Critical evaluation of Tesco's financial and operating performance

This report evaluates Tesco's financial and operating performance during the year 2018-19 through ratio analysis and other factors. It discusses profitability, activity, liquidity, solvency, and investor ratios, as well as financial and non-financial information, corporate social responsibility, and corporate governance.

B10833
ACCOUNTING
AND FINANCE

REPORT
To : The Board
From: Management Accountant
Date :
Title: Critical evaluation of the company’s financial and operating performance
over the year 2018-19 of TESCO
INTRODUCTION
Tesco plc, exchanging as Tesco, is a British worldwide food supplies and general
product retailer with home office in Welwyn Garden City, Hertfordshire, England,
and United Kingdom. It is the third-biggest retailer on the planet estimated by net
incomes and the ninth-biggest retailer on the planet estimated by incomes. It has
shops in seven nations across Asia and Europe, and is the market chief of staple
goods in the UK (where it has a piece of the pie of around 28.4%), Ireland,
Hungary and Thailand.
This report will evaluate overall performance of Tesco during financial year
2018 to 2019 through various financial tools such as ratio analysis and financial
and non- financial factor analysis.
Ratio Analysis:
Ratios are one of the parts of key performance indicators (KPI’s) which shows
how company is performing. The main limitation of ratio analysis is; it only
shows short information’s and ignores size and volume of firm. It is best suited to
see brief of overall performance, for more detail managerial accountant needs to
see full description of Income statement and Balance sheet. Some of the ratio
analysis for TESCO has done below:
Profitability Ratios:
Profitability ratio is utilized to assess the organization's capacity to create pay
when contrasted with its costs and other expense related with the age of pay

during a specific period. This proportion speaks to the conclusive outcome of the
organization. Some of the types of profitability ratios are discussed below:
1. Gross profit margin:
This ratio is also used to measure the segment revenue. A high ratio
represents the greater profit margin and it’s good for the company. Gross
profit margin of Tesco is same as 2018; because it maintains cost of sales
with increase in revenue.
2. Net profit margin:
The net profit ratio gives an indication of the percentage of sales value that
the firm has retained as profit. A high ratio represents a positive return in
the company and better the company is. It is also showing 6% in both
years.
3. Return on Capital Employed:
The return on capital employed ratio is considered by many investors as
most important ratio; because here profit is compared with amount of
funds invested by owner of the company.
A high ratio represents better the company is. Tesco’s return on capital
employed exceeds 2018 and hence favorable for company.
4. Return on Shareholders Capital Employed:
= Profit Available to shareholders × 100 = X %
Equity (Shareholders Capital Employed)

This ratio measures Profitability of equity fund invested the company. It
also measures how profitably owner’s funds have been utilized to generate
company’s revenues. A high ratio represents better the company is.
Tesco’s return on equity is 12% in 2018 and it reduced to 9% in 2019;
which is bad indicator for company.
Activity Ratios:
This ratio quantifies how productively the business is running (McMahon, and et.
Al., 1993). Types of activity ratios are discussed below:
1. Inventory (Stock) Turnover Ratio:
This ratio gives an information of how often inventory held by company is
sold during the period. A high ratio is good for the company. Low ratio
indicated that stock is not consumed for a longer period of time. Data of
2019 and 2018 shows ratio of 24.49 and 23.91; which indicates favorable
change.
2. Total Net Assets Turnover Ratio:
The net asset turnover ratio is used to know how well company is utilizing
its resources. A high ratio represents efficient utilization of total Assets in
generating sales. Tesco showing 1.30 in 2019 and 1.28 in 2018; which
indicates company has efficiently utilized resources comparing to previous
year.

3. Receivables Days:
This ratio is used to discover the average time taking by customers to pay
back company’s money owe by them. A high ratio represents better credit
policy as compared to a low ratio. In 2019, Tesco’s average collection
period is approx 41 days; while in 2018 it was 38 days. It is unfavorable
change for the company.
Liquidity Ratio:
It's a proportion which reveals to one's capacity to take care of its obligation as
and when they become due (McMahon, and et. Al., 1993). For the most part,
Liquidity and transient dissolvability are utilized together. Types of liquidity
ratios are as follows:
 Current ratio:
This ratio measures the financial strength of the company. Generally 2:1 is
treated as the ideal ratio, but it depends on industry to industry. Current
assets include Stock, Debtor, Cash and bank, receivables, loan and
advances, and other current assets. On the other hand; Current liability
composes of Creditor, Short-term loan, bank overdraft, outstanding
expenses, and other current liability. Tesco’s both years current ratio is
less than 1; which indicates it fails to maintain ideal ratio of 2:1. In 2018 it
records 0.71 and 2019 only reach to 0.61 which is worst situation for
company. Tesco requires improving this ration otherwise bankruptcy
situation can crash the firm.
 Acid test ratio:
Current ratio = Current Assets
Current Liabilities
Acid test ratio = Quick Assets _
Current Liabilities

This ratio is the best measure of the liquidity of Tesco. This ratio is more
useful than the current ratio. The quick asset is computed by adjusting
current assets to eliminate those assets which are not in cash. Generally
1:1 is treated as an ideal ratio. Quick asset ratio of both year is below 1:1;
again company showed unfavorable change and not able to maintain
Quick assets ratio.
Solvency Ratios:
Solvency ratios are the ratios which are determined to pass judgment on the
budgetary situation of the association from a long haul dissolvability perspective.
Types of Solvency ratios are discussed below:
 Long term debt to Equity ratio: Here Long-Term Debt incorporates long
haul advances for example Debentures or Long-term advances taken from
Financial Institutions and Equity implies Shareholders' Funds for example
Value Share Capital, Preference Share Capital and Reserves as Retained
Earnings. The Ratio likewise helps in recognizing the amount Long-term
obligation business has raise contrasted with its Equity Contribution
(Ehrhardt and Brigham, 2011).
 Total Debt to Equity ratio: The Ratio helps in distinguishing how a lot of
business is subsidized by obligation contrasted with Equity Contribution.
Higher the ratio better for company’s wealth. The ratio of 2018 shows
1.45 which means company raises it funds more from issuing shares but in
2019; it has 0.91 ratios indicates that company uses almost equal sources
of debt and equity. But in 2019; Tesco required to face regular payment of
interest due to more borrowings.
 Debt ratio: This Ratio means to decide the extent of all out Assets of the
organization which are financed through Debt. The higher the proportion,
higher the influence and higher is the budgetary hazard by virtue of
overwhelming obligation commitment.
 Financial Leverage ratio: This Ratio intends to decide the amount of the
business resources have a place with the Shareholders of the organization

instead of the Debt holders/Creditors. The higher the proportion, higher
the influence and higher is the money related hazard by virtue of
substantial obligation commitment taken to fund the benefits of the
business.
 Proprietary ratio: It demonstrates the degree to which investors reserves
have been put resources into the benefits of the business. The higher the
proportion, the lesser the influence and similarly less is the money related
hazard with respect to the business. On the other hand, it very well may be
determined by taking the backwards of Financial Leverage Ratio.
Gearing ratio:
The gearing ratio quantifies the extent of an organization's acquired assets to its
value. A high equipping proportion speaks to a high extent of obligation to value,
while a low outfitting proportion speaks to a low extent of obligation to value.
This proportion is like the obligation to value proportion, then again, actually
there are various minor departure from the outfitting proportion equation that can
yield somewhat various outcomes. Tesco’s gearing ratio’s shows figure 1.41 in
2019 and 1.69 in 2018; which indicates that company has more equity to meet its
long term debts and hence favorable. But in 2019 it has reduced its gearing ratio
which shows more borrowings but it doesn’t show any bad impact (Brigham,
1996).
Investor ratio:
Investor ratios are used to measure the ability of a business to earn an adequate
return for the owners of the business. The owners have money tied up in the
business and need a return commensurate with the risk involved. Tesco’s return
on equity is 26% which is more than 2018; but dividend cover ratio’s less more
dividend paid by company in 2019 (Brigham and Ehrhardt, 2013).

Other Analysis:
Financial and Non financial Information’s: Company has recorded over 11.5%
growth in annual sales; its statutory revenue also shown increment of 11.2% at the
end of 2019. According to John Alian (Chairman of Tesco) company has gone
through two non financial changes such as change in executive committee due to
illness and discussion on sustainable growth not focusing solely on financial
metrics (Lesikar and Pettit, 1998).
Company not only focuses on strategic plan but also on organizations internal
culture. It was also found that company’s board of director’s focus on employee
centric approach; it also invested in sustainable value for long term. It focuses on
quality products for its clients. During past four years; company has shown
significant progress and attach some mean to Tesco’s various brands such as
Tesco group, bank and finance. Company has successfully reduced its total
indebtedness from £ 22 billion in 2015 to £ 12 billion till the end of year; through
its good net earnings (Tallent, 1993).
Corporate Social Responsibility:
It is a self authorizations model which is followed by each big organization
through becoming socially accountable to stakeholders and public as a whole. It
means to be good practice by Tesco to adopt this ethic; as it built company’s
image for long run of the business. It means company is organizing in such a
manner that it supports society and protects the environment. Some of the CSR
shown by Tesco towards various other factors are:
 Environment: Company promotes hazardous issues of environment
through proper implementation of solutions with proper awareness plan on
internet and social media.
 Community: Tesco helps children community through providing proper
nourishment and education and creation of peaceful environment.

Corporate Governance
Tesco has robust governance framework to support company itself. It follows
hierarchal structure of corporate where every employee establishes clear
responsibility and accountability for their outcomes and it also practices decision
making. All the process and transactions control by director of the company; it
follows decentralized model of commanding employees.
Staffing: Tesco is run by more than 450,000 employees around different part of
the world.
Investment: Tesco has invested more than £102 million in energy efficiency
which benefits company through save £37 million saving till now. It also engages
itself in investing on employees in the form of training, simulation and world tour.
The recorded investment by company on employees during the year was around
£237 million (Schneider, and et. Al., 2018).

REFERENCES
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Brigham, E.F., 1996. Financial management theory and practice. Atlantic Publishers &
Distri.
Ehrhardt, M.C. and Brigham, E.F., 2011. Financial management: theory and practice.
South-Western Cengage Learning.
Lesikar, R.V. and Pettit, J.D., 1998. Report writing for business. Irwin/McGraw-Hill.
McMahon, R., Holmes, S., Hutchinson, P. and Forsaith, D., 1993. Small enterprise
financial management: Theory and practice.
Schneider, W.J., Lichtenberger, E.O., Mather, N. and Kaufman, N.L., 2018. Essentials of
assessment report writing. John Wiley & Sons.
Tallent, N., 1993. Psychological report writing. Prentice-Hall, Inc.

APPENDICES:
Profitability ratio:
2019 (£m) 2018 (£m)
1 Return on equity
A Profit after tax 1320 1210
B Net worth:
Equity share capital & reserves 14858 10502
Less: Non controlling interests -24 -22
14834 10480
Return on equity (A/B) 9% 12%
2 Earnings per share:
A Net profit 1320 1210
B Total no. of shares outstanding 184.8 145.2
Earnings per share (A/B) 0.14 0.12
3 Return on Capital Employed
A Net operating profit 2153 1839
B Capital Employed
Total Assets 49047 44884
Less: Current Liability 20680 19233
28367 25651
Return on Capital Employed
(A/B) 8% 7%
4 Return on Assets
A Net Profit 1320 1210
B Total Assets 49047 44884
Return on Assets (A/B) 3% 3%
5 Gross Profit Margin
A Gross Profit 4144 3352
B Sales 63911 57493
Gross Profit Ratio (A/B) 6% 6%
6 Net Profit Margin
A Net Profit 1320 1210
B Sales 63911 57493
Net Profit Ratio (A/B) 2% 2%

Activity ratio:
2019 (£m) 2018 (£m)
1 Total Assets Turnover Ratio
A Sales 63911 57493
B Total Assets 49047 44884
Total Assets Turnover Ratio
(A/B) 1.30 1.28
2 Fixed Assets Turnover Ratio
A Sales 63911 57493
B Fixed Assets 36379 31135
Fixed Assets Turnover Ratio
(A/B) 1.76 1.85
3 Stock Turnover ratio
A Cost of Goods Sold 59767 54141
B
Average Inventory ((Opening +
Closing)/2} 2440.5 2264
Stock Turnover ratio (A/B) 24.49 23.91
4 Debtor Turnover ratio
A Credit Sales 63911 57493
B
Average Debtor
{(opening+closing)/2} 1572 1504
Debtor Turnover ratio (A/B) 40.66 38.23
Liquidity Ratio
2019 (£m) 2018 (£m)
1 Current Ratio
A Current Assets 12668 13749
B Current Liabilities 20680 19233
Current Ratio (A/B) 0.61 0.71
2 Acid Test Ratio
A Quick Assets:
Current Assets 12668 13749
Less: Inventory + prepaid exp. 2623 2276
10045 11473
B Current Liability 20680 19233
Acid Test Ratio (A/B) 0.49 0.60

Solvency Ratios
2019 (£m) 2018 (£m)
1 Long - Term Debt to Equity Ratio
A Long term Debt 5673 7142
B Total Equity 14834 10480
A/B 0.38 0.68
2 Total Debt to Equity Ratio
A Total debt 13533 15171
B Total Equity 14834 10480
Total Debt to Equity Ratio (A/B) 0.91 1.45
3 Debt Ratio
A Total Debt 13533 15171
B Total Assets 49047 44884
Debt Ratio (A/B) 0.28 0.34
4 Financial Leverage
A Total Assets 49047 44884
B Total Equity 14834 10480
Financial Leverage (A/B) 3.31 4.28
5 Proprietary Ratio
A Total Equity 14834 10480
B Total Assets 49047 44884
Proprietary Ratio (A/B) 0.30 0.23
Gearing Ratio 2019 (£m) 2018 (£m)
A Long term debt 5673 7142
Add: Short term Debt 1599 1479
Add: Bank overdrafts
7272 8621
B Shareholder's Equity 5165 5107
Gearing Ratio (A/B) 1.41 1.69
Investors Ratios
2019 (£m) 2018 (£m)
1 Return on Equity
A Net Income 1320 1210
B Average Equity 5165 5107
Return on Equity (A/B) 26% 24%
2 Dividend Cover

A Net Income 1320 1210
B Dividend 357 80
Dividend Cover (A/B) 3.70 15.13