Financial Statement Analysis of Tesco: 6AG502 Module Report 2020/2021

This report presents a comprehensive financial statement analysis of Tesco, a multinational retail company. It begins with an introduction to financial statement analysis and its importance, followed by background information on Tesco, including its vision, mission, and SWOT analysis. The main body delves into fundamental analysis, including common size statements, segment analysis, Dupont analysis, and trend analysis. The report then provides a detailed financial analysis and interpretation using various ratios (liquidity, activity, and profitability), examining Tesco's performance from 2018 to 2020. Cash flow analysis and future prospects, considering the impact of COVID-19, are also discussed. The report concludes with recommendations based on the analysis and references supporting the findings. The analysis covers key aspects like strategic planning, competitive landscape, and financial health, offering insights into Tesco's operational efficiency, financial leverage, and overall performance.

Financial
Statement
Analysis

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Background information:.............................................................................................................1
Fundamental analysis:..................................................................................................................2
Financial analysis and interpretation:..........................................................................................4
Cash flow analysis:......................................................................................................................7
Future prospects:..........................................................................................................................7
Recommendations:.......................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Financial statement analysis can be defined as a procedure of analysing financial
statement of an organization for the purpose of making decisions. It is used by internal decision
makers of company for formulating effective strategies for expansion and success of business.
This also helps management team of business in the process of monitoring and managing
finances. Apart from this, external stakeholders utilise this approach for understanding financial
health of entity and evaluating its performance as well as business value (Abor, 2017). Basis of
this report is conducting financial statement analysis for Tesco. It is a multinational company
that operates in retailing sector. This report covers industry analysis and description of strategic
planning process. It conducts fundamental analysis of business which involves evaluation of
common size statements as well as segmental analysis. Further, financial statements is analysed
and interpreted along with analysis of cash flow statement. Apart from this, future prospects of
an enterprise is investigated in accordance to effects of Covid 19 and recommendations are
provides as per analysis.
MAIN BODY
Background information:
Background information of Tesco: Tesco is a public limited company that serves in
international market. Company is headquartered in Welwyn Garden city of England, United
Kingdom. It is founded by Jack Cohen in the year 1919. Company operates in retailing industry
and it serves in various areas, that includes, United Kingdom, Slovakia, Ireland, Hungary, Czech
Republic as well as India. Supermarkets, hypermarket, convenience shops and superstore are
products of an organization. Company earned revenue of £63.911 billion in the year 2019 and its
net income is of £1.320 billion in the same year. It is a leading retailer of grocery in UK and
comes among most valuable brands of country. Even in international market, entity is fifteenth
most valuable in context to retail brand in the year 2016. While measuring in terms of revenue,
entity can be stated as night largest around globe and it is third largest in terms of gross revenue.
Number of employees that are working in an organization is about 450,000 in the year 2019
(Dewi Anggadini, 2018).
Vision: To become most valuable business in context to customers that are served, communities
in which it is operated, loyal or committed colleagues as well as shareholders.
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Mission: To become champions for the customers and help them in enjoying better standard of
life.
SWOT Analysis of Tesco:
Strengths Weaknesses
 Tesco is the market leader in retail
sector hence, enjoys long term
sustainability and high profitability.
 Supply chain network of an
organization is highly efficient and
pertains effective policies for waste
management which leads to reduction
in costs that incurs in business.
 Low cost strategy of Tesco leads to
reduction in profit margin.
 Strategies of business for entering in
markets of United states and markets of
Japan comes up as a failure.
Opportunities Threats
 Firm pertains an opportunity in
expanding its operations in various
untapped markets.
 Tesco can further grow its operations
by enhancing its activities of online
sales.
 Increasing number of competitors in the
market comes up as a threat for
business.
 No deal Brexit leads towards
suspension of free trade agreement
along with EU.
Strategic planning process: It refers to a organizational procedure that includes strategic
defining, direction, and making of decisions for allocation of resources for the purpose of
pursuing strategies. It is a control mechanism that guides implementation of strategies. It is an
essential aspect of strategic management and is executed by internal decision makers. It involves
various steps such as, determination of strategic position of business, identification or
prioritization of goals or objectives, development of strategic plan, mobilization of resources,
execution of decided action plan and lastly, management and monitoring of performance of
business activities (Doron, 2016). Strategic plan of Tesco is to divide organizational activities in
three different types of levels as per its priorities, corporate level strategy is applied fr highest
level, business level strategy is for middle level and operational strategy for activities that require
lower level of management. Adoption of this strategy enables an organization to gain
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competitive advantage in an international market and enhance its efficiency as well as
productivity. Apart from this, entity is focused towards providing superior quality products at
low piece which improvises long term sustainability of business and ensures enhancement of
customer loyalty. It increases profitability of an enterprise. Main competitors of Tesco are Asda,
Sainsbury's as well as Morrison's. Apart from this, Aldi, Lidl, and Wait rose are also competitors
of an organization. Tesco is evaluated as third largest in context to retail industries in word,
Walmart and Asda are top two player globally, while, in relevance to United Kingdom company
is top player in retail sector.
Fundamental analysis:
Common size statement: It can be explained as a form of interpretation or analysis of
financial statements of business. It is also termed as vertical analysis. This method enables
evaluation of financial statements by considering each line items as base amount percentage for a
particular period of accounting. Common size statement simplifies analysis of financial
information of an enterprise and is always expressed in percentage form. There are mainly two
types of financial statement, that is, income statement and balance sheet (Dut, 2016). Former is a
statement in which every item is expressed as percentage of revenue. It is utilised for the purpose
of vertically analysing financial statement and evaluating performance of Tesco. It shows
profitability position of an entity. While on the other hand, later, displays numeric value as well
as relative percentage of liabilities, assets and equity of Tesco. In balance sheet of common size
items of single asset line is compared with total asset value, similarly, value of total liabilities
and equity is compared with total liability and total equity, respectively.
Segment analysis: Segment refers to a component of an organization or business that
generates revenue or reacts product line. In other words, segments can be defined as a unit of
business which is self sufficient. Hence, it can be noted that segment are those part of an
organization that pertains separate information regarding finance and separate strategy for
management. Segment analysis or reporting is a procedure of breaking of financial data of
company into different divisions or segments. It provides clear picture of financial performance
of an organization to its stakeholders. Hence, it is used by management team of Tesco for
evaluation of incomes, expenditures, assets as well as liabilities in context to each segment or
division of business. Accounting standards are set for segment analysis which states that
statement analysis should align with reporting structure of an enterprise (Duţescu, 2019).
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Dupont analysis: It is a framework that is utilised for evaluating fundamental
performance of an organization. This techniques is applied for the purpose of decomposing
different drivers for return on equity. It allows investors of business to focus on key metrics
regarding financial performance and helps in identifying its strengths and weaknesses. It mainly
focuses on three financial metrics, that are, operational efficiency, efficiency regarding usage of
assets as well as financial leverage. Net profit margin represents operational efficiency,
efficiency of asset use is measured with asset turnover ratio and equity multiplier helps in
measuring leverage (Elsayed, 2017).
Trend analysis: It refers to a technique of technical analysis that is utilised for studying
financial data of an organization over a time period. It mainly focuses on change factor within
balance sheet as well as income statement of an organization. While conducting trend analysis of
Tesco, in context to its income statement in 2015 and 2016 it is interpreted that cost of sales of
an organization reduced from 95.3 percent of revenue to 94.9 percent. Gross profit of entity
enhanced from 4.7% to 5.1% which is a positive indicator as income earning capacity of from
core operations of business increased. Apart from this, administration expenses of Tesco
increased from 3.1% in 2015 to 3.4% in the year 2016. In relation to operating profit of an
organization, it increased from 1.6 percent to 1.7 percent from 2015 to 2016 which indicates that
ability of entity regarding management of operating expenses is improvising. Interest expenses
of company is 1percent in 2015 while it increased to 1.2 percent in 2016. profit before and after
tax reduced by 0.1 percent from 2015 to 2016 which states that overall profitability of business
declined over a period of time.
Financial analysis and interpretation:
Financial analysis and interpretation is an attempt for determining evaluation and
significance of financial information for the purpose of estimating position of funds in an
organization. Apart from it, this approach helps in forecasting future earning prospects of
business and determines ability of Tesco in context to payment of short term or long term
obligations. Main function of conducting financial analysis enabling effective management of
fund in business (Erdoğan and Erdoğan, 2020). Ratio analysis of Tesco is computed below for
determining financial performance of an enterprise. This framework is used for comparing
performance of business with other entity or its own past performance. It also helps in evaluating
trend line of company for formulating adequate strategies.
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Ratio analysis of Tesco:
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Basics 2018 2019 2020
Current ratio =
Current assets /
current liabilities
0.71 0.61 0.73
Quick ratio = quick
assets / quick
liabilities
0.59 0.48 0.80
Gross profit ratio =
Gross profit / net
sales * 100
58.27% 64.84% 70.7%
Net profit ratio = Net
profit / net sales* 100
20.97% 20.69% 14.99%
Inventory turnover
ratio = Average
inventory / number
of days
23.92 22.83 24.73
Debt equity ratio =
Debt / Equity
1.57 1.09 1.05
Return on capital
employed ratio =
profit before tax /
working capital * 100
6.14 9.34 8.4
Return on equity
ratio = Net income/
Shareholder's equity
9.49 8.90 7.06
Earning per share=
Net income / Average
shares outstanding
0.58 0.54 0.38
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Liquidity ratio: This financial metric helps in determining ability of an enterprise in
paying off its current obligations without raising any external capital (Haskins, 2017). Current
ratio and quick ratio are calculated for analysing liquidity position of Tesco.
Current ratio measures that whether enterprise have enough resources for the purpose of
meeting its short term debts. Hence, it compares current assets of business with its current
liabilities. On interpretation of current assets of Tesco it can be noted that it decreased from 0.71
in 2018 to 0.61 in 2019 which states decrement in paying capacity of short term, while in 2020
current ratio of company again improved to 0.73. Hence, short term debt paying capacity of
Tesco has increased over a period of time.
Quick ratio evaluates liquidity position of an organization for analysing capacity of
company in paying its current debts by available liquid assets. It is also known as acid test ratio.
Higher acid test ratio indicates better liquidity position of business, while on the contrary lower
acid test ratio indicates negative results. Interpretation of quick ratio of Tesco states that quick
ratio of company was 0.59 in 2018 and it decreased to 0.48 in 2019. But, quick ratio of an
organization enhanced to 0.80 in the year 2020. Hence, liquidity position of business has
enhanced over time which indicates improvisation in liquidity position of enterprise.
Activity ratios: This financial metrics helps in analysing operational efficiency of an
enterprise. Hence, it is also termed as efficiency ratio (Kim, Kang and Park, 2019).
Inventory turnover ratio highlights efficiency of company in context to selling or
replacing inventory over a time period. On computation of inventory turnover ratio of Tesco it
can be noted that inventory turnover of company reduced from 23.92 times in the year 2018 to
22.83 times in the year 2019. It indicates decrement in sales of an organization. While, in the
year 2020, inventory turnover ratio of Tesco improvised to 24.73 times which states that
efficiency of company regarding management of inventory is increasing.
Financing ratio: It can be described as a magnitude which compares statistical values of
financial statement of an enterprise (Mitchell, Nørreklit and Nørreklit, 2017).
Debt equity ratio is a technique that helps in analysing capital structure of business and
it measures financial risk associated with an organization. Dent equity ratio of Tesco indicates
that it reduced from 1.57 in 2018 to 1.09 in the year 2019. Further, in 2020 its debt equity ratio
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further decreased to 1.05. Hence, it can be pinpointed that financial risk of Tesco is declining as
its debt component is reducing over a period of time.
Return on equity: It is calculated to measure financial performance of an organization
by dividing net income earned by business from shareholder's equity. From above calculated
return on equity of Tesco it can be identified that it reduced from 9.49 in 2018 to 8.90 in 2019
and 7.06 in 2020 which pinpoint decrement financial performance of an organization.
Earning per share: It refers earning that is generated by common shares of business. In
context to Tesco, its EPS decreased from 0.58 to 0.38 from 2018 to 2020. It indicates drcrement
in value of earnings in context to per outstanding shares.
Profitability ratio: This ratio is applied by managers of business and investors for the
purpose of analysing earning or profit generation capacity of an enterprise. It reveals about most
profitable sectors of business (Othman, 2020). There are several types of profitability ratios, such
as, gross profit ratio, net profit ratio etc.
Gross profit ratio indicates relationship among gross profit and net revenue of business.
In other words, this ratio is calculated for evaluating operational performance of an entity. Gross
profit of Tesco interprets that gross profit earned by company enhanced from 58.27 percent in
the year 2018 to 64.84 percent in the year 2017. while, in the year 2020 it further enhanced to
70.7 percentage. Hence, profit generation capacity of Tesco from its core operations increased in
during this time period which indicates increasing efficiency of business.
Net profit margin reveal actual profit that is earned by company after deducting all types
of expenses. Hence, net profit ratio states percentage of income that is generated by company. By
interpreting net profit margin of Tesco it can be stated that net profit margin of an organization
reduced from 20.97% to 14.99% from 2018 to 2020. hence, profitability factor of business is
decreasing.
Return on capital employed: It measures profitability of an enterprise in terms of
capital that is employed in business. It is utilised for analysing for analysing profitability of
company by investigating its capacity for earning profit from capital. From this ratio analysis it
can be interpreted that return on capital employed of Tesco was low in 2018, that is , 6.14 while
it increased at high level and showcased 78.4 return on capital employed in the year 2020. hence,
efficiency of an entity have improvising and company is gaining comparatively high level of
return from capital that is employed in it.
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Cash flow analysis:
Cash flow analysis is a technique which is utilised for evaluating flow cash in an
organization during a predetermined time period (Yesiariani and Rahayu, 2017). Purpose of
analysis cash flow of Tesco is to identify sources of cash generation and areas in which business
incurs high expenditure. It helps in determining liquidity and solvency position of business. In
relevance to Tesco, it can be identified that outflow of cash is increasing due to improved
expenses of administration and interest charges.
Future prospects:
There is no doubt in the fact that pandemic of Covid 19 has hindered operations of
business at huge extent. This outbreak brought various new challenges for organizations in
context to attracting and retaining customers and maintaining long term sustainability.
Profitability of Tesco declined as sales unit reduced due to decrement in buying capacity of
customers. Apart from this, expenditures where high as company have to pay fixed expenses
such as, interest, rent, maintenance cost etc. here, Tesco possess an opportunity to increase
customer engagement by providing high quality services to customers, such as home delivery of
products, offering discounts etc. for the purpose of retaining customer base.
Recommendations:
For the purpose of increasing productivity and sustainability of Tesco, it is recommended
that company should focus on reducing its expenses by eliminating unnecessary expenditures.
Apart from this, company can further increase its operational efficiency by minimizing
operational cost. Risk factor associated with firm should be reduced by properly managing debts
of business.
CONCLUSION
From the above report it can be concluded that financial statement analysis enables
financial manager of an organization for gaining insight of financial situation of business by
evaluating and analysing its financial statements, which are, cash flow statement, income
statement as well as balance sheet. Fundamental analysis can be conducted by evaluating
segment analysis and trend analysis of business for investigating about its financial performance.
Trend analysis of Tesco states that efficiency of company is improving over a period of time.
Apart from this, profit earning capacity of an organization is also enhancing. By focusing on
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minimization of expenses and enhancing management activities in business company can further
improvise its profitability.
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REFERENCES
Books and Journals:
Abor, J. Y., 2017. Understanding and Analysing Financial Statements. In Entrepreneurial
Finance for MSMEs (pp. 171-197). Palgrave Macmillan, Cham.
Dewi Anggadini, S., 2018. Quality of financial information management system on quality of
financial statement of local goverment.
Doron, M. E., 2016. The Securities Acts and public accounting: Financial statement audits as
symbolic reform. Accounting History. 21(2-3). pp.329-343.
Dut, M. A., 2016. The Development of Internal Controls to Detect and Prevent Financial
Statement Fraud. Northcentral University.
Duţescu, A., 2019. Closing Procedures, Financial Statements and Financial Analysis. In
Financial Accounting (pp. 261-293). Palgrave Macmillan, Cham.
Elsayed, A., 2017. Indicators of the Financial Statement Fraud (Red Flags). Available at SSRN
3074187.
Erdoğan, M. and Erdoğan, E. O., 2020. Financial Statement Manipulation: A Beneish Model
Application. In Contemporary Issues in Audit Management and Forensic Accounting.
Emerald Publishing Limited.
Haskins, M. E., 2017. Horse Vet, LLC: Transaction Analysis and Statement of Cash Flows
Preparation (Option 1). Darden Business Publishing Cases.
Kim, Y. S., Kang, S. A. and Park, S. H., 2019. The effect of management style on financial
statement comparability: evidence from Korean business groups. Asia-Pacific Journal of
Accounting & Economics, pp.1-18.
Mitchell, F., Nørreklit, H. and Nørreklit, L., 2017. The validity of financial statement
measurement. In A philosophy of management accounting (pp. 134-148). Routledge.
Othman, R., 2020. Financial Statement Fraud Detection and Investigation in Digital
Environment. In Critical Concepts, Standards, and Techniques in Cyber Forensics (pp.
187-214). IGI Global.
Yesiariani, M. and Rahayu, I., 2017. Deteksi financial statement fraud: Pengujian dengan fraud
diamond. Jurnal Ekonomi dan Keuangan Islam. 21(1). p.49.
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