Report for potential investors in tesco plc

Report for emf endowors in tesco plcThe purpose of this report is for potential investors who be considering buying sh argons in Tesco plc. The report creates an overall picture of Tescos monetary position and shows an judgment of Tescos action over the hold one-third years.The data usanced to measure the financial position of Tesco was ga in that respectd from the Annual report of the last deuce-ace years. This information was downloaded from the official Tesco website.From that, the proportionalitys were calculated from the financial statements within the report.Results symmetrys200420052006Change (%)Return on capital employed13.99%14.77%17.29%19.09% amplification earn pay Margin5.17%5.76%5.78%10% increaseAsset Turnover2.72 propagation2.56 times2.99 times9.03% increaseCurrent Assets0.56 times0.57 times0.52 times8.77% dropQuick Ratio0.3510.3510.33105.71% decreaseGearing digest35.35%34.52%28.38%19.72% decreaseInterest Cover7.758.319.4618.08% increaseEarning per address15.05p17.44p20.07p25.01% increaseDividend Cover2.13 times2.29 times2.57 times17.12% increaseIntroductionThe aim of this report is to provide an assessment of the fraternitys surgical procedure over the iii year period to a group of potential investors in the alliance. So this report will use nine financial symmetrys which argon useful for the investors to suspensor them to identify and foreground area of exhaustively and bad performance of the conjunction and area with prodigious change.Therefore this report will consistbrief overview of the history of Tesco and thus it will analyse the doughability, liquidity, investment analysis of Tesco plc.The report will excessively advice potential investors on whether shares in this go with would be a honor fitted investment.Brief Background on Tesco plcIt is best prevail sexn that Tesco Company is the starring(p) retailer in the UK and one of the largest food retailers in the world. The retail manufacture is a highl y competitive market. Tesco competes with a wide range of retailers with a wide range sizes and there face increase competition from UK retailers as well as international operators. Tesco also sell non food trustworthys such as electrical goods and clothing. In general Tesco is a successful economic company which attract investors to invest in the company.General Financial compendiumIt is well known fact that the financial proportionalitys come important for investors to help them whether they should buy shares in the business, sell them, or hold on shares which already own them. Therefore ratios analysis helps investors to identify and highlight area of good and bad performance of the company and area with signifi great dealt change.In addition, financial ratios explain the relation between contrasting figures in the financial statements consequently we could calculate hundred of ratios fro a set of financial statements, because of this we need to know which ratio provide a good and useful information for the investors , the ratios which are applied incorrectly they may be completely useless and misleading. withal if they are use correctly they are useful for understanding the performance of the company and supplying the company account.Ratios describe the relationship between different items in the financial however the relative usefulness of each ratio depends on what aspects of a companys business affairs are being investigated. In this sheath of Tesco plc, there are four elements of ratios that are been analysed. These are Profitability, runniness and Investment analysis.Return on Capital Employed (ROCE)The ROCE is an important greenback of the arrive atability of a company. This is because it is a popular indicator of oversight efficiency by contrasting the net amplification generated by the company with the gist capital employed (traditionally, total capital employed in this case has been taken to be the farseeing term funding). It doe s not only hold back the funds the stockholders have invested, but also funds invested by banks and former(a) lenders, and therefore shows the productivity of the pluss of the group.ROCE = PBIT -100Capital employed2006 = 2,280 -1009,444 + 3742= 17.29%2005 = 1,952 -1004,563 + 8,654= 14.77%2004 = 1,729 -1007,990 + 4,368= 13.99These calculations show that the return on capital employed has been on steadily increasing for the past three years. For 2006, the ROCE is 17.29% which is 1.94 % above the average for the three years. This specifys that Tesco is using its invested resources more efficiently and that by comparing with other leading retailers, they ROCE are higher(prenominal). This shows that this figure is more probably to be acceptable to potential investor. simile on Return on Capital employed classTesco plcJ Sainsbury plcMorrisons200413.997.996.01200514.77-2.565.1200617.293.73-5.63 public15.353.0533333331.826667Net profit margin is another widely used ratio in the assessm ent of company performance and in comparison with companies in the same industry.Net profit margin = Profit forwards exceptional items, post valuate -100Revenue (turnover)2006 = 2,280 -10039,454= 5.78 %2005 = 1,952 -10033,866= 5.76 %2004 = 1,735 -10033,557= 5.17 %From the calculation, it shows that net profit margin has been increasing slightly which shows Tesco have kept control of its expenses.Group sales have increased systematically through 2004/05 by 9.4% and in 2005/06 by 14.33%. (Note in order for comparisons, 2 different figures were used in 05 sales ascribable to the implementation of IFRS darn the comparison for 04/05 was accounted under the standard of UK GAAP).As for PBIT, there was not frequently increase in 2004/05, however between 2005/06 there was an increase of 14.16 %.Comparison on Net profit MarginYearTescoJ Sainsbury plcMorrisons20045.17%3.23%6.19%20055.77-0.99%2.12%20065.781.43%2.17%Average5.5730.0120.035This shows Tesco average on net profit margin for the past three years is way above the averages of other leading supermarkets.This illustrates that in 2005 and 2006, Tesco profit margin is miles ahead. From this it rout out be reason that it is a profitable company which has kept control of its expenses.The Asset Turnover is a measure of how more than sales are generated by the capital asset base of a company.Asset turnover = Revenue (turnover)Capital employedFor Tesco plc, asset for the three years are as followsFor 2006 = 39,45413,186= 2.99 timesFor 2005 = 33,86613217=2.56 timesFor 2004 = 33,55712,358= 2.72 timesthis shows that asset turnover is slightly increasing. This is due to the fact that revenue has increased considerably from 33,557 in 2004 to 39,454 in 2006Comparison on Asset TurnoverYearTesco plcJ Sainsbury plcMorrisons20042.722.470.9820052.562.572.5920062.992.612.59Average2.75666672.552.053333This shows that Tesco is above the average asset turnover for the market. From this it can be concluded that Tesco is generat ing more sales from its capital base.Liquidity AnalysisIt is clear that liquidity ratios analysis important to the investors as liquidity ratios tie in to the capacity of business to pay its gip term debt as become due, therefore the focus is on the relationship between menses assets and creditors due within one year, since these measure short term sources of cash and short term calls on that cash, there are two commonly used ratios which highlight such a situationCurrent ratios ( oc latest assets/current obligation)The current ratio measure the relationship between the companys current assets and its current obligation in Tesco Companys balance sheet shows the current asset for 2006 3991 and current obligation of 7518, the current asset for 2005 3224 current liability 5680, for 2004 current assets 3139 current liability 5618Current ratios = currents assetsCurrent liabilitiesFor 2006 = 39197518= 0.52 timesFor 2005 = 32245680= 0.57 timesFor 2004 = 31395618= 0.56 timesIt can be seen from the takes the current ratio for Tesco company is stable between 2004 and 2005, however it send packing slightly in 2006, this is because of the fact that there was an increase in current liabilities.Quick ratios (Current assets inventories) / current liabilitiesThe quick ratios ignore the stock and concentrates upon those assets which can be turned into cash, the quick ratios important for investors who demand to take share in Tesco Company where stock is turned over quickly and the sales are mainly on a cash, consequently the quick ratios compares liquid current assets with current liabilities.For 2006 = 3919 14647518= 0.33 1For 2005 = 3224 -13095680= 0.35 1For 2004 = 3139 11995618= 0.35 1As it can be seen from the results the quick ratios test follow much the same trend on average over the three years of 0.34, which shows low level of resources are tied up in inventory. It can also be concluded that Tesco does not have any cash flow problems and therefore the comp any is using its resources well.Gearing AnalysisAn important determinant of a companys capacity to develop is its funding structure.This very important as it enables the company to assess its capacity to satisfy its long term commitment.The financial structure of a business is an important consideration when assessing the financial health of any entity.The or so commonly used structure is the Gearing ratio, which quantifies the relationship between debt and equity.The higher the ratio then the more vulnerable the company is perceived to be this is because there is a high and fixed call on its profit before equity can be satisfied. This representation that a company that has high gearing will has deal with its long term commitment such as long term debt and this in turn marrow they will be less fund for honorarium such as dividend for shareholders.Gearing Ratio = Long Term Debt -100Capital EmployedFor 2006 = 3742 -1009444 + 3742= 28.38%For 2005 = 4563 -1008654 + 4563= 34.52%For 2 004 = 4368 -1007,990 + 4,368= 35.35 %From these calculations, it shows that the long term debt has been decreasing steadily for the past couple of years tour on the other hand the equity of the company has been increasing steadily, which indicate the finances of the company as moving towards equity and less on debt.Interest hiding ratioIt is important to recognize that the use up put out ratio is important for investors as they measure the amount of profit for sale to carry on interest payable. The high interest cover ratio it pith that the company or business is comfortably able to assemble its interest from profit. in the same way a low value from interest cover ratio it means that the business is in danger to meet its interest obligations therefore the profit operable to the shareholder will be very low.In Tesco company the measure of interest cover ratio as followInterest cover ratio = profit before interest and taxInterest chargeFor 2006 = 2280241= 9.46For 2005 = 195 2235= 8.31For 2004 = 1729223= 7.75The measure of interest cover ratio of Tesco within the last three years tells us that the company maintaining increase in interest cover ratio 7.75, 8.31, 9.46 as a result Tesco is able to meet its interest from the profit therefore the profit are sufficient to pay the interest it owes and the profit available to the shareholder increased from 1729m in 2004 to 2280 in 2006.Investment AnalysisPotential investors who want to buy shares in a company want to be able to have the information they require to compare the benefit from their investment.There are two measures of benefit to the investorOne is the profit of the period (usually referring to the profit available for the ordinary shareholders).The other is the dividend, which is the amount actually paid to the shareholders.Earning Per Share (EPS)EPS is a widely used measure of business performance and progress, and importantly the role change from year to year should be monitored for the trend. I t explains to an investor the kind of return they could get hold for each share during the accounting period. Therefore, it is important ratio as earning per share works out the average amount of profits earned per ordinary share popd.In accordance with FRS 14 Earnings per share, EPS must be disclosed on the face of the income statement. This means that when producing financial statements companies must disclose the EPS figures for investors to see.EPS = Earnings (profit)Number of equity share in issueFor 2006 = 1,5707,823= 20.07pFor 2005 = 1,3447,707= 17.44pFor 2004 = 1,1007,307=15.05pAs it can be seeing there has been a besotted increase of EPS for the past of years. This indicates that potential investors would have an attractable return on there sharesDividend CoverThe dividend cover ratio is another important ratio for potential investors as it measures the proportion of available profits which are issued to shareholders and the amount which is reserved by the company. In another words, the dividend cover ratio tells the investor how easily a business can pay its dividend from its profit.Dividend Cover = Profit after taxOrdinary dividendFor 2006 = 1,570609= 2.57 timesFor 2005 = 1,344587= 2.29 timesFor 2004 = 1100516=2.13 timesThe measure of dividend cover ratio of Tesco plc for the last three years has shown a steady increase. It increased slightly from 2004 to 2005 and again in 2006.A high dividend cover means that a company can easily afford to pay dividend.For the last year (2006), the dividend covers shows that for every 2.57 made in the profit, 1 was issued to the shareholdersInvestment Advicegross revenue have risen by 14.94 %to 39,454mPre-tax profits are up by 24%, with earning per share increasing by 25% in 2006 from 2004.This result shows the excellent performance from all aspects of Tesco strategy.This is an extract from the Directors report for 2006The directors recommend the payment of a final dividend of 6.10p per ordinary share, to be p aid on 14 July 2006 to members . Together with the interim dividend of 2.53p per ordinary share paid in celestial latitude 2005, the total dividend for the year will be 8.63p compared with 7.56p for the previous year, an increase of 14.2%This shows that Tesco plc strong performance is been implemented in dividend as can be seen in the increase of payment.Tesco faces strong competition from other leading supermarket, however with the management strategy implemented by Tesco and their huge experience which has given them good image (every little help) and trust in the market as a leading retailer. Therefore, it will be worthwhile investment for those who are interested in earning money through share price fluctuations to invest in Tesco.ConclusionThis report has used nine ratios to analyse and interpret the financial position of Tesco plc. There are many other ratios that could be used and will also assist in the interpretations of the financial accounts.Although there are limitation s to ratio analysis such as ratios are base upon past performance and hence there are historical data. even so ratio analysis is one of the best ways to analyse the financial performance of a company. This is because, it allows managers to spot any problems and therefore concentrate resources on that area.If ratio analysis is interpreted the right way then it can be useful tool of results which can be understood by accountants and non-financial users such potential investors.