University of South Wales

 

 

 

 

Strategic Financial Management

Assessment Point 1

 

 

 

Abstract

This business report constitutes of two main parts; the first part is aimed to analyzing all the major stakeholders for Tesco, while specifying the major three most important ones, then we will be reviewing and analyzing how the Environmental and Social Review and the Corporate Governance Report might affect how Tesco demonstrates its performance in terms of its corporate and social responsibilities to two of the three major stakeholders identified, this is through a deep dive into the company’s 2016 financial report.

The second part will be to Analyze and evaluate the financial position of Benedict Co. using a range of financial ratios, in attempt to discover if the company is able to meet the requirements of the company’s potential customers, investors, lenders and suppliers. Detailing the reason behind the chosen ratios while highlighting the aspects of the company’s performance. Finally, we will be critically evaluating the application of financial ratios in interpreting and measuring the company’s performance.

 

 

1-  Introduction

Each company has a set of various stakeholders that vary from internal to external, these stakeholders are defined as individuals or organizations that are directly or indirectly impacted or affected by the company’s results. All of those need to be managed in a manner that leads to a successful and prosperous business. One way to analyze stakeholders is by their power and interest. High power, high interest stakeholders are Key Players, while Low power and low interest stakeholders are least important. The stakeholder analysis is a systematic way of identifying all the stakeholders in order to prioritize, manage and engage with them effectively and in a successful way. Stakeholder identification and analysis is the first step in the long process of managing those stakeholders, engaging with them and to maintain a good and fruitful relationship with.

The second part of this report is focused on Analyzing and evaluating the financial position of Benedict Co. We will be using financial ratios; such ratios generally help to provide an economic overview for the company. The main categories of accounting ratios used in the analysis are:

• Profitability ratios: used to measure the profitability and the company’s ability to generate earnings relative to its revenue, operating costs, and other balance sheet assets, also reviewing shareholders’ equity over time.
• Efficiency or working capital ratios: used to measure how efficiently the company uses its short-term assets and liabilities. It can also be used to calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity, and the general use of inventory and machinery.
• Liquidity ratios: it is an important class of financial metrics used to determine a debtor’s ability to pay off current debt obligations without raising external capital.
• Gearing ratios (leverage): demonstrates the degree to which the company’s activities are funded by shareholders’ funds versus creditor’s funds.
• Investor ratios: measure the relationships between earnings, dividend and share price.

Utilizing these ratios, we will have a better understanding of the company’s performance, financial status, and cash flow.

2- Tesco

Tesco [Tesco PLC] is a British multinational groceries and other merchandise retailer having its headquarters in Welwyn Garden City, Hertfordshire, England. By gross revenues, Tesco is the third-largest retailer in the world and the ninth-largest retailer in the world measured by revenues. It is operating in seven countries across Asia and Europe, and it is considered the market leader of groceries in the UK.

Tesco was founded in 1919 by Jack Cohen, the business expanded rapidly, and by 1939 the company had over 100 Tesco shops across the country. Tesco has expanded globally since the early 1990s, with operations in 11 other countries in the world. Mid last century, Tesco has diversified into other retailing avenues such as books, clothing, toys, furniture and electronics, also petrol / gas, software and financial services in some countries also into internet and telecommunication services.

2.1      Stakeholders Analysis

Clarke and Clegg (1998) have classified stakeholders into four categories; Primary Social Stakeholders, Secondary Social Stakeholders, Primary Non-Social Stakeholders and Secondary Non-Social Stakeholders. Another simpler classification will be to categorize stakeholders into two main groups, internal and external; where internal stakeholders are the entities within the business, while the external ones will be not within the business but are affected or dearly care about its performance. With these classifications in mind, the main internal stakeholders for Tesco will be the Employees [called colleagues on the company’s website and in its external reports] and Shareholders or investors, while the external ones will be Customers and Suppliers, following Clarke and Clegg (1998) model, the following are the main types of stakeholders:

• Primary Social Stakeholders
  • Customers
  • Employees / Colleagues
  • Suppliers and Partners
  • Management
  • Investors and Shareholders

 

• Secondary Social Stakeholders
• Media and Commentators
• Competitors
• Charities and Food banks

 

• Primary Non-Social Stakeholders
• The Environment
• Future Generations

2.1.1          Customers

Customers are at the heart of the company’s stakeholders’ analysis and focus, as they are the recipients of the company’s goods, services and products. The company is considered to have a customer-focused culture that has pervaded the company’s success; also customers have been stated clearly in the company’s 2015 updated mission statement “Serving Shoppers a little better every day” also there is one of the core values detailing on how to deal with people, “We treat people how they want to be treated”. With all of this in mind, it is clear that Tesco considers its customers as one of the primary stakeholders, hence the company thrives to deliver one of the best customer experiences whenever possible, such as 24/7 hours services to accommodate the customers busy schedules and their sudden emergency needs. Also the company offers one of the best customer loyalty scheme in the industry, and it is considered a pioneer in this area by developing such scheme that started in the 1960’s

2.1.2          Colleagues [Employees]

Tesco has reported in its 2016 annual report that it currently employing 476 thousand employees globally, the company offers a great environment for employment, as it offers very competitive benefits such as Employee Share Schemes, additional discounts on merchandises, staff housing options as well as a lot more benefits, that make Tesco as an employer or choice attracting employees and talents in the countries of its operations, and maintain a very good employee retention rate.

2.1.3          Suppliers

Suppliers are a vital stakeholder to Tesco, an outmost importance was given to this specific stakeholder as part of the annual reports, in some cases they were referred to as partners, according to the company’s website, Tesco works only with top manufacturers, who enjoy superior reputations and offer the highest quality wares. Suppliers were mentioned in Porter’s model of five forces in which “supplier power” refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. Hence partnering with the right supplier is of great importance to secure business continuity and success. According to Porter’s 5 forces industry analysis framework, supplier power, or the bargaining power of suppliers, is one of the forces that shape the competitive structure of the industry.

2.1.4          Environment

As part of the Corporate and Social Responsibility, Tesco has been running a sustainability program that has been detailed on the corporate website, as one of their missions is to have a shared responsibility to reduce waste from “farm to fork”. Mainly to reduce food waste while working in partnership with their suppliers and partners. Key action items from this program:

• Broadening specifications: This program allows the company to take much more of their suppliers’ crop, to maximize the amount of produce they sell in store, and give customers great products at low prices.
• Managing bumper crops: To reduce waste, the company sold extra-large boxes of produces at a cheaper price than usual. Accordingly, customers benefited from the bumper crop and the company took more from the growers.
• Improving food processing: By connecting growers with suppliers of fresh and frozen foods, this can provide a stable demand and supply of produces, which increases the amount of crop used and saves edible produce being ploughed back into the field.

Fesco has also partnered with a charity called FareShare, which has a program aimed at relieving food poverty and reducing food waste, the company has helped its suppliers to redistribute to charity utilizing FareShare application which helps in redistributing food to people in need.

2.2      Corporate Social Responsibility

As part of the 2016 Corporate Governance report which is part of the annual report, the company has identified in section 4 the relations with its social and environmental stakeholders through the Corporate Responsibility Committee report. Within this report, it stressed on the importance of corporate responsibility to rebuilding trust and transparency with a wide spectrum of the stakeholders mainly the customers.

In the report, the committee recognizes that the company has made a big difference on national and international fronts and how simple actions can have a significant impact to customers and to the environment. There were several projects that the committee has been driving and following, during the report year the company has showed progress on some vital projects impacting key stakeholders as follow:

 

2.2.1          Customers and Communities

The company has been working on 2 main fronts as part of the sustainability and corporate responsibility towards the customers and the communities, the first project is the ‘Eat Happy/Farm to Fork’ project which has reached a key milestone in November 2015 with 1 million children having participated in education trail initiative aimed at raising awareness about the process of food production and making healthy eating choices which increased the overall awareness of the average customer, allowing the consumers to make healthier and more responsible choices. The company has highlighted one of its targets which is to to make it easier for customers, colleagues and the communities to have a healthier life. One way is by creating partnerships with health experts like Diabetes UK and the British Heart Foundation that support prevention and cure for the biggest health challenges in modern days. In 2015 the company has raised 7.89 million pounds that are placed towards prevention projects and important health researches.

2.2.2          Environment

Tesco has a great social responsibility towards the environment, and this has been detailed in the company’s 2016 annual report, examples of such responsibilities are detailed below.

As part of the UK government program to reduce the production and use of plastic bags, the company has raised through the ‘Bags of Help’ program 11.5 million pounds, where proceeds from sales of carrier bags are reinvested into local projects to develop some of the poorly utilized outdoor areas.

On the other hand, the company has continued to make progress on trying to prevent food waste from farm to fork, first through their suppliers, by making as much use of the edible crops as possible. Second through the company’s own operations, The Community Food Connection (CFC), run in partnership with FareShare FoodCloud, working to deliver one main aim, which is to never throw away food that could be eaten. The program allows stores to notify local charities to how much extra food available at the end of each day, through the FareShare FoodCloud app. Charities simply respond by text message to confirm that they will collect the surplus food. This has been expanded to more than 100 stores; nearly 9 million meals have been donated with with a value reaching over 4.6 million in one year. Tesco is the only UK retailer to publish independently assured food waste data for its own operations. The company didn’t send any food waste to landfill since 2009 which is a great measure in preserving the environment and securing a better future for next generations.

Another important topic is carbon and greenhouse gas emissions, with the recent global warming concerns that have been sounded by scientists across the world, greenhouse gas emissions are monitored carefully at Tesco through an independent party, KPMG LLP using the assurance standards ISAE 300 which is also reported in details in the annual reports. The aim is to reduce those gas emissions year of year, in 2016 report, it confirmed that the company has reduced the net carbon intensity per sq. ft. of retail and distribution floor space by 1.8% compared to the previous year, and 41.7% since 2006/07.

 

 

3.  Benedict Co. Financial Position Analysis

3.1              Introduction

Benedict Company provides salvage solutions, it is specialized in buying and selling damaged or abandoned freight and other similar items, from transport claims or warehouse losses, simply they purchase almost anything worldwide that can be transported. The company has been in operations since 1983. During this section of the report, we will be performing a detailed analysis of the company’s financial position using a range of financial ratios, demonstrating the overall financial status of the company while highlighting the aspects of performance that raise concerns.

3.2              Financial Ratios

Financial or Accounting ratios are considered a group of important metrics used to measure the efficiency and profitability of a company based on its financial reports, while expressing the relationship between various financial data points.

3.2.1          Profitability

Profitability is measured through a class of metrics that are used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholders’ equity over time, using data from a specific point in time. In general, having a higher profitability ratio relative to a competitor’s ratio or relative to the previous period’s ratio indicates that the company is financially well performing.

In Benedict Co case, the Return on Capital Employed [ROCE] which is the primary profitability ratio, expressing the percentage of return the company earned and the capital employed. In this case, the ROCE dropped from 21.9% in year 20X0 to 18% in 20X1 despite the increase of sales, this indicates that the revenue per invested capital has reduced, which is a negative indication. This might be due to new investments into the company that might be expect to improve returns on multi-year term for example. Other importance matrix is the Gross Profit percentage; in this case, the Gross Margin has improved and jumped 41.7% to 48% which is a significant increase in sales revenue, but the Net margin declined from 36.9% to 31% which indicates that the cost of sales has increased which affected the revenue, at this point the company has to review its operating costs, and to apply efficiencies whenever possible. Another angle to look at is the Net Asset turnover ratio which shows how efficiently the company’s capital is used to produce turnover, in 20X0 the turnover ratio was 0.24, and it increased to 0.28 in 20X1, although this doesn’t imply that there is a problem, but emphasis on the fact that efficiencies need to be deployed in operations to improve the situation.

3.2.2          Efficiency and Use of Resources

The use of efficiency ratios which are sometimes called activity ratios are used by investors to measure the performance of the company’s short-term, quantifying how efficiently the company uses its short-term assets and liabilities. An important measure is the number of debtor days or the trade receivable day, as this is very important in cash collection flow affecting the overall company’s cash flow, this figure was 55.7 days in 20X0 and reduced to 90 days in 20X1 which is showing a delay in collecting revenue, which negatively impact the cash flow; keeping in mind that average number of days for companies in the same field is 55 days. As a quick remedy is to ensure faster cash collection will be by issuing invoices on time and tackle the debtors more often to reduce the debtor days.

Trade Payable days is another measure that impacts the company’s cash flow, it was 108 in 20X0 and jumped to 155 in 20X1, it isn’t particularly bad, but the industry standard is 90 days which might reflect negatively on the company’s business structure and might prevent partners from dealing with company in future contracts. Inventory days shows the number of days the company holds its inventory before selling it, this number also increased from 65 to 118 days which shows that the selling process is hindered for some reason and needs to speed it up, as the average among competitors is 60 days. The cash conversion cycle gives idea of the length of time it takes the company to generate cash from operations, this value was 13 in 20X0 and increased to 53.6 in 20X1, this needs to be looked at and corrective actions need to be implemented.

3.2.3          Liquidity Ratios

This is an important metrics used to determine if the company can pay off current debt obligations without raising external capital. Two ratios are involved, Current ratio which is a liquidity ratio that measures the ability to pay short-term obligations due within one year. It has dropped from 1.25 in 20X0 to 1.19 in 20X1 while the industry average is 1.6. This is alarming, as if the ratio keeps dropping at one point the company might not have the capital to meet its short-term obligations which might lead to significant problems or even bankruptcy.

The other matrix is the Quick ratio, which is similar to the current ratio but as a shorter-term measure of liquidity. The industry average is 1.0, while the company’s ratio reduced from 0.745 in 20X0 to 0.7 in 20X1, again this is considered alarming, it might drive away investors and partners and need to be addressed from different angles.

3.2.4          Gearing Ratios

Gearing ratios consist of group of financial ratios that compare some form of equity or raised capital to debt. It is a measurement of the entity’s financial leverage, which demonstrates the degree to which the company’s activities are funded by shareholders’ funds versus creditor’s funds. The capital gearing ratio increased from 23.6% in 20X0 to 30% in 20X1 and the debt/equity ratio increased from 30.9% to 42.8% in the respective year. This indicate that the company has more financial leverage and is more susceptible to economic downturns as the company has higher amounts of debt as compared to shareholders’ equity.

3.2.5          Investors

Investors are an important stakeholder for the company, and managing the relationship is a vital managerial aspect; in 20X1 the return on equity has dropped from 27% in 20X0 to 23.50%, which is in line with the drop in ROCE. On the other hand dividend per share slightly increased from $0.20 to $0.25, this is due the total increase of dividend paid by the company which has been increased from 3.6M to $4.5 M. Dividend Yield is the ratio of the annual dividend compared to the share price, this ratio decreased from 0.55% to 0.46% (down by 0.9%) which is inline with the stock price increase, from $3.6 per share to $5.6.

 

4.  Conclusion

From the financial analysis of Benedict Co. it appears that the company is not heading in the right direction, as their profit margins have been declining and the revenue per invested capital has dropped, this might repel investors away which might have some devastating results, mostly being unable to raise more capital to run their operations or to acquire additional inventories. Cash collection is slower and inventory day on hand has been prolonged, which lead to a poor current ratio, which indicates that the company is barely able to manage its short-term obligations which are due within the fiscal year. While the company’s gross and profit margins declined it is not clear why the decision to increase dividend, but there is a possibility that the company is trying to attract further equity by attracting more investors.

Important actions to be considered such as cutting internal operational cost, as the company’s sales revenue has increased in 20X1 compared to 20X0 but the profit margin dropped which indicates increase in cost of sales, this needs to be strategically addressed.  General operational efficiencies are required to be applied by the company, mainly to better utilize its capital and cash collection process. We recommend further analysis to take place; such as applying financial ratios over various periods of time and to compare more “year of year” data, to get a better understanding of the company’s financial status and trends over years.

Appendix

ROCE =

Operating Profit [not including Interest and Tax] X 100 / Total Assets [Including non-current Liabilities]- Current liabilities

20X1= (8300+1300)X100 / 50800+12000-10800 =18.4%

20X0= (8700+500)X100 / 39000+8000-5100 = 21.9%

 

Net Profit= Operating Profit [not including Interest and Tax] X 100 / Total Sales

20X1= 9600X100/30800= 31%

20X0= 9200X100/24900= 36.9%

 

Gross Profit= Gross Profit X100/ Total Sales=

20X1= 14800X100/30800= 48%

20X0= 10400X100/24900= 41.7%

 

Net Asset Turn Over = Sales [Turnover] / Capital employed

20X1= 14800/52000= 0.28

20X0= 10400/41900= 0.24

 

Debtor day= [Trade Receivables / Credit sales] X 365

20X1= [7600/30800] X 365= 90 days

20X0= [3800/24900] X 365= 55.7 days

 

Trade [Stock] day= [Inventory / Cost of sales] X 365

20X1= [5200/16000] X 365= 118.6 days

20X0= [2600/14500] X 365= 65.4 days

 

Creditor day= [Trade Payable / Cost of sales] X 365

20X1= [6800/16000] X 365= 155 days

20X0= [4300/14500] X 365= 108 days

 

Cash conversion cycle = Inventory (Stock) days + Receivable (Debtors) days – Payables (Creditors) days

20X1=118.6 + 90 -155= 53.6 days

20X0= 65.4 + 55.70 – 108= 13 days

Current Ratio = Current assets / current liabilities

20X1= [12800/10800] = 1.19

20X0= [6400/5100] = 1.25

 

Quick Ratio = [Current assets – Stock] / current liabilities

20X1= [12800-5200]/10800 = 0.7

20X0= [6400-2600]/5100 = 0.745

 

Capital Gearing Ratio= [long term debt / (Capital Employed] X 100

20X1= [12000/(50800-10800)]X100 = 30%

20X0= [8000/(39000-5100)] X 100= 23.6%

 

Debt to Equity Ratio= [long term debt / (Share Capital + Reserve)] X 100

20X1= [12000/28000]X100 = 42.8%

20X0= [8000/25900] X 100= 30.9%

 

Return on Equity Ratio=

[Earnings after tax and preference dividends / (Ordinary share capital plus reserves + Reserve] X 100

20X1= [6600/28000]X100 = 23.5%

20X0= [7000/25900] X 100= 27%

 

dividend per share = Dividend paid to ordinary shareholders / Number of issued ordinary shares

20X1= 4500000/18000000 = 0.25

20X0= 3600000/18000000 = 0.20

 

Dividend yield = [Dividend per Share / Market Price per share] X 100

20X1= [0.25/5.6]X100 = 4.46%

20X0= [0.2/3.6] X 100= 5.55%

 

 

References:

• BBC https://www.bbc.com/news/magazine-23988795 (Accessed 24 April 2019)
• Clarke, T. and Clegg, S. (1998) Changing Paradigms: The Transformation of Management Knowledge for the 21st Century. New Yort: Harpercollins Pub Ltd.
• Freeman, R.E. and Reed, D.L. (1983). Stockholders and Stakeholders: A New Perspective on Corporate Governance. California Management Review. Available at: http://journals.sagepub.com/doi/10.2307/41165018 (Accessed: 24 April 2019)
• https://www.stakeholdermap.com/stakeholder-analysis-definition.html (Accessed 23 April 2019)
• Porter, M. E. (1985). The Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.
• Ross A.S., Westerfield W. R. and Jordan D. B. (2019). Strategic Financial Management, Mc Graw Hill Education, UNICAF eBook Available at: https://unicaf.vitalsource.com/#/books/9781308908311/cfi/0!/4/2
• Stakeholder map https://www.stakeholdermap.com/stakeholder-analysis-definition.htm (Accessed 21 April 2019)
• Telsco PLC Sustainability (2019) https://sustainability.tescoplc.com/sustainability/food-waste/topics/suppliers/ (Accessed 22 April 2019)
• Tesco PLC Annual Report (2017) https://www.tescoplc.com/media/264194/annual-report-2016.pdf (Accessed 20 April 2019)