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Sustainability Accounting And Accountability: Tesco Plc Deals In Retail Sector

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Question:

Discuss about the Sustainability Accounting And Accountability for Tesco Plc Deals In Retail Sector?

 

Answer:

This study deals with a company named Tesco Plc that deals in retail sector in Australia. This company is the market leader in the retail sector and recognized in more than 13 countries. In this particular study, Tesco’s financial ratios will be analyzed for three years. Tesco faces stiff competition with Sainsbury and focus on innovative strategies in order to retain in the global market. This study will include recommendations at the end for the potential future investors in consideration with the future employability in business activities. In this particular study, profitability ratio are calculated in order to understand the profitability position of Tesco Plc. Liquidity ratio of Tesco Plc indicates the ability of the firm to meet the short-term obligations for specified time. Tesco Plc should find innovative ways to recover its initial position because it faces stiff competition in the UK global market.

Ratio Analysis

Ratio analysis of Tesco Plc will give brief description of its financial standing in the business activities. Ratios are taken from the financial statements, balance sheet, and make the comparison as well (Scott, 2014). This kind of relationships will help to provide the investors, creditors as well as internal management of Tesco for future business activities.

Gross Profit Margin

Gross Profit Margin is one of the profitability ratios that help in comparing gross margin with net sales. This particular ratio expresses the profitability of Tesco Plc in comparison with sale of inventory as well as merchandise. Addition to that, gross profit ratio of Tesco Plc reveals the sale of inventories in paying off the operating expenses from past activities.

 

2013

2014

2015

Gross Profit Margin

     

Gross profit

2382

2631

-5792

Net Sales

63406

63557

62284

 

3.756742264

4.139591233

-9.299338514


From the above calculation, it is easy to figure out that Tesco Plc finding hard to remain profitable in the current financial year. In the year 2015, gross profit of Tesco Plc is showing negative amount due to lack of current sales and production level. It is recognized that Tesco Plc is experiencing an increase in gross profit from 2013 to 2014 and then decrease in the current financial year (Kaplan and Atkinson, 2015). Decrease in gross profit was due to low sales, reduced in productivity level as well as poor control over the cost of selling expenses from past financial activities.

Return on Capital Employed

Return on capital employed is one of the profitability ratios that help in measuring the efficiency level of Tesco Plc for generation of profits. In other words, it serves as a comparison with net operating profits to employment of capital for Tesco Plc (Datar et al. 2013). This particular ratio helps the potential investors on matters relating the value of dollars in profits and generation of capital employment criteria. This helps in predicting long-term profitability for showing the efficiency of assets and consideration on long-term financing matters in an overall manner. This helps in ascertaining on longevity of Tesco Plc for its customer base.

Return on Capital Employed

2013

2014

2015

Net Operating Profit

2382

2631

-5792

Total Assets

50129

50164

44214

Current Liabilities

-18985

-21399

-19810

 

3.446479729

3.676480863

-9.046607522


From the above calculation for three years, it is noticed that Tesco Plc experiencing negative amount in the current financial year. This reveals that Tesco Plc is experiencing huge decrease in the ROCE from 2013 to 2015 (DRURY, 2013). Reasons for negative amount are mainly due to investment in new stores for market development purpose of Tesco Plc for future business practices. It is recommended that Tesco Plc need to regain its position and increase in the level of performance for future purpose.

Operating Profit Margin

Operating Profit Margin is one of the profitability ratios that help in measuring the net income earned with the amount of dollars. In other words, creditors as well as investors mainly use this ratio for viewing at the convertibility pattern on sales and net income for future business activities (Bebbington et al. 2014). Investors investing in Tesco Plc make sure that they invest their money in high profit generating business. It is easy to distribute the dividends and pay back the loans in timely manner.

Operating Profit Margin

2013

2014

2015

Net Income

1528

1912

-5719

Net Sales

63406

63557

62284

 

2.409866574

3.008323237

-9.182133453


From the above calculation, it is easy to predict that Tesco plc experiencing negative profit margin in the current financial year. Tesco Plc is facing high decrease in the profit margin because of its high administration expenses (Deegan, 2012). In other words, Tesco Plc faces initial operating loss in the year 2015 for installation of Tesco Direct. This instalment was because of unseasonal weather in the summer season. Tesco needs urgent recovery because it lacks profit in recent financial statements and should make ways to increase profit as soon as possible.

Current Ratio

Current Ratio is one the liquidity ratios that helps in measuring short-term liabilities of Tesco Plc in comparison with current assets in an overall manner. This ratio reveals the ability of a particular firm to meet the short-term obligations for future business activities (Zadek et al. 2013). This particular ratio will helps investors as well as creditors for viewing at the liquidity position of Tesco Plc for future purposes.

 

2013

2014

2015

Current Ratio

     

Current Assets

13096

15572

11958

Current Liabilities

-18985

-21399

-19810

 

-0.68981

-0.7277

-0.60363


From the above calculation, it is evident that Tesco Plc facing negative current ratio from past three years. This implies that liquidity position of Tesco Plc fails to meet the short-term obligations in timely manner. It is important to understand the fact that current ratio is an indication to check on the ability of firm in meeting short-term obligations with available working capital as well as continuous trading activities (Bradshaw et al. 2013). It is advisable for Tesco Plc to have higher current ratio and the ideal ratio is 2:1. Negative current ratio of Tesco Plc implies that the company will fail to cope with short-term obligations in the near future. Addition to that, Tesco Plc operates in supermarkets so they do not need high stock and wastage of holding cost (Freeman et al. 2014). It is important to consider the fact that negligible trade debtors will result in high trade creditors and this will delay in the payment system from past business activities.

 

Acid-test Ratio

Acid-test ratio is one of the liquidity ratios that help in measuring the ability of Tesco Plc in paying the current liabilities in timely manner. It is important to understand the fact that quick assets can be converted into current assets within time of 90 days.

Quick acid test ratio

2013

2014

2015

Current assets

13096

15572

11958

Inventory

3744

3576

2957

Current Liabilities

-18985

-21399

-19810

 

-0.4926

-0.56059

-0.45437


From the above calculation, it is easy to understand that Tesco Plc facing negative quick ratio in its business activities. It helps in eliminating stocks with the available current assets and paying off short-term liabilities in an overall manner. Tesco Plc fails to cover up current liabilities with the available current assets without relevant stocks (Edwards, 2013). This particular company faces liquidity problems with insufficient availability of current assets as well as current liabilities. The ideal ratio is 1.5:1, so it is advisable for Tesco Plc to solve the liquidity problems in the near future.

Settlement period for trade payables

Trade Payable ratio is one the liquidity ratios that help in measuring the accounts payable in comparison with net credit purchases for particular period. This turnover ratio will ensure number of times for the purpose of average accounts for specified period (Hall, 2012). This particular ratio will help the creditors in analyzing the liquidity position of Tesco Plc in response with current suppliers as well as vendors in an overall manner.

Settlement period for trade payables

2013

2014

2015

Trade creditors

-766

-1910

-2008

Credit Purchases

-10068

-9303

-10651

 

27.77016

74.93819

68.81232


From the above calculation, it is easy to understand that Tesco Plc satisfies in recovering its debts within 68 days in current financial year. This implies that Tesco Plc is eligible in paying off its suppliers frequently and makes the regular payments for future business activities (Brown, 2014). Tesco Plc should use this ratio for conduction of newline credit and acquisition of new customers for future business activities.

Settlement period for trade receivables

Accounts Receivable turnover ratio is one of the efficiency ratios that help in measuring the accounts receivable for particular period. This particular ratio will reveal the efficiency of Tesco Plc in collection of credit sales from customers for future business activities (Brigham and Ehrhardt, 2013). The ideal collection payment is 90 days and collection of customers for future business activities.

Settlement period for trade receivables

2013

2014

2015

Average Accounts Receivable

4800

5261

5315

Annual Sales

63406

63557

62284

 

27.63145

30.21327

31.14724


From the above calculation, it is easy to understand the Tesco Plc has 31 days to pay back its receivable for future business activities. It is advisable to have high efficiency ratios because it will help in collection of cash from the customer on an urgent basis (Brigham and Daves, 2012). This particular ratio indicates the quality of credit sales as well as receivables for future business activities.

 

Stock turnover

Stock Turnover ratio is one of the efficiency ratios that help in measuring the inventory and comparing with the cost of goods sold. This particular ratio signifies the number of times inventory turns around for particular time (Dorfman and Cather, 2012). Addition to that, stock turnover ratio helps in measuring in average inventory in dollars for specified time.

Stock Turnover

2013

2014

2015

COGS

2382

2631

-5792

Average Inventory

3744

3576

2957

 

232.2196

268.5445

-714.941


From the above calculation, it is easy to understand that Tesco Plc has negative inventory ratio in the current financial year. It is advisable for Tesco Plc to adopt inventory control measures. It is important to understand the fact that shortage or excess of stock does not serve the purpose (Madura, 2012). It should manage to control with relevant cost of goods sold with the available inventory system for future business activities.

Earnings per Share

Earnings per share are one of market prospect ratios that help in measuring the net income with relevant stock outstanding for future business activities. This particular ratio measures the amount of money with each share of stock (Lasher, 2013). In other words, it is required to view at the profits of Tesco Plc in matters for outstanding shares. It is important to consider the fact those earnings per share helps in showing the profitable position of Tesco Plc in business activities in an overall manner.

Earnings Per Share

2013

2014

2015

Net Income

1528

1912

-5719

Preferred Dividends

1.16

10.13

4.63

Weighted Average common shares outstanding

10535

9728

1985

 

0.14493

0.195505

-2.88344


From the above calculation, it is relevant that Tesco Plc faces negligible earnings per share from the past three years. It is necessary to compare the earnings per share of Tesco Plc with its competitors and judge on the profitability position in an overall manner (Moyer et al 2014). This particular calculation in earnings per share highly depends on the outstanding shares for particular time. It is advisable for Tesco Plc to check on this ratio and slit its earnings in more shares as well as stocks for future business activities (Scott, 2014).

 

Return on Equity

Return on Equity is one of the profitability ratios that help in measuring the ability of Tesco Plc in the generation of profits especially from the shareholders. It includes those shareholders who have invested large chunk of money in the operational activities of Tesco Plc (Kaplan and Atkinson, 2015). This particular ratio helps in revealing on profit earned from each dollar assessing with the stockholders in an overall manner.

Return on Equity

2013

2014

2015

Net Income

1528

1912

-5719

Shareholder's Equity

16643

14715

7071

 

0.09181

0.129935

-0.8088


From the above calculation, it is easy to predict that Tesco Plc experiences negligible return on equity from the past three years. This particular ratio indicates the effective management of Tesco Plc and its dealing in the equity financing especially in the fund operations as well as growth of future business activities (Datar et al. 2013). It is advisable to Tesco Plc to rise in the investment pattern and invite more investors for future purpose. Most of the investors select return on equity and change it with the passage of time. This particular ratio helps in tracking progress of Tesco Plc and maintenance of positive earnings trend within specified period.

 

Conclusion

From the above study, it is easy to understand that Tesco Plc Deals In Retail Sector. Ratio analysis helps in predicting the liquidity, profitability and efficiency pattern of Tesco Plc for the given three years. In this study, profitability ratio is calculated and results shows that Tesco faces negative figure in the current financial year. This can be checked by implementation of low cost measures and check on the inventory level for future business activities. Liquidity ratio helps in assuming the ability of Tesco Plc in meeting the short-term obligations within the specified time. Calculation on liquidity ratio is explained that includes current ration and quick ratio. From the calculation, it is relevant to understand the fact that these ratios fails to meet the short-term obligations of Tesco Plc in timely manner. Efficiency ratio helps in measuring the ability of Tesco Plc in meeting the long-term obligations in the most appropriate way.

 

Reference List

Bebbington, J., Unerman, J.,and O'Dwyer, B. (2014). Sustainability Accounting And Accountability. Routledge.

Bradshaw, M., Bens, D., Frost, C. A., Gordon, E., McVay, S., Miller, G., ... and Wong, F. (2013). Financial Reporting Policy Committee of the American Accounting Association's Financial Accounting and Reporting Section: Accounting Standard Setting for Private Companies. Accounting Horizons,28(1), 175-192.

Brigham, E., and Daves, P. (2012). Intermediate financial management. Cengage Learning.

Brigham, E., and Ehrhardt, M. (2013). Financial management: theory & practice. Cengage Learning.

Brown, R. (2014). A history of accounting and accountants. Routledge.

Datar, S. M., Rajan, M. V., Wynder, M., Maguire, W., and Tan, R. (2013). Cost accounting: a managerial emphasis. Pearson Higher Education AU.

Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.

Dorfman, M. S., and Cather, D. (2012). Introduction to risk management and insurance. Pearson Higher Ed.

DRURY, C. M. (2013). Management and cost accounting. Springer.

Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting)(Vol. 29). Routledge.

Freeman, R. J., Shoulders, C. D., Allison, G. S., Smith Jr, G. R., and Becker, C. J. (2014). Governmental and nonprofit accounting: theory and practice.JPAEJOURNAL OF PUBLIC AFFAIRS EDUCATION VOLUME 20 NUMBER 3, 441.

Hall, J. (2012). Accounting information systems. Cengage Learning.

Kaplan, R. S., and Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Lasher, W. R. (2013). Practical financial management. Cengage Learning.

Madura, J. (2012). International financial management. Cengage Learning.

Moyer, R. C., McGuigan, J., and Rao, R. (2014). Contemporary financial management. Cengage Learning.

Scott, W. R. (2014). Financial accounting theory. Pearson Education Canada.

Zadek, S., Evans, R., and Pruzan, P. (2013). Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.

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