Financial Securities Analysis
Strategies to Evaluate Business Financial System
Financial system is the system which enables lenders and borrowers to exchange funds. The global financial system is generally broader regional system which encompasses all financial institutions, borrowers and lenders within the global economy. On the other side auditing is the process of evaluation of the financial statements and business environment to make effective business strategies. Thus, it can be said that financial system play very significant role in making effective and suitable investment or disinvestment decisions. The present research report is designed to provide knowledge regarding current economic conditions and events and their impact on capital and money market. The part B of the study is related to SWOT analysis of Tesco. In addition to this final task of the report will include ratio analysis and interpretation of the financial conditions of the business to make effective investment decisions, for investors of the Tesco.
The economic factors influencing the UK supermarket industry highly results from current economic state of the country. There is a noticeable food price inflation despite the recovery of economy and boosting average income. This inflation is surpassing the wage growth, making the effect of economic recovery unappealing for supermarket industry. Increase in the fuel prices also has an impact on supermarkets because it keep customers restricted from going to out of town stores to save fuel prices. Another factors affecting the supermarkets is the high value of real estate held by retailing companies. Most of the companies holds two third of their stores as free holds. It signifies that major supermarket firms like Tesco trade below the value of their property. Approach of selling property and leasing it back would free up more cash and will make their business more competitive. Rate of employment and unemployment also affect the UK supermarket industry because it affects the spending of consumers. The economic situation influences the rate of employment or unemployment rate within economy. This is a vicious cycle which can be broken only through promoting customer spending. This can be done by supermarkets through offering attractive offers and discounts for the people. There is a high impact of economic situation on general investment strategies of firms. General investment strategies of the industry are acquisition, merger etc. Firms in order to expand their share in market generally follows acquisition or merger approaches. These strategies are commonly adopted by the companies and it creates an impact on their sales & profits.
Money market can be defined as the segment of the financial market in which financial instruments with high liquidity and very short maturities are traded, such as trading of negotiable certificates of deposits (CDs), bankers acceptances, Treasury bills, commercial paper etc. On the other side capital market is the financial market for purchasing and selling equity and debt instruments, such as shares, derivatives etc. Both money and capital market can be influenced by various economic events. The main economic events that affects both these market can be explained as below.
Inflation: This is the major event or economical condition that may influence the capital as well as money market of UK. Inflation means higher consumer prices, low production. This often represents sales and reduces profits (Andrianova, Demetriades and Shortland, 2006). Higher prices will also often lead to higher interest rates. For example, the Bank of London may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. Thus it is clear that inflation play very significant role in sustaining money and capital market of the particular nation. Central bank of the country must make effective policies in order to manage inflation rate to operate financial markets effectively and efficiently.
Deflation: This is the opposite condition of the inflation condition, and this type of economical event can also influence the functioning of market and prices of financial instruments. Decreasing prices tend to mean lower profits for organisations and reduced economic operations. Share prices may go down, and investors may start selling their shares and move to fixed-income investments like bonds, bank deposits, Fixed deposits etc (Arteta, 2003). Interest rates may be lowered to encourage people to borrow more. The goal is increased spending and economic activity. The Great Depression (1929-1939) was one of the worst periods of deflation ever.
Economic and political shocks: Many a time investors see in the market that there are big changes due to economical and political shocks. Changes around the globe can influence both the economy and stock prices as well as capital and money market of world. For instant, increase in energy costs can lead to lower sales, lower profits and lower stock prices. An act of terrorism can also lead to a downturn in economic activity and a fall in stock prices. Hence, it can be said that economical and political shocks may affect both the market positively or negatively (Cardarelli, Elekdag and Lall, 2009).
Economic crisis: The economic crisis can be defined as the worst economic condition in which money and capital market goes down. The financial crisis of 2007-2008 is the popular world financial crises. This threatened the total collapse of large financial institutions, that was prevented by the bailout of banks by national governments, but stock markets still dropped worldwide. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of UK dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis (Chinn and Ito, 2008).
The retail sector of UK is know as one of the major industry of the region as well as world. The major player of this industry are Arcadia Group, John levis, Amazon, Aldi, Lidl, Tesco etc. The present research study is related to Tesco PLC which is British multinational grocery and general merchandise retailer headquartered in Chenshunt, Hertfordshire, England, UK. This is the third biggest retailer in the world by profits and the second biggest retailer entity in the world by revenues. It is the largest retailer of the nation and employs approximately 200000 full time employees. The association has nearly three thousand stores, and out of which 1427 are express convenience shops. The major products of the firm are grocery, books, clothing, electronics, furniture, petrol and software. Tesco also offers a range of financial services, teclocoms and internet services (Davies and Drexler, 2010). Thus, it can be said that this is one of the largest player of UK retail industry and have ability to influence the economy of the world.
The organisation generated annual sales revenue of £65.17bn in the year 20012. Out of this figure, £42.8bn was generated in the UK. Furthermore, the company was developed in the year 1919 by Jack Cohen as a group of market stalls. It had a market capitalisation of about £20.5 billion in the year 2014, the 28th-largest of any company with a primary listing on the London Stock Exchange. Hence, it can be stated that the association is helping the retail sector in improving demand in world market. The presently various companies are comping in this field and creating problems for Tesco. However, Tesco has diversified its business by investing various other profitable sectors such as books, clothing, financial services, software, IT etc (Edison, Levine and et. al., 2002). This kind of business strategy helps the association in sustaining business operations for long time period.
The SWOT evaluation stands for strengths, weaknesses, opportunities and threats for a business. This SWOT analysis assesses the TESCO Group, a global retailing powerhouse and portfolio of retail brands that offer food and non-food items in countries all over the world in different formats, including a large online retail store. Hence, the evaluation can be performed as below.
Strengths: The major strength of the firm is that it has won numerous awards for its retail excellence, consumer service and overall shopping experience, which is helpful in improving goodwill and reputation of it in world retail sector. As per the annual report of the entity, it can be said that the entity has solid cash reserves and wide range of property with sales of more than £72 billion for the financial year of 2011-12. Furthermore, the entity has 6784 stores worldwide, and increase of 433 stores since 2012 (Elliot and Elliot, 2004). It has considerable brand equity in its name with global recognition and respect for what it stands for in terms of quality, selection, and service. Presently, the association is using new and innovative technologies throughout its operations in order to reduce cost and enhance service experiences.
Weaknesses: Tesco is developing its business operations by using diversification modle which has various weaknesses. In addition to this competitive advantage is not sustainable and can be imitated by competitors. Hence, competitive pressures have led to price wars that have eroded some of the retailer's profit margin when Tesco should have been focused on other ways to gain the competitive advantage.
The over dependency to home market in the UK may be very big weakness of the the association which may reduce the world market share of the entity. Some of the retail formats in certain nations have not conducted as well as estimated, suggesting that TESCO might not have done as much market research as they should have done (Goldsmith, 2005).
Opportunities: There are opportunities for strategic alliances with other brands and admired companies to offer more products and to enhance market share by attracting more customers worldwide. Increasing international presence is also major opportunity for the association to develop its business operations in global market. Diversification model adopted by the entity is helpful in improving international trade by developing new and unique products. The move by the management to develop its own brand tablets and smartphones can attract more people towards brand. In addition to this, company has big opportunities in online shopping sector, which is developing industry in the world marketplace (La Porta, Lopez-de-Silanes and et. al., 2001). Presently, joint venture and franchising are two major strategies that can be adopted by the entity to enhance business operations in global market.
Threats: The major threat of Tesco is competition form developing nations such as BRIC. The improved operations expenditures are also the big threat to the entity. The UK crisis is the major element that have decreased the sales of the association in domestic as well as world retail market (Davies and Drexler, 2010). One threat that Tesco continues to resist is the takeover of Asda by Wal-Mart. Branding of stores as Asda Wal-Mart has been increasing in the UK, demonstrating a weakening in the consumer disdain for Wal-Mart.
Ratio analysis is one of the major techniques through which effective decisions and recommendations can be developed, related to investment or disinvestment in share of Tesco. Investors can evaluate financial conditions and performance of the business by using ratio evaluation methods, through which they can decided whether they should buy, sell or hold the stock of Tesco (Levine, 2000). By using and evaluating several ratios, estimation can be also made. Hence, followings are the key ratios of Tesco Plc.
Profitability ratios: By evaluating above financial ratios, it has been found that there is low level of fluctuation in return on capital employed and gross profit margin of the entity in all three financial years. On the other side there is very high level of fluctuation in net profit ratios. The net profits ratio was 44% in the year 2012, and now it is 1.5%, which shows that company is not able in generating sufficient profit to pay good return to investors.
Liquidity ratios: Current and quick ratios of the association are almost stable in all the three years. However the level of this ratios is not fulfil standard level which is 1, and thus it can be said that company is not able in paying its daily expenses and obligations (Levine, 2000). This kind of condition is not favourable for the future of the business as the entity is not able in paying day to day costs.
Gearing ratios: Debt to equity ratio of the entity shows very efficient position of the entity. The ratio has increased by 0.41 in the year 2014. The present level of it is higher than standard level which is 2. Hence, it can be said that company is able in paying its long term liabilities. This has sufficient amount of fixed assets to repay long term debts.
Investment ratios: These are the major ratios through which investor of the entity can make effective and profitable decisions regarding investment and disinvestment. High fluctuation in return on equity ratio has been found, that represents that company is not able in generating profits to pay return on its equity (Coline, 2010). PE ratios is very high in the year 2014 which may be favourable for the investors. Dividend yield is stable in all the three years, however the level of this is very low which is not favourable for further investment. EPS of the entity is higher in the year 2014 with compared to year 2013 that may be positive sign for the investors.
By interpreting the above ratios it can be suggested that investor should take hold position in the entity to recover its cost. The financial position of the entity is weak than year 2012 but stronger than year 2013. Furthermore, PE ratio of the entity is 27 which meets standard level of company which is 25, and hence investor should take hold position for next one year because there is possibility of improvement in financial condition of Tesco (Financial system review, 2014).
On the basis of above research study it has been found that economic condition of the UK as well as world can influence the performance and conditions of the association positively as well as negatively. UK debt crisis of year 2008 is the major event that made big impact on the investors of the company as well as financial conditions of the association negatively. The stock prices of Tesco was lower in this time period. SWOT analysis is the major technique of internal and external auditing which states strengths, weaknesses, opportunities and threats of the entity. Furthermore, ratios analysis of the company represents financial conditions and performance of the entity through which effective and best decisions regarding buy, sell or hold can be made easily. The evaluation shows that the entity is not performing well in the year 2013, and hence investor should to be hold proposition to recover their losses.
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