FINANCIAL ANALYSIS: TESCO VS DEBENHAMS

FINANCIAL ANALYSIS: TESCO VS DEBENHAMS

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Table of Contents

1.0 Introduction. 3

2.0 Objective. 3

3.0 Background information. 3

3.1 Tesco Plc. 3

3.2 Debenhams Plc. 4

4.0 Financial ratio analysis. 5

4.1 Profitability ratios. 5

4.1.1 Gross profit margin. 5

4.1.2 Operating profit margin. 6

4.1.3 Net profit margin. 8

4.2 Liquidity ratios. 9

4.2.1 Current ratio. 9

4.2.2 Acid-test ratio. 10

4.3 Efficiency ratios. 12

4.3.1 Asset turnover. 12

4.3.2 Receivable collection period. 13

4.3.3 Payables payment period. 13

4.3.4 Inventory turnover period. 14

4.4 Gearing ratio. 14

4.4.1 Interest coverage. 14

4.4.2 Financial leverage. 15

4.4.3 Equity gearing. 16

5.0 Recommendations and conclusions. 17

References. 18

Appendices. 20

 

1.0 Introduction

Most significantly, financial analysis involves selection, assessment, and interpretation of financial data, together with other relevant information, to help in making financial and investment decisions (Fabozz 2009, p. 193). Financial analysis may be undertaken to evaluate the efficiency of operations, potential investments, creditworthiness, credit policies, and financial leverage of the company. Furthermore, the primary source of data for financial analysis includes balance sheet and income statement. Financial analysis employs various ratios to evaluate the performance of a given company in comparison to its competitors (Khan & Jain 2007, p. 6). The financial ratios employed include profitability ratios, liquidity ratios, operational ratios, and leverage ratios.

2.0 Objective

The main goal of this paper is to evaluate and compare the financial performance of Tesco plc and Debenhams plc through financial ratio analysis encompassing three-year period from 2012 to 2014.

3.0 Background information

3.1 Tesco Plc

Tesco Plc’s history of development can be traced back in 1919 during the time when Jack Cohen began selling surplus groceries via a stall in London, where he made a profit of one pound from sales of four pounds on the first day (Zentes,  Morschett & Schramm-Klein 2011, p. 311). However, the Tesco Brand appeared in the market in 1924 when Cohen purchased a tea shipment from T.E Stockwell. Therefore, the initials of names, T.E Stockwell and Cohen were combined to Tes-co and in 1929, Jack Cohen started to operate a flagship Tesco store that was located in Burnt Oak. As the brand kept on growing, Tesco was incorporated as a private limited company in 1932 and became enlisted in LSE (London Stock Exchange) market in 1947 with a 25 p share price. Furthermore, Tesco exhibited its expansionary zeal by acquiring rival shops and buy 1960, the company had acquired 200 Harrow stores and 70 Williams stores, as well as the Victor Value chain and 97 Charles Philips stores (Fernie & Sparks 2009, p. 162). In 1961, the company entered into the Guinness Book of Records as the Europe’s largest store and in seven years, it opened its fits “Superstore’ in West Sussex, Crawley. In 1987, the company completed a successful hostile takeover of its competitor, Hilards Supermarket for £ 220 m. In an effort to overtake Sainsbury, the company launched the Tesco Clubcard scheme in around 1995 and Tescom.com in 2000 (Palmer, Meek, Parkinson & Meek 2012, p. 204). Unfortunately, the company started declining in 2013 where it reported the first decline in profits in its 20-year history. In 2014, Tesco exhibited worst performance in a 20 –year history, with a 3.7 % decline in sales. In 2014, Sept 22, the company shocked the market where it overstated its semi-annual profit projection by £ 250 m.

3.2 Debenhams Plc

Debenhams Plc is among the largest clothing and goods retailers in the United Kingdom (Varley 2014, p. 33). The company’s origin can be traced back to 1778 When William Clark opened a drapers store in London to sell expensive fabrics, parasols, bonnets, and gloves. In 1813, the business becomes Clark & Debenham when William Debenham invested in this business and established the first store away from London City in Cheltenham (Francis, Terry & Steven 2013, p. 281). From 1818, the company started to prosper years later due to Victorian fashion for mourning where the windows and female relatives followed a stringent code of etiquette and clothing. Since then, the company continued to operate as an independent company up to 1980s, when the Bruton Group succeeded it hostile takeover. In 1998, the company regained its autonomous when it “demerged” from the Burton Group and Debenhams changed its company name to Arcadia Group plc. After this de-merger, Debenhams was enlisted into LSE until 2003, but became re-enlisted in 2006. In 2007 and 2009, the company managed to acquire 9 stores from Roches (Ireland) and acquired Magasin du Nord (Denmark).

4.0 Financial ratio analysis

4.1 Profitability ratios

Essentially, all business ventures cannot exist in the life long without making profit (Duska 2007, p. 167). Therefore, evaluation of profitability levels of a company is very important to management, investors, creditors, and obligors. However, there is no direct formula for determining a firm’s level of profitability. For this reason, several ratios such as gross profit margin, operating profit margin, and net profit margin can be used to evaluate the company’s level of profitability.

4.1.1 Gross profit margin

Gross profit margin can be viewed as gross profit expressed as a component percentage of total revenues (Pinson 2008, p. 115). In other words, gross profit margin is the percentage of revenues that is available to meet operating expenses. Therefore, a high gross profit margin is an indication of increased levels of profitability. The gross profit margin of Tesco plc for the year 2012, 2013, and 2013 are 8.44 %, 7.79 % and 6.62 %, respectively; and for the Debenhams plc for 2012, 2013, and 2014 are 13.59 %, 13.13 % and 12.8 %, respectively. These gross profit margins for Tesco imply that the company was able to generate £0.084, £ 0.076, and £ 0.066 of gross profit from every pound of revenues generated by the company in the financial year that ended at 2012, 2013, and 2014 respectively. For Debenhams plc, its gross profit margins imply that it was able to generate £0.135, £ 0.131, and £ 0.121 of gross profit from every pound of revenues generated by the company in the financial year that ended at2012, 2013, and 2014 respectively. From graph 1 below, The Debenhams’ gross profit margin level is higher than that of Tesco, but both companies exhibit a declining growth.

Graph 1: Gross profit margin

Reliability of grow profit margin

No matter how high gross profit margin ratio of company, this metric is still perilous to depend upon due to misconceptions surrounding gross profit margin. Therefore, full complementary of other ratios can be employed to provide a more detailed snapshot of a company’s financial stability and success (Tracy 2012, p. 13).

4.1.2 Operating profit margin

Operating profit margin is the operating margin expressed as a component percentage of sales revenue (Graham, Smart,  & Megginson 2012, p. 45). In other words, operating profit margin indicates the percentage of sales revenues that remains after cost of sales and operating expenses are deducted from total sales revenues. Therefore, a high operating profit margin is an indication of increased level of profitability. The operating profit margin of Tesco plc for the year 2012, 2013, and 2013 are 5.95%, 5.13 % and 4.73 %, respectively; and for the Debenhams plc ‘s operating profit margin 2012, 2013, and 2014 are 7.85 %, 6.70 % and 5.53 %, respectively. These operating profit margins for Tesco imply that the company was able to generate £0.060, £ 0.051, and £ 0.047 of operating profit from every pound of sales revenues generated by the company in the financial year that ended at 2012, 2013, and 2014, respectively. In the case of Debenhams plc, its operating profit margins imply that it was able to generate £0.078 £ 0.067, and £ 0.055 of operating profit from every pound of revenues generated by the company in the financial year that ended at 2012, 2013, and 2014, respectively. From graph 2 below, The Debenhams’ operating profit margin level is higher than that of Tesco, but both companies exhibit a declining growth in profitability.

Graph 2: Operating profit margin

Reliability of operating profit margin

Operating profit margin is beneficial as it shows the percentage of profit generated by the operating activities. However, the operating profit margin does not take account other important items such as financial obligations, tax income, and income from non-operating activities which may have substantial impact on financial performance of a company. Therefore, operating profit alone cannot be relied upon when concluding the profitability level and other profitability ratios are needed for complementary and comparability (Robinson,  Henry, Pirie & Broihahn 2015, p. 330).

4.1.3 Net profit margin

Net profit margin is often defined as the net profit expressed as a component of sales revenues (Baker & Powell 2005, 62). In other words, it is the residual sales revenues that remain as the bottom-line item of income statement after cost of sales, all expenses, and preference share dividends are deducted from total sales revenue. It is the amount of money that can be attributed to the shareholders and retained earnings. Therefore, a high net profit margin is an indication of increased level of profitability. The net profit margin of Tesco plc for the year 2012, 2013, and 2013 are 4.39%, 0.04 % and 1.54 %, respectively; and for the Debenhams plc ‘s net profit margin 2012, 2013, and 2014 are 5.62 %, 5.08 % and 3.77 %, respectively. These operating profit margins for Tesco imply that the company was able to generate £0.044, £ 0.0004, and £ 0.015 of net profit from every pound of sales revenues generated by the company in the financial year that ended at 2012, 2013, and 2014, respectively. In the case of Debenhams plc, its net profit margins imply that it was able to generate £0.056 £ 0.051, and £ 0.038 of net profit from every pound of revenues generated by the company in the financial year that ended in 2012, 2013, and 2014, respectively. From graph 3 below, The Debenhams’ net profit margin level is higher than that of Tesco, but Debenhams’ exhibits a declining growth in profitability; whereas Tesco’s decreases in 2013 and then increases 2014.

Graph 3: Net profit margin

Reliability of net profit margin

One of the usefulness of net profit margin is price control where a company can use net profit margin to establish the direct correlation between price and profit on a per-unit basis. Unfortunately, profit margin does not assist in determining sales volume and uncovering of true cost efficiency of generating sales revenues.

4.2 Liquidity ratios

The liquidity level refers to the extent to which a firm can meet its short-term financial obligations such as trade payable and interest burden at the disposal of total current assets. Liquidity level is often evaluated using current and acid-test ratio.

4.2.1 Current ratio

As a measure of liquidity level, current ratio is often used to determine the degree to which a given company can cover up its short-term financial debt using all of its current assets (Graham,  Smart & Megginson 2012, p. 41). Therefore, a current ratio greater than or equal to 1 show that the current assets of a company are sufficient enough to cover up current liabilities. The vice versa is true. However, the current ratios for Tesco plc for the year 2012, 2013 and 2014 are 0.67, 0.69, and 0.73, respectively; whereas Debenhams’ current ratios are 0.63, 0.63 and 0.64 in the same order of years. It is evident that the current assets of the two companies are not sufficient enough to settle current liabilities for the three-year period as depicted in Graph 3 below. However, the ability to settle current liabilities tends to increase for the two companies.

Graph 3: Current ratio

 Reliability of current ratio

Most notably, current ratio indicates the cash richness and short-term strength of a firm, as well as the status of the operating cycle. However, current ratio involves illiquid inventory that results in overestimation of company’s liquidity position. Inventory is vulnerable to obsolete and damage (through fire, floods, and accidents).

4.2.2 Acid-test ratio

As a measure of liquidity level, acid-test ratio is often used to determine the degree to which a given company can cover up its short-term financial debt using all of its liquid assets in cases where inventory become obsolete or damage (Graham,  Smart & Megginson 2012, p. 41). Therefore, an acid-test ratio greater than or equal to 1 show that the liquid assets of a company are sufficient enough to cover up current liabilities. The vice versa is true. However, the acid-test ratios for Tesco plc for the year 2012, 2013 and 2014 are 0.48, 0.49, and 0.56, respectively; whereas Debenhams’ currents ratios are 0.17, 0.15 and 0.19 in the same order of years. It is evident that the liquid assets of the two companies are not sufficient to settle current liabilities for the three-year period as depicted in Graph 4 below. However, the ability to settle current liabilities tends to increase for the two companies.

Graph 4: Acid-test ratio

Reliability of Acid-test ratio

Most importantly, acid-test ratio eliminates the illiquid components (inventory) from the equation giving the better snapshot of the company’s liquidity position. Collapsing companies have high level of inventory and acid-test can be much of help in uncovering such situations. However, acid-test ratio ignores the timing of cash flows and this alone cannot be used to assess liquidity of the company.

4.3 Efficiency ratios

Efficiency ratios are used to evaluate the company’s efficiency in management of assets such as inventory, account receivables and total assets. Therefore, company’s efficiency can be evaluated using efficiency ratios such as asset turnover, account receivable turnover, and inventory turnover.

4.3.1 Asset turnover

Asset turnover ratio is used to indicate the amount of sales revenues in pounds generated by one pound of assets acquired by the company (Ryan 2004, p. 218). A high asset turnover implies that the company is using fewer assets to generate more sales, which is a sign of efficiency. The asset turnover of Tesco plc for the year 2012, 2013, and 2013 are 1.26, 1.26 and 1.26 times, respectively; and for the Debenhams plc ‘s asset turnover 2012, 2013, and 2014 are 1.07, 1.07 and 1.08 times, respectively. These asset turnovers for Tesco imply that the company was able to generate £1.26, £ 1.26, and £ 1.26 of sales revenue from every pound of assets acquired by the company in the financial year that ended at 2012, 2013, and 2014 respectively. In the case of Debenhams plc, its asset turnovers imply that it was able to generate £1.07, £ 1.07 and £ 1.08 of sales revenues from every pound of assets acquired in the financial year that ended at 2012, 2013, and 2014 respectively. Graph 5 below indicates that the assets turnovers for the two companies remained relatively stable during the three-year period, but Tesco’s are higher.

Graph 5: Asset turnover

4.3.2 Receivable collection period

Receivable collection period is used to indicate the number of days through which the company is able to collect cash its debtors. Fewer days indicate that the company’s management is efficient in managing account receivables. Account receivable period is calculated from account receivable turnover. The Tesco’s account receivable periods are 12.81 days, 12.19 days, and 10. 89 days in 2012, 2013 and 2014 respectively; whereas Debenhams’s receivable collection periods are 3.8 days, 3.34 days and 4.32 days in the same order of years. As can be noticed, Tesco has higher receivable collection period.

4.3.3 Payables payment period

Payables payment period is the number of days taken by the company to settle its account payable (Ryan 2004, p. 219). High number of days indicate inefficiency of company’s management in managing the accounts payable. Furthermore, the payables payment period is determined from payable turnover. The Tesco’s Payables periods are 37.46 days, 35.53 days, and 34.34 days in 2012, 2013 and 2014, respectively; whereas Debenhams’s payables payment periods are 51.41 days, 53.80 days and 50.05 days in the same order of years. As can be noticed, Debenhams plc has higher payables payment period.

4.3.4 Inventory turnover period

Inventory turnover period shows the number of days in which inventory stays on store shelves before turned into cost of sales or sales revenues (Ryan 2004, p. 219). Less number of days indicates management efficiency in converting inventory into cost of goods sold. Inventory turnover period is determined from inventory turnover. The Tesco’s inventory periods are 22.44 days, 23.32 days, and 22.26 days in 2012, 2013 and 2014 respectively; whereas Debenhams’s inventory periods are 62.93 days, 65.89 days and 62.05 days in the same order of years. As can be noticed, Debenhams plc has higher inventory turnover period.

4.4 Gearing ratio

The gearing ratio determines the proportion of borrowed money (debt) to its equity. The gearing depicts the financial obligation to which a company y is subjected, since beyond debt can result in financial difficulties. A very high gearing ratio implies a high debt proportion to equity. Examples of gearing ratio include Interest cover, financial gearing and equity gearing.

4.4.1 Interest coverage

Interest coverage is a ratio that indicates the extent to which EBIT is capable of covering interest obligations for short-term and long-term debts (Glynn 2008, p. 410). The interest coverage ratios of Tesco plc are12.80, 10.53 and 9.46 times in 2012, 2013 and 2014 respectively, and Debenhams’ interest coverage ratios are 11.99, 12.97, and 9.01 times in order of the same years. Interest coverage ratios for the two companies tend to decrease indicating an increasing debt burden as indicated by Graph 6.

Graph 6: Interest coverage ratio

4.4.2 Financial leverage

It is also known as debt ratio. Financial leverage is used to indicate the proportion of debt financing the company’s assets. When financial leverage is high, the risk of the business also goes high since the company has more debt burdens that may increase chances of default (Glynn 2008, p. 410). Financial leverage is determined by dividing total debt by total assets. According to Graph 7 below, the financial leverage of Tesco plc is increasing while that of Debenhams is decreasing. This implies that the Tesco’s business is more risky than Debenhams’.

4.4.3 Equity gearing

Equity gearing is also known as debt-to-equity ratio. This ratio is used to indicate how the company’s capital is structured. A high equity gearing ratio indicates that the company’s debt is more than the equity and depicts a high risk of the business. Graph 8 indicates that Tesco’s equity gearing is increasing while Debenhams’s equity gearing is tending to decrease (Glynn 2008, p. 410). This indicates that Tesco’s debt is increasing more than equity making its business more risky when compared to that of Debenhams’.

Graph 9: Equity Gearing

5.0 Recommendations and conclusions

As indicated by the current and acid-test ratio, Tesco’s and Debenhams’ liquidity level is too low, implying that the two have no ability to meet their short-term financial obligations. The companies are likely to experience financial difficulties as creditors and obligors will not be willing to supplier goods on credit and finances due to fear of default. To avoid these circumstances, it is advisable for the two companies to increase their current assets such as cash and cash equivalent through issuance of equity. Furthermore, Debenhams plc has higher profitability level than Tesco plc as indicated by gross profit margin, operating profit margin, and net profit margin. However, the profitability levels of the two companies are decreasing gradually. Tesco plc is more efficient in managing total assets to generate sales revenues when compared to Debenhams. Tesco plc is also efficient in paying due to its creditors as it takes less time to settle payables payment than Debenhams.  Additionally, Debenhams is more efficient in debt collection from its customers than Tesco as it has less receivable collection period. Besides, Tesco is more efficient in inventory management as it has low inventory turnover period. On the other hand, as far as gearing ratios are concerned, Tesco’s business is more risky due to decreasing ability to cover its interest obligations, assets are increasingly becoming acquired by debt, and high debt in its capital structure when compared to that of Debenhams. Therefore, the company should try its best to reduce the debt proportion to achieve a balanced capital structured that is stable. High debt proportion increases debt burden, increasing the chance of default and running into bankruptcy.

List of References

Baker, H. K., & Powell, G. E 2005. Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub.

Duska, R. F 2007. Contemporary reflections on business ethics. Dordrecht, the Netherlands: Springer.

Fabozz, F 2009. Institutional Investment Management: Equity and Bond Portfolio Strategies and Applications. London: John Wiley & Sons.

Fernie, J., & Sparks, L. (2009). Logistics & retail management: Emerging issues and new challenges in the retail supply chain. London: Kogan Page Ltd.

Francis, G., Terry, G., & Steven, T 2013.  International Bibliography of Business History. London: Routledge.

Glynn, J. J 2008. Accounting for managers. London: Cengage Learning.

Graham, J. R., Smart, S. B., & Megginson, W. L 2012. Introduction to corporate finance. Australia: South-Western/Cengage Learning.

Graham, J. R., Smart, S. B., & Megginson, W. L. (2012). Introduction to corporate finance. Australia: South-Western/Cengage Learning.

Khan, M. Y., & Jain, P. K 2007. Management accounting: Text, problems and cases. New Delhi: Tata McGraw-Hill.

Palmer, R., Meek, R., Parkinson, L., & Meek, H 2012. CIM Coursebook 06/07 Managing Marketing Performance. London: Routledge.

Pinson, L 2008. Anatomy of a business plan: A step-by-step guide to building the business and securing your company’s future. Tustin, CA: Out of Your Mind & into the Marketplace.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. Hoboken : Wiley

Ryan, B 2004. Finance and accounting for business. London: Thomson Learning.

Tracy, A 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. New Jeysey: RatioAnalysis.net.

Varley, R 2014. Retail Product Management: Buying and Merchandising. London: Routledge.

Zentes, J., Morschett, D., & Schramm-Klein, 2011. Strategic retail management: Text and international cases. Wiesbaden: Gabler.

Appendices

FINANCIAL STATEMENTS

INCOME STATEMENTS

TESCO

Currency in As of: 25-Feb 23-Feb 22-Feb
Millions of British Pounds   2012 2013 2014
    Restated Restated Reclassified
    GBP GBP GBP
Revenues 63,916.00 63,406.00 62,554.00
TOTAL REVENUES   63,916.00 63,406.00 63,050.00
Cost Of Goods Sold 58,519.00 58,596.00 58,635.00
GROSS PROFIT   5,397.00 4,810.00 4,174.00
Selling General & Admin Expenses, Total 1,594.00 1,555.00
1,193.00
OTHER OPERATING EXPENSES, TOTAL   1,594.00 1,555.00 1,193.00
OPERATING INCOME   3,803.00 3,255.00 2,981.00
Interest Expense -411 -429 -447
Interest And Investment Income 114 120 132
NET INTEREST EXPENSE   -297 -309 -315
Income (Loss) On Equity Investments 91 72 60
Other Non-Operating Income (Expenses) 44 -15 -11
EBT, EXCLUDING UNUSUAL ITEMS   3,641.00 3,003.00 2,715.00
Merger & Restructuring Charges
Impairment Of Goodwill -495
Gain (Loss) On Sale Of Assets 397 -290 180
Other Unusual Items, Total -161 -636
Other Unusual Items -94 -27
EBT, INCLUDING UNUSUAL ITEMS   4,038.00 2,057.00 2,259.00
Income Tax Expense 874 529 347
Minority Interest In Earnings -8 4 4
Earnings From Continuing Operations 3,164.00 1,528.00 1,912.00
EARNINGS FROM DISCOUNTINUED OPERATIONS   -350 -1,504.00 -942
NET INCOME   2,806.00 28 974
NET INCOME TO COMMON INCLUDING EXTRA ITEMS   2,806.00 28 974
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS   3,156.00 1,532.00 1,916.00

 

DEBENHAMS

Currency in As of: 1-Sep 31-Aug 30-Aug
Millions of British Pounds   2012 2013 2014
    GBP Restated GBP
    GBP
Revenues 2,229.80 2,282.20 2,312.70
TOTAL REVENUES   2,229.80 2,282.20 2,312.70
Cost Of Goods Sold 1,927.50 1,982.60 2,033.40
GROSS PROFIT   302.3 299.6
279.3
Selling General & Admin Expenses, Total 127.3 146.6 151.3
OTHER OPERATING EXPENSES, TOTAL   127.3 146.6 151.3
OPERATING INCOME   175 153 128
Interest Expense -14.7 -12.2 -14.4
Interest And Investment Income 0.1 0.4 0.2
NET INTEREST EXPENSE   -14.6 -11.8 -14.2
Other Non-Operating Income (Expenses) -2.1 -2.2 -3.5
EBT, EXCLUDING UNUSUAL ITEMS   158.3 139 110.3
Other Unusual Items, Total -4.5
Other Unusual Items -4.5
EBT, INCLUDING UNUSUAL ITEMS   158.3 139 105.8
Income Tax Expense 33 23.1 18.6
Earnings From Continuing Operations 125.3 115.9 87.2
NET INCOME   125.3 115.9 87.2
NET INCOME TO COMMON INCLUDING EXTRA ITEMS   125.3 115.9 87.2
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS   125.3 115.9 87.2

 

BALANCE SHEET

TESCO

Currency in As of: 25-Feb 23-Feb 22-Feb
Millions of British Pounds   2012 2013 2014
    Restated Restated Reclassified
    GBP GBP GBP
Assets
Cash And Equivalents 1,725.00 1,457.00 2,021.00
Short-Term Investments 1,243.00 522 1,016.00
TOTAL CASH AND SHORT TERM INVESTMENTS   2,968.00 1,979.00 3,037.00
Accounts Receivable 389 472
274
Other Receivables 1,855.00 1,646.00 1,607.00
TOTAL RECEIVABLES   2,244.00 2,118.00 1,881.00
Inventory 3,598.00 3,744.00 3,576.00
Prepaid Expenses 420 417 321
Finance Division Loans And Leases, Current 2,502.00 3,094.00 3,705.00
Finance Division Other Current Assets 580 1,055.00 485
Other Current Assets 551 689 2,567.00
TOTAL CURRENT ASSETS   12,863.00 13,096.00 15,572.00
Gross Property Plant And Equipment 34,772.00 35,643.00 36,585.00
Accumulated Depreciation -9,062.00 -10,773.00 -12,095.00
NET PROPERTY PLANT AND EQUIPMENT   25,710.00 24,870.00 24,490.00
Goodwill 3,449.00 2,954.00 2,286.00
Long-Term Investments 423 1,312.00 1,301.00
Finance Division Loans And Leases, Long Term 1,901.00 2,465.00 3,210.00
Finance Division Other Long-Term Assets 1,526.00
Deferred Tax Assets, Long Term 23 58 73
Deferred Charges, Long Term 677 739 885
Other Intangibles 492 669 624
Other Long-Term Assets 3,717.00 3,966.00 1,723.00
TOTAL ASSETS   50,781.00 50,129.00 50,164.00
LIABILITIES & EQUITY
Accounts Payable 6,375.00 6,069.00 5,853.00
Accrued Expenses 2,208.00 2,275.00 1,942.00
Short-Term Borrowings 415 746 846
Current Portion Of Long-Term Debt/Capital Lease 1,423.00 20 1,064.00
Current Portion Of Capital Lease Obligations 32 6 6
Finance Division Other Current Liabilities 5,465.00 6,015.00 6,858.00
Current Income Taxes Payable 416 519 494
Other Current Liabilities, Total 2,947.00 3,341.00 4,342.00
TOTAL CURRENT LIABILITIES   19,249.00 18,985.00 21,399.00
Long-Term Debt 9,978.00 9,946.00 9,188.00
Capital Leases 134 122 115
Minority Interest 26 18 7
Pension & Other Post-Retirement Benefits 1,872.00 2,378.00 3,193.00
Deferred Tax Liability Non-Current 1,160.00 1,006.00 594
Other Non-Current Liabilities 587 1,031.00 953
TOTAL LIABILITIES   32,980.00 33,468.00 35,442.00
Common Stock 402 403 405
Additional Paid In Capital 4,964.00 5,020.00 5,080.00
Retained Earnings 12,164.00 10,535.00 9,728.00
Treasury Stock -18 -9 -20
Comprehensive Income And Other 263 694 -478
TOTAL COMMON EQUITY   17,775.00 16,643.00 14,715.00
TOTAL EQUITY   17,801.00 16,661.00 14,722.00
TOTAL LIABILITIES AND EQUITY   50,781.00 50,129.00 50,164.00

 

DEBENHAMS

Currency in As of: 1-Sep 31-Aug 30-Aug
Millions of British Pounds   2012 2013 2014
    GBP Restated GBP
    GBP
Assets
Cash And Equivalents 44 27 64.4
TOTAL CASH AND SHORT TERM INVESTMENTS   44 27 64.4
Accounts Receivable 20.9 19.8
25.3
Other Receivables 2.3 1.1 2.1
TOTAL RECEIVABLES   23.2 20.9 27.4
Inventory 332.3 357.9 345.7
Prepaid Expenses 52.2 57.4 47.3
Other Current Assets 7.8 7.3 1.5
TOTAL CURRENT ASSETS   459.5 470.5 486.3
Gross Property Plant And Equipment 1,243.40 1,301.10 1,347.20
Accumulated Depreciation -581.8 -609 -658
NET PROPERTY PLANT AND EQUIPMENT   661.6 692.1 689.2
Goodwill 818.5 819 818.5
Long-Term Investments 1.9 1.8 4.2
Deferred Tax Assets, Long Term 83.2 69.3 51
Other Intangibles 46.4 57.5 74.3
Other Long-Term Assets 20.1 22.6 24.9
TOTAL ASSETS   2,091.20 2,132.80 2,148.40
LIABILITIES & EQUITY
Accounts Payable 318.3 345 326.2
Accrued Expenses 119.8 109.2 104.6
Short-Term Borrowings 161.2 161.3 196.9
Current Portion Of Long-Term Debt/Capital Lease 2.2 2.3 5.4
Current Portion Of Capital Lease Obligations 2.2 1.8 3.3
Current Income Taxes Payable 55.7 49.7 42.8
Other Current Liabilities, Total 67.7 69.6 78.2
Unearned Revenue, Current 2.1 4.8 3.9
TOTAL CURRENT LIABILITIES   727 741.9 758
Long-Term Debt 253.1 236.2 221.8
Capital Leases 4.5 3.1 3.2
Pension & Other Post-Retirement Benefits 57.3 24.6 9.3
Deferred Tax Liability Non-Current 64.7 59.1 53.4
Other Non-Current Liabilities 323.6 323.5 335.3
TOTAL LIABILITIES   1,430.20 1,388.40 1,381.00
Common Stock 0.1 0.1 0.1
Additional Paid In Capital 682.9 682.9 682.9
Retained Earnings -9.9 64.9 100.7
Comprehensive Income And Other -12.1 -3.5 -16.3
TOTAL COMMON EQUITY   661 744.4 767.4
TOTAL EQUITY   661 744.4 767.4
TOTAL LIABILITIES AND EQUITY   2,091.20 2,132.80 2,148.40

 

CALCULATIONS AND FORMULAS

Gross Profit Margin

Formula:

Gross Profit margin 2012′ 2013′ 2014′
Tesco plc 8.44% 7.59% 6.62%
Debenhams plc 13.56% 13.13% 12.08%

Operating Profit Margin

Formula:

Operating Profit margin 2012′ 2013′ 2014′
Tesco plc 5.95% 5.13% 4.73%
Debenhams plc 7.85% 6.70% 5.53%

Net profit margin

Formula:

Net profit margin 2012′ 2013′ 2014′
Tesco plc 4.39% 0.04% 1.54%
Debenhams plc 5.62% 5.08% 3.77%

Current ratio

Formula:

Current ratio 2012′ 2013′ 2014′
Tesco plc 0.67 0.69 0.73
Debenhams plc 0.63 0.63 0.64

Acid-test ratio

Formula:

Acid-test ratio 2012′ 2013′ 2014′
Tesco plc 0.48 0.49 0.56
Debenhams plc 0.17 0.15 0.19

Asset turnover

Formula:

Asset turnover 2012′ 2013′ 2014′
Tesco plc 1.26 1.26 1.26
Debenhams plc 1.07 1.07 1.08

Receivable collection period

Formula:

Account receivable turnover 2012′ 2013′ 2014′
Tesco plc 28.48 29.94 33.52
Debenhams plc 96.11 109.20 84.41
Receivable collection period 2012′ 2013′ 2014′
Tesco plc 12.81 12.19 10.89
Debenhams plc 3.80 3.34 4.32

Payables payment period

Formula:

Payable turnover 2012′ 2013′ 2014′
Tesco plc 9.74 10.27 10.63
Debenhams plc 7.10 6.78 7.29
payable turnover period 2012′ 2013′ 2014′
Tesco plc 37.46 35.53 34.34
Debenhams plc 51.41 53.80 50.05

Inventory turnover period

Formula:

Inventory turnover 2012′ 2013′ 2014′
Tesco plc 16.26 15.65 16.40
Debenhams plc 5.80 5.54 5.88
Inventory turnover period 2012′ 2013′ 2014′
Tesco plc 22.44 23.32 22.26
Debenhams plc 62.93 65.89 62.05

Interest coverage

Formula:

Interest coverage 2012′ 2013′ 2014′
Tesco plc 12.80 10.53 9.46
Debenhams plc 11.99 12.97 9.01

Financial leverage

Formula:

Financial leverage 2012′ 2013′ 2014′
Tesco plc 0.65 0.67 0.71
Debenhams plc 0.68 0.65 0.64

FINANCIAL ANALYSIS: TESCO VS DEBENHAMS

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Table of Contents

1.0 Introduction. 3

2.0 Objective. 3

3.0 Background information. 3

3.1 Tesco Plc. 3

3.2 Debenhams Plc. 4

4.0 Financial ratio analysis. 5

4.1 Profitability ratios. 5

4.1.1 Gross profit margin. 5

4.1.2 Operating profit margin. 6

4.1.3 Net profit margin. 8

4.2 Liquidity ratios. 9

4.2.1 Current ratio. 9

4.2.2 Acid-test ratio. 10

4.3 Efficiency ratios. 12

4.3.1 Asset turnover. 12

4.3.2 Receivable collection period. 13

4.3.3 Payables payment period. 13

4.3.4 Inventory turnover period. 14

4.4 Gearing ratio. 14

4.4.1 Interest coverage. 14

4.4.2 Financial leverage. 15

4.4.3 Equity gearing. 16

5.0 Recommendations and conclusions. 17

References. 18

Appendices. 20

 

1.0 Introduction

Most significantly, financial analysis involves selection, assessment, and interpretation of financial data, together with other relevant information, to help in making financial and investment decisions (Fabozz 2009, p. 193). Financial analysis may be undertaken to evaluate the efficiency of operations, potential investments, creditworthiness, credit policies, and financial leverage of the company. Furthermore, the primary source of data for financial analysis includes balance sheet and income statement. Financial analysis employs various ratios to evaluate the performance of a given company in comparison to its competitors (Khan & Jain 2007, p. 6). The financial ratios employed include profitability ratios, liquidity ratios, operational ratios, and leverage ratios.

2.0 Objective

The main goal of this paper is to evaluate and compare the financial performance of Tesco plc and Debenhams plc through financial ratio analysis encompassing three-year period from 2012 to 2014.

3.0 Background information

3.1 Tesco Plc

Tesco Plc’s history of development can be traced back in 1919 during the time when Jack Cohen began selling surplus groceries via a stall in London, where he made a profit of one pound from sales of four pounds on the first day (Zentes,  Morschett & Schramm-Klein 2011, p. 311). However, the Tesco Brand appeared in the market in 1924 when Cohen purchased a tea shipment from T.E Stockwell. Therefore, the initials of names, T.E Stockwell and Cohen were combined to Tes-co and in 1929, Jack Cohen started to operate a flagship Tesco store that was located in Burnt Oak. As the brand kept on growing, Tesco was incorporated as a private limited company in 1932 and became enlisted in LSE (London Stock Exchange) market in 1947 with a 25 p share price. Furthermore, Tesco exhibited its expansionary zeal by acquiring rival shops and buy 1960, the company had acquired 200 Harrow stores and 70 Williams stores, as well as the Victor Value chain and 97 Charles Philips stores (Fernie & Sparks 2009, p. 162). In 1961, the company entered into the Guinness Book of Records as the Europe’s largest store and in seven years, it opened its fits “Superstore’ in West Sussex, Crawley. In 1987, the company completed a successful hostile takeover of its competitor, Hilards Supermarket for £ 220 m. In an effort to overtake Sainsbury, the company launched the Tesco Clubcard scheme in around 1995 and Tescom.com in 2000 (Palmer, Meek, Parkinson & Meek 2012, p. 204). Unfortunately, the company started declining in 2013 where it reported the first decline in profits in its 20-year history. In 2014, Tesco exhibited worst performance in a 20 –year history, with a 3.7 % decline in sales. In 2014, Sept 22, the company shocked the market where it overstated its semi-annual profit projection by £ 250 m.

3.2 Debenhams Plc

Debenhams Plc is among the largest clothing and goods retailers in the United Kingdom (Varley 2014, p. 33). The company’s origin can be traced back to 1778 When William Clark opened a drapers store in London to sell expensive fabrics, parasols, bonnets, and gloves. In 1813, the business becomes Clark & Debenham when William Debenham invested in this business and established the first store away from London City in Cheltenham (Francis, Terry & Steven 2013, p. 281). From 1818, the company started to prosper years later due to Victorian fashion for mourning where the windows and female relatives followed a stringent code of etiquette and clothing. Since then, the company continued to operate as an independent company up to 1980s, when the Bruton Group succeeded it hostile takeover. In 1998, the company regained its autonomous when it “demerged” from the Burton Group and Debenhams changed its company name to Arcadia Group plc. After this de-merger, Debenhams was enlisted into LSE until 2003, but became re-enlisted in 2006. In 2007 and 2009, the company managed to acquire 9 stores from Roches (Ireland) and acquired Magasin du Nord (Denmark).

4.0 Financial ratio analysis

4.1 Profitability ratios

Essentially, all business ventures cannot exist in the life long without making profit (Duska 2007, p. 167). Therefore, evaluation of profitability levels of a company is very important to management, investors, creditors, and obligors. However, there is no direct formula for determining a firm’s level of profitability. For this reason, several ratios such as gross profit margin, operating profit margin, and net profit margin can be used to evaluate the company’s level of profitability.

4.1.1 Gross profit margin

Gross profit margin can be viewed as gross profit expressed as a component percentage of total revenues (Pinson 2008, p. 115). In other words, gross profit margin is the percentage of revenues that is available to meet operating expenses. Therefore, a high gross profit margin is an indication of increased levels of profitability. The gross profit margin of Tesco plc for the year 2012, 2013, and 2013 are 8.44 %, 7.79 % and 6.62 %, respectively; and for the Debenhams plc for 2012, 2013, and 2014 are 13.59 %, 13.13 % and 12.8 %, respectively. These gross profit margins for Tesco imply that the company was able to generate £0.084, £ 0.076, and £ 0.066 of gross profit from every pound of revenues generated by the company in the financial year that ended at 2012, 2013, and 2014 respectively. For Debenhams plc, its gross profit margins imply that it was able to generate £0.135, £ 0.131, and £ 0.121 of gross profit from every pound of revenues generated by the company in the financial year that ended at2012, 2013, and 2014 respectively. From graph 1 below, The Debenhams’ gross profit margin level is higher than that of Tesco, but both companies exhibit a declining growth.

Graph 1: Gross profit margin

Reliability of grow profit margin

No matter how high gross profit margin ratio of company, this metric is still perilous to depend upon due to misconceptions surrounding gross profit margin. Therefore, full complementary of other ratios can be employed to provide a more detailed snapshot of a company’s financial stability and success (Tracy 2012, p. 13).

4.1.2 Operating profit margin

Operating profit margin is the operating margin expressed as a component percentage of sales revenue (Graham, Smart,  & Megginson 2012, p. 45). In other words, operating profit margin indicates the percentage of sales revenues that remains after cost of sales and operating expenses are deducted from total sales revenues. Therefore, a high operating profit margin is an indication of increased level of profitability. The operating profit margin of Tesco plc for the year 2012, 2013, and 2013 are 5.95%, 5.13 % and 4.73 %, respectively; and for the Debenhams plc ‘s operating profit margin 2012, 2013, and 2014 are 7.85 %, 6.70 % and 5.53 %, respectively. These operating profit margins for Tesco imply that the company was able to generate £0.060, £ 0.051, and £ 0.047 of operating profit from every pound of sales revenues generated by the company in the financial year that ended at 2012, 2013, and 2014, respectively. In the case of Debenhams plc, its operating profit margins imply that it was able to generate £0.078 £ 0.067, and £ 0.055 of operating profit from every pound of revenues generated by the company in the financial year that ended at 2012, 2013, and 2014, respectively. From graph 2 below, The Debenhams’ operating profit margin level is higher than that of Tesco, but both companies exhibit a declining growth in profitability.

Graph 2: Operating profit margin

Reliability of operating profit margin

Operating profit margin is beneficial as it shows the percentage of profit generated by the operating activities. However, the operating profit margin does not take account other important items such as financial obligations, tax income, and income from non-operating activities which may have substantial impact on financial performance of a company. Therefore, operating profit alone cannot be relied upon when concluding the profitability level and other profitability ratios are needed for complementary and comparability (Robinson,  Henry, Pirie & Broihahn 2015, p. 330).

4.1.3 Net profit margin

Net profit margin is often defined as the net profit expressed as a component of sales revenues (Baker & Powell 2005, 62). In other words, it is the residual sales revenues that remain as the bottom-line item of income statement after cost of sales, all expenses, and preference share dividends are deducted from total sales revenue. It is the amount of money that can be attributed to the shareholders and retained earnings. Therefore, a high net profit margin is an indication of increased level of profitability. The net profit margin of Tesco plc for the year 2012, 2013, and 2013 are 4.39%, 0.04 % and 1.54 %, respectively; and for the Debenhams plc ‘s net profit margin 2012, 2013, and 2014 are 5.62 %, 5.08 % and 3.77 %, respectively. These operating profit margins for Tesco imply that the company was able to generate £0.044, £ 0.0004, and £ 0.015 of net profit from every pound of sales revenues generated by the company in the financial year that ended at 2012, 2013, and 2014, respectively. In the case of Debenhams plc, its net profit margins imply that it was able to generate £0.056 £ 0.051, and £ 0.038 of net profit from every pound of revenues generated by the company in the financial year that ended in 2012, 2013, and 2014, respectively. From graph 3 below, The Debenhams’ net profit margin level is higher than that of Tesco, but Debenhams’ exhibits a declining growth in profitability; whereas Tesco’s decreases in 2013 and then increases 2014.

Graph 3: Net profit margin

Reliability of net profit margin

One of the usefulness of net profit margin is price control where a company can use net profit margin to establish the direct correlation between price and profit on a per-unit basis. Unfortunately, profit margin does not assist in determining sales volume and uncovering of true cost efficiency of generating sales revenues.

4.2 Liquidity ratios

The liquidity level refers to the extent to which a firm can meet its short-term financial obligations such as trade payable and interest burden at the disposal of total current assets. Liquidity level is often evaluated using current and acid-test ratio.

4.2.1 Current ratio

As a measure of liquidity level, current ratio is often used to determine the degree to which a given company can cover up its short-term financial debt using all of its current assets (Graham,  Smart & Megginson 2012, p. 41). Therefore, a current ratio greater than or equal to 1 show that the current assets of a company are sufficient enough to cover up current liabilities. The vice versa is true. However, the current ratios for Tesco plc for the year 2012, 2013 and 2014 are 0.67, 0.69, and 0.73, respectively; whereas Debenhams’ current ratios are 0.63, 0.63 and 0.64 in the same order of years. It is evident that the current assets of the two companies are not sufficient enough to settle current liabilities for the three-year period as depicted in Graph 3 below. However, the ability to settle current liabilities tends to increase for the two companies.

Graph 3: Current ratio

 Reliability of current ratio

Most notably, current ratio indicates the cash richness and short-term strength of a firm, as well as the status of the operating cycle. However, current ratio involves illiquid inventory that results in overestimation of company’s liquidity position. Inventory is vulnerable to obsolete and damage (through fire, floods, and accidents).

4.2.2 Acid-test ratio

As a measure of liquidity level, acid-test ratio is often used to determine the degree to which a given company can cover up its short-term financial debt using all of its liquid assets in cases where inventory become obsolete or damage (Graham,  Smart & Megginson 2012, p. 41). Therefore, an acid-test ratio greater than or equal to 1 show that the liquid assets of a company are sufficient enough to cover up current liabilities. The vice versa is true. However, the acid-test ratios for Tesco plc for the year 2012, 2013 and 2014 are 0.48, 0.49, and 0.56, respectively; whereas Debenhams’ currents ratios are 0.17, 0.15 and 0.19 in the same order of years. It is evident that the liquid assets of the two companies are not sufficient to settle current liabilities for the three-year period as depicted in Graph 4 below. However, the ability to settle current liabilities tends to increase for the two companies.

Graph 4: Acid-test ratio

Reliability of Acid-test ratio

Most importantly, acid-test ratio eliminates the illiquid components (inventory) from the equation giving the better snapshot of the company’s liquidity position. Collapsing companies have high level of inventory and acid-test can be much of help in uncovering such situations. However, acid-test ratio ignores the timing of cash flows and this alone cannot be used to assess liquidity of the company.

4.3 Efficiency ratios

Efficiency ratios are used to evaluate the company’s efficiency in management of assets such as inventory, account receivables and total assets. Therefore, company’s efficiency can be evaluated using efficiency ratios such as asset turnover, account receivable turnover, and inventory turnover.

4.3.1 Asset turnover

Asset turnover ratio is used to indicate the amount of sales revenues in pounds generated by one pound of assets acquired by the company (Ryan 2004, p. 218). A high asset turnover implies that the company is using fewer assets to generate more sales, which is a sign of efficiency. The asset turnover of Tesco plc for the year 2012, 2013, and 2013 are 1.26, 1.26 and 1.26 times, respectively; and for the Debenhams plc ‘s asset turnover 2012, 2013, and 2014 are 1.07, 1.07 and 1.08 times, respectively. These asset turnovers for Tesco imply that the company was able to generate £1.26, £ 1.26, and £ 1.26 of sales revenue from every pound of assets acquired by the company in the financial year that ended at 2012, 2013, and 2014 respectively. In the case of Debenhams plc, its asset turnovers imply that it was able to generate £1.07, £ 1.07 and £ 1.08 of sales revenues from every pound of assets acquired in the financial year that ended at 2012, 2013, and 2014 respectively. Graph 5 below indicates that the assets turnovers for the two companies remained relatively stable during the three-year period, but Tesco’s are higher.

Graph 5: Asset turnover

4.3.2 Receivable collection period

Receivable collection period is used to indicate the number of days through which the company is able to collect cash its debtors. Fewer days indicate that the company’s management is efficient in managing account receivables. Account receivable period is calculated from account receivable turnover. The Tesco’s account receivable periods are 12.81 days, 12.19 days, and 10. 89 days in 2012, 2013 and 2014 respectively; whereas Debenhams’s receivable collection periods are 3.8 days, 3.34 days and 4.32 days in the same order of years. As can be noticed, Tesco has higher receivable collection period.

4.3.3 Payables payment period

Payables payment period is the number of days taken by the company to settle its account payable (Ryan 2004, p. 219). High number of days indicate inefficiency of company’s management in managing the accounts payable. Furthermore, the payables payment period is determined from payable turnover. The Tesco’s Payables periods are 37.46 days, 35.53 days, and 34.34 days in 2012, 2013 and 2014, respectively; whereas Debenhams’s payables payment periods are 51.41 days, 53.80 days and 50.05 days in the same order of years. As can be noticed, Debenhams plc has higher payables payment period.

4.3.4 Inventory turnover period

Inventory turnover period shows the number of days in which inventory stays on store shelves before turned into cost of sales or sales revenues (Ryan 2004, p. 219). Less number of days indicates management efficiency in converting inventory into cost of goods sold. Inventory turnover period is determined from inventory turnover. The Tesco’s inventory periods are 22.44 days, 23.32 days, and 22.26 days in 2012, 2013 and 2014 respectively; whereas Debenhams’s inventory periods are 62.93 days, 65.89 days and 62.05 days in the same order of years. As can be noticed, Debenhams plc has higher inventory turnover period.

4.4 Gearing ratio

The gearing ratio determines the proportion of borrowed money (debt) to its equity. The gearing depicts the financial obligation to which a company y is subjected, since beyond debt can result in financial difficulties. A very high gearing ratio implies a high debt proportion to equity. Examples of gearing ratio include Interest cover, financial gearing and equity gearing.

4.4.1 Interest coverage

Interest coverage is a ratio that indicates the extent to which EBIT is capable of covering interest obligations for short-term and long-term debts (Glynn 2008, p. 410). The interest coverage ratios of Tesco plc are12.80, 10.53 and 9.46 times in 2012, 2013 and 2014 respectively, and Debenhams’ interest coverage ratios are 11.99, 12.97, and 9.01 times in order of the same years. Interest coverage ratios for the two companies tend to decrease indicating an increasing debt burden as indicated by Graph 6.

Graph 6: Interest coverage ratio

4.4.2 Financial leverage

It is also known as debt ratio. Financial leverage is used to indicate the proportion of debt financing the company’s assets. When financial leverage is high, the risk of the business also goes high since the company has more debt burdens that may increase chances of default (Glynn 2008, p. 410). Financial leverage is determined by dividing total debt by total assets. According to Graph 7 below, the financial leverage of Tesco plc is increasing while that of Debenhams is decreasing. This implies that the Tesco’s business is more risky than Debenhams’.

4.4.3 Equity gearing

Equity gearing is also known as debt-to-equity ratio. This ratio is used to indicate how the company’s capital is structured. A high equity gearing ratio indicates that the company’s debt is more than the equity and depicts a high risk of the business. Graph 8 indicates that Tesco’s equity gearing is increasing while Debenhams’s equity gearing is tending to decrease (Glynn 2008, p. 410). This indicates that Tesco’s debt is increasing more than equity making its business more risky when compared to that of Debenhams’.

Graph 9: Equity Gearing

5.0 Recommendations and conclusions

As indicated by the current and acid-test ratio, Tesco’s and Debenhams’ liquidity level is too low, implying that the two have no ability to meet their short-term financial obligations. The companies are likely to experience financial difficulties as creditors and obligors will not be willing to supplier goods on credit and finances due to fear of default. To avoid these circumstances, it is advisable for the two companies to increase their current assets such as cash and cash equivalent through issuance of equity. Furthermore, Debenhams plc has higher profitability level than Tesco plc as indicated by gross profit margin, operating profit margin, and net profit margin. However, the profitability levels of the two companies are decreasing gradually. Tesco plc is more efficient in managing total assets to generate sales revenues when compared to Debenhams. Tesco plc is also efficient in paying due to its creditors as it takes less time to settle payables payment than Debenhams.  Additionally, Debenhams is more efficient in debt collection from its customers than Tesco as it has less receivable collection period. Besides, Tesco is more efficient in inventory management as it has low inventory turnover period. On the other hand, as far as gearing ratios are concerned, Tesco’s business is more risky due to decreasing ability to cover its interest obligations, assets are increasingly becoming acquired by debt, and high debt in its capital structure when compared to that of Debenhams. Therefore, the company should try its best to reduce the debt proportion to achieve a balanced capital structured that is stable. High debt proportion increases debt burden, increasing the chance of default and running into bankruptcy.

List of References

Baker, H. K., & Powell, G. E 2005. Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub.

Duska, R. F 2007. Contemporary reflections on business ethics. Dordrecht, the Netherlands: Springer.

Fabozz, F 2009. Institutional Investment Management: Equity and Bond Portfolio Strategies and Applications. London: John Wiley & Sons.

Fernie, J., & Sparks, L. (2009). Logistics & retail management: Emerging issues and new challenges in the retail supply chain. London: Kogan Page Ltd.

Francis, G., Terry, G., & Steven, T 2013.  International Bibliography of Business History. London: Routledge.

Glynn, J. J 2008. Accounting for managers. London: Cengage Learning.

Graham, J. R., Smart, S. B., & Megginson, W. L 2012. Introduction to corporate finance. Australia: South-Western/Cengage Learning.

Graham, J. R., Smart, S. B., & Megginson, W. L. (2012). Introduction to corporate finance. Australia: South-Western/Cengage Learning.

Khan, M. Y., & Jain, P. K 2007. Management accounting: Text, problems and cases. New Delhi: Tata McGraw-Hill.

Palmer, R., Meek, R., Parkinson, L., & Meek, H 2012. CIM Coursebook 06/07 Managing Marketing Performance. London: Routledge.

Pinson, L 2008. Anatomy of a business plan: A step-by-step guide to building the business and securing your company’s future. Tustin, CA: Out of Your Mind & into the Marketplace.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. Hoboken : Wiley

Ryan, B 2004. Finance and accounting for business. London: Thomson Learning.

Tracy, A 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. New Jeysey: RatioAnalysis.net.

Varley, R 2014. Retail Product Management: Buying and Merchandising. London: Routledge.

Zentes, J., Morschett, D., & Schramm-Klein, 2011. Strategic retail management: Text and international cases. Wiesbaden: Gabler.

Appendices

FINANCIAL STATEMENTS

INCOME STATEMENTS

TESCO

Currency in As of: 25-Feb 23-Feb 22-Feb
Millions of British Pounds   2012 2013 2014
    Restated Restated Reclassified
    GBP GBP GBP
Revenues 63,916.00 63,406.00 62,554.00
TOTAL REVENUES   63,916.00 63,406.00 63,050.00
Cost Of Goods Sold 58,519.00 58,596.00 58,635.00
GROSS PROFIT   5,397.00 4,810.00 4,174.00
Selling General & Admin Expenses, Total 1,594.00 1,555.00
1,193.00
OTHER OPERATING EXPENSES, TOTAL   1,594.00 1,555.00 1,193.00
OPERATING INCOME   3,803.00 3,255.00 2,981.00
Interest Expense -411 -429 -447
Interest And Investment Income 114 120 132
NET INTEREST EXPENSE   -297 -309 -315
Income (Loss) On Equity Investments 91 72 60
Other Non-Operating Income (Expenses) 44 -15 -11
EBT, EXCLUDING UNUSUAL ITEMS   3,641.00 3,003.00 2,715.00
Merger & Restructuring Charges
Impairment Of Goodwill -495
Gain (Loss) On Sale Of Assets 397 -290 180
Other Unusual Items, Total -161 -636
Other Unusual Items -94 -27
EBT, INCLUDING UNUSUAL ITEMS   4,038.00 2,057.00 2,259.00
Income Tax Expense 874 529 347
Minority Interest In Earnings -8 4 4
Earnings From Continuing Operations 3,164.00 1,528.00 1,912.00
EARNINGS FROM DISCOUNTINUED OPERATIONS   -350 -1,504.00 -942
NET INCOME   2,806.00 28 974
NET INCOME TO COMMON INCLUDING EXTRA ITEMS   2,806.00 28 974
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS   3,156.00 1,532.00 1,916.00

 

DEBENHAMS

Currency in As of: 1-Sep 31-Aug 30-Aug
Millions of British Pounds   2012 2013 2014
    GBP Restated GBP
    GBP
Revenues 2,229.80 2,282.20 2,312.70
TOTAL REVENUES   2,229.80 2,282.20 2,312.70
Cost Of Goods Sold 1,927.50 1,982.60 2,033.40
GROSS PROFIT   302.3 299.6
279.3
Selling General & Admin Expenses, Total 127.3 146.6 151.3
OTHER OPERATING EXPENSES, TOTAL   127.3 146.6 151.3
OPERATING INCOME   175 153 128
Interest Expense -14.7 -12.2 -14.4
Interest And Investment Income 0.1 0.4 0.2
NET INTEREST EXPENSE   -14.6 -11.8 -14.2
Other Non-Operating Income (Expenses) -2.1 -2.2 -3.5
EBT, EXCLUDING UNUSUAL ITEMS   158.3 139 110.3
Other Unusual Items, Total -4.5
Other Unusual Items -4.5
EBT, INCLUDING UNUSUAL ITEMS   158.3 139 105.8
Income Tax Expense 33 23.1 18.6
Earnings From Continuing Operations 125.3 115.9 87.2
NET INCOME   125.3 115.9 87.2
NET INCOME TO COMMON INCLUDING EXTRA ITEMS   125.3 115.9 87.2
NET INCOME TO COMMON EXCLUDING EXTRA ITEMS   125.3 115.9 87.2

 

BALANCE SHEET

TESCO

Currency in As of: 25-Feb 23-Feb 22-Feb
Millions of British Pounds   2012 2013 2014
    Restated Restated Reclassified
    GBP GBP GBP
Assets
Cash And Equivalents 1,725.00 1,457.00 2,021.00
Short-Term Investments 1,243.00 522 1,016.00
TOTAL CASH AND SHORT TERM INVESTMENTS   2,968.00 1,979.00 3,037.00
Accounts Receivable 389 472
274
Other Receivables 1,855.00 1,646.00 1,607.00
TOTAL RECEIVABLES   2,244.00 2,118.00 1,881.00
Inventory 3,598.00 3,744.00 3,576.00
Prepaid Expenses 420 417 321
Finance Division Loans And Leases, Current 2,502.00 3,094.00 3,705.00
Finance Division Other Current Assets 580 1,055.00 485
Other Current Assets 551 689 2,567.00
TOTAL CURRENT ASSETS   12,863.00 13,096.00 15,572.00
Gross Property Plant And Equipment 34,772.00 35,643.00 36,585.00
Accumulated Depreciation -9,062.00 -10,773.00 -12,095.00
NET PROPERTY PLANT AND EQUIPMENT   25,710.00 24,870.00 24,490.00
Goodwill 3,449.00 2,954.00 2,286.00
Long-Term Investments 423 1,312.00 1,301.00
Finance Division Loans And Leases, Long Term 1,901.00 2,465.00 3,210.00
Finance Division Other Long-Term Assets 1,526.00
Deferred Tax Assets, Long Term 23 58 73
Deferred Charges, Long Term 677 739 885
Other Intangibles 492 669 624
Other Long-Term Assets 3,717.00 3,966.00 1,723.00
TOTAL ASSETS   50,781.00 50,129.00 50,164.00
LIABILITIES & EQUITY
Accounts Payable 6,375.00 6,069.00 5,853.00
Accrued Expenses 2,208.00 2,275.00 1,942.00
Short-Term Borrowings 415 746 846
Current Portion Of Long-Term Debt/Capital Lease 1,423.00 20 1,064.00
Current Portion Of Capital Lease Obligations 32 6 6
Finance Division Other Current Liabilities 5,465.00 6,015.00 6,858.00
Current Income Taxes Payable 416 519 494
Other Current Liabilities, Total 2,947.00 3,341.00 4,342.00
TOTAL CURRENT LIABILITIES   19,249.00 18,985.00 21,399.00
Long-Term Debt 9,978.00 9,946.00 9,188.00
Capital Leases 134 122 115
Minority Interest 26 18 7
Pension & Other Post-Retirement Benefits 1,872.00 2,378.00 3,193.00
Deferred Tax Liability Non-Current 1,160.00 1,006.00 594
Other Non-Current Liabilities 587 1,031.00 953
TOTAL LIABILITIES   32,980.00 33,468.00 35,442.00
Common Stock 402 403 405
Additional Paid In Capital 4,964.00 5,020.00 5,080.00
Retained Earnings 12,164.00 10,535.00 9,728.00
Treasury Stock -18 -9 -20
Comprehensive Income And Other 263 694 -478
TOTAL COMMON EQUITY   17,775.00 16,643.00 14,715.00
TOTAL EQUITY   17,801.00 16,661.00 14,722.00
TOTAL LIABILITIES AND EQUITY   50,781.00 50,129.00 50,164.00

 

DEBENHAMS

Currency in As of: 1-Sep 31-Aug 30-Aug
Millions of British Pounds   2012 2013 2014
    GBP Restated GBP
    GBP
Assets
Cash And Equivalents 44 27 64.4
TOTAL CASH AND SHORT TERM INVESTMENTS   44 27 64.4
Accounts Receivable 20.9 19.8
25.3
Other Receivables 2.3 1.1 2.1
TOTAL RECEIVABLES   23.2 20.9 27.4
Inventory 332.3 357.9 345.7
Prepaid Expenses 52.2 57.4 47.3
Other Current Assets 7.8 7.3 1.5
TOTAL CURRENT ASSETS   459.5 470.5 486.3
Gross Property Plant And Equipment 1,243.40 1,301.10 1,347.20
Accumulated Depreciation -581.8 -609 -658
NET PROPERTY PLANT AND EQUIPMENT   661.6 692.1 689.2
Goodwill 818.5 819 818.5
Long-Term Investments 1.9 1.8 4.2
Deferred Tax Assets, Long Term 83.2 69.3 51
Other Intangibles 46.4 57.5 74.3
Other Long-Term Assets 20.1 22.6 24.9
TOTAL ASSETS   2,091.20 2,132.80 2,148.40
LIABILITIES & EQUITY
Accounts Payable 318.3 345 326.2
Accrued Expenses 119.8 109.2 104.6
Short-Term Borrowings 161.2 161.3 196.9
Current Portion Of Long-Term Debt/Capital Lease 2.2 2.3 5.4
Current Portion Of Capital Lease Obligations 2.2 1.8 3.3
Current Income Taxes Payable 55.7 49.7 42.8
Other Current Liabilities, Total 67.7 69.6 78.2
Unearned Revenue, Current 2.1 4.8 3.9
TOTAL CURRENT LIABILITIES   727 741.9 758
Long-Term Debt 253.1 236.2 221.8
Capital Leases 4.5 3.1 3.2
Pension & Other Post-Retirement Benefits 57.3 24.6 9.3
Deferred Tax Liability Non-Current 64.7 59.1 53.4
Other Non-Current Liabilities 323.6 323.5 335.3
TOTAL LIABILITIES   1,430.20 1,388.40 1,381.00
Common Stock 0.1 0.1 0.1
Additional Paid In Capital 682.9 682.9 682.9
Retained Earnings -9.9 64.9 100.7
Comprehensive Income And Other -12.1 -3.5 -16.3
TOTAL COMMON EQUITY   661 744.4 767.4
TOTAL EQUITY   661 744.4 767.4
TOTAL LIABILITIES AND EQUITY   2,091.20 2,132.80 2,148.40

 

CALCULATIONS AND FORMULAS

Gross Profit Margin

Formula:

Gross Profit margin 2012′ 2013′ 2014′
Tesco plc 8.44% 7.59% 6.62%
Debenhams plc 13.56% 13.13% 12.08%

Operating Profit Margin

Formula:

Operating Profit margin 2012′ 2013′ 2014′
Tesco plc 5.95% 5.13% 4.73%
Debenhams plc 7.85% 6.70% 5.53%

Net profit margin

Formula:

Net profit margin 2012′ 2013′ 2014′
Tesco plc 4.39% 0.04% 1.54%
Debenhams plc 5.62% 5.08% 3.77%

Current ratio

Formula:

Current ratio 2012′ 2013′ 2014′
Tesco plc 0.67 0.69 0.73
Debenhams plc 0.63 0.63 0.64

Acid-test ratio

Formula:

Acid-test ratio 2012′ 2013′ 2014′
Tesco plc 0.48 0.49 0.56
Debenhams plc 0.17 0.15 0.19

Asset turnover

Formula:

Asset turnover 2012′ 2013′ 2014′
Tesco plc 1.26 1.26 1.26
Debenhams plc 1.07 1.07 1.08

Receivable collection period

Formula:

Account receivable turnover 2012′ 2013′ 2014′
Tesco plc 28.48 29.94 33.52
Debenhams plc 96.11 109.20 84.41
Receivable collection period 2012′ 2013′ 2014′
Tesco plc 12.81 12.19 10.89
Debenhams plc 3.80 3.34 4.32

Payables payment period

Formula:

Payable turnover 2012′ 2013′ 2014′
Tesco plc 9.74 10.27 10.63
Debenhams plc 7.10 6.78 7.29
payable turnover period 2012′ 2013′ 2014′
Tesco plc 37.46 35.53 34.34
Debenhams plc 51.41 53.80 50.05

Inventory turnover period

Formula:

Inventory turnover 2012′ 2013′ 2014′
Tesco plc 16.26 15.65 16.40
Debenhams plc 5.80 5.54 5.88
Inventory turnover period 2012′ 2013′ 2014′
Tesco plc 22.44 23.32 22.26
Debenhams plc 62.93 65.89 62.05

Interest coverage

Formula:

Interest coverage 2012′ 2013′ 2014′
Tesco plc 12.80 10.53 9.46
Debenhams plc 11.99 12.97 9.01

Financial leverage

Formula:

Financial leverage 2012′ 2013′ 2014′
Tesco plc 0.65 0.67 0.71
Debenhams plc 0.68 0.65 0.64
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