Introduction
Firms use the process of financial statement analysis to identify existing or potential financial weaknesses and strengths in their units. The process of financial statement analysis also helps in identifying proper connection between parameters in a profit and loss account and those in the balance sheet.
Firms prepare financial statements in order to satisfy certain external, both business and legal, external reporting responsibilities. The statements are also important when it comes to making certain, especially financial, decisions. Where decisions have to be made by the management, it is imperative that those decisions be grounded on the framework of financial statements. Of course, by themselves, the figures and facts in financial statements are meaningless. However, when subjected to analysis, proper interpretations can be made which can be of immense help in the decision making process.
In this report, I will analyse the financial statements of two UK Public Limited Company (PLC) competitors, namely Tesco and Marks & Spencer. The two firms are leading retailers in the UK and, indeed, internationally, providing jobs to hundreds of thousands worldwide.
Layout of the Financial Statements
Below is the layout of the financial statements. The one of Tesco PLC is adapted from the firm’s publication dubbed Tesco PLC Annual Report and Financial Statements 2010 while Marks & Spencer’s financial statement is adapted from a report titled Your M&S Annual Report and Financial Statements 2010. I have limited this section to three financial statements namely income statements, balance sheets and cash flow statements.
Tesco PLC
Tesco PLC has evolved into a leading retailer especially over the last decade. This is manifest in the financial statements of the year ended February 2010 from which it is discernible that the group recorded impressive growth in virtually all areas operation. It can be found from the financial statements that overall group sales (inclusive of value added tax) improved by 6.8% (to £62.5bn in 2010) and the group’s profit before tax rose by 10.4% above values recorded in the same period for the previous year. Shareholders will also be happy to note that the value of dividend per share rose by 9.1%. The fact that the balanced sheet has been significantly strengthened over this period is also of note.
Marks & Spencer PLC
Founded about 125 years ago, Marks & Spencer PLC is undoubtedly one of the biggest retailers in the world market. As is clear from the financial statements of the year ended April, 2010, the group weathered the recession well and posted impressive performance. Group revenue increased by 5.2% to £9.5bn as adjusted group operating profit rose 4.6% to 9.8% above figures posted over the same period the previous year. With earnings per share at 33p, shareholders realized a 17.9% increased return on their investment.
From the aforementioned, it is clear that both groups, through prudent management, overcame the attendant risks posed by recession and posted success in most areas of their operations. Tesco PLC especially appears to record impressively higher turnovers and translating them into profits.
Analysis of the Financial Statements
i. Fixed asset turnover is used to measure how well a firm is using its fixed assets for the purposes of generating revenue
Fixed asset turnover = Sales/Average Fixed Assets
For Tesco PLC = 56910/34258 = 1.66
For M & S PLC = 9 536.6/5633 = 1.69
The two values are almost equal and well above 1.0 which implies that the groups are using their fixed assets rather well.
ii. Liquidity Ratios are used to show the ability of a firm to meet the obligations resulting from its normal operating cycle. One of these is current ratio which is a measure of the quantity of cash and current assets that can convert to cash in a years time compared to the obligations that may arise in the following year.
Current Ratio = Current Assets/Current Liabilities
For Tesco PLC = 11765/16015 = 0.73
For M & S PLC = 1520.2/1890.5 = 0.80
The rule of thumb dictates that the value of current should be at a minimum of 1.0. The values are less than one. Measures should be taken to raise them though they may also be a consequence of better profits the companies are realizing.
From above, we learn that the two firms are qualitatively operating at the same level. At a subjective level, one would have concluded that Tesco Group PLC, with its higher sales and profit values is a better performer. This is however not true because we can now see that such high sales and turnovers are only possible because of the large amounts assets employed to satisfy. Clearly, such a venture comes with attendant expenses.
Conclusion
Financial statement analysis is a powerful tool in knowing evaluating the true performance of a firm. The two retailers I have dealt with in this paper, viz Marks and Spencer PLC and Tesco PLC leading retailers in the world stage. Judging from their financial statements and from the mini-analysis above, one realises that they are strong firms with good profitability and solid financial foundation. As already intimated, Tesco PLC seems to have higher sales volumes and hence turnover. However, ratio analysis shows that both firms are using their assets prudently and, as is manifest, both returned profits in the year ended 2010.
Both PLC groups have recorded increased returns on investment. The dividends per share have risen by 9.1% and 17% for Tesco PLC and M & S PLC respectively. The financial statements of both firms also show a trend towards reduction of spending and maximisation of revenue. The two firms have done well in the period in question, bearing in mind that the period under review (the year ending 2010) coincided with the economic meltdown that led to liquidation of certain well established firms.
On the whole, if one argues in terms of turnover and asset base, one concludes that Tesco PLC Group is a much better fir m for any potential investor. If one also learns a little of the firm’s history, one sees that in its just about 25 years of existence, it has attained the levels reached by the more than a century old M & S PLC Group. This coupled with what the financial analysis yields, tells us the firm is tenacious and portends better financial returns for investors.
Works Cited
Tesco PLC Annual Report and Financial Statements 2010
Your M&S Annual Report and Financial Statements 2010
