Financial Performance Analysis of Tesco: A Ratio Analysis

This project provides the analysis of the different ratios of accounting for the measurement of the financial performance and position of the business. The financial performance of Tesco can be analysed by evaluating the different financial ratios for the last three years. Limitations of ratio analysis are also discussed.

Financial accounting

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Analysation of the financial performance of Tesco in the last few year.....................................1
Limitations of ratio analysis........................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial accounting is that type of accounting which includes the method of documenting,
summarising and reporting the transaction which arising during the operations of business in a
given period of time. Financial accounting which is reflected in the books of the organization in
the accrual basis over the accounting on cash basis. In this project the chosen organization is
Tesco for which financial information on last three years. The evaluation liquidity and financial
structure of the business performance over the three years will be made.
MAIN BODY
Analysation of the financial performance of Tesco in the last few year
The financial performance of Tesco can be analysed by evaluating the different financial
ratios for the last three years.
Profitability ratio:
Profitability ratios are the ratios which shows how much profit Tesco is generating
through its sales and operations (Dlotko, Qiu and Rudkin, 2019). The return of shareholders fund
which increased in 2018 but has fallen since then shows that the company has been able to return
this percentage of the total equity through the shareholders fund. The return on capital employed
ratio of this company shows relation of the profit from the capital invested in the organization
which is also seem to fall in the year 2020. Return of assets is also a profitability ratio which
simply shows how effectively the organization is utilizing its assets for the generation of profit.
This ratio for this organization increased in 2019 to 3.41 but in the year of 2020, it again fell to
2.03 which is even lower that it was in 2018. This shows that the company is unable to utilize the
assets effectively. Profit margin ratio shows how much profit is generated by the company after
the deduction of all kinds of expenses from its revenue which has slightly decreased. The Gross
margin ratio of this organization also has increased which shows that the company is making
profit from the revenue after the deduction of the Cost of goods sold. The comparison between
the gross margin ratio and profit ratio shows that the indirect expenses of this organization has
increased due to which there is opposite trend in these ratios. The EBITDA ratio of this
organization show how much earning does the organization is able to generate before the
deduction of interest, taxes and depreciation (Ekmeil and Abumandil, 2020). This ratio also has
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increasing trend which show that the company is generating higher income every year but due to
high interest, taxes and depreciation its net profit is getting decreased.
Operational ratios:
Operational ratios show the efficiency of the organizations and its operation for the
generation of the profit. The operational ratios are of different types which are considered to
evaluate the financial performance of Tesco. The net assets turnover ratio which is very helpful
for the assessing the efficiency of he company’s assets for the generation of revenue or sales. For
this organization this ratio was 2.24 which increased to 2.25 in 2019 but again fell to 1.88 in
2020. This shows that currently the efficiency of the company is not as good as it was in last few
years (Joo, 2021). The fixed assets turnover ratio is also an efficiency ratio which show the
efficiency of the company in the utilization of its fixed assets which are building, plant and
machinery etc. For Tesco this ratio has fallen in the last three years showing the increase in
depreciation of those asset and less income against it. Interest cover ratio shows how easily can
pay interest on its outstanding debt which will be an effective measure for increasing the
productivity of the business. For this organization the interest coverage ratio was the highest in
2019 at 4.12 but again fell to 2.06 in 2020. The stock turnover ratio shows determines how soon
does the company sells its products and services and replace it with the new products and
services. It is said to be very effective in the determination of the efficiency of the inventory
management of this company. This ratio has been the most efficient in 2020 showing the
company is able to quickly sell all the products and services. Debtors collection period is the
average amount of time which is taken by the company for the collection of the total debts from
its sundry debtors (Lumbantobing, 2020). The best average of this ratio is in 2019 were the
company is able to recover the debts in the least number of days.
Structure ratios:
These ratios are very helpful in assessing the company’s performance in assessing the
quality of the company’s capital structure. Current ratio is the ratio which shows the ability of
the company for paying the short-term obligations. It shows how liquid the company is by
dividing the current assets from its current liabilities (Morales-Díaz and Zamora-Ramírez, 2018).
This ratio should ideally be 2:1 however Tesco has never reached this state. The ratio of this
organization is 0.73 in 2020 which is the highest but it requires a lot of improvements. The
liquidity ratio is the ratio which is also used for the determination of the ability for payment
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short-term obligation, a being quite similar to current ratio it also the same upward trend which
needs to be even higher. Asset coverage ratio shows the efficiency of the company for selling the
assets for paying of all its debts. This ratio for Tesco has also decreased in 2020 showing that the
company needs to reduce its total debts. This ratio shows the total number of employees and how
effective they are in production of the revenue. This shows the efficiency of the employees of the
organization. Gearing per employee ratio has increased in 2020 to 222.95 which was low in 2019
at 161.26 but was way higher in 2018 at 233.35 therefore the company needs to reach the
productivity its employees had earlier. The profit per employee shows the how much
contribution each employee has in the generation of the profit for the company. It shows a
downward trend meaning that either the company has increased the number of employee or has
low profit in 2020. The turnover per employee shows that the how efficient has an employee
been in completing the turnover of the organization.
Limitations of ratio analysis
There are the different limitations to the accounting ratios which are used for the analysation
of the financial performance.
No inter firm comparison:
These ratios only have the potential of explaining the financial information for one given
firm and fail to analyse multi firm comparison of financial analysation (Yuliarti and Diyani,
2018). This is important because the concern of the business is also with the competition
specially for an organization like Tesco. The is a limitation as it limits the organization to
compare it self with its competitors. Comparison with competitors is helpful for the business in
the development of some effective strategy.
Limited information from single ratio :
In the ratio analysis each ratio explains different financial aspect of the organization. Due
to which from a single ratio very less information can be developed (Riyanti, 2020). A single
ratio is also unable to convey any meaning of the ratios which are helpful for the calculation of
the ratios which can lead to confusion in spite of analysation. Ratio analysis is basically a tool
which is used for the financial performance analysis of an organization therefore it should
provide the complete information however, the financial analysis is dependent on multiple ratios.
Lack of Adequate Standards:
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There are not fixed standards for the ratio which means there are no rules and
regulations which are required for the interpretations of these ratios. The analysation becomes
difficult due to lack of standards. Having some standards will make the analysation of these
ratios more systematic and easier to interpret. Standards will help the ratio analysis be have some
rules on how they must be used for analysation of information.
Complicated and misleading conclusion:
The calculation of some ratios are very complicated because they require a set of
information which cannot be differentiated. Due to complications in the calculations of the ratios
the analysation become complicated. These ratios make the comparative study very complicated
due to which it misleads the conclusion of the study into another direction which is not correct
and rather misleading.
Inherit limitations of accounting:
As these are the accounting ratios they are calculated out of the accounting information
on an organization which tends to mislead the company and the management of the organization.
This happen due to the fact that the accounting has some limitations of its own. The high number
of assumptions made in the accounting holds the accuracy to this method. Thus, the ratios also
reflect the assumption of the accounting methods.
CONCLUSION
With the help of this project it can be concluded that Tesco plc has improved its
performance a lot in the last 3 years and has the potential of improving its business even more.
This project provides the analysis of the different ratios of accounting for the measurement of the
financial performance and position of the business. In this project the limitations to the ratio
analysis is also discussed.
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REFERENCES
Books and Journals
Dlotko, P., Qiu, W. and Rudkin, S., 2019. Financial ratios and stock returns reappraised through
a topological data analysis lens. arXiv preprint arXiv:1911.10297.
Ekmeil, F.A.R. and Abumandil, M.S., 2020. The Effect Of Market Structure And Financial
Ratios On Financial Performance In Palestinian Private Hospitals During Coronavirus
Disease, Covid-(19). European Journal of Molecular & Clinical Medicine. 7(6). pp.669-676.
Joo, J., 2021. Statistical Analysis of Extreme Values of Financial Ratios. Knowledge
Management Research. 22(2). pp.247-268.
Lumbantobing, R., 2020, April. The Effect of Financial Ratios on the Possibility of Financial
Distress in Selected Manufacturing Companies Which Listed in Indonesia Stock Exchange.
In Proceeding of the 6th Annual International Conference on Management Research
(AICMaR 2019). Advances in Economics, Business and Management Research (Vol. 132).
Morales-Díaz, J. and Zamora-Ramírez, C., 2018. The impact of IFRS 16 on key financial ratios:
A new methodological approach. Accounting in Europe. 15(1). pp.105-133.
Riyanti, S.D., 2020. Analysis of Financial Ratios For Financial Distress conditions in
Manufacturing Companies. Jurnal READ (Research of Empowerment and
Development). 1(2). pp.56-65.
Yuliarti, A. and Diyani, L.A., 2018. The effect of firm size, financial ratios and cash flow on
stock return. The Indonesian Accounting Review. 8(2). pp.226-240.
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