Financial Analysis of Tesco

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Managing Financial Principles

TESCO Ltd.

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Zahid Iqbal

ID: 8531

Abstract:

This paper highlights different financial aspects of TESCO Ltd. Company. It identifies different sources of finance for the company. An overview of different financial ratios which represent liquidity, profitability and performance of the company. Then an investment appraisal has been developed for TESCO for further growth, development and expansion of the business.

Table of Contents

Abstract:2

Introduction:4

Sources of Finance:5

Internal Resources:5
External Sources:6
Recommendations:8
INVESTMENT APPRAISAL:10

Post Completion Review (PCR):10
Methods of Investment Appraisal11
Ratio Analysis:13

Profitability Ratios:13
Return on Assets:15

Efficiency Ratios:17
Liquidity Ratios:20
Quick Ratio:21
Stability Ratios:22
References:23

Introduction:

TESCO was founded by Mr. Jack Cohen in 1919, when he initiated to sell surplus groceries from a stall in the East End of London. It’s first own brand product was TESCO Tea and its first store was Burnt Oak, Edgware, North London. In 1932 TESCO stores became a private limited company. First modern food warehouse was introduced by TESCO in 1934.

In last ten years, the following are the major milestones of TESCO.

• Tesco.com was launched and in this was it became online.

• TESCO became leading organic retailer in the UK.

• TESCO launched ‘Customer Champions’ in its stores.

• It entered Malaysia, Japan, Turkey, China, United States, South Korea and India in different types of business opportunities and with different products according to the local requirements.

• It became first major British Super Market to enter music download market.

• It launched Tesco Homeplus.

The current strategy of TESCO is to diversify the business which was laid down in 1997 and it has proved the base of success for the business not only in UK but also in many other markets and it had proved itself as a market leader.

Sources of Finance:

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Internal Resources:

Retained Profit:

Retained profit is the amount of profit or dividend which is not distributed to the share holders but retained for the some new investment/project like that. So instead of going to banks or any other outside source of finance, mostly organizations prefer to utilize retained profit.

TESCO reserved £6842m as retained earnings to expand its businesses in 2008, in 2009 it retained £776m and in Feb. 2010 it has retained £9,356m. It shows that there is a growing trend in keeping the retained earnings in TESCO.

|2008 (£m) |2009(£m) |Feb. 2010(£m) | |6842 |7776 |9356 |

Table and graph showing retained earnings from 2008 to Feb. 2010

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Sale of fixed assets:

Sale of fixed assets which are no more needed in the organization due to the replacement of new technology can be a source of finance as well so it would be a sensible decision that instead of paying cost to maintain and stock such fixed assets, those assets should be sold and finance should be obtained.

External Sources:

Bank Overdraft:

When an account reaches zero, even then the company can withdraw the money from the account, this is called overdraft (Sayer 2007). This facility is very important for the company as sometimes it may need to use this facility urgent to accomplish some transaction.

HP/ Leasing:

According to Sayer (2007), “An agreement in which one party gains a long-term rental agreement and the other party receives a form of secured long-term debt.” The companies prefer to lease the costly machinery usually instead of purchasing it. The company pays the rent of the leased...
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