Financial Statements Analysis: Tesco

Return on Equity (Total shareholder Return)

Analysis

The total shareholder return dropped significantly, as the years progressed forward. It is evidently clear that the company share price was also affected, as a result of the drop in the ratio: this drop might be attributed to such elements as;

• First, there is a probable cause which is attributed to low-amount of sales. The lower sales meant that the company had reduced its strategy in advertising their respective products to the potential ever-growing market, and thus, lost the sales percentage to the existing competitors in the market.
• Second, there is a possibility of the costs of goods being valued at higher amount as the financial periods progressed intensively. The increase in the amount of “cost of goods sold” is attributed to the existing supplier, increasing their prices of the commodities supplied, and unfair amount of discounts offered to the company as a whole (Bloomberg Business Week 2012b).

Another rationale behind the subsequent decreases in the values of the ratio is probably because the interest on the liabilities for shareholders equity has been on the increase over-time. This is attributed to the increasing amount of liabilities, as the firm increases its operations.

Return on Capital Employed Ratio

Analysis

There is a substantial increase in the values of the ratios provided. As the financial years progress, it is evidently clear that there is no significant change in the values of this ration. In its nature, the ratio is used to compute the amount of profits, which are derived from the existing value of assets.

The rationale behind the lower values of this ratio is expounded as follows; first, it is safe to indicate that the firm is using more amounts of assets to effect profits or revenue made in the present financial period. This means that the firm deploys extensive assets in the process of attracting for customers. Second, it is possible that the firm has lowered the prices of its products to a point, whereby what the sales revenue obtained does not cover for the amount of resources used to effect the sales altogether. This means that the firm is entirely dependent on using assets, as compared to creating revenue needed for paying-off debts. Third, there is the likelihood of the company to be using its assets in order to clear-off both long-term and short-term liabilities. In that case, the asset resource employed is reduced significantly to allow for creation of additional values which can be later used to effect dividend payments.

As compared to Morrison Co. which has a ROE of about 13.9 % which means that the Company needs to increase on its earnings before interest and tax margin, in order to provide improvement for the fundamental health of the Company’s operational activities (Morrisons 2012).

Dividend per Share Ratio

Analysis

There is an insignificant amount of change from the financial period starting in 2008. This is attributed to slower growth of sales revenue, thus, profits. The dividend per share is a ratio which is used to measure the value of earnings, which a single share held can attract. It is considered to be a crucial ratio, which potential investors use to determine the possibility of their share profits, hence, dividends.

The lower values in the amount of dividends per share mean that the sales revenue collected from the selling activity is lower enough to effect profits, which can then be used to pay-off existing investors’ dividends, while other being affected as retained earnings, which can later be used to increase the operational activities of the firm.

However, there is the possibility that the firm has adopted the policy of holding onto much of its profits, made as retained earnings, thus, allowing a substantial lower amount of it to be used to pay-off investors as dividends.

The fact that the sales revenue collected is considered to be insignificantly lower means that the firm has halted its promotional activities as advertisement to attract newer customer base. It might be caused by significantly higher prices of the products generated, hence, making the potential customers unable to afford to pay for them.

In comparison to Morrison Supermarket Co., whose dividends per share stand at 14.10(Morrisons’.2012), at 14.76 Tesco Plc is considered to be more inclined in the generation and payment of dividends, as compared to opting for investing in subsequent capital gains.

Profit Margins

Analysis

The value for this ratio keeps on increasing, as years progressed. Despite the fact that the increase in the values is considered to be insignificant to effect any possible change in policy previously held, such as dividend policy, the insignificant increase in the amount of this ratio is possibly caused by the low sales target.

As compared to Morrison Supermarket Co., whose ratio stands at 907, Tesco still is portrayed as having much lower quantum than its competitor (Morrisons 2012).

Gearing Ratio

Analysis

There is a significant decrease in the value of this ratio. As compared to its competitor; Morrison Supermarket Co, which gearing ratio stands at 23 %, it is fair to assume that Tesco financial stability is on the compromise. This possible decrease in the stability is a clear indicator of the firm consuming its assets into paying-off debts.

The current price for the shares held in Tesco Plc stands at $ 16.15 (Bloomberg Business Week 2012). As compared to the industry analysis this share price stands at the lowest side. This may, in turn, lead to a substantial decrease in the number of potential investors who might be interested in the purchasing of its shares; as a result, the Company is likely to suffer financial stability, hence, proportionate decrease in the amount of operations of the firm altogether.

To sum up, it is not a positive idea for the potential investors to purchase the stocks of this Company, since there is no indication that the Company is going to post substantial profits, which are needed for paying-off dividends altogether.