Management Systems & Financial Information for Decision Making

Questions: 1. Critically discuss the primary objective and four secondary objectives of both companies. Whilst analysing these objectives critically provide evidence of their success or even failure. 2. Critically analyses two ratios in the following areas between 2011 and 2014 from FAME on both companies: Profitability Efficiency Financial/Stability Investor 3. Critically discuss the importance of cash management and capital budgeting to both companies. Answers: 1. Profile of TESCO PLC: Tesco is identified as the biggest supermarket in UK dominating the retail segment of British with domestic market share and worldwide sales. Food is the main origination of Tesco and later it catered the service into garments, financial and internet service, consumer electronics and telecoms. Primary Objective: The primary objective of Tesco is to create the value and culture among the customers. Secondary Objective: The secondary objectives of Tesco are to remain as a market leader and provide more than the competitors. Treating the customers as a part of Tesco team. Treating the customers gently and softly. Caring the employees so that they care for the customers with mine hearted. Critical Analysis of Objectives: Globalization and severe competition among retail supermarkets has increased customers awareness; profitability and finally the persistence of organizations are highly impacted by customer satisfaction: thus it has become the important key issues in the current world (Cheng et al. 2011; Beatson et al. 2007). Customer satisfaction approach is always very subjective and it can be influenced by various factors such as products/service price, reliability, responsiveness and lead time (Cochran, 2003). Customer satisfaction is the outcome of the value received through customers perception where the value equals perceived service quality relative to price (Hallowell 1996, p. 29). Perceived quality is the first determinant of overall customer satisfaction and perceived value is the second determinant (Fornell et al, 1996, p. 9). Employees in service industries have strong influence over customer satisfaction. They take a leading role in driving the performance of organization. Organizational performance has strong impact on employee interactions with customers (Peltier, Dahl Mulhern, 2009). Tescos business is customer oriented. It provides the products that has value for money for its customers and delivers high quality service. Tesco is committed to improve the services and products and thus introduced value for money offer regarding the customers perception on their shopping experience such as quality, price, range, service, shopping environment, parking availability and store hygiene levels (Tesco PLC, 2012). Tesco also carries out market research survey to track consumer preferences, demands and expectations and the companys ability to meet those demands (Tesco PLC, 2012). Tesco has achieved immediate advantage against competitors in exploring the rends of consumers, establishing targeted communications, accurately measuring the promotions, protecting against the activities initiated by competitors and ensuring right product at right place on time. These issues helped Tesco to enhance the product and service quality in order to increase the customer satisfaction which in turn creates customers loyalty (Benady, 2006). Profile of British Telecommunications PLC: British Telecommunications Group, PLC is one of the leading providers of telecommunications services in Europe. The core activities of BT group include local, national and international telecommunications services, broadband with higher value, internet services and products and IT solutions. Primary Objectives: BT has a very clear vision of where they want to be and currently they are taking steps to achieve the goal. Their renovation has primary objectives. Turning around to be a global services Secondary Objectives: Their main purpose is to offer world-class telecommunications and information products and services and to improve network activity at home and overseas so that they can: To drive broadband services Making BT a great place to work To become wholesalers choice To create a brand in the SME sector (The Guardian, 2008) Critical Analysis of Objectives: The movement of globalization process has made the companies to expand its business in multi nations. About 50% of BT group total revenue is generated by BT global services. Telecom is determined to be the dynamic economic sectors and it faces persistent market and technological forces (Wellenius Stern, 1996). It is essential to retain the market share of global services. The share of BTs in DSL and LLU installed base remains 35%, which keeps growing up in the economic crisis. The SME market provides a large purse that telecom companies have no option but to compete for it. Succeeding is this market will depend on various factors such as efficiency to run quickly to occupy the large market during its fast evolution; diplomatic in selecting the appropriate channels to reach customers; willpower to take initiative and to strengthen the SME market; tractability and self-scrutiny to deal the business partners, maximizing delivery and identify total telecom solutions. The telecoms that conglomerates these attributes efficiently and utilizing them wisely will navigate SME market expansion (Breedveld et al, 2005). BT has reached an attitude which is much stronger and indomitable by competitors. UK based customers dominate the segment and it deliver solutions to more than 150 countries linking communities, installations and value chains that are important to organizations. It is responsible for more than 25 million telephone lines. BT is the only UK telecom company to deliver fixed line telephone connection to any UK address. It operates the most public telephones all over UK (Malaga, 2003). 2. Profitability Ratios: A) Gross Profit Ratio: ( million) ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Gross Profit 5261 4089 4010 9692 9011 9286 Net Sales 64539 64826 63557 18987 18103 18287 Ratio 8% 6% 6% 51.04% 49.77% 50.77% Gross Profit Ratio = Gross Profit/Net Sales *100 = 5261/64539*100 = 8% Interpretation: BT group has high gross profit margin than Tesco. It indicates that BT group is making a reasonable profit and keeps the overhead cost in control. But Tesco is showing less profit margin and also unable to control its cost of sales. It is recommended for Tesco to minimize the cost of sales and make a reasonable profit. B) Net Profit Ratio: ( million) ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Net Profit 2814 120 970 6495 6122 6374 Net Sales 64539 64826 63557 18987 18103 18287 Ratio 4% 0.1% 1.5% 34.2% 33.8% 34.8% Net Profit Ratio = Net Profit/Net Sales*100 = 2814/64539*100 = 4% Interpretation: The results indicate that BT group is showing higher net profit margin than Tesco. BT group profit margin shows that the company is more effective in converting the revenue into profit. Tescos profit margin indicates a low margin of safety which shows that there is higher risk of decline in sales. Finally it might result in less profit and a net loss. C) Operating Profit Margin: ( million) ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Operating Income 3835 1960 2259 2120 2315 2312 Net Sales 64539 64826 63557 18987 18103 18287 Operating Profit Margin 0.05 0.03 0.03 0.11 0.127 0.126 Operating Profit Margin = Operating Income/Net Sales = 3835/64539 = 0.05 Interpretation: The result indicates that BT group is showing higher operating margin than Tesco. BT group is earning more per pound of sales and fixed costs are in control for the production. But in case of Tesco the fixed costs might be higher for the production even though it shows a good sales volume. D) Return on Capital Employed (ROCE): ( million) ($ million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 EBIT 3825 1960 2259 6495 6122 6374 Capital Employed 18261 20594 18055 14693 17275 17211 ROCE 20% 9.51% 12.51% 44.20% 35.43% 37.03% ROCE = EBIT/Capital Employed*100 = 3825/18261 = 20% Interpretation: The result indicates that BT group shows higher percentage than Tesco but it has been compared to the previous years. The lower percentage indicates that the company should increase the operating profit without corresponding increase in the capital employed. Though BT group has maintained steady operating profit in the year 2012, in later years it has not been maintained efficiently. So both the companies have to maintain operating profit by minimizing the value of capital employed. E) Return on Equity (ROE): ($ million) ($ million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Net Income 4433 43 1614 1756 1948 2018 Avg. Shareholders Equity 27466.5 26956.5 25082.5 1308 (262) (592) ROE 16.13% 0.15% 6.43% 134.25% 743.51% 340.87% ROE = Net Income/Average Shareholders Equity*100 = 4433/27466.5*100 = 16.13% Interpretation: The results indicate that Tesco has generated more profit with the money invested by shareholders than the BT group. Since the companies differ in the industry sector, it is not fair conclusion that the industries making higher return are better investment than the lower return. F) Return on Assets (ROA): ($ million) ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Net Income 4433 43 1614 1756 1948 2018 Total Assets 80223 77599 83053 23948 24879 24898 ROA 5.67% 0.05% 2.01% 7.33% 7.82% 8.10% ROA = Net Income/Total Assets*100 = 4433/80223*100 = 5.67% Interpretation: The results exhibits that BT group is showing higher ratio than Tesco. BT group is efficient in managing its assets to generate profit and it is earning more money on its assets than Tesco. Tesco results show that it is slightly inefficient in managing its assets. 2. Investment Ratios: A) Dividend Cover: ( million) ($ million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Profit After Tax 1498 3320 86 1756 1948 2018 Dividend 1180 1184 1189 (590) (683) (778) Dividend Cover 1.26 2.80 0.07 2.97 2.85 2.59 Dividend Cover = Profit after Tax/Dividend = 1498/1180 = 1.26 Interpretation: The result indicates that the BT group is more capable to pay dividends to its shareholders than Tesco. Tescos dividend is consistently below 1.5 and it suggests that the company might not be able to sustain the current level of dividends during severe variation in profit in the future. Similarly, BT group is maintaining higher proportion of its income to meet its financial requirements which ends in higher dividend payout in the coming years. B) Dividend Yield: ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Dividend Per Share 14.76 14.76 14.76 8.30 9.50 10.90 Market Price Per Share 318.2 372.25 318.95 224.32 279.41 375.86 Dividend Yield 4.63% 3.96% 4.62% 3.70% 3.40% 2.90% Dividend Yield = Dividend per Share/Market Price per Share*100 = 14.76/318.2*100 = 4.63% Interpretation: The above result indicates that Tesco yields more dividend than BT group. Tesco pay its investors a high dividend in contrast to the fair market price of the share. Investors of Tesco are highly compensated for their investments compared to the investors of BT group. It also differs from one industry to another industry. C) Price Earnings Ratio (P/E): ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Market Price per share 318.2 372.25 318.95 224.32 279.41 375.86 Earnings per share 37.41 35.97 32.05 25.80 26.30 28.20 Price Earnings Ratio 8.50 10.34 9.95 8.69 10.62 13.32 Price Earnings Ratio = Market price per share/Earnings per share = 318.2/37.41 = 8.50 Interpretation: The above result indicates that BT group is showing higher price earnings compared to Tesco. The rise in the earnings per share also raises the market price per share which indicates positive future performance and investors are willing to high for the companys shares. Though Tesco doesnt show poor ratio, performance is lower compared to BT group. Since both the companies belong to different industry, the ratios also differ from one another. D) Payout Ratio: ( million) Company TESCO PLC BTC PLC Year 2012 2013 2014 2012 2013 2014 Dividend per share 14.76 14.76 14.76 8.30 9.50 10.90 Earnings per share 37.41 35.97 32.05 25.80 26.30 28.20 Payout Ratio 0.39 0.41 0.46 0.32 0.36 0.38 Payout Ratio = Dividend per share/Earnings per share = 14.76/37.41 = 0.39 Interpretation: The above result indicates that the payout ratio is almost equal for the companies and it is showing a low dividend payout ratio. It shows that both the companies are retaining a large portion of the earnings for future growth. A high payout ratio is preferred by the investors to purchase shares in order to earn continuous dividend from the company. A low ratio is good for those who seek appreciation in the value of stock. 3. Importance of Cash Management and Capital Budgeting: Based on the above ratios it appears that British Telecommunications Plc. would be considered as a favored choice, given higher margins with their presence in telecom sector and greater presence in global market. Additionally, BT has its presence on the high street and has the ability to take advantage of recovery of UK economy. Given this, BT Plc., could be less risky than Tesco Plc., which has given scope for high income. Considering the profitability, BT Plc. is making a reasonable profit and keeps the overhead cost in control than Tesco Plc. BT group profit margin shows that the company is more effective in converting the revenue into profit. BT group is earning more per pound of sales and fixed costs are in control for the production. But in case of Tesco the fixed costs might be higher for the production even though it shows a good sales volume. Since the companies differ in the industry sector, it is not fair conclusion that the industries making higher return are better investment than the lower return. When it comes to the investment, Tescos dividend is consistently below 1.5 and it suggests that the company might not be able to sustain the current level of dividends during severe variation in profit in the future. Similarly, BT group is maintaining higher proportion of its income to meet its financial requirements which ends in higher dividend payout in the coming years. BT group is showing higher price earnings compared to Tesco. The rise in the earnings per share also raises the market price per share which indicates positive future performance and investors are willing to high for the companys shares. Though Tesco doesnt show poor ratio, performance is lower compared to BT group. Since both the companies belong to different industry, the ratios also differ from one another. BT Plc., is favored for its various telecom business solutions, both UK and global market, which are anticipated to gain advantage as global recovery. The main advantage is the scope of business, with potential risk in the UK telecom market diminished by enhanced performance from various operations and international sales. Tesco is more exposed to be the dominant player in grocery market. It is well placed to take over the enhancing residue through its multi-channel businesses. 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