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Tesco was founded by Jack Cohen in 1919 and is headquartered in Waltham Cross, the United
Kingdom. Tesco Plc is a very reputed international retailer which is engaged in offering various
food, non-food and other retailing services. It operates numerous varieties of store formats that
offer different products, such as fresh produce, wines and spirits, in-store bakery, ready-meals
and sandwiches. The company has operations in countries like United Kingdom, the Republic of
Ireland, Slovakia, Turkey, Thailand, South Korea, Malaysia, Japan and the United States.

Retailing Services of TESCO include the company’s online shopping channels, and
Tesco Direct; Telecoms; Tesco Personal Finance (TPF), and Dunnhumby, its consumer research
business. Euroinvestor (2010)

The financial figures of TESCO do not tell us much about the company if not properly used and
analyzed with the help of ratios. So we can see that there is an inherent advantage that is earned
by using ratios to analyze the financial statements of the company for the last 3 years.

Importance of Ratio Analysis of Financial Statements

• It simplifies the financial statements: The understanding of financial statements can be

done in an easy manner. Ratios help us to inform the entire story of changes that occur in the
financial domain/areas of the business.
• It also helps in future planning: It acts as a tool in future planning and forecasting as the
ratios do tell the management the current performance of the company and enables the
management to look at the future position through planning, co-ordination, control and
communications and thus informed decision making can be possible.

• It assists in inter-firm or competitor comparison: It provides all the information needed
for inter company evaluations. Ratios highlight all the different factors linked with
successful and unsuccessful firms. They also help to reveal the strong/overvalued firms and
weak/undervalued firms. These ratios are useful in finding about the company’s
effectiveness and efficiency in the past and likely performance in the future.

• Ratios help in taking investment decisions: All the investment decisions that the company
needs to take in the case of investors and the borrowing and lending decisions that the
bankers need to take, etc.

• It provides the company with reliable financial information.

• Ratios provide other sources of information like changes in economic resources, substitute
markets and the other obligations of the company. Ratio analysis Benefits (2009)

• Ratios provide financial information that help to estimate the earnings of a business.

• It acts as a tool to disclose all the information according to the requirements of the users.

Financial statement analysis (FSA) involves cautious identification of information from

financial statements for the main purpose of meeting the future objectives by clearly showing the
financial status/condition of the company. This objective can be achieved by:
○ Examining the trends in key financial data
○ Comparing financial data across companies
○ Analyzing key financial ratios.

Managers treat the financial ratios with due importance as it helps in:
○ Providing indicators of how well the company and its business units are performing.
○ These ratios can be used in a balanced scorecard approach.

An inexperienced and a rookie manager may presuppose that ratios are not sufficient in
themselves as a source for taking decisions about the future. The conclusions that are based on
ratio analysis must be regarded as tentative.

Ratios should not be seen as an end but rather looked upon as a starting point which acts as
indicators of what to chase and look into in greater depth. There may be many questions raised,
but they seldom answer any question by themselves. Complementary to ratios there are other
sources of data that should be analyzed to make conclusions about the future of an company.
The manager should look at other factors like industry trends, technological changes, consumer
tastes, and economic conditions. Ratio analysis Importance (2010)

We can also use Ratio analysis to do a competitor analysis and see our performance with respect
to our competitors. For this I have taken Morrison Supermarkets PLC and compared it with
Tesco Plc to see the standing of my company V/s another competitor. This helps us to know our
strengths and weaknesses in all the areas of the business.

TESCO'S Summary of Performance Results (2008-10)

GBP mn
2008 2009 2010
Net Sales 47,298 53,898 56,910
Operating Profit 2791 3169 3,457
Share of post-tax profits of joint ventures and associates 75 110 33
Interest payable( net) -63 -362 -314
PBT 2803 2917 3176
Provision For Taxes -673 -779 -840

Profit after tax from continued operations (Net Profit) 2,130 2,138 2,336
Earnings per share (Pence) 26.95 27.14 29.33
Market Value per share (Pence) 360 428 416.18
Dividend per Share (Pence) 10.9 11.96 13.05

Interest Cover 44.30 8.75 11.01
Cost of goods sold (COGS) 43,668 49,713 52,303
Total Assets 30,164 45,564 46,023
Current Liabilities 10,345 17,595 16,015
Current Assets 5,992 13,081 11,765
Inventories 2430 2669 2,729
EBIT 2866 3279 3,490

Tesco Plc website (2008-2010)

Summary of Comparative Results (2009-10)

GBP mn
Morrison Tesco Difference
Net Sales 15,410 56,910 (41,500)
Operating Profit 907 3,457 (2,550)
Share of post-tax profits of joint ventures and
associates 11 33 (22)
Interest payable( net) -60 -314 254
PBT 858 3176 (2,318)
Provision For Taxes -260 -840 580
Profit after tax from continued operations (Net
Profit) 598 2,336 (1,738)
Earnings per share (Pence) 20.5 29.33 (9)
Market Value per share (Pence) 289.1 416.18 (127)
Dividend per Share (Pence) 8.2 13.05 (5)
Interest Cover 15.12 11.01 4
Cost of goods sold (COGS) 14,348 52,303 (37,955)
Total Assets 8,760 46,023 (37,263)
Current Liabilities 2,152 16,015 (13,863)
Current Assets 1,094 11,765 (10,671)

Inventories 577 2,729 (2,152)
EBIT 918 3,490 (2,572)
Tesco Plc Annual Report (2010)
Morrison Supermarkets Plc Annual report (2010)
Revenue and Operating Profits

The revenues earned by the company and the level of operating profit does tell us the size,
capacity and type of player the company is in the market. The turnover and profits after
deducting the operating expenses incurred by the company clearly tells us the efficiency and
effectiveness of the company.

Year 2008 2009 2010

Revenue 4729 53898 56910
Operating Profits 2791 3169 3457

We can see that though the operating profits of the company has been rising it can be
associated to the rise in revenue which is the primary reason for the rise as cost reduction
has not happened over the years. The trend of both the revenue and operating profits are
seen to rise at a constant level.

Year Morrison Tesco

Revenue 15410.00 56910.00
Operating Profits 907.00 3457.00

The comparison of Morrison and Tesco tells us that Tesco is a much bigger company and
has a much higher turnover. But through its policies we see that the level of operating
profit of Morrison in percentage terms is higher because of its stringent Optimization
policies and procedures. Tesco has to try to reduce its cost of sales which is a major burden
on the profits of the company.


Dividend Yield

The Dividend Yield refers to the quantum of dividend that a company declares or pays out to its
shareholders as compared to the share price. It is the cash flow of the shareholders for each
pound pence invested in the equity position or shares.

Dividend Yield = Dividend per Share / Price per Share

Price Earnings Ratio (P/E Ratio)

The Price to Earnings ratio is the estimation of the current level of the share price in comparison
to the earnings per share that the shareholder gets from the company. The P/E is often related to
“earnings multiple” as it represents the amount of cash an investor will be ready to allocate per
pound/pence of earnings.

Price Earnings Ratio = Market Value per Share / Earnings per Share (EPS)

Dividend Cover

Dividend cover can be referred to as the ratio of the net income or earnings of the company vis-
à-vis the amount of dividends that are paid to the shareholders of the company. It simply the
number of times the profit can pay for the dividends declared by the company.

Dividend Cover = Earnings per Share / Dividend per Share

GBP mn
TESCO Plc Analysis (2008-10)
Ratios 2008 2009 2010
Revenue 47,298 53,898 56,910
Operating Profits 2,791 3,169 3,457
Dividend Yield 3.03% 2.79% 3.14%
Price/Earning Ratio 13.36 15.77 14.19
Dividend Cover 2.47 2.27 2.25

Although the dividend yield has risen from 2009 to 2010 the PE ratio has declined. The
dividend coverage ratio is below the European average which needs to be improved in the
time to come.

GBP mn
Ratios Morrison Tesco
Revenue 15,410 56,910
Operating Profits 907 3,457
Dividend Yield 2.38% 3.14%
Price/Earning Ratio 14.10 14.19
Dividend Cover 2.50 2.25

We see that Morrison’s earnings met the expectations of its shareholders and as such the
aim to improve sales and margins whilst investing for long term growth was met. Delivery
of its Optimisation Plan has ensured strong growth in sales, profits and dividends, whilst
they have also invested to generate future growth. In line with the policy we announced in
2008, dividend per share has been increased by 41% to give a total for the full year of 8.2
pence. As a result, dividend cover has been reduced to 2.5 times, the average for the
European grocery retail sector.

The revenue of Tesco high has lower quantum in comparison to Morrison with respect to
Operating Profits. The Dividend Yield and P/E ratio of Tesco is higher thus showing that
the shareholders are much more dividend savvy rather than capital gains in the case of
TESCO as compared to Morrsion.


Gross Profit Margin (%)

Gross Profit Margin can be associated to be the metrics used to calculate the financial condition
of the company by calculating the amount of revenue left after deducting the cost of goods sold.
This gives us the indication as to the extra revenue that can be used to meet the unforeseen

Gross Profit Margin (%) = ((Revenue – Cost of Goods sold)/Revenue) * 100

Operating Profit Margin (%)

This is the amount of revenue that is there with the company after deducting the operating
expenses, depreciation and administrative expenses with respect to the net sales of the company.
This shows us the operating efficiency of the company.

Operating Margin = Operating Profit / Net sales

Return on Assets (ROA)

Return on Assets is the level of profits relative to the amount of total assets the company has.
Thus it is the efficiency and effectiveness with which the assets are used to generate income
from it.

Return on Assets (ROA) = Net Profit / Total Assets

Return on Capital Employed

It refers to the level of profits generated from the investments made or assets after deducting the

Return on Capital Employed (ROCE) = (EBIT / (Total Assets – Current Liabilities))

Key Ratios of TESCO

Ratios 2008 2009 2010

Gross Profit Margin (%) 7.7% 7.8% 8.1%
Operating Profit Margin (%) 5.90 5.88 6.07%
% %
Return on Assets (ROA) (%) 7.06 4.69 5.08%
% %
Return on Capital Employed (ROCE) 14.5 11.7 11.6%
% %

We can see that TESCO’s GP margin, OP margin and ROA all have risen from 2009 to
2010 but the ROCE has been stagnant which shows inefficiency in asset utilization and also
poor debtor’s management policies.

Profitability Ratios
Ratios Morrison Tesco
Gross Profit Margin (%) 6.9 8.1
Operating Profit Margin (%) 5.89 6.07
Return on Assets (ROA) (%) 6.83 5.08
Return on Capital Employed (ROCE) 13.9 11.6

Although Tesco is a bigger company we still see that the gross profit margin of 6.9%
increased by 60 basis points (bps) which Morrison estimated to be 30 bps higher than it
would have been had the proportion of fuel sales in the mix remained at the same level as
the previous year. The company has continued to make good progress in delivering further
supply chain benefits as our business expands as well as driving further outperformance
from our gross margin Optimisation Plan initiatives. The GP margin of Morrison is much
higher than that of Tesco which is mainly due to the fact that Tesco as a higher cost of
production which is the main problem factor.
The operating margin is more or less similar at 6% which is a good sign. Tesco has an
inefficient use of Assets so the ROA has reduced.
Again ROCE of Morrison is higher than that of TESCO thus TESCO needs to increase the
EBITA margin to improve the financial health of the company.


Current Ratio

The Current Ratio refers to the company’s financial health or position to meet its short term
obligations. The operating cycle of the company is important in this regard as its efficiency can
be seen through this ratio.

Current Ratio = Current Assets / Current Liabilities

Current Ratio < 1 = Company will have problem in paying off its obligations
Current Ratio > 1 = Healthy financial conditions

Quick Ratio

The Quick Ratio of the company tells us the company’s ability to meet the short term obligation
in comparison to the highest level of liquid assets that the company possesses.

Quick Ratio = ((Current Assets – Inventories) / Current Liabilities)

The current ratio of TESCO over the years has been good and it should try to maintain
that but inventory needs to be reduced as a lot of the products sold are perishable in

From the above ratios of Morrison and Tesco we can see that the current ratio of Tesco
though less than 1 still is much better than Morrison to meet its short term requirements of
funds. So both companies especially Morrison has to increase its current assets by reducing
its high level of current liabilities which can be done by reducing the creditor’s level of the
company. The quick ratio has more or less the same conditions. Thus by improving the
operating cycle and also decreasing the creditors position will help the company to meet
the working capital requirements.


✔ Tesco Plc website (2008-2010) [Accessed on 6th January,

✔ Tesco Plc Annual Report (2010) [Accessed on 6th January,


✔ Euroinvestor (2010)

[Accessed on 6 January, 2011].

✔ Morrison Supermarkets Plc Annual report (2010) [Accessed on 6th
January, 2011].

✔ Tesco results (2009) [Accessed

on 6th January, 2011].

✔ Ratio analysis Importance (2010)
atios.htm [Accessed on 6th January, 2011].

✔ Ratio analysis Benefits (2009)

for-financial-statement-analysis [Accessed on 6th January, 2011].