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Financial Analysis of Tesco and Benedict Co.
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Financial Analysis of Tesco and Benedict Co.

Gift Udiomunu David R1911D9784170 Strategic Financial Management (AF4S31-V2-20800) Lecturer: Bashkim Isufi 9/10/2020

Table of Contents 1. INTRODUCTION................................................................................................... 3 2. Tesco corporate strategic financial analysis......................................................... 4 2.1

Introduction.......................................................................................................... 4

2.2

Stakeholder analysis.........................................................................................

2.2.2 2.3

4

Employee stakeholders................................................................................ 5 Corporate social responsibility............................................................................ 7

2.3.1

Community and customers.......................................................................... 7 2.3.2. Environment................................................................................................ 7

3. Benedict corporate strategic financial analysis........................................................ 8 3.1

Introduction.......................................................................................................... 8

3.2

Analysis of the Company’s financial ratios.......................................................... 9

3.2.1

Profitability Ratios......................................................................................... 9

3.2.2

Use of resources ratios.............................................................................. 10

3.2.3

Liquidity ratios............................................................................................ 10

3.2.4

Gearing ratios............................................................................................. 11

3.2.5

Investor ratios............................................................................................. 11

4. Conclusion.............................................................................................................. 11 5. Appendix A – Financial data................................................................................... 12 Appendix B - Calculations.......................................................................................... 13 References................................................................................................................. 16

1. INTRODUCTION The purpose of this article is to analyze the two companies from a financial perspective, Tesco and Benedict Corporation. The main stakeholders of Tesco will be analyzed, and Tesco’s 2016 annual report will be used to review the organization’s performance in fulfilling its corporate social responsibility and its environmental, social review and corporate governance reports. Tesco is one of the leading customer-centric retail supermarket chains in the UK. It serves customers through its online and offline stores (Tesco, 2018), and makes money mainly by investing in and selling high-quality fast-moving consumer goods (UKEssays, 2017). Tesco has different stakeholders, but in the process of this research, only three input stakeholders of the organization's financial performance will be analyzed, namely customers, suppliers, and employees. In addition, this article attempts to analyze the financial status of Benedict Corporation as a "professional and experienced buyer and reseller of damaged goods, abandoned freight, casualties losses and more losses" (Benedict Co., 2018). This article will consider a series of financial ratios to measure the financial performance of the organization.

1.1 Structure This article is composed of four main chapters. The first chapter introduces the scope of the research, a brief methodology and readers' expectations for each part of the research. The second chapter fully analyzes the investment of Tesco’s three main stakeholders on its financial performance. The third chapter analyzes the financial status of Benedict Corporation and emphasizes its performance through a series of financial ratios analyzed in this research. Finally, Chapter 4 will summarize the results of the analysis and put forward some recommendations suitable for each organization.

CHAPTER II: TESCO CORPORATE STRATEGIC FINANCIAL ANALYSIS

2.1 Definitions Freeman and Reed (1983) defined stakeholder as individuals, groups or organizations, on which an organization depends for survival. A couple of other definitions given by a wide range of authors, such as Freeman and Reed (1983), posit that stakeholders are people, firms, organizations, entities or simply the entire community that can affect or be affected by the company’s activities. In this study, Tesco’s 2016 annual report will be used in classification of its stakeholders into three segments namely; Internal, External and connected stakeholders and this classification will be followed (Tesco, 2017, p.40)

2.1 Tesco Stakeholders Tesco’s 2016 annual report highlights its three core stakeholders namely; customers, suppliers and its colleagues (Tesco, 2017, p.48, 53). In the annual report, customers as seen as belonging to the group of external stakeholders are referred to as individuals or entities who purchase and repurchase the product/services of the organization frequently thus, having their customer loyalty defined by their average weekly expenditure or act as referrals to other shoppers. Tesco’s second core stakeholders are suppliers that belong to partnerships and they fall under the group of connected stakeholders. Tesco’s employees are referred to as colleagues and they fall under the category of internal stakeholders in whom the organization invests in order to better serve its customers.

2.2.1 Customer stakeholders Tesco is majorly in business because it has customers and views its customers as key stakeholders because without them, it will be non-existent. Tesco’s mission statement indicates that its aim is to improve on its customer service quality continuously thus highlighting how much value it places on its customers. As also indicated in Tesco’s mission statement, Tesco has the goal of being the top ranking retail company in respect to the entire customer experience and this is shown in value added programs like the loyalty scheme which Tesco was among the first to adopt in the industry it operates. 2.2.2 Employee stakeholders According to Tesco’s 2016 annual report, Tesco has across 11 countries in which it operates its business almost 500,000 employees. Tesco proves that it values its employees by trying to offer them a range of benefits that includes adequate working condition, competitive salaries and a couple of other portfolios that is created with the purpose of providing employee welfare such as employees getting discounts on anything they purchase from Tesco and housing options. Tesco is a number one choice employer either for part time or full-time employment across the different countries it operates and because it is known to have high employee retention rate compared to other organization playing in the same industry, it attract a huge amount of employees from different fields. It is very important to view employees as valuable key stakeholders the business to customer kind of business because they are the ones in constant interaction with customers and how the interaction goes can either make the business go smoothly or not.

2.2.3 Supplier stakeholder By virtue of Tesco's business model, it relies on a series of suppliers who provide its products that it makes available shop customers. As can be seen from the annual report, Tesco believes that all suppliers are very important, because they will become the key driving force of Tesco's business, so they regard all suppliers as partners. Tesco has partnered with top grocery and daily necessities producers to provide customers with the highest quality products in its stores. If the supplier, as a stakeholder, decides to increase or decrease the price and availability of the products it supplies, it may directly affect Tesco's business activities. Therefore, the importance of stakeholder management to suppliers can never be overemphasized to ensure Tesco's business profitability and continuity, and to ensure that products are always provided to customers at the correct price.

2.3 Corporate social responsibility As mentioned in the corporate governance section of Tesco's 2016 annual report, Tesco established a corporate social responsibility (CSR) committee to serve as a medium of communication with its social and environmental stakeholders. The report of the Corporate Social Responsibility Committee emphasized the importance and value Tesco attaches to corporate social responsibility practices, which partly focus on establishing and maintaining the trust level of internal and external stakeholders. In addition, after verifying its corporate social responsibility report, Tesco has made tremendous efforts as an organization, which has had a positive impact on the environment and customers. The Corporate Social Responsibility Committee has launched a number of projects that have had a direct and positive impact on customers, communities and the environment, some of which will be discussed.

2.3.1 Community and customers Tesco has a community- and customer-oriented corporate social responsibility project. Among these projects, there is a project labeled "Eat Happy/ Farm to Fork", which focuses on helping people make healthy choices when choosing food by letting people know how the food they eat is produced.

2.3.2. Environment Tesco's environmental strategy focuses on five main areas (climate, freshwater, ocean, forest and sustainable agriculture) and is determined to encapsulate this throughout its entire business and supply chain. To this end, Tesco has been continuously reducing the carbon intensity of its storage and distribution centers, and is gradually moving towards the 2020 goal of halving the carbon emissions per square foot of its storage and distribution centers and reducing carbon emissions by 25% per case of the goods delivered. Due to Tesco's performance and disclosure of its environmental impact, Tesco became the only retailer to be included in the 2016 Carbon Information Disclosure Project Climate A List. In addition, Tesco became the first UK retailer to join the Sustainable Agriculture Initiative, which gave it the opportunity to work with companies and partners in various industries to help define, promote and implement its agricultural supply chain best practices in the environment.

3. Benedict corporate strategic financial analysis 3.1 Introduction Benedict Corporation (Benedict Corporation) is a leader in the business of salvage goods trading in the UK. They participate in the purchase and resale of abandoned and/or damaged goods that have certain commercial value and are mainly obtained from customer claims and warehoused damaged goods. In the following part, the financial status of Benedict to meet the requirements of its stakeholders will be analyzed and evaluated, and a series of financial ratios will be used to analyze and evaluate whether there is any cause for concern.

3.2 Analysis of the Company’s financial ratios Financial ratios (also known as accounting ratios) are a series of ratios that are used to determine the financial efficiency and profitability of an organization based on the data in the organization's financial reports. Therefore, the data in the organization's financial reports will be compared by using ratios.

3.2.1 Profitability Ratios The financial ratio used to determine the extent to which an organization can obtain income, assets, equity, operating costs, and other data captured regularly from its operations is called profitability ratio. An organization is deemed to have achieved good financial performance when its profitability is higher than that of its competitors or maintains regular growth. In order to obtain Benedict Corporation’s profitability, the return on capital (ROCE) used by the business will be analyzed. According to the calculations in Appendix B, although sales increased from 20X0 to 20X1, Benedict Corporation’s return on capital used decreased from 21.9% to 18%. This means that investment income per unit of capital has decreased, which is certainly not a good sign. It can be argued that the only way to reduce the return on capital employed is if the organization carefully makes investments that would make profit in the next few years. In addition, from the calculation results observed in Appendix B, it can be seen that from 20X0 to 20X1, the gross profit increased significantly from 42% to 48%. However, despite the increase in gross profit, net profit fell from 31% to 27%. This means that the cost of doing business has increased. Therefore, it will be very relevant for the organization to conduct an operating cost analysis to understand where to cut unnecessary costs.

3.2.2 Use of resources ratios The use of resource ratios, also known as activity ratios, is used to determine the short-term performance of the organization and effectively measure the extent to which the organization uses its assets and liabilities. 

Debtor days: This ratio usually shows the number of days (average) required to repay the debt owed by the debtor. From 20 x 0, Benedict Corporation’s debt days increased from 55.7 to 90.06. This means that the organization's ability to quickly collect revenue has been delayed. ● Creditor days: From 20X0 to 20X1, the average time to pay creditors increased from 108.24 days to 155.13. It can be observed that although the increase in creditor days is higher than the increase in debtor days, Benedict Corporation still enjoys trade credit. However, due to the extension of the creditor’s time limit, the seller may refuse to deliver materials to the organization, so this is a crucial organizational situation. This is definitely not a good indication.



Inventory days: This is the average number of days an organization retains its inventory before selling a product. Competitors’ inventory days averaged 60 days, but from 20x0 to 20x1, Benedict Corporation increased its inventory days from 65 days to 118 days. The same is true for the cash conversion cycle, increasing from 13 to 53.6 from 20X0 to 20X1.

3.2.3 Liquidity ratios These ratios are used to determine whether the organization can take care of its own debt without external support.

The average current ratio was 1.6, but the current ratio of Benedict Corporation dropped from 1.23 to 1.19 from 20X0 to 20X1. The industry average quick ratio is 1.0. However,

Benedict’s quick ratio was reduced from 0.75 to 0.7 from 20x0 to 20x1. All these indicate that the organization's financial situation is poor.

3.2.4 Gearing ratios These ratios are used to initiate a comparison between equity capital and debt. The debt ratio of Benedict has increased, from 20X0 to 20X1 from 23.6% to 30%, and the debt/equity ratio from 20X0 to 20X1 rose from 30.9% to 42.8%. This means that if the economy declines, Benedict Corporation will be affected. 3.2.5 Investor ratios From 20X0 to 20X1, the return on equity decreased from 27% to 23.5%, and the dividend also increased as it rose from $0.2 to $0.25. However, the dividend yield has declined, from 0.55% to 0.46%, which is all negative from an investor's perspective.

4. Conclusion After carefully studying Benedict’s financial reports and all the ratios that measure the company’s financial performance, it is easy to conclude that the organization’s financial performance is poor. From the perspective of investors, it should be recommended not to invest in Benedict Corporation unless the organization will take actions that can bring positive changes to the organization’s current financial situation. The sales growth from 20X0 to 20X1 shows that all hope has not been lost. However, although sales have increased, revenue has fallen. Therefore, Benedict Corporation needs to aim to reduce operating costs.

5. Appendix A –

Financial

data

Table 1: Statement of income for benedict co. (Source: University of South wales,

2020)

Table 2: Statement of financial position for Benedict Co. (Source: University of South Wales, 2020)

Appendix B

–

Calculations

Return of capital employed (ROCE) ROCE = [Operating Profit (excluding tax and interest) / (Total Assets - Current liabilities)] X 100 For 20 X 1: ROCE = [ (8 3 0 0 + 1 3 0 0) / (5 0 8 0 0 + 1 2 0 0 0 – 1 0 8 0 0 ) ] X 100 = 18.4% For 20 X 0: ROCE = [ ( 8 7 0 0 + 5 0 0 ) / ( 3 9 0 0 0 + 8 0 0 0 - 5 1 0 0 ) ] X 100 = 21.9% Net Profit Net profit = [ Operating Profit (excluding tax and interest) / Total Sales] X 100 For 20 X 1: Net profit = ( 9 6 0 0 / 3 0 8 0 0 ) X 100 = 31% For 20 X 0: Net profit = ( 9 2 0 0 / 2 4 9 0 0 ) X 100 = 36.7% Gross Profit Gross profit = [ Gross Profit / Total Sales] X 100 For 20 X 1: Gross profit = ( 1 4 8 0 0 / 3 0 8 0 0 ) X 100 = 48% For 20 X 0: Gross profit = ( 1 0 4 0 0 / 2 4 9 0 0) X 100 = 42% Net Asset Net asset For 20 X 1: For 20 X 0:

Turnover turnover = Sales / Capital employed Net asset turnover = 1 4 8 0 0 / 5 2 0 0 0 = 0.28 Net asset turnover = 1 0 4 0 0 / 4 1 9 0 0 = 0.2

Debtor day Debtor day = ( Trade Receivables / Credit sales) X 365 For 20 X 1: Debtor day = ( 7 6 0 0 / 3 0 8 0 0 ) X 365 = 90 days For 20 X 0: Debtor day = ( 3 8 0 0 / 2 4 9 0 0 ) X 365 = 56 days Trade [Stock] day Trade [Stock] day = ( Inventory / Cost of sales) X 365 For 20 X 1: Trade [Stock] day = ( 5 2 0 0 / 1 6 0 0 0 ) X 365 = 119 days For 20 X 0: Trade [Stock] day = ( 2 6 0 0 / 1 4 5 0 0 ) X 365 = 65 days

Creditor day Creditor day = ( Trade Payable / Cost of sales) X 365 For 20 X 1: Creditor day = [ 6 8 0 0 / 1 6 0 0 0 ] X 365 = 155 days For 20 X 0: Creditor day = ( 4 3 0 0 / 1 4 5 0 0 ) X 365 = 108 days

Cash conversion cycle Cash conversion cycle = Inventory days + Receivable days – Payables days For 20 X 1: Cash conversion cycle = 1 1 8 . 6 + 9 0 - 1 5 5 = 5 3. 6 days For 20 X 0: Cash conversion cycle = 6 5 . 4 + 5 5 . 7 0 - 1 0 8 = 1 3 days Current Ratio Current Ratio = Current assets / current liabilities For 20 X 1: Current Ratio = [ 1 2 8 0 0 / 1 0 8 0 0 ] = 1. 1 9 For 20 X 0: Current Ratio = [ 6 4 0 0 / 5 1 0 0 ] = 1 .2 5

Quick Ratio Quick Ratio = ( Current assets – Stock ) / current liabilities For 20 X 1: Quick Ratio = ( 1 2 8 0 0 - 5 2 0 0 ) / 1 0 8 0 0 = 0 .7 For 20 X 0: Quick Ratio = ( 6 4 0 0 - 2 6 0 0 ) / 5 1 0 0 = 0 .7 5 Capital Gearing Ratio Capital Gearing Ratio = ( long term debt / Capital Employed ) X 100 For 20 X 1: Capital Gearing Ratio = [ 1 2 0 0 0 / ( 5 0 8 0 0 - 1 0 8 0 0 ) ] X 1 0 0 = 30% For 20 X 0: Capital Gearing Ratio = [ 8 0 0 0 / ( 3 9 0 0 0 - 5 1 0 0 ) ] X 1 0 0 =24%

Debt to Equity Debt to Equity 00 For 20 X 1: Debt For 20X0: Debt

Ratio Ratio = [ long term debt / ( Share Capital + Reserve ) ] X 1 to Equity Ratio = 1 2 0 0 0 / 2 8 0 0 0 X 1 0 0 = 4 2 . 8 % to Equity Ratio = 8 0 0 0 / 2 5 9 0 0 X 1 0 0 = 3 0 . 9 %

Return on Equity Ratio Return on Equity Ratio = [ Earnings after tax / ( Ordinary share capital + reserves + Reserve ) ] X 1 0 0 For 20 X 1: Return on Equity Ratio = [ 6 6 0 0 / 2 8 0 0 0 ] X 1 0 0 = 2 3 . 5 % For 20 X 0: Return on Equity Ratio = [ 7 0 0 0 / 2 5 9 0 0 ] X 1 0 0 = 2 7 %

Dividend Per Share Dividend per share = Dividend paid to shareholders / Number of issued shares For 20 X 1: Dividend per share = 4 5 0 0 0 0 0 / 1 8 0 0 0 0 0 0 = 0 . 3 For 20 X 0: Dividend per share = 3 6 0 0 0 0 0 / 1 8 0 0 0 0 0 0 = 0 . ...