Finance Essay Example | Topics and Well Written Essays - 3750 words

Finance - Essay Example This report analyses the behaviour of the stock in the past five years, links it to the financial performance of the company and predicts the future trend that may emerge. This report also analyses the value of the TESCO share as an instrument for investment in absolute terms. Different tools are available for making financial analysis of stocks and range from the very simple and elegant to the very complex and difficult to understand ones. Here we use some of the most recognised analysis methods such as Earnings per Share (EPS); Price to Earnings Ratio (PE); Cash Flow Discounting; Market Value; and Book Value. The financial performance of the company is better understood through the calculation of some important ratios that assist us in further detailed appraisal. (These ratios are calculated from the summary financial performance sheets placed at Enclosures 1 and 2.) This ratio helps us understand the relative importance of long-term debt in the capital structure and can therefore provide useful additional information for assessing the acceptability of the overall leverage position of the business. The long-term leverage of the company is good and shows a positive and reducing trend over the period considered. Indicating that the long term debt is coming down and this will impact future interest burden as well as allow the company to raise further funds in the debt market, should they be required. c. Interest cover = operating profit / interest charges This shows the number of times available profit covers interest charges and measures the extent to which operating profit can fall without being insufficient to cover the interest charges and thereby create a pre-tax loss. 2003 2004 2005 2006 2007 2007-08 Operating Profit 1361 1600 1943 2235 2653 1289 Interest Expenses 227 258 235 241 216 20 Interest Cover (Times) 6.00 6.20 8.27 9.27 12.28 N.R.2 The effect of the lowering debt resulting in lowering of the interest burden is clearly evident in these numbers. The company appears to have no problem in servicing its debt, the numbers compare very favourably with the industry average of 3.29. 1.2 Operating performance: The ratios that are relevant are: a. Return on Capital Employed (also known as the primary ratio) = Operating Profit / Capital Employed