Managing Financial Principles and Techniques
1. Explain what documents and statements you have consulted.
The Group Income Statement (P&L) and the Group Balance sheet were consulted. The following information was extracted. A companies profit and loss account shows revenue, expenditure and the profit or loss resulting in operations for a given financial year.
£ M 2011
Sales (Revenue) 64539 60455
Cost of Sales (59278) (55330)
Gross Profit 5261 5125
Overheads Expenses (1652) (1640)
Property 376 432
Net Profit 3985 3917
Balance Sheet for Tescos – A financial statement ...view middle of the document...
It must be noted that there has been a fall from 2011 to 2012.
Net Profit: Net Profit x 100 3985 x 100 3917 x 100
Sales 64539 60455
= 6.18% =6.48%
The net profit takes into account the day to day operations of the firm. At over 6% there is a marginal reduction from the gross figure which is to be expected from a cash rich company, suggesting that the company is running with minimal overheads and running costs.
Net Assets: FA+CA-CL = 37918 + 12353 35167 + 11608
- 19180 -17731
= 31091 =29044
ROCE: Net Profit x 100 3985 x 100 3917 x 100
Net Assets 31091 29044
= 12.82% = 13.49%
This figure takes the profit performance and measures its value against the investment in the business. At almost 13% this is not a bad return. The figure has dropped from 2011.
Gearing: Debt 9911+688 9689+600
Equity 402+4964 402+4896
= 1.98 : 1 = 1.94 : 1
The ideal figure is 2:1, we can say that this is a highly geared company and its gearing is increasing, hinting at possible danger signs in equity and debt. This may be the norm for this type of company and will need to be compared to a similar retail company.
3. Using non-financial information – on both internal and external aspects of the company – explain how it is helpful in making a decision on this company.
For 2012, 12.2% of the fixed assets is tied up in goodwill.
Socio – Cultural Continue to invest in people by employing an additional 20,000 people in the UK in the 2 years. Reinforcing its commitment to local communities.
Increase in employment.
Improving the market for the customer.
Technical Developing online shopping. Tesco bank up by 14%.
Economic Developing its own ‘value’ brand.
Expanding by creating ‘worlds’ such as baby and sports worlds. Increase in Employment.
Crisis tax in Hungary costs £38m which affected its profit margin in Europe.
Expanded in US and Asian market.
Political - Legal Carbon zero policies. Produced a carbon zero training academy.
In the UK Tesco is reinvesting by developing its people, its products, its stores.
In the US they are consolidating, they are not in profit yet. The focus will be on getting more of there existing stores to reach profitability before stepping up the rate of new store openings.
In Asia, sales grew by 10%, and are winning the share of the market.
4. Recommend a course of action. Would you advise the takeover bid to go ahead? Which parts of your financial and other analysis are the most important in coming to this decision?
Do not take over this company this year, wait one year to evaluate the figures again. If the figures dip it will represent huge problems for this cash rich company. The gearing aspect will give a clear indication of this company’s well being when compared to the figures from 2011.
This company is running a very tight ship (compare...