453507 ratio.doc - TESCO PLC 2 TESCO PLC Table of Contents...

TESCO PLC

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2 TESCO PLC
Table of Contents
TESCO PLC .................................................................................................................................... 3
Introduction .................................................................................................................................. 3
Financial Analysis ........................................................................................................................ 3
Liquidity Ratios ........................................................................................................................ 4
Acid Test Ratio/ Quick Ratio ................................................................................................... 5
Gearing Ratio ............................................................................................................................... 6
Debt/Equity Ratio = Total Debts: Total Equity ........................................................................ 6
Interest Cover ........................................................................................................................... 6
Profitability Ratios ....................................................................................................................... 7
Gross Profit Margin .................................................................................................................. 8
Gross Profit as a percentage of Cost of goods sold .................................................................. 8
Net Profit Margin ..................................................................................................................... 8
SWOT Analysis ............................................................................................................................ 9
Conclusion/Recommendation to the Directors .......................................................................... 11
References .................................................................................................................................. 12

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3 TESCO PLC
TESCO PLC
Introduction
Tesco is a huge British retailer having strong business operation around the globe. It is
considered as the third largest retailer globally based upon the revenue that it generates. It was
started in the year 1919 by Jack Cohen as a simplified grocery store until 1924 when the Tesco
brand was initially launched in 1924. Tesco is a well diversified company working in many
different ventures; it has over the years created a great deal of value in the eyes of their
customers. Its shares are currently traded in the London stock exchange under the code of TSCO.
(London Stock Exchange, 2010)
“Tesco operates 923 stores and employs 240,000 people, giving us access to a population of 260
million across our nine markets. Over the past five years, we have expanded from our traditional
UK supermarket base into new countries, products and services, including a major non-food
business, personal finance and internet shopping. The increasing scale and internationalization of
our sales and purchasing operations makes a significant contribution to our efficiency and
profitability, as we progress towards our long-term goal of becoming a truly international
retailer” (Global Sources).

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4 TESCO PLC
Financial Analysis
The company’s performance and Financial Analysis is done using ratio analysis.
Ratio analysis is a procedure where an item of financial data is compared with another
item of financial data so as to interpret the relationship between the two so that an
understanding can be developed about the information and hence conclusions could be
drawn. (Morley, 1984)
“Ratio analysis is one of the most common types of financial analysis and is thought to
be the most important method of financial analysis of an enterprise. It is a more advanced
approach to analysis of structure and dynamics of the balance sheet and profit and loss account
than the initial analysis. It was introduced by banks which use it to examine solvency of
businesses which they credit. The ratio analysis enables examination of various aspects of
business' operations.” (Business-explained, 2008)
The main ratios used to analyse the company’s financial performance are;
- Liquidity Ratios
- Gearing Ratios
- Profitability Ratios
Liquidity Ratios
Liquidity ratios give insight about a firm’s ability to meet its shot term financial obligations.
These kinds of ratios are of great importance to those people who are willing to extend short
term credit facility to an organization. (Financial Ratios, 2007)