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OXFORD BROOKES UNIVERSITYResearch and Analysis Project Report Topic 8 The Business and Financial Performance of Tesco PlcPeriod 2006 to 2008

Submitted By: Syed Fahad Amjad ACCA Reg.No: 1346741 Mentoring By: Colin Biggs

The project is submitted as part of the requirements for the award of the BSc in Applied Accounting, Oxford Brookes University

November 2009 6458 words

Oxford Brookes University Research and Analysis Project

AcknowledgementsI am grateful to my mentor Mr. Colin Biggs for his guidance and patience throughout the preparation of this project report. I would also like to thank my friends and family who supported me during the year.

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Oxford Brookes University Research and Analysis Project

Business and Financial Performance of Tesco plc: Contents 1. Introduction 1.1 Topic 1.2 The Chosen Topic 1.2 The Organisation 1.3 Aims and Objectives 2. Information Gathering 2.1 Primary and Secondary Sources 2.2 Methods Used to Gather Information 3. Analysis and Presentation 3.1 Company Profile 3.2 Analysis of TESCO i. Profitability Ratios Net Profit Margin Operating Income Margin Gross Profit Margin Sales Growth Return on Investments Return on Equity Earnings Per Share ii. Liquidity Ratios Current Ratio Acid Test Ratio iii. Financial Leverage Ratios Total Debt to Asset Debt to Equity Interest Cover iv. Efficiency Ratios Asset Turnover Inventory Turnover Debtors Turnover Days Creditors Turnover

5 5 6 6 8 8 9 10 10 10 10 12 13 14 16 17 19 20 21 21 22 23 24 25 25 25

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Oxford Brookes University Research and Analysis Project

4. Current Strategic Evaluation 5. SWOT Analysis 6. Conclusion 7. References 8. Appendix 1 9. Appendix 2 10. Appendix 3

26 27 28 30 32 35 37

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Oxford Brookes University Research and Analysis Project

1.0 INTRODUCTION1.1 Topic My chosen topic is listed at number 8 in the project areas mentioned by Oxford Brookes University. The topic is related to the business and financial performance of an organisation over a period of up to three years that is from 2006 to 2008. The organisation on which I would be doing my research and analysis is Tesco Plc. For the benchmark treatment. I would compare Tesco Plc to J Sainsbury Plc. Both the companies operate in a similar industry and market and both are competitors to each other. The research is mainly based in relation to the shareholders and stakeholders viewpoint that have particular interest in the performance of Tesco plc and also about its future strategies. 1.2 The Chosen Topic The reason behind the selection of topic 8 is my good understanding of the financial aspects and issues of any organisation as I have studied in F7 of ACCA. Therefore, because of the familiarity of the topic I would be able to report a good research and analysis project. I would also use my knowledge about the ratios in order to provide more detailed performance indicators and the fluctuation which could be identified through ratio analysis of an organisation. Making analysis of a real organisation is completely different from the questions that are present in the examination. The fluctuations and unusual events in the organisation may create further problems which require practical and realistic approach. Although most of the information can be obtained through the desired organisations annual accounts, there are still many aspects of organisation which require more research in order to conclude the organisations performance in an appropriate manner. The information is usually obtained through primary and secondary sources of information. The project will help me to enhance my skills in analysing the performance of any organisation through the ratio analysis approach. It will also provide me with a guidance on how to practically write a real report keeping in mind all the knowledge which I would gain through this report. The report is not completely based on the financial factors, but it will also include the non financial factors that have affected Tesco plc in the last three years. My reports main focus will be on the financial and operational performance of Tesco to determine the key of company strategy along with finding and defining the factors other than financial. This would allow me to build up my knowledge about the non financial indicators which affects

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Oxford Brookes University Research and Analysis Project

organisation. All this research will increase my chances of presenting a better project report and also increase my techniques for data interpretation. 1.3 The Organisation Selection The reason behind the selection to analyse the financial position of Tesco plc is that it is the largest British retailer by both global sales and domestic market share with profits exceeding 2 billion. In 2008, Tesco became the worlds third largest retailer, the first movement among the top five since 2003. Originally specialising in food and drink, it has successfully diversified into areas such as clothing, consumer electronics, financial services, telecoms, health insurance, dental plan, retailing and renting DVDs, CDs, music download, internet services and software. Tesco has 2109 stores in the UK and internationally it has 1822 stores in which it covers US, Central Europe and Rest of Asia. Tesco employs approximately 273000 employees to cover its operations nationally and internationally. Therefore, I am very much interested to research on the strategy of Tesco plc to update my knowledge regarding the successful strategy of one of the largest retailer in the world today. Tesco has been able to establish a consistent strategy for growth, which has also allowed them to strengthen their core UK business and drive expansion into new markets. Tesco has brought jobs and investment to areas that other retailers had rejected. I would measure the risks which Tesco and its shareholders are or may face in the future. 1.4 Aims and Objectives The aim for this project report is to view the companys performance according to the potential and ordinary shareholders point. Shareholders are always interested in the return of their investment. The main concern for them is whether the success of Tesco plc would continue at the same return or will there be an increase in return. Whether the success of Tesco plc would continue in the future and what further options available for future growth and investment for the company. Also the risks that Tesco plc is currently facing and the future risk factors which may create hindrance in the success of the organisation. All these questions require measures in such a way which could be understood by all the shareholders. Hence this leads to the method of ratio analysis through which company performance can be measured and understood by everyone concerned. Therefore, my evaluation will be based on Tescos past performance as well as its strategy. This would be done by analysing the financial statements of Tesco plc and also its business strategy for future growth.

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Oxford Brookes University Research and Analysis Project

Financial Analysis Financial statement analysis is a judgemental process. One of the primary main objectives is the identification of major changes in trends, and relationships and the investigation of the reasons underlying those changes. Probably the most widely used financial analysis technique is ratio analysis and these financial ratios are usually expressed in terms of percentages and times. The financial ratios which would be used for the analysis of Tesco plc financial operations and performance fall into the following categories. Profitability ratios measure managements ability to control expenses and to earn a return on the resources committed to the business. I would measure the profitability of Tesco through: Net Profit Margin Operating Income Sales Growth Gross Profit Return on Investment Return on Equity Earnings per Share

Liquidity ratios measure a firms ability to meet its current obligations. I would measure the liquidity of Tesco by analysing its: Current Ratio Acid Test Ratio

Leverage ratios measure the degree of protection of suppliers of long term funds and can also aid in judging a firms ability to raise additional debt and its capacity to pay its liabilities on time. I would used the following ratios to conclude the financial viability of Tesco concerning the payments to its long term debt: Total Debt to Asset Debt to Equity Interest Coverage Ratio

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Oxford Brookes University Research and Analysis Project

Efficiency, activity or turnover ratios provide information about managements ability to control expenses and to earn a return on the resources committed to the business. The ratios which would be used to analyse its working capital management are: Asset Turnover Debtors Collection Days Inventory Turnover Ratio Creditors Payment Days

Non-Financial Factors I have also highlighted the major non financial factors which affected the relevant ratios more than the others and the reasons behind the importance of those non-financial factors. Strategic Analysis I will also analyse the strategy of Tesco which they have implemented successfully especially in the recent years as they become one of the largest retailers in the world and UK top retailer. SWOT Analysis I will also include a SWOT analysis to explain the current position of Tesco. A SWOT analysis is an instrumental framework to identify the strength, weaknesses, threats and opportunities for a company. The strengths and weaknesses are internal value creating or destroying factors such as assets, skills or resources a company has. The opportunities and threats are external value creating or destroying factors which a company cannot control. Future Growth This report will also emphasise

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