Introduction
Tesco plc is a British multilateral retailer of groceries and other merchandise, and it is headquartered at Hertfordshire, England, United Kingdom. The company was founded by Jack Cohen in 1919 as a market stalls group and has been in operation for more than a century. Cohen began by buying the excess military food and sold it at Well Street Market, London. After the first experimentation of indoor market stall in 1930, he opened in 1931 the first Tesco shop in 54 Watling Street. Thereafter in 1947, Tesco went public, and the first floatation was made on London Stock Exchange as Tesco Stores (Holdings) Limited. In 1956, the first self-service shop was opened as well as the first supermarket in Maldon.
Tesco started diversifying its services from 1960 to offering electronics, clothing, books retailing, toys, furniture, software, petrol, telecoms, financial services, and provision of internet services and appeared in the Guinness Book of Records as the largest supermarket in Europe in 1961. The company has been expanding its operation through the opening of new stores as well as acquiring other stalls. TescoCompany is listed on the London Stock Exchange as a constituent of the FTSE 100 index. As of February 2019, it had a market capitalization of £18.1 billion and a turnover of £64 billion. The basic earnings per share (EPS) was £13.65. Measured by gross revenues, it emerges as the third-largest world retailer, whereas it is ninth when measured with revenues.
WmMorrisons Supermarket Plc
WmMorrisons Supermarket Plc (2019) plc was founded in 1899 by William Morrison, and its headquarters is in Bradford, West Yorkshire, England. It is the fourth largest supermarket in the United Kingdom. Andrew Higginson and David Potts are the current chairpeople and Chief Executive Officer, respectively. In 1958, it opened the first self-service shop with products with prices and three checkouts. In 1961, the company opened the supermarket at Girlington district, Bradford. WmMorrisons Supermarket Plc, as of 2016, had 498 stores a rapid expansion that has helped the company’s revenue growth. The products offered in the supermarket include clothing, food, and drink, magazines, books, DVDs, and CDs. In the financial year 2018, the company recorded a revenue of 17,735 million with the market capitalization of. Over the same year, the company generated an operating income of 458 million and a net income of 311 million. The total number of employees the company had as of 2019 was 110,000.
Analysis
Financial ratios
A financial ratio is a yardstick for measuring the financial performance and position of a company like liquidity, efficiency, stability, risk, operational effectiveness, and profitability. This gives investors and other company stakeholders’ relevant information to make viable decisions. This paper presents the following ratios in relation to Tesco plc and WmMorrisons Supermarket Plc for the financial year 2019.
| Margins & Ratios | Tesco Plc (2019) | WmMorrisons Supermarket Plc (2019) |
| Price Earnings Ratio (P/E) | 18.74 | 19.09 |
| EBITDA margin | 3.37% | 2.22% |
| Net Profit margin | 2.80% | 1.38% |
| Current Ratio | 0.61 | 0.42 |
| Return on Equity (ROE) | 12.07% | 5.27% |
| Return on Assets (ROA) | 3.65% | 2.46% |
| Equity ratio | 30.24% | 46.70% |
| The net debt-equity ratio | 2.71 | 1.14 |
| Asset Turnover ratio | 1.30 | 1.79 |
| Inventory turnover | 22.84 | 24.02 |
Price Earnings Ratio (P/E)
This financial ratio measures the market performance of the company through the evaluation of a private and public investment in equity. The higher the P/E, the higher the risk profile of the company because of the high expectation of earning growth. Tesco plc has a P/E ratio of 18.74 as compared to 19.09 for WmMorrisons Supermarket Plc. This shows that Morrisons is a risky investment venture than Tesco.
EBITDA Margin
The comparison of the operating profit in relation to sales produces an EBITDA margin. The EBITDA margin is a financial ratio that assesses the firm’s operating profitability, calculated as a percentage of the total revenue of the company. It provides an investor with an insight into operating profitability and cash flow of the company since it excludes interest, depreciation, taxes, and amortization. It is simply the operating income in relation to the total income of the company. The higher the EBITDA margin, the lesser the expenses incurred hence the good financial performance of an institution. The figure above shows an EBITDA margin of Tesco plc and Morrisons Supermarket for the financial year 2019. For the year, Tesco recorded 3.27%, whileMorrisons Supermarket had 2.22%. In 2005, the EBITDA margin was approximately 18% and decreased to 8.74 in the second half of 2008. This indicates that Morrisons Supermarket cuts cost more than the way in which Tesco does.
Net Profit Margin
This ratio analyses the generated income in comparison to sales revenue. Net profit is the total revenue less cost of goods sold, operating expenses and other expenses, debt interest, and corporate taxes. It shows the ability of management of the company to generate enough profit from the sales and also take into account the overhead and operating costs as to whether they have been contained. For the FY 2019, Tesco generated a net income of £1791 million and sales revenue of £63,911 million, which translates to a net profit margin of 2.8 percent compared to 1.38 percent for Morrison plc. This is an indication that Tesco is healthier than Morrisons Supermarket when it comes to making a profit out of sales.
Current Ratio
Measurement of a company’s ability to meet its short-term obligations is assessed through the generation of cash ratio. This is comparisons of current assets against current liabilities, which is an indication of a firm’s liquidity. Acceptability of the current ratio varies from one industry to another. The retail industry prefers a high current ratio because much of the current assets are urgently required to settle liabilities that have emerged. In many cases, creditors prefer the company that holds a higher current ratio because it shows that a company is more likely to settle debts or pay them back for supplies made. Both Tesco and Morrisonsplc did not meet the acceptable current ratio of 1. The current ratio of 1 means current assets are equal to current liabilities; hence the company is liquid. 0.61 for Tesco means that 61 percent of current liabilities can be settled by current assets and likewise to Morrisons, where 42 percent of current liabilities can be paid using current assets.
Return on Equity (ROE)
Every investor expects a return from investment made to any business. The owners of the company contribute their money in the form of capital with a view to get returns. ROE measures business profitability against equity. It, therefore, shows the growth ability of the company. According to this, the management of Tesco plc has an ability to generate 12.07 percent from the invested capital as compared to 5.27 percent for Morrisons Supermarket.
Return on Assets (ROA)
This is an efficiency ratio that indicates how the company uses its assets to generate profit. Most companies strive to survive through squeezing returns from limited resources available. For the financial year 2019, Tesco plc recorded a 3.65 percent return on assets compared to 2.46 percent for the case of Morrisons Supermarket. This means that Tesco utilizes its assets more than the way Morrisons Supermarket does by squeezing only 2.46 percent out of the total assets of £9,916 million. Since ROA shows how the company can convert invested money into income, hence the higher the ROA, the better the company.
Equity Ratio
Through this ratio, we can measure the relative proportion of equity that is being used in order to finance the assets of the company. This is an indication of how to leverage the company is by not factoring in the creditors. In 2019, Tesco had a shareholder’s equity of 14,834, while the total assets were 49047, which gives an equity ratio of 30.25 percent. This means that 30.25 percent of total assets have been financed by shareholder’s equity. On the other hand, with 4631 and 9916 of shareholder’s equity and total assets, respectively, for Morrisons Supermarket, the equity ratio is gotten to be 46.7 percent. An indication that much of assets in Morrisons Supermarket are financed by shareholder’s equity.
Net Debt to Equity ratio
It shows the relationship between total liabilities and shareholder’s equity of a company. The usability of this ratio is to show the leverage level of a firm. Total liabilities include both short-term and long-term such as long-term loans. Tesco and Morrisons Supermarket had total liabilities of 40213 and 5285, respectively. This gives a ratio of 2.71 and 1.14 when divided by the equity of 14,834 and 4631 for the respective companies. Through this ratio, we can conclude that Tesco finances its operations through the use of many debts than Morrisons Supermarket. In addition, it indicates the ability of shareholder equity to pay all outstanding liabilities in case the company is liquidated.
Asset Turnover ratio
The two retail companies realized an increase in sales revenue in 2019 from the 2018 financial year. Tesco recorded an increase of 11.5 percent from 57,493 to 63,911, while Morrisons Supermarket recorded a 2.7 percent from 17,262 in 2018 to 17735 in 2019. The asset turnover ratio relates total sales revenue from the company’s operation to total assets. It shows the ability of the company generates revenue using its assets. Companies with a higher asset turnover ratio like Morrisons Supermarket are more efficient since they utilize their assets in a manner that generates higher revenue. This ratio varies from industry to industry, with retail and consumables industry recording the lowest because they have a small asset base, but their sales volume is high. On theother hand, industries dealing with utilities as well as real estates have a large asset base but low asset turnover due to low sales volume. The higher the asset turnover, the higher the efficiency of the firm.
Inventory turnover
Inventory management in a business is critical as it is the factor of the cost incurred. Poor management of inventory means high cost and low efficiency. This ratio is an efficiency ratio showing inventory management by getting the financial relationship between the costs of goods sold with the average stock. For the case of Tesco, it is shown that the inventory was sold 22.84 times during the year. On the other hand, the Morrisons Supermarket converted its inventory into sales 24.02 times. It means that Morrisons Supermarket is efficient in the sense that there were large amounts of purchases as well as a large number of sales hence reduces its storage costs and other holding costs.
Sustainability Reporting
Sustainability reporting is a report from organizations that provide information on economic, social, environmental, and performance-based on governance. Sustainability reporting is crucial in addressing critical issues in organizational such as organizational impacts on sustainable development. Potential growth, as well as the satisfaction of human wants, are greatly influenced by the maintenance of a conducive environment where there is unison in the exploitation of resources, the direction of investment, and technological advancement. In addition, the growth of the business is influenced by transparency in reporting risks and opportunities they meet during their operation. The companies presenting their sustainability reports have been increasing over the years. KPMG (2017) reports that out of 250 largest companies in the world, 78% integrated their sustainability reporting, which is a much bigger percentage as in 2011, when only 44% reported the initiative.
The companies that accept to release their sustainability reports are majorly from industries with huge impacts on the environment as well as social context, and therefore they try to legitimize their existence through Corporate Social Responsibility (CSR). Due to these environmental effects, the companies raise their transparency, motivation to employees, their competitiveness, and improve brand enhancement as well as building their reputation. Hence, companies focus on matters of sustainability reporting discloses their actions, which will greatly increase both legitimacy and their market value. Additionally, information disclosure helps in making improvements to how the public perceives their sustainability performances.
As a large company dealing with retail items and more than 325,000 employees as well as 2318 stores, revealing its sustainable growth is one of its beliefs. The company has revealed its responsibility to what customers want as well as sensible for business. If the company would take unsustainable decisions, there is a possibility that it will cause harm to its growth hence increases the costs without reducing its impacts on the environment. For disclosure, Tesco has divided the report into five sections that include products, emissions, waste recycling, climate change, and resources. Mostly, supermarkets retail food items that most people use to sustain their lives, and if the supermarket has environmental responsibility, then it will be effective in protecting the environment. There has been a high relationship between sustainability reporting and expansion of future opportunities that Tesco has been practicing. On the other hand, the Morrisons Supermarket has continuously been reporting on environmental matters. The following are their area of interest on corporate social responsibility; giving support to farmers in Britain, ensuring food safety and quality, proper handling of plastic such as reusing and recycling, food waste reduction, and supporting the local community.
References
Aras, G. A., &Crowther, D. (2008). Corporate Sustainability Reporting: A Study in Disingenuity? Globalization and the Good Corporation, 279–288. doi:10.1007/978-94-007-0818-1_19
Azar, C., Holmberg, J., & Lindgren, K. (1996). Socio-ecological indicators for sustainability. Ecological Economics, 18(2), 89–112. doi:10.1016/0921-8009(96)00028-6
Belkaoui, A., &Karpik, P. G. (1989). Determinants of the Corporate Decision to Disclose Social Information. Accounting, Auditing & Accountability Journal, 2(1). doi:10.1108/09513578910132240
Monahan, S. J. (2018). Financial Statement Analysis and Earnings Forecasting. Foundations and Trends® in Accounting, 12(2), 105-215.
Williams, E. E., &Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.
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