Accounting for Management Common Stockholders

Question: Choose a company from UK listed under the London stock exchange market and conduct a five year fiancial statement of this company dated 5yrs ago. Your analysis should include: A brief summary of the company. Calculations of various ratios which will be used to analyse the companys performance over the years, choosing at least two from profitability. liquidity, and working capital and solvency ratio. Provide an analysis on each ratio calculated. Answer: Introduction- TESCO was founded in the year 1919 by John Edward Cohen. The name TESCO comes from the initials of Cohen's tea supplier T.E. Stockwell combined with the first two letters of Cohen. Cohen is considered to be the biggest retail revolutionary responsible for several small revolutions which have led to the current retail industry. TESCO is one of the largest retailers in the world operating in approx 2491 stores and employing over 350,000 people worldwide with profits exceeding 3billion. The UK is the company's largest market while it has recently expanded their operations in Central Europe, Thailand and recently in the US under the name of "Fresh Easy". In the United Kingdom, TESCO operates under four banners of Extra, Superstore, Metro, Express, One Stop and Homeplus. TESCO PLC (Amounts in m ) Particulars 2014 2013 2012 2011 2010 Indicates Profitability ratios: Net profit margin: 1.53% 0.04% 4.36% 4.42% 4.10% Bad since decreased Net profit 970.00 24.00 2,814.00 2,671.00 2,336.00 Sales revenue 63,557.00 63,406.00 64,539.00 60,455.00 56,910.00 Return on equity: 240.10% 5.96% 700.00% 666.92% 588.41% Bad since decreased Net income 970.00 24.00 2,814.00 2,671.00 2,336.00 average equity 404.00 402.50 402.00 400.50 397.00 Return on assets: 2.71% 0.06% 7.70% 7.69% 7.04% Bad since decreased Net income 970.00 24.00 2,814.00 2,671.00 2,336.00 Average total assets 35,812.50 37,475.50 36,542.50 34,712.50 33,171.50 Effeciency ratios: Inventory turnover ratio: 25.26 19.35 17.54 18.78 19.38 Good Since Increased Cost of goods sold 59,547.00 59,252.00 59,278.00 55,330.00 52,303.00 Average inventory 2,357.50 3,061.50 3,380.00 2,945.50 2,699.00 Receivables turnover ratio: 0.44 0.01 1.13 1.27 1.26 Bad since decreased Net revenue 970.00 24.00 2,814.00 2,671.00 2,336.00 Average receivables 2,190.00 2,591.00 2,493.50 2,109.00 1,854.00 Asset turnover ratio: 2.71% 0.06% 7.70% 7.69% 7.04% Bad since decreased Net revenue 970.00 24.00 2,814.00 2,671.00 2,336.00 Average total assets 35,812.50 37,475.50 36,542.50 34,712.50 33,171.50 Liquidity ratios: Current ratio: 0.65 0.67 0.64 0.65 0.71 Bad since decreased Current assets 13,085.00 12,465.00 12,353.00 11,608.00 11,392.00 Current liabilities 20,206.00 18,703.00 19,180.00 17,731.00 16,015.00 Quick ratio: 0.54 0.53 0.46 0.48 0.54 Bad since decreased Current assets-inventory 10,895.00 9,940.00 8,755.00 8,446.00 8,663.00 Current liabilities 20,206.00 18,703.00 19,180.00 17,731.00 16,015.00 Working Capital (7,121.00) (6,238.00) (6,827.00) (6,123.00) (4,623.00) Negative amount increased- Bad Current assets 13,085.00 12,465.00 12,353.00 11,608.00 11,392.00 Current liabilities 20,206.00 18,703.00 19,180.00 17,731.00 16,015.00 (Annual Report , TESCO) The ratios talk about the valuation of the company in the eyes of the market. The investor shall only look at the market reputation of the company before it is thinking of making an investment in it. In case the reputation is bad, then the investor shall not make an investment in the same since that would not give him any return on it. By above, it can be stated that the ratios must be analyzed for the company to arrive at any decision. The profitability ratios talk about the performance of the company in the eyes of the market. The investor shall only look at the performance of the company before it is thinking of making an investment in it (Accounting tools, 2015). In case the reputation is bad, then the investor shall not make an investment in the same since that would not give him any return on it (Accountingtools.com,2015) Net Profit Margin- It refers to the ratio of profit to the revenues of a company which is typically express as the percentage. This scenario represents an amount of profit that business is extracting from the sale (Accountingtools.com,2015). It is generally intended to be a measure of overall business. High - profit margin shows good performance indicating that company is correctly pricing its product and cost control system is also very efficient. Thus considered very useful for comparing the same in the same industry. In the given case, the Net profit margin of TESCO is decreasing which shows bad performance (Annual report). Return On Equity The calculation of this ratio indicates the ability of an entity to generate profit from the shareholders investment. It is also an indicator of the effectiveness of the use of equity funding for the growth of the company. High return on equity indicates that fund of investors has been used by the company effectively. Higher ratio is considered better than lower ratio which is used to compare the company in the same industry. Investors attract to the company having high return on equity ratio. In the states case, return on equity TESCO is decreasing which shows bad performance over the period of 5 years (Accountingtools.com,2015). Return on Assets- It refers to the ratio arising from the net income to the average assets of the company. It indicates the ability of the company for using its assets on the generation of income for the year. It clearly measures the number of cents earned for each dollar. Thus, consequently higher ratio indicates higher profitability i.e., good performance .This ratio is used to compare the companies in the same industry, this is because most of the company are assets sensitive. For example, they require high plant machinery to generate income in comparison to others. Their ROA is consequently lower than the other companies which are low assets sensitive. In the stated case, this ratio of TESCO is decreasing which shows bad performance over the period of 5 years. Efficiency Ratio - Calculation of efficiency Ratio helps to compare the companies in the same industry that how efficiently they are employing their assets and how they managing the debt lets check the efficiency ratio for both Vodafone and BT PLC Inventory Turnover Ratio- Calculation of this ratio helps to measure the management of companys inventory level. If the same is high, it shows that company is managing its inventory efficiently and lower ration is an indicator of poor management of inventory, or that company is having some issues for pushing the inventory for the sale purpose. In the stated case, this ratio of TESCO is increasing which shows good performance over the period of 5 years(Accountingtools.com,2015). Receivable Turnover Ratio= Calculation of this ratio helps to determine the efficiency of the companys credit Policies which companies made while selling their product or services. If the receivable turnover is low, then it indicates that either it is becoming hard for the company to collect the debt from the creditor or they are providing credit very easily which shows bad performance on the part of the company. Taking into account all the factors, it is recommended that company should have the high receivable turnover. . In the stated case, this ratio of TESCO is decreasing which shows bad performance over the period of 5 years Assets Turnover Ratio- This ratio measures how efficiently the company is measuring / using its short term as well as long term assets. One can say how effectively the assets are using in generating the sale for the company. High Assets turnover is an indicator good performance. . In the stated case, this ratio of TESCO is decreasing which shows bad performance over the period of 5 years. Liquidity Ratio This ratio shows the companys ability to pay off its current liabilities with the use of current assets. The financial strength ratios i.e. liquidity ratio talk about the ability of the company to pay off its dues. Higher the same denoted the higher the ability of the company to maintain margin of safety. The investor shall only look at the performance of the company before it is thinking of making an investment in it (Accountingtools.com,2015). In case the reputation is bad, then the investor shall not make an investment in the same since that would not give him any return on it. By above, in the stated case, this ratio of TESCO is decreasing which shows bad performance over the period of 5 years Current Ratio- This ratio provides an idea regarding the company ability to pay its current debt with its current assets only. It is considered as an important debt for the company since as we all are aware that current liabilities will be due within a year. High- current ratio shows a positive performance of the company that it can pay off their current liabilities within a year without having set off of any amount other than current assets. In the stated case, it is decreasing hence not good performance even though shows stability. Quick Ratio- It measures the ability of the company to meet the requirement of the short-term obligation with the use of liquid assets (Accountingtools.com,2015). Hence, there is a requirement to deduct inventory while calculating the Quick ratio. It considered as a sign of companys financial strength or weakness. It provides information about the companys short - term obligations. It indicates by using the short- term assets/ Liquid Assets, how much of the companys short term debt can be met In the stated case, this ratio of TESCO is decreasing which shows bad performance over the period of 5 years Working Capital In refers to the deduction of current assets from Current Liability to determine whether the company can pay its debt with the use of Current Assets. It considered as a sign of companys financial strength or weakness. It provides information about the companys short term obligations. It indicates by using the short- term assets/ liquid Assets, how much of the companys short- term debt can be met. In the stated case of Tesco, it I negative amount which is also in increasing order, clearly depicts that company is not able to pay its debt within a year. Conclusion Recommendation By calculation of ratios as well as analysis the annual reports of the company, it has been clear that company is not showing good performance over a period of time. Proper steps must be taken to reduce the expense or to increase the revenue of the company. Also, there is a requirement to keep control over current Assets, liabilities so as to maintain the required ratio. References: Accountingformanagement.org, (2015). Return on common stockholders' equity - formula, example | Accounting for Management. [Online] Available at: https://www.accountingformanagement.org/return-on-common-stockholders-equity-ratio/ [Accessed 23 Mar 2016]. Accountingtools.com, (2015). Accounts Receivable Turnover - Accounting Tools. [Online] Available at: https://www.accountingtools.com/accounts-receivable-turnover [Accessed 23 Mar 2016]. Accountingtools.com, (2015). Accounts Receivable Turnover - Accounting Tools. [Online] Available at: https://www.accountingtools.com/accounts-receivable-turnover [Accessed 23 Mar 2016]. My Accounting Course, (2015). Asset Turnover Ratio | Analysis | Formula | Example. 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