Financial Accounting: Analysis of Tesco's Financial Performance and Limitations of Ratio Analysis

Financial accounting

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Analysing the financial performance of last three year for Tesco...............................................1
Limitations of ratio analysis........................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial accounting is a kind of accounting which consists of different methods which
utilized for the documentation, reporting and summarising the transactions which occur during
the business operations for a given time period. This type of accounting is what is reflected in the
books of the organization and is considered to be available in both the accrual and cash basis. In
this project the organization for which the financial accounting is going to be analysed is Tesco.
This project will explain the financial performance of the company in the last three years. It will
also reflect the limitations of the ratio analysis.
MAIN BODY
Analysing the financial performance of last three year for Tesco
The following ratios will help in providing the financial performance analysis of Tesco,
Profitability Ratio:
The profitability ratio is said to be the ratio which helps in reflecting the amount of profit
made by the organization. Return of Shareholders fund ratio is one of the profitability ratios
which shows percentage of return out of shareholders investment (Kamaluddin, Ishak and
Mohammed, 2019). This ratio of Tesco increased in 2018 but since then this ratio has only fallen
showing the lack of profitability in the organization. The return of capital employed which is the
ratio that reflect the profit generate in comparison to the capital invested in the organization.
Tesco performance in this ratio was also poor as the it falls in the end in 2020. The return of
assets ratio that state the profitability is also showing how effective the organization is in
generating income from its assets. This ratio was at its peak in 2019 at 3.41 but it again fell in
2020 showing that the business needs new strategy for improving efficiency of its assets. The
profit margin ratio is the reflection of the total amount of profit which is generated by the
organization after excluding all the expenses from its revenue which has showing increasing
trend. The Gross profit margin is also similar to the profit margin ratio but in this only the cost of
goods sold is considered as the expenses (Correa-Mejía and Lopera-Castaño, 2020). The
comparison between the GP margin and profit margin shows they have different trends reflecting
increase in the indirect expenses of the organization. The EBITDA ratio is said to be the total
earning which the organization is able to generate before the deduction of the interest, taxes and
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