Tesco Plc Financial Statement Analysis

The provided document is an essay on the financial statement analysis of Tesco Plc for the years 2019 and 2020. The essay utilizes five financial ratios to assess the company's profitability, liquidity, solvency, leverage, valuation, and management efficiency. It also highlights the significance of these ratios in making informed decisions for external users such as investors, creditors, suppliers, customers, and the government.

 
  
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Fundamentals in Financial Management: Tesco Plc.
Tesco Plc. is a multinational grocery company headquartered in Welwyn Garden City, England.
Ken Murphy currently leads the company as the Chief Executive Officer (CEO), oversees over
450,00 employees. The company’s brands include Booker, Makro, Premier, Jack’s, One Stop,
and the Subsidiaries are Tesco Mobile, Tesco Ireland, and Tesco Bank (Tesco Plc., 2020). The
purpose of the report is to conduct a financial ratio analysis for the two financial years, 2019 and
2020. To know the financial health of the company, the five ratios selected for the analysis are
categorised into profitability, liquidity, management, leverage and valuation ratios. The report not
only calculates and interprets the ratios but also indicates the users, both internal and external,
who can benefit from the information provided in the financial ratios.
Table 1: Data adopted from Tesco Plc. (2020)
1. Profitability ratios 2020 2019
Gross Profit Margin = Gross Profit / Net Sales 4889/64760 = 7.55% 2554/63911
=7.18%
Return on Assets = Net Income / Average Total
Assets
971/52302=0.02or
2%
647/56898 =0.01
or 1%
2. Liquidity Ratios
Current Ratio = Current Assets / Current
Liabilities
12879/17927= 0.72 12480/20973
=0.6
Quick Ratio = Current Assets- Closing Inventory /
Current Liabilities
12879-2433/17927 =
0.58
12480-
2617/20973https://www.coursehero.com/file/83376154/Essaydocx/
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=0.47
3. Management Efficiency Ratios
Receivables Turnover = Net Credit Sales /
Average Accounts Receivable
64760/1396 = 46.39 63911/895 =
71.41
Inventory Turnover = Cost of Goods Sold /
Average Inventory
59871/2433 =24.61 89325/2617
=34.13
4. Leverage Ratios
Debt Ratio = Total Liabilities / Total Assets 39027 /52302 = 0.75 43442/ 56898
=0.76
Debt-Equity Ratio = Total Liabilities / Total
Equity
39027/13275 =2.94 43442/13456
=3.23
5. Valuation and Growth Ratios
Earnings Per-Share = (Net Income-Preferred
Dividends)/ Average Common Shares Outstanding
971/ 9793.50 =0.1 647/9793.50
=0.07
Dividend Pay-out Ratio = Dividend Per Share/
Earnings Per Share
0.09/0.17 = 0.53 0.07/0.11 =0.64
Users of Financial Information
Both internal and external stakeholders can use the financial information provided in either the
statements or ratios. The internal user of financial information is the company’s management,
while the external users are creditors, government, investors, employees, customers, and the
generic public (Das and Pandit, 2020).https://www.coursehero.com/file/83376154/Essaydocx/
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Users of Profitability Ratios Information
According to Easton et al. (2018), the profitability ratios are the government, investors, and
employees. Considering that the profitability ratios show the company’s revenues, expenses, and
income, the government uses the ratios to gauge if the company is compliant with the tax returns.
For example, the gross profit margin should always be higher than the net profit margin if the
company is tax compliant. Besides, the employees use the profitability ratios to know if the
company is making adequate profits that can cover the expenses like their wages and salaries.
The investors can also be interested in the profitability ratios to know if the company’s expenses
are within limits, and therefore, their investments would not be misused.
From table 1, Tesco Company’s profitability position improved from 2019 to 2020. Statistics
show that the company is headed towards the right direction financially and employees, as well
as investors, would consider continuing their corporation with the firm (Tesco Plc., 2020). For
example, an employee can take the action of extending the employment contract while the
investors can take the action of adding more money into the business. The government will also
use the ratio to compare the tax returns considering that 30% of the Net Income should be
subjected to tax.
Users of Liquidity Ratios Information
Easton et al. (2018) posit that liquidity ratios show the financial ability of Tesco Plc. to meet all
the short term financial obligations as and when they fall due. The first user who relies on the
liquidity ratios is a creditor. A creditor needs the current ratio to know if the company is capable
of settling his or her dues within one accounting period. For example, in 2020 and 2019, the
current ratios of 0.6 and 0.72 indicate that for every 1 dollar (1$) of current liabilities, thehttps://www.coursehero.com/file/83376154/Essaydocx/
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company only has 0.6 and 0.72 in current assets (Tesco Plc., 2020). The quick ratios indicate a
weak liquidity position of the company if the most liquid assets are considered cash and cash
equivalents, less the closing inventory. Customers can also use the ratio to gauge whether they
can be allowed by the company to take goods on credit. The creditors can use the current ratios
to reduce the number of goods they sell to the company on credit because Tesco Plc. is unable to
meet all the short-term liabilities.
Users of Management Efficiency Ratios Information
The management efficiency ratios show the company’s ability to manage the company’s assets
and liabilities (Easton et al., 2018). The receivable turnover ratio shows the number of times debt
is collected within an accounting period while the inventory turnover shows the number of times
stock is moved in the business. The management of a company will be the most interested
stakeholder for the management ratios because they show the efficiency of the company’s
management and the overall position of the company. For example, the debtors’ turnover reduced
from 71 to 46 between 2019 and 2020, while the inventory turnover reduced from 34 to 24 over
the same period (Tesco Plc., 2020). This fact shows that the company’s efficiency has reduced
and it needs to take two key actions. First, the company needs to employ more debt collectors.
Besides, the management can use discounts to make debtors settle their dues on time. The other
significant effort to strengthen the inventory turnover ratio is advertising. The company can
increase the advertising expenses to better market the products and reduce their life cycles, thus
allowing higher revenues.
Users of Leverage Ratios Informationhttps://www.coursehero.com/file/83376154/Essaydocx/
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The balancing of capital structure is paramount in a business. A company is highly leveraged if
debt capital exceeds equity capital (Easton et al., 2018). The ratio is used by investors who need
the information to see the leverage position of the company and know if they should invest their
resources. A debt ratio below one (1) shows that the company has more total assets than total
liabilities; thus, it has a strong solvent position. However, the debt-equity ratios of 2019 and
2020 show that the firm has more debt than equity in its capital structure. Comparing the two
years, the ratio shows that the company relies more on debt in 2020 than in 2019. The company
should split its shares and invite more investors to ensure a balance between debt and equity.
Users of Growth or Valuation Ratios Information
According to Williams and Dobelman (2017), every investor needs to know whether their
resources invested in the company in the form of shares will earn returns in the form of
dividends or more shares. The first critical valuation ratio that investors look for is the earnings
per share (EPS). This ratio shows the amount per dollar of investment shares that the investor
will get as returns. In Table 1, the EPS shows that for every dollar, the investor earns $0.07 and
$0.1 in 2019 and 2020 (Tesco Plc., 2020). This aspect shows that the company’s EPS improved
between 2019 and 2020. Therefore, an investor would be encouraged to put in more resources,
considering the positive trend of the company’s earnings. The second ratio under the growth or
valuation ratios that the investors are interested in is the dividend payout ratio. This ratio shows
the actual amount per dollar of investment that investors earn in the form of dividends. A higher
dividend payout ratio is better for the investors because any shareholder’s primary aim is to earn
returns on their shares (Das and Pandit, 2020). Using the dividend payout ratio, as shown in tablehttps://www.coursehero.com/file/83376154/Essaydocx/
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1, the ratio of 0.64 and 0.53 indicates that the company reduced the payout between 2019 and
2020 (Tesco Plc., 2020).
Conclusion
The ratio analysis is useful in the definition of a company’s financial health. The five financial
ratios used in the company’s analysis address the key areas of profitability, liquidity and
solvency, leverage, valuation and management efficiency. Unlike management accounts that only
benefit the internal stakeholders, the financial accounts used to calculate the financial ratios,
benefit many external users like the government, creditors, suppliers, customers, investors and
the general public. Therefore, it is of significance for any user for financial information to
understand the exact ratio that can help in making an accurate decision. For example, a creditor
should look for the liquidity and solvency ratios that show the ability of the company to meet all
the short and long term financial obligations as and when they fall due while an investor should
focus on the valuation or growth ratios that give a clear picture of the returns, in terms of
earnings and dividends, that will come from the acquired shares.
Reference List
Das, S. and Pandit, S., 2020. Financial statement analysis and forecasting. Springer.
Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial
statementanalysis & valuation. Cambridge Business Publishers.
Tesco Plc., 2020. Annual reports and financial statements 2020. Tesco Plc.
https://www.tescoplc.com/investors/reports-results-and-presentations/annual-report-2020/https://www.coursehero.com/file/83376154/Essaydocx/
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Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. In Quantitative
Financial Analytics: The Path to Investment Profits (pp. 109-169). World Scientific
Publishing Co. Pte. Ltd.https://www.coursehero.com/file/83376154/Essaydocx/
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