Financial Statement Analysis

This document provides a detailed analysis of Tesco's financial statements, including profitability ratios, liquidity ratios, activity ratios, and solvency ratios. It examines Tesco's role in the international market, competitors, and current market conditions impacting its financial performance. The document also discusses the development in both the external and internal environment of Tesco. The analysis reveals insights into Tesco's financial performance and provides recommendations for improvement.

Running head: FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis
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1FINANCIAL STATEMENT ANALYSIS
Table of Contents
Introduction:...............................................................................................................................3
Role within the wider international market:...............................................................................3
Competitors and current market conditions impacting financial performance:.........................3
Development in both external and internal environment:..........................................................4
Ratio Analysis:...........................................................................................................................5
Profitability Ratios:....................................................................................................................5
ROCE:....................................................................................................................................5
Gross Profit Ratio:..................................................................................................................5
Operating Profit ratio:............................................................................................................6
Liquidity Ratios:.........................................................................................................................6
Current Ratio:.........................................................................................................................6
Acid Test Ratio:.....................................................................................................................7
Activity Ratios:..........................................................................................................................7
Trade receivables Collection Period Ratios:..........................................................................7
Trade Payables Payment Period:............................................................................................8
Inventory Turnover Period Ratio:..........................................................................................8
Solvency Ratio:..........................................................................................................................9
Debt to Equity Ratio:.............................................................................................................9
Debt to Total Asset:...............................................................................................................9
Interest Cover Ratio:............................................................................................................10

2FINANCIAL STATEMENT ANALYSIS
Market Position Analysis:........................................................................................................10
Earnings per Share:..............................................................................................................10
P/E Ratio:.............................................................................................................................11
Dividend Yield:....................................................................................................................11
Recommendations:...................................................................................................................12
Conclusion:..............................................................................................................................12
References:...............................................................................................................................13

3FINANCIAL STATEMENT ANALYSIS
Introduction:
Tesco Plc that has the trading name of Tesco is regarded as the British multinational
groceries and general merchandise retailer that has headquarter in Welwyn Garden City
Hertfordshire, England (Tesco plc 2019). Tesco is regarded as the third largest retailer in the
world in terms of the gross revenue generated and ninth largest in the world based on the total
revenues. Tesco was founded during the year 1919 and expanded globally from the early
1990 having operations in 11 other countries.
Role within the wider international market:
Considering the role of Tesco in the international market the company mainly
operates through joint venture with local firms. The success of Tesco in the international
market is generally aided by the local culture that makes it easy for the company to offer
customers in the international market by serving as per their needs (Wood, Wrigley and Coe
2016). Tesco plays a vital role in the international market to promote joint venture and
networks among the business associates to establish the contacts with the local suppliers.
Competitors and current market conditions impacting financial performance:
Tesco faces intense competitors from Aldi and Lidl Stiftung & Co.KG, Sainsbury and
Morrison. Tesco leads the UK retail market with market share of 28% however the business
faces strong competition from Sainsbury, Asda and Morrison. These brands compete heavily
among themselves and are generally known for their penetrative pricing strategy. Even
though Asda and Sainsbury are second and third largest retailer in UK but they are better
known for their expansion stores in the supermarkets. Morrison is also not far away in terms
of competition with approximately 10.7% of the market share from Tesco. Morrison also has
tie-ups with several farmers that directly supply their groceries to Morrison which reduces the
cost distribution and increases competition.

4FINANCIAL STATEMENT ANALYSIS
In the tough retain market, Tesco is avoiding to pass the entire impact of increase in
price to customers. The household budgets of consumers is stretched by inflation. Despite the
tough market conditions Tesco reported a 2.3% increase in sales during the first quarter of
2018 (Shi et al. 2018). The current rise in inflation has steadily triggered a drop in value of
pound that has pushed up the cost of Tesco’s import goods which may pose a challenge to its
financial performance.
Development in both external and internal environment:
To develop the internal environment at Tesco, the company has invested significantly
in research and development making the business operations smooth as the multinational
food retailing company (Annualreports.com 2019). Tesco with the help of internal and
external developments has succeeded in neutralizing the external pressure of change.
Similarly, Tesco has adopted to the external market uncertainties to stabilize the operations.
The addition of value chain at Tesco has exhibited a lean in the overall cost of
leadership management due to agile functions of inbound logistics. As per Liang (2018)
Tesco has succeeded in using its present market position and economies of scope in enhance
its bargaining power from suppliers and attain a lower costs.
According to Kim, Hallsworth and Kim (2018) Tesco has made heavy investment to
streamline its operations by using the third generation ERP solution. Introduction of the ERP
solution has internally helped Tesco in attaining higher profitability and has assisted in
minimization of stock level both internally and its external stores.

5FINANCIAL STATEMENT ANALYSIS
Ratio Analysis:
Profitability Ratios:
As stated by Robson, Young and Power (2017) profitability ratio is regarded as the
bottom line ratios that assess the profitability record of a business.
ROCE:
As per Khan (2015) the ROCE reflects the fundamental performance of a business
which expresses the relationship between the operating profit and average amount of long
term capital invested in the business.
Years 2014 2015 2016 2017 2018
Operting Profit 2631 -5972 1046 -5750 1837
Total Assets 50164 44214 43904 45853 44862
Current Liabilities 21399 19810 29714 19405 19238
Capital Employed 28765 24404 14190 26448 25624
ROCE 9.15% -24.47% 7.37% -21.74% 7.17%
Return on Capital Employed
The ROCE for Tesco over the period of five year span has reflected a fluctuating
trend as the ratio declining negatively in 2017 to stand at -21.74 while gaining in the year
2018 to stand positively at -7.17. This is due to increase in the level of current liabilities and
increasing operating cost.
Gross Profit Ratio:
As per Warren and Jones (2018) the gross profit ratio represents the gross profit from
the sales revenue produced to the difference between the revenue generated and cost of sales
occurred.

6FINANCIAL STATEMENT ANALYSIS
Years 2014 2015 2016 2017 2018
Sales Revenue 63547 56925 54433 55917 57491
Cost of Sales 59547 59128 51579 53015 54141
Gross Profit 4010 -2112 2854 2902 3350
Gross Profit Margin 6.31% -3.71% 5.24% 5.19% 5.83%
Gross Profit Ratio
The gross profit ratio for Tesco during the five year span remained static except
during the year 2015 where the profit declined to -3.71%. The business reflects a rise in
revenue and the figure can be taken into account to explore the other areas of growth to
streamline the selling costs.
Operating Profit ratio:
According to Downs (2017) the operating profit ratio explains the operating profit
derived from the sales revenue during the accounting year.
Years 2014 2015 2016 2017 2018
Operating Income 2631 -5972 1046 -5750 1837
Net Sales 63547 56925 54433 55917 57491
Operating Profit Ratio 4.14% -10.49% 1.92% -10.28% 3.20%
Operating Profit Ratio
As evident from the figures the operating profit over the five year period reflected a
continuous decline which reflects the operating costs of business such as cost of sales and
utilities have increased.
Liquidity Ratios:
As per Elliott (2017) the liquidity ratio is related to the measurement of a firm’s
ability to meet its short term debt obligations.
Current Ratio:
As stated by Hermason, Edwards and Maher (2016) the current ratio provides a
comparative view of the liquid assets with the current liabilities.

7FINANCIAL STATEMENT ANALYSIS
Years 2014 2015 2016 2017 2018
Current Assets 15572 11958 14828 15417 13726
Current Liabilities 21399 19810 29714 19405 19238
Current Ratio 0.73 0.60 0.50 0.79 0.71
Liquidity Ratios - Current Ratio
The computation of Tesco current ratio shows that it is below the industry standard
and less than one. This suggest that Tesco has inventory that are short lived together with
perishable goods and products that have higher turnover. The lower current ratio of Tesco
signifies that it is less liquid.
Acid Test Ratio:
As per Kim (2018) the asset test ratio is identical to current ratio that reflects more
stringent liquidity test after excluding inventories.
Years 2014 2015 2016 2017 2018
Current Assets 15572 11958 14828 15417 13726
Inventories 3576 2957 2430 2301 2263
Current Liabilities 21399 19810 29714 19405 19238
Acid Test Ratio 0.56 0.45 0.42 0.68 0.60
Acid Test Ratio
By excluding the inventories, the acid test ratio for Tesco over the five year span
stood less than one. It is understood that the assets of Tesco does not covers the current
liabilities that might be a cause of concern for business to meet its short term debt
obligations.
Activity Ratios:
According to Weygandt, Kimmel and Kieso (2015) the activity ratio signifies how
efficiently a business manages its resources.

8FINANCIAL STATEMENT ANALYSIS
Trade receivables Collection Period Ratios:
As per Kim (2018) this ratio determines the time taken by the credit customers to pay
off their amount that is owed to the business.
Years 2014 2015 2016 2017 2018
Trade Receivables 2190 2121 1607 2301 2263
Total Sales 63547 56925 54433 55917 57491
Trade Receivables Period 12.58 13.60 10.78 15.02 14.37
Trade Receivables Collection Period
Activity Ratios
Tesco receivables period over the period of five years has remained short and ranges
on an average of 15 days. This is beneficial because the credit sales of Tesco is settled on
time without decrementing the company’s cash flow.
Trade Payables Payment Period:
As stated by Downs (2017) this ratio determines the average time taken by the
business for paying off their supplies for goods purchased on credit.
Years 2014 2015 2016 2017 2018
Trade Payables 10595 9922 8568 8875 8996
Cost of Goods Sold 59547 59128 51579 53015 54141
Trade payable period 64.94 61.25 60.63 61.10 60.65
Trade Payables Payment Period
From the above stated computations Tesco is settling their credit suppliers on the
average period of 60 days. The ratio highlights the company has been consistent over the five
year span with this time frame to avoid any loss goodwill from their credit suppliers.
Inventory Turnover Period Ratio:
The inventory turnover ratio measures the average time period for which the
inventories are held by a business.

9FINANCIAL STATEMENT ANALYSIS
Years 2014 2015 2016 2017 2018
Beginning Inventory 11094 3576 2957 2430 2301
Closing Inventory 3576 2957 2430 2301 2263
Average Inventory 7335 3266.5 2693.5 2365.5 2282
Cost of Goods Sold 59547 59128 51579 53015 54141
Inventories Turnover Period 44.96 20.16 19.06 16.29 15.38
Inventories Turnover Period
As evident from the above computation the inventory turnover period for the five year
span has represented a progressive improvement. At Tesco the inventories are held for shorter
period which implies that funds are not held up in the form of asset. With shorter inventory
period Tesco can reasonably plan in advance for the customer demand trends to avoid
potential shortage of stock.
Solvency Ratio:
The solvency ratio determines the degree to which the assets covers the business
commitments for future payment of liabilities.
Debt to Equity Ratio:
The debt to equity ratio measure the relative proportion of shareholders equity and
debt used to fund the assets of the business.
Debt to Equity Ratio
Years 2014 2015 2016 2017 2018
Total Liabilities 35449 37143 35278 39415 34382
Shareholders Equity 14715 7071 8626 6438 10480
Debt to Equity Ratio 2.41 5.25 4.09 6.12 3.28
Solvency Ratios
The debt to equity ratio for Tesco signifies a higher proportion of shareholders equity
and debt is used to finance the business. The ratio over the five year has been higher
indicating the Tesco is highly resourced with outside borrowings in comparison to its
shareholders funding.

10FINANCIAL STATEMENT ANALYSIS
Debt to Total Asset:
According to Elliott (2017) the debt to total assets serves the financial leverage
indicator of total percentage of assets which is financed by the creditors, debt and liabilities.
Years 2014 2015 2016 2017 2018
Total Liabilities 35449 37143 35278 39415 34382
Total Assets 50164 44214 43904 45853 44862
Debt to Total Asset 0.71 0.84 0.80 0.86 0.77
Debt to Total Asset
The ratio highlights that the debt to total asset of Tesco over the five year span has
stood less than one. This implies that on an average only 30% of the Tesco’s assets are
financed by its creditors. The ratio is relatively on the lower side and involves risk on the
Tesco’s assets.
Interest Cover Ratio:
As stated by Warren and Jones (2018) the interest cover ratio determines the amount
of operating profit is available to a business to meet its interest expenses.
Years 2014 2015 2016 2017 2018
Operating Profit 2631 -5972 1046 -5750 1837
interest Payable 564 661 29 874 630
Interest Coverage 4.66 -9.03 36.07 -6.58 2.92
Interest Coverage ratio
The ratio for the five year span is somewhat representing a fluctuating trend as it
declined to stand negatively in 2015 and 2017 to -9.03 and -6.58 respectively. However it
gained significantly in 2016 to stand at 36.07. Tesco relatively has higher operating profit to
cover its interest expense in light of its fluctuating operating profit.
Market Position Analysis:
This ratio determines the share of business from the perspective of shareholders.

11FINANCIAL STATEMENT ANALYSIS
Earnings per Share:
The ratio determines the profit earned per share by a firm.
Years 2014 2015 2016 2017 2018
Net Profit 790 -5741 138 -40 1206
Weighted Average No.of Shares 8078 8107 8126 8148 8165
EPS 9.78 -70.82 1.70 -0.49 14.77
Investment Ratios -- Market Position Analysis
Earnings Per Share
The EPS of Tesco has been fluctuating as from 2015 to 2017 it has represented a
quick decline. However, it increased to stand positively in 2018 to 14.77. With such
fluctuating trends the investors of Tesco may prefer another company that have higher EPS.
P/E Ratio:
The ratio is associated to the market value of share with respect to the earnings per share.
Years 2014 2015 2016 2017 2018
Market Value Per Shre 320.35 224.75 173.4 194.6 209
EPS 9.78 -70.82 1.70 -0.49 14.77
Price Earnings Ratio (P/E) 32.76 -3.17 102.10 -396.40 14.15
Price Earnings Ratio (P/E)
The ratio above shows that Tesco market share is significantly greater at times than
the level of EPS except during the year 2015 and 2017 where it negatively stood -3.17 and -
396.40. Though P/E has represented a fluctuating trend but the investors may be attracted by
the Tesco’s greater earnings power.
Dividend Yield:
As per Elliott (2017) this ratio assess the cash return derived from a share with respect
to its present market value.

12FINANCIAL STATEMENT ANALYSIS
Years 2014 2015 2016 2017 2018
Dividend Paid 189 914 0.4 82
Market Value Per Share 320.35 224.75 194.6 209
Dividend Yeild 0.59 4.07 0.00 0.00 0.39
Dividend Yeild Ratio
The ratio reflects that dividend per share stood 0.39 in 2018 while the market value
per share has increased leading to lower cash returns from the share than to Tesco’s market
value.
Recommendations:
The retail markets is witnessing uncertain changes over the years with customer taste
and preferences changing rapidly. To be competitive in the foreign market, Tesco must adopt
the strategy of mergers and acquisitions with the local firms as this would speed up the
process of development. The exploitation of strategic capabilities at Tesco encourage the
foreign companies to merge with Tesco in order to attain cost efficiency and new capabilities.
Conclusion:
On a conclusive note the analysis concludes that Tesco is leading the UK retail market
by pursing cost leadership and differentiation strategy. The company used the lean and agile
supply chain to make the best use of competitive advantage and uncertain market conditions.
To assure profitability and growth Tesco must focus on increasing the areas of growth by
merging with the local suppliers as this would be vital for the future success of the business.

13FINANCIAL STATEMENT ANALYSIS
References:
Annualreports.com. 2019. Tesco plc - AnnualReports.com. [online] Available at:
http://www.annualreports.com/Company/tesco-plc [Accessed 3 Jan. 2019].
Downs, L.C., 2017. Financial Accounting.
Elliott, B., 2017. Financial Accounting and Reporting 18th Edition. Pearson Higher Ed.
Hermason, R., Edwards, J. and Maher, M., 2016. Accounting Principles: Managerial
Accounting.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Kim, M., 2018. Principles-Based Accounting Standards and Regulatory Enforcement.
Kim, W., Hallsworth, A. and Kim, H., 2018. On being local and being successful in Korea:
Tesco and E‐mart. Area.
Liang, Y., 2018. The Current Situation Analysis and Development Strategy of Traditional
Retail Industry under Electronic Commerce.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as
social and organizational practice: exploring the work of financial reporting. Accounting,
Organizations and Society, 56, pp.35-37.
Shi, Y., Lim, J.M., Weitz, B.A. and France, S.L., 2018. The impact of retail format
diversification on retailers’ financial performance. Journal of the Academy of Marketing
Science, 46(1), pp.147-167.
Tesco plc. 2019. About us. [online] Available at: https://www.tescoplc.com/about-us/
[Accessed 3 Jan. 2019].

14FINANCIAL STATEMENT ANALYSIS
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.
Wood, S., Wrigley, N. and Coe, N.M., 2016. Capital discipline and financial market relations
in retail globalization: insights from the case of Tesco plc. Journal of Economic
Geography, 17(1), pp.31-57.