Any long-term Tesco (LSE: TSCO) shareholders should now be used to volatility. Over the past 12 months, the company’s shares have bounced between 140p and 220p as the market has lost, regained, and then lost its confidence once again in the turnaround plan.

Indeed, year-to-date, shares in Tesco are up by 6.3% after paring gains from an earlier rally in March, which meant the company’s shares had risen by more than 32% during the first three months of the year. 

However, over the past four or five weeks, shares in Tesco have lost around a fifth of their value as investors have booked profits made earlier in the year, and cold water has been thrown on Tesco’s recovery plan.

From bad to worse 

The most significant development that has shaped Tesco’s trading pattern this year has been the warning from JPMorgan Cazenove that the supermarket is in worse shape than first impressions suggest.

These accusations are based on Tesco’s rather cloudy accounting practices and some window dressing of the figures. For example, the broker points out that Tesco paid no tax during its last financial year, and annual capital expenditure was unsustainably low at £1bn, below its annual depreciation charge. 

What’s more, Tesco’s most recent earnings release was flattered by one-off benefits such as the sale of Blinkbox and a reclassification of ATM income from the bank to the retail division. JPMorgan also raised concerns about Tesco’s cash flow figures. The company’s costs are set to increase by around £200m this year according to the broker, that’s despite Tesco’s efforts to cut costs, and the company will pay a normalised tax rate this year. These two factors mean that Tesco’s free cash flow is unlikely to improve going forward, and the company’s balance sheet will remain stretched.

Investors are also concerned about the impact another supermarket price war will have on Tesco and the group’s margins. Nielsen and Kantar Worldpanel reports issued at the beginning of this month showed that all four of the leading grocers lost market share in April, with Asda recording its worst month on record. After this performance, City analysts believe that Asda is set to get more aggressive on pricing later this year as it attempts to claw back lost market share.

The bottom line 

So, the threat of a price war and opaque accounting practices are the two main themes that have pushed investors away from shares in Tesco over the past month. The company’s valuation is also troubling.

At present, shares in Tesco trade at a forward P/E of 23.7 for the year ending February 2017. Such a high multiple leaves little room for error if the company is dragged into another price war or costs increase faster than expected. A more suitable earnings multiple would be 10 to 12 times, which implies a share price of either 68p per share or 82p per share for the retailer based on current earnings estimates.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.