PART 1

TESCO PLC Tesco was founded in 1919 by Jack Cohen, when he purchased the shipment of tea from T.E Stockwell and later in 1924 combined the initial of the names (TES) with the first two letters of his surname (CO). The first TESCO store was opened in Burnt Oak, Middlesex in 1929. Tesco is now operating in 14 different countries around the globe with almost 5000 stores worldwide and it is one of the largest retailers around the world. According to Kantar worldpanel, 2012 Tesco covers almost 30% of the market share in the UK. The financial data of company does not tell us the entire position of an organisation and its performance over the year or certain period of time for comparative purposes. Therefore, the use of ratios to analyse the position and performance is better approach.

Advantages of Ratios Analysis: It helps to understamd FS: Ratios not only simplifies the financial statement these also help to compare the changes in financial area of the company. It helps in budgeting: Ratios work as forecasting and budgeting tool for management by telling the current and previous year performance of the company. Informed decision making is possible through planning, control, co-ordination and communication. Assist in comparasion: Ratios provide data for inter-company evaluation and it helps identify the factors linked between a successful and unsuccessful firms. Helps making investment decision: Ratios by simplifying the financial information and by separating key areas information helps investors to make decision on their investment.

Ratios help providing reliable financial information. It is tool to disclose the information the way the user wants. It provides the information required to calculate the earnings of an organisation.

These help identifying other information like substitute market, companys obligations and change in economic resources (Ratio Analysis Benefits, 2009)

Financial ratios Profitability ratio Gross Profit margin% Net Profit margin% ROCE

2012 Gross Profit Margin (%) = ((Revenue Cost of Goods sold)/Revenue) * 100 Operating Margin = Operating Profit / Net sales Return on Capital Employed (ROCE) = (EBIT / (Total Assets Current Liabilities)) Overhead/sales ratio = (Overhead /Revenue) * 100 8.15% 6.17% 13.3%

2011 8.48% 6.48% 12.%

2010 8.10% 6.07% 12.1%

Overhead/Sales

2.56%

2.71%

2.68%

Profitability RATIO Gross Profit Margin: Gross Profit margin is used to calculate the financial condition of the company after deducting the Cost of Goods Sold from its revenue. The contributing factors include the fall in sales all around the UK and abroad. TESCO in 2012 expanded its business especially in meat, bakery and frozen food ranges (TESCO PLC, 2012) which resulted in higher COGS but it should be kept in mind that eventually this stock will benefit the company is long run. Net Profit Margin: Net Profit margin is used to calculate the financial condition of the company after deducting all expenses. The N.P margin of TESCO for last three years has mixed trend of increasing and decreasing. We can see that in 2011 the G.P margin was increased from 6.07% to 6.48% and in 2012 it decreased to 6.17%. The factors that contributed in the growth

were aggressive marketing campaigns with the aim to promote its brand and product. The company gained the competitive advantage by enhancing the services it offered like making online shopping easy and cheap with almost every product available to online customer as to instore consumer. The companys strategy to enter international market also contributed in its growth as the number of stores was increased; however, the factors involved in decrease in G.P include the closure of its Strategic Business Unit in some foreign countries. (TESCO 2011-12 http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9583 264/Tesco-profits-fall-for-first-time-in-18-years.html ) Return on Capital Employed: Return on Capital Employed is a profit measurement tool that demonstrates the profit generated by the company from its gross assets. Although Tesco could not performed as planned in UK but still the ROCE is increased, discontinuing its operations in Japan helped getting better result (TESCO, 2012 http://www.tescoplc.com/files/reports/ar2012/index.asp?pageid=20 ). LIQUIDITY RATIO 2012 Current Ratio Curr. Assets Curr. Liabilities 0.67 2011 0.68 2010 0.73

Quick Ratio

Curr. AssetsStock Curr. Liabilities

0.48

0.50

0.56

Liquidity ratio measure the company ability to meet its short term debt. In 2011, with the steady growth the highest value of assets were recorded; however the liabilities also increased over the time. Because this value, in all three years, is less than one therefore companys assets are incapable of meeting the short term liabilities. However, the overall market average is low because of the sector the company operates in as these companies has to maintain high amount of inventories mostly bought on short term credit and the inventory usually has limited life. So the impact on companys liquidity is due the inventory bought on credit which does not affect its overall liquidity position as the company has strong profit and diversified business.

The quick ratio measure the ability of the company to pay its obligations using highest liquid assets it owns. The current values show that TESCO can only pay almost half of its debt with its assets which in times is further decreasing as in 2010 it was 0.56 and in in 2012 it had fallen to 0.48. The company should therefore stick with their Forsaking Debt policy and to enhance its liquidity position for now and for future if economic downturn hits again.

Gearing Ratio Debt to Equity Long Term Debt Total Shareholders' Equity 2012 77.14 % 2011 77.73% 2010 104.40%

Gearing

Long Term Debt Long Term Debt+ Shareholders' Equity Around 50% gearing, the company is not perceived to have a financial risk, but higher gearing such as 70-85% imply high financial risk.

43.58 %

43.73%

48.78%

Interest Cover

Profit Before Interest and Tax Interest Payments

9.556 4

7.8902

5.9706

Debt to equity: It is used to calculate the proportion of equity and debt the business uses to finance the purchase of new asset. Generally, the company with higher Debt/Equity ratio is considered more risky because company is more aggressive in financing its purchase though debt. The trend in TESCO is decreasing which is making it less risky; in 2010 the ratio was 104% which in 2011 was fallen to 77% and is maintained in 2012. Gearing

The two major sources to generate finance are Equity and Debt, which collectively known as capital employed. The gearing ratio measures the extent to which the company is financed by debt out of its total capital employed. Generally, 50% is an acceptable value but it usually depends on the industry average. The industry TESCO operates in has average of 60%+ so this value is acceptable cause it is lower than many of its competitors. However, the company has high debt to equity ratio which shows that Tesco is heavily financed by debt which makes is it more risky and investor might demand higher returns if it try to float its share in market later. Efficiency Ratio 2012 22.15 2011 20.86 2010 19.04

Stock Turnover

Stock*365 Cost of Sales

Debtors Turnover

Debtors*365 Credit Sales

15.03

14.07

12.11

Creditors Turnover

Trade Creditos*365 Cost of Sales

69.17

69.16

65.89

Asset Turnover Stock turnover:

Sales*100% Fixed Assets

170.21 171.91 166.12

Stock turnover or inventory turnover indicates the average time a company takes to sells its stock, it is calculated in days. The higher stock turnover shows that company takes too long to sell its stock which indicates poor financial health because of inability to convert its stock into cash quickly. Stock turnover of TESCO has increasing trend as we can see that in 2010 it was 19 days which in 2011 increased to 21 days and in 2012 further increased by a day. This change puts the question mark on the efficiency of the retail market leader, the major revenue of TESCO are from food retailing and the nature of food is generally perishable, having 22 days of stock turnover indicates that the company would be spending too much money to keep the food product consumable. However, the product with very short life would be wasted or being sold at very cheap prices resulting in high expenses and lower profits. Tesco has to improve

its stock turnover by implementing better marketing strategies and advertising. Debtor turnover: Debtor turnover measures the average time taken by the debtors to pay off their debts, it is also measured in days. Low debtor turnover shows that company working capital position is good and it has strong debtor management skills. The debtor turnover of Tesco has increased from 12 days to 14 days in 2011 which indicates that the company is not performing well on debtor management; even though this value is not that bad but on comparison with its competitors like J Sainsbury and Morrison that has average receivable turnover of 5 and 4 days respectively, we can say that TESCO has very high debtor turnover. Tesco should improve its debtor turnover by using more appropriate means of communication like automatic reminding system and dedicated debtor management team. Creditor turnover: The ratio calculates the average time taken by the company to make payments to its suppliers. The average payment period in 2011 and 2012 was 69 days which is slightly higher than the period in 2010 i-e 65 days. High turnover days represents that company keeps the money longer then it pays. Tesco has lower debtor and stock turnover which is an evidence that the increase in creditor turnover is not due to the financial difficulty, though the company is paying off its debt quickly which can be alarming if not dealt properly. Asset Turnover: It measures how effectively company utilizes its assets to generate sales. The company utilises its assets efficiently to generate sales as the asset turnover in the year 2012 was 170.21 which was slightly lower than the previous year; however company has managed to use is assets more efficiently than it was using in 2010. Conclusion The ratio analysis presents the true position of the company. The information it reveals can be used both internally and externally. The company can use ratios to analyse its current performance and to plan its future strategies more efficiently. Externally, the investors can use these ratios to compare performance of different companies to make better decision making for investment. By looking at the financial statement figures of TESCO PLC it can be understood that the company is performing very well in all aspect of

business. However, financial ratios reveal the true picture of the company and shows that in some areas the company needs to focus on and need improvements especially in its efficiency and performance. Tesco is no doubt the most successful retailer in terms of profits but it has very strong competitors just behind it and some are even better in terms of efficiency. In the end, if Tesco wants to maintain its market leader title it has to concentrate on all small aspects of business and adopt the strategies that are being used by its competitors to improve their performance.