Answer

Analysis of Tesco Plc. Financial Statements

&    

Valuation

 

 

 

Tesco Plc. Analysis

Executive Summary

Tesco Plc. trading is a multinational groceries and other general merchandise retailer that is based in Hertfordshire in England but operates throughout Asia and Europe. It is the world’s third largest retailer based on gross revenues. It was founded as a group of market stalls in 1919 and controls about 28% of the UK’s groceries and other general merchandise market. It is listed as TSCO in London Stock Exchange and also in Irish Stock Exchange. It is among the companies that form the FTSE 100 component. This report analyzes the performance of Tesco Plc. compared to its competitors in the market, Lenta limited and X5 retailing Group.

Profitability ratios such as Return on Capital Employed and Return on Assets have been used to compare the profitability of the three companies. Other ratios like solvency and liquidity ratios have also been applied to evaluate the financial soundness of the company in relation to its competitors in the market. The Price/Earnings ratio has been utilized to determine the value of the company. The major differences in financial performance of the companies that operate in the same industry can be attributed to the differences in dividend policies, profitability and the prevailing global economic conditions.

 

 

 

 

 

 

 

 

Contents

Tesco Plc. Analysis. 3

Executive Summary. 3

Part 1. 5

a). Introduction. 5

b). Profitability Ratio Analysis. 5

Net Income. 6

Return on Equity. 7

Return on Assets. 8

c). i). Liquidity Ratio Analysis. 9

Current Ratio. 9

Quick Ratio. 10

c). ii) Leverage or Gearing Ratios. 11

Debt-Equity. 12

Solvency Ratio. 13

d). Value Ratios. 13

Price Earnings Ratio. 14

Earnings Per Share. 15

Assumptions. 16

Part 2. 16

Tesco Plc. Stock Evaluation. 16

Price Earnings Ratio. 17

Conclusion. 18

Reference. 20

Appendices. 23

Tesco Plc. Performance Summary. 23

 

Part 1

 a). Introduction

 a). Tesco Plc. Is a UK multinational company that deals in groceries and general consumer goods. The company’s head offices are in Hertfordshire in England but its operations spread across seven countries in Asia and Europe (Tesco 2015). Tesco is among the largest supermarkets in the world with average revenue of £57.491billion in 2018 while employing over 460,000 employees (Tesco 2017).  Tesco shares are traded on London Stock Exchange and it is one of its FTSE 100 constituent Index (Yahoo Finance 2019). The company has a market capitalization of £18.1 billion and over six thousand five hundred and sixty outlets globally. The company registers over eighty million shopping trips every week among its global outlets.

 X5 Retail Group is one of the largest Russian food retailers. It operates several different format retail formats. The company’s proximity stores trade under the name Pyaterochka brand while average supermarkets trade as Perekrestok brand while the hypermarkets are Karusei. Its global depositary is listed in London Stock Exchange and also the Moscow Stock Exchange (X5 Retail Group 2015). 

 Lenta Ltd is Russia’s second largest hypermarket and supermarket chain. It was founded in St. Petersburg in 1993 by Oleg Zherebtsov initially as cash & carry before developing as one of the country’s largest hypermarket brand (Yahoo Business Finance 2019). Lenta limited currently has over 122 hypermarkets across Russia and twenty seven supermarkets in Moscow (Lenta Limited 2017). 

b). Profitability Ratio Analysis

Profitability ratios are used to identify the areas of weaknesses and strengths within a company. The ratios also assist in pointing out areas where opportunities are available in a company. Net income margin is the ratio of the net income compare to the sales revenues. Tesco profitability performance was the least compared to the other two companies. In 2013 Tesco registered 0.19% net income margin compared to X5’s 38.20% and Lenta’s 4.92% during the same year as illustrated in Table 1 below.

		Profitability Ratios
		Net Income
	2013	2014	2015	2016	2017
Lenta Ltd	4.92%	6.03%	3.33%	3.56%	3.56%
X5 retail Group	38.20%	2.00%	1.75%	2.16%	2.42%
Tesco Plc.	0.19%	1.53%	-8.45%	0.24%	-0.10%

 

Table 1.

The net income trend for all the three companies shows a decreasing trend. The worst year for Tesco Plc was in 2015 when it registered a huge loss amounting to 8.45%. It is during this period that the commercial income overstatement was discovered. Probably the management was a little more strict on its profit calculations as the company cooperated with the UK’s serious fraud unit that was investigating its financial statement for possible improprieties (Tesco 2015 pg. 33)

                                           Net Income Margin Trend

Figure 1.

From the net income margin trend in figure 1 above, Tesco Plc. performance in 2015 was the worst in all its five year analysis.

	Profitability Ratios
	Return on Equity
	2013	2014	2015	2016	2017
Lenta Ltd	144.54%	69.96%	17.88%	18.69%	18.10%
X5 retail Group	246.29%	14.01%	13.54%	17.55%	19.81%
Tesco Plc.	0.72%	6.59%	-74.47%	2.01%	-0.63%

 

Table 2.

    Return on Equity is the ratio of the net income to equity. The current trend of profitability is important to investors as it provides a rough estimate of future profits.  The ROE trend for the three companies as indicated in table 2 above is fluctuating however Tesco Plc. performance in 2015 is still the worst. Its profitability however improved in 2016 but decreased slightly in 2017. Compared to its competitors its performance was the least in the market as shown in figure 2 below.

Return On Equity Trend

Figure 2.     

Return on Assets is the amount of profit that a company earns compared to the assets invested in the business. Tesco performance on Return on is comparatively better compared to its ROE. Table 3 below illustrates the performance of Tesco in comparison to its competitors. Tesco ROA amounted to 0.24% in 2013, 1.93% in 2014 and negative 11.91% in 2015. In 2016 the company recovered from a -11.9 ROA in 2015 to 0.29.  For every £ 100 invested in Tesco in the year 2016, the investor earned £ 0.29 while in 2015 the investor lost £11.9 for every £100 invested in Tesco. Compared to X5 retail group, for every RUB 100 invested in the company in 2013 the company earned 69.51 while in 2014, 2015, 2016 and 2017 the company earned Rub 3.62, 3.52, 4.71 and 5.55 respectively.  For Lenta limited where for every one hundred Russian Ruble invested in the company in 2013 as indicated in table 3 below, the company earned RUB 4.03 while in 2014 it earned RUB 6.64 while in 2015, 2016 and 2017 the company earned RUB 4.78, 6.19 and 7.38 respectively (Lenta Limited 2015).

 

		Profitability Ratios
		Return on Assets
	2013	2014	2015	2016	2017
Lenta Ltd	4.03%	6.64%	4.78%	6.19%	7.38%
X5 retail Group	69.51%	3.62%	3.52%	4.71%	5.55%
Tesco Plc.	0.24%	1.93%	-11.91%	0.29%	-0.12%

Table 3

Tesco Plc. had the lowest scores in table 3 above. In 2013 through to 2017, the company had ROA of less than 1%. In 2013, for every £100 that the company invested in assets, the company earned £0.24 while in 2014 the company earned £1.93. Figure 3 below shows Tesco’s and its Competitors ROA trends.

Return On Assets

 

Figure 3

c). i). Liquidity Ratio Analysis

Liquid assets are those assets that a company can convert quickly into cash when required. Liquidity ratios indicate a company’s ability to honor its short term commitments (Drake, n, d). Higher ratios indicate better performance and reduced risk for the short-term lenders. The rule of thumb for current ratio is 2:1 that is, the current assets should be twice the current liabilities while for quick ratio it should be 1:1, that is, the net current assets should be equal to the current liabilities (Acornlive, n, d). Table 4 below shows the ratios of Tesco Plc. and its competitors Lenta Ltd and X5 retail group.

		Liquidity Ratios
		Current Ratio
	2013	2014	2015	2016	2017
Lenta Ltd	0.75	0.81	1.04	0.69	0.66
X5 retail Group	0.55	0.78	0.57	0.57	0.60
Tesco Plc.	0.70	0.77	0.60	0.76	0.86

 

Table 4.

Current Ratio

 

Figure 4  

Tesco liquidity ratio indicates that the company is at par with its competitors in the industry. In 2013, the company registered a current ratio of 0.70 compared to 0.55 for X5 and 0.75 for Lenta limited in the same period of time as shown in table 4 and figure 4 above. A current ratio of 0.70 implies that the current assets are about 70% of the current liabilities. If the company were to be compelled to pay all its current liabilities then it would fall short of 30%. The rule of thumb recommends that the current assets should be twice the current liabilities. The ratio should be 2.0 and above (Drake n, d).

		Liquidity Ratios
		Quick Ratio
	2013	2014	2015	2016	2017
Lenta Ltd	0.43	0.49	0.67	0.40	0.30
X5 retail Group	-0.51	-0.57	-0.47	-0.43	-0.38
Tesco Plc.	0.50	2.34	2.05	-2.16	-2.43

 

Table 5.

The quick ratio is the ratio between the current assets less the inventory divided by the current assets. The average industry ratio for quick ratio is 1:1. The current asset should be equal to the current liabilities (Acornlive, n, d). The quick ratio for Tesco Plc reflected an increasing trend between 2013 and 2014 however the trend decreased sharply between the years 2015 to 2016 and a little further in 2017. The company’s competitors however enjoyed a relatively stable liquidity throughout the five year period as shown in figure 5 below. Tesco’s liquidity was outstanding in 2014 and 2015 however it decreased sharply to negative 2.16 and 2.43 in 2016 and 2017 as shown in table 5 above.

Quick Ratio

Figure 5

c). ii) Leverage or Gearing Ratios

These are debt ratios and they reflect how much the company is relying on debt to fund its operations. Total debts include both long term and short term debt.

Debt to Equity Ratio = Total debt Total Equity.

Interest Coverage Ratio = EBIT/Interest Expense

The rule of thumb is that total debt should not be more that 50% of total assets or Equity. The ideal ratio is 50:50 however very low ratios indicate that the company is not exploiting its credit facilities to take advantage of the opportunities in the market while very high ratios may indicate that the company’s risks of bankruptcy are also very high. Tesco had the second lowest average debt equity ratio. In 2013, Tesco had 1.99 times debt compared to equity while in 2014 the ratio was 2.33 times. The average debt ratio for the five years was 3.93 times the amount of equity. Lenta limited had debts amounting16.97 times compared to equity while in 2014 the ratio was 7.44 times. The average debt ratio for Lenta for the five years was 6.5 times the amount of equity. The three companies are highly leveraged. X5 retail group has the least leverage and its long-term and short-term debts are more than twice the company’s equity. In 2013, X5 had 2.63 times debt compared to equity while in 2014 the ratio was 2.88 times. The average debt ratio for the five years was 2.73 times the amount of equity.

		Leverage
		Debt-Equity
	2013	2014	2015	2016	2017	Average
Lenta Ltd	16.97	7.44	2.79	2.87	2.44	6.5
X5 retail Group	2.63	2.88	2.84	2.73	2.57	2.73
Tesco Plc.	1.99	2.33	5.25	5.50	4.56	3.93

 

Table 6

The three companies are heavily in debt and each company should take measures to reduce the debt ratio by paying them annually by regular installments.

Solvency ratios are also referred to as leverage ratios. They measure the ability of a company to sustain its operations indefinitely ostensibly by comparing its debt levels and its equity, earnings or assets. Solvency ratio focus on long term ability of a company to sustain its operations compared to liquidity ratios that focus on short term ability of a company to pay its short term debts. A solvency ratio measures a company’s creditworthiness and its financial soundness in the long term.

Solvency Ratio = Net Income After tax + Non-Cash Expenses/Short term Liabilities + Long term liabilities.

		Leverage
		Solvency Ratio
	2013	2014	2015	2016	2017
Lenta Ltd	9%	9%	6%	7%	7%
X5 retail Group	101%	12%	12%	15%	17%
Tesco Plc.	7%	9%	-3%	4%	3%

 

Tesco incurred losses in 2015 hence its solvency ratio was negative 3% that year however in 2013 and 2014 the solvency ratios were 7 and 9% respectively. In 2016 and 2017 the solvency ratios were 4 and 3% respectively. X5 retail group has better solvency ratios compared to Lenta and Tesco Plc. The net income plus non-cash items were more than the long and short-term liabilities by 101 in 2013. In 2014 and 2015 the solvency ratio was 12% while 2016 and 2017 it amounted to 15 and 17% respectively. Lenta limited had the second best solvency ratios with 9% in 2013 and 2014 while in 2016 and 2017 it was 7%. In 2015, the company’s solvency ratio was 6% (Tesco 2015).

d). Value Ratios

Value ratios reflect a company’s embedded value in stock and which investors use to screen investment in such companies. For example, a company that has a high P/E ratio may be regarded either as overpriced or it’s operating in a bullish market or the investors are highly optimistic. Low P/E ratio indicates that a company’s track record is not favorable and the investment may not provide good prospects or opportunities.

	Equity Shareholders Perspectives
	Price Earnings Ratio
	2013	2014	2015	2016	2017
Lenta Ltd	2727.83	2156.29	2021.52	1968.78	1664.78
X5 retail Group	1.99	2.94	3.46	4.23	4.51
Tesco Plc.	0.49	23.42	-3.98	168.60	-843.00

 

Table 7

In 2013, X5 had the best P/E ratio. To earn $1 dollar in the company it would cost RUB 1.99 while an investor in Lenta would require RUB 2727.83. In Tesco it would cost £0.49 or 41.12 RUB. In 2014, Lenta’s cost of $1 dollar investment return reduced to RUB 2156.29 and later 1968.78 and 1664.78 in 2015, 2016 and 2017 respectively. Its P/E average amounted to RUB 2107.84.

 

 

 

	Equity Shareholders Perspectives
	Earnings Per Share
	2013	2014	2015	2016	2017
Lenta Ltd	0.08	0.11	0.11	0.12	0.14
X5 retail Group	273.25	187.02	208.82	328.36	462.36
Tesco Plc.	17.30	0.36	-2.12	0.05	-0.01

 

Table 8

Tesco had the least earnings power among the three companies in table 8 above. X5 retail group had the highest earnings per share followed by Lenta limited. In 2013, X5 had earnings per share of RUB 273.25 while Tesco had RUB 1453.20 (17.30 x 84) but for the other years the company earned mostly losses. Lenta limited on the other hand earned less than RUB 1 for all the years five years under study as illustrated in table 8 above and in figure 6 below.

Figure 6

e). Analysis

Tesco was the least profitable among the three companies. X5 retail group displayed very strong performance in profitability especially during the first three years including earnings per year. Compared to Lenta limited which has taken over as the leading company in profitability. Between 2013 and 2014 Lenta limited and Tesco were the most solvent companies whereas X5 was the least solvent however after 2015 Tesco’s solvency suffered and it was overtaken by X5. X5 solvency ratios are also the highest with an average of 17% followed by Lenta 7% and Tesco plc. X5 price-earnings ratio is also the least whereas its earnings ratio is the highest. Finally I would recommend to investors to purchase X5 stock as the company’s performance, earnings per share, solvency and liquidity are the best among the three followed by Lenta limited and finally Tesco Plc. X5 has the least debt compared to Lenta and Tesco.

The liquidity ratios indicate that X5 financial stability is not favorable. The current assets are supposed to be at least twice the current liabilities (Drake n, d). However, the current liabilities of X5 are more than its current assets. It means that the company cannot honor all its current obligations should they be required. The company risk bankruptcy if all the short term creditors demand to be paid.

Assumptions

The assumptions made on share prices depend on the availability of the historical share prices of the three companies (Yahoo Business Finance 2019). Some of the share prices have been averaged to arrive at the figures used in calculations.

Part 2

Tesco Plc. Stock Evaluation

The Price-Earnings ratio is an important tool when evaluating how attractive the stock price of a company is compared to its earnings. P/E ratio is the amount an investor pays for a company’s $1 dollar of earnings (Kennon 2019). For example, if a company’s share is selling at $100 and the earnings per share is $5 then the P/E is $20. The company is selling each dollar of earnings at $20. The P/E ratios for the three companies are provided below;

	Equity Shareholders Perspectives
	Price Earnings Ratio
	2013	2014	2015	2016	2017	Average
Lenta Ltd	2727.83	2156.29	2021.52	1968.78	1664.78	2107.84
X5 retail Group	1.99	2.94	3.46	4.23	4.51	3.43
Tesco Plc.	0.49	23.42	N/A	168.60	N/A	64.17

 

Table 9

Tesco in 2013 had a P/E ratio of £0.49 or 41.12 RUB. In 2014 the PE was negative while in 2015 it was RUB 1967.28 (23.42 x 84) while in 2016 it amounted to RUB 14,162.4. Tesco figures were in sterling pound and which were exchanging at between 84 and 83 RUB per sterling pound. Lenta limited had the highest average P/E while Tesco and X5 were second and third respectively. X5 had the best PE ratio in 2013. Lenta had the highest P/E ratio and to earn $1 dollar in the company it would cost you an investment of RUB 2727.83 while in X5 it would cost RUB 1.99. In Tesco it would cost £0.49 or 41.12 RUB. In 2014, Lenta’s cost of $1 dollar investment return reduced to RUB 2156.29 and later 1968.78 and 1664.78 in 2015, 2016 and 2017 respectively. Its P/E average amounted to RUB 2107.84. X5 retail group in 2013 had a P/E ratio of RUB 1.99 and later 2.94 in 2014. In 2015, 2016 and 2017 the company had a P/E ratio of 3.46, 4.23 and 4.51 respectively. The average P/E ratio for X5 retail group amounted to RUB 3.43. However, the most attractive stock to purchase were those of X5. Its average value for RUB1 investment was RUB 3.43. The current prices of the three companies and their earnings have been provided on tables 10 and 11 below.

	Equity Shareholders Perspectives
	Earnings Per Share
	2013	2014	2015	2016	2017
Lenta Ltd	0.08	0.11	0.11	0.12	0.14
X5 retail Group	273.25	187.02	208.82	328.36	462.36
Tesco Plc.	17.30	0.36	-2.12	0.05	-0.01

Table 10

	Current Share Prices
	2013	2014	2015	2016	2017	Average
Lenta Ltd	226.41	226.41	226.41	226.41	226.41	226.41
X5 retail Group	543.48	550.44	722.80	1388.90	2084.00	1057.92
Tesco Plc.	8.43	8.43	8.43	8.43	8.43	8.43

 

Table 11

Tesco Plc. had a share price of 8.43 and some earnings of 17.30 in 2013 while X5 had a share price of 543.48 and some earnings of 273.25 in the same year. X5 had the highest earnings per share as well as the highest share prices. For an average share price of 1057.92 the company earned 462.36. Tesco share price was 8.43 while its earnings were negative. Lenta limited had share prices worth 226.41 and earnings of 0.14 per share. X5 shares are worth buying while for Lenta limited and Tesco Plc should be sold if one has purchased them (Kennon 2019). The average share price in 2013 for Lenta limited was 226.41 while the earnings per share amounted to 0.08 for the same period as indicated in table 10 and 11 below. The shares should be sold as an intelligent investor would purchase X5 shares and consider selling the shares of the other two companies due to low returns. For an average price of 1057, an investor would have slightly more than three times the earning power if he purchased X5 shares.

Conclusion

Tesco made phenomenal changes in its six strategic drivers. In 2017 the company announced the sale of some of its retail businesses in Turkey including Kipa and Garden center chain, Giraffe Restaurants, Euphoria Bakery and its coffee shops Harris + Hoole. Tesco has strategized on building its key core competencies in a bid to strengthen its unique brand and growth potential to create a formidable challenge to its competitors in the industry. The company has also merged with Booker group to stump its authority in UK’s food market and strengthened its out of home leading food business. Tesco is determined to recover from its below average performance to once again control the groceries and general merchandise retail market. The analysis shows that Tesco’s liquidity is above average and its profitability suffered after the discovery of the commercial income overstatement in 2015. The company has however made efforts to recover from its below average performance and its strategizing for a better performance in future.

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