Tesco's Financial Performance: Gearing and Interest Coverage Analysis

This report provides a financial analysis of Tesco, focusing on the gearing ratio and interest coverage ratio over a three-year period (2017-2019). The analysis evaluates Tesco's debt levels and its ability to meet interest expenses, comparing its performance with competitors like Sainsbury and Morrison. The gearing ratio analysis reveals a reduction in Tesco's debt, while the interest coverage ratio indicates fluctuations in its capacity to cover interest payments. The report highlights Tesco's relative financial standing within the industry, considering its debt management and profitability compared to its competitors. The report uses the provided formulas to interpret the financial situations and draws conclusions about Tesco's overall financial health and performance in comparison to its competitors, providing insights into its financial stability and risk profile.

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Accounting and Financial Management
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1/26/2020

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Gearing Ratio
This ratio represents the level of interest-bearing liabilities in the company
(businessbankingcoach.com, 2020). The high gearing ratio represents a high volume of debt in
the capital structure in comparison to equity whereas low gearing ratio shows that the company
has less part of the debt in its capital structure. Using this formula in the interpretation of Tesco's
financial situation, this is to state that over the past three years, Tesco has reduced the level of
debt in its capital structure from 60% in the 2017 to 41% in 2018 and just 28% in 2019 which is
good indication to the overall financial situation. Further to compare, this ratio with other
companies of the industry i.e. Sainsbury and Morrison this is to state that these companies have
also reduced the level of debt in the past three years. Nevertheless, in comparison to Tesco, they
seem to be in a good position throughout these three years. For instance, in 2017, Tesco had 60%
debt in its capital structure whereas two other companies had only 23% (Sainsbury) and 28%
(Morrison) debt of their overall capital. Similarly in 2018 also, Tesco had the highest gearing
ratio among all three companies with 41% whereas the two other companies only contained 18%
(Sainsbury) and 22% (Morrison) debt. Lastly, wherein 2019, Tesco has reduced the debt level up
to 28%, its competitors have reduced debt up to 9% (Sainsbury) and 19% (Morrison).
In such a situation to state that Tesco is doing well where it has achieved a significant reduction
in its debt part yet the position of competitors is better.
Interest Coverage Ratio
This ratio shows how easy a company is likely to pay interest expenses out of its profits
(corporatefinanceinstitute.com, 2019). The high-interest cover ratio shows a better ability of the

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firm to meet out its interest expenses. The subjective ratio of Tesco has reduced to 6.01 in 2018
in comparison to 2017 where the same was 11.69. It shows that in 2018, it was difficult for the
company to meet out its interest expenses. Further, the situation became a bit better in 2019
again where the ration has increased from 6.01 to 6.08. In 2017, Tesco was more likely to pay its
interest expenses easily than Sainsbury, as interest coverage ratio of it was only 5.8. But the
other company i.e. Morrison was in a better position than Tesco with 23.40 as its interest
coverage ratio. It means the company could pay its interest expenses 23.40 times with its
operating profits. A similar situation remained in 2018 whereas Tesco had a better interest
coverage ratio (6.01) than Sainsbury (5.18) but had not good enough as Morrison (6.64). In 2019,
Sainsbury did very well and has reached to the level of 15.60 as its interest coverage ratio where
the subjective ratio of Tesco was 6.08 and of Morrison was 5.18.
Since the figures remained fluctuating during three years, hence a comparison of Tesco with an
average of the industry seems to be a good option. Hence to state that only in 2018, Tesco had
better interest coverage ratio (6.01) than average of industry (5.89).

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References
businessbankingcoach.com. (2020) Understanding the gearing ratio. [online] Available from:
http://www.businessbankingcoach.com/wp-content/uploads/2014/03/Understanding-the-gearing-
ratio-PDF-for-Download.pdf [Accessed on 28/01/2020]
corporatefinanceinstitute.com. (2019) What is Interest Coverage Ratio (ICR)? [online] Available
from: https://corporatefinanceinstitute.com/resources/knowledge/finance/interest-coverage-ratio/
[Accessed on 28/01/2020]