This is no buying opportunity – Tesco goes from bad to worse

Just when you think that things couldn’t get any worse for Tesco (LSE:TSCO) investors, they have.  The company has announced this morning that it has inflated its latest half-year profits to the tune of £250m.

In a nutshell it has booked income before it should have done, and has delayed recognising costs until a future period. This is pure number massaging at its best. Unsurprisingly, its share price is tanking.

So not only does Tesco have a problem with its sales, profits and return on its assets, the whole integrity of its profits is now being called into question. An investigation has been launched, but this smacks of the acts of desperate company accountants under pressure to mask the real extent of the mess that Tesco is in. It now seems that they have gone too far.

I wrote about Tesco a couple of weeks ago in MoneyWeek magazine and argued that the shares weren’t really that cheap. I said I wouldn’t be interested in buying until they fell to at least 150p. I stand by that figure.

But this morning’s revelations suggest Tesco is in deep trouble, with a highly questionable company culture that smells very bad indeed. Tesco will not go bust – but it is like a big ship that has been holed and is still taking on water.

I’ve been banging on from time to time about how Tesco’s finances are not as strong at they seem. It has lots of off-balance sheet debt and has milked its suppliers as a source of cash flow by squeezing their payment terms. This game is well and truly over.

It would not surprise me one bit if Tesco is forced to ask it shareholders for more cash to shore itself up and to buy itself some time to turn itself around. The dividend has been slashed but we can’t rule out a rights issue.

These shares are nowhere near the bottom yet. Buying now may be a mistake. There will be a better entry point in the future.

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