Ahold vs. Tesco- Analyzing Performance Case Solution
From: Mary King
Subject: Performance Analysis- Ahold vs. Tesco
The potential investment opportunity in two different retail companies namely Ahold and Tesco presented various challenges for the European equity analyst, Mary King. However, Mary used financial data including income statements and balance sheets from the year 2008 to 2011 to evaluate the financial performance of both retailers in order to determine which would be beneficial for investment purposes. Furthermore, Mary conducted ratio analysis of Ahold and Tesco to efficiently determine and compare the performance of both retailers to arrive at an effective decision. The findings related to the Ratio Analysis are illustrated below.
Assessing the gross profit margin of Ahold and Tesco, it can be determined that the gross profit margins of Tesco’s were higher than Ahold. Similarly, the gross profit margin of both retailers had increased from year 2009 to 2010, but had shown a decrease in the year 2011. Additionally, the net income margin of Tesco was higher than Ahold. Moreover, the net income margin of Ahold decreased from the year 2009 to 2010, but showed a considerable increase in the year 2011. Additionally, Tesco’s net income margin had increased from the year 2009 to 2010 but had shown a minimal decrease in 2011.
In addition to this, the cost of goods sold per revenues for Ahold had increased consistently over the three year period from 72.83% in 2009 to 73.83% in 2011. However, Tesco’s COGS to sales ratio had decreased from the year 2009 to 2010, but it showed an increase in the year 2011. Furthermore, it can be evaluated from the analysis of profitability ratios of both retailers that the costs of Ahold were increasing, which meant that its future profitability would be affected if its costs would continue to increase. On the other hand, Tesco’s cost of goods sold to sale ratio had decreased in 2010 and increased in the year 2011, which showed that if the cost of goods sold continues to grow, then the profitability of the retailer would decrease.
Operating efficiency and cash conversion cycle
The net long-term ratios to sales ratio for Tesco were higher than the ratio calculated for Ahold, which indicated that Tesco was more efficient in converting or exploiting its long-term assets to generate sales revenues. Additionally, it was assessed that the long-term asset to sales ratio showed an increasing trend over the three year period for Ahold. However, the trend showed a deceasing trend for Tesco. Furthermore, its net long-term asset to sale ratio was decreasing, which showed that the retailer had become less efficient with time. However, the increasing asset to sales ratio of Ahold exhibited that the retailer was becoming more efficient with time. Furthermore, the cash ratio for Ahold was higher than the cash ratios for Tesco. Moreover, it can be assessed that the cash ratio exhibited a decreasing trend over the years for both retailers. However, this meant that Ahold was in a better position to pay-off its debt as the cash position of the retailer was adequate as compared to Tesco. Additionally, the deteriorating cash flow condition of Tesco adversely affected its going concerns and could decrease the investors’ confidence in the company.
The short-term liquidity ratios of Ahold were higher than Tesco, which meant that Ahold was in a better position to pay-off its debt as its assets easily convertible in to cash were in excess than its current liabilities as compared to Tesco. Furthermore, Ahold was more liquid than Tesco and it would be more likely to pay-off its debt in the event of a crises. Moreover, the current ratios and quick ratios of Ahold were higher than Tesco. Additionally, the short-term liquidity, current and quick ratios exhibited a decreasing trend for both retailers.
The annual working capital of Ahold was positive, whereas the working capital for Tesco was negative, which meant that the cash flow situation was at its worst as the management of the retailers did not have sufficient cash flow to meet the daily cash flow requirements of the business. This resulted in compromising Tesco’s going concern. Furthermore, the future of Tesco looks bleak in light of its working capital situation.
Moreover, the accounts receivable days of Ahold were lower thanTesco’s, which showed that Ahold’s inventory was converted into cash quicker as compared to Tesco, which further indicated that the retailer had more cash flow on a daily basis.
After evaluating the financial performance of both retailers, it is recommended to Mary that Ahold should be considered for investment purposes because it would prove to be more beneficial than Tesco since Ahold’s future looks bright under the ratio analysis conducted to evaluate the performance of the retailers. The current management of Ahold is better as compared to Tesco, which could be assessed form the annual working capital calculated, in which Ahold working capital were although decreasing annually but were positive and would fulfill the daily cash flow requirements of the business...........................
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