Evaluating TESCO's Financial Performance Using Accounting Ratios

Financial Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
1. Evaluating TESCO performance using accounting ratios......................................................3
2. Highlighting the limitations of Accounting ratios..................................................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Accounting ratios calculated from financial statements and other relevant data are
beneficial for any company to interpret and analyse and interpret the financial position and
performance of company. The present report is based on TESCO plc, a British retail company
dealing in various products and services. Report will examine different ratios for a three-year
period to explain company's efficiency in operations, etc. Further, study will highlight various
limitations that a company faces while interpreting accounting ratios.
1. Evaluating TESCO performance using accounting ratios
Profitability Position:
 Return on shareholders' funds indicates firm's ability to earn adequately in order to repay
its shareholders (Aliu, Akpa and Egwakhe, 2020). Ratio has drastically increased from
2.25% to 12.39% from 2017 to 2018 which shows that TESCO has paid a large part of
profits to shareholders as dividend and retained less. After 2018, ratio has declined to
9.91 in 2020 that depicts company is retaining its profit to put it back in business for
expansion and diversification purpose. This ratio is also used by investors to evaluate
company's efficiency before investing their excess funds in company.
 Another ratio return on capital employed shows TESCOs capability to generate profits
from the capital employed. Basically, it tells how much profit business is earning from
each pound of capital invested. ROCE has suddenly increased from 0.55% to 5.90% from
2017 to 2019 which describes organization's is favourably using its capital assets to earn
higher profit margins. It then decreased to 3.83% in 2020 which shows for every pound
invested, company generated 3.8 cents in operating income.
 Return on total assets is important ratio to measure productivity of business by stating the
investment potential to generate value (Acosta-González, Fernández-Rodríguez and
Ganga, 2019). Ratio first increased from 2.89% to 3.41% from 2018 to 2019, then
declined to 2.51% in 2020. In other words, every pound invested by TESCO in assets, it
generated £28.9 to £25.1 of income.
 The profit margin of TESCO is ranging between 2% to 2.62% and on the other hand,
gross profit margin ranges between 5% to 7% from 2017 to 2020. Business entity is
earning good amount of gross profit from its regular selling activities after covering its