Strategic Financial Management
Name: Rochelle Fearon
ID Number: 7453149
Course Code: AF4S31-V2-16611
Tutor’s Name: Chris Benjamin
Date: April 24, 2020
Topic: Financial Analysis of Tesco and Benedict Co.
1
ID Number 7453149
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Financial Analysis of Tesco and Benedict Co.: Corporate Social Responsibility, Assignments of Financial Management
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Strategic Financial Management
Name: Rochelle Fearon
ID Number: 7453149
Course Code: AF4S31-V2-
Tutor’s Name: Chris Benjamin
Date: April 24, 2020
Topic: Financial Analysis of Tesco and Benedict Co.
1
Table of Contents
- Introduction Page Number
- History
- Stakeholders
- Corporate Social Responsibility
- Financial Analysis of Benedict Co.
- .Analysis of the Financial Ratios
- .Profitability Ratios
- .Use of Resources
- .Liquidity Ratios
- .Gearing Ratios
- .Investor Ratios
- Conclusion
- References
- Appendix
- .Industry Financial Data
- .Statement of Profit and Loss
- .Balance Sheet
- .Calculation of Ratios
History Tesco is one of the largest goods retail company. Hence, they are considered industry leaders. The company is headquartered in the United Kingdom and it has over 3400 stores across the world and more than 300,000 employees in UK only. Tesco operates globally across 11 countries to include Europe and Asia. Tesco, which was founded in 1919, has grown over the years and now holds a market leading position. Tesco provides a wide range of products and services to customers which includes food, gasoline, furniture and financial and services. Tesco works with stakeholders who affect and are affected by Tesco. I will seek to analyze the relationship of some of the stakeholders with the company’s performance. TESCO Strategic Financial Analysis Stakeholders Stakeholders refer to individuals who have an interest in an organization. They are a group of individuals that have influence over an organization’s actions or a group of individuals that an organization’s actions can also influence. According to Freeman 1984, “stakeholders are persons who contribute to an organization’s achievement or is affected by the same”. Freeman 1984 also states that “stakeholders can influence a firm’s outcome, hence the stakeholders can differ from one organization to another”. Doh and Quigley (2014, p. 256) state that after analyzing multiple levels of leadership, they have deducted that the responsible leader at a micro level are very important stakeholders. They stated that responsible leaders consider their followers to be important stakeholders. Metcalf & Benn (2013) stated that “stakeholders can be separated into two groups; these are internal and external stakeholders”. According to Surbhi (2015), “the difference between internal and external stakeholders is that internal stakeholders are those individuals who are formally a part of the organization and the external stakeholders are groups of individuals or individuals that can be affected or are able to influence an organization”. Stakeholders can placed into categories; these are Primary Social Stakeholders and Non-Social Stakeholders, Secondary Social Stakeholders and Non-Social Stakeholders. Primary Stakeholders have direct interest in a company whereas Secondary Stakeholders have very little interest in a company. Tesco’s primary social stakeholders consists of management, investors, employees and suppliers. Their secondary social stakeholders include their competition, media and charities. Tesco’s primary non-social stakeholders would be the environment and the next generation. Tesco’s Annual Report 2016 highlights three main stakeholders. These are, suppliers, customers and its colleagues/employees. (Tesco, 2017, p.48,53). The company places emphasis on these stakeholders as they have them included their metrics as part of their long-term strategy and its KPI’s. The company has adopted the approach that in order to improve their financial 4
performance, they have “to improve their stakeholder alignment in relation to its suppliers and customers”. (Tesco, 2016). This has also shown the stakeholders’ importance on the measurements of the performance of the company. Categories of Stakeholders Source: The United Microelectronics Corporation Website 5
Tesco employs staff from different countries with different talents. Tesco is a top choice employer in the different countries it operates in. They offer both full-time and part time employment. Employees are key stakeholders as they can build relationships with the customers based on their interaction with them. Tesco treats their employees as important stakeholders. They invest in their employees to in order to better serve their customers. According to Tesco, 2019, “the company has invested heavily to provide longstanding benefits its employees and provides them with the support reach their potential”. Corporate Social Responsibility Atrill & McLaney, 2006 described “corporate governance as the way in which companies are directed and controlled”. Tesco’s shareholders have been given the right to elect its Board of Directors. The Board of Directors are expected to make good decisions in the interest of these shareholders. According to Tesco, 2016, “the BOD has given their commitment to focus on corporate governance and to build transparency and trust. They plan to achieve this by creating a culture where individuals are empowered to speak up and voice their concerns and by ensuring employees/colleagues understand their duties and responsibilities”. According to the corporate governance section of the Tesco Annual Report in 2016, Tesco has a CSR committee it uses to relate with its stakeholders. The CSR committee report highlights the extent to which Tesco values Corporate Social Responsibility practices which can be used to build and maintain the confidence and trust of its stakeholders. The CSR report looks at the fact that Tesco has put a lot of effort into making a significant impact on the environment and its customers. The CSR committee has spearheaded many projects that has had direct impact on its stakeholders to include the community, its customers, and the environment. It is also reported that Tesco has implemented a Group Delegated Authorities Schedule and a governance framework that acts as a guide and outlines those who are allowed to make decisions. According to (Tesco,2016), “this will ensure that the right people are taking the right decisions”, which will build trust among colleagues/employees, and between the company and its customers. This schedule will also ensure that persons take responsibility for their actions and extra care is taken in the decision-making process. Tesco’s main corporate social responsibility project focuses on the customers and the community. The project is called “Eat happy/Farm to Fork” and it was created to allow persons to make proper and healthy choices with their food. This project is aimed at raising awareness on the food production process. It was reported that one mill. children had participated in the educational activities surrounding this project. As a part of the drive to deal with social and economic challenges faced by customers and employees, Tesco started a Bags of Help Scheme, which came into play after the United Kingdom, put a charge on plastic bags. With this scheme, Tesco raised funds to that would be used to reinvest in projects locally, in an effort to develop under-utilized outdoor areas. Tesco 7
also started a Community Food Connections project that is aimed at reducing food waste. This is a project that Tesco is very proud of. It was reported that from this project, “surplus food was distributed through 12 large-format stores in the UK”. (Tesco, 2016). In Tesco’s 2016 Financial Statements they outlined their most important performance indicators which include stakeholder metrics for employees and customers. (Tesco, 2016) This results prove that Tesco’s performance improved over the year, in all its indicators. In (Tesco 2017) Corporate Governance Report, Tesco’s environment and social review proved to be very informative for the company in terms of depicting the importance and measure the performance of its main stakeholders. Tesco has shown some corporate governance factors relative to their customer and supplier performance that looks at leadership, management accountability and effectiveness and compensation. They have adopted the UK Corporate Governance code by observing the relationships between its environmental and social factors and they have adopted certain report structures. Financial Analysis of Benedict Company Benedict Company is contending for a contract to attain an important component of an organization. Hence a financial analysis has to be conducted as the company has to be performing well in order for them to attain the contract and honor it, otherwise issuing them the contract would prove to be risky. The financial ratios were calculated using the company’s Income Statement and Balance Sheet. The Income Statement, the Balance Sheet and financial ratios are presented in the Appendix. Ratios are as follows:
- Investor Ratios- Used by analysts to assess the performance of shares and the company’s returns by the shareholder’s perspective,
- Use of Resources Ratios-measures how well the company has uses its resources.
- Profitability Ratios- Used to measure how well management has generated the returns on capital for investors.
- Gearing Ratios- These ratios show the relationship between capital that the owners have contributed and capital that has been financed by other means. (Loans) According to Atrill and McLaney, 2006, “The level of gearing shows the level of risk associated with the business as the businesses use loan financing”.
- Liquidity Ratios- Used to measure how well the company converts their short-term assets into cash in order to clear their debts. 8
Liquidity Ratios Used to assess how well a company can convert its resources into cash. This has to do with the short-term payables and their resources. Based on the analysis of the ratios, both Quick Ratio and Current Ratio had declined from the previous year. This is due to a spike in liabilities. This result proves that Benedict Co’s assets are unlikely to cover its debts. This does not make them competitive in its liquidity ratios, when compared to competitors. Gearing Ratios A Ratio that is used to measure a company’s financial leverage. When the ratio is high, the company has more debt than equity. If there is too much debt, that can affect the company finically. There was an increase in the capital gearing ratio for 20X1, however Benedict Co is still considered to be in the normal range. The increase is as a result of an increase in the company’s liabilities in 20X1. Though the company’s Debt/Equity Ratio is increased, it is still low in 20X1. According to Edwards, 2003, “the company is not realizing its potential in generating gains by borrowing from their investors, as a result, the company is making it more risky for investors as they are not very competitive in this category”. Investor Ratios The Return on Equity ratio in 20X1 reflected a decrease of more than 3%. This decrease means that investors received less on their investment. Dividends went up a little in 20X1, however there was still a decrease in profits such as earnings per share which is as a result of a decrease in earnings after tax. Price/Earnings increased by 64% in 20X1. This was as a result of an increase in the market price per share along with a decrease in the EPS. For this ratio Price/Earnings was high however as a result of the low EPS. 10
Conclusion In this paper, three of Tesco’s main stakeholders were identified and an analysis of the relationship between their corporate social responsibility/objectives and performance was conducted. Further the financial analysis of Benedict Company was carried out and it was concluded that awarding this company a contract would not prove to be a good decision as a result of the poor financial position of Benedict Company. They were unable to efficiently collect revenue and convert their stock to cash. The liquidity ratios further reflected that Benedict Co was unable cover its short-term liabilities with its current assets. Benedict Co’s financial risk increased, and this would deter business from lenders and suppliers. The financial analysis led to the findings that the company had experienced low profitability, an increase in their debtor days, creditor days, cash conversion cycle and negative liquidity ratios. This also proves that the fact that the company cannot produce earnings for their potential investors, as a result of them earning less than their dividend values. 11
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