Accounting Ratio Analysis-TESCO
In the present business environment it is very essential for the companies to effectively evaluate their financial statements as it will help them in properly determining the performance of their company. Further, proper assessment of the financial statement also assists companies in decision related to investment (Fernie & Ebooks Corporation, 2005). For this purpose, ratio analysis is very important tool in the hands of a manager. Through ratio analysis companies can not only evaluate the performance of their firm, rather they can also compare its current performance its past performance or with the performance of its industry peers (Fernie & Ebooks Corporation, 2005). The present work analyzes the financial of a retail giant Tesco by applying various ratios to the company’s financial statements.
Overview of Tesco
Tesco is one of the largest retail companies in the United Kingdom. It is having approximately 2715 retail outlets in the United Kingdom and Ireland. Jack Cohen founded the company in the year 1919 and the headquarters of Tesco are located at East London. Sir Terry Leahy CEO and David Reid Chairman of the company are taking the company to further heights (Yahoo Finance, 2013). The firm operates in Groceries, financial services, telecoms and consumer goods. In March, the company reported total sales of £ 43.6 billion with operating profit of about £ 2.272 bn. Current its net income is about 2.8 billion. In 2012, these figures were £63916 million, £3803 million and £2806 million respectively. To keep on attracting investors and to retain its existing investors, the company distribute dividends at regular intervals (Yahoo Finance, 2013).
Liquidity ratio tells about the company’s ability to meet its short term obligations so that it can remain prepare for any unforeseen events. There are basically two types of liquidity ratio, current ration and quick ratio.
It tells about the firm’s ability to meet its short-term liabilities with the available liquid or current assets. It can be calculated by dividing current assets from current liabilities
Current ratio = (current assets/ current liabilities)
Current ratio for 2013 = 12,465 / 18,985 = 0.66
Current ratio for 2012 = 12,353 / 19,249 = 0.64
Ideally for a company the current ratio should be around 2. This shows that the company is having enough short term funds to meets its short term liabilities. In the given case, the current ratio of the company is coming out to be 0.66 for the year 2013 while the current ration for 2012 is 0.64. This show company is not having enough liquidity to meet its daily operations and company can find it difficult to meets its obligations (Warren, 2013). This is very poor from a firm’s perspective.
The quick ratio tells about the company’s ability to to meet its short-term debts by use of liquid cash without stock.
Quick ratio = (current assets – inventories / current liabilities)
Quick ratio for 2013 = 3,744 / 18,985 = 0.46
Quick ratio for 2012 = 3,162 / 17,731 = 0.48
Ideally for a company the current ratio should be around 1. This shows that the company is having enough short term funds to meets its short term liabilities. In the given case, the quick ratio of the company is coming out to be 0.46 for the year 2013 while the current ration for 2012 is 0.48. This show company is not having enough liquidity to meet its daily operations and company can find it difficult to meets its obligations (Penner, 2013). This is very poor from a firm’s perspective. There is not much difference between current ratio and quick ratio which means company has not invested much on inventory.
Return on equity
Return on equity is an important measurement to evaluate the efficiency of the company. It tells about the performance of the company that is, whether the company is generating enough returns to its equity holders or not.
Return on equity = net income / shareholders’ equity
Return on equity for 2013 = 2,188 / 16,643 = 13.15 %
Return on equity for 2012 = 4,182 / 17,775 = 23.53 %
In the given case, the return on equity for the company is coming out to be 13.15 per cent for the year 2013, while it was 23.53 per cent in the previous year. This reflects poor performance of the company in comparison to the past. A lower return on equity means the company is not able to generate enough revenue to make adequate profit (Kaas, Goovaerts and Dhaene, 2010). If the returns are very low, in that case investors will not invest in the company and company may find it difficult to raise enough capital for its operations.
Earnings per share (EPS)
EPS = Net Income / Outstanding shares
EPS for 2013 = 356.15 / 4.71 = 75.615
EPS for 2012 = 2806 / 3.98 = 705.03
Earning per share tells about the net earnings available with the company to distribute it among its shareholders. A higher Earnings per share is always better for any company. In the case of Tesco, earnings per share of the company were 705.03 in 2012 which dropped to 75.615 in 2013. This again reflects poor performance of the organization. It means company is not able to generate much revenue and therefore is not able to deliver higher profits (Young and Aitken, 2007).
Inventory turnover ratio
Inventory Turnover Ratio = Sales / Inventory
Inventory Turnover Ratio for 2013 = 64826 / 3744 = 17.31
Inventory Turnover Ratio for 2012 = 63916 / 3598 = 17.76
Inventory turnover ratio tells about the ability of the company that how quickly the company is able to sell its products. If the products of the company are liked by the customers, more customers will buy the products and the company will have to refill its inventory very frequently. For a good company it must be as low as possible. In the given case, inventory turnover was 17.76 in 2012 and it declined slightly to 17.31 in 2013 (Gibson, 2012). It means company had not made any efforts in improving its sales as there is not much change in the figures.
Receivable turnover ratio
Receivable Turnover Ratio = Sales / Receivables
Receivable Turnover Ratio for 2013 = 64826 / 3094 = 20.95
Receivable Turnover Ratio for 2012 = 63916 / 2502 = 25.54
Receivable turnover ratio tells about the efficiency of the company in receiving its cash from the debtors. For a good company Receivable turnover ratio should be as low as possible. If the company will have low Receivable turnover ratio, in that case it will have enough case available with it in the form of working capital. On the other hand, if it is very high, in that case company will feel shortage of cash and have to rely on debt capital (Bradford, 2008). In the given canes the Receivable turnover ratio of the company is coming out to be 25.54 days for 2012 and it was reduced to 20.95 days in 2013. This shows company has improved its credit management policy and it is good from the company’s point of view.
Talking about the performance of the company from the viewpoint of a business which purchases material from Tesco, it can be said that in comparison to 2012 the company has stricken its credit management policies. Earlier, in 2012, the receivable turnover period for the company was around 25 days. That is, the firm provides 25 days to its debtors to clear their accounts. Later on, in 2013, the company reduced this period from 25 days to near about 21 days. This means, now the debtors have to clear their account in 21 days (Baker and English, 2011). This shows that although the company has stricken its credit management policy and has receded the period from 25 days to near about 3 weeks, still the performance of company is good and other businesses can work with Tesco. A Receivable turnover ratio of 21 days means the debtors have 21 days with them to clear their account. In the present business scenario when most of the companies deal in cash, other businesses have good opportunity as they do not have to pay instantly for the purchases they have made. They have 3 weeks in their hands to make the payments. In these 21 days they can sell their material and can clear their accounts with Tesco. Therefore, from the viewpoint of other businesses, the performance of Tesco is quite satisfactory (Bradford, 2008).
After analyzing the financial performance of the company it can be said that in comparison to 2012, in 2013 the performance of the company has deteriorated at most of the parameters. Further, on some parameters the company is not able is improve its performance significantly. This shows that the company is finding it difficult to operate in the market. There is not much rise in the revenues and profit of the company suggesting that there is stiff competition in the market and Tesco is not able to attract more customers towards it.
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