Accounting and Financial Management

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Management
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Number of words: 6000
Accounting and Financial Management
Table of Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................2
Company Background................................................................................................................2
Industry Analysis for TESCO....................................................................................................3
PESTEL Analysis...................................................................................................................3
SWOT Analysis......................................................................................................................5
Comparison of company performance with industry based upon ratios calculated...................7
Analysis of the different sources of finance available to TESCO............................................14
Sources of long and short-term finance for Tesco................................................................15
Financial structure of Tesco..................................................................................................16
Financial disciplines of Tesco in terms their approach to growth and returns.....................19
Justification for choice of financing.........................................................................................20
Conclusion................................................................................................................................22
References................................................................................................................................23
Web references.........................................................................................................................24
Executive Summary
It is important to note that in order to evaluate the performance of a certain organization,
business ratios or indicators can be used to do the performance analysis. Despite the fact that
there is an immense competition in the market, it is important for companies to survive in the
market that they operate and develop. In achieving sustainable development for companies,
one of the most efficient and effective way will be analyze historical performances through
different business ratios and other indicators. As investors want to make sure that it is worth
investing in the company, ratios and performance analysis will contribute towards hugely to
have insights into the target companies performances. Other than that this will help
companies to understand their financial strength and position to identify the feasibility of
investing in new projects and assets. In this way, the business performance evaluation is
exceptionally useful for the organizations and their partners. In fact, the organizations can't
encourage or fortify their business performance without directing analysis of their history in
light of the fact that the performance assessment empowers the organizations to discover the
qualities, shortcomings that should be enhanced, the finance feasibility and the budgetary
position of the organization too to encourage the decision making procedure for the
organizations.
Introduction
In this report it will present the financial analysis which is done for Tesco PLC based upon
the different rations for the company for the years of 2014, 2012 and 2010. These ratios will
include Return on Capital Employed, Operating Profit Margin, Asset Turnover, Current ratio,
gearing ratios, Interest Cover, EPS and PE Ratio along with relevant workings and supporting
documentation. Along with that an analysis will be provided regarding the role and functions
of the company. This will be supported by an analysis of the companys industry and
comparison of company performance with their competitors. At the end it will analyze the
issues regarding financing and investment decisions of Tesco to support the purchase of land
building in order to identify the best sourcing of financing for the required investment.
Company Background
TESCO PLC is a multinational company for
grocery and general merchandise goods retailer
founded in 1919 by Jack Cohen and Tescos
headquarter is in London, United Kingdom.
Compared to other retailer organizations, Tesco
can be considered as the second-largest retailer
(Largest retailer Wal-Mart) in the world in terms of profits and it falls into the third place in
revenues. Tescos operations are being carried out in 14 different countries across Asia,
United
Kingdom and North America continents with the help of

over 530,000 employees. Tesco is the market leader
in
UK (with a share of around 30%), Malaysia,

Thailand and Republic of Ireland. While
carrying out their operations in those countries
Tesco currently operating in number of sectors
which includes retailing of books, furniture,
petrol,
clothing,
Furthermore
electronics
they
and
provide
software.
financial,
telecommunication and internet services (Tesco

Website
2013).
Industry Analysis for TESCO

Tescos market shares and their position when we compare other leading players in the
market can be shown as follows:
Figure 1: Share of leading players in the UK retail market

Source: http://www.statista.com/statistics/279900/grocery-market-share-in-the-united-kingdom-uk/
PESTEL Analysis
PESTEL framework will analyze environment in which Tesco carry out their operations by
giving attention to different forces which have the most impact on companys performance in
the dynamic environment they operate.
Political
The UK government adopting a new tax measure which will affect the operations of
Tesco.
UK government increasing the VAT rate from 17.5% to 20% with the aim to increase
government revenue by 13 billion per year.

In China accession to the WTO now trying to promote a free flow of foreign trades by
eliminating all barriers in order to influence Western companies such as Tesco

UK government proposing a new fat tax system in order to control obesity which will
affect adversely on Tescos activities.
4

Economic
Economic factors are really important for Tesco as thy impact of these are direct on
the buying behavior of customers.

Reduction in interest rates of UK marker in difficult times in order to prevent
unemployment issues in the company and the industry

Spending power of customers increased in the recent past as interest were reduced to
make them feel confident about the financial status

Since the recession in 2009 customers mindsets still face with uncertainty avoiding
them to spend in premium products which provide more opportunities for companies
like Tesco.
UK spending on retail items (mainly food items) has increased over the past years
Social
UK market demographics shows that there more elder people than younger people or
children (Represent baby boom generation) which affect Tesco as they dont tend to
buy much retail items.

Internet literacy will be much less compared to a society with younger people where
online retailing services will not earn a good yield as well as they dont find it
convenient for themselves.

More greener and health conscious attitude of customers are increasing and demand
for organic foods are increasing as well.

Customers have become more knowledgeable as they will change from one product to
another quickly unlike earlier times.
Technological
Technology to develop and maintain better supply chain networks have become more
visible and even provide competitive advantage over other companies.

Use of internet for grocery retailing has increased hugely due to availability of
internet in every home which is shown a steady growth as well (Subscriptions to the
Internet have grown by over 50% and estimates are shown that the Internet is being
used by 70% of the population in the UK).

Use of technology to create awareness of the products through social media, and mass
media.
Mobile apps to carry out retailing activities for customers which make their lives
much easier than earlier days.

Introduced of royalty programs with the help of technology where mobile users can
engage in these much more effectively now.
5

Environmental
Environmentally friendly, reduced packaging is being promoted by the Government
of UK.
Attention to reusable bags has risen to a better level and even refuse plastic bags from
grocery retailers.
More concerns towards being socially responsible in dealing with the environment for
companies.
Adding carbon food print data on dairy products, potatoes and orange juice by
companies like Tesco in the retailing industry.
Legal
Number of laws affect retailers like Tesco due to the fact that they provide large
number of products.
Increase of VAT by the UK government to over a level of 20% to finance their budget.
Limiting subsidies provide to farmers which in return affect the standards set for them
by the industry they operate with.
SWOT Analysis
Figure 2: SWOT Analysis for Tesco
Strengths
Weaknesses
(Attributes of the External

(Attributes of the organization) Internal
Strong Brand Name leading to

significant competitive advantage
and sales.
Tesco holds a 30% share of the
UK retail market.
Tescos
non-food
division
provides 23% of total group
earnings
which
ensures
significant income with no
reduction.
Strong financial
performance
Opportunities
Demand and growing popularity
for retail products in UK and
overseas
Ability to further increase
number of outlets in the countries
Tesco operate.
Limited presence in Developed countries

and emerging global economies (BRIC
economies)
Limited target segment as there is only one
product line and positioned as a high quality
product
Have a very limited market within Asian
countries
Large number of suppliers means number of
difficulties in managing the supply chain.
Corporate policies dont allow returns of
Threats
Price of other retail products and brands are
cheap compared to Tesco products.
Fake products come into the market with the
same name will harm the name of the brand
name
Exchange risk by engaging in activities in
Comparison of company performance with industry based upon ratios

calculated
As per the chairman of Tesco, in his report it was mentioned that despite economic downturn
and other regulations imposed by the government that Tesco has been able to remain resilient.
As it is known very well that the market Tesco operates is highly competitive, where even
with that nature they have been able to hold onto high proportion of share. Three major
competitors are Sainsbury, Asda and Morrison. These competitors are savvy with large
supply chain networks and has the ability to do a significance influence on the market.
However recent financial crisis put Tesco under the radar where customers tried to switch
into cheap suppliers such as Asda due to their buying power comes down which was
happened latter of 2009 and beginning of 2010. Then with the time Tesco has been able to
recover from that and provide affordable products to the market as a whole and therefore it is
important to assess the market as a whole over these years.
A financial analysis will lead the way in calculating the earning capacity of a firm, in judging
the financial performance and financial position of the company, liquidity status of the
company in terms of both long term and short term funds requirements, to understand future
growth of the company, and identify efficiency in operations of the company.
Methods of Financial Analysis are as follows:
Ratio Analysis
Comparative financial statement analysis
Common size statement analysis
Ratio Analysis
Ratio Analysis can be considered as one of the most important tool in financial analysis and it
will yield quantitative information to assist decision making. In evaluating Tescos
performances following ratios will be mainly calculated:
Return on Capital Employed (ROCE)
Earnings before
2010
2,835
2012
2,775
Interest and Tax

8
2014
2,631

Total Assets
Current Liabilities
ROCE
47,206
17,731
9.62%
50,781
19,249
8.80%
50,164
21,399
9.216%
As we know primary objective of a business is to obtain substantial return from the capital
invested. ROCE yield how well a company use their capital to yield a better income. In that
case we could see that over the 5 years time period there has been a huge drop and then an
increase after 2012 period. This could be due to the reason that recession period Tesco went
through since the period began from 2010 first quarter. Even though the total assets amount
has gone up along with the current liabilities Tescos earning has gone down over the years.
There are clear indications regarding the lack of management concerns over the utilization of
capital of the company to get a better return.
Operating Profit Margin (Operating profit/Sales*100%)
Figure 3: Key Financials of Tesco
Operating profit ratio reveals the relationship between how much operating profit was
reported and sales. From the ratio it can determine whether the average percentage of mark
up from the sales made is obtained or not. Operating profit margin of Tesco over the years has
dropped significantly after 2012 even though the revenue has maintained at a better level.
There could be number of reasons for this.
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a. Cost of sales going up due increase in prices of raw materials, transport, etc. without a
corresponding increase in selling price or total sales revenue.
b. Due to the government regulations labor cost has increased significantly where it was
not manageable for the management.
c. As per new concerns over the organic foods more costs were incurred in obtaining
ingredients for making food items.
d. Faults in products led to re order or reproduce these items where Tesco has to incur
more cost on those.
From the table we could also see that Net profit margin percentage has gone down as well
which reflects the effect of increase in cost of sales.
Asset Turnover (Sales/Total Assets)
The asset turnover ratio shows the efficiency of a company and their capacity to use their
assets in generating an income for the company. Below table shows Tescos asset turnover
and other related ratios.
Figure 4: Efficiency Ratios
Asset turnover over the 5 years (From 2010 to 2014) hasnt changed much where in 2010 it
was 1.24 and in 2014 it was 1.27. This implies that Tesco has been able create sales 1.27
times of Assets they have. Where through sales they have been able to cover the value of
assets of the company (For every 1$ of asset Tesco makes 1.27$). For a company higher the
ratio, the better it is. Therefore it could be said that Tesco management has been able to carry
out their activities more efficiently and effectively.
Current Ratio (Current Asset / Current Liabilities) and Gearing Ratio (Debt / Equity)
10
Figure 5: Liquidity Ratios
Solvency and liquidity ratios shows how well company can cover their liabilities reflecting
their financial stability in the long term. Current ratio is used commonly in calculating
liquidity levels of a company. Liquidity is defined as the capacity of a company to meet their
current liabilities as the time passes. The standard rate of current ratio is 2:1, where in the
industry it is considered as ideal. So it is identified that the current ratio of Tesco is not up to
the ideal standards and therefore lagging behind. The figures shown in the above tables shows
that the trend in the current ratio does not reach the standard; where a low ratio tells that the
working capital is quite inadequate. Current ratio of Tesco hasnt had any increase or
decrease over the past 5 years where it stays at 0.73 though there is a drop in 2012 which
means that Tescos ability to pay its short term debt has stayed at the same level. The current
ratio of Tesco is also low due to supermarket like Tesco does not want to hold more stock and
nil debtors.
Gearing
The gearing ratio of Tesco has come down compared to year 2010 though its an increase
from the year 2012. The higher an organizations gearing, the more the company is known to
be risky. Acceptable level is set for a company considering the industry they operate where in
this case it is the retailing industry. It could be interpreted that Tesco has been able to reduce
debt level of the company with the sales they made over the years. It may have increased
from year 2012 due to higher creditor rate.
Interest Cover
Year
Interest Coverage
2010
2012
2014
6.98
10.20
6.05
The interest cover ratio determines how many times the profit before interest and tax (PBIT)
can cover the interest cost the company has to incur. When a company has a better interest
cover it is known to have a lower financial risk. Interest cover ratio of Tesco is better than the
companies in the industry. When we look at Tescos past years Interest coverage has
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decreased to 6.05 though it was increased in the year 2012. Even with that Tescos position is
still has a better place in covering their finance costs.
EPS (Revenue/Number of shares)
Figure 6: EPS over the years
EPS is calculated divide total revenue by number of shares where it shows the amount of
money one share earns and this is considered to be the single and yet most critical variable in
deciding a shares price. This is also used in calculating price to earnings ratio. We can see
that over the years EPS has come down 0.36 from 0.88 in 2010. This could be due a recent
share issue where number of share prices were increased but not the total sales. Also with
recent market crashes share prices went down in totally where this EPS reduction reflects that
as well.
PE Ratio (Price per share/earning per share)
Figure 7: EPS and share price
The price-earnings ratio (P/E ratio) is a way to evaluate and compare level of stock prices
against the company profits in order provide investors with details regarding a value of a
stock.
EPS
Price per share
PE Ratio
2010
1.37
7.40
5.4
2012
1.62
10.57
6.52
12
2014
0.56
9.70
17.32

This is basically means that shareholders and investors are ready to pay shown PE ratio value
for every dollar of earnings that Tesco has. Over the years even though EPS has gone down,
book value per share has come down. This higher P/E ratio will indicate that investors will
need and higher earnings and growth in the future compared to average rates in the market.
Taking into account, the ratios above it creates the impression that Tesco would be the
favored decision, given higher margins originating from operations in non-food products and
a more prominent online presence. To include, Tesco has a more prominent presence in the
high-end market, where now there is a capacity to exploit the UK's recover from economic
crisis. Tesco's introduction outside of the grocery and retail business could likewise be seen as
an advantage when competitors from Aldi, Lidl and Waitrose keep on taking basic supply
piece of the pie. In the course of recent years, the 3 food merchants above have taken a
consolidated 3.5 offer focuses from contenders, likening to around 4.4Billion in deals.
Energy proceeds with Y-O-Y development at Aldi quickening to 33.5%, contrasted and
Tesco, who over the six-weeks to February second 2014, accomplished a 2.4% drop in deals.
Expanding rivalry in the business has prompted another grocery store Price War', which is
relied upon to thump edges again as retailers compete for piece of the overall industry. Once
more, Tesco Plc will be the favored decision because of its introduction to Non-Food business
and in addition International operations, which can possibly drive future deals. As of late,
Tesco has declared it will enter the Indian market, under a 50:50 Joint Venture with Tata,
making it the first outside general store to enter India's 330 Billion Retail division. Given
this, Tesco Plc, might look less risky than other competitors where expected income streams
are achieved.
Tesco has the upper hand in the market given that their business portfolio is quite large
compared to their competitors in both UK & International market where Tesco is expected to
benefit as the global recession come to solved status. Unlike their competitors in the UK
market due to their large presence in the international market, risks they face in UK grocery
market has been reduced. Their competitors such Sainsbury is more exposed to increasing
competition as the presence outside the UK market is limited and Tesco is in a place to
exploit the opportunity of improving market conditions through their multi-channel business.
In Tescos latest report for year ending Feb, 2015 they mentioned their sales were backed up
by online retailing where in UK it was accounted to 15%+ and in overseas 60%+ and
enhanced clothing sales. They also mentioned that in UK their margins have decreased quite
drastically where this was faced by almost all the competitors while making a large profit
13

margins in Asia and other countries, and through their banking operations where this proves
that expansion is paying back to the company.
The future of Tesco is more focused towards achieving growth, with less capital investing and
trying to generate more cash flow for the company with infrastructure available, where
financial disciplines will be much strict than earlier. As per 2014/15 financial year, current
performance of Tesco Group Sales reported a turnover of 72. 4 billion with a group trading
profit of 3.5 billion. When we compare with the previous financial year it can be seen that
group sales has a 1.3% increase while 2.5% constant growth has been followed since past
years. Even with that there is a decline in the group profit of Tesco which is around 13%,
which reflects large investments carried out in the UK market and overseas in enhancing the
outlet reach and introducing new products to the product portfolio. Tesco is without a doubt
can consider as the best recovery of the decade in retail industry. It is, after all, bouncing back
from a lower lever and improving their sales figures, even with number of reductions over the
time period. Chief executive Dave Lewis emphasized the fact that their firm hand on crisis,
and setting an important plan helped to come out from that. Other main reason to bounce
back quite strongly is that their scope to generate cash to put in the balance sheet where
selling businesses and market which dont yield a bigger profit for them.
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Analysis of the different sources of finance available to TESCO

As per Kotler at. El. (1999), for an organization different financial needs can arise in each
year to fund different requirements. Reasons can be because of requirements which falls into
both long-term and short-term. Short-term requirements are where those are recognized as
working capital needs, and cash needs for day-to-day activities. Long term requirements can
be categorized as purchasing an asset, starting a new project or funding a new project, for
research and development, etc.
Figure 8: Sources of Finance

Source: http://colourpoint.co.uk/sample_files/1298471421.pdf
These finance requirements are really different when we compare with each other in terms of
time length and other characteristics. Because of that provide finance to them needs to be
taken care of in a different way. For Tesco it may be filling short term requirements for
buying goods for their markets and opening up a new supermarket in a new area. Therefore it
is critical to identify and provide finance to each requirement in a way where requirement
will be fulfilled as well as funding process has maintained efficiently as well. Balancing both
liquidity and profitability are critical parts in this.
For long term requirements Use more of long term financial sources
For short term requirements Use more of short term financial sources
15

Or company can adopt a mixture of both types of financial sources in funding all the
necessities of the company. It is better to watch how the managements behavior in terms
taking funds from outside whether they are aggressive, moderate or conservative.
Aggressive Use more short term sources in all types of requirements.

Moderate Use more of long term financial sources & For short term requirements -
Use more of short term financial sources

Conservative Use more long term sources in all types of requirements.
Sources of long and short-term finance for Tesco

As per Gowthorpe (2005), in discussing different sources for financing to reserve long and
short term monetary requirements for an organization it will incorporate range of different
finance sources, which can be both internal or external to satisfy those needs. As we
examined before companies can utilize number of ways to fulfill different types of finance
needs or a mixture of them for every one of the need. When doing that it can be seen that
there are both pros and cons in both types of sources, have an impact on the organization's
development, and there are parts that government plays in these financing strategies.
Long term sources Different sources are included in this where long time will be
given to repay. This includes sources such as long terms loans, Bonds, Preference
shares, etc. Compared to other sources these can be considered as cheap where still
can make an impact on the companys gearings and also on profit levels. Even the
finance charges for these are tax deductible which enable the organization in save part
of the profit which could be significant in paying back. Long terms sources also can
include options such as share issues, which are important in funding long term
requirements and where outcome of the investment will bring benefits to the company
in the long term. When considering Tesco they mostly consider long term sources
even in their working capital management following a more like conservative strategy
as the management is stricter in funding to enable better control.

Short term sources Short term sources includes number of different options which
are be mostly paid in a shorter time period as well. This can include short term bonds,
over drafts, trade credit, etc. The problem raised here is that the high finance cost
associated with paying back and because of that it will create a bigger impact on both
financial statements and gearing ratios quite significantly (Ogilvie, 2009).
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Financial structure of Tesco
Tesco has occupied both equity and debt in financing their activities and projects of the
company. When we concern Tescos equity, in 2013 there had been a share issue at 0.05p
each of totaling up to 19 million ordinary shares, while no preference shares was issued this
time. Along with that share issue, share capital had a final value amounting to 403 million
and total equity attributable to owners of Tescos parent company is 16,661 million, lower
than 2012 that total equity raised to 17,801 million. Apart from that no shareholders were
there who has the ownership over securities where which could provide special rights
regarding the company control.
Figure 9: Capital Structure of Tesco

Source: http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=tscdy
When we consider the companys debt, thinking that capitalizations debt aspect is covered
from borrowings, derivative financial instruments, post-employment benefit obligations,
deferred tax liabilities and provisions, total debt was 14,483 million in 2013, increased
approximately 5.47% from 2012.When we assess about different measurements, debt/equity
ratio for 2013 is 87 %, while in 2012 it was 77%. Apart from that, a conclusion can be made
that capital is structured 53% by shareholders equity and 46.5% by debt. These mentioned
values were 56.4% and 43.5% respectively, in 2012. In common it can be identified that
organizations proportion for debt in financing of their activities has had a rise of 6.4% in
2014 compared to 2012.
17

2012 amount
2014 amount
Share Capital
Share premium
Retained earning
Accumulated other
in m
402
4964
12,369
442
in m
404
5020
9,728
(93)
comprehensive income
Equity contributed to parent
17,907
15,059
Increase/Decrease
Amount
Percentage %
2
56
(2,641)
(535)
0.25
1.1%
(21.35%)
(121%)
company
Table 1: Equity Capital
For the financial year ended in Feb 2012, 19 million ordinary shares of 5p each were issued
in relation to share options for an aggregate consideration of 57m and during the financial
year 2014 4 million shares of 5p each were issued in relation to share bonus awards for an
aggregate consideration of 0.2m.
Figure 10: Non-Current Liabilities
Therefore when we consider an option like Share issue with the large number of shares and
considering the current status of the market it might not be seen as a great idea to carry out
another share issue as even the dividend payout has gone down as well. Therefore it is
important to consider an alternative to this option such as preference share issue where as
shown in the Figure 9, no preferred equity has been raised over the past few years. Therefore
given the priority in paying back investors in the market will consider in investing in Tesco as
the recent forecasts shows a growth in terms of financial figures since the recession period
came to an end.
As we mentioned earlier long term sources include long term loans as well. This can be seen
as a better way of obtaining funds because:
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Gearing is only 0.63

Interest cover ratio exceeds 6.50
Because of these evaluations banks will consider Tesco as a lesser risk company and provide
loans to them at a low interest rate. As per figure 10 we can see that even after the year 2014
long-term only stands at 9,188 million where it has gone down compared to previous years.
Therefore Tesco can go ahead and fund their future requirements by obtaining a long-term as
well.
Other than long-term sources and issuing shares, another way of funding a project from in
house sources will be using retained earnings or profits earned. But it is important consider
consequences before using such method. As we can see form Table 1, comprehensive income
has gone below zero where it shows a negative value. Also compared to previous years
retained earnings shows a lower value as well. Therefore concerns might be raised using
these for funding projects where company even might lose out benefits they can obtain via
taking a loan such as interest deduction from tax.
Another important finance methods for companies such as Tesco in UK is that finance from
government. The government and the European Union provide finance in order to support
business in UK:
Protect jobs in failing/declining industries such as retail market at the moment in UK.
If Retail market can be properly developed then can create number of jobs.
For companies like Tesco to build up on new businesses.
Few of the sources of funds mentioned in above are:
European Structural Fund

Assisted Areas
Regional Selective Assistance
Small Loans Guarantee Scheme
Sale and leaseback would be another option Tesco can carry out in countries or in counties
where the business is declining and to fund this they can sell a properly which in freehold and
invest the money they get from the business in developing and come up with new products
while leasing the property back to carry out their business activities.
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Financial disciplines of Tesco in terms their approach to growth and returns
Figure 11: Approach to growth and returns of Tesco
In implementing a financial disciplines Tesco PLC expects and aims in achieving

sustainability by mainly focusing on three segments:
Continue enhance their business activities in UK and overseas

Sustainable growth through multi-channel supply chain network
Give emphasis to international growth
Therefore when funding new projects it is important to focus on above three segments while
fulfilling below expectations of shareholders and investors:
Mid-single digit trading profit growth

Increase ROCE to range within 14% - 17%
Increased dividend, mainly align it with underlying earning, where the target should
set to cover more than two times.
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Justification for choice of financing

It is said that the Tesco is now seeking to purchase land and building which represents 10% of
companys Net Assets Employed where the value would be around 1500 million. This can
be considered as a significant value when we compare the yearly earnings of recent past of
Tesco. Therefore it is important to assess which source needs to be considered in financing
this option. As we identified earlier as Tesco is more conservative, company will need to
focus more on long term options as trying to pay back this amount in short-term will not be
feasible and also short term will costs more than long term sources when we try to obtain an
amount such as this. Therefore the next thins we must consider is that whether to finance this
in house or using external sources. There are mainly two options in financing this large
amount where it is either to carry out a share issue/preference share issue or obtain a long
term loan. It is important to assess both pros and cons of these two options before selecting a
one.
Share issue
Long-term loan
Pros
As the market has come to a stable state at Considering gearing ratios and the amount
the moment there will be more investors of long term debt of the company acquiring
willing to invest their money companies like a long term would be much easier compared
Tesco which shows a better future in terms to other sources.
of development.
Holds no right to pay dividend or payback Long time gap to pay back the loan hence
unless directors declared by directors.
company can afford to do it in the long run
As shares issues has been carried out Since the company name is well established
previously procedures would be much easier banks will provide loans to Tesco at a very
lesser rate
Through a share company might be able to No change in ownership of the business
attract new investors other than existing where unlike in share issue which can lead
shareholders.
to lose the control over the company.

Tax deductions for interest need to be paid
by the company will help to retain profit for
the company where these interest payments
are allowed to deduct before calculating
taxes.
No extra cost in obtaining the loan where to
21

sign
agreements
and
legal
activities
company will not need to spend lots of

money.
Cons
As there has been number of share issues Effects on the credit rating will go down as
people might not be willing to go for a share another loan amount will be added which in
issue an invest money
return can yield a negative image on the
company regarding loans been taken.

Extra cost will need to be incurred in Interest has to be paid regardless of any
issuing share issue where to get an exact other payment or investment the company
amount company will need to issue more has to carry out
shares.
Issuing shares will create difficulties in
managing a company and even in losing out
proper control over the company activities.
No payment such as dividends can be
deducted against tax
Therefore with the analysis carried it can be seen that obtaining a will provide more benefits
to the company over a share issue, preference share issue (in which case the only difference is
the obligation pay a premium in every year which is also not tax deductible) or a bond issue.
Therefore in purchasing this new land and building Tesco needs to obtain a long term loan as
the existing reserves are at a low level hence cannot be used much and also share issuing will
not yield proper benefits to the company. Even considering the new financial disciplines and
capital structure to maintain ROCE at a better rate and also to increase dividend Tesco needs
to consider about obtaining a bank loan where issuing shares will reduce the ability to
achieve any of the mentioned objectives.
22
Conclusion
Performance evaluation will help a company to understand different sides of their business
operations on one hand where by analyzing performance in a certain period and help the
company to forecast their future business performances. These information obtained on
business performances can be used by number of parties, different stakeholders which include
shareholders, creditors, employees, tax authorities, government, media, etc. All the mentioned
parties can use these information of performance evaluation with an aim to assess the
business operations of the firm, future of the company and can contribute towards decision
making process of the company as evaluation will bring a clear image on the organizations
financial health or status, the financial feasibility, profitability and resource management.
Also with the right information investors and shareholders will be able to make the right
decision in terms of their investments where proper opportunities can be identified regarding
the potential of positive outcome of it. In Tesco with the recent changes in market and
economy there has been lots of changes to the organization as well. This is due to recession
as well as changes in the retail industry which affected all the players in the market. In
assessing finance options for a company like Tesco it is important to assess the industry and
assess the companys performance using different ratios to understand the situation of the
company. With that understanding company like Tesco can go ahead and consider about new
investments to decide which options to select and how to finance these options. Companys
capital structure decides how the company is going to fund their activities in the long term to
obtain more benefit and maximize their wealth. With that they can select the best options to
finance their needs and wants to achieve mentioned objectives where in Tescos case it
needed to assess sources of long and short term, finance structure and finance disciplines
before come to an conclusion.
23
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Edition, New York: The McGraw-Hill
Dodge,R. (1997), Foundations of Business Accounting, Second Edition, Boston: Thomson
business press
Dransfield, R. (2013), Business Economics, Oxon: Routledge
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24

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Web references
About Tesco, (Online), Available from: http://www.tescoplc.com/about-tesco [Accessed on
04-07-2015]
About Tesco history (Online), Available from: http://www.tescoplc.com/index.asp?pageid=11
[Accessed on 04-07-2015]
Growth,
Profitability
and
Ratios
for
Tesco
(Online),
Available
from:
http://financials.morningstar.com/ratios/r.html?t=TSCDY [Accessed on 04-072015]

Tesco Plc, Annual report of Tesco Plc in 2014. (Online), Available from:
http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf
[Accessedon 04-07-2015]
Tesco PLC Annual Report, (2013), (Online), Available from:
https://files.the-
group.net/library/tesco/annualreport2013/pdfs/tesco_annual_report_2013.pdf
[Accessedon 04-07-2015]
25

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