Ratio Analysis of Tesco PLC

This assignment delves into the financial performance analysis of Tesco PLC through the lens of ratio analysis and the balanced scorecard. It meticulously examines various financial ratios encompassing profitability, liquidity, solvency, efficiency, and investment, providing insights into Tesco's operational strengths and weaknesses. Furthermore, it explores the four perspectives of the balanced scorecard: learning and growth, business processes, customer perspective, and financial perspective. The assignment concludes with recommendations for Tesco to enhance its operations and improve overall performance.

FINANCE

TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................1
INTRODUCTION...........................................................................................................................2
MAIN BODY ..................................................................................................................................2
Literature review analysis and Conclusion..................................................................................2
Comparison of result and ratio analysis.......................................................................................2
Discussion of the performance of company.................................................................................7
Balance scorecard and evaluation of the use of KPI in assessing organizational performance . 7
Advantages and disadvantages of ratio analysis .........................................................................9
CONCLUSION AND RECOMMENDATION..............................................................................9
REFERENCES..............................................................................................................................11

EXECUTIVE SUMMARY
This assignment will consist of analysis of financial ratios to identify performance of
tesco inn the industry. It will also include use of balance scorecard to measure the performance
of organization to achieve their performance goals. It will also provide evaluation of ratio
analysis to discuss about various advantages and disadvantages of using this technique.
Moreover, it will include summary of the assignment and recommendation for tesco to improve
its performance.
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INTRODUCTION
Finance is a term which is related to management of money in the organisation. Finance
is important to operate various activities of firm. It is easily convertible in to cash and there are
various sources of finance which organisation can use to perform its various activities. It is used
for sources and application of money to get effective results which helps in growth of
organisation. Tesco will be included in this assignment which is a retail company. It is having its
global presence and provide various products such as supermarket, hypermarket etc. and it is a
market leader of grocery in UK with market share of around 28.4 %. TESCO is providing
products to customers according to their demand due to which it is increasing their market share.
This assignment will include Trend in the performance of organisation using ratios. Furthermore,
it will include balance scorecard and evaluation of use of KPI in assessing organisational
performance. Also, it will provide recommendation for company to improve their performance.
MAIN BODY
Literature review analysis and Conclusion
According to the view of (Andersen and Tarp, 2016), Accounting techniques are used to
analyses the financial data for identifying the performance of organization for effective decision
making to improve the performance and profitability of firm. It includes ratio analysis, trend
analysis and common size analysis.
In the views of (Adel, 2015) , financial ratios are used for measuring the profitability and
liquidity position of organization. This ratio analysis helps the organization in making effective
decision for improving its various operation to achieve the performance goals of organization.
According to (Abdul Karim, 2014), Ratio analysis helps in forecasting and planning for
the future activities and also helps in measuring the performance on the basis of analysis. On the
contrary, it considers only quantitative b factors and ignore qualitative factors
Comparison of result and ratio analysis
Ratio analysis of Tesco
Profitability ratio analysis : This ratio analysis is done to measure the organization
performance (Tesco PLC -TSCO, 2018). Profitability ratios are divided into tow margins and
return. Ratios that show margins represent the firm 's ability to translate sales to profit at various
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stages of measurement. Ratios that shows returns represent the firm ability ton measure the
overall efficiency of the firm in generating returns for its shareholder's. Profitability ratio
analysis include four ratios which consist of gross profit ratio, net profit ratio , return on capital
employed and return on assets.
Particulars Formula
Profitability ratio
analysis
2017 2018
Gross Profit 2902 3350
Net profit -40 1206
Sales revenue 55,917 57491
Earnings before interest and
tax or operating profit 1168 1589
Capital employed 6438 10480
Net income -40 1206
Average total assets 44879 45358
GP ratio Gross profit / sales * 100 5% 6%
NP ratio Net profit / sales * 100
-
0.07% 2%
Return on capital employed EBIT / capital employed 18.1%
15.2
%
Return on assets Net income / average total assets
-
0.09%
2.66
%
On the basis of above computation it can be interpreted about profitability ratio analysis
of tesco for the years 2017 and 2018 to compare the profitability of company. According to the
table gross profit ratio for the year 2017 is 5 % which increased to 6 % in the year 2018 which
shows that profitability of Tesco is increased in 2018 as compared to 2017. Also, it can be
interpreted that net profit ratio of tesco in the year 2017 was 0.07 % which increased to 2% in the
year 2018 that shows the net profit is increased in the year 2018 which is beneficial of the
organisation. Furthermore, it can be interpreted that return on capital employed in the year 2017
was 18.1 % which reduced to 15.2 % in 2018 which shows that the returns are reduced in 2018
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as compared to 2017. Moreover, it can be interpreted that return on assets in 2017 was 0.09 %
which increased to 2.66 % which is beneficial for the tesco.
Liquidity ratio analysis : This analysis is done by organisation to identify the liquidity
position of firm which provide information about the firm 's ability to pay its obligation.
Liquidity ratio shows the ability of organisation to pay its short – term debts. High liquidity
ration shows that firm is having enough money to pay its obligation and low liquidity ratio shows
that the firm may struggle to pay its short – term obligations.
Liquidity ratio analysis 2017 2018
Current assets 15417 13726
Current liabilities 19405 19238
Inventory 2301 2263
Prepaid expenses 0 0
Quick assets 13116 11463
Current ratio Current assets / current liabilities 0.79 0.71
Quick ratio
Current assets - (stock + prepaid
expenses) 0.68 0.60
From the above computation of the liquidity ratios it can be interpreted about various
ratios which are used to identify the firm's ability to pay its short term obligations. As per the
above computation it can be interpreted that current ratio of tesco in the year 2017 was 0.79
which reduced to 0.71 that shows the firm have low liquidity position due ton which firm will
struggle in paying its short term obligation the ideal current ration is 2 : 1 which shows that
organization have double current assets to pay its current liability. According to the computation
it can be analyzed that in 2017 tesco was having more liquidity than in 2018 but then also it does
not have good liquidity position and it will affect the firm badly. Also, as per the computation it
can be interpreted that quick ratio which is determined by subtracting stock and prepaid expenses
from current assets. According to above table it has been identified that in 2017 quick ratio was
0.68 which reduced to 0.60 that shows that the firm liquidity position is not good and it will
suffer in paying its short – term obligations. The ideal quick ratio is 1 : 1 which shows that the
organization have funds equal to the obligations.
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Solvency ratio analysis : this ratio analysis is used to measure the company ability to
meet it's long term debts . Solvency ratio helps in measuring the organization have efficient cash
flows to meet their obligation. It involves debt – equity ratio b which shows the comparison
between equity and debts of firm to measure its capability to pay the obligations.
Solvency ratio analysis
Long-term debt 9330 7032
Shareholder's equity 6438 10480
Debt-equity ratio Long-term debt / shareholders’ equity 1.45 0.67
From the above analysis it can be interpreted about debt – equity ratio which is computed
to identify the firm ability to pay its long term obligation. Debt – equity ratio is calculated by
dividing the long term – debt of the firm with shareholder 's equity. According to the table it can
be interpreted that in 2017 the debt equity ratio of tesco was 1.45 that shows organization have
more debts as compared to its equity and it 2018 the debt equity ratio of tesco decreased to 0.67
which shows that organization have fewer debts as compared to its equity and in this case tesco
will be able to pay its obligation.
Efficiency ratio analysis : this ratio analysis is done to measure organization ability to use its
assets and manage its liabilities. Efficiency ratio analysis include ratio such as inventory turnover
ratio, total assets turnover ratio and fixed assets turnover ratio. Efficiency ratio helps in
measuring the ability of firm in effectively utilizing its assets and managing its liabilities.
Efficiency ratio analysis
2017 2018
Cost of goods sold 53015 54141
Average Inventory 2366 2282
Turnover or sales revenue 55,917
57,49
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Average total assets 44879 45358
Average fixed assets 29756 30786
Stock turnover ratio (In 22.41 23.73
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times)
Total assets turnover ratio 1.25 1.27
Fixed assets turnover ratio 1.88 1.87
From the above computation it can be determined about various ratio which helps in
measuring the firm's ability in effectively utilizing its assets which include ratio such as
inventory turnover ratio, total assets turnover ratio and fixed assets turnover ratio. According to
table, stock turnover ratio of tesco in 2017 was 22.41 which increased to 23.73 in 2018. it is
calculated by dividing the cost of good sold with average inventory for a period. It shows the
number of time inventory is sold and replaced by organization. Total assets turnover ratio
measures the value of company sales generated relative to value of assets. According to the
above table , it can be interpreted that in 2017 total assets turnover ratio was 1.25 which
increased to 1.27 which shows that the company is able to generate enough revenue. Also, it can
be interpreted that fixed assets turnover ratio shows the ratio of sales to the value of fixed assets,.
It shows how organization is using its fixed assets to generate sales. Moreover, it can be
interpreted that in 2017 fixed assets turnover ratio was 1.88 which increased to 1.87 this shows
that firm is utilizing its fixed assets effectively to generate sales and thus it is beneficial of tesco.
Investment ratio : Investment ratio are used to measure the ability of firm to earn
adequate return for the owners of the business. Investment ratio helps the firm in identifying the
return generated fir the shareholder to provide them profit.
Investment ratios
2017 2018
Earnings per share
(Net income - preferred dividend) /
Number of shares outstanding -0.01 0.44
Dividends per share Annual dividends / Number of shares 0 0.03
From the above table it can be interpreted about investment ratio which include earning
per share and dividend per share. According to the computation, it can be interpreted that
earning per share in 2017 was -0.01 which increased to 0.44. That shows comparison to 2017
which shows negative eps which is bad for organization increase to 0.44 in 2018 which is
beneficial for firm. Also, as per dividend per share in 2017 was 0 which increased to 0.03 in
2018 which is improved from 2017.
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Discussion of the performance of company
Tesco as per the ratio analysis is performing well in the industry as it have food
profitability ratio which shows that tesco is performing better in industry as per the analysis.
According to the profitability ratio analysis it can be identified that tesco has increased its
profitability in 2018 as compared to 2017. It also has good efficiency ratio which shows
company performance is increased over the year which is beneficial for firm. Also, the sale
revenue is increased in the year 2018 which is beneficial for tesco to gain more market share by
increasing their customer base. Tesco is operating is activities in all over the regions and
increasing in global presence to attract more customers towards the firm. Also, it has identified
that tesco performance is increased over the years and also have increased their profitability
which helps the firm in growing its market.
Balance scorecard and evaluation of the use of KPI in assessing organizational performance
Balance scorecard is used to measure the performance of organization to improve the
internal functions of organization. It is used to provide feedback to company about their various
internal operation and the external outcomes (How To Use The Balanced Scorecard , 2017).
Balance scorecard is a strategic planning and management tools to measure its performance to
increase their profitability of the firm . It takes non- financial aspect of business such as
customer satisfaction and business operations to identify the performance of organization in the
future. Balance scorecard approach involves collecting data and analyzing the company from
four perspectives.
This perspective consist of learning and growth that include training and knowledge
resources , business processes which include product and service meet customer demand, custom
er perspective that include customer satisfaction and financial perspective that include collecting
traditional type of financial data about corporate performance such as sales and expenditure.
Balance scorecard is used By Tesco during the strategic planning to make sure company efforts
are integrated with overall strategy and vision. Balance scorecard is used by Tesco maximizing
profit which is profit balance scorecard in which organization expand is revenue sources and
cost efficiency. Understand customer need and increase customer confidence to increase
profitability. Manufacturing scorecard is used in which lower cost of production process,
optimize channel to maximize profit etc.
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Benefits : balance scorecard helps the organization in improving the performance by
implementing better strategic planning which helps the firm in maximizing their profitability. It
helps Tesco in improving their communication strategy which helps in better communication
internally and externally (Gumel, Saad and Salina, 2014). Balance scorecard helps the firm in
providing better management information which will assist in increasing their operation to
improve their functioning. It also assists management in improving their performance report
which will provide true picture of the company's performance.
Disadvantages : Balance scorecard is a costly and time consuming tools which many
organizations does not afford to implement. It also provides disadvantage to organization that it
will not work effectively if the information provided in incomplete. It requires use of appropriate
strategy to analyze data. Balance scorecard mainly focus on the internal function but does not h
provide full focus on external factors.
Key performance indicators : It helps the organization by tracking their performance
to measure the performance with the standard performance goals. KPI helps the organization in
effective decision making which helps in improving the performance of firm. It focuses on
strategic and operational improvement (Adnan and Ajija, 2015). KPI include setting targets
goals and then tracking the progress according to the set target. Organization use performance
indicators to track their overall performance to improve the areas which are lagging behind
according to the indicators to achieve the performance goals of firm. These performance
indicators are measurable to organization can achieve quantitative analysis of the firm progress.
Benefits : It helps Tesco in achieving the performance goals by following their targets.
It assists Tesco in identifying their areas which require improvement to increase profitability of
firm . It helps tesco in making decision effectively to improve the functioning of firm. Kpi helps
in identifying the future profitability of the enterprise by measuring the performance goals with
the actual performance.
Disadvantages : Setting performance goals can be disadvantageous if the firm progress
is not according to the set target. It focuses on improve future results without reference to
external parties and benchmarks (The Pros and Cons of KPIs, 2013). The data is collected
frequently which can be incorrect.
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Advantages and disadvantages of ratio analysis
Ratio analysis refers to the analysis of figures present in the financial statements that includes
profit and loss account, balance sheet , fund flow statement etc. it helps in better understanding
of financial statement.
Advantages
 It helps in forecasting and planning to the future improvement .
 Ratio analysis provide assistance to the tesco to prepared estimates for the budget on the
basis of figures present in the ration analysis(Aalbers, 2015).
 Ratio analysis helps the organization in measuring their operational efficiency.
 It helps in improving the performance and reducing the cost for firm.
Disadvantages
 Ratios are calculated from the figures present in the financial statement and it has some
limitation due to which ratio analysis is affected.
 Different accounting policy regarding valuation of inventory, charging depreciation etc.
make the accounting data and ratio of two firm non=- comparable.
 Fixed assets show the changes in position statement at cost only and does not show the
changes in price level.
 Ratios are tools of quantitative analysis only and qualitative factors are ignored while
computing ratios.
CONCLUSION AND RECOMMENDATION
From the above study it has been concluded about ratio analysis of tesco which has
provided with profitability ratio, liquidity ratio, solvency ratio, efficiency ratio and investment
ratio. Furthermore, it has provided with balance scorecard and its four perspectives which has
included learning and growth, business processes, customer perspective and financial
perspective. Moreover, it has concluded about advantages and disadvantages of ratio analysis
techniques used in the report. It is recommended to tesco to improve its various operations to
increase their returns which are showing bad result as per the investment ratio analysis. Also, it is
recommended to tesco to increase its current assets to improve the liquidity position of tesco.
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Tesco should use balance score card for measuring its performance to improve its profitability
and be able to pay its obligation.
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REFERENCES
Books and Journals
Abdul Karim, S. (2014), “Contemporary waqf administration and development in Singapore”,
The Singapore International Waqf Conference, Singapore. pp. 2-10
Adel, A. (2015), “Global financial crisis: an Islamic finance perspective”, International Journal
of Islamic and Middle Eastern Finance and Management. Vol. 3 No. 4.pp. 306-320
Andersen, T. and Tarp, F. (2016), “Financial liberalization, financial development and economic
growth in LDCs”, Journal of International Development. Vol. 15 No. 2. pp. 189-209
Aalbers, M. B. (2015). In N. Castree (Ed.), The international encyclopedia of geography:
People, the earth, environment, and technology. Oxford: Wiley
Adnan, M.A. and Ajija, S.R. (2015), “The effectiveness of Baitul Maal wat Tamwil in reducing
poverty: the case of Indonesian Islamic Microfinance Institution”, Humanomics. Vol. 31
No. 2. pp. 160-182.
Gumel, G., MD Saad, N. and Salina, H.K. (2014), “Assessing the impact of Islamic microfinance
on poverty alleviation in Northern Nigeria”, Journal of Islamic Economics, Banking &
Finance. Vol. 10 No. 4. pp. 37-49
ONLINE
How To Use The Balanced Scorecard . 2017. [Online]. Available through
<https://www.clearpointstrategy.com/how-to-use-balanced-scorecard/>.
Tesco PLC -TSCO. 2018. [Online]. Available through <http://tools.morningstar.co.uk/>.
The Pros and Cons of KPIs. 2013 .[Online]. Available through
<https://www.theglobaltreasurer.com/2013/11/19/the-pros-and-cons-of-kpis/>.
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