Tesco's Financial Performance: Ratio Analysis and Qualitative Review

This report provides a comprehensive financial analysis of Tesco plc, comparing its performance against competitors like Morrison using ratio analysis. It evaluates key metrics such as gross profit margin, net profit ratio, current ratio, quick ratio, debt-equity ratio, stock turnover ratio, total asset turnover ratio, fixed asset turnover ratio, debtor's collection period, and creditor's payment period. The analysis reveals Tesco's strengths and weaknesses in areas like profitability, liquidity, and efficiency. The report also discusses the limitations of ratio analysis, including reliance on historical data, changes in accounting policies, potential for manipulation, and neglect of non-monetary factors. A qualitative analysis explores Tesco's core business, customer exposure, and competitive positioning. Finally, the report includes a reflective practice section, discussing personal financial skills and a plan for improvement. Desklib provides access to this assignment and other study resources for students.

Finance For Managers

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................................................................4
TASK 1........................................................................................................................................................................................................4
Critical analysis of Tesco's performance against its competitors............................................................................................................4
Comprehensive discussion on limitations of Ratio analysis....................................................................................................................7
Qualitative analysis of Tesco within its industry against its competitors................................................................................................8
Description of risks and opportunities that the company is facing in both qualitative and quantitative aspects..................................10
CONCLUSION..........................................................................................................................................................................................12
RECOMMENDATION.............................................................................................................................................................................12
TASK 2......................................................................................................................................................................................................13
Reflective practice.................................................................................................................................................................................13
Self-reflection on current financial skills and personal action plan to develop this..............................................................................13
REFERENCES..........................................................................................................................................................................................16
APPENDIX................................................................................................................................................................................................18

INTRODUCTION
Finance managers are backbone of any company as they carry on complex & challenging job by helping enterprise's in taking
decisions regarding financial investments and planning. Further, manager also aids company in raising funds so that firm can maintain
a proper balance between its capital structure i.e., equity & debt without any inadequacy of finance at the time of need. Hence, for this
project Tesco plc has been selected which is a listed British multinational corporation headquartered in Welwyn garden city, England,
running an operation of groceries & general merchandise retailer. Therefore, following project report will include Tesco's performance
within its industry, with the aid of ratio analysis. Hence, this tool of analysis will help investors along-with company in improving &
understanding the actual performance of themselves in comparison to their competitors over a period. Similarly, through this firm will
have a clear view of their financial position, solvency status, etc. i.e., whether they are having sufficient money or not to meet with its
short term obligation. In addition to this, last part of this report will be based on critics over the performance & the impact of the same
on financial decision-making by comparing it with previous work experience.
TASK 1
Critical analysis of Tesco's performance against its competitors.
1. Gross profit margin: This ratio indicates that how effectively & efficiently company is generating profits after deducting cost
of goods sold from its revenue generated through operations. Therefore, from the computed table it has been reflected that after
comparing data of Tesco and Morrison, the former is performing well by generating 7% gross profit margin in both 2019 &
2020 financial year. Further, looking at the data of Morrison plc they are giving constant figure of 4% during both periods
(Annual report of Tesco 2020, 2021). Thus, after analysing performance of Tesco against its competitor, the change in overall
performance with 3% downfall is seen in Morrison's performance. Therefore, such alteration is experienced because, revenue
generated from sales is decreasing in Morrison plc as compared to Tesco.
2. Net profit ratio: NP margin reflects that how much net income the company is generating from its total sales. Hence,
percentage of net profit computed from the given table indicating that, Tesco is showing constant margin i.e., 2% in both

financial years. However, Morrison has generated better result during the period 2020, with 2% net profit margin its previous
year with 1% positive change. Therefore, we can say that such constructive alterations are faced by Morrison due to a rise in
net profit after deducting indirect expenses. Subsequently, after analysing the figures of both organization, manager can
conclude that Morrison is doing far better than Tesco.
3. Current ratio: Whether company is having sufficient current assets or not to meet with its current obligation, can be
determined through current ratio. Therefore, after analysing the liquidity position, manager came to a point that Tesco and
Morrison are not performing well in these regards. This interpretation is made after comparing the result of both firms against
the ideal current ratio i.e., considered to be 2:1. Thus, from this comparison, it can be interpreted that their current ratio in
comparison to Morrison is better with 0.134% rise in current year (Annual report of Tesco 2019. 2021). Alternatively,
competitive firm i.e., Morrison is facing a downfall by 0.023% during the period 2020.
4. Quick ratio: After seeing the company's liquidity position from determined table, it has been concluded that Quick ratio is
also not compatible for meeting its short term obligation because, figures derived doesn't match with ideal ratio which is 1:1.
But comparing the data from its ideal ratio, Tesco is maintaining its liquidity position in a better way with an increase of
0.124% during period 2020. Conversely, Morrison is depicting a downfall of 0.004% in the current year (Annual report of
Morrison’s 2020. 2021). Hence, it reflects that both organization's capacity to pay its short term liabilities are not good.
5. Debt-equity ratio: How much debt company is having towards its per equity are determined through this ratio. Therefore,
computed figure sheet denotes that Tesco has either taken back its debt or completed the process of redemption during the
period 2020 because it shows the result of 1.594 from 1.675 in financial year 2019. Apart from this, data of Morrison indicates
that they have dis-invested the debt portion into its equity part, as shareholder's equity of competitive firm is showing a rising
figures in 2020. Hence, according to the ideal ratio company should have debt less than 2, & in regard to this both firm is
falling within these criteria.

6. Stock turnover ratio: This ratio measures that within how many days company is selling its inventory. The given chart
indicates that Tesco's turnover ratio is showing a figure of 22.627 times in 2019 which is increased to 24.735 during the current
year as compared to Morrison, where the change is just 0.206%. Therefore, after such comparison of two companies in terms
of their efficiency, Tesco is said to be the best one as they are converting its stock through sales at a greater pace than
Morrison. Hence, it can be concluded that both firm’s performance in terms of selling their inventories sounds to be good but
Tesco is performing far better.
7. Total asset turnover ratio: This efficiency ratio measures that how effectively company is generating revenue through
optimally utilizing its total assets. From the following table it has been depicted that, Tesco's total asset turnover ratio during
2019 is 1.166 times which is increased to 1.186 times, with 0.02% rise during the current year. On the other hand, Morrison's
efficiency of making revenue from its total asset is decreasing in period 2020 with a 0.054 times downfall in comparison to its
performance in previous year (Annual report of Morrison’s 2019, 2021). Therefore, it can be concluded that Tesco's total asset
turnover ratio is proved to be best from its competitor.
8. Fixed asset turnover ratio: FAT ratio indicates the efficiency level of company through looking into how effectively a firm is
yielding revenue from its operations by using their fixed assets. With the help of determined results it has been concluded that
both Tesco & Morrison are performing better, but the later is showing excellent performance as the ratio has increased by
16.686% during their current period. Further, it has seen that Tesco is generating revenue only 1.552 times in financial year
2020 from 1.533 in 2019. So, it is concluded that Morrison is excelling with its performance in comparison to Tesco.
9. Debtor's collection period: The determined ratio analysis table is reflecting that average debtor's collection period of Tesco
company is proved to be sound in comparison to Morrison. Moreover, the former company is receiving payment from their
customers during its current year has showed downfall with change of 0.984 days in comparison to their competitor. Hence,
Tesco is taking 0.267 days less in current period, so, it is concluded that quoted company's performance in context of
collecting debt is proved to be good.

10. Creditor's payment period: Tesco's credibility in context of Morrison is proved to be good after analysing the performance
of creditor's payment period. Hence, Tesco is repaying their creditors within 54.113 days during period 2020 in comparison to
year 2019 as days generated is 56.283. However, Morrison is showing poor credibility in regard to Tesco because, repayment
days has increased to 0.273 during period 2020, therefore, it has been proved that Tesco is performing in a better way.
Comprehensive discussion on limitations of Ratio analysis.
Even though ratios are easy to calculate, but they too face with some limitations which obstruct company to know actual
performance.
 Calculation derived with the help of financial statements: Ratio analysis is carried on by deriving information from
financial statements like balance sheet, income and cash flow statement in which some elements of balance sheets are recorded
on historical data. Consequently, the result arises will reflect disparity due to the hindrance of not recording some items of
financial position at actual cost.
 Changes in accounting policies: The constant change of accounting policies and procedures may put a significant impact on
its financial reporting because result of ratio analysis will come in an altered form during such period (Thornton, Lamb and
White, 2020). Hence, it does not provide analyst with a base for proper comparison due to the modifications made consistently.
 Manipulation made in financial statement: As ratio is calculated through the data based on financial statement, there is a
high chance of manipulation done by company's management for showing good results than its actual performance. Therefore,
ratio analysis may not accurately depict the true nature of business, as misrepresentation of information can't be detected
easily.
 Inflation: Financial statements are released periodically with time differences between each release. Therefore, if inflation has
incurred in between the periods then this effect will not let real prices be reflected in financial statements. Hence, numbers
across different tenure is not comparable until inflation effects are adjusted properly in the books of accounts.

 Size of business: Ratio analysis doesn't give consideration to the size of business & economies of scale while comparing the
performance, hence deviate attention of intended user from figures and financial statements. Besides this, they also don't
consider factors which have a negative impact on enterprise's action.
 Contingent liabilities are not taken into account: Biggest limitation firm faces in ratio analysis is that, it doesn't take into
consideration any contingent liability i.e., based upon external factors such as legal matters, etc. Hence, these may have
material impact on financial position of enterprise, & which may change the entire result if not considered.
 Change of operations: There are high chances that company can change its product line, supply chain, equipment, or process
during a course of business (Carreras Simó and Coenders, 2020). Therefore, due to this operational change comparison of
financial data with other assessment year may not give correct base & in turn lead to misleading conclusion about company's
future prospects and performances.
 No standard base is found: While determining ratios, no standardized form is found because there exists no particular
definition to any type of ratios. Therefore, doesn't give one specific base of what items to be included & which should not be
enclosed while calculating ratios (Feng and et.al, 2018). Hence, companies follow different way/ formula for determining the
ratios which in short, not giving comparable base to identify the performance of company.
 Ignores non-monetary items: One of the major drawback that affects the calculation of ratio analysis is that it considers only
monetary information for determining financial & other performances of company. Hence, important qualitative aspects of
firm such as productivity, working environment, etc. of employees operating in an organization are ignored.
Qualitative analysis of Tesco within its industry against its competitors.
This judgement consists of non-quantifiable factors like customer and geographic exposure, core business, competitive
analysis, etc. Therefore, help users to know about company's value & future prospects by considering various factors like:
1. Company's core business: Tesco is dealing in large varieties of product either it is in the context of financial or non-financial
area. Hence, the company's core businesses are Hypermarket, supermarkets, Tesco metro, express shops, fuel station, one stop,

Banking and I.T. sector along with its reach on providing online services through its website. Therefore, by comparing Tesco
with its competitor, Morrison is having its reach on online selling of kid's clothes and homewares along with grocery store.
Moreover, they also have convenient small number of stores providing several items like books, magazines, CDs, etc.
Therefore, after analysing their core business it can be said that Tesco's exposure in product line is more than Morrison.
2. Industry growth trend: Tesco has seemed to be a market leader amongst the industry for last 25 years. Moreover, they own
more than 3000 stores in United Kingdom market with 28% market share. Whereas, in comparison to Tesco, Morrison is
proved to be vulnerable as they hold low market share & because of this company is reflected as a market follower instead of a
leader. Therefore, through this it has been depicted that Tesco is running its operations effectively and efficiently & because of
this having large exposure in market share too.
3. Competitive advantage: During today's time, there are many companies incorporated in the market all over the world.
Through fundamental analysis it has been noted that Tesco is having strong brand image with good quality & quantity of its
products & services. Further, because of this company may enjoy high profit growth in the future (Tseng and et.al., 2020).
Therefore, through comparison it has been reflected that, Morrison stands out to be different from its competitors by promoting
fresh products & commitment towards sustainability.
4. Quality management: Company must have qualitative management so that they will able to meet its customer's needs &
wants along with their satisfaction. Hence, buyer’s satisfaction is the main concern of Tesco which is carried on by
management team. Firm fulfils this need by getting meet their customers with nutrient and qualitative products. Furthermore,
comparing with Morrison, they are committed to achieve high level of client satisfaction through operational effectiveness
which becomes mandatory in today's time.
5. Technology: Advancement of technology brings various new opportunities for Tesco and it includes, facility of home delivery
through introduction of online shopping. Furthermore, they have also invested significant amount in energy efficiency projects
for reducing its carbon footprint. Whereas, Morrison is focusing on forecasting income and production through launching sales

based ordering system machine, so that no wastage of resources is made by producing extra merchandises (Marrucci, Marchi
and Daddi, 2020). Hence, it is concluded that Tesco is focusing on both customer and saving resources of environment which
is termed to be the best as they take care of both environment and customers.
Description of risks and opportunities that the company is facing in both qualitative and quantitative aspects.
 This report presents various financial risks that Tesco company is facing & opportunities prevailing from which they can
overcome its risk. Hence, following threat and their measures are mentioned below:
With the help of financial tool i.e., ratio analysis, organization has come to know about various risks which are obstructing
them to excel in its overall performance. Therefore, one such risk which lagging behind the company in maintaining its financial
position are current & quick ratio. Hence, following threat is identified through looking at the percentage derived which is even not
meeting its ideal ratio i.e., 2:1. However, this risk describes that firm is not having sufficient current assets to meet its short term
obligation & facing with liquidity crunches during its both financial period. Further, one more risk which is derived from data analysis
is that, Tesco is also not even able to maintain its quick ratio because they are lacking behind in meeting the standard requirement i.e.,
1:1. Hence, after seeing at the above risks it can be concluded that, if Tesco continues to operate like this only by maintaining such
ratio then they soon will face a condition of winding up because firm is not even in a position to meet its short term debts.
Thus, company can improve its financial position risk through identifying various opportunities prevailing within & outside
the organization like, firm can increase its current assets through converting inventory into revenue at fastest pace. For this, revenue
can be indirectly increased by using social networking sites which seems to be the hottest platform in today's era, hence, through this
stocks will be sold off at fastest rate (Karami, Samimi and Ja'fari, 2020). Furthermore, Tesco can also improve its liquidity position by
disposing off capital assets if they are not generating even a penny from that possession. Besides these mentioned solutions, company
can increase their liquidity position through demanding a longer payment period from its supplier, along with this they can take
initiative for reducing company's overhead cost with the help of technology advancement. Further, organization can have improvised
their financial position by tightening their debtor’s collection period policy i.e., negotiating with them for paying back amount as early

as possible, along with this they can introduce a scheme of providing discount for securing fast repayment. Moreover, firm can also
start taking long term debt rather than seeking for short term loans for carrying on business operations, thus through this current
liability will decreased which can have proved to be beneficial for Tesco to raise its financial position and maintaining stability in the
market amongst its competitors. Subsequently, firm by exploiting these opportunities and techniques can carry on their operational
activities effectively.
 On the basis of qualitative aspects too, Tesco has identified various risks and opportunities, which are enumerated below:
Risks faced by Tesco is, they lack behind in providing products with that much quality which its other competitors are giving
to its customer's besides any promotional strategies applied. Therefore, with a focus of rendering and satisfying buyer's needs, they
also forgotten about operational efficiency that is to be achieved for reducing the cost of products for working and carrying on its
operations effectively. On other side, besides the above mentioned risk they are also lagging behind in maintaining sustainability by
not taking care of eco-friendly environment at the time of producing goods, as its other's competitor are focusing on. In addition to this
risk of quick and effective delivery with proper measures to be taken care of during Covid -19 has also been faced by Tesco.
To overcome this qualitative risk & start flourishing in the market Tesco need to start producing goods which maintain and
meet the quality standards in alignment with its other competitors. Therefore, by not giving heavy discounting facility if company
starts focusing on its operational strategies, will also aid them to reduce their expenses and other overhead cost like labour, suppliers,
etc. Hence, through this change & identification of opportunity will ultimately lead firm in increasing its sales effectively and
efficiently. Besides this company can improve their service quality i.e., delivering products to customer's home by taking proper
measure regarding Covid-19 which is essential need of public during this time. Further, in context to opportunities, Tesco can take
advantage of sustainability by going with paperless transactions and supporting vendors who are supplying healthy and nutritionist
products. Moreover, due to Covid-19 the need of going green becomes essential that's why company should consider this as great
opportunity and must encourage this.

CONCLUSION
From the above project report it has been articulated that management faces various drawbacks while determining the financial
position of company through ratio analysis. Moreover, computation of ratios is made from the financial statements and the preparation
of such includes a high manipulation chances along with inflation based problem. In addition to this, report also consist of ratio
analysis where Tesco's performance has been evaluated against its competitive firm Morrison & after analysing it, overall financial
performance of Tesco is proved to be good. But, the selected company need to work on its liquidity position by selling off its
unproductive asset, etc.
RECOMMENDATION
 Tesco company is highly recommendable to investors for investment purpose because from the results obtained through ratio
analysis it has been detected that, quoted firm is performing well in comparison to its competitive entity i.e., Morrison plc.
Some points supporting this statement are mentioned below.
 Moreover, in Tesco, manager has seen a significant growth in their solvency ratio which indicates that company is in a good
position to meet its long term debt obligation. Therefore, by this performance investor are ensured that they will earn good
returns through this investment (Carreras Simó and Coenders, 2020).
 Further, by looking at its efficiency ratio it also proved to be efficient in context of maintaining proper trade-offs, etc. so
through these investors get secured that amount of dividends will be timely paid to them.
 Thus, after such valuation manager concludes that company seems to have high potential growth in the future, as it is giving
tough competition to other competitors in market. Therefore, from technical analysis, it can be said that, investors having high
potential to earn good returns can invest in the company for generating wealth.

TASK 2
Reflective practice
In the context of Tesco, financial decision-making has helped the company in taking numerous decisions regarding improving
the performance of business operations. Therefore, for this various financial tools have been used like, ratio analysis, capital
budgeting, balance scorecard, etc. Through this module I have got the opportunity to know many new things regarding ratios & its
analysis, which has helped me to improve my understanding level that where the company is lagging behind, how company can
improve their performances, etc. From this module I too got knowledge in respect to capital budgeting, balance score card, and many
more tools relating to finance. Hence, capital budgeting has helped me with studying & knowing how to judge, which project should
be accepted and where we should ignore investing our capital. Along with this I got vast knowledge regarding balance score card in
both financial and non-financial term which makes us understand that how company can make them appear themselves in front of
their investors. Apart from this, it has also taught us what alternative options in terms of finance enterprise can choose to improve their
performance for achieving their mission and vision. In context, to non-financial terms, they have taught us to make healthy relation
with their customers in order to achieve objectives successfully.
However, this module has prepared me for dealing several other projects relating to balance score card, capital budgeting
methods apart from ratio analysis. Now, after grabbing this knowledge I can easily solve difficult to difficult problems easily by
making proper judgement regarding which project should be chosen so that company will enjoy the benefit of its profitability. This
project along with module has enhanced my inbuilt skills and also added new other types of skill in it which made me more expert in
this area.
Self-reflection on current financial skills and personal action plan to develop this.
According to the Gibbs model of reflection I have got this opportunity to recognize my financial skills, and helped me in
flourishing it more. Therefore, by making financial report and doing technical along with fundamental analysis of Tesco company
from its competitor i.e., Morrison, it helped me in recognizing my personal skills. Previously, I possess of skills like solving problems