Tesco's Financial Performance and Recommendations for Improvement

Tesco's financial position indicates a constant increase in debts and reduction in assets and equity. This suggests the company is struggling to manage its operations. The analysis also shows a decline in gross profit and net profit margins, leading to significant losses. To improve its financial position, recommendations include reducing costs, introducing new products, changing customer perception, managing expenses, choosing the right source of finance, and planning for uncertainty.

FINANCIAL MANAGEMENT AND
ANALYSIS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
RATIONALE OF TESCO...............................................................................................................1
PERFORMANCE ANALYSIS.......................................................................................................2
Profitability Ratios..................................................................................................................2
Liquidity ratios.......................................................................................................................4
Working Capital Ratio............................................................................................................6
Capital Structure.....................................................................................................................7
Stock Market Performance.....................................................................................................9
LIMITATION OF RATIO ANALYSIS........................................................................................10
CONCLUSION AND RECOMMENDATION.............................................................................11
Conclusion............................................................................................................................11
Recommendation..................................................................................................................12
REFERENCES..............................................................................................................................13
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TABLE OF FIGURES
Figure 1 Working Capital................................................................................................................8
Figure 2Capital Structure.................................................................................................................9
Figure 3 Stock market performance of Tesco................................................................................10
2

INTRODUCTION
Financial management is the arrangement of funds with an aim to achieve desired
objective of the organisation in an effective and efficient manner. This is the differentiated
function that is associated with the top management (Ahrendsen and Katchova, 2012). The main
purpose of preparing this report is to determine the financial position of the company by
calculating various ratios. In addition to this, impact of legal, political, economic and tax changes
on the financial statements of the company is also evaluated. Along with this, the other purpose
of preparing this report is to find out the stock market performance of the company. In regard to
all this, weakness of ratio analysis will be assessed to improve the same. In order to study the
financial statements of the company, ratio analysis has been done by using various secondary
data sources like internet, books and journals.
The main purpose of choosing Tesco is to determine the financial performance of the
company for the last five years. Tesco is a multinational company of UK which deals in all types
of consumer goods.
RATIONALE BEHIND CHOOSING TESCO
In the following report, Tesco has been taken into consideration. It is a multinational
retail and grocery company which deals in all types of consumer products. It is the third largest
retail company headquartered in Welwyn Garden City, Hertfordshire. This company is a public
limited company listed on London Stock exchange. This company was founded in 1919 by Jack
Cohen. In the year 1990, Tesco has repositioned its structure and move on from state down-
market and low-cost retailer (Tesco PLC ADR, 2015). This in turn proves to be very successful
for the company. Tesco had a market capitalization of around £18.1 billion up to 22 April 2015.
Tesco is one of the fastest growing companies in retail industry. It is continuously
providing new and innovative consumer goods which in turn attract the large number of
customer. As it is a growing company so analysing the financial statements of this company will
prove to be very beneficial for us. Another reason of using this company is to analyse its
financial position and to decide whether investing in this company prove to be beneficial or not.
It is one of the growing industries which in turn will provide lot of reliable data in order to
analyse the financial performance of various industry. In addition to this, retail industry is one of
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the fastest growing company which in turn will help to find out the latest trend that are taking
place in the corporate world.
PERFORMANCE ANALYSIS
Profitability Ratios
Profitability ratio indicates the part of the sales revenue that is covered by the gross
profit. This ratio also indicates the firm’s ability control its direct expenses (Estrada, 2005). In
order to measure firm’s performance on cost control, it is necessary to compare current year ratio
value with the previous year. If sales is growing rapidly but direct expenses grow at slow pace,
then it means that firm is keeping good control on direct expenses.
Profitability Ratios
Formula 2011 2012 2013 2014 2015
Gross
profit(GP)
5125 5261 4089 4010 (2112)
Net
profit(NP)
2655 2806 124 974 (5741)
Net
sales(NS)
60455 64539 64826 63557 62284
Gross
profit ratio
GP/
NS*100
8.47% 8.15% 6.30% 6.30% -3.40%
Net profit
ratio
NP/NS*100 4.40% 4.34% 0.19% 1.53% -9.21%
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Interpretation
Gross profit ratio of the Tesco is declining continuously and in last year, it was negative.
This reflects that every year firm is earning less gross profit on sales. There is an increase in
previous year’s sales but gross profit increases at slow rate. Hence, it can be said that less control
on direct expenses is one the main reasons which are responsible for the decline of the firm’s
gross profit. On the other hand, there is a net profit ratio which indicates the proportion of the net
profit on sales. This also reflects firm’s capability to control indirect expenses. Net profit ratio of
the firm is declining sharply and it was negative in the last fiscal year. This shows that condition
of the firm is very critical. This decline is observed in the sales because there was loose control
on the indirect expenses of the firm. There may be many other reasons that are responsible for
the low net profit. Due to recession, demand for products fall from people side and due to this
reason, Tesco earns low amount of profit on sales. In the retail industry, there is a stiff
competition and due to this reason, firms operating in this industry are continuously reducing
their product’s prices. This leads to low earning of margin on sales. Tesco is also compelled to
reduce its product price and due to this reason; it is earning low profit on per unit of sales. This is
the basic reason behind decline in profit.
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2011 2012 2013 2014 2015
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
8.47% 8.15%
6.30% 6.30%
-3.40%
gross profit
Illustration 1: gross profit ratio analysis
2011
2012
2013
2014
2015
-0.1 -0.08 -0.06 -0.04 -0.02 0 0.02 0.04 0.06
4.40%
4.34%
0.19%
1.53%
-9.21%
net profit
Illustration 2: net profit ratio analysis

Liquidity ratios
Current ratio- This ratio indicates the firm’s liquidity position. If current ratio is increased,
then it means that firm has large amount of current assets to meet its current liability on time
(Kastantin, 2005). Current ratio of the Tesco is fluctuating steadily. It shows good increase in
current ratio at good growth rate but also declines at fast rate as well. However, in past years, its
performance was not good this is because; it failed to beat benchmark of 2:1 which is a set
standard. It is even when its current ratio value failed to become 1. Current figure of current ratio
indicates that for every one pound of current liability, firm has 0.67 pound of current assets.
Hence, firm is not in the position to pay its current liabilities on time. It can be said that firm
needs to make lots of efforts in order to improve its liquidity position in the business.
Quick ratio- This ratio gives a clear picture of firm’s liquidity position than current ratio.
In this ratio, same formula is applied but prepaid expenses and stock are not included in the
company’s current assets. Hence, quick ratio shows company’s liquidity position in a proper
manner. Quick ratio of Tesco is also declining steadily and the one main thing on which attention
is needed is that there is a huge gap in the current and quick ratio. This reflects that stock and
prepaid expenses cover a large portion of the Tesco’s current assets. On this basis, it is stated that
firm must try to make its liquidity position as strong as possible.
Liquidity Ratios
Formula 2011 2012 2013 2014 2015
Current
assets(CA)
12039 12863 13096 15572 11958
Current
liabilities (CL)
17731 19249 18985 21399 19810
stock(S) 3162 3598 3744 3576 2957
Current ratio CA/CL*
100
67.90 66.82 68.98 72.76 60.36
Quick ratio CA-S/
CL*100
50.06 48.13 49.25 56.05 45.43
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7
2011 2012 2013 2014 2015
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
67.90% 66.82% 68.98% 72.76%
60.36%
current ratio
Illustration 3: Current ratio

Working Capital Ratio
Working capital is calculated by the company in order to find out the efficiency and short
term financial health of the company (Leong, Pagani and Zaima, 2009).
Working capital ratio
formula 2011 2012 2013 2014 2015
Current
assets(CA)
12039 12863 13096 15572 11958
Current
liabilities (CL)
17731 19249 18985 21399 19810
Working capital CA-CL -5692 -6386 -5889 -5827 -7852
Interpretation
As per the above calculation, it can be interpreted that working capital of the company is
constantly fluctuating. Company's current assets are less as compared to current liabilities. The
reason behind this situation can be that company is not able to make payment to its creditors on
time. Therefore, in order to overcome this problem, company should start preparing various
strategies and financial activities in advance.
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1 2 3 4 5
0
0.1
0.2
0.3
0.4
0.5
0.6
50.06% 48.13% 49.25%
56.05%
45.43%
quick ratio
Illustration 4: Quick ratio

Capital Structure
Capital structure shows how a company is able to finance its overall activities and
operations by using various sources of finance. Debt of the company includes all types of bonds
that are issued by the company (Nissim and Penman, 2001). On the other hand, shareholders
equity includes retained earnings, preference shares, equity shares and many more things..
Below is the calculation of debt-equity ratio of Tesco.
Capital structure
Formula 2011 2012 2013 2014 2015
Debt(D) 17731 19249 18958 21399 19810
Equity(E) 16535 17775 16643 14715 7071
Capital structure D/E 1.07 1.08 1.13 1.45 2.80
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2011
2012
2013
2014
2015
-9000 -8000 -7000 -6000 -5000 -4000 -3000 -2000 -1000 0
-5692
-6386
-5889
-5827
-7852
working capital ratio
Figure 1 Working Capital

Interpretation
As per the above calculation, it can be interpreted that company's debt is more as
compared to that of equity which is not a good sign. In order to be successful, equity of the
company should always be more as compared to that of its debt. In short, it can be said that debt
is the expense of the company and equity is the income.
In the above calculation, it can be seen that debt equity ratio of Tesco is constantly
increases. From year 2011 to 2014, debt equity ratio was growing at a slow rate, but in year
2015, its capital structure ratio increases at a high speed. This is turn shows that firm is not able
to properly manage all its operations. Liabilities of the Tesco are constantly increasing. In
addition to this, it also indicates that Tesco is not able to pay to its creditors on time due to which
its liabilities are constantly increasing. The reason behind this condition can be that Company is
not able to reduce the cost of its production. Change in economic condition of the organization
can also be one of the reasons for the reduction in the level of equity. It also shows that they are
not able to maintain the balance between its inflow and outflow of cash. In addition to this, they
are also not able to hold a balance between assets and liabilities of the enterprise.
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2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
3
1.07 1.08 1.13
1.45
2.8
capital structure
Figure 2Capital Structure

Stock Market Performance
Stock market is the place where large number of brokers comes together with an aim to
buy and sell the stock and various other securities of the different companies. This is the market
where electronic trading process takes place (Werner and Brand, 2001).
Henceforth, stock market performance is the presentation of the company over a certain
specified time period. This helps the company to enhance financial performance of the particular
company. By analysing this performance, one can conclude whether company is growing or
moving towards downward.
Therefore, the stock market performance of Tesco Company is listed below:
On the basis of the above chart, it can be concluded that financial position of Tesco is not
good. Its market share is continuously fluctuating. After analysing the last past five years
performance of the company, it is seen that from continuous five years, market share of Tesco is
declining. In year 2013, it was able to grow its market share as compared to 2012. But still it was
not able to grow at high rate. Its market share still shows the negative balance.
Again in the year 2014, its market share again declines at a high rate as compared to
2013. Market share of Tesco’s shows a falling trend from -5.42% to -43.12%. Likewise, in the
year 2015, Tesco has made great efforts to grow. It was able to increase its market share from -
43.12% to -4.10%. But it cannot be ignored that its market share still shows a negative balance.
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Figure 3 Stock market performance of Tesco
(Source: Tesco PLC ADR, 2015)

Thus, after analysing the overall performance of Tesco, it can be concluded that financial
position of the company is not good. Therefore, it is recommended that Tesco should start
focusing more on the formation of its strategies with an aim to reduce its cost of production. In
addition to this, they should bring innovation in its products.
LIMITATION OF RATIO ANALYSIS
Ratio analysis can be used to compare the financial statements of various companies and
to gain general understanding about the results. But at the same time, it cannot be ignored that
there are various limitations of conducting ratio analysis. Some of the weaknesses are as
follows:- Historical: - All the data that are collected for the purpose of calculating ratios are
actually derived from the historical data. The data is not the current data. And it may not
be necessary that the same condition or results of the company will be carried forward in
future (Ye, Wang and Zheng, 2015). It may change after sometime. Thus, in order to
achieve the consistency ratio performance, analysis can be done on Performa information
and afterwards comparing the same with historical results may prove to be beneficial. Inflation: - Rate of inflation can change at any time period. For instance; the rate of
inflation in year 2012 was 100%, in that case sales of products will appear to be double
but actual sales of the product do not change.
 Accounting policies: - Different types of policies are adopted by different companies for
recording similar financial transaction. This means that two different products are
compared together. For instance, suppose one company record the sales of the firm at
gross while the other organization to do the same on net basis. Company strategies: - Comparing the ratio of two organizations is made by considering
different strategies that can prove to be very problematic. For example; suppose one
company is considering the low-cost strategy and accept to earn lower gross margin in
exchange to the high market shares. On the other hand, another company is considering
the high customer services strategy and are accepting to earn higher gross margin and
price. Past information: - Ratio analysis is done by considering the past data. But the users are
much concern about the current and future data (Contents, 2015).
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 Data collected from balance sheet: - While calculating the ratio analysis, the data is
collected from the balance sheet. But the information recorded in the balance sheet is the
one that is generally recorded at the end of the reporting period. If the balance reduces on
the reporting date, then it can create an adverse impact on the outcome of the ratio
analysis.
 Business environment: - Irregular business environment of the various organisations can
also affects the ratio analyses. For example: - 40 days outstanding sales may considered
to be poor at the time of rapid growing sales. But the same may prove to be good at the
time of economic contraction. Selection of different sources of finance: - Ratio of the companies cannot be compared for
those who use different sources of finance. For example, one company may purchase the
property while other is leasing the same or some other firm finances its business unit by
using long term borrowing whereas the other may collect funds from shareholders or
from reserves.
 Accounting practices: - Different accounting practices can affect analyses of the ratio
even when the comparison is done for the similar company. For example- LIFO v/s FIFO
or leasing v/s buying equipments.
CONCLUSION AND RECOMMENDATION
Conclusion
On the basis of above report, it can be concluded that financial position of Tesco from the
last five year is not good. Its liabilities and debts are constantly increasing and assets and equity
are reducing. This indicates that the company is not properly able to manage its all operations. In
addition to this, it can interpret that Tesco’s gross profit and net profit ratio are reducing
constantly. While in the year 2015, it has been seen that company's gross profit and net profit
margin reduces at a high speed. Company has suffered a huge loss in year 2015. The current
assets of the company are less as compared to its current liabilities for the last five years.
Recommendation
After analysing the financial position of the company by calculating various ratios, it can
be interpreted that company is not doing well. Therefore, recommendations that can be followed
by the Tesco in order to improve its financial position have been discussed below:
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1. Tesco should make efforts to reduce the cost of sales and manufacturing. This in turn will
help the company to generate more and more revenue. In addition to this, company will
also be able to grow up from negative trends and start generating profit.
2. Tesco should try to introduce new and innovative products in the market. But before
doing so, company should start doing research and take feedback from the customers.
This in turn will help the company to analyse the latest trend, taste and preference of the
customers. After which company will be able to manufacture accordingly (Financial
ratios, 2015).
3. Tesco should make an attempt to change the perception of customers. Positive
perception will help Tesco to grow.
4. This retail firm should also try to reduce their expenses and generate more income.
5. Company should make an attempt to choose the best source of finance for raising its
capital. They should analyse whether the selected source will generate more income or
will increase the debt of the company.
6. Company should prepare various strategies in advance in order to overcome any
uncertainty that can occur due to change in internal and external environment (Tesco PLC
ADR, 2015). Formation of these strategies will also help the company to analyse the price
of its competitor’s products.
7. Tesco should also start planning all its financial activities in advance in order to
overcome various uncertainties, maintain the flow of cash, proper utilization of available
resources and to effectively distribute the resource and capital in each and every
department. This in turn will help the company to avoid the condition of deficit and
surplus outcomes.
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REFERENCES
Books and Journals
Ahrendsen, L. B. and Katchova, L. A., 2012. Financial ratio analysis using ARMS data.
Agricultural Finance Review. 72(2). pp. 262 – 272.
Estrada, J., 2005. Adjusting P/E ratios by growth and risk: the PERG ratio. International Journal
of Managerial Finance. 1(3). pp. 187 – 203.
Kastantin, T. J., 2005. Beyond earnings management: Using ratios to predict Enron's collapse.
Managerial Finance. 31(9). pp.35 – 51.
Leong, K., Pagani, M. and Zaima, K. J., 2009. Portfolio strategies using EVA, earnings ratio or
book‐to‐market: Is one best?. Review of Accounting and Finance. 8(1). pp. 76 – 86.
Nissim, D. and Penman, S. H., 2001. Ratio analysis and equity valuation: From research to
practice. Review of accounting studies. 6(1). pp. 109-154.
Werner, R. A and Brand, W. A., 2001. Referencing strategies and techniques in stable isotope
ratio analysis. Rapid Communications in Mass Spectrometry. 15(7). pp. 501-519.
Ye, X., Wang, D. and Zheng, X., 2015. Effects of density ratio and diameter ratio on penetration
of rotation projectile obliquely impacting a granular medium. Engineering Computations.
32(40). pp. 1025 – 1040.
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https://investor.ryanair.com/wp-content/uploads/2015/07/Annual-Report-2015.pdf>.
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http://maaw.info/BalScoreSum.htm>. [Accessed on 10th February, 2016].
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http://financials.morningstar.com/balance-sheet/bs.html?
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