AF4S31 – ASSESSMENT 1 (AV2)

AF4S31 –STRATEGIC FINANCIAL MANAGEMENT

STRATEGIC FINANCIAL EVALUATION AND ANALYSIS OF TESCO AND BENEDICT CO.

NAME – UGOCHI IJOMA-WOSU

REGISTERATION NUMBER- R1702D2396271

MODULE TUTOR:

JULY 2021
Table of Contents

1. Introduction
2. TESCO CORPORATE STRATEGIC FINANCIAL ANALYSIS
3. STRATEGIC FINANCIAL ANALYSIS AND EVALUATION OF BENEDICT CO.
4. CONCLUSION
5. REFERENCES
6. APPENDICES
6.1 Industrial Financial Data
6.2 Benedict Co.’s income statement
6.3 Benedict Co.’s Balance sheet
6.4 Calculated capital employed
6.5 Calculation of benedict Co.’s financial Ratios.
INTRODUCTION AND ESSAY STRUCTURE

There are different categories of stakeholders from external to internal in an organisation. This report analysis is
focused on carrying out an analysis of 2 companies.

TESCO AND BENEDICT CO.

Tesco as known as one of the largest retailers leading UK shopping mart and in the business of selling quality and
affordable products (Tesco, 2016) through their different stores as well as online and have an important focus on
working with different stakeholders , this includes employees customers suppliers, investors etc (Tesco, 2019).
Areview and assessment of Tesci Financial performance in the area of corporate and social responsibility over its
corporate and social Governance as well as its environmental factors will be carried out.

The second section of this repport will also focus on the evaluation and analysisof the financial arm of the Benedict
Co. which is known for providing great timely solutions. The organisation purchases and sells destroyed or forgotten
freight and other items. (Benedict co.,2019).

In this report we would be able to calculate, analysis and interprete a list of financial ratios to ascertain the
company’s performance and growth financially and the a proper summary of the findings , interpretations and
recommendations will be concluded.

2. FINANCIAL ANALYSIS OF TESCO

2.1 Definition of Stakeholders.

A stakeholder is any person , organization , social group or society at large that has a stake in the business, thus they
can be internal or erxternal to the business. ( www.study.com , 2019)

From study.com stake can also be seen as a key interest to the business and the concept of stakeholder doesn’t
cover ethical and moral implications for business governance. It’s important for a business to take into account of
interests of the stakeholders.

Bryson (2003) also emphasised that stakeholders’ analysis is an intelligent step by which business oragnizations are
to grasp full understanding and build strategises to manage both internal and external environments for the
organization to achieve great profitability.

In a nutshell, stakeholders can be seen as people , firms , organisation or put simply an entire community that can be
affected by the organisations activities.

From Tesco Annual Report 2016 stakeholders are classified into three major categories- Primary (Internal),
Secondary ( External) and connected stakeholders ( Tesco, 2016 PP 40)

2.2 STAKEHOLDERS FOR TESCO

Tesco has three stakeholders highlighted in the corporate governance report known as

- Staff and colleagues

- Customers and suppliers.

The colleagues are known as Tesco’s employees , in which the organization invests with a priority to better serve its
customers.

From Tesco’s annual report (2016), three key primary stakeholders are colleagues (staff), customer and suppliers..
the order stakeholders are grouped under secondary ones , these are

- Government Councils
 - Competitors
- Media and Journalist
- Regulators ans CSR Charities.

Tesco Customers

People or entities who buy the company products and services or also recommend the company to other entities are
known as Tesco Customers.

TESCO SUPPLIERS

Suppliers are Tesco’s key stakeholders that belong to partnership under connected stakeholders.

2.3 ANALYSIS OF TESCO’S ENVIRONMENTAL AND SOCIAL REVIEW AND CORPORATE GOVERNANCE REPORT.

In this section , an attempt to critically assess how environmental and social review and corporate governance report
assists Tesco to show its performed in terms of cooperate and social responsibilities (CSR) to two of its main
stakeholders. The two main stakeholders here is the customers and suppliers who have been emphasis and their
importance noted in the annual report, 2016. (Tesco , 2016)

Tesco’s growth and productivity has been demonstrated to rely on these two stakeholders in measuring Tesco’s
Growth and performance to customers and suppliers key performance indicator ( KPI)were introduced relating the
emphasis that the organisation highly respects their contribution to its profitability.

Strategic aims and measures to check the performance of customers and suppliers to support its corporate
governance aims of re-establishing trust and transparency has been put to place ( Tesco, 2017). With these aims and
objectives , strong CSR activities on the community and charity projects have been stationed. Tesco inculcated the
UK corporate governance code of inculcating specific reporting structures, standards and emphasising its social and
environmental factors (Tesco 2017 PP.30)

2.3.1. TESCO’S PERFORMANCE IN TERMS OF CSR TO ITS CUSTOMERS AND SUPPLIERS.

As seen in the Corporate Governance Report emphasising Tesco’s non-financial aims and objectives, environmental
and social responsibilities seen in the report (Tesco, 2016).

According to the CEO’s (David Lewis) statement in the Annual report, we can deduce that Tesco’s priorities and
importance are of 3 fold -

- Trust and Transparency Re-established.

- Strengthen and Protect the balance sheet.
- Regain competitiveness

Also he also stated that Tesco has 476,453- strong staff and 6902 Retailer shops.

(Tesco Plc Annual Report and Financial Statement, 2016).

There has been several projects that the committee has been driving and following during the report year the
organization has demonstrated growth on some key projects , impacting key stakeholders as follows-

TESCO PLC CSR and Corporate Governance is used in re-establishing Trust and Transparency among its customers
and suppliers. This is shown and reported by Tesco (2017) as seen below-

- Tesco has built flood stem

- Charity Partnership with diabetes UK and the British health foundation to raise 30 million to improve healthy
living,
 - Community food collection nationwide drive
- All extra and surplus food from Tesco Stores in UK goes to charity and not disposed.

The performance of these non-financial CSR iniatives are tied with their financial objectives of Tesco as seen in
(Tesco, 2016).

3. STRATEGIC FINANCIAL ANALYSIS AND EVALUATION OF BENEDICT CO.

3.1. INTRODUCTION AND PREFERRED FINANCIAL RATIOS.

Benedict Co. has maintained being a provider of superb rescue solutions over the years. The company is focused on
purchasing and trading destroyed or deserted freight and other warehouse losses products. (Benedict Co., 2019).

3.1.1 DEFINITION OF FINANCIAL RATIO

Financial Ratio is a relative magnitude of two selected numerical valuses taken from an enterprise’s financial
statements . ( www.corporatefinanceinstitute.com, Undated).

Financial Ratios offer enterpreneurs a way to assess their company’s growth and performance and then carry out a
comparism with other types just like theirs in the industry. Ratios deals with the measurement of the relationship
established two or more factors of financial statements . To see the effectiveness of ratios is when results or
outcomes over several periods sre compared. ( www.bdc.ca, undated)

Financial Ratios can also be seen as time –tested way of assessing a business. Managers , Suppliers , Vendors,
customers and investors all use financial ratio analysis to under study the financial health of the business.

I used a range of financial ratios to assess and evauate the Benedict Co.financial growth, health and performance in
satisfying its stakeholder’s expectations by using the company’s financial statement provided for the Year 20X0 and
20X1 as well as industry economic data.

Table A

Financial Ratio What it Measures Formula

Profitability Ratios

1 Return on Capital Shows the % of return gotten by a company’s PBIT x100

employed (ROCE)Ratio
2 Gross Profit Margin
3 Net Profit Margin
4 Net Asset Turnover
Liquidity Ratios
5 Current Ratio
capital employed.it is an important measure Total Assets – Current
of performance, it makes comparism between Liabilities
profit before income tax(PBIT) with the
amount of capital invested.
Indicates the% of a company’s turnover which PBITx100
is represented by profit after operating cost. Sales
Indicates the % of a selling price that Gross Profit x100
represents profits rather than cost Sales
Shows how efficiently the company’s capital Turnover
employed is used to produce turnover. Capital Employed
To measure how company’s ability to cover
expenses. The 2 well known types are Current
Ratio and Quick Ratio, with both based on
Balance sheet
It gives the number of times that a company’s Current Assets
working capital assets cover its short-term Current Liabilities
 liabilities. It is a reflection of financial strength.
It is the number of times a company’s current
assets exceed its current liabilities, which is an
indication of the solvency of the business.
6 Quick Ratio Also known as Acid Test Ratio. That’s because Current asset less
the quick ratio looks only at a company’s most stock/ Current
liquid assets and compares them to current Liabilities
liabilities. The quick ratio tests whether a
business can meet its obligations even if
adverse conditions occur similar to the current
ratio but Stock is excluded for current assets.
Efficiency Ratios( Use of To measure the efficiency of a company’s
Resources Ratios) operation. It uses the data from the balance
sheet and the profit & loss statement.

7 Stock Days Measures the number of days’ worth of stock inventory x365
Held by the company Cost of Sales

8 Debtor Days Measures the no. of days (Average) that it Trade receivables x 365
takes a debtor to pay. sales

9 Creditor Days Measures the no. of days that it takes to pay Payable x365
Creditors. Cost of sales

10 Cash conversion cycle Gives an idea of the average length of time it stock days + Debtors days-
takes a company to generate cash from operations creditors Days

Gearing Ratios – measures the amount of capital that comes from debt .In other words , leverage financial
ratios are used to evaluate a company’s debt levels thus measuring level of long-term debt as a percentage
of equity (ordinary shares and reserves) or total funds (equity plus debt)

Financial Ratio What it measures Formulae

1. Gearing Ratio This measures debt as a % of the total capital Long-term debts x100
(share and debt) funding business Total assets less current liabilities

2. Debt/Equity Ratio Calculates the weight of total debt and financial Total liabilities /shareholders equity
Liabilities against shareholders equity

3. Interest Cover Determines how easily a company can pay its Profit before interest and tax /
Interest expenses Interest Payable

4. Debt Ratio Measures the relative amount of a company’s Total Liabilities/

Assets that are provided from debt Total Assets

Investor Rations

5. Return on equity A similar measure ROCE Earning after tax x 100

Ordinary share capital plus reserves
 6. Dividend per share(DPS)
7. Earnings Per Share (EPS)
8. Dividend Cover
9. Payout Ratio
10. Price/earnings ratio
11. Dividend Yield
12. Earnings Yield
Adapted from : Scicluna, C. (2019), Module Handout Notes and corporate Financial Institute (undated)
DPS Dividend paid to Ordinary share
#Issued ordinary shares
show the amount of dividend (DPS) Earning after tax
And profit (EPS)available to each ordinary #of issued ordinary shares
Shareholder.
Inverse of pay-out ratio EPS
DPS
Inverse of dividend cover Dividend paid to ordinary shareholder
X100/earnings after tax
Shows the number of years earnings
That a shareholder would be willing Market price per share/ EPS
To sacrifice in order to purchase one
Share.
shows the return to ordinary shareholders DPS x100
As a % of the share price represented by DPS Market price per share
shows the return to ordinary shareholders as a EPS X100
% of the share price represented by EPS Market price per share
3.2 CALCULATIONS, INTERPRETATIONS AND ANALYSIS OF BENEDICT CO. FINANCAL RATIOS

In this part of analyses of Benedict Co.’s Financial Ratios seen in appendices.

3.2.1 Profitability Ratios

Below Is the table that represents Net Profit Margins and ROCE ratios have droppes from 24.19% to 17.5% and also
32.93% to 22.73% respectively. The possibility of a decrease in ROCE may be due to company’s profit before taxes
drop from $8.7Million to $8.3Million in years 20X0 and 20X1 respectively (Appendix). Also it is possible at the same
time ROCE may have dropped due to an increase in the capital employed from $33.9Million to $40Million.

Profitability Ratio

Table C

Operating Profit 20X1 20X0 Observations

Return on Capital Employed (ROCE) 17.50% 24.19% Drop/Decrease

Net Profit Margin 22.73% 32.93% Drop/Decrease

Gross Profit % 48.05% 41.77% Increased

Net Asset Turnover 0.77 0.73 Increased

The reduced ROCE may mean that the organisation’s effectiveness in using capital to provide profit has dropped but
it is also possible that the organisation purchased more items to sell on low competitive prices to bring in more
customers that eill reveresly increase sales. This also is a better explanation to the drop in net profit margin ratios.

The Net asset turnover had an increase during the years under study from 0.73 to 0.77 times. This can be attached to
the increase in sales than the capital used. This indicates improvement in Benedict Co.’s capability to build and
provide revenue from capital used. (Scicluna, 2019).

Gross Profit ratio can be seen as increased from 41.77% to 48.05% from 20X0 to 20X1. This can be attributed to an
equal increase in sales 23.69% from Table C and the gross profits from $10. 4 Million to $14.8Million - 42.31%, hence
the growth of the gross profit ratio. This observation will buttress my earlier suggestion that though ROCE dropped
under the two years in review, there were more sales which may have been to drive in more customers by low prices
of items. Decreasing cost and increased sales in this review may explain the increase in gross profit margin.

3.2.2 Benedict Co Liquidity Ratios

Table D

Benedict Co. Liquidity Ratios in 20X0 and 20X1

LIQUIDITY RATIOS 20X1 20X0 REVIEWS

Current Ratio 1.19 1.25 Decreased

Quick Ratio 0.70 0.75 Decreased

From Above we would notice that the current ratio and quick ratio dropped slightly from a 1.25 to a 1.19 and from
0.75 to 0.70 accordingly during the period under observation. In 20X1 for every $1.19 of current assets , the
organisation had $1.0 Liabilities. I can say Bendict Co. can cover its liabilities marginally. The possible cause of a
decrease in current ratio may be due to the increased sales noted earlier. Benedict Co. can re-invest their profits by
actually purchasing more assets or to get a long-term loan oor pay its debts, this is to increase current ratio. A high
current ratio may possibly mean that the cash is not well optimised. Jim (2011) emphasised that current ratios of 1.0
to 1.5 may indicate that a business may suffer to pay liabilities.

What Quick ratio does is to look at the most liquid assets and compares it with current liabilities. Looking at Table D
one will notice that quick ratio dropped from 0.75 to 0.70, it was ok to remain high and satisfactory to recommend
figures between 0.5 to 1(Corporate Finance Institute, Undated). It is possible that it dropped due to the increase in
sales as earlier noted in Year 20X1.

3.2.3 USE OF RESOURCE RATIOS – BENEDICT Co.

Table E

Ratios 20X1 20X0 REVIEWS

Inventory/stock days 118.63 65.45 Increased

Trade/ Debtor receivable days 90.06 55.70 Increased

Trade/ Creditor Payable days 155.13 108.24 Increased

Cash Conversion Cycle 53.56 12.91 Increased

The Debtors day ratio assesses the average number of days required for an organisation to receive payment from its
customers for invoices assigned to them (Bragg, 2018). The above table indicates an increase in debtors day ratio
from 55.7 to 90.06, this is a clear increase of 43.9 days in 20X1 when compared to previous year. We can see a clear
increase in the organisation’s capability in to collect trade receivables and in my own view depicts poorly on the
performance in 20X1. Benedict Co. compares poorly with other industry members with an average of 55 trade
receivable days. (Kaplan Financial, 2012)

We can deduce from Table E that Benedict Co. increased creditor days from 108.24 to 155.13, a difference of 43.31
days in the tear 20X0 to 20X1. Payables are no longer than receivables and Benedict Co. trade suppliers may not
choose to give credit to the organisation and choose to deal with other industry members. This can also relate with
the fact that the organisation has a poor financial position.

The cash conversion cycle is known as a cash flow calculation that assesses and measures the time used for an
organisation to turn its investment in other resources factors as well as inventory into cash. Table D indicates a
significant increase in Benedicts Co.’s cash conversation cycle from a just 12.91 to 53.56 from 20X0 to 20X1. This is
due to the increase in stock and the credit and debtor days noticed in Table D. So from all of these findings , it can be
said that Benedicts Co. has been performing poorly and has been unresourceful in the use of generating cash from
its capital assets.

3.2.4 Financial Position Analysis of Benedict Co. (Gearing Ratios)

Kaplan Financial (2012) emphasised the evaluation of financial position of business with main focus on the openness
to risk and its stability by looking at the way and pattern the business is been built and financed. This is known as
gearing, it assesses and measures the level of external debt the organisation has in comparism to equity finance
(share, capital and reserves).
Table F

Gearing Ratios 20X1 20X0 Reviews

Gearing Ratio% 30.00 23.60 Increased

Equity Ratio/ Debt % 42.86 30.89 Increased

Interest Cover 5.38 16.40 Decreased

From the above calculation in Table F, we can see that there was a little increase in gearing ratio from 23.60% to
30.00% from 20X0 to 20X1 and it is below the recommended 50% (Scicluna ,2019). This increased can be attached to
the organisation’s increase in long term debt - $8Million to $12 Million than when put into comparism to a little
increase in capital from $33.9Million to $40 Million. (17.99%)

Liquidity ratio from Table F shows that the organisation has increased its risk to cover its long term debts by capital
employed ( Edwards, 2003). Equity Ratio has significantly increased from 30.89% in 20X0 to 42.86% in 20X1
(50%)which is obviously because of an increase in the organisation’s long term debt acquisition and that of its stock
capital and reserves(8.11% in Appendix 6.3). Highly geared organisations are regarded to be riskier but
comparatively cheaper to service than lower geared organisations.

Lets look at interest cover ratio which assesses and measures the capability of an organisation to pay interest out of
the profits they make. 9Scicluna 2019 and Kaplan Financials , 2012). From Table F, we can see a fall in interest cover
ratio from 16.40 times to 5.38 times, showing a drop in Benedict Co. ‘s profits (4.6% which also led to an increase in
financial costs up to 160%. Though we can see a drop, I am still on the school of thoughts that the organisation is still
able to pay its interest from the dropped profits. As Edwards (2003) emphasised that Benedict Co.’s interest cover
ratio deterioration may create a risk to shareholders dividends.

3.2.5 Benedict Co. Investor Ratios.

The investor Ratio measures and assesses the returns to the owner of business (Kaplan Financials, 2012).

Table G Benedict Co. Investors Ratios for years 20X0 and 20X1

Ratios 20X1 20X0 Reviews

Return on equity 23.57% 27.03% Decrease

DPS (Dividend per share) 0.03 0.02 Increased

EPS (Earnings per share) 0.00004 0.00004 Constant

Dividend Cover 0.001 0.002 Decreased

Pay Out Ratio% 68181.82 51428.57 Increased

Earnings/ Price Ratio 152727.27 92571.43 Increased

Dividend yield % 0.45 0.56 Decreased

Earning yield % 0.0007 0.0011 Decreased

The above Table indicates that return on equity decreased while DPS increased. The DPS increase can be explained
by the 25% increase in the total dividends paid ( Appendix 6.2).there is a decrease from 0.002 times to 0.001 times,
this is because of the decreased earnings after tax and the high dividends paid.
EPS remained unchanged and relatively low. Payment ratio is inversely proportional to dividend cover ratio so it
means as one moves to zero the other factor grows to infinity. The yield of dividendratio decreased from 0.56% to
0.45% as a result of increased stock’s market price of 55.56%, offsetting the DPS by 25% as noticed. We would also
observe that there was a reduction in the earnings yield due to the noticeable deterioration of profitability and the
EPS values tending to zero.

4. THE CONCLUSION

The report evaluation shows that Benedict Co. as an organisation with a weak financial status and a highly strong
risks in finance and business. There was a level of deterioration in its profitability and performance. The liquidity of
the organisation also stressed its operations. The creditor and debtor days together with conversion cycle increased
obviously. The Poor state can be attributed to an increase in gross profit margin and also a little increase in Net asset
turnover. Hence, with more time and more assessment and analysis the findings can be concluded.

From our use of resources Ratios we can see that Benedict Co. did not assess and accelerate its stock trading, collect
revenue and to turn stock into cash. With the outcome of the calculation of liquidity ratios, the organisation may not
be able to meet its short-term liabilities and may not be able to recover its operational and sales cost. The two years
used for this observation interprets the business and financial risks as increasing, this is confirmed with the gearing
ratios. Also an Investor ratio shows Benedict Co’s being unable to provide earnings for its investors and this is
because of the noticed earning lesser than dividend values.

Based on my findings and analysis done Benedict Co. will not be able to meet up with the necessary requirements of
potential customers, lenders, investors and suppliers.

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