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INTRODUCTION
Tesco is the one of the largest retail chains in the UK. Currently, the firm is operating at multiple locations in the UK in retail industry. The company was founded in year 1919 by Jack Cohen. Currently, company is having 6, 800 shops across the world and having 4, 50, 000 employees. In the present research study, ratio analysis of the Tesco is done and it’s financial and profitability and investment related areas are evaluated and comments are made on the company performance. At the end of the report, concluding section is prepared.
Main body
Table 1Ratio analysis
| Particulars | Formula | 2020 | 2019 |
| Current assets | 13164 | 12578 | |
| Current liability | 17927 | 20973 | |
| Current ratio | Current assets/Current liability | 0.73 | 0.60 |
| Net income | 973 | 1270 | |
| Shares outstanding | 9790 | 9790 | |
| EPS | Net income/Shares outstanding | 0.099387 | 0.129724 |
| Debt | 16587 | 16639 | |
| Equity | 13253 | 13432 | |
| Debt equity ratio | Debt/Equity | 1.25 | 1.24 |
| EBIT | 2518 | 2649 | |
| Interest expense | 1244 | 1089 | |
| Interest coverage ratio | EBIT/Interest expense | 2.024116 | 2.432507 |
| Net income | 973 | 1270 | |
| Shareholder equity | 13253 | 13432 | |
| ROE | Net income/Shareholder equity*100 | 7% | 9% |
| Gross profit | 4580 | 4696 | |
| Sales | 64760 | 63911 | |
| Gross profit ratio | Gross profit/Sales*100 | 7% | 7% |
| Net profit | 973 | 1270 | |
| Sales | 64760 | 63911 | |
| Net profit ratio | Net profit/Sales*100 | 1.50% | 1.99% |
Interpretation
Current ratio: Tesco has low liquidity in its business as it can be observed that in the year 2020 liquidity ratio was 0.73 and in the year 2019 value of same ratio was 0.60. Liquidity slight increases in the business but still it is below standard 2:1. This clearly indicates that firm earns less profit in its business and due to this reason there is less liquidity in the business. Low profit lead to less cash in the business which means less current ratio (Alam and Raut-Roy, 2019). Tesco cannot pay all its short term obligations on time. If it pays all short term obligations on time, then it will need to borrow more money in the business.
EPS or earning per share: EPS of the Tesco in the year 2019 was 0.12 and in the year 2020 it becomes 0.09 which reflect that firm generates less return for the investors. Equity almost remains same but the profit remains low. One of the main reasons behind the decline in the profit is an elevation in the expenses specifically financial cost of the business. Perhaps, financial burden increase in the business and due to this reason burden of interest increase on the firm relative to previous year which lead to lower profit in the business. Hence, this lead to decline in profit in the business and consequently EPS has also declined in the business.
Debt equity ratio: Debt equity ratio reflects the capital structure of the Tesco. It can be seen from the table that debt equity ratio value in the year 2020 was 1.25 and in the year 2019 value of the ratio was 1.24. It can be said that debt is more than the equity in the capital structure and currently capital structure is balanced (Is Tesco (LON: TSCO) using too much debt?.,2019). Further, if debt taken, but not paid on time, then it may create problems for the firm. Firm further is not able to take more debt in its business considering its EBIT and other profit values.
Interest coverage ratio: This ratio reflects the number of times firm can pay interest using its operating profit. In the year 2020 interest coverage ratio was 2.02 and in the year 2019 value of the ratio was 2.43. Hence, it can be said that firm can pay interest using OP two times and its interest payment capacity decline slightly relative to the previous year. It can be said that on this front there is no problem for the firm.
Return on equity (ROE): A ROE decline from 9% to 7% of the Tesco and this reflect that firm failed to generate sufficient returns for the investors. A decline of 2% happened in the ROE which is not good from the business point of view. Decline in the net profit is the main reason behind low ROE (Tesco., 2020). Tesco needs to control finance cost and other expenses in the business so that more profit can be achieved in the business.
Gross profit ratio: Gross profit ratio of Tesco remains same at 7% for both analyzed FY’s which reflect that there is stability in the company performance. The firm maintains strict control on COGS in its business. However, further it needs to lower down this cost in its business. Tesco can in this regard take a number of steps like it can renegotiate contracts with its suppliers and can reduce cost of purchase in the business. Tesco is focusing on resilience of the supply chain and in this regard, it works with its suppliers and elevation their satisfaction score by 25 points. It makes dealing system with the suppliers easy and transparent, which lead to lift of 35 points. Tesco needs to capitalize all these positive situations in terms of low cost in the business.
Net profit ratio: Net profit ratio value is very low in the business as it can be seen from the above table that in the year 2020 value was 1.50% and in the year 2019 value was 1.99%. Hence, it can be said that firm profitability declined slightly and currently is very low. Tesco is running under heavy cost pressure as the gross profit ratio value was very low and now the same thing is seen in the net profit ratio (Rosnizam and et.al., 2020). Hence, it can be sad that there is a lack of control on expenses in the business. Tesco needs to do a very hard task to improve its performance. In report CEO, stated that the firm makes its offer more relevant and competitive but it did appear from the results. The CEO stated that the company changed the way stores operate and focus is on online delivery of the products. Perhaps a lot more needs to done in these areas and due to this reason expected results are not achieved in the business.
CONCLUSION
On the basis of the above discussion, it is concluded that Tesco performance is not good and it earns less profit and there is liquidity in the firm business. Investors must not make an investment in the company because the firm is operating in the high cost pressure environment. Tesco needs to work a lot on controlling finance cost and other cost in the business. In this regard, it can renegotiate contracts with the suppliers and can use process reengineering approach to evaluate business operation’s and identify areas where work can be done to lower down expenses in the business.
REFERENCE
Books and Journals
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).
Rosnizam, M. R. A. B. and et.al., 2020. Market Opportunities and Challenges: A Case Study of Tesco. Journal of the community development in Asia. 3(2). 18-27.
Online
Is Tesco (LON: TSCO) using too much debt?.,2019. [Online]. Available through:<https://simplywall.st/stocks/gb/consumer-retailing/lse-tsco/tesco-shares/news/is-tesco-lontsco-using-too-much-debt>.
Tesco., 2020 . [PDF]. Available through:<https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf>.
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