RAP 8 Tesco Financial Analysis PDF

OXFORD BROOKES
UNIVERSITY
Research and Analysis Project
Report
Topic 8
The Business and Financial Performance of
Tesco Plc
Period 2006 to 2008
Submitted By: Syed Fahad Amjad

ACCA Reg.No: 1346741
Mentoring By: Colin Biggs
The project is submitted as part of the requirements for the award of the BSc
in Applied Accounting, Oxford Brookes University
November 2009
6458 words
Oxford Brookes University
Acknowledgements
I am grateful to my mentor Mr. Colin Biggs for his guidance and patience throughout the
preparation of this project report.
I would also like to thank my friends and family who supported me during the year.
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Business and Financial Performance of Tesco plc:
Contents
1. Introduction
1.1 Topic 5
1.2 The Chosen Topic 5
1.2 The Organisation 6
1.3 Aims and Objectives 6
2. Information Gathering 8
2.1 Primary and Secondary Sources 8
2.2 Methods Used to Gather Information 9
3. Analysis and Presentation 10

3.1 Company Profile 10
3.2 Analysis of TESCO 10
i. Profitability Ratios
 Net Profit Margin 10
 Operating Income Margin 12
 Gross Profit Margin 13
 Sales Growth 14
 Return on Investments 16
 Return on Equity 17
 Earnings Per Share 19
ii. Liquidity Ratios
 Current Ratio 20
 Acid Test Ratio 21
iii. Financial Leverage Ratios
 Total Debt to Asset 21
 Debt to Equity 22
 Interest Cover 23
iv. Efficiency Ratios
 Asset Turnover 24
 Inventory Turnover 25
 Debtors Turnover Days 25
 Creditors Turnover 25
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4. Current Strategic Evaluation 26
5. SWOT Analysis 27
6. Conclusion 28
7. References 30
8. Appendix 1 32
9. Appendix 2 35
10. Appendix 3 37
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1.0 INTRODUCTION
1.1 Topic
My chosen topic is listed at number 8 in the project areas mentioned by Oxford Brookes
University. The topic is related to the business and financial performance of an organisation
over a period of up to three years that is from 2006 to 2008. The organisation on which I
would be doing my research and analysis is Tesco Plc.
For the benchmark treatment. I would compare Tesco Plc to J Sainsbury Plc. Both the
companies operate in a similar industry and market and both are competitors to each other.
The research is mainly based in relation to the shareholders and stakeholders viewpoint that
have particular interest in the performance of Tesco plc and also about its future strategies.
1.2 The Chosen Topic

The reason behind the selection of topic 8 is my good understanding of the financial aspects
and issues of any organisation as I have studied in F7 of ACCA. Therefore, because of the
familiarity of the topic I would be able to report a good research and analysis project. I
would also use my knowledge about the ratios in order to provide more detailed
performance indicators and the fluctuation which could be identified through ratio analysis
of an organisation.
Making analysis of a real organisation is completely different from the questions that are
present in the examination. The fluctuations and unusual events in the organisation may
create further problems which require practical and realistic approach. Although most of
the information can be obtained through the desired organisation’s annual accounts, there
are still many aspects of organisation which require more research in order to conclude the
organisation’s performance in an appropriate manner. The information is usually obtained
through primary and secondary sources of information.
The project will help me to enhance my skills in analysing the performance of any
organisation through the ratio analysis approach. It will also provide me with a guidance on
how to practically write a real report keeping in mind all the knowledge which I would gain
through this report.
The report is not completely based on the financial factors, but it will also include the non
financial factors that have affected Tesco plc in the last three years. My report’s main focus
will be on the financial and operational performance of Tesco to determine the key of
company strategy along with finding and defining the factors other than financial. This
would allow me to build up my knowledge about the non financial indicators which affects
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organisation. All this research will increase my chances of presenting a better project report
and also increase my techniques for data interpretation.
1.3 The Organisation Selection

The reason behind the selection to analyse the financial position of Tesco plc is that it is the
largest British retailer by both global sales and domestic market share with profits exceeding
£2 billion. In 2008, Tesco became the world’s third largest retailer, the first movement
among the top five since 2003. Originally specialising in food and drink, it has successfully
diversified into areas such as clothing, consumer electronics, financial services, telecoms,
health insurance, dental plan, retailing and renting DVDs, CDs, music download, internet
services and software.
Tesco has 2109 stores in the UK and internationally it has 1822 stores in which it covers US,
Central Europe and Rest of Asia. Tesco employs approximately 273000 employees to cover
its operations nationally and internationally.
Therefore, I am very much interested to research on the strategy of Tesco plc to update my
knowledge regarding the successful strategy of one of the largest retailer in the world today.
Tesco has been able to establish a consistent strategy for growth, which has also allowed
them to strengthen their core UK business and drive expansion into new markets. Tesco has
brought jobs and investment to areas that other retailers had rejected. I would measure the
risks which Tesco and its shareholders are or may face in the future.
1.4 Aims and Objectives

The aim for this project report is to view the company’s performance according to the
potential and ordinary shareholders point. Shareholders are always interested in the return
of their investment. The main concern for them is whether the success of Tesco plc would
continue at the same return or will there be an increase in return. Whether the success of
Tesco plc would continue in the future and what further options available for future growth
and investment for the company. Also the risks that Tesco plc is currently facing and the
future risk factors which may create hindrance in the success of the organisation. All these
questions require measures in such a way which could be understood by all the
shareholders. Hence this leads to the method of ratio analysis through which company
performance can be measured and understood by everyone concerned.
Therefore, my evaluation will be based on Tesco’s past performance as well as its strategy.
This would be done by analysing the financial statements of Tesco plc and also its business
strategy for future growth.
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Financial Analysis
Financial statement analysis is a judgemental process. One of the primary main objectives is
the identification of major changes in trends, and relationships and the investigation of the
reasons underlying those changes. Probably the most widely used financial analysis
technique is ratio analysis and these financial ratios are usually expressed in terms of
percentages and times.
The financial ratios which would be used for the analysis of Tesco plc financial operations
and performance fall into the following categories.
 Profitability ratios measure management’s ability to control expenses and to earn a

return on the resources committed to the business. I would measure the
profitability of Tesco through:
 Net Profit Margin

 Operating Income
 Sales Growth
 Gross Profit
 Return on Investment
 Return on Equity
 Earnings per Share
 Liquidity ratios measure a firm’s ability to meet its current obligations. I would
measure the liquidity of Tesco by analysing its:
 Current Ratio
 Acid Test Ratio
 Leverage ratios measure the degree of protection of suppliers of long term funds
and can also aid in judging a firm’s ability to raise additional debt and its capacity to
pay its liabilities on time. I would used the following ratios to conclude the financial
viability of Tesco concerning the payments to its long term debt:
 Total Debt to Asset

 Debt to Equity
 Interest Coverage Ratio
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 Efficiency, activity or turnover ratios provide information about management’s ability

to control expenses and to earn a return on the resources committed to the
business. The ratios which would be used to analyse its working capital
management are:
 Asset Turnover
 Debtors Collection Days
 Inventory Turnover Ratio
 Creditors Payment Days
Non-Financial Factors
I have also highlighted the major non financial factors which affected the relevant ratios
more than the others and the reasons behind the importance of those non-financial factors.
Strategic Analysis
I will also analyse the strategy of Tesco which they have implemented successfully especially
in the recent years as they become one of the largest retailers in the world and UK top
retailer.
SWOT Analysis
I will also include a SWOT analysis to explain the current position of Tesco. A SWOT analysis
is an instrumental framework to identify the strength, weaknesses, threats and
opportunities for a company. The strengths and weaknesses are internal value creating or
destroying factors such as assets, skills or resources a company has. The opportunities and
threats are external value creating or destroying factors which a company cannot control.
Future Growth
This report will also emphasise on the future growth of Tesco plc in order to justify whether
the strategy of Tesco plc is parallel to their growth. This will provide some evidence about
their success in the future and whether Tesco plc will be able to continue with its turnover.
Moreover, I will also put some light on the action taken by the competitor which may affect
financial performance of Tesco plc.
2.0INFORMATION GATHERING
There are two types of source of information, primary source and secondary source of
information. The objective behind the classification of these two sources is to determine
the accuracy and reliability of information.
2.1 SOURCES
Primary Source
Primary sources of information are those that provide first-hand accounts of the events,
practices, or conditions. In general these are documents that were created by the
witnesses or first recorder of these events at about the time they occurred and include
diaries, letters, reports, photographs, creative work, financial records, memos and
newspaper articles.
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Secondary Source
Secondary source of information is one that was created later by someone who did not
experience first-hand or participate in the events or conditions. Some of the secondary
sources will be from reference material, book, encyclopaedia, magazine, video or audio
tape, TV, newspaper.
All the information used in the project report is consist of Secondary Data and Information.
2.2 METHODS USED IN INFORMATION GATHERING

For this report, I have used secondary source of information through which the analysis of
Tesco plc be carried out. The information contains:
Annual Report from year 2006 to year 2008 of Tesco Plc

Annual reports contain the financial statements that are prepared at the end of each year.
It would include Tesco plc’s profile, corporate structure, board of directors, chairman’s
statement, the yearly overview, financial highlights, statement of corporate governance,
statement of internal control, financial results analysis of shareholdings and the notice of
annual general meeting.
Annual Report from year 2006 to year 2008 of J Sainsbury Plc

This report is important to make comparison with Tesco as most of my comments are based
on ratios calculated from these accounts. I have chosen Sainsbury because it operates in the
same retail industry and one of Tesco’s major competitors. Copies of the financial
statements can be found in Appendix 3.
Internet – Tesco and J Sainsbury Website

Nowadays, internet is a global network of interconnected networks. Internet carries
messages, documents, programs and data files that contain every kind of information.
A lot of information is also obtained from financial times website including the updates
regarding financial of Tesco, its operations and the opening of their own bank. www.ft.com
Also I found current information on the Reuters website which also assisted me in
evaluating the future growth of Tesco. The website is www.reuters.com
Moreover the internet provided detail explanation about the primary and secondary source
of information which was obtained from the website www.library.uiuc.edu
Text Books
Books can be used as reference to gain extra knowledge. One of ACCA paper, which is F7
‘Financial Reporting’ text book from Bpp, which allowed me to get detailed knowledge
about accounting such as the method of calculating ratios. Furthermore, I have used related
accounting books as reference for my financial analysis. The books are titled as ‘Key
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Management Ratios by Ciaran Walsh, ‘Business Ratios and Formulas: A Comprehensive

Guide’ by Steven M. Bragg and ‘100 IFRS Financial Ratios’ by P.N Schomig
Newspaper/Media
The types of newspaper which I used during my project are:
 Financial Times
 The Independent
 Evening Standard
 The Times
The reason to use newspapers as a source of information is because they provide an

independent opinion about the organisation and also about the industry in which the
organisation operates. It has also assisted to highlight the important ongoing changes in
non-financial factors of the organisation.
Library Research
I also went to the British Library for general reading and research which was mainly
concerned to the strategy of Tesco plc, the survey of the retail industry for the past period. I
also read some old newspaper articles about Tesco and J Sainsbury.
I was also able to access through database such as Financial Analysis Made Easy (FAME)
which allows me to get the summary of the financial information of Tesco and J Sainsbury.
Mentor
A lot of information support regarding report writing and presentation has been contributed
by my mentor Mr. Colin Biggs. The information included communication and prioritising
skills which helped me prioritise my data and sources to make sure all the sources were
authentic and up to date.
2.0ANALYSIS AND PRESENTATION

3.1 Company Profile
Tesco is an international and Britain's biggest and most profitable supermarket chain, is the
darling of the City. Tesco became the market leader in 1995 and has continued to increase
its market share ever since, reaching a staggering 31.5% market share in 2006, and taking
12.5% of total consumer spend in the UK. Tesco has also been voted as the best admired
company and the most impressive aspect of Tesco’s triumph was the ‘margin of victory’.
Tesco also came top in other categories, ‘Quality of Management, ‘Quality of Goods and
Services’, ‘Ability to Attract, Develop and Maintain Top Talent’, ‘Value as a Long Term
Investment’, Quality of Marketing’ and ‘Use of Corporate Assets.’
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3.2 ANALYSIS OF TESCO

PROFITABILITY RATIOS
Net Profit Margin
Net profit margin in general shows the financial performance of a company.
The graph below shows net profit of Tesco and Sainsbury for the past three years (£’m).
Table shows change in Net Profit Margin during the periods 2006-08 in (millions)
Years 2006 2007 2008 Change

Net Profit for Tesco 1576 1899 2130 35%
Net Profit for Sainsbury 58 324 329 467%
Tesco
Sales and operating profit has been increased in every year. Sales grew faster in other areas
than the core business. There was progress and robust growth in newer areas such as non-
food, electrical, furniture and DIY and the online and catalogue non-food business. Tesco
also invested in financing activities which also helps the profit to grow further.
Cost of sales and other expenses were also increasing but Tesco still able to maintain
healthy profit margin. Tesco’s net profit margin was increased more in the international
market than its UK market. The column graph below shows the increase in its net profit in
the UK and International Market.
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Sainsbury
Though the profit in 2006 was very low, Sainsbury has increased its profits by cutting out
their expenses by producing more products to cut down their cost per unit which were very
high in 2006 as compare to 2007-08.
Operating Income Margin

The table below shows the Change in Operating Income Margin for 2006-08 periods in
(millions)
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The table below shows the change in Operating Income during 2006-08 periods in (millions)

Operating Income for Tesco 2280 2648 2791 22.4%
Operating Income for Sainsbury 229 520 530 131%
Tesco
Tesco has increased consistently its operating income margin during 2006-08 periods. The
change of 22.4% during a 3 years period shows the strong growth. However, administrative
expense incurred during 2008 caused a little fluctuation in the operating profit as the
expenses increased by 13% in 2008 compared to 10% in 2007.
Sainsbury
On the other side, Sainsbury has increased its operating income margin substantially in 2007
and 2008. They have decreased the cost of sales and cutting out the administrative
expenses especially in 2007 and 2008 to maintain a constant growth of operating profit.
Gross Profit Margin

The graph below shows the change in gross profit of Tesco and Sainsbury during 2006-08
periods
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The table below shows the increase in gross profit of Tesco and Sainsbury during 2006-08
periods in millions

Gross Profit for Tesco 3028 3463 3630 19.8%
Gross Profit for Sainsbury 1067 1172 1002 -6.09%
Tesco
There has been consistency in the growth of its gross profit. The increase in gross profit in
2007 was due to one-off events of adjustments of pensions. However, the change of 19.8%
shows their strategy is consistent and Tesco has still maintained a healthy percentage of
gross profit to its sales. During 2008, Tesco reduced its gross profit from 8.12% to 7.67%
because of the price war that was going on due to the recession. However, Tesco was still
able to show an increase in its sales of 2% along with the competitive advantage over the
others by selling its products much cheaper than Sainsbury.
Sainsbury
There was a good gross profit percentage maintained by Sainsbury during 2006-07 periods.
However, in 2008, the decrease in gross profit was due to less increase in sales as compare
to increase in its cost of sales as Sainsbury expanded into Northern Ireland and it cost more
to deliver the goods into this part of UK.
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Sales Growth
Sales figures of Tesco and Sainsbury from year 2006 to year 2007 (millions)
Table below shows the change in sales of Tesco and Sainsbury.

Sales by Tesco 39454 42641 47298 19.88%
Sales by Sainsbury 16061 17151 17837 11.05%
Tesco
Tesco’s sales growth in 2006-08 periods was increased by 19.88% at an average due to their
growth in the international areas. The dominated the UK market and simultaneously
increased their growth in Asia, Europe and Rest of World. In 2007, international sales grew
by 17.9% at actual exchange rates which boost up the total sales growth. While in 2008, the
online business was increased by 30% and their joint venture in telecom delivered profit for
the first time.
UK and International Market Sales Growth:

The graph below shows the sales growth of Tesco in the UK and International Market.
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Sales
Contribution 2006 2007 2008 %Change
UK 32657 35580 37949 16%
International 10480 11031 13824 32%
The sales figures above are VAT inclusive. There is a continuous increase in sales of Tesco in
its UK and International market showing a consistent successful growth. The international
market has increased its sales contribution twice as compare to the UK market. This is
because of Tesco’s successful implementation of their strategy to sell those products and
food items which are more desirable in those markets. The significant increase in their
international sales also shows that they have given a tough competition to the local
supermarkets in those countries by selling the same items at lesser prices.
Sales Growth in Non-Food

According to the analysts ‘good value product has been driving Tesco’s non-food growth’
(source BBC news).
Tesco’s general merchandise business has been resilient and it remains an important
contributor to the growth. Tesco non-food sales again grew faster than the core business. In
2006, the non-food sale of UK alone was increased by 13% to £6.8 bn, while in 2007, it
increased by 11.6% in the UK to £7.6 bn.
The group non-food sales in 2007 was £10.4 bn including £2.9bn of sales internationally.
Also, group non-food sales rose by 12% to £11.8bn which includes £3.5bn sales
internationally and 9% increase to UK sales to £8.5bn.
Among many non-food products, the most products which were sold in volume and value
includes consumer electronics, stationary, DIY and clothings. All these products provided
rapid growth to Tesco in the non-food area. Tesco Direct which was specifically designed to
sell non-food products via website has also contributed towards the non-food sales growth.
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Sainsbury
Sainsbury has also increased its sales during 2006-07 periods. However in 2008 its sales
growth was reduced due to increase in its cost of sales.
Return on Investment
The table below shows the percentage increase/decrease in return on investment
Return on Investment 2006 2007 2008

Net Income 1576 1899 2130
Long term Liability + Equity 15045 16655 19901
Percentage Increase/Decrease 10.48% 11.40% 10.70%
Tesco
Based on the ratios calculation, the return on investment for Tesco has been increasing
steadily between 2006, 10.48%, to 2007, 11.40%. Although there was a slightly decrease
during year 2008, however, overall ROI is still looking healthy. The decrease of ROI during
2008 was due to increase of operating expenses which directly affects operating profit to
decrease in the ratio of ROI.
Return on Investment 2006 2007 2008

Net Income 58 324 329
Long Term Liability + Equity 7937 6855 7510
Percentage Inc/Dec 0.7% 4.73% 4.38%
Sainsbury
Sainsbury ROI has increased significantly from 2006, 0.73%, to 2007, 4.73% and a slight
decrease was seen in 2008. Sainsbury cut down their operating expenses and
simultaneously increased the sales in 2007-08 periods.
Return on Equity
The graph below shows the comparison between Tesco and Sainsbury Return on Equity.
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The table below shows the percentage increase/decrease in return on equity
Return on Equity 2006 2007 2008

Net Income 1576 1899 2130
Equity 9444 10571 11902
Percentage Increase/Decrease 16.70% 18% 18%
Tesco
Tesco’s return on equity has been consistent throughout the period of 2006-08. There has
also been a increase in the ratio during 2007 when the ratio increased from 16.70% in 2006
to 18% in 2007. The increase in the ratio was resulted due to the increase in the net income
by 20% as compare to 2006 net income. One of the main non-financial factors that boost
the return on equity was Tesco’s participation in a number of charity campaign. Tesco
donated £8.7 million to sports for school and cancer research UK which helped them raise
£53 million in equity (Business in the community, 2008). While in 2008, they were able to
maintained the same percentage which represents good performance and shows further
increase in future as the investment matures.
Return on Equity 2006 2007 2008

Net Income 58 324 329
Equity 3965 4349 4935
Percentage Inc/Dec 1.46% 7.45% 6.67%
Sainsbury
Sainsbury increased its return on equity ratio significantly in 2007 when its percentage was
climb from 1.46% in 2006 to 7.44% in 2007. The reason behind the increase of this ratio was
due to the massive increase in their net income.
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Earnings per Share

It should be noted that last year’s EPS would be actual, while current year and forward year
EPS would be estimates.
The table below shows the EPS of Tesco for the period 2006-08.
Earnings Per Share 2006 2007 2008

Ordinary Shares 1570 1874 2124
Weighted Ave. No. Of Shares 7823 7936 7881
EPS 20.07 23.61 26.95
Tesco
Tesco earnings per share have been increased during 2006-08 periods on a consistent basis.
In 2006 the earnings per share was 20.07p which was increased during 2007 by 19% to
23.84p, and in 2008 it was further increased by 13% to 26.95 showing Tesco’s strong
earnings and increasing return for investors every year.
The table below shows share price of Tesco analysed from year 2006 to year 2008.
There was a decrease in share price during 2008. Recession has been the main reason
behind the decrease of its share price as it hits all the largest retailers during 2008.
However, by the end of 2008, Tesco share price started to boost up again as the graph
shows.
Earnings Per Share 2006 2007 2008

Ordinary Shares 176 249 337
Weighted Ave. No. of
Shares 1692.2 1719.8 1767.2
EPS 10.40 14.48 19.07
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Sainsbury
Sainsbury earnings per share have increased significantly during 2007 as it was 3.8p in 2006
which was increased in 2007 by 400% to 19.2p while in 2008 it has a slight decrease to
provide EPS of 19.1p. Sainsbury has also maintained a strong EPS in 2006-08.
LIQUIDITY RATIOS
Current Ratio
The table below shows the current ratio figures of Tesco for the period 2006-08.
Current Ratio 2006 2007 2008 Change

Current Assets 3919 4576 6300 61.0%
Current Liabilities 7518 8152 10263 36.5%
Ratio 0.52 0.56 0.61 14.75%
Tesco
There has an overall change of 14.75% in the current ratio. Tesco’s current ratio in the
recent past year 2006 was almost half to their liabilities 0.52:1 which could have resulted of
having shortage of assets in meeting the liabilities. However in 2007 there was a increase in
current assets and a slight decrease in current liabilities giving a ratio of 0.56:1. In 2008 the
current assets were increased significantly as compared to the increase in current liabilities
which allowed Tesco to have better current ratio of 0.61:1. The increase in current ratio
must have helped in obtaining inventories even in bigger quantities to get more bulk
discount in order to reduce the cost of sales.
Sainsbury
The table below shows the figures of Current Ratio from Sainsbury.
Current Ratio 2006 2007 2008

Current Assets 3845 1940 1722
Current Liabilities 4810 2721 2605
Ratio 0.80 0.71 0.66
The current ratio in 2006 was 0.80:1. Also the ratio has been decreasing since 2006 and in
2007 it became 0.71:1 while in 2008 it has been reduced to 0.66:1 indicating further
liquidity problems in the future may arise if the ratio keeps on declining.
Acid Test Ratio

Tesco
The table below shows the figures of Tesco Acid Test Ratio during the period 2006-08.
Acid Test Ratio 2006 2007 2008

Current Assets-Stocks 2455 2645 3870
Ratio 0.34 0.32 0.38
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The ratio shows a clear increase during 2006-08. In case of immediate payment of demand,
Tesco could still pay one third of its customers. Tesco has kept on expanding its business in
the UK and international market and also increased its ratio shows an excellent strategy to
cope with its debtors and availability of cash. In 2008 because of increase in trade
receivables and introduction of short-term investments further increased the ratio.
Sainsbury
The table below shows the Acid Test Ratio figures taken from Sainsbury’s Finanicial
Statement during the period 2006-08.
Acid Test Ratio 2006 2007 2008

Current Assets-Stocks 3269 1350 1041
Ratio 0.68 0.50 0.40
Sainsbury
The ratio of Sainsbury has been decreasing from 2006 which 0.50:1 and decreased to 0.50:1
in 2007 while in 2008 it became only 0.4:1 showing decrease in cash and cash equivalents.
The decrease in ratio during 2008 was due to increase in its ending inventory.
FINANCIAL LEVERAGE RATIOS

Total Debts to Assets
Tesco
The table below shows the figures of total debt and asset of Tesco for the period 2006-08.
Total Debt to Asset 2006 2007 2008 Change

Total Liabilities 13119 14236 18262 0.39
Total Assets 22563 24807 30164 0.34
Ratio 0.58 0.57 0.61 0.04
During 2006-08, as the table shows, Tesco has been on the move to expand its business as
their financing or debt has been increasing, especially in 2008 where the debt financing
increased rapidly. This is due to Tesco opened many stores internationally and as well in the
UK and also invested heavily in its non-food products market to promote its new image.
However, there was also a major increase in its assets in 2008 which made the ratio
decrease slightly more.
Sainsbury
The table shows the figure of Sainsbury’s debt and assets for the period 2006-08 in millions.
Total Debt to Asset 2006 2007 2008

Total Liabilities 8782 5227 5180
Total Assets 12747 9576 10115
Ratio 0.69 0.55 0.51
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During 2006-07 period, Sainsbury was able to pay off the amount that they owed to their
customers and other bank by obtaining the amount from those customers who owed the
money from Sainsbury. While in 2008, Sainsbury increased its PPE as well as inventory to
boost up its assets and reducing the liabilities by decreasing their short term borrowings.
Debt to Equity
The graph below shows the increase/decrease of debt to equity ratio of Tesco and Sainsbury
for the period 2006-08.
The table below shows the debt and equity figures of Tesco for the period 2006-08 in
millions.
Debt to Equity 2006 2007 2008 Change

Total Liabilities 13119 14236 18262 0.39
Equity 9444 10571 11902 0.26
Ratio 1.39 1.35 1.53 0.10
Tesco
There has been fluctuation in the ratio of Tesco for the last 3 years. The increase in liability
was caused as Tesco borrowed a lot of long term debt as well as short term debt to invest
heavily into the international operations especially in the US in 2008 where it opened
almost 50 stores. The long term borrowings were used to increase its sales growth in the
international market as the UK market has no more expansion opportunities. There was also
increase in its deferred tax liabilities. However, most of the funding has been done through
retained earnings but still a considerable amount has also been obtained from external
sources of finance.
Sainsbury
The table below shows the debt to equity figures of Sainsbury for the period 2006-08 in
millions.
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Debt to Equity 2006 2007 2008

Total Liabilities 8782 5227 5180
Equity 3965 4349 4935
Ratio 2.21 1.20 1.05
The debt to equity ratio of Sainsbury in 2006 was very high 2.21. Sainsbury owed the
amount from its bank customers and other banks which increased its liability significantly.
However in 2007, Sainsbury efforts decreased the ratio to almost half 1.20 and during 2008
it was further decrease to 1.05.
Interest Coverage Ratio

It should be noted that the lower the interest coverage ratio, the larger the debt burden is
on the company.
Tesco
The table below shows the figures for EBIT(Earnings Before Interest and Tax) and Interest
Expense for the period 2006-08 in millions.
Interest Coverage 2006 2007 2008

EBIT 2362 2779 2866
Interest Expense 241 216 250
Ratio 10.20 12.86 11.46
Tesco has maintained healthy interest cover ratio during 2006-08 periods. Tesco is able to
cover its interest expense with its profits. The ratio shows that Tesco is also able to pay the
amount owed to its creditors when the payment is demanded. This also points out an
advantage to Tesco of obtaining further debt as current figures of the ratio are positive for
the company.
Sainsbury
The table below shows the figures for Interest Cover Ratio of Sainsbury for the period 2006-
08 in millions.
Interest Coverage 2006 2007 2008

EBIT 229 520 528
Ratio 1.47 4.85 4.0
Sainsbury’s interest cover ratio in 2006 was only 1.47. Sainsbury increased its ratio through
increase in their profits and also by paying off some of their debts to their bank’s customers.
EFFICIENCY RATIOS
Asset Turnover
The higher the turnover ratio, the better it is for the company.
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Tesco
The table below shows the figures of total assets and sales of Tesco during the period 2006-
08 in millions.
Asset Turnover 2006 2007 2008

Total Assets 22563 24807 30164
Sales 39454 42641 47298
Ratio 1.75 1.72 1.57
Asset turnover ratio for Tesco during 2006-08 periods has reduced slightly. In 2006 the ratio
was 1.75 which decreased to 1.72 in 2007 while in 2008 it was further reduced to 1.56. This
means that Tesco has been able to generate sales of £1.56 for every £1 of assets it owned
and used for the year.
Sainsbury
The graph below shows figures of Sainsbury’s assets and sales for the period 2006-08 in
millions.
Asset Turnover 2006 2007 2008

Total Assets 12747 9576 10115
Sales 16061 17151 17837
Ratio 1.26 1.79 1.76
The asset turnover ratio of Sainsbury has increased during 2006-08 periods. The ratio was
1.26 in 2006 which increased to 1.79 in 2007 while in 2008 it was slightly decreased to 1.76.
However, Sainsbury has also maintained a consistent increase in this ratio.
Working Capital Analysis

Tesco
Ratio 2006 2007 2008
Stock Turnover Ratio 15 days 18 days 20 days
Debtors' Collection Period 8 days 9 days 10 days
Creditors Payment Period 51 days 56 days 61 days
Debtors
At an overall average, the collection days of debtors has increased in 2006-08 periods.
However there is not a large increase of days in each year. As far as the receivable concerns,
the increase by a 1 day each year is not significant for the company. The increase days
compared to the increase in its debtors shows that Tesco has established a strong
management program for its debtors.
Inventory
The inventory turnover days has increased in 2006-08 periods. However, the increase in
days is not very significant. The increase in inventory was caused due to the expansion of its
operation in the UK as well as international market where it opened massive number of
Page 24
stores within a year of 2008. The inventory holding period is not of significant importance as
compared to the inventory they had to put in considering their expansion.
Creditors
The increase in credit period is not significant but Tesco has to maintain its credit period on
a consistent basis. If the turnover period keeps on increasing, this will affect its relationship
with its supplier as the suppliers would receive their payments late. It would also affect
Tesco’s creditworthiness. There is a need for them to review the management of their
creditors.
Sainsbury
The table below shows the working capital figures of Sainsbury’s debtors, inventory and
creditors for the periods 2006-08.
Ratio 2006 2007 2008

Stock Turnover Ratio 14 days 13 days 15 days
Debtors' Collection Period 6 days 4 days 4 days
Creditors Payment Period 51 days 52 days 49 days
Debtors
Sainsbury debtor’s days has been reduced in the period of last 3 years. It is as low as 4 days
in recent years. This shows their WC cycle does not take long to convert stocks into cash.
Inventory
The inventory days period has also been very well established. It only takes a maximum of
15 days for the stock to go to the shelves for the sale. This shows their excellent
management of inventory.
Creditors
The creditor’s payment period is reduced during 2008. The reduction shows their concern
for the payment to their suppliers; they reviewed their payment program for the creditors
and brought a change to assure the payments of their creditors is on time.
4.0 CURRENT STRATEGIC EVALUATION

The objectives of the Tesco’s strategy are:
 To grow the Core UK business
 To become a successful international retailer
 To be as strong in non-food as in food
 To develop retailing services, such as Tesco Personal Finance, Telecom and
tesco.com and
 To put community at the heart of what we do
Page 25
Tesco’s current strategy has five areas in which it has divided its whole businesses.
 Core UK
 Non-Food
 International
 Retailing Services
 Community
Core UK
The UK is our biggest market and the core of our business. They aim to provide all their
customers with excellent value and choice. Tesco’s UK stores are divided into six formats,
differentiated by size and range of products sold.
Tesco Extra stores are larger in size, mainly out of town hypermarkets that stocks nearly all
of the Tesco’s product ranges. There are more than 175 of these stores in the UK.
Tesco Superstores are standard large supermarkets, stocking groceries and a much smaller
range of non-food goods than extra stores. There are approximately 424 stores in the UK.
Tesco Metro stores are sized between Tesco superstores and Tesco express stores. They are
mainly located in city centers, the inner city and on the high streets of small towns. There
are almost 160 stores of this format in the UK.
Tesco Express stores are neighborhood convenience shops, stocking mainly food with an
emphasis on higher-margin products (due to lack of economies of scale) alongside everyday
essentials. They are approximately 827 stores operating in the UK.
One Stop stores are the only category which does not include the word Tesco in its name.
These are very small stores. There are about 513 stores of this kind of format operates in
UK.
Tesco Homeplus are the non-food ventures. Stores offer all of Tesco’s ranges except food in
warehouse-style units in retail parks. There are currently 10+ stores operating in the UK.
Non-Food
The aim of Tesco is to be as strong in non-food as in food. This means offering the same
great quality, range, price and service for the customers as they do in their food business.
Tesco direct and Tesco homeplus has increased the non-food sales significantly. Tesco direct
is designed to extend the reach of non-food offer by making it more available. It offers
11000 products online and 7000 on the catalogue. There has been a rapid increase in
Tesco’s non-food sales in recent past. In 2008, the non-food group sales grown to represent
23% of the total Tesco sales.
Page 26
International
International sales of Tesco contribute almost over half of the total group sales. The
increase in level of sales to such an extent shows their successful operations internationally.
In 2007/08, Tesco also opened its stores in the US to compete with stores of US. Tesco is
investing heavily in its international market. In 2008, Tesco opened 508 new stores out of
which over 350 were outside UK.
Retailing Services
Tesco has followed its customer into the growing world of retailing services, aiming to bring
simplicity and value to complex markets. Their services are performing well with sales in
their online businesses up by over 30% in 2008. Tesco Personal Finance having a joint
venture with Royal Bank of Scotland getting back to a faster rate of growth. Tesco telecom
has also provided growth in its operations. The joint venture with O2 having a loss in
2006/07 seen an excellent profitability of 39% mainly because of its strong growth in
customer base. Hardware sales were also increased. This has shown Tesco’s encouraging
efforts to bring back the venture in profits which were going down in the last couple of
years.
Community
This was not the part of Tesco strategy until 2008, where they also included community as
their important part in the strategy. The main idea behind the inclusion of this part is to
ensure the society and communities that Tesco’s are doing efforts to decrease the effects of
carbon. Through their unique Green Clubcard Scheme, they able to reduce the carrier bags
by over 1 billion. Tesco was also named as the best Charity of the Year by raising £4.4m for
the British Red Cross. They have also invested £25m to create a Sustainable Consumption
Institute.
All these efforts and inclusion of the community as one of their main areas of strategy
shows how effectively they implement their strategies.
5.0 SWOT ANALYSIS

The SWOT analysis includes the strengths, weaknesses, opportunities and threats which
Tesco is facing or may face in the future.
Strengths
 Tesco is the largest retailer in UK and the third biggest retailer in the world. This
shows that supermarkets trends are lead by Tesco in UK
 Tesco has excellent customer base, even in the recession time, Tesco’s profits were
up as Tesco was able to cut down prices to perform well in a price war competition
and customers were satisfied with the products prices that it offered
 Tesco international market is increasing and they are heavily investing outside the
UK. The investment is justified as in 2008, the international sales were almost over
half of the Tesco’s total group sales
Page 27
 Tesco have successfully grown from food to non-food business and their non-food
business has spread rapidly. With leading the food market share, Tesco is becoming
popular as a non-food store as well
Weaknesses
 UK recession has caused almost all the supermarkets profit and sales growth. Tesco’s
sales growth still increased by 12%, but the recession showed Tesco has still needs to
implement a strategy to deal with such critical situation where customers are
cautious and become more selective about the products
Opportunities
 Tesco has excellent prospects to grow in its non-food area. They entered non-food
with strong planning and have attained good success through Tesco direct and Tesco
Homeplus stores. Tesco has targeted US in 2007 to open its stores and has
successfully implemented the strategy. They are also concentrating in opening stores
in different countries around the world to grow further in their international market
Threats
 Tesco has grown so rapidly in the last decade and with such a strong strategy
implementation that they have taken over the UK retail market. There is no such
threat to its strategy at present, but as they are expanding internationally and in
non-food area to increase its investments which ultimately increase its sales. There
might be a possibility of over gearing by investing too much of its debt in
investments, or it might also foresee a possibility of over trading as their sales rate
are increasing more rapidly internationally than in the UK
6.0 CONCLUSION
Tesco has been consistent in its recent performance and also increasing its operations. Their
international market has a significant impact on its total group sales as it contributes over
half of the sales in 2008. Tesco being the third largest retailer of the world has shown
excellent growth in and outside the UK. They are seeking different countries to capture the
market. During 2007 they opened their stores in US which turned out a successful
investment. Tesco after becoming the biggest retailer of UK is now competing with
Carrefour and Wall Mart for the number one spot. Their last decade’s performance shows
their consistent success is their customer base market. Tesco follow customer’s requirement
and provide the quality product in the lowest possible rate. For shareholder viewpoint, the
EPS in the last 3 years has increased and likely to increase in the future. Also, their entry into
non-food did not take longer to make an impression on the leaders of non-food area. In UK,
they are facing Currys and Marks & Spencer as their first competitors. However, during the
last couple of years, Tesco’s performance under non-food area is exceptional. Through
Tesco Direct and Homeplus stores their non-food sales contributes about 12% of the total
group sales showing an excellent strategy. They have also joint venture with O2 for telecom
and Financial services with the Royal Bank of Scotland which also contributes to the non-
food sales. Their future strategy is simple:
Page 28
 To be as strong in non-food as in food

 To capture the international market and also capture the number one spot in
retailers rating
Tesco is investing heavily in its international market and also in non-food area. They are
spreading into different businesses rather than just operating as a core retailer showing
their wide planning. There is a lot of potential in Tesco for investments. Their ROI for the last
3 year is an evidence of good return. They are also not facing any big threats from
anywhere.
Therefore, I would strongly suggest institutional investors to invest in Tesco as it’s still a
growing organization having excellent strategy.
Page 29
REFERENCES
 Walsh, C. 2006. Key Management Ratios (4th Ed.). Great Britain: Ashford Color Press Ltd.
 Bragg, S.M.2006. Business Ratios and Formulas: A Comprehensive Guide (2nd Ed.).Hoboken,
New Jersey: John Willey & Sons, Inc.
 Bull, R. 2007. Financial Ratios: How To Use Financial Ratios To Maximize Value And Success
For Your Business. Great Britain: CIMA Publishing, Oxford.
 BPP, 2008. Financial Reporting International. Great Britain: BPP Learning Media Ltd, London.
 Wiehle, U., Deter, H., Diegelmann M. & Schomig, P.N.2005. 100 IFRS Financial Ratios.
Germany: Cometis AG
 Saunders, M., Thornhill, A. & Lewis, P.2006. Research Methods For Business Student (4th Ed.).
Great Britain: Pearson Education Ltd.
 Collis, J. & Hussey, R.2003. Business Research: A Practical Guide For Undergraduate And
Postgraduate Students (2nd Ed.). New York: Palgrave Macmillan.
 Dawson, C. 2007. A Practical Guide To Research Methods: A User-Friendly Manual For

Mastering Research Techniques And Projects (3rd Ed.). Great Britain: How To Books Ltd.
 Braithwaite, T. & Urry, M. (2008, December 02). Tesco’s Sales Growth Beats Forecasts.
London: Financial Times.
 Rigby, E. (2008, November 10). Sainsbury Loses Strongholds To Tesco. London: Financial
Times.
 Leahy, J. (2008, August 12). Tesco Breaks Into Indian Grocery Market. India: Financial Times.
 Rigby, E. & Braithwaite, T. (2008, May 12). Shoppers Positive On Tesco’s US Stores. London:
Financial Times.
 Croft, J. & Rigby, E. (2008, June 01). Tesco To Buy RBS Share In Finance Division. London:
Financial Times.
 Thompson, J. (2008, November 13). Tesco Challenges Argos With Catalogue Outlets. London:
The Independent.
 Lynch, R. (2008, June 10). Sales Boost For Tesco. London: The Independent.
Page 30
 Williams, H. (2008, April 15). Tesco Profits Rise In Challenging Market. London: The
Independent.
 Hawkes, S. (2008, April 12). Tesco To Monitor Millions Of Consumers Around The World.
London: The Sunday Times. Source: Dunnhumby.
 Dangerfield, A. (2007, January 16). The Continue Rise of Tesco Non-Food. London: BBC News.
 Thompson, J. (2007, November 26). Tesco Reveals Aggressive International Expansion Plan.
London: Retail Week
 Thorniley, T. (2008, May 01). UK Grocery Inquiry is a Tesco Victory. London: Daily Mail.
 Craven, N. (2007, September 30). Tesco Expects to Set New Profits Records. London:
Financial Mail.
 http://www.tescoplc.com/plc/ir/ar/archive/
 http://www.jsainsburys.co.uk/index.asp?pageid=20&year=archive
Page 31
APPENDIX 1.0
Tesco Plc
2006 2007 2008
Gross Profit Margin

Revenue 39454 42641 47298
Gross Profit 3028 3463 3630
7.67 8.12 7.67
Net Profit Margin

Revenue 39454 42641 47298
Net Profit 1576 1899 2130
3.99 4.45 4.50
Return on Equity
Net Profit 1576 1899 2130
Capital Employed 9444 10571 11902
16.6 17.96 17.89
Current Ratio
0.49 0.51 0.58
Acid Test Ratio

Less: Inventory 1464 1931 2430
0.24 0.21 0.34
Stock Turnover Days

Closing Stock 1464 1931 2430
Cost of Sales 36426 39401 43668
Average Cost of Sales (Cost of
sales/365) 99.79 107.94 119.63
14.66 17.88 20.31
Page 32
Debtors' Collection Days

Closing Debtors 892 1079 1311
Revenue Per Day 108.09 116.824 129.58
8.25 9.23 10.11
Creditors' Payment Days

Closing Creditors 5083 6046 7277
Cost of Sales Per Day 99.79 107.94 119.63
50.93 56.00 60.82
Debt to Equity
Long-term Creditors 5601 6084 7999
Total Equity 9444 10571 11902
0.37 0.36 0.40
Interest Cover
Net Profit 2362 2779 2866
10.20 12.86 11.64
Earning Per Share

Net Profit Attributable To
Shareholders 1570 1892 2124
Number of Shares 7823 7936 7881
0.20 0.23 0.26
Page 33
Sainsbury Plc
2006 2007 2008
Gross Profit Margin

Revenue 16061 17151 17837
Gross Profit 1067 1172 1002
6.64 6.83 5.61
Net Profit Margin

Revenue 16061 17151 17837
Net Profit 58 324 329
0.36 1.88 1.84
Return on Equity
Net Profit 58 324 329
Capital Employed 3965 4349 4935
1.46 7.44 6.66
Current Ratio
0.80 0.71 0.66
Acid Test Ratio

Less: Inventory 576 590 681
0.68 0.50 0.40
Debt to Equity
Long-term Creditors 3972 2506 2575
Total Equity 3965 4349 4935
0.50 0.36 0.34
Page 34
APPENDIX 2.0
FORMULA’S
 Net Profit Margin
Net Income
Sales
 Operating Income Margin
Operating Income
Sales
 Gross Profit Margin
Gross Profit
Sales
 Return on Investments
Net Income
Long-term Liability+Equity
 Return on Equity
Net Income
Equity
 Earnings Per Share
Ordinary Shares
Weighted Ave. Number of Shares
 Current Ratio
Current Assets
Current Liabilities
 Acid Test Ratio
Current Assets-Stocks
Current Liabilities
 Total Debt to Assets
Total Liabilities
Total Assets
 Debt to Equity
Total Debt
Total Equity
 Interest Cover
Earnings before Interest & Tax
Interest Expense
 Asset Turnover
Sales
Total Assets
Page 35
 Stock Turnover Period

Average Inventory
Cost of Goods Sold/365
 Debtors Turnover Period

Average Gross Receivables
Sales/365
 Creditors Turnover Period
Creditors
Cost of Goods Sold/365
Page 36

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OXFORD BROOKES

Submitted By: Syed Fahad Amjad

Business and Financial Performance of Tesco plc:

3. Analysis and Presentation 10

4. Current Strategic Evaluation 26

1.2 The Chosen Topic

1.3 The Organisation Selection

1.4 Aims and Objectives

 Profitability ratios measure management’s ability to control expenses and to earn a

 Net Profit Margin

 Total Debt to Asset

 Efficiency, activity or turnover ratios provide information about management’s ability

2.2 METHODS USED IN INFORMATION GATHERING

Annual Report from year 2006 to year 2008 of Tesco Plc

Annual Report from year 2006 to year 2008 of J Sainsbury Plc

Internet – Tesco and J Sainsbury Website

Management Ratios by Ciaran Walsh, ‘Business Ratios and Formulas: A Comprehensive

The reason to use newspapers as a source of information is because they provide an

2.0ANALYSIS AND PRESENTATION

3.2 ANALYSIS OF TESCO

Years 2006 2007 2008 Change

Operating Income Margin

Years 2006 2007 2008 Change

Gross Profit Margin

Years 2006 2007 2008 Change

Table below shows the change in sales of Tesco and Sainsbury.

Years 2006 2007 2008 Change

UK and International Market Sales Growth:

Sales Growth in Non-Food

Return on Investment 2006 2007 2008

Return on Investment 2006 2007 2008

The table below shows the percentage increase/decrease in return on equity

Return on Equity 2006 2007 2008

Return on Equity 2006 2007 2008

Earnings per Share

Earnings Per Share 2006 2007 2008

Earnings Per Share 2006 2007 2008

Current Ratio 2006 2007 2008 Change

Current Ratio 2006 2007 2008

Acid Test Ratio

Acid Test Ratio 2006 2007 2008

Acid Test Ratio 2006 2007 2008

FINANCIAL LEVERAGE RATIOS

Total Debt to Asset 2006 2007 2008 Change

Total Debt to Asset 2006 2007 2008

Debt to Equity 2006 2007 2008 Change

Debt to Equity 2006 2007 2008

Interest Coverage Ratio

Interest Coverage 2006 2007 2008

Interest Coverage 2006 2007 2008

Asset Turnover 2006 2007 2008

Asset Turnover 2006 2007 2008

Working Capital Analysis

Ratio 2006 2007 2008

4.0 CURRENT STRATEGIC EVALUATION

5.0 SWOT ANALYSIS

 To be as strong in non-food as in food

 Dawson, C. 2007. A Practical Guide To Research Methods: A User-Friendly Manual For

Gross Profit Margin

Net Profit Margin

Acid Test Ratio

Stock Turnover Days

Debtors' Collection Days