Whilst I was searching for information on the internet I came across a set of all the current shareholders at Tesco, it shows the company which has invested money and the amount of percent they have of the organisation.
1. Barclays Global Investors (3.82%)
2. Legal and General (2.79%)
3. Schroder Investment Mgt Ltd (2.87%)
4. State Street Global Advisors (2.73%)
5. Axa Investment Managers (2.63%)
6. Threadneedle Investments (2.33%)
7. Scottish Widows (2.08%)
8. M & G Investment Mgt Ltd (1.99%)
9. Morley Fund Management (1.88%)
10. UBS Global Asset Mgt (1.73%)
- Sources of finance
Businesses can have trouble if they fund their activities inappropriately. For example, businesses that try to rely too heavily on short-term sources might run out of cash. Using bank overdrafts, Hire Purchase and leasing to acquire machinery and other fixed assets for too long can raise costs and drain working capital. Similarly, if a business tries to fund rapid growth with short-term sources, it might run out of cash. This is because growth often requires heavy capital expenditure, which might be better funded with long-term sources.
If Tesco wants to run a successful organisation, they will need to ensure that they do not rely on to much cash sales, to reinvest in their businesses. For example if Tesco do not plan for the future and think expect to make a lot of money in the next 6 months and business progresses slowly, employees may need to be fired of to cover the sudden drop in profits and inflows. Therefore, they need to ensure that they do have money to fall back on to re invest in new stock or expand different areas to ensure that it appeals to a wider variety of people.
Although, using to much long term capital may also be a problem. It is not prudent to fund the purchase of raw materials with a long-term loan. For example, the raw materials will be used to meet immediate orders and payment for them will be received fairly soon, long before the loan is repaid. However, there is a growing belief that business should perhaps make more use of long-term sources. They are often cheaper and provided spending is kept under control, a more solid financial foundation is built.
- Short term Finances
Liquidity
Tesco may need to have sufficient liquid funding, incase of an emergency. Liquid funds are funds which Tesco has available to spend. Tesco can use the money that has been given from customers to pay the suppliers for the stock it has received on credit.
Bank overdraft
A bank overdraft is when a bank will set you limits were you can below zero in your bank account. If money is needed instantly and there is not enough cash available then using the overdraft facility would come in handy. The money is taken out as soon as the user is paid in their account and they may be charged a small amount because they have used this facility.
- Long Term Finances
Long-term finances are finances that will be gained in the future and not in the near future. Tesco will need to deal with this by going through financial records so that they are up to date with all their creditors.
Bank loans
This is when a business needs extra funding either to reinvest in the business or to expand a certain are of the organisation. This money will be borrowed for a long period of time and paid back over a certain period of time. This is when Tesco requires more funds and which they can pay back in instalments. A bank loan will be arranged for a set period of time with either a fixed or variable interest rate.
The advantage of taking out a fixed interest loan is that Tesco will know exactly what their monthly outgoings will be throughout the period of the loan.
Debentures
Limited liability companies such as Tesco PLC may decide to invite the different businesses and members of the public so that they can invest some money into Tesco as a debenture. A debenture is a type of loan that has set repayments dates which need to be met.
Credit and hire purchase
If Tesco decides into new fixed assets, they could choose to have the items on credit. This means that the organisation would get a item and then they would pay it back after/over a certain period of time. This is an advantage for Tesco because the item can be paid for by the earnings that are made by Tesco.
- Tesco’s Finances
Tesco PLC has to deal with a lot of money coming in and out of the organisation. I am going to explain all the sources of finance that are used by Tesco and how they are effective to Tesco’s. I will analyse the different finances Tesco use and what they could do if they wanted to raise more money to reinvest in stock or the store.
Share Capital – Share capitol is money raised from selling shares. Tesco will use the money raised to re invest into Tesco, in expansion of stores and introduction of more products. If Tesco wanted to introduce a wider variety of stock into the organisation and they didn’t have enough liquid cash, then they could sell their shares to raise more money. From the List on the previous page you can see the highest share holder is Barclays Global Investors with only 3.82% Which means that Tesco have still got a large part of the organisation.
Mortgage – Is a long-term loan taken out to buy properties. Tesco will use this if they want to open a new branch. They would go to a loan company with their projected figures and the expected annual income, and based on these figures they will be told if they are accepted to have a loan. They will need to ensure that they can afford the repayments and that they are clearly stated before the store is opened. This is because Tesco need to ensure that they are expected to make enough money to reinvest in stock pay off the mortgage and pay wages of the staff at Tesco.
Unsecured Loan – Is a loan that you do not put security up against. Pay back higher than interest because it is unsecured. This exposes the lender to more risk. Sole traders, partnerships, private and public limited companies, use this. This can be dangerous to Tesco depending on how they go about the situation and the money, which is earned by the company.
Debentures – A Loan given to PLC, like a corporate bond. Debenture holders do not have voting rights as they are not owners. This is used by PLC businesses and not used by sole traders, partnership and LTD businesses.
Hire Purchase – This is when machinery is hired and then after a certain period of time it becomes yours. It is like buying and expensive item in instalments. This is a good way for Tesco to have machinery and not notice the amount they paid for the item. As Tesco will be paying back a smaller amount a month they will have more money to spend on more important things like reinvestment and stock turnover.
Venture Capitalists - A business that would look to invest in another business as an investment. This could be something that Tesco may consider, although as Tesco is already a well established organisation. And should therefore already be able to raise capital to open a new store or to generate a new or wider range of stock.
Government & EU – Provide money to businesses who they think will be a good investment. This would be always be helpful to Tesco if they were receiving money with the backing of the Government, this is why they should try and set a good example for similar competitors.
Bank overdraft - When you go below zero in you bank account, interest may be charged. There fore Tesco will need to ensure they have enough cash available if they require it and so that they don’t spend money unnecessarily on paying back interest when it could be avoided
Trade Credit - When a creditor has given you things and you pay them back afterwards. This would also be a could be investment for Tesco as they will not be paying a lot of money back initially, although later on once the business becomes more established they will be earning more money and it will be more easier to pay off their debts.
Leasing - This is when you leas machinery over a certain period of time.
Debt Factoring - When loan companies lend money for a short period of time to clear debt of certain people.
Credit cards - Companies also have credit cards, used to purchase all day to day things.
Retained profit - Money you have already kept from previous sales, and re used afterwards.
Sales & Leaseback - When you sell an item and then loan it back. This may be used in Tesco because they may buy some machinery, which may be needed in the future but not at the current time, and they would lease it back to someone who will pay rent for the item.
- Financial recommendations
If Tesco want to have the best success possible, they will need to ensure that they appeal to all their customers and have a wide variety of stock available to purchase. They will need to ensure that they have enough original capital to invest in the building process. They will need to ensure that they don’t spend to much on stock as new stock will be arriving every few days. I recommend that Tesco uses the Hire purchase method wherever possible, as they will be paying for the item in monthly instalments and as they are making profit from the shop they will also be able to pay off any machinery that they have purchased to be used within a particular store. Tesco will need to ensure they do everything they can to be environmentally friendly this may seem not be a financial objective, but if Tesco are setting a good example for competitors and the government understands what Tesco are trying to achieve, they may invest into Tesco to help the environment more or provide more variety of different stock. Every little section would matter to Tesco, as all the big things or small things will allow them to gain a larger market share and therefore, it will help them to increase their profits. In addition, Tesco bringing out schemes such as the “CLUBCARD” is also helpful, as customers would spend more if they are close to a target in the amount of Club card Points they have got. This is also an incentive to shop at Tesco and not any of Tesco’s Competitors have similar ways of attracting new and keeping existing customers.
- Ratio’s
There are four different types of ratios, this will help to work out how Tesco have preformed over the last couple of years. I have shown the four different ratios and explained them below.
Liquidity Ratio
This Ratio helps to show whether the business is solvent. They look at the firm’s ability to pay it immediate bills. Focus on current assets and liabilities.
Gearing Ratio
This helps to examine the relationship between loan capital and share capital or fixed interest bearing debt and total capital employed.
Profitability Ratio
This would show a business how well it is doing. It focuses on profit, turnover and the amount of capital employed in the business. Some are known as activity ratios, which look at how well a business uses its resources such as stock.
Shareholder’s Ratio
This can be used to analyse the returns shareholders get on their investment in the company, it focuses on earnings, dividends and share price.
- Liquidity Ratio’s
This is an assessment of a business’s ability to meets its short term debts. It is a measure of whether the business has enough cash or assets, which can easily be converted into cash, this may be done to pay bills, invoices as they come due for payment.
Current ratios
The current ratio is something called working capitol ratio, this is done to find out the working capitol that is available to an organisation. The relationship used to calculate the current ratios is current assets and current liabilities. It is also shows that for every £1 the business owes, how much time they can pay that debt off in the short term. It is calculated using the following formula:
Current ratio = Current Assets
Current Liabilities
2004 Current Ratio = £3139m
£2479m
2004 Current Ratio = 1.27:1
2005 Current Ratio = £3457m
£2615m
2005 Current Ratio = 1.32:1
The current ratio in both years is of an average price. An ideal value for the current ratio would be 2. Referring to the figures, which I have collected by calculating my current ratio, I can see that my current ratios for the two years are below average. In 2004 the current ratio was 1.27, and in 2005 it raised to 1.32 this may show a steady increase in the current ratio, and Tesco would be happy to see the current ratio increasing.
Acid Test Ratio
The Acid test ratio is more a test to see if an organisation is liquid. This is done because stocks are not treated as liquid resources. The stock of a business is not guaranteed to be sold. They could become obsolete which means they have become out of date or cannot be sold. They are therefore excluded from the current assets when calculating the ratio.
Acid Test Ratio = Current Assets – Stock
Current Liabilities
2004 Acid Test Ratio = £3139m - £1199m
£2479m
2004 Acid Test Ratio = 0.78:1
2005 Acid Test Ratio = £3457m – £1309m
£2615m
2005 Acid Test Ratio = 0.82:1
The Acid test once again increased this is because the value were similar for the stock levels in both years. Although they are both below the ideal level for Tesco. They are expected to have at least 1, but in both the previous years It means that the current assets do not cover is current liabilities, this could mean there is a problem with the systems carried out In Tesco. However in 2005, acid test increased once again from 0.78 million to 0.82million. This is a sign of encouragement for Tesco and they may be able to invest in the fact that they are performing better.
- Gearing Ratio’s
The gearing ratio focuses on the long-term financial stability of an organisation. It measures long-term loans as a proportion of a firms capital employed. It shows how reliant the firm is upon borrowed money. In turn that indicates how vulnerable the firm is to financial setback. Highly geared companies can suffer badly in recessions. Because even when times are hard they still have to keep paying high interest payments to the bank. The formula used to measure the gearing ratio is:
Gearing = Long Term Loans x 100%
Capital employed
2004 Gearing = -3566 _ x 100%
4537 + -3950
2004 Gearing = - 395078.59
2005 Gearing = -3648 _ x 100%
5229 + -4037
2005 Gearing = -403784.64
- Profitability Ratio’s
This is a measure if a business’s ability to generate more revenue from its activities than it costs to undertake those activities
Asset Turnover Ratio
The asset turnover ratio measures how many pounds worth of sales a company can generate from its asset base. Company directors often use the phrase “make the assets sweat”. In other words, make the assets work hard. If there is a period in the year when the factory is quite. An active company director might want to find a source of extra business. In this way, the company could keep generating sales from its existing assets. Then would push up the asset turnover. This is the formula used to calculate the Assets Turnover:
Asset Turnover = Sales Turnover
Assets employed
2004 Asset Turnover = 33557
10943
2004 Asset Turnover = 3.07
2005 Asset Turnover = 37070 = 3.35
10943
2005 Asset Turnover = 3.35
Gross Profit Margin
Gross profit margin = Gross profit x 100
Turnover
2004 Gross Profit Margin = 2507 x 100
31050
2004 Gross Profit Margin = 7.5%
2005 Gross Profit Margin = 2717 x 100
37070
2005 Gross Profit Margin = 7.3%
Net Profit Margin
This ratio measures the relationship between the net profit (profit made after all the overhead expenses have been deducted) and the level of turnover or sales made. It is calculated using the following formula:
Net Profit Margin = Net Profit x 100
Turnover (Sales)
2004 Net Profit Margin = 2507 x 100
33557
2004 Net Profit Margin = 5.4%
2005 Net Profit Margin = 2717 x 100
37070
2005 Net Profit Margin = 5.8%
Return of Capital Employed (ROCE)
This is sometimes referred to as being the primary efficiency ratio and is perhaps the most important ratio of all. It measures the efficiency with which the firm generates profit from the funds invested in the business. It answers the key questions anyone would ask before investing or saving: What annual percentage return will I get on my capital?
ROCE = Operating Profit x100
Capital employed
2004 ROCE = 1735 X 100
7990
2004 ROCE = 21.74%
2005 ROCE = 1949 x 100
9057
2005 ROCE = 21.52%
Operating profit is profit after all operating costs and overheads have been deducted. It can also be called trading (or net) profit. It is also acceptable to calculate the return of capital employed using pre tax profit. Capital employed is long-term loans plus shareholders funds. When looking at published accounts. It is helpful to remember that capital employed = assets employed.
After calculating my Return of Capital employed for both years it can be seen that there has been a decrease from 2004 and this may disturb the running practices of Tesco as it means that they are creating less money.
- Shareholder Ratio’s
Return on equity = Profit after tax
Shareholder funds
- Recommended Ratio’s
- Investment Appraisal
Investment Appraisal will help me to identify what will be best to you for the organisations financial performance, I will use three different projects to identify which will be best for each of the different investment appraisals, I have shown a table with the three different projects and what will happen over the course of 5 years.
DCF/NPV refers to the value of money over a period of time, this becomes important because all the money generated which is received in the future, it money which has lost value. It is worth less.
The advantage of using the DCF/NPV method is because it is dependant on the cash flow, the returns from different investment options can be compared easily and the opportunity cost of investment is taken into account.
The disadvantage however of using the method of DCF/NPV is that it can be very time consuming. You would have to wait for annual financial reviews to be published and this may take up to a year. Information can become inaccurate if information is input into the computer incorrectly. In addition, if a computer cannot be used and the method does not provide accurate means of comparison if the initial outlay on projects is significantly different
ARR overcomes any problems that may occur for the payback method. The ARR works with the comparison of the average annual profit with the capital cost.
The advantage if ARR are that the method focuses on the profitability of investment projects rather than the payback period and it is easy to compare different investment projects, the higher the ARR.
The disadvantage of ARR is that it does not take the timing of the cash flow into account, from which a business can suffer with a poor of irregular cash flow. All calculation needs to be correct and up to date, other wise all information about organisation progress will be misleading.
The formula that is used to work out the Account Rate of return is
Average Annual Profit x 100
Capital Outlay
The average annual profit is total value of all the years divided by the number of years. Capital outlay is the money you spend. It can also be initial cost of something like machinery.
I will go through this formula for all of the projects, to find out the rate of return.
Payback period is the time it takes to repay the initial investment in a project. The payback method involves calculating the payback period. This is very important to a organisation and it could decide whether an organisation is successful. The cost of items such as machinery and costly investments are very important because the more money the organisation makes the more quickly they can pay of the cost of the machinery. Therefore, they will be able to make more profit more quickly, whereas if they do not have substantial income the organisation may be affected, enough profit may not be made, and the company will become bankrupt. For example, a business was investing £20,000 and each year the business generated £4,000 it would take 5 years to pay back the initial set up cost.
The advantages of the payback method are that is quite simple to apply, this method is appropriate when technology is changing as it is now days. This technology can become very helpful to organisation and it would be very helpful for them to create documents and other business related documents.
The disadvantage of using investment appraisals in if the cash flow period is ignored. All the information generated at the end of the quarter terms. The company will not have an accurate feedback on the how the organisation is performing.
- DCF/NPV
NPV compares the value of the pound today to the value of that same pound in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
Project A
For project A, the initial cost is £150,000. And there is a decrease in the value of 5% every year, which means has been shown in the table below, after the first year the value has decreased by £7,500. For the second year, the value has gone down to 135,375 which means over a period of 2 years the value has decreased in total by 14,625. This has continues of the given period of 5 years. The final value after the 5 years has decreased to 116069 which means there has been a total decrease of 33,931.
Project B
Project B is going to be analysed in the same way that project A was analyses, I will look at the different changes that has been caused by the percentage change. The initial cost for this year was £110,000. After the first year, the value decreased to 104500 that in total is a decrease of only 5,500. The next period was the second year the value of this year was 99,275 this was a decrease of 10,725. This is a major increase compared to the previous year. After the third year, the balance was 99,275 that seems to be a large decrease. The fourth year showed a value of 89,597, but after the final year it was clear that there was a large decrease the figure for the fifth was 85,118, the total decrease in the 5 year period was 24,882
Project C
The final project will also be analysed using the same system as the first two projects, the initial figure was 200,000, which was more than both the other projects. In the first year, the value had decreased to 190,000 that was a decrease of 10,000 that is quite large considering project B decrease by 24,882 in total over 5 years. The Second year the balance reduced to 180,500 that was a total decrease of 19,500. The second year showed the total decrease 180500, and the third was 171,475 after the year. This project is showing a major decrease in the value, it can clearly be identified that this project will show the biggest decrease because of the initial value was higher than the previous two. The total after deductions for the fourth year was 162,902 that shows a total decrease of 37,098. The final year proved my predictions the final balance was 154,757 and this is shown by the total deduction over the 5 year period being 45,243. This figure is nearly twice the amount of the total deduction for Project B. And also over 10,000 more than Project A
I would recommend Project C for the DCF/NVP method because after the 5 year period, the value is the highest compared to the other two projects. I have created a table to show the final value for the three different projects after the 5 year period of deductions
- ARR
Project A
60000 x 100
150000
0.4 x 100 = 40%
The final figure that I received was 40%, I got this using the formula above. The £60,000 is the average that was worked out after adding up the totals of Project A and then dividing the answer I got by 5 which was the amount of years that it lasted. The capital outlay is the money spent or the initial cost. After doing all the relevant working outs I have found out that Project A gives 40% ARR.
Project B
30000 x 100
110000
0.2727 x 100 =27.27%
To find out the final percentage of ARR I used the same formula for the first project and I will use the same for the last, this will give me an accurate measurement for all of the years. After I did all the calculations, I found out that the percentage of ARR was 27.27%
Project C
56000 x 100
200000
0.28 x 100 = 28%
The £56,000 is the average that was worked out after I added the value up for the 5 years and divided it by the number of 5. The final figure I received after I did the calculations for the 5 years was 28% ARR.
I think that the best method in accordance to the Account Rate Return, is Project A. the reason I think that this is the best method is because it has the highest Account Rate of Return of 40%. The worst project for Tesco to use would be Project C, which had the lowest ARR that was 27.27%. Project C was not much better with an ARR of 28%.
- Payback
Project A
For project A the initial cost was £150,000 and from the first two years, the money that was made was £60,000, this figure did not change for the third year, which made the total for the two year £120,000. There was still a remaining balance of £30,000 which was taken from the £90,000 which I was going to receive from the fourth year, using this information I found out that it would take 3 years and 4 months to pay back the initial cost of £150,000.
Project B
For project B, the initial cost was £110,000 and from the first two years I would have a total of £60,000 and from the third year, I would receive another £30,000. so after three years I would have a total of £90,000 which was £20,000 short of the initial cost of £110,000. During the fourth year I received another £30,000. using this information I calculated that it would take 3 years and 8 months to pay back the original amount of £110,000.
Project C
For project C, the initial cost was £200,000. And in the first two years I have calculated I would receive the full amount of £200,000 back, as I will be receiving £100,000 a year. So it would only take two years to payback.
After calculating how long it would take to pay back each of the amount for the three different project I have identified that project C is the best and I am recommending this methods because it is payback the quickest, as it only takes two years. Project B took the longest to payback, this method took 3 year and 8 months. Although it took 3 years and 4 months for Project A.
Sensitivity Analysis
Sensitivity analysis may be used to analyse the effects of changes in some of the variables that influence investments returns. It allows businesses to ask “what if” questions when appraising investment projects. I am going to go through 3 different projects, and ask the “what if” question to see if purchasing a particular item would be good for the business in the long term, with a 20% increase in expected revenues and also a 20% decrease in the expected revenues.
Project A
Project B
Project C
NPV
NPV compares the value of the pound today to the value of that same pound in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
I am going to look at the NPV for the three different project. I will be using the price of £1 for the three projects and see which one will be best. All the figures are rounded to the nearest penny.
Project A
This is the formula that I used to use to calculate the amount price after every year:
100 x 100
110
This is the formula for the first year, as I will start of with £1, which is 100p so therefore once I complete the calculation I end up with 90p. I will then divide 90 by 110. I will do this for every year few different percentages.
From the information seen above, it can clearly be identified that it would be best for Tesco if the 2% was the amount that the Net Profit Value changed. This is because for every £1 that Tesco had they would still be getting 91p back over the course of five years. On the other hand if there was a change of 10% in the price level of the pound, then Tesco will be receiving 61p for every pound over the course of 5 years. This is a 30p Difference from 2% to 10%. I have shown the formula used to calculate to the percentage decrease for every year and for the three projects I am looking at.
ARR
I am now going to calculate the average annual profit for the three projects. I will looks at both a 10% increase and a 10% decrease over the 5-year period, once I have looked at this I will go back and evaluate what I have found out.
5.0
Unit 11 – Impact of finance on Business Decisions Page of