Financial Analysis of Tesco: Performance, Liquidity, and Financial Structure

This report analyzes the performance, liquidity, and financial structure of Tesco for the years 2017 to 2020. It includes an evaluation of profitability ratios, operational ratios, and structure ratios. The report also discusses the limitations of using ratios for financial analysis.

Financial
Accounting

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Analysis of performance, liquidity and financial structure of Tesco along with financial
structure for years 2017 to 2020..................................................................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial accounting could be described as the technique which is used to analyse
performance of a company so that future decisions could be formulated. It is very important for
all the enterprises to make sure that they are having proper information about the financial status
of company as it may facilitate the attainment of all the long-term business goals (Akman, Acar
and Kızıl, 2020). The organisation which is selected for this report is Tesco which is one of the
largest retailers of the United Kingdom. It is operating its business all around the world. It was
founded by Jack Cohen in year 1919 and since then the operations are executed by it
successfully. The Present report is focused with “financial analysis” of Tesco which covers
various topics such as evaluation of performance, liquidity and “financial structure” of the
enterprise for three years. Apart from this, financial ratios are also used for the purpose of
analysing these aspects in the context of the organisation and along with this, limitations of using
financial ratios are also covered in this assignment.
MAIN BODY
Analysis of performance, liquidity and financial structure of Tesco along with financial structure
for years 2017 to 2020
For all the companies it is very important to analyse financial position and performance
of business so that strategic decisions for the future could be formulated as it can help to reach all
the desired objectives of business. In order to assess the actual position of business managers can
use different types of ratios which can facilitate the assessment of performance, liquidity and
financial structure of business. By using these ratios, enterprises will be able to formulate
effective decisions for successful execution of all the operations. With the help of ratio analysis,
the enterprises can determine the weaknesses that are required to be overcome so that the
financial strength could be improved. There are various types of ratios which could be used for
purpose of the assessment of the performance of company (Foabeh and Achaleke, 2020). A
description of the position of the company on the basis of them is as follows:
Profitability ratios: These ratios are focused on analysis of profitability of the
organisation so that the ability of the enterprise to generate profits during the accounting year
could be analysed. Some of the main profitability ratios are Return on shareholder’s fund, return
on capital employed, return on total assets, profit, gross, EBIT and EBITDA margins. While
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analysing these ratios of “Tesco” it has been detrmined so for year “2017 – 2018” the return on
shareholder funds was 12.39 which was decreased in 2018 – 2019 up to 11.27 and for 2019 –
2020 it was also decreased up to 9.91. It is showing that the return on the funds of shareholders
are decreasing which is affecting profitability of the organisation. On the other hand, the results
of a return on capital employed are showing fluctuation in the results for the period of three years
from 2017 to 2020. These are 5.07, 5.90 and 3.83 respectively. It is demonstrating that the
returns of the enterprise are decreased that affects profitability. The outcomes of return on total
assets are showing that for 2017 – 18 it was 2.89 which was increased in 2018-19 up to 3.41 and
again decreased up to 2.51 for the year ending 2020. It shows that entity is not able to manage its
profitability in systematic manner (Kassem, 2019).
Profit margins for years from 2017 to 2020 are 2.26, 2.62 and 2.03 respectively. It
reflects that profits of the entity are fluctuating year by year and for the recent year it is very low.
Gross margin for the three year’s duration from 2017 to 2020 of Tesco are 5.83, 6.48 and 7.07. It
is demonstrating that profitability in context to gross profit is good for the company. EBIT
margin for three years is increasing for Tesco as for 2017 – 18 it was 3.20, for 2018 – 19 it was
3.37 and for 2019 – 20 it is 3.89. It shows that it will facilitate the organisation to meet all its
future goals and objectives. The EBITDA margin is demonstrating that the results of it are
fluctuating because of changes in it. For the duration of three years the values of it are 6.27, 5.62
and 6.06 respectively.
By analysing all the profitability ratios, it has been determined that the ability of Tesco to
generate profits is decreasing since year 2017 – 18 because most of the ratios are showing
decreased results. It is essential for management to take corrective actions so that the lower
profitability could be improved and higher profits could be generated in future (Kizil and
Kaşbaşı, 2018).
Operational ratios: These ratios are calculated for the purpose of determining efficiency
of business to carry out all the operations in systematic manner. In order to analyse the ability to
operate all the operational fields various ratios could be focused. These are various turnover
ratios and some of them are net and fixed assets, stock and debtors turnover ratios. Apart from
this, interest cover, debtor collection and creditor payment ratios are also calculated to determine
efficiency. Discussion of results on the basis of ratios is as follows:
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Net asset turnover ratio is showing that it is fluctuating since the last three years. For the
duration of three years from 2017 to 2020 the results of it are 2.24, 2.25 and 1.88. It shows a
weak position of business. A Fixed asset turnover ratio is showing a reducing trend in the ratios
which reflects the weak operational efficiency of business. The results of this ratio for three years
are 1.85, 1.76 and 1.65 respectively. The Interest cover ratio of the enterprise is also decreasing
for 2017 – 18 it was 3.06, for 2018 – 19 it was 4.12 and for 2019 – 2020 it is 2.06. It is
demonstrating that for the current year the value of it is very low. A Stock turnover ratio is
demonstrating the changes in the ability of operations of the company. The results of it are 24.40,
24.42 and 26.62 for year 2017 to 2020. The changes in it are showing that the ratio is increasing
and affecting the performance of the company. The Debtor turnover ratio is decreasing for the
company since last three years which shows that the amount is recovered by the organisation
lately in 2020 as compared to previous years. The results of it for year 2017 to 2020 are 127.27,
106.87 and 130.83 respectively (Mooney, 2019).
From the results of debtor and creditor payment “ratios” it has been evaluated that debtor
collection for three years is changing “continuously” but the creditor payment is decreasing for
the company. It is demonstrating that the time period which is taken by the creditors is reducing
for the company that will enhance funding of the enterprise. On the other hand, the debtor
collection period shows that the payments are made to the debtors in short-period which helps it
to maintain good relations with the debtors (Utami, 2018).
Structure ratios: These ratios are used for the purpose of evaluating the structure of the
organisation so that the management can determine that the structure is maintained by them
properly or not. With the help of them, Tesco will be able to analyse liquidity, performance and
financial stability of business. Current ratios for last three years are 0.71, 0.61 and 0.73 which
shows that the liquidity of the organisation is good for 2020 as compared to previous years.
Liquidity ratios for the period of these years are 0.60, 0.49 and 0.60 that demonstrates that
liquidity of the enterprise is “low” but it is improved as compared to the previous year. Asset
cover and gearing ratios are showing fluctuation in the results that demonstrates that entity’s
performance is changing with time (Schroeder, Clark and Cathey, 2019).
On the basis of all the financial ratios it has been determined that performance of Tesco is
not very good because most of the ratios are showing unfavourable results for the organisation.
Due to this, the position and performance of the company is getting impacted negatively.
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Limitations of using the ratios: There are various limitations of using ratios for
determining an organisation’s performance. A Discussion of all of them is as follows:
 All the contingent liabilities are ignoring by ratio analysis which may result in
inappropriate outcomes.
 The results of ratios could not be considered as accurate because it does not incorporate
uniform accounting policies.
 All the market conditions are ignored in the calculation of ratios which affects the
accuracy of results.
 It cannot capture the impact of seasonality which affects the decisions that are made by
the investors (Vu, 2016).
CONCLUSION
From the above project report it has been concluded that for all the businesses it is very
important to be focused with financial accounting as it can help to determine an actual position
of business. In order to analyse the position of business different ratios could be used which are
current, liquidity, gross margin, interest “cover” etc.
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REFERENCES
Books and Journals:
Akman, V., Acar, B. and Kızıl, C., 2020. Auditing Techniques to Avoid Cost Accounting
Frauds. EMAJ: Emerging Markets Journal. 10(1). pp.60-66.
Foabeh, P. A. and Achaleke, H. F., 2020. ATTITUDES AND PERCEPTIONS OF
SHOPPERS’GROCERY SUPERMARKET CHOICES: A COMPARATIVE
ANALYSIS BETWEEN BIG C AND TESCO LOTUS. International Journal of
Research-GRANTHAALAYAH. 8(7). pp.67-79.
Kassem, R., 2019, April. What Matters in the Assessment of Financial Reporting Fraud Risk.
In 9th Counter Fraud Conference and Forensic Accounting Conference.
Kizil, C. and Kaşbaşı, B., 2018. Accounting Scandals and Eye-Catching Frauds: USA-Japan
Comparison by Considering the Role of Auditing. Journal of Asian Research. 2(3).
Mooney, S., 2019. An investigation into attitudes of Tesco customers in South Dublin towards
private-label brands (Doctoral dissertation, Dublin Business School).
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Utami, M. W., 2018. THE ROLE OF NATIONAL CULTURE IN THE EMERGENCE OF
FINANCIAL STATEMENT FRAUD: COMPARISON OF JAPANESE AND
BRITISH CULTURE IN THE CASES OF OLYMPUS AND TESCO.
Vu, M., 2016. IS THE BALANCED SCORECARD USEFUL IN A COMPETITIVE
INDUSTRY?: Using Tesco PLC as a case study in the UK grocery retail industry.
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