Financial Analysis of Tesco: Liquidity, Profitability, Efficiency, and Leverage Ratios

This report presents the financial analysis of Tesco, a large supermarket chain in the UK, for two years using ratio analysis. It examines the liquidity, profitability, efficiency, and leverage ratios of the company and provides interpretations and recommendations.

Accounting and Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
Appendix........................................................................................................................................11

INTRODUCTION
Accounting is referred as an art of recording & reporting business or monetary
transactions of the company. On the other hand, finance is managing the funds of the business in
an optimum and effective for getting desired level of outcome or success. For this report, Tesco
has been selected which operates as a large supermarket chain in UK. The report presents the
financial analysis of the company for two years by using ratio analysis as a tool for analysing its
performance.
LIQUIDITY RATIOS
Current ratio (CR)- It is the popular metric that assess the shirt term liquidity position of
the company in respect to available assets and outstanding liabilities (Murad and et.al., 2019).
This ratio reflects an ability of an enterprise in generating adequate cash in order to pay off all
the debts as it become due. It is measures of analysing the entire financial state of an
organization. By dividing liquid assets from current liabilities liquidity position of the firm can
be assessed effectually.
Particulars Formula 2018 2019
CR CA / CL 0.71 0.61
Interpretation- From the above table it has been represented that over the years the
current ratio of Tesco is seen as declining which means that current assets of the firm is reducing
with increase in the current liabilities. This shows that the liquidity position of the company is
affecting that in turn means that company is not using its current or short term assets in an
effective and efficient manner.
Quick ratio- It referred as the financial ratio which is used for analysing short term
liquidity position of an entity. It is also known as an acid test ratio which helps in assessing
company’s ability in relation to fulfilling current obligations from current assets excluding stock
and prepaid expenses (Gouda, El-Hoshy and Hassan, 2018).
Particulars Formula 2018 2019

Quick ratio
Quick assets/Current
liabilities 0.58 0.50
Interpretation- From ratio analysis it has identified that the quick ratio of Tesco results as
0.58 in 2018 and 0.50 in 2019 which indicates that the ratio is declining with very little
difference. This is because an inventory of the firm is decreasing and current liabilities is
increasing. This analysis depicts that Tesco needs to focus on maintaining current assets that can
easily be converted into cash for improving its ratio so that it can meet its immediate obligations
timely and efficiently.
PROFITABILITY RATIOS
Net profit ratio (NPR)- It is the profitability ratio that implies for the profit earned, after
paying off all the indirect, interest & tax expense, by the firm out of sales (May and Berry,
2019). This ratio is computed by dividing the net profits to that of net sales. This ratio provides
deeper insight about company’s position in terms of profitability.
Particulars Formula 2018 2019
NPR NP / sales * 100 2.10% 2.07%
Interpretation- In terms of NPR company’s position can said to be good when it
increases over the years. The assessment reflects that the net profit ratio of Tesco is very low
equating to 2.10% in 2018 and 2.07 in 2019. This depicts that the expenses and the cost of an
entity is very high which reduces the profitability. Therefore, Tesco must take necessary
measures or actions for improving and increasing its profits. It must ensure control on the
expenses and increase its prices so that higher profit could be attained.
Gross profit ratio- It means the profitability ratio that helps in identifying association
takes place between GP and sales. It assists in identifying and evaluating operational
performance of business (Messerlian and Gaskins, 2017). Gross profit refers to the amount
earned through sales after deducting cost of sales. Accordingly, by dividing GP from sales
profitability level can be assessed prominently.

Particulars Formula 2018 2019
GPR GP / sales*100 7.21% 5.24%
Interpretation- The above depicted tabular presentation exhibits that GP ratio of Tesco is
decreasing from 7.21% to 5.24% over the 2 years. Greater the GP ratio, better is the operational
performance of an entity. However, as ratio of Tesco is decreasing it means that the cost related
to its sales is increasing. Thus, for improving the ratio company should seek for reducing
expenses and increasing the sales with a greater value within an entire market or industry.
Operating profit ratio- Results of ratio analysis reflects that indicates the amount of the
profits gained by an enterprise after making payment of its variable cost like wages, cost of raw
material etc. It is expressed as % of the sales and shows an efficiency of the firm in controlling
an expenses and the costs attached with the business operations. It is the ratio that helps in
identifying an ability of management in running its business.
Particulars Formula 2018 2019
Operating profit
margin
Operating profit/Net
sales*100 3.20% 3.37%
Interpretation- Outcome of ratio analysis entails that the operating margin of Tesco
increased over the period but it’s still lower. Higher ratio indicates that an entity is running its
operations effectively with optimum use of the resources and reduced operating expenses. As the
ratio of Tesco is declining and low, it clearly states that the performance of an enterprise is not
good.
Return on equity- This ratio measures returns that an owner receives by way of its
common stock or with respect to their shareholdings. It states an ability of an organization
in gaining profits from that of the investments made by the shareholders in the firm
(Furuya-Kanamori and Doi, 2016). It is determined by dividing profitability from total
equity.
Particulars Formula 2018 2019
Return on equity Net
income/Shareholders
0.12 0.09

funds
Interpretation- The results declared that ROE of Tesco is reducing which means that
over 2 year company is not generating enough profits through its equities or an investment made
by the shareholders.
Return on capital employed (ROCE)-It is the ratio that determines an efficiency of the
company in generating the profits from that of its capital employed. It compares the net operating
income with that of the capital employed.
Particulars Formula 2018 2019
ROCE
Net income / total
assets – current
liabilities 4.70% 4.66%
Interpretation- Higher ROCE ratio depicts that an enterprise is making an economical
use of the capital, however lower ratio the reflects ineffective use of the capital. As the ROCE
ratio of Tesco is declining, this means that an enterprise failed to make effective use of its capital
for the purpose of earning larger profitability.
EFFICIENCY RATIO
Inventory days-
It helps in identifying time period which business unit is taking for converting stock into
sales. It is computed based on average value of an inventory and COGS in a given period for a
particular or specific date.
Particulars Formula 2018 2019
Inventory days
Avg.
Inventory/COGS 15.26 15.98
Interpretation- Specifically, greater inventory days specifies that the firm is keeping its
inventory in the business for a long term and not selling on a quick basis (Annual report of

Tesco, 2018). From above analysis it has been indicated that an inventory days of Tesco is lower
or adequate which reflects that it is efficiently turning its inventory into the cash.
Average collection period- This ratio depicts the number of days take by the company in
receiving its owed amount or due amount on the part of its customers. It is been calculated by
comparing the trade debtor with the sales revenue .
Particulars Formula 2018 2019
Debtor collection
period
Trade
debtors/Revenue*365 9.4 9.4
Interpretation- Higher ratio or days indicates that long time is taken by an entity in
collecting its receivables (Murad and et.al., 2019). The assessment shows that Tesco is taking
around 9.4 days for collecting its trade receivables which seems as the better ratio, however, it
also states that the firm does not provide the goods on a credit basis which might reduces its
sales.
Average payable period- It means an average number of the days that company takes for
paying an invoice received from the vendors and the suppliers. It is computed by dividing the
trade payables with that to cost of sales.
Particulars Formula 2018 2019
Creditors payable
period
Trade payables/cost
of sales *365 60.6 57.1
Interpretation- The ratio of Tesco is seen as high but over the year it is declining which
means that company is taking long time in order to pay its suppliers but is seeking for managing
the ratio by reducing the days and making timely payments.
Asset turnover ratio- It acts as the major efficiency ratio which measures an ability of the
firm in generating revenues from that of its assets by way of comparing the net sales with its
average total assets.
Particulars Formula 2018 2019

Asset turnover ratio
Net sales/Avg total
assets 1.28 1.30
Interpretation- Higher the asset turnover ratio, the more efficient is an entity in using its
assets. As the ratio is increasing from one period to another, it means that firm is gaining larger
amount of profits by using its assets.
LEVERAGE RATIOS
Debt equity ratio- It reflects financial leverage of the company and represents an
amount of the equity and the debt used for financing its assets (May and Berry, 2019). By
this, one can assess the extent to which company’s capital structure is good.
Particulars Formula 2018 2019
Debt-equity ratio
Long term debts/
shareholders fund 0.67 0.38
Interpretation- Lower the D/E ratio, better is the leverage position of the company. The
above evaluation indicates Tesco is resulting a lower debt-equity ratio which means that it does
not make funding of its projects through higher amount of borrowed funds. It also means that the
company is having sufficient owned funds to meet its long term liabilities.
Interest coverage ratio- It measures organization’s ability in meeting its interest related
payments. This ratio equates to dividing EBIT with that of an interest expenses for a particular
time period which is one.
Particulars Formula 2018 2019
Interest coverage ratio
EBIT/Interest
expenses 3.07 4.02
Interpretation- Higher the ICR, better is the position of an enterprise whereas lower ratio
indicates more of the debt expenses and high financial burden (Annual report of Tesco, 2018).

The evaluation depicts that the ICR of Tesco is increasing which means that company is having
sufficient earnings and is capable in meeting its interest expenses in efficient way.
CONCLUSION
By summing up the above report it has been concluded that an overall performance and
the position of Tesco is not good or sound in terms of liquidity and profitability ratios. However,
with respect to its efficiency and leverage position, it is performing in a better way.

REFERENCES
Books and journals
Furuya-Kanamori, L. and Doi, S. A., 2016. Selection of the appropriate binary effect measure
for the correct interpretation in meta-analysis. International journal of cardiology. 202.
pp.467-468.
Gouda, O. E., El-Hoshy, S. H. and Hassan, H. T., 2018. Proposed three ratios technique for the
interpretation of mineral oil transformers based dissolved gas analysis. IET Generation,
Transmission & Distribution. 12(11). pp.2650-2661.
May, P. S. and Berry, M., 2019. Tutorial on the acquisition, analysis, and interpretation of
upconversion luminescence data. Methods and applications in fluorescence. 7(2).
p.023001.
Messerlian, C. and Gaskins, A. J., 2017. Epidemiologic approaches for studying assisted
reproductive technologies: design, methods, analysis, and interpretation. Current
epidemiology reports. 4(2). pp.124-132.
Murad, M. H. and et.al., 2019. When continuous outcomes are measured using different scales:
guide for meta-analysis and interpretation. Bmj. 364. p.k4817.
Online
Annual report of Tesco. 2018. [Online]. Available through:
<https://www.tescoplc.com/media/476422/tesco_ara2019_full_report_web.pdf>

Appendix