Analyzing Financial Performance of TESCO using Ratio Analysis

Accounting

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Analzing the financial performance of TESCO using ratio analysis......................................3
2. Explaining the limitations of accounting ratios while analyzing the company performance. 5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Accounting is the complete procedure of recording and analyzing all the financial
transations that a business undertakes in order to earn profit. It aids the firm in keeping the
expenses within limits and making optimum utlisation of resources. For the purpose of analyzing
and interpreting the financial performance of company, financial ratios are applied. The present
case scenario is based on TESCO Plc which is a british company founded by Jack Cohen in
1919. The company has a retail business of merchandise and groceries headquartered in England.
The present report will analyze and evaluate the complete performance, liquidity and financial
structure of company for a period of 3 years i.e. from 2017 to 2020 with the help of various
accounting ratio and other important information. It will help to explain the company
performance and position in the industry. Further, the report will highlight the limitations of
ratios that arise at the time of evaluating the company.
MAIN BODY
1. Analzing the financial performance of TESCO using ratio analysis
Accounting ratios assesses company performance to compare it with previous year's
performance or with other firms within same industry. Ratios develop the relationship between 2
components of the financial statements to judge the short term and long term financial position.
The complete interpretation of TESCO plc from year 2017 to 2020 is discussed below:
Profitability analysis: The ratios that determine the corporate's ability to secure the
income, equity, assets, all costs, etc. from its regular business activities are Profitability ratios
(Svynarenko, Zhang and Kim, 2019). The organisation is said to have good financial
performance when it yields higher profits and maintain a growth level. To evaluate the TESCO's
profitability, ROCE shows how much income a company generates from each pound of capital
employed. It has suddenly increased from 0.55% to 5.07% from 2017 to 2018 and a gradual
increase from 2018 to 2019 and again declining in 2020 to 3.83%. it shows that company is not
generating enough income from its capital. TESCO can improve the ratio either by enhancing the
revenues or decreasing the overall expenses. Furthermore, Gross margin of company is
increasing from 5.19% to 7.07% from 2017 to 2020. However, net profit shows increase from
0.26% to 2.62% from 2017 to 2019 and a decline to 2.03% in 2020. The huge differenece
between gross and net profit shows that TESCO is incurring a lot of indirect expenses to run its