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Company Overview

Tesco Plc is a retail organization which was established in the year 1919 by Jack Cohen and is headquarter in England, UK. The company is involved in the businesses of Retailing & related activities and Retail insurance and banking services. It is considered to be third-greatest retailer around all over the world assessed with respect to gross revenue. It has stores in five countries around Europe, & is the groceries market leader in the United Kingdom. By the end of 2021, the company generated a net income of around £6.147 billion and a net revenue of around £57.887 billion. Tesco is registered on the LSE (London Stock Exchange) & is a constituent or voter of FTSE 100 Index. Furthermore, its segments contain ROI & UK, which contains the Republic of Ireland and the United Kingdom; Central Europe, which contains retail insurance and banking services through bank in the UK.

The primary purpose of this report is to analyse or examine the financial performance and position of the UK listed organization & the growth and business strategy that the group has been pursing in the recent years. Thus, the organization selected in this report is “Tesco Plc”, hence financial ratio analysis and vertical analysis have been utilized to examine overall financial performance of the company for the prior five years. With respect to this, the limitations of financial ratios and trend analysis have been discussed in the report. Lastly, on the basis of overall analysis and discussion, mentioned in the report, a conclusion has been provided.

Vertical analysis refers to a procedure of analysing or examining the company’s financial statements that list every item as a % of base revenue figure in the statement. Based on the vertical analysis calculation, it can be observed that though overall net revenue has decreased significantly but still there is a huge increment in the total profit by 10.62% in 2021 as compared to previous years (Jackson 2021). The finance cost has also reduced by 1.64% due to which the profit before tax also reduces by 1.42% in the current year. With respect to company’s balance sheet, the total current assets decrease to 22.58% in the current year and the total amount of debt has also reduces and in turn it ultimately reduces the financial risk and leverage (Alam and Raut-Roy 2019).

On the basis of horizontal analysis calculation that has been provided in the excel sheet, it can be observed that the net change in the net revenue is around 10.61% in 2021 as compared prior financial years. Moreover, there is a considerable net change in the net profit which stands around 531.76% in the current year. Whereas, on the other hand, there is also a reduction of 14.55% in the total assets in 2021 and the total equity also decreases to 7.81%. The overall liquidity position has deteriorated but there is an improvement in the profitability position.

Purpose of the Report

Financial ratio analysis is a beneficial management framework that would enhance the understanding of the financial outcomes & trends over time, & deliver key indicators of an organizational performance (Karale 2020). Managers would utilize ratio analysis in order to highlight the weaknesses and strengths from which initiatives and strategies can be developed.

Tesco’s liquidity position is determined by analysing the three different types of liquidity ratios for the financial years 2021, 2020, 2019, 2018, and 2017. On analysing the company’s current ratio and quick ratio, it can be observed that the metric was less than 1 from the past five years (Amel-Zadeh et al. 2020). It implies that the company does not have sufficient liquid assets and cash to cover all of its current debts and the primary reason behind this is that the company’s current assets does not exceeds the value of current liabilities. Moreover, Tesco is also reliant on its current assets (inventory) in order to clear all its debts obligations in 2021 as compared to prior financial years. Moreover, the cash ratio also reduced to 0.16 times in 2021 from 0.20 times in 2017, implying that Tesco is having more amount of current debts in comparison to cash & cash equivalents.

In comparison to Sainsbury, the overall liquidity position is quite similar with that of the company because both the companies do not have enough liquid assets or cash in order to cover all of its current debts or obligations. However, Sainsbury is also reliant on its inventory and has more amount of current debts than the cash & cash equivalents in terms of covering debts.

The overall profitability positions and performance of Tesco is determined by examining the three important types of profitability ratios over the last five years (Rosnizam et al. 2020). On the basis of calculation, that has been provided in the appendix and excel sheet, it can be seen that there is a significant increment in the metric to 10.62% in 2021, which implies that the company efficiently control its costs & delivered services or goods at a price considerably higher than its prices in comparison to previous years (De Mooij and Hebous 2018). Thus, high metric may cause from an efficient management control and low expenses or costs. Furthermore, the company’s ROE and ROA increased significantly to 49.87% and 13.61% in 2021, implying that Tesco is inflating its net profit creation without requiring as much net capital. It is quite efficient in terms of generating profits from its total assets and in increasing the value of a shareholder in 2021 as compared to 2020, 2019, 2018, and 2017.

Discussion

Furthermore, in comparison to Sainsbury, the overall profitability position is not at par as it suffered from net loss in the current year due to pandemic as it has adversely affected its net sales. Whereas, on the other hand, Tesco has generated a significant proportion of net profit from its available total assets, shareholders equity, and net revenue.

The company’s overall operational efficiency position is determined by inspecting or examining the different types of efficiency ratios (TEXTS 2018). Based on the calculation, it can be noticed that inventory turnover ratio increases marginally to 25.88times in 2021, suggesting that Tesco is selling its services or goods quickly, & hence there is a significant demand for the products and higher metric indicates insufficient inventory or strong sales. The company is also managing its stock efficiently. Whereas, on the other hand, Tesco’s accounts receivable turnover decreases marginally to 45.83 times in 2021 from 46.39 times in 2020, but if it is compared from previous financial years, the company has improved its efficiency position. Thus, it indicates that the company is efficiently processing its credit and the customers are of superior quality, and it operates on the basis of cash (Easton et al. 2018). Lastly, in the case of asset turnover, there was no significant change in the metric from the past few years. With respect to comparison to Sainsbury, the company is at par because its value is higher than its competitor in the current year as compared to previous years. Though, both the companies have improved its efficiency position, but Tesco is more efficient in the process of credit collection.

The financial leverage positions of Tesco are determined by analysing or scrutinizing the different types of solvency ratios for the past five years (Yhip and Alagheband 2020). On the basis of financial ratio calculation, the debt ratio pertaining to 2021, 2020, 2019, 2018 and 2017 stands at 73.44%, 75.07%, 69.70%, 76.94%, and 86.29%. Hence, it indicates that the company is trying to be stable with the possibility of longevity as an organization lower ratio has a lower debt and the company has more amount of assets than debt. Moreover, the debt-to-equity ratio also decreases significantly to 269.18% in 2021 as compared to prior financial years, implying a stock or company with higher risk and financial leverage to the shareholders. However, lower proportion of financing is made by debt through lenders, in comparison to financing through equity via company’s shareholders (Griffin and Mahajan 2019). Lastly, the interest coverage ratio has decreased to 1.87 times in 2021, which means that the group’s debt burden & the possibility of default or bankruptcy is high.

Vertical Analysis

In comparison to Sainsbury, the overall financial leverage or solvency position is not at par with that of the company because its financial risk has increased and higher than Tesco as it is is more dependent on current debts in terms of financing or funding business operations.

The market positions of Tesco are decided by analysing or examining EPS, P/E ratio, and Dividend Yield Ratio from 2017 to 2021. On analysing the Tesco’s EPS, it can be seen that the metric has decreased considerably to 754p in 2021, indicates a poor condition with respect to the company’s health and also provides lower return to its shareholders in the current year as compared to previous years (Morgado et al. 2017). On the other hand, the P/E ratio increased to 38.63p in 2021, suggesting that investors are ready to pay higher price due to a growth and development expectations in the upcoming period. In addition, with respect to dividend yield ratio, there was no significant change in the metric between 2020 to 2021, but it indicates a positive sign of the company’s performance. In comparison to its competitor (Sainsbury), the company is at par because its P/E ratio is in positive and favourable, but in the case of its competitor P/E ratio is in negative. In the case of Dividend Yield Ratio, the value of Tesco is higher than Sainsbury.

The businesses and the growth strategy that the group has been implementing in the recent years are discussed and mentioned below:

  1. The business strategy of Tesco delivers an amount of resilience to some risks, especially the physical risks. For instance, their diversified supply chain aspect assists in providing resilience to the influences of a climate change on certain areas; and their large physical warehouse footprint, multi-national business and national reach deliver some resilience to the possible local flooding hotspots.
  2. Tesco monitors and oversees the groups social and environmental obligations particularly those that support the strategy of the company.

The following limitations of the financial ratio analysis are discussed and mentioned below:

  • Financial ratios avoid the price level transitions because of an inflation. Many financial metrics are computed by making use of historical costs, & they inspect a transition in the level of price between the periods (Nadezhdina et al. 2020). Thus, this does consider the precise financial situation.
  • Accounting ratios ignore the firm’s qualitative approaches. They only consider the quantitative or monetary aspects.
  • Financial accounting ratios does not solve any financial issues of the organization. They are way of ending and not the real solution.
  • Information utilized in the financial analysis is mainly done on the basis of real past outcomes that are being released by an organization (Robinson 2020). Thus, ratio analysis framework does not represent or identify the future’s company’s performance.

Conclusion

Based on the above discussion and analysis mentioned in the report, it can be concluded that financial ratio analysis and vertical analysis (trend analysis) have been utilized to evaluate the overall financial performance and position of Tesco. However, Tesco has improved its overall financial position by generating more proportion of net income and maintains all of its costs considerably. But it must improve its liquidity positions by clearing all of his dues or current debts quickly.

References

Alam, S. and Raut-Roy, U., 2019. Evaluating the Effectiveness of Reward Strategy at Tesco: Evidence from Selected Stores in UK. Indian Journal of Industrial Relations, 55(1).

Amel-Zadeh, A., Calliess, J.P., Kaiser, D. and Roberts, S., 2020. Machine learning-based financial statement analysis. Available at SSRN 3520684.

De Mooij, R. and Hebous, S., 2018. Curbing corporate debt bias: Do limitations to interest deductibility work?. Journal of Banking & Finance, 96, pp.368-378.

Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Griffin, P.A. and Mahajan, S., 2019. Financial Statement Analysis. Finding Alphas: A Quantitative Approach to Building Trading Strategies, pp.141-148.

Jackson, A.B., 2021. Financial statement analysis: a review and current issues. China Finance Review International.

Karale, U., 2020. Financial Statement Analysis: Definition, Meaning and Multi-step Income Statement; Methods of Financial Statement Analysis Continued..; Ratio Analysis: Definition, Meaning, Importance and Limitations; Ratio Analysis: Types of Ratios: Liquidity Ratios and Interpretation; Turnover or Activity or Efficiency Ratios; Profitability Ratios; Solvency or Leverage Ratios; Ratio to Balance Sheet: Simple Sum on Preparation of Balance Sheet; How to Prepare Balance Sheet from Accounting Ratios: Simple and Easy Sums ....

Morgado, F.F., Meireles, J.F., Neves, C.M., Amaral, A. and Ferreira, M.E., 2017. Scale development: ten main limitations and recommendations to improve future research practices. Psicologia: Reflexão e Crítica, 30.

Nadezhdina, S., Filatov, S., Khramtsova, T., Shaposhnikov, A. and Krasnova, M., 2020. Opportunities And Limitations Of The Indicator System For Financial Diagnostics And Bankruptcy Forecasting. Economic and Social Development: Book of Proceedings, pp.473-481.

Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.

M.R.A.B., Kee, D.M.H., Akhir, M.E.H.B.M., Shahqira, M., Yusoff, M.A.H.B.M., Budiman, R.S. and Alajmi, A.M., 2020. Market opportunities and challenges: A case study of Tesco. Journal of the Community Development in Asia (JCDA), 3(2), pp.18-27.

TEXTS, I.A., 2018. Financial statement analysis. Instructor.

Yhip, T.M. and Alagheband, B., 2020. Financial Statement Analysis. In The Practice of Lending (pp. 47-94). Palgrave Macmillan, Cham.

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