Tesco PLC: Investment Analysis

Subject: Company Analysis
Pages: 6
Words: 1665
Reading time:
6 min
Study level: Master

Introduction

Tesco plc is one of the largest retail chains in the UK. However, the company is multinational, with subsidiaries and investments all over the world. The attractiveness of stocks to investors is always a multi-criteria and complex issue, even when it comes to market leaders. Retail is filled with many competitors, especially in the international market, where Tesco plc currently occupies the third position (Wood, Wrigley, & Coe, 2017). The company’s stock price depends on many factors and has had both large ups and downs over the past five years, which nevertheless have relatively stabilized to date (Stock Rate of Tesco PLC – Investing, 2021). A specific dynamics of the fall were observed in 2020 due to the COVID-19 pandemic, but now, there is an increase in general. This paper analyzes the ratios in order to provide the client with information on the current profitability of an investment in Tesco plc shares.

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Company’s Financial Performance Comparative Analysis

One of the initial significant factors indicating a company’s well-being is its overall financial condition. The most attractive for investors are companies that annually increase their EBITDA, capital, and revenue. At Tesco plc, based on the data obtained, it can be concluded that sales of the company with and without special operations increased compared to 2018 (Tesco PLC Annual Report, 2019). Compiled ratios of the return on equity and return on shareholders’ funds show different dynamics. Tesco plc’s return on equity increased by more than one percent, but its performance is still relatively low compared to the retail average (McLaney & Atrill, 2016). Tesco plc, in turn, responds with stability, which in the long term makes it possible to rely on the company’s ability to manage shareholder funds. In addition, this indicator eliminates the possibility of errors in the analysis of companies with enormous debt.

Return on shareholders’ funds, in turn, fell by almost 3%, passing the 10% threshold, which is considered the norm in any investment. At first glance, this dynamics does not inspire confidence, but one cannot judge the attractiveness of investments by it alone. First, the company’s gross profit has increased, which indicates the effectiveness of the approach to increasing revenue from the cost of goods. Within the retail context, this is an outstanding characteristic, which shows the company’s ability to regulate inflation and depreciation of goods while maintaining positive growth. In addition, the company’s organizational culture allows keeping the course of increasing operating profit margins, maintaining or reducing the level of operating expenses with growing profits. Optimization issues in such large companies operating in the international market are fundamental in investment analysis.

The net profit margin is one of the most critical indicators of a company’s performance since it ultimately combines operating expenses, its pricing competence, and interest expenses. Retail values ​​range from 0.5% to 7.5%; there is no ideal percentage (Mohammadipour et al., 2018). Tesco plc has slightly lost a fraction of a percentage compared to 2018, but internationally, stability is more important. The main expenses of the retail company are utilities, rents, salaries, and administrative fees. The company’s international experience implies that each country has its own political, legal, and even social factors, which not only put its own legislative restrictions on the conduct of activities but also have its own national character, which, if poorly analyzed, will lead to losses. Considering that in the company’s annual report, the cash turnover indicator fell by almost 10%, it is still impossible to make a final decision on the indicators of the profitability group.

The effectiveness of a company is measured by many indicators, among which there is an indicator of stocks in a certain period. It indicates how quickly a company turns around its products. Here Tesco plc has some of the best results even in its business sector, since in retail, these indicators are consistently low, unlike, for example, the automotive industry. The indicator increased slightly but remained at the same shallow level for retail. This fact suggests that Tesco plc has a perfect relationship between the purchasing and sales departments, which is the key to success in this kind of business.

The company’s average settlement for receivables is also relatively low, which means that Tesco plc collects payments to cover receivables exceptionally quickly. On average, 30 days is considered a standard indicator, as in credit debt, so an indicator of more than nine days, which, moreover, has slightly decreased, speaks in favor of the company as an investment object. Retail is heavily dependent on accounts receivable, which is why this business sector values ​​companies that know how to manage it. A low indicator can be negatively assessed only if the company has too strict credit conditions, but such conditions are typical, as a rule, for other industries and industries.

Paying accounts payable over a long period over several years speaks of the company’s high reputation, as well as the fact that financial regulation in it is carried out with outstanding talent. In retail, it is generally accepted that the longer accounts payable are paid, the better the company manages cash flows. A significant period of more than fifty days for several years already speaks of the company’s ability to dispose of funds for a long time without damaging its reputation on the part of suppliers. Since Tesco plc also deals with perishable products, maintaining such an indicator, which fell by five days compared to 2018, is a sign of a successful company and attractive investments.

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Net assets turnover shows positive growth in cases where the company incurs high costs due to business expansion, which are reflected negatively in other profitability indicators. The slight growth indicates that the company remains firmly in the leadership position in the market due to the considerable cash flow and status of an international company. In addition, this figure for Tesco plc is above average, which again underlines the success of the company’s organizational culture and structure.

Retail, along with banks and hospitality, relies quite heavily on its employees, on whom profits depend. Tesco plc’s sales-per-employee ratio shows a positive trend, as companies that increase the number of employees and increase profits simultaneously are well quoted on the stock market. Outsourcing in retail, as a rule, is not associated with the direct functions of the company for the sale and customer service. Therefore, it is not taken into account in this sample. Even though the threshold of “success” for large companies starts from 200 thousand, companies like Tesco plc, in which many employees are a necessary measure and an industry tradition, can be considered attractive for investments.

However, in matters of liquidity, not everything is as good as the company’s efficiency. The current liquidity ratio and acid test ratio are less than one. It is believed that the company most often extinguishes short-term liabilities at the expense of its assets. When liabilities exceed assets, the ratio is between 0 and 1. However, within retail, and specifically Tesco plc, strong cash flow justifies low ratios. Also, constant development and the start of new grandiose projects can reduce this indicator. Operating cash flow also has a relatively low ratio. Nevertheless, the only negative signal for investors is their decline, in some places even significant, compared to 2018.

The interest coverage ratio and the company’s transfer ratio are pretty adequate for retail. The interest coverage ratio is considered to be the norm at 1.5, while Tesco plc has a significant increase compared to 2018. The company can cover its loan obligations with ease, but relatively high ratio ratios make the company sensitive to economic downturns. This fact is not surprising due to its wide distribution throughout the world and dependence on the purchasing power of citizens. However, its decline is a good signal for investors.

Recommendations and Outcomes

Dividends are the most understandable area for an investor. In general, Tesco plc has quite positive dynamics in all investment indicators. In this regard, it is necessary to collect all the analyses carried out in a single recommendation. Firstly, Tesco plc is a company with a highly developed organizational culture, and all business processes within the company and external suppliers are extremely well established and time-tested. It is a good signal for investors that even in the event of economic downturns, the company can solve the problem with the help of qualified employees and many years of experience.

Second, some of the low and negative performance metrics are justified by the nature of retail. The company works with perishable products worldwide, constantly establishing a supply chain, regulating many deliveries, and now, given the pandemic, it is forced to comply with all security measures. Against the backdrop of unsuccessful statistics, the company continues to increase its main profit, but at the same time, it loses in cash flow. Retail is dependent on every little reason, as it works with many people internationally, so stability is critical here than maintaining high growth. In this connection, Tesco plc shares are recommended for purchase if necessary to invest to save money. The company’s dynamics do not imply a sharp increase in income; however, long-term stability will keep investments in good hands.

Restrictions

It is always worth considering the risk of manipulation, which can affect specific ratios in different ways, such as net asset turnover and liquidity. In addition, the analysis in this work was based on the data of 2018 and 2019. However, global events such as a pandemic, with sufficient force, adjust the activities and efficiency of retail companies. Certain restrictions imposed by the state, the availability of delivery services are beginning to play a decisive role in determining the new market leader. The international nature of Tesco plc also requires an ongoing assessment of the political, economic, and social situation in the country in which the supermarket is located. Nevertheless, the company’s many years of experience allows us to confidently state that in the long term, shares will be able to accurately preserve investments and pay dividends in accordance with the set deadlines.

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Reference List

McLaney, E. J. & Atrill, P. (2016). Accounting and Finance: An Introduction. Harlow: Pearson.

Mohammadipour, R., et al. (2018) ‘A Comparative Study of the Retail Margin and Efficiency: Municipal Green Grocery Centers vs. Green Groceries (Case Study of Mashhad County)’, Agricultural Economics and Development, 23(89), pp. 155-184.

Stock Rate of Tesco PLC – Investing (2021) Web.

Tesco PLC Annual Report (2019) Web.

Wood, S., Wrigley, N., & Coe, N. M. (2017) ‘Capital discipline and financial market relations in retail globalization: insights from the case of Tesco plc’, Journal of Economic Geography, 17(1), pp. 31-57.