Strategic Financial Analysis of Tesco 2016 Annual Report and Financial

Ratio Analysis of Benedict Co.

by Onwuasor Obianuju
R1511D1136036

Strategic Financial Management (AF4S31-V1)

Tutor: Anna Kochanova
University of South Wales
Business School

24 SEPTEMBER 2018
CONTENTS

Introduction ---------------------------------------------------------3
Tesco’s Annual Report Analysis --------------------------------------5
Tesco’s Stakeholders -------------------------------------------------------5
Tesco’s Corporate and Social Responsibility--------------------------5
Benedict Co.: Fianacial Ratio Analysis -----------------------------8
Analysis of Financial Ratio of 20X1 and 20X0 --------------------9
Critical Evaluation of Financial Analysis --------------------------13
Conclusion ------------------------------------------------------------------ 14
Reference -------------------------------------------------------------------- 15

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INTRODUCTION

This report seeks to examine and evaluate vital segments in the 2016 Annual
report of Tesco. It also identifies Tesco’s key stakeholders and analyses how
the environment, social review and corporate goverance for the organization
denotes performance and how well it fulfils its CSR to its stakeholders in
general. Tesco is a listed amongst the worlds retail outlets as being on of the
largest with over 400,000 collegues serving millions of customers both on line
and offline (Tesco,2016, p.3). Stakeholders are fundamentally individuals,
groups/organizations with interest in a business. In the case of Tesco,its
internal stake holders are shareholders, employees and staffs and board
members; they are perpertrated to serving the organization while Tescos
external stakeholders are people who or directly or indirectly impacted by your
products such as clients, community, governement etc. This reports further
discusses and critically analysis Benedict Co.’s financial postion using various
financial statements and ratios to evaluate if they are meet requirements and
are suitable to be enagaged as suppliers.

TESCOs ANNUAL REPORT ANALYSIS

TESCO STAKEHOLDERS

Grimsleys (2017) defined stakeholders as an indivdual or group of persons

who have an interest in an organization. The persons can affect or be affected
by the fruition of the company/organisations achievement (Slideshare, 2014).
Stakeholders play an important role in every business; they help business run
smoothly by providing finances especially in situations where they have been
in long term relationship with the organizations, they also provide companies
with feedback from product inception to its development, they provide
community sense which can shape the internal organization positively and
increase sales externally. Stakeholder in business can either be internal or
external. Internal stakeholders includes employees, owners, investors while
wxternal investors includes the government, community, media, suppliers,
competitors, the environment and customers.

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The three stakeholders identified by the Tesco’s 2016 Annual Report icludes
the consumer, employees and shareholders.
The consumer in this case is an external stakeholder, they are recipents of a
product for monetary or other valuable considertaion. Consumers are steady
on the look out for better prices, high grade/quality products, regular supply of
products, value for money and good customer service. In 2015, Tesco made
a commitment to put their customers first by offering small helps in the
services rendered which would in turn lead to bigger outcomes. Tesco strives
to make shoppers experience to be better from the quality of offer to the
thoughtfullness of service. Tesco goes as far as reducing and simplifying
prices, improving its range of products and delivering excellent customer
service to retain and drag in new customers
(https://www.tescoplc.com/media/264194/annual-report-2016.pdf , pg. 3)
The employee is an internal stakeholder whose actions directly affects the
organization. They contribute their skill set and labour. They are normally
employed to play a particular role packaged as a job. Employees can directly
affect the productiveity and efficency in the business as they are points of first
contact with customers. Employees want high pay, good working condition,
fair treatment and job security. In order to keep employees motivated in 2016
Tesco (2016, pg. 3) opted for a defined contibution scheme as opposed to the
acceptable UK pension scheme. With this new scheme, Tesco provides staff
with both a competitve and sustainable plan in the long run. Tesco treats its
employee as its most valued asset. They also provide employees with flexible
working hours, training opportunities and a more transparent way of working.
The shareholders and investors are internal stakeholder. They are indivduals
or institutions who legally owns a share of stock in a pubic or private
corporation. Shareholders have a direct influence because the possess voting
rightd on corporate establisments. They look for high profit and divdend, long
term growth, a posistive corporate image and a share of a say in the
business. (https://www.slideshare.net/messageforu/stakeholders-in-business-
16038680). Tescos shareholders have the right balance of skillsets,
experience and background to properly manage teams. They bring to the
table an abundance of customer service, IT and vendor/supplier relationship.

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TESCO’s CORPORATE AND SOCIAL RESPONSIBILITIES
In an attempt to the discuss how Tesco’s corporate and social responsibility
have demonstrated performance to its stakeholder a clear understanding of
CSR and how to identify its key categories is needed. Smith (2011, p.10) in
his book, “ Defining Corporate Social Responsibility: A system approach for
social responsible capitalism” defined CSR as
“a business system that enables the production and distribution of wealth for
the betterment of its stakeholders through the implementation and integration
of ethical systems and sustainable management practices”.
Carmela (2016) asserted that CSR could be subdivided into four (4) major
categories listed as follows
a) Environmental- these are initiatives accepted by organizations, which
predominantly play focus to two areas in particular; reduction of green
house gases aka carbon footprint and pollution. To increase
organizations standing as good corporate citizens they have to take
actions to reduce all forms of pollution caused by their organization.
b) Philanthropic- these initiatives involve the donation of resources (time,
money, experience etc.) to charities or the community whether local or
international. These donations are normally directed to worthy causes
like causes fighting for human rights, clean water or educational
programs in their nearby community or international community.
c) Ethical business/ labor practices- the primary motive of ethics in
business is to provide fair labour practices. Practices like equal pay for
work, a conducive working condition and wage compensations are
employed.
d) Economic Responsibilities- This initiative focuses on the long-term
growth of the organization taking into account the organizations
standards for environmental, philanthropic and ethical practices.
Stakeholders must incessantly make certain that decisions made for the
business are causing little to no harm to the community or environment at
large . They make a choice to use an alternate resource if they realize that
current resources are becoming scarce.
In Tesco’s 2016 annual report, under the section titled “Business Model” on
page 10, Tesco makes know its model which focus on the little things to make

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bigger impacts/differences. Its in this difference making to a large extent that
its corporate and social responsibilities are fulfilled ensuring that customers,
employees and communities are served better everyday. The annual report in
page 20 makes reference to the organisations environmental and social
review. Listed below is the summary analysis of Tesco performance as
regards the 4 sub categories of corporate social responsibilities
a) TESCO’s Environmental Efforts: In an attempt to posistion the
organisation with the global effort to go green, Tesco comenced on an
initiative 18 months ago which focuses on climate, freshwater, marine,
forests and sustainable agriculture. In 2015, 70% of emmision was due to
electricity consumption at its centres. Tesco was able to reduce its carbon
intensity of its stores and centres by ½ carbon emissions per square foot ,
in the case of goods being delivered-carbon emission per case was
reduced by 25%, in the brands own packaging-emission was reduced by
27% by investing over 700m pounds in efficiency measures , renewable
energy on site. In addition to reducing its own emission, Tesco
continously encourages its supplier on the need and benefits of a green
community. One of Tescos largest supplier are on course to reduce its
emission by 30% before the end of 2020. Tesco is also the first british
retailer to join the sustainable agriculture initiative; this enables Tesco
work with companies and partners who share the need to implement
better environmental pratices. Tesco intends to achieve all of this by
continously raising awarness, exchanging knowledge and building skills
around sustainability and adaptable supply chain
(https://www.tescoplc.com/media/391787/corporate-responsibility-
update_nov-2016-final.pdf , p.10)

b) TESCO’s Philantrophy Efforts: Tesco in its annual report for 2016

started that it raised over 13.7 million dollars through crowd funding from
customers and donations from investors for its national charity in
partnership with Diabetics Uk and the British Heart Foundation with the
aim to tackle and prevent heart diseases and diabetics. The corporate
responsibility update for 2016 indicates that some of the money from this
project would also be used to improve the communities health via sporting

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 and fitness events. Also, through its community food connection, charties
can easily be alerted about the amount of surplus food available at their
large stores at the end of the day. In the past 15 years, Tesco also
supports causes in which the community stands to gain like with Race for
Life and various fundraiser for cancer reasearch and has also encouraged
its employees and customers to take part.Tesco is under no obligation to
undertake this endeavour.
(https://www.tescoplc.com/media/391787/corporate-responsibility-
update_nov-2016-final.pdf)

c) TESCO’s Ethical Labour / Business Efforts: In 2016, Tesco launched a

newer code of business conduct where they gave out refresher trainings
to its employees on anti-bribery and income recognition. In the Peope
report in Tesco’s 2016 Annual Report and Financial statement, it states
that Tesco started an awareness campaign called “protector line”
whisteblowing hotline. This hotline is an anoymous phone line or email
where employees, suppliers or customers can drop rising concerns at
early stages. Tesco was shorlisted for the thompsons Reuters foundation
2016 stop slavery award because it is a strong advocate against mordern
day slavery . Tesco supports over 400,000 social programmes in
communities they source from. As founding members of the ethical
trading initiative ETI, they support their suppliers to comply with all ethical
codes; their focus is building long term relationships with the best
suppliers who shares similar values. In general, Tesco ensures all
stakeholders have best value

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Stakeholder Financial Ratio Reasons for interest

Customer -Profitability These analyses provide

customers with health
-Liquidity
status of the business. The
-Return on capital employed health of a business can
tell if it would be able to
provide credit and payment
services for its customers.

Investor -Return on capital employed These financial ratios

provide investors and
-Earnings per share
shareholder with
-Dividend per share knowledge of investments.

-Dividend yield This includes how

investments would
-Liquidity
generate returns, how
-Interest cover frequently these
aforementioned returns will
-Price/Earning Ratio
be paid as dividends and
the company’s standing as
compared to same in the
industry

Supplier -Profitability Suppliers are interested in

recovery of its investment.
-Liquidity
Any firm with poor ratios
-Creditors Turnover wouldn’t most likely be able
to fulfill its promises and 8
obligations to its suppliers.
Lender -Gearing Ratios This ratio tells lenders how
unpredictable credit returns
-Interest cover
to a business might be.
-Dividend cover This ratio tells lenders how

-Dividend yield efficient a company is at

repaying its debits. If
results are not satisfactory
a lender is under no
obligation to give out credit.

BENEDICT CO.: FINANCIAL RATIO ANALYSIS

Financial ratio analysis is essential to appraise the performance of Benedict

Co. This analysis will determine if Benedict Co. is suitable and would stand as
a reliable supplier to provide the components needed for business production.
The financial statement for Benedict Co. will be reviewed from the perspective
of a customer, investors, lenders and suppliers. Below is a table of the various
ratio analyses that various stakeholders would be particularly concerned
about.

This analysis will also juxtapose Benedict Co. performance in comparison with
other companies in the same industry using crucial ratios like the current ratio,
quick ratio, trade receivable ratio, inventory days and trade payable. These
key ratios chosen are important to all stakeholders.

ANALYSIS OF FINANCIAL RATIOS BETWEEN 20X1 AND 20X0

Listed below is a comparison of financial ratios in Benedict Co. between 20X1

and 20X0.

1. RETURN ON CAPITAL EMPLOYED

ROCE is a key ratio for assessing organizations profitability. In 20X1

and 20X0 respectively, Benedict. Co made a profit of 24% and 27.14%
on capital employed. Performance in 20X1 dropped as compared to

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 previous year; not withstanding return is however reasonable. `

2. GROSS PROFIT

This ratio represents the percentage of the selling price is profit not
cost. The higher the gross profit ratio the more favorable it is being that
it can easily cover inventory cost. Benedict Co. experienced an
increase in gross profit % from 41.77% to 48.05% meaning 20X1 was a
more profitable year.

3. NET PROFIT MARGIN

This ratio shows the % of company’s revenue that is profit after

operating cost is deducted. The net profit margin of Benedict Co.
dropped from 36.95% to 31.17% between both years. Benedict Co.
experienced a significant drop of 5.78% in one year. Nevertheless a
net profit margin of 31.17% will not disturb the company’s current
position.

4. NET ASSET TURNOVER

This financial ratio measures the companies’ turnover generated in

relation to its asset. The higher this ratio, the higher the rate of
conversion. Benedict Co. net asset turnover increased from 0.73 in
20X0 to 0.77 in 20X1, which shows that the company’s utilization of
capital employed to generate sales.

5. STOCK DAYS

Stock day measures the amount of days a company holds inventory

before sale. This ratio clearly shows how long funds are held in
inventory. Benedict Co. experienced an increase in stock days from 66
days to 118 days in 20X0 and 20X1. This increase in stock days is
undesirable as stocking inventory is expensive because of storage and
security. Higher stock days also means the company will be cash
strapped. As compared to industry standard of 60 days, Benedict Co.
had a better year in 20X0 than 20X1.

6. DEBTORS DAYS

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 This ratio effectively measures the number of days in average that
debtors take to pay off their debt. In 20X0, Debtors day was 56 days as
compared to 20X1 with 90 days. This means that in 20X1, debtors
would take a longer time to pay as compared to prior years. It is a drop
of 35 days as compared to industry standards. Money needed for other
operational cost is tied down with debtors.

7. CREDITORS DAYS

Creditors days measure the amount of days it takes for Benedict Co. to
pay creditors. Benedict. Co noticed an increase of over 47 days in just
one year. When compared to industry standards of 90 days; 20X0 had
a better creditor day of 108 days than 20X1 with 155 days. This ratio
would make it difficult for Benedict Co. to get credits because lenders
aren’t certain of how soon repayment would be paid

8. CASH CONVERSION CYCLE

This ratio gives an estimate of time it will take Benedict Co. to generate
cash from its operations. There was a relatively large increase in cash
conversion cycle from 14 days in 20X0 to 53 days in 20X1. This
happened from having longer stock and debtor days in 20x1 meaning
that cash flow was relatively lower and hindered operations.

9. CURRENT RATIO

Current ratio measures Benedict Co. ability to cover all its short-term
debt as they become due. Benedict Co. experienced a drop it its ratio
from 1.25 in 20X0 to 1.19 IN 20X1. This fall is most likely as a result of
Benedict Co. drop in liquidity in 20X1. Although the ratio is tolerable it
is still very close to break even.

10. QUICK RATIO

This ratio is an index of an organizations short-term liquidity. It

indicates its ability to meet up to its short-term obligations. Benedict
Co. quick ratio went down from 0.75 in 20X0 to 0.70 in 20X1. This
performance shows that Benedict Co. will not be able to cover its short-

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 term debts. The quick ratio is also lower than the industries standard of
Creditors, investors and lenders would not be impressed with this
rating

11. CAPITAL GEARING RATIO

Capital gearing ratio indicates the company’s ability to cover its long-
term debt in terms of capital employed. Benedict Co. had an increase
from 23.6% to 30% in 20X0 and 20X1 respectively. This raise indicates
that the company is getting riskier and unsafe to invest in

12. DEBT/EQUITY RATIO

This ratio indicates the company’s ability to cover its long term debts in
terms of shareholders equity and reserves. Benedict Co. noticed an
increase from 30.89% to 42.86% in 20X0 and 20X1 respectively. This
increase indicates that Benedict Co. dependencies on investors
decreased while the dependence on creditors increased. The company
is not as stable as it was the previous year

13. INTEREST COVER

Due to high interest rates in 20X1 there was a drop in interest cover
from 18.4 in 20X0 to 7.38 in 20X1. This problem might have resulted
from the high borrowing that occurred in 20X1. This decrease is a
cause for worry for investors but can still suffice as the cover is far
greater than 1. Depending on the amount of risk an individual is will to
take the interest cover is still adequate

14. RETURN ON EQUITY

This ratio indicates how much profit an investor acquires from the value
of his/her equity invested. This ratio is key for investors who are
interested in the efficiency of the company in terms of generating
income. The return on equity of Benedict Co. dropped from 27.03% to
23.57% in 20X0 and 20X1 respectively

15. DIVIDEND and EARNING PER SHARE

The dividend per share is the sum of declared dividends issued by a

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 company for every outstanding share while earning per share shows
the amount of dividends and profit available to shareholders. The DPS
in 20X1 increased to 0.25 from 0.20 in 20X0 thus implying increased
performance while the EPS decreased from 0.39 to 0.37 in 20X0 and
20X1 respectively. This fall is relatively insignificant does not influence
share price.

16. DIVIDEND COVER

This ratio measures the ability to pay off dividends. Benedict Co. had a
dividend cover of 1.43 in 20x1 and 1.93 in 20X0. Being that both values
are above 1 means this value can suffice

17. PRICE/ EARNING RATIO

Investors use this ratio to determine the cost price for stocks based on
its current earning. This provides fair assessment of market stock
value. Benedict Co. has noticed a significant increase in P/E ratio from
15.23 to 9.13 thus indicating growth in confidence performance by
investors.

CRITICAL EVALUATION OF FINANCIAL RATIO ANALYSIS

Financial ratio analysis is of importance to all stakeholders because it

evaluates the organizations operational and financial performance in terms of
efficiency, liquidity, profitability and its solvency. It’s a great tool for decision-
making. All stakeholders need this information to make financial decisions.
This information needed to calculate these ratios can be found in financial
statement. Financial Ratio Analysis provides both the firms present and past
financial position and can be used to gather ratios for future performance.
These ratios are easy to use and are uncomplicated. It is important to
compare ratios across industries over a particular period of time. Financial
analysis can be used to identify problems before they cause issued (Zions,
2017). Hence it is an important accounting tool and would be useful for years
to come.

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CONCLUSION

Tesco has shown in their 2016 annual report that they care a whole lot about
their stakeholders and have designed their businesses to ensure that
stakeholders are satisfied. This has grown significant trust in the brand. Tesco
went a step further by joining starting the UN initiative, which targets
Corporate and Social Responsibilities. Over 400,000 people have benefitted
from this initiative. Efforts to conserve the environment have been prime and
the organization has managed to reach major targets to this regards.

The financial ratio analysis, which was carried out by Benedict. Co. shows
that their performance has dwindled. That being said, Benedict. Co. has ratios
that are acceptable to industry standards and share prices in the organization
are on the rise. It is important that any stakeholder who wants to invest should
tread with caution but however Benedict Co. has indication that the future
would be bright.

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REFERENCES
Caramela, S. (2016). What is Corporate Social Responsibility?. [Online]
Available at: http://www.businessnewsdaily.com/4679-corporate-social-
responsibility.html. [Accessed 14 Sep. 2018].

Grimsley, S. (2017). What Is a Stakeholder in Business? - Definition &

Examples. [Online] Available at: http://study.com/academy/lesson/what-is-a-
stakeholder-in-business-definition-examples-quiz.html. [Accessed 18 Sep.
2018].

Kumar, M. (2017). Which Groups Are Interested In Which Types Of Ratio

Analysis Of Any Firm?. [Online] Available at:
https://www.academia.edu/1115788/Which_Groups_Are_Interested_In_Whic
h_Types_Of_Ratio_Analysis_Of_Any_Firm. [Accessed 21 Sep. 2018]

Tesco.com.(2016). Annual Report 2016. [Online] Available at:

https://www.tescoplc.com/media/264194/annual-report-2016.pdf [Accessed
17 Sep. 2017].

Tesco.com (2016). Corporate responsibility update 2016. [Online] Available

at: https://www.tescoplc.com/media/391787/corporate-responsibility-
update_nov-2016-final.pdf [Accessed 18 Sep 2018]

Smith, R. E. (2011). Defining Corporate Social Responsibility: A Systems

Approach for Socially Responsible Capitalism. [Online] Available at:
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1009&context=od_the
ses_mp. [Accessed 17 Sept. 2018].

Zion’s Business Resource Centre. (2017) How to Analyse Your Business

Using Financial Ratios. [Online] Available at:
https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf. [Accessed 21
Sept 2018]

Slideshare.com (2014). Stakeholders in business. [Online] Available at:

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https://www.slideshare.net/messageforu/stakeholders-in-business-16038680

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APPENDIX I: Benedict Co. Table of Financial Ratios

RATIO WORKINGS 20X1 WORKING 20X0 INDUSTRY RATIO
(CURRENT)
Return on Capital ((8300+1300)/(50800- 24% ((8700+500)/(39000- 27.14%
Employed 10800))*100 5100))*100
Gross Profit (14800/30800)*100 48.05% (10400/24900)*100 41.77%
Net Profit Margin ((8300+1300)/30800)*100 31.17% ((8700+500)/30800)*100 36.95%
Net Asset Turnover 30800/(50800-10800) 0.77 24900/(39000-5100) 0.73
Stock Days (5200/16000)*365 118 d (2600/14500)*365 66 d 60d
Debtors Days (7600/30800)*365 90 d (3800/24900)*365 56 d 55d
Creditors Days (6800/16000)*365 155 d (4300/14500)*365 108 d 90d
Cash Conversion Cycle 90+118-155 53d 56+66-108 14d
Current Ratio 12800/10800 1.19 6400/5100 1.25 1.6
Quick Ratio (12800-5200)/10800 0.70 (6400-2600)/5100 0.75 1.0
Capital Gearing Ratio 12000/(12000+28000)*100 30% 8000/(8000+25900) 23.6%
Debt/Equity Ratio (12000/28000)*100 42.86% (8000/25900)*100 30.89%
Interest Cover (8300+1300)/1300 7.38 (8700+500)/500 18.4
Return on Equity (6600/28000)*100 23.57% (7000/25900)*100 27.03%
Dividend per Share 4500/18000 0.25 3600/18000 0.2
Earnings per Share 6600/18000 0.37 7000/18000 0.39
Dividend Cover 0.37/0.25 1.48 0.39/0.2 0.195
Price/ Earnings Ratio 5.6/0.37 15.12 3.6/0.39 9.23
Payout Ratio (4500/6600)*100 75% (3600/7000)*100 51%
Dividend Yield (0.25/5.6)*100 4.8% (0.2/3.6)*100 5.5%
Earning Yield (0.37/5.6)*100 7.4% (0.39/3.6)*100 10.8%