R1812D7073086
University of South Wales
School of Busine ss a nd Society
March 2020
Tutor: Bashkim Isuf i
Student: Oluwadare Akinyera
Student Number: R1812D7073086
Module Assessment 1
Course Code: AF4S31
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Financial Analysis of TESCO and Benedict Co.: A Comparative Study, Essays (university) of Business Finance
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University of South Wales
School of Business and Society
March 2020
Tutor: Bashkim Isufi
Student: Oluwadare Akinyera
Student Number: R1812D
Module Assessment 1
Course Code: AF4S
Contents
Customers are referred to as individuals or group of individuals who purchase various brands/services form the organization to satisfy their needs. These individuals also go ahead to recommend TESCO to other people. (TESCO, 2017) Customers are referred to as external stakeholders. Suppliers are individuals or people who make supplies to TESCO. The AR defines them as those that are satisfied with doing business with them. (TESCO, 2017) Colleagues/Employees consists of the workforce of TESCO. In the context of being a stakeholder, the TESCO report defines them as those class of colleagues or employees that will recommend it as an employer of choice and a favorable place to work. 2.2 Tesco Corporate Social Responsibility To Its Stakeholders We would be analyzing how Environmental and Social Review and the Corporate Governance Report helps Tesco validate its two key Tesco stakeholders. Customers and Employees are the selected stakeholders that will be analyzed. These two were chosen because they are mentioned in Tesco’s Annual Report. They are also the standout stakeholders that had a significant contributions to the overall performance of the company. TESCO pays a lot of attention to its CSR duties. They do this in two distinct ways
- A committee that looks to its CSR duties internally. This is headed by a Board Committee.
- Feedbacks and advice helps the organization also improve it CSR duties externally. 2.3 Environmental and Social Review Report TESCO has a reputation of being involved in community initiatives and program. This shows that TESCO take corporate social responsibility very serious. This report gives us a fairly detailed view of how TESCO demonstrates it CSR to its Customers and colleagues. The Environmental and Social Review(ESR) Report in the Annual Report of TESCO shows that the organization started its CSR internally with the workforce. According to the ESR report, The had the objective to improve the welfare of its employees in order to improve productivity from it’s workforce. They focused on improving the well-being of its colleagues by introducing adjustable working hours. This will enable employees work at a time that suits their circumstances.
The company also tried to promote an open and transparent way of working. One way they did this was by advocating diversity in the workplace and pledging a strong cause to upholding human rights. These approaches to CSR puts the organization in a more humane light from the perspective of the employee. They also focused on improving the health of its colleagues by forming partnerships with reputable health experts in the UK. These approach led to improving the health and wellbeing of its workforce These approaches may have improved the productivity of its workforce and even customers, thereby impacting positively on its workforce. Their approach impacted positively on one of the Big Six KPIs. There was 11 per cent increase over last year in the number of colleagues that will recommend TESCO as a great place to work. TESCO initiated an innovative way of reducing food wastage from suppliers. This helped suppliers save more money and improve their profitability and productivity. An increase of their operating profit over the previous year, +1.1% growth over the previous year. (Tescoplc,com, 2017) 2.4 Corporate Governance This reports shows that TESCO placed a lot of importance on promoting its Corporate Social Responsibility. The Corporate Responsibility Chairman, John Allan reiterated this in the report, by stating that the company “are seeking to take a leading position on corporate responsibility matters within our industry” (Tescoplc.com, 2016). A major highlight of one the company’s CSR achievements is the ‘Eat Happy/Farm to Fork’ project that sensitized over 1 million children on healthy eating habits. The report further adds that the project is “ helping children to learn more about where their food comes from and to obtain the skills to get more involved in cooking at home.” (Tescoplc.com, 2016) 3.0 BENEDICT CO. STRATEGIC FINANCIAL ANALYSIS Benedict company is a UK firm that deals in the purchasing and reselling damaged and unused freight in all parts of the country. These range from marine, trucking, railroad, or airfreight claims and from casualty losses of a commercial nature.(Benedict Company, 2020). This report will seek to financially analyze the aforementioned company using different financial ratios in order to have a better and standard evaluation of Benedict Co. financial position. This analysis will help make
This can be a concern for investors as it maybe deduced that the company is not efficiently managing its capital employed. 3.1.3 Net Profit Margin(NPM) Net Profit Margin for 20X1 decreased by 5.8% over 20X1 even though there was a 24% growth in sales. This decrease is as a result of increased operating costs in 20X1. This also a concern for potential investors as it shows that the company cannot efficiently manage its operating cost. 3.1.4 Net Asset Turnover (NAT) This helps the organization efficiently making use of their assets and their current liabilities to improve the turnover. There is an increase in NAT from 20X0 to 20X10 BY 4.8% this small increase from 20X0 shows that the organization was able to use its capital employed to increase turnover than the previous year. (Scicluna, 2019). This means that 3.1.5 Gross Profit There was a 6% differential increase between 20X0 and 20X1. This is majorly down to an increase in turnover in 20X1. 3.2 USE OF RESOURCES RATIO This shows the cycle in which a company utilizes its working capital.(Scicluna, 2019). The ratios that will be measured includes:
- Stock Days
- Debtor Days
- Creditor Days
- Cash Conversion Cycle Ratios 20X1 20X0 Comments Stock days 118.63 65.45 Increased Debtor days 90.06 55.70 Increased Creditor days 155.13 108.24 Increased Cash conversion cycle 53.56 12.91 Increased
3.2.1 Stock Days In comparison to the industry average of 60 days, 20X0 AND 20X1 showed 5 days and 59 days increment respectively. This shows that the organization is finding it difficult to utilize available resources to move or trade their stock inventory. This is may be an issue or challenge that may raise doubts in a potential investor. This ratio may also show deficiencies in the company’s distribution system. 3.2.2 Debtor Days The ratio shows how many days it takes for debtors to pay for goods or services rendered. There was increase in debtor days for 20X0 to 20X1, over 60%. This shows that the company were less efficient in their debt collection. Other factors that could have led to this is stronger bargaining power from debtors, poor debt management tools and systems. The introduction of a stringent debt collection process, introduction of promotions and discounts to customers who pay early could tackle this problem. 3.2.3 Creditor Days Creditor days is the amount of time (days) it takes the company to pay back creditors, usually suppliers. There was a 47 day increase in creditor days between 20X0 AND 20X1. This shows that the company took longer days to pay back creditors. This is of serious concern especially to potential suppliers who are seeking to do business with the company. This can put them off seeing that it takes a considerable amount of time for Benedict Co to pay. This may also indicate that there may be some complicated financial issues. 3.2.4 Cash Conversion Cycle This ratio is used to determine how long it takes a company to generate money from its operations.(Scicluna). In 20X0, it took lesser time for Benedict Co. to generate money from its operations, - 41 days, than in 20X1. This may show a shortage of cash that may make smooth running of daily operations difficult. 3.3 LIQUIDITY RATIOS This ratio describes if the company has enough money to cover its debts. Ratios 20X1 20X0 Comments Current ratio 1.19 1.25 Decreased Quick ratio 0.70 0.75 Decreased
3.5 INVESTOR RATIOS Ratios 20X1 20X0 Comments Return on equity 23.57% 27.03% Decreased Dividend per share (DPS) 0.25 0.2 Increased Earnings per share (EPS) 36.67 38.89 Decreased Dividend cover 146.66 194.44 Decreased Payout ratio 68.18% 51.43% Increased Price/earnings ratio 15.27 9.26 Increased Dividend yield 4.46% 5.56% Decreased Earnings yield 654.75% 1080% Decreased 3.5.1 Returns on Equity There is a decrease year on year in the ROE. The major factor is the decrease in profit after tax compared to the invested equity. This may mean that earnings of shareholders will dwindle over time. The company’s operations also may not be generating enough earnings to retain shareholders trust and to attract potential investors. 3.5.2 Dividend per share Benedict Co. made a panic attempt to earn the trust of its shareholders after posting a low Return on Equity/. They increased their Dividend per share. This may have been an erroneous move since it would have been a better move to invest in improving their operations, thereby improving the Returns on Equity. 3.5.3 Pay-out Ratio The Pay-out ratio increases due to Benedict Co increasing its Dividend per share. It shows that the company is trying to keep its shareholders. 3.5.4 Price/ Earnings Ratio The strategy that Benedict Co. employed to retain its shareholders finally paid off as the Price/Earnings ratio increased. This shows that the shareholders wanted to invest further in the company.
4.0 CONCLUSION AND RECOMMENDATIONS Review and financial analysis of Benedict Co indicates that the company may not be an ideal tender for the supply of the important business component. This is because of some negative indices discovered during the analysis. One stand out index is the Creditor Days ratio. This shows that the company may not be credible or may have issues in terms of payments. Liquidity problems also poses a challenge as the company is having difficulties in the following trading their stock efficiently, collecting money from debtors, and high operational costs. High risk due to inability to cover its liabilities and interest charge is another disturbing feature of the company. Nevertheless, the company needs to focus on increasing its turnover and reducing its operational costs. This can be done by implementing a strategy to efficiently trade their stock quicker, decrease credit days allocated to suppliers to improve working relationship with them.
BENEDICT CO. STATEMENT OF FINANCIAL POSITION AND RATIO
- 1.0 INTRODUCTION...............................................................................................................................................................
- 2.0 TESCO STRATEGIC FIANANCIAL ANALYSIS.......................................................................................................................
- 2.1 TESCO Key Stakeholders..................................................................................................................................................
- 2.2 Tesco Corporate Social Responsibility To Its Stakeholders..............................................................................................
- 2.3 Environmental and Social Review Report........................................................................................................................
- 2.4 Corporate Governance....................................................................................................................................................
- 3.0 BENEDICT CO. STRATEGIC FINANCIAL ANALYSIS.............................................................................................................
- 3.1 ANALYSIS OF BENEDICT CO FINANCIAL RATIOS...............................................................................................................
- 3.1.1 PROFITABILITY RATIO...................................................................................................................................................
- 3.1.2 Return On Capital Employed (ROCE)............................................................................................................................
- 3.1.3 Net Profit Margin(NPM)...............................................................................................................................................
- 3.1.4 Net Asset Turnover (NAT).............................................................................................................................................
- 3.1.5 Gross Profit...................................................................................................................................................................
- 3.2 USE OF RESOURCES RATIO..............................................................................................................................................
- 3.2.1 Stock Days....................................................................................................................................................................
- 3.2.2 Debtor Days..................................................................................................................................................................
- 3.2.3 Creditor Days................................................................................................................................................................
- 3.2.4 Cash Conversion Cycle..................................................................................................................................................
- 3.3 LIQUIDITY RATIOS............................................................................................................................................................
- 3.3.1 Current Ratio................................................................................................................................................................
- 3.3.2 Quick Ratio...................................................................................................................................................................
- 3.4 GEARING RATIOS.............................................................................................................................................................
- 3.4.1 Capital Gearing Ratio....................................................................................................................................................
- 3.4.2 Debt/Equity Ratio.........................................................................................................................................................
- 3.4.3 Interest Cover...............................................................................................................................................................
- 3.5 INVESTOR RATIOS..........................................................................................................................................................
- 3.5.1 Returns on Equity.......................................................................................................................................................
- 3.5.2 Dividend per share.....................................................................................................................................................
- 3.5.3 Pay-out Ratio..............................................................................................................................................................
- 3.5.4 Price/ Earnings Ratio..................................................................................................................................................
- 4.0 CONCLUSION AND RECOMMENDATIONS......................................................................................................................
- APPENDIX............................................................................................................................................................................
- INDUSTRY DATA..................................................................................................................................................................
- BENEDICT CO STATEMENT OF INCOME...............................................................................................................................
- BENEDICT CO. STATEMENT OF FINANCIAL POSITION AND RATIO CALCULATIONS..............................................................
- REFERENCES........................................................................................................................................................................
- 20X1 20X CALCULATIONS
- $’000 $’
- Non-current assets 38,000 32,
- Inventory 5,200 2,
- Account receivables 7,600 3,
- Current assets 12,800 6,
- Total assets 50,800 39,
- Share capital 18,000 18,
- Reserves 10,000 7,
- Capital and reserves 28,000 25,
- 6% bonds 12,000 8,
- Non-current liabilities 12,000 8,
- Trade payables 6,800 4,
- Overdraft 4,000
- Current liabilities 10,800 5,
- Total liabilities 50,800 39,
Ratios Interpretation Formulas Calculations Results 20X1 20X0 20X1 20X PROFITABILITY RATIOS Return on capital employed (ROCE) It is the percentage of return earned by a company's capital employed. (Scicluna, 2019) PBITx Capital Employed (TA- CL)
(8,300+1300)X
(8700+500)X
Net profit margin It is the percentage of the turnover of a company which is profit after operating costs. (Scicluna, 2019) PBITx Sales (8,300+1300)x (30,800) (8,700+500)x (24,900)
Gross profit % It is the percentage of selling price that represents profit instead of cost. (Scicluna, 2019) GPx Sales 14800 x 30, 10400 x 24,
Net asset turnover It is how efficiently the company's capital employed is utilized to produce turnover. (Scicluna,
Turnover Capital employed(TA – CL)
USE OF RESOURCES
Stock days It is the average number of day’s worth of stock held by the company. (Scicluna, 2019) Inventory x 365 Cost of Sales 5,200 x 16, 2600 x 14,
days
days Debtor days It is the average number of days that it takes a debtors to pay. (Scicluna, 2019) Trade receivablesx Sales 7,600 x 30, 3,800 x 24,
days
days Creditor days It is the average number of days that it takes to pay creditors. (Scicluna, 2019) Payablesx Cost of Sales 6,800 x 16, 4,300 x 14,
days
days Cash conversion cycle It is the average time it takes a company to generate cash from operations. (Scicluna, 2019) Stock days + Debtors days – Creditors days
days
days Liquidity ratios Current ratio It is the number of times that a Current Assets 12,800 6,400 1.19 1.
Payout ratio Inverse of dividend cover (Scicluna, 2019) Dividend paid to ordinary shareholders x 100 / earnings after tax (4,500 x 100) 6, (3,600 x100) 7,
Price/earnings ratio Shows the number of years' earnings that a shareholder would be willing to sacrifice in order to purchase one share. (Scicluna,
Market price per share / EPS
Dividend yield Shows the return to ordinary shareholders as a % of the share price represented by DPS DPSx Market price per share (0.25 x 100)
(0.2 x 100)
Earnings yield Shows the return to ordinary shareholders as a % of the share price represented by EPS. (Scicluna, 2019) EPSx Market price per share (36.67 x 100)
(38.89x 100)
REFERENCES Benedictcompany.com. 2020. About Benedict Company | Benedict Company. [online] Available at: http://www.benedictcompany.com/about/ [Accessed 26 March 2020]. Benn, S., Abratt, R. and O’Leary, B., 2016. Defining and identifying stakeholders: Views from management and stakeholders. South African Journal of Business Management , 47(2), pp.1-11. Clarkson, M. 1995. ‘A stakeholder framework for analyzing and evaluating corporate social performance’, Academy of Management Review, 20(1): 92-117. Freeman, R.E. & Reed, D.L. 1983. ‘Stockholders and stakeholders: A new perspective on corporate governance’, California Management Review, 25(3): 93- Scicluna, C. (2019). Strategic Financial Management AF4S31: Interpretation of Financial Statements. Available at: http://vle-usw.unicaf.org/mod/resource/view.php?id=36393. Tesco PLC. 2020. Key Facts. [online] Available at: <https://www.tescoplc.com/about/key-facts/
[Accessed 23 March 2020]. Tescoplc.com. 2020. [online] Available at: <https://www.tescoplc.com/media/264194/annual- report-2016.pdf> [Accessed 25 March 2020]. The Guardian. 2020. Company Profile For Tesco. [online] Available at: https://www.theguardian.com/sustainable-business/profile-tesco [Accessed 23 March 2020].