4.1. PERL Framework Financial Analysis on Tesco
The PERL (Performance, Efficiency, Risk and Liquidity) framework is very useful for two reasons: It gives us the idea and picture of how Tesco’s financial ratios are linked and offers a structure that is consistent with the above SWOT analysis.
The above ratios indicates a declining performance for Tesco in 2015. Margins which measures the return of profit on all invested capital has declined significantly and may be as a result of tense competition and other supply chain management issues. ROCE of -23.54% is indicating that shareholders are paying heavily for Tesco’s investment in current assets and…show more content… While Tesco pays suppliers on average 56 days, it has to finance from its own resources 12 days until goods are sold and payments received. The same as in 2014. This is an over-trading issue affecting Tesco’s effort in expanding its revenue.
The 97% show high fixed costs in Tesco’s cost structure which makes the company more vulnerable in profitability fluctuations. The 97% and 106% for 2015 and 2014 respectively implies that any variation in turnover would impact upon Tesco’s operating profit. The question is, does Tesco has internal cost flexibility? The increase in gearing ratio is also due to lower net assets. This is largely as a result of Tesco’s actions to impair asset values in Europe and goodwill in China.
The Cost of Operational Gearing has been plotted using MS Excel with Tesco’s 5-year Revenue and EBITDA, which indicates that for the 5 years on average (1-0.0878) or 91.22% of revenue is variable cost while the balance of the costs is fixed. The above estimates indicates that the fraction of fixed cost is marginal suggesting that changes in EBITDA are not in line with Tesco’s revenue. A concern that must be addressed by management. This is due to the fact that Tesco is growing and is increasing its expenditure on non-current assets and human assets whiles revenue is…show more content… These may be as a result of Tesco's troubles from accounting scandal that has obligated changes in its top management, a sinking share price, decreasing sales and loss of consumer confidence as consumers turn to discount rivals such as Lidl and Aldi. Nevertheless, Tesco has put in place a road map to address the key issues by rebuilding trust with shareholders and stakeholders, as well as to win consumers’ confidence in Tesco’s brand.
To the clients of this analysis, especially shareholders, they should hold their shares and not sell them, but must not extend their risk by buying more. For lenders, the loans already given should be enough and must put measures in place to make sure it’s been repaid even if it delays but no further loans must be given to Tesco, at least for now to limit any insolvency risk. The lenders may review the loan terms and the covenants.
5. Valuation Analysis
5.1. A fair value equity valuation
For this part, I will used Dividend Valuation Model to estimate a fair value of Tesco’s Equity. This is because Tesco is supposed to pay out dividend every year, all things being equal. I will therefore adopt three assumptions from the study guides;
That Tesco is a going concern company.
Receiving constant rate of return in future periods. Chang in future dividends due to change in certain