Introduction
This report outlines the performance of Tesco PLC as a multinational grocery and general merchandise retailer as compared to other rival players in the industry. Close attention is paid to the selected ratios to show the financial stability of the company about rivals. The ratios show profitability, gearing, and liquidity of the company. The company takes the largest market share in the UK. Initially, it was dealing with grocery but later diversified into other sectors such as banking, clothing, and among others. Therefore, the annual financial report of the company provides vital information for investors.
Company history
Tesco PLC was founded in 1919 by Jack Cohen as the United Kingdom multinational grocery and general merchandise retailer. Measured by profit, it is among top five largest retailers across the world and best among first five major retailers regarding revenues (Koller, Goedhart, & Wessels, 2011). Over time, the company diversified geographically and into other sectors such as retailing of books, electronics, furniture, and among other services. It spread its business across Asia and Europe.
Primary business activities
Jack Cohen started the company with the initial aim of grocery and general merchandise retailing in the UK market. Over time, the business increased its profits and operation with the business slogan “pile it high, and sell it cheap”. It was operating as a group of market stalls. History states that the company was the first retailer to major into home grocery shopping (Bloomberg, 2014). The Company eventually diversified into other sectors such as financial services, software, petrol, electronics, books, telecom, and so forth. Currently, the company has successfully established over 6000 stores across the world. Therefore, Tesco PLC is the largest and most profitable online grocery retailer today.
Competition and position in industry
In the recent past, the company has embarked unto adopting market strategies in operation so that it could have a competitive advantage over its rivals in the retail market. It is making use of modern technology in its operation. Since years of its start, the company has a successful history and has established several working marketing strategies. And because of a diversification strategy, the company is developing its marketplaces and merchandise across the UK and other countries' markets. The foodstuffs trade has been in front line in the UK. Also, the company has secured large market shares in ever-changing global retailer market. Tesco has successfully gained competitive advantages over its rival by allowing these different strategies (Koller, Goedhart, & Wessels, 2011).
The company’s management decided to have a diversified range of products which are distributed across Europe and another range to serve local customers. They have done a thorough market analysis, and they know which products to offer to the customers and the exact range of customers who will buy their products and services. They have done detailed market research and tested the concept of the new range, the pricing, attitudes of people towards the company, and the purchasing habits of the customers.
Ratio analysis of the Company
The company has shown improvement in its performance in the last five years and is expanding its market share. When the net operating profit ratio is compared with rival companies, the company indicates a weaker performance.
Profitability ratios
Profitability ratios of the company show the relationship between the profit and sales revenue. This ratio is critical because it designates profitability of the company about its operational performance. Tesco PLC has a low operating profit margin when the operating profit ratio is compared to its rivals. In the year 2013, there was a ratio decrease of 1.50% as compared with the ratio in the year 2012. It happened because of reduced expenses in administration and increased sales revenue from the preceding year.
Source (Bull, 2007)
Gearing ratio
The gearing ratio indicates that the company is presently low-geared. The capital structure ratio that portrays the proportional relationship between equity and debt balance is known as the gearing ratio. The indication we get is that the company has a low-interest commitments simply because debt finance is low. Therefore, the company has higher gearing ratio and its experiencing higher risks due to high-interest commitments which at times many companies fail to meet when trading conditions are unfavorable.
The accounting ratio we have seen above provides us with excellent financial information so that we can judge if it’s reasonable to invest our funds in the corporation. Sometimes the company may have a tax advantage because of its debt finance history (Bloomberg, 2014). The company may have a lower tax charge if the interest payments coming from debt finance are deductible from taxable profits. The earnings per share ratio of Tesco PLC are higher as compared to other rival companies.
Basically, confidence is developed based on the envisaged capability in making future profits. For instance, falling in the price-earnings ratio of the firm shows that the capital market is projecting a decline in future profits. However, the company has a higher ratio when compared to rivals in the retail market. The only thing that the ratios fail to outline is the qualitative characteristics within the company and external environment in which the company does its operation.
The company reputation and market reputation have a substantial impact on the financial position of the firm. The company is presently operating in a very competitive environment. To remain at the top of the business; it needs to proactively meet customers’ high expectations. This strategy is not indicated in the financial analysis of the company. The ratios calculated are based on historical data which cannot provide the future financial position of the company.
Source (Bull, 2007)
Liquidity ratio
Most temporary (or short-term) creditors choose a high current ratio because of the reduced risk, but for investors, they prefer a lower current ratio simply because they want to fund the company to grow by taking advantage of the available resources. The current assets should be more than the current liabilities.
The current ratio of Tesco PLC is 0.79 times. This accounts for 65% lower as compared to services sector and 26% lower than that of grocery stores industry.
Source (Bull, 2007)
Conclusion
The ratios above makes Tesco PLC be the best choice to make investments simply because of the higher margins originating from non-food items operations and large base on the online market. Also, the company dominates on the high-street, thereby taking advantage of the economic recovery of many countries. Moreover, the company has large exposure outside the grocery making it enjoy greater benefits than rival companies.
Recommendations
1. When we look at the liquidity position and the gearing ratio, the company is in a good position. Therefore, it’s good for an investor to buy shares from it.
The company has to maintain its successful history, and with that perspective, more customers will shift from other companies to purchase products from Tesco. Second, the company should provide high-quality products and excellent services, thereby attracting more customers and keeping old customers. As a result, the customers will feel that the company is the best service provider. It will make the company look unique. Third, for the company to succeed in the competitive market environment, it should embrace marketing strategies such as advertising and promotion to increase sales.
2. The company has a high current ratio as compared to the liability ratio.
The current ratio provides the efficiency of the company to turn its products into cash. Many companies find it hard to alleviate their obligations simply because they have a long inventory turnover making them run into liquidity problems. It is always good to compare companies within the same industry simply because business operations differ. Tesco has an acceptable current ratio when compared to other rivals, making it a healthy business to invest in. The Company has the capability of paying its obligations due to the higher current ratio. A company operating under current ratio less than 1 shows that the company is unable to pay off its obligations.
References
Bull, R. 2007. Financial Ratios: How to use financial ratios to maximize value and success for your business'. Elsevier.
Bloomberg, (2014). Company Share Prices. [Online]: Available at http://www.bloomberg.com/markets/stocks/.
Koller, T, Goedhart, M and Wessels, D (2011): Valuation; Measuring and managing the value of companies, US. McKinsey & Company.
