Gearing ratios
Gearing ratios are important in examining the ability of a firm to meet both short-term and long-term debt obligations (Peterson & Fabozzi, 199: 124).
Gearing ratios namely, debt to equity= long-term debts/ Shareholders funds) *100
Debt-to-capital employed = (long-term debts/ Capital Employed)*100
In analyzing the company’s debt to equity ratio, we deduce that the resultant value in 2010 is favorable at 77%. However, in 2011, Tesco posted a deteriorated debt-to-equity ratio of 1.05 or 105%. A debt-t-equity of more than one or 100% indicates that Tesco operated more on debts than equity in 2011. The underlying result implies that the company traded on a risky ground indicated by the mentioned indicator. The company should prepare to enter a new financial year on a new footing to avoid the risk of accumulating excess debts, which may hamper its financing programs (Peterson & Fabozzi, 199: 124). In essence, the company I considered riskier in 2011 as compared to 2010 that was better by about 28%.
On the other hand, the debt to capital employed indicates how well a firm operates on its assets relative to the underlying long-term debt financing. A company should maintain the debt-to-capital employed ratio below 0.5 or 50%. In 2010, the company recorded a 30.77% debt-to-capital ratio. This ratio indicated that Tesco generated more than two-thirds of the total funding, while debt funding provided one-third. Although Tesco maintained the ratio below 50%, it deteriorated by 7% to post the ratio of 37%.
Capital structure ratios
Earnings per share (EPS) = profit after tax- Preference Dividends /Number of ordinary shares
Dividend yield (DY) = Dividend per Share/ market price Per Share *100%
Price-Earnings ratio (P/R) = Market Price per share/ Earnings per Share
Dividend per share (DPS), dividend cover = dividend/number of ordinary Shares. The following table summarizes the underlying capital structure ratios relating to Tesco Company.
The dividend per share exhibited an increasing trend over the four years beginning from 2008. This incremental rate of dividends per share indicates that Tesco enjoyed high profitability, which translated to the declaration of higher dividends. Throughout the four years, the company registered an incremental percentage of about 1.3% per annum. The outcome favors its market strength since a higher dividend encourages potential investors to invest in the company with higher returns on investments. Of the four years, 2011 saw a tremendous increase thereby recording 13.05% dividend per share. Going by these values, Tesco would have garnered a substantial amount of public investments had it declared a public offering within this period.
Investors make up their benefits on both dividends and capital gains on their investments. The amount of dividend is equivalent to the interest rate on the amount borrowed since it represents the expected income on an investment. From the above information, it is critical to note that the low dividend yield demonstrates a strong share price appreciation. In 2010 for instance, the company posted a 3.05% dividend yield rate on its shares. These figures slowed further in 2011 to 2.66%. In this scenario, the price per share in 2011 is slightly higher than in 2010.
Surveys indicate that low growth in dividend yield signifies a change of strategy toward an aggressive approach to realize higher capital gains through highly-priced shares. Although this approach is beneficial, a low dividend yield rate, low asset base, coupled with huge debts are true indicators of a company under financial distress (Peterson & Fabozzi, 199: 124).
Earnings per share indicate the extent to which one share contributes to the general profitability of a company. Tesco Company posted n average earnings per share, which translates into a higher dividend yield. Investors tend to select those companies with higher earnings per share.
The analysis shows that on average, a single share contributes 28% of the total profits of the firm. On the other hand, price-earnings per share shows how much a one-unit share would generate based on the share market price. In essence, this ratio implies that given the market price of a share, investors will gauge the proportion of the benefits that accrue on top of the value of their investment. In 2010, Tesco recorded a price-earnings ratio of 10.89. This figure slowed down in 2011 by recording 9.59. This trend implies that investors may feel discouraged because of the reduced earning value of their shares in Tesco. This is because investors desire to have a higher P/E ratio to demonstrate a strong share.
Reference
Peterson, P. & Fabozzi, F.J. 1999. Analysis of financial statements. New York: John Wiley and Sons.