit to retain the shareholders who are not getting their investment worth or to attract new shareholders. Dividend per share: In a desperate attempt to retain shareholders after achieving low ROE, Benedict Co increased the Dividend per share, which is a misguided move as they could have invested this money in enhancing their operations thus increasing the ROE. Pay-out Ratio: Benedict Co. increases their pay-out ratio which is obvious also due to the increase in the DPE; this almost confirms their shareholder desperate retention strategy. Price/ Earnings Ratio: Despite it might have looked ill-advised, their retention plan worked as it is evident in the increase of the price earnings ratio, meaning that the
shareholders are happy with their investments and willing to invest more in the company due to the return on the investment they had. CHAPTER FOUR: CONCLUSIONS AND RECOMMENDATIONS
Profitability Ratios Return on capital employed (ROCE) It shows the % return earned by a company's capital employed (Scicluna, 2019). PBIT x 100 Capital employed (TA- CL)
x (50,800 -10,800) (8700+500) x (39,000-5,100)
Net profit Margin It Shows the % of a company's turnover which is represented by profit after operating costs (Scicluna, 2019). PBIT x 100 Sales (8,300+1300) x 100 (30,800) (8,700+500) x (24,900)
Gross profit Margin It Shows the % of selling price that represents profit rather than cost (Scicluna, 2019). GP x 100 Sales 14800 x 100 30, 10400 x 24,
Net asset turnover It shows how efficiently the company's capital employed is used to produce turnover (Scicluna, 2019). Turnover Capital employed (TA- CL)
APPENDIX : BENEDICT’S FINANCIAL RATIOS CALCULATIONS
Use of resources Stock days It shows the average no of days’ worth of stock held by a company (Scicluna, 2019). Inventory x 365 Cost of Sales 5,200 x 365 16, 2600 x 14,
5 days
days Debtor days It shows the number of days (average) that it takes a debtor to pay (Scicluna, 2019). Trade receivables x 365 Sales 7,600 x 365 30, 3,800 x 365 24,
days
days Creditor days It shows the number of days (average) that it takes to pay creditors (Scicluna, 2019). Trade payables x 365 Cost of Sales 6,800 x 365 16, 4,300 x 365 14,
days
days Cash conversion cycle It gives an idea of the average length of time it takes a company to generate cash from its operations (Scicluna, 2019). Stock days + Debtors days – Creditors days
days
days Liquidity Ratios Current ratio It indicates the number of times that a company's current assets cover its short-term liabilities (Scicluna, 2019). Current Assets Current Liabilities
times
times Quick ratio This is similar to the current ratio but Stock is excluded from the current assets (Scicluna, 2019). Current asset - stock Current liabilities
times
times Gearing Ratios Capital Gearing This ratio shows the level of Long-term debts x 100 12,000 x 100 8,000 x 100 30 % 23.
