Comprehensive Financial Statement Analysis: Tesco Earnings Forecast

This report provides a detailed financial statement analysis of Tesco, focusing on predicting earnings for the fiscal year 2009-10 based on historical data and projected expansion plans. It outlines key assumptions related to floor space, revenue, and cost management. The analysis includes regional revenue forecasts, asset estimations, and the impact of economic factors on operating margins. Interest expenses, investment income, and dividend policies are also considered to project net profit and cash flow. The report concludes with an assessment of Tesco's ability to manage debt and fund expansion, offering a comprehensive view of the company's financial outlook for the specified period. Desklib offers a wealth of similar documents and study tools for students.

Financial Statement Analysis
Introduction & Purpose of Report
The report deals with prediction of earnings in 2009-10 based on past data and certain future
plans of the company. The report is in grafted with lot of technical assumptions which if
change may change the actual results.
Tesco is an UK based retailer with it major operations in four geographical segment mainly:
(a) United Kingdom;
(b) Rest of Europe;
(c) Asia;
(d) United States
The major revenue of the company flows from its outlets and is in a expansion phase to add
more floor space in its inventory. The company at opening of 2009-10 has a space floor of
87,452thousand Square feet under its bucket and is planning to expand by 8 Mio Square Feet
in 2009-10.
Answer 1
The estimation of sales in 2009-10 is in grafted with a lot of assumptions. Some of them
have been highlighted here-in-below:
(a) Floor Space has a direct and positive relationship with revenue of the company i.e.
increase in floor space shall increase revenue;
(b) Time has a direct and positive relationship with revenue of the company i.e. increase in
time shall increase revenue and vice versa;
(c) There is no inflationary change or change in prices;
(d) Average of opening and closing floor space has a direct impact and is used for
computation of Revenue in FY 2009-10;
(e) Other factors if any remains constant.
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Revenue regional wise in 2008-09 is noted;
(b) Opening Square Feet in 2008-09 is noted;
(c) Closing Square Feet in 2009-10 is noted;
(d) Average Square Feet is computed by taking average of opening and closing;
(e) Per Square Feet Revenue is computed;
(f) No of Weeks in 2008-09 is noted;
(g) Per Square Feet Per Week Revenue is computed;
(h) Post above, Opening Square Feet in 2009-10 is noted;
(i) Closing Square Feet in 2009-10 is noted;
(j) Average Square Feet is computed by taking average of opening and closing;
(k) No of Weeks in 2009-10 is noted;
(l) Revenue is computed by multiplying 2009-10 Sq Feet * Weeks* Per Square Feet Per
Week Revenue.

The above analysis is presented here-in-below via a table:
Sl. No Particulars UK Rest of Europe Asia US Total
2008/2009( Realised)
1 Revenues 38191 8862 7068 206
2 Operating Profit 2540 479 343 -156
3 Opening Square feet Space ('000) 29549 22517 23363 530 75959
4 Closing Square feet Space ('000) 31285 28838 26179 1150 87452
5 Average Square feet Space 30417 25677.5 24771 840 81705.5
6 Per Square Feet Revenue 1.255581 0.345127057 0.285334 0.245238
7 Per Square Feet Operating Profit 0.083506 0.018654464 0.013847 -0.18571
8 No of weeks in 2008-09 53 53 53 53
9 Per Square Feet per week Revenue 0.02369 0.006511831 0.005384 0.004627
10 Per Square Feet per week Operating Profit 0.001576 0.000351971 0.000261 -0.0035
11 Opening Square feet Space ('000) in 2009-10 31285 28838 26179 1150
12 Closing Square feet Space ('000) 33055 31535 28849 1750
13 Average Square feet Space 32170 30186.5 27514 1450 91320.5
14 No of weeks in 2009-10 52 52 52 52
15 Revenues 39629.92 10221.6085 7702.544 348.8859
Answer 2
The estimation of asset in 2009-10 is in grafted with a lot of assumptions. Some of them
have been highlighted here-in-below:
(a) Change in Working Capital is directly proportional to change in average Floor Space of
all the regions;
(b) The change in Asset in 2008-09 over 2007-08 has been taken as the base for change in
2009-10;
(c) The capital expenditure data for 2008-09 is inconsistent with the figure provided in the
balance sheet. Further, the same matches approximately with the debt increase in 2008-
09;
(d) The increase in assets is assumed to be funded both by debt and equity;
(e) For computing the change in asset the decrease in debt by 1 Billion GBP is not taken into
consideration;
(f) Further equity has been computed by the percentage change in last year comparison way
(g) Other factors if any remains constant.
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Net Working Capital has been computed by change in Floor space per Square feet;
(b) Net Current Tangible Asset has been computed By considering the Change in 2008-09
over 2007-08 and allocating it on the basis of percentage;
(c) Net Current intangible Asset has been computed By considering the Change in 2008-09
over 2007-08 and allocating it on the basis of percentage;

(d) Other non-Current Asset has been computed By considering the Change in 2008-09 over
2007-08 and allocating it on the basis of percentage;
(e) Non-interest bearing liabilities has been computed By considering the Change in 2008-
09 over 2007-08 and allocating it on the basis of percentage;
(f) Debt has been computed By considering the Change in 2008-09 over 2007-08 and
allocating it on the basis of percentage;
(g) Equity has been computed By considering the Change in 2008-09 over 2007-08 and
allocating it on the basis of percentage;
The above analysis is presented here-in-below via a table:
Sl
No Particulars
2007-
08
2008-
09
Chang
e
% of
Change
Change in 2009-
10 2009-10
1 Net working Capital -3885 -4912 -1027 -5490.0
2 Net Current Tangible Asset 19787 23152 3365 57.6% 2497.35 25649.35
3 Non-Current Intangible Asset 2336 4027 1691 29.0% 1254.98 5281.98
4 Other non-Current Asset 1725 3469 1744 29.9% 1294.32 4763.32
5
Non-interest bearing
liabilities -954 -888 66 1.1% 48.98 -839.02
6 Total Business Asset 19009 24848 5839 4333
7 Debt 7194 11910 4716 80.8% 3500 15410
8 Equity 11815 12938 1123 19.2% 833
13771.4393
6
9 Total 19009 24848 5839 4333
29181.4393
6
Answer 3
The estimation of net impact on margin in 2008-09 is in grafted with a lot of assumptions.
Some of them have been highlighted here-in-below:
(a) All other factors except saving cost, depreciation and economic downturn change are
proportionate and variable;
(b) Economic downturn is the difference between the saving cost and the increased
depreciation;
(c) Decrease in Amortisation is not considered for analysis;
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) First Operating Expense is divided by Operating Sales is computed which comes at
94.10% for both the years;
(b) Increase in depreciation is Computed;
(c) Saving Cost is noted;
(d) Difference between Saving cost and depreciation is taken as economic downturn as other
factors have been proportionate;
(e) Impact on operating margin is computed by dividing Downturn by Operating margin.

The above analysis is presented here-in-below via a table:
(a) Net Impact on Margin on account of downturn
Sl No Particular 2007-08 2008-09
1 Sales 47298 54327
2 Actual Operating Expenses -44507 -51121
3 % of Sales 94.10% 94.10%
4 Depreciation Increase -12.78
5 Savings in cost 550
6 Economic Downturn change (4+5) 537.2229
7 Operating Margin 3206
8 Net impact of down turn on tesco margin 16.76%
Depreciation and Amortisation %
Sl No Particular 2007-08 2008-09 2009-10
1 Depreciation on non-current tangible asset 876 1036 1122.693
2 Cost of Asset 25550 29844 32341.35
3 Depreciation % 3.43% 3.47% 3.47%
4 Increased in depreciation in 2008-09 12.78
5 Amortisation on non- current intangible asset 116 153 193.0861
6 Cost of Asset 2944 4790 6044.98
7 Amortisation % 3.94% 3.19% 3.19%
The estimation of operating Expense in 2009-10 is in grafted with a lot of assumptions.
Some of them have been highlighted here-in-below:
(a) The proportion of 2008-08 expense to sale before consideration of saving cost,
depreciation and economic downturn shall remain consistent;
(b) Depreciation and Amortisation shall be computed on the basis of the last year % of
depreciation and amortisation.
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Operating expense of 2008-09 is reduced by saving cost, depreciation and economic
downturn;
(b) The reduced figure is then divided by sales to arrive at reduced operating expense as %
of sales;
(c) The sale of 2009-10 is multiplied with the computed %;
(d) Post above, deduction is made for depreciation and downturn and addition for cost
saving.
The above analysis is presented here-in-below via a table:

(b) Estimation of Operating Expense in 2009-10
Sl No Particular 2008-09
1 Sales 54327
2 Actual Operating Expenses -51121
3 Depreciation and Amortisation 1189
4 Cost Saving -550
5 Economic Downturn Change 537.2229
6 Expense before above change -49944.8
7 % of Sales 91.93%
8 Sales in 2009-10 57902.96
9 Operating Expense before adjustment -53232.3
10 Economic Downturn Change -537.223
11 Cost Saving 550
12 Depreciation & Amortisation -1315.78
13 Operating Margin 3367.672
Answer 4
The estimation of interest expense in 2008-09 is in grafted with a lot of assumptions. Some
of them have been highlighted here-in-below:
(a) The rate of debt is assumed at 5.68% since the computed figure is not consistent with
past years;
(b) Return on pension asset is assumed at last year value;
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Interest expense is computed by reducing the amount of debt computed in answer 2 by 1
Billion pound and then multiplying it with 5.68%;
(b) Reducing the above computed figure with return on pension asset
The above analysis is presented here-in-below via a table:
Interest Expense
Sl No Particular 2007-08 2008-09 2009-10
1 Interest Expense 159 309 818.5
2 Return on Pension Asset -47 -25 -25
3 Net Interest 112 284 793.5
4 Debt 7194 11910 14410
5 Interest Rate 2.21% 2.59% 5.68%
The estimation of interest expense in 2008-09 is in grafted with a lot of assumptions. Some
of them have been highlighted here-in-below:

(a) Investment income is consistent with 2008-09 percentage;
(b) The rate of dividend is consistent with 2009-10 percentage;
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Computing net profit by reducing interest expense, tax from operating margin;
(b) Adding investment income based on above assumption;
(c) Computing Debt to equity Ratio
The above analysis is presented here-in-below via a table:
Computation of Profit after tax
Sl. No. Particular 2009-10
1 Operating Margin 3367.672
2 Interest Expense -793.5
3 Investment Income 170.2656
4 Tax Expense -741.001
5 Net Profit 2003.448
Sl No Particular 2007-08 2008-09 2009-10
1 Investment Income 32 124 170.2656
2 Non-Current Asset 1725 3469 4763.32
3 % Return 1.86% 3.57% 3.57%
Sl No Particular 2007-08 2008-09 2009-10
1 Dividend Paid 792 883 964.0008
2 Equity 11815 12938 13771.44
3 % 7% 7% 7%
Computation of Net Debt to Equity
Sl No Particular 2009-10
1 Debt 14410
2 Equity 13771.44
3 Debt to Equity Ratio 1.046368
Answer 5
The computation is based on the assumption that aforesaid all the assumption hold good then
the cash flow of the company shall be:

Free Cash flow
Sl. No. Particular 2009-10
1 Net Profit 2003.447983
2 Depreciation and Amortisation 1315.778699
3 Cash flow before dividend 3319.226683
Thus, on the basis of above, it can be seen that the company shall have 3.3 billion Sterling
before dividend. Thus, company shall be in a position to pay back the debt. Further, the
amount that shall be utilised for expansion shall be around 1 Billion Sterling. Thus, the same
may be feasible.
Answer 6
The estimation of sales in 2009-10 is in grafted with a lot of assumptions. Some of them
have been highlighted here-in-below:
(f) Floor Space has a direct and positive relationship with revenue of the company i.e.
increase in floor space shall increase revenue;
(g) Time has a direct and positive relationship with revenue of the company i.e. increase in
time shall increase revenue and vice versa;
(h) There is no inflationary change or change in prices;
(i) Average of opening and closing floor space has a direct impact and is used for
computation of Revenue in FY 2009-10;
(j) Other factors if any remains constant.
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Revenue regional wise in 2008-09 is noted;
(b) Opening Square Feet in 2008-09 is noted;
(c) Closing Square Feet in 2009-10 is noted;
(d) Average Square Feet is computed by taking average of opening and closing;
(e) Per Square Feet Revenue is computed;
(f) No of Weeks in 2008-09 is noted;
(g) Per Square Feet Per Week Revenue is computed;
(h) Post above, Opening Square Feet in 2009-10 is noted;
(i) Closing Square Feet in 2009-10 is noted;
(j) Average Square Feet is computed by taking average of opening and closing;
(k) No of Weeks in 2009-10 is noted;
(l) Revenue is computed by multiplying 2009-10 Sq Feet * Weeks* Per Square Feet Per
Week Revenue.
The above analysis is presented here-in-below via a table:

Sl. No Particulars UK Rest of Europe Asia US Total
2008/2009( Realised)
1 Revenues 38191 8862 7068 206
2 Operating Profit 2540 479 343 -156
3 Opening Square feet Space ('000) 29549 22517 23363 530 75959
4 Closing Square feet Space ('000) 31285 28838 26179 1150 87452
5 Average Square feet Space 30417 25677.5 24771 840 81705.5
6 Per Square Feet Revenue 1.255581 0.345127057 0.285334 0.245238
7 Per Square Feet Operating Profit 0.083506 0.018654464 0.013847 -0.18571
8 No of weeks in 2008-09 53 53 53 53
9 Per Square Feet per week Revenue 0.02369 0.006511831 0.005384 0.004627
10 Per Square Feet per week Operating Profit 0.001576 0.000351971 0.000261 -0.0035
11 Opening Square feet Space ('000) in 2009-10 31285 28838 26179 1150
12 Closing Square feet Space ('000) 33055 31535 28849 1750
13 Average Square feet Space 32170 30186.5 27514 1450 91320.5
14 No of weeks in 2009-10 52 52 52 52
15 Revenues 39629.92 10221.6085 7702.544 348.8859
Answer 7
The estimation of asset in 2009-10 is in grafted with a lot of assumptions. Some of them
have been highlighted here-in-below:
(a) Change in Working Capital is directly proportional to change in average Floor Space of
all the regions;
(b) The change in Asset in 2008-09 over 2007-08 has been taken as the base for change in
2009-10;
(c) The capital expenditure data for 2008-09 is inconsistent with the figure provided in the
balance sheet. Further, the same matches approximately with the debt increase in 2008-
09;
(d) The increase in assets is assumed to be funded both by debt and equity;
(e) For computing the change in asset the decrease in debt by 1 Billion GBP is not taken into
consideration;
(f) Further equity has been computed by the percentage change in last year comparison way
(g) Other factors if any remains constant.
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Net Working Capital has been computed by change in Floor space per Square feet;
(b) Net Current Tangible Asset has been computed By considering the Change in 2008-09
over 2007-08 and allocating it on the basis of percentage;
(c) Net Current intangible Asset has been computed By considering the Change in 2008-09
over 2007-08 and allocating it on the basis of percentage;
(d) Other non-Current Asset has been computed By considering the Change in 2008-09 over
2007-08 and allocating it on the basis of percentage;

(e) Non-interest bearing liabilities has been computed By considering the Change in 2008-
09 over 2007-08 and allocating it on the basis of percentage;
(f) Debt has been computed By considering the Change in 2008-09 over 2007-08 and
allocating it on the basis of percentage;
(g) Equity has been computed By considering the Change in 2008-09 over 2007-08 and
allocating it on the basis of percentage;
The above analysis is presented here-in-below via a table:
Sl
No Particulars
2007-
08
2008-
09
Chang
e
% of
Change
Change in 2009-
10 2009-10
1 Net working Capital -3885 -4912 -1027 -5490.0
2 Net Current Tangible Asset 19787 23152 3365 57.6% 2497.35 25649.35
3 Non-Current Intangible Asset 2336 4027 1691 29.0% 1254.98 5281.98
4 Other non-Current Asset 1725 3469 1744 29.9% 1294.32 4763.32
5
Non-interest bearing
liabilities -954 -888 66 1.1% 48.98 -839.02
6 Total Business Asset 19009 24848 5839 4333
7 Debt 7194 11910 4716 80.8% 3500 15410
8 Equity 11815 12938 1123 19.2% 833
13771.4393
6
9 Total 19009 24848 5839 4333
29181.4393
6
Answer 8
The estimation of net impact on margin in 2008-09 is in grafted with a lot of assumptions.
Some of them have been highlighted here-in-below:
(a) All other factors except saving cost, depreciation and economic downturn change are
proportionate and variable;
(b) Economic downturn is the difference between the saving cost and the increased
depreciation;
(c) Decrease in Amortisation is not considered for analysis;
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) First Operating Expense is divided by Operating Sales is computed which comes at
94.10% for both the years;
(b) Increase in depreciation is Computed;
(c) Saving Cost is noted;
(d) Difference between Saving cost and depreciation is taken as economic downturn as other
factors have been proportionate;
(e) Impact on operating margin is computed by dividing Downturn by Operating margin.
The above analysis is presented here-in-below via a table:

(a) Net Impact on Margin on account of downturn
Sl No Particular 2007-08 2008-09
1 Sales 47298 54327
2 Actual Operating Expenses -44507 -51121
3 % of Sales 94.10% 94.10%
4 Depreciation Increase -12.78
5 Savings in cost 550
6 Economic Downturn change (4+5) 537.2229
7 Operating Margin 3206
8 Net impact of down turn on tesco margin 16.76%
Depreciation and Amortisation %
Sl No Particular 2007-08 2008-09 2009-10
1 Depreciation on non-current tangible asset 876 1036 1122.693
2 Cost of Asset 25550 29844 32341.35
3 Depreciation % 3.43% 3.47% 3.47%
4 Increased in depreciation in 2008-09 12.78
5 Amortisation on non- current intangible asset 116 153 193.0861
6 Cost of Asset 2944 4790 6044.98
7 Amortisation % 3.94% 3.19% 3.19%
The estimation of operating Expense in 2009-10 is in grafted with a lot of assumptions.
Some of them have been highlighted here-in-below:
(a) The proportion of 2008-08 expense to sale before consideration of saving cost,
depreciation and economic downturn shall remain consistent;
(b) Depreciation and Amortisation shall be computed on the basis of the last year % of
depreciation and amortisation.
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Operating expense of 2008-09 is reduced by saving cost, depreciation and economic
downturn;
(b) The reduced figure is then divided by sales to arrive at reduced operating expense as %
of sales;
(c) The sale of 2009-10 is multiplied with the computed %;
(d) Post above, deduction is made for depreciation and downturn and addition for cost
saving.
The above analysis is presented here-in-below via a table:

(b) Estimation of Operating Expense in 2009-10
Sl No Particular 2008-09
1 Sales 54327
2 Actual Operating Expenses -51121
3 Depreciation and Amortisation 1189
4 Cost Saving -550
5 Economic Downturn Change 537.2229
6 Expense before above change -49944.8
7 % of Sales 91.93%
8 Sales in 2009-10 57902.96
9 Operating Expense before adjustment -53232.3
10 Economic Downturn Change -537.223
11 Cost Saving 550
12 Depreciation & Amortisation -1315.78
13 Operating Margin 3367.672
Answer 9
The estimation of interest expense in 2008-09 is in grafted with a lot of assumptions. Some
of them have been highlighted here-in-below:
(a) The rate of debt is assumed at 5.68% since the computed figure is not consistent with
past years;
(b) Return on pension asset is assumed at last year value;
Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Interest expense is computed by reducing the amount of debt computed in answer 2 by 1
Billion pound and then multiplying it with 5.68%;
(b) Reducing the above computed figure with return on pension asset
The above analysis is presented here-in-below via a table:
Interest Expense
Sl No Particular 2007-08 2008-09 2009-10
1 Interest Expense 159 309 818.5
2 Return on Pension Asset -47 -25 -25
3 Net Interest 112 284 793.5
4 Debt 7194 11910 14410
5 Interest Rate 2.21% 2.59% 5.68%
The estimation of interest expense in 2008-09 is in grafted with a lot of assumptions. Some
of them have been highlighted here-in-below:
(a) Investment income is consistent with 2008-09 percentage;
(b) The rate of dividend is consistent with 2009-10 percentage;

Analysis
On the basis of aforesaid assumption, computation has been done in the following manner:
(a) Computing net profit by reducing interest expense, tax from operating margin;
(b) Adding investment income based on above assumption;
(c) Computing Debt to equity Ratio
The above analysis is presented here-in-below via a table:
Computation of Profit after tax
Sl. No. Particular 2009-10
1 Operating Margin 3367.672
2 Interest Expense -793.5
3 Investment Income 170.2656
4 Tax Expense -741.001
5 Net Profit 2003.448
Sl No Particular 2007-08 2008-09 2009-10
1 Investment Income 32 124 170.2656
2 Non-Current Asset 1725 3469 4763.32
3 % Return 1.86% 3.57% 3.57%
Sl No Particular 2007-08 2008-09 2009-10
1 Dividend Paid 792 883 964.0008
2 Equity 11815 12938 13771.44
3 % 7% 7% 7%
Computation of Net Debt to Equity
Sl No Particular 2009-10
1 Debt 14410
2 Equity 13771.44
3 Debt to Equity Ratio 1.046368
Answer 10
The computation is based on the assumption that aforesaid all the assumption hold good then
the cash flow of the company shall be:
Free Cash flow
Sl. No. Particular 2009-10