Tesco Managing Operations and Finance 1

TESCO MANAGING OPERATIONS AND FINANCE

 Tesco Managing Operations and Finance 2

Introduction
Tesco is Britain’s largest retailer and has been recognized for being the most valuable

brand in the country on several occasions. Founded in 1919 by Jack Cohen the company has

expanded significantly and improved its global presence. Currently, Tesco employs the

company’s headquarters is situated in Hertfordshire and has employed over 420.000 people in its

different stores across the world. Although the company has been a market leader for an

extended period, changes in market dynamics and increase in competition could threats its

positions in the future. Conducting a financial analysis is crucial for the management of the

organization and other stakeholders to understand the position in the market and whether its

business operations are sustainable. This financial analysis breaks down Tesco’s current financial

positions by evaluating the various financial ratios relative to its closest competitor Sainsbury’s.

Market Description
Tesco is primarily focused on the Supermarket and Grocery store industry which makes

up the biggest percentage of the retail outlets in the United Kingdom. Its product portfolio

includes food and beverages, home appliances, clothing, as well as financial services. The

company is the market leader in the United Kingdom in a very competitive market holding

28.4% of the market share. Sainsbury’s is Tesco’s closest competitor with both companies

holding a joint 42.7% of the market share. Other market players include Asda, Morrison, Aldi,

and The Cooperative among others. The graph below shows the market share of grocery stores in

the United Kingdom between 2017 and 2020

 Tesco Managing Operations and Finance 3

Tesco also commands a big portion of the market outside Europe and has been among the

biggest retailers in the continent for the past decade. The company operates across five countries

in Europe and has major stores in these countries. The past decade has seen the country expand

significantly with the number of retail stores across the world increasing from risen from 3.751

to 7,005 between 2008 and 2020. The graph bellows shows the increase in the number of stores

by Tesco.
 Tesco Managing Operations and Finance 4

Despite its global presence, much of the revenues that Tesco generates come from the

local market in the United Kingdom. For this reason, the success of the company in the home

market is crucial for the overall success of the business. The emergence of other market players

in the home market could threaten Tesco’s position if the company fails to pay attention to the

market trend. The financial report of the organization will prove very vital in understanding the

company’s position compared to its competitor Sainsbury’s.

Financial Ratios
Organizations use financial ratios in different ways in making crucial managerial

decisions about the operations of the business. These rations present crucial information

regarding the financial situations of organizations and how this affects the management, risk

analysis, and market performance of an organization (Kazan and Ozdemir, 2014). Calculating

the financial ratios from the financial statement of Tesco paints a picture of the company’s

current financial situation. Furthermore, comparing the financial ratios with those from

Sainsbury’s will also assist in understanding where Tesco stands financially concerning the

competition in the environment. The financial ratios for both companies were calculated from the

latest annual financial reports for both companies. The financial years 2020 for 29th February for

Tesco and 7th March 2020 for Sainsbury’s.

Asset turnover
Assets turnover ratios measure the assets of the company concerning the revenues that

the assets generate. These measures are crucial for the management in identifying how effective

Tesco is using its resources to generate profit (Guo and Wang 2019). The formula for calculating

asset turnover involves dividing the revenues of an organization by the total assets of the

organization (Ismail, 2017). The table bellows show the comparison of the total asset turnover

rations from the financial year 2020 for both companies.

 Tesco Managing Operations and Finance 5

Asset turnover = Revenue

Assets

Tesco Sainsbury’s
64,760 £m 16245 £m
52,903 £m 28,919 £m
1.14 0.56

Tesco reported an asset turnover ratio of 1.14 for the financial year 2020 demonstrating

that the company is in a very good position regarding the utilization of its assists to generate

profit. The company through its operations can generate a revenue of £1.14 for every £1 worth of

assets showing that it is in a position of growth and performs significantly well in the market. On

the other hand, Sainsbury which is Tesco's closest rival reported an asset turnover ratio of 0.56

for the same financial years. This ratio is healthy for the organizations given that it is above the

industry averages. The information from this financial ratio shows the managers at Tesco that

they can leverage the company’s assets to fight the competition in the market. In general, Tesco

still holds a position of advantage because of the resources at its disposal.

1.4
1.2
1
0.8
0.6
0.4
0.2
0
Asset Turnover Ratio

Tesco Sainsbury's

Inventory turnover
Inventory turnover, on the other hand, is a crucial financial ratio which can which

demonstrates the profitability of organizations. This ratio measures the number of times a
 Tesco Managing Operations and Finance 6

company replaces the inventory that it has sold in a given period (Wood et al. 2017). Managers

use this metric to evaluate the sales of organizations and how the sales translate to the overall

profitability of the organization. Organizations that report slow turnover often have weak sales or

excess inventory implying that the companies take a longer period to realize profits in their

operations (Fenyves et al. 2020). Tesco operates in a high-volume, low-margin industry where it

tends to record the highest turnover ratios when compared to other industries.

Tesco Sainsbury’s
60,180 £m 26,719 £m
2,433 £m 1,929 £m
24.73 13.84

Tesco reported an inventory turnover ratio of 24.73 which is a very healthy indicator that

the company is performing well in terms of the sales of its products. For the financial year 2020,

Tesco was able to replace the inventory it had sold 24.73 times which played a crucial role in

maintaining the company’s profitability during the financial year. Comparing the inventory

turnover ratios of the two companies shows that Tesco has a competitive edge over Sainsbury

from the financial report of 2020. During this year, Tesco performed extremely well beyond the

industry averages which stands at 13. The management at the company can interpret this

performance as a positive and a sign that the business operations of the organizations are highly

profitable. Tesco made twice as many sales as its closest competitor during the 2020 financial

year demonstrating that the company can maintain a healthy competition resulting from its sales.
 Tesco Managing Operations and Finance 7

30
25
20
15
10
5
0
Invetory Turnover Ratio

Tesco Sainsbury's

Current Ratio
The current ratio is another important financial ratio that assists in the risk analysis of an

organization. The Current Ratio is a liquidity ratio that evaluates the relationship between the

current assets and the current liabilities of an organization to determine its positions of the

organization in meeting the short-term obligations (Morales-Díaz and Zamora-Ramírez 2018). A

current ratio is a useful tool that analysts and investors can use to evaluate the short-term risk of

an organization and how it can use the current assets reported in the balance sheet in meeting the

short-term debts and other payables. A healthy current ratio for any organization should be above

the industry average (Hofmann and Sertori 2020). The current ratio is obtained by dividing the

total current assets of a company by the total current liability of the company in a specific year.

Current Ratio
Tesco = Current assets
Sainsbury’s
13,164 £m Current liabilities
7,589 £m
17,927 £m 11,417 £m
0.73 0.66

For the financial year 2020, the current ratio for Tesco went below 1 suggesting that the

company had fallen short regarding its capability to fulfill short-term obligations. Although this

figure may seem to be unhealthy for the organizations. The general condition in the industry

suggested that Tesco was performing relatively well. The industry average fell below 1 indicated
 Tesco Managing Operations and Finance 8

that most of the market players struggled to meet the short term short-term objectives. Tesco’s

closest competitor also recorded a current ratio that was significantly lower than that industry

average as well as Tesco. This ratio shows that Tesco is still ahead of the competition in the

market regardless of the liquidity problems that if faced during the financial year.
0.74
0.72
0.7
0.68
0.66
0.64
0.62
Current Ratio

Tesco Sainsbury's

Quick Ratio
Another liquidity ratio for analyzing the risks of an organization is the quick ratio. This

financial ratio measures the ability of a company to meet its short-term obligations using the

most liquid assets that it possesses in a given financial period (Lin, Liang, and Chen 2011). In

other words, it refers to the company's capability to pay short-term debts without having to

obtain any financing or sell its inventory. A higher quick ratio implies that an organization has

the capability of meeting the short-term obligation with the highly liquid assets that it possesses.

The quick ratio is obtained by devising the summation of cash and accounts receivable by the

current liability of the company.

Quick Ratio = Cash + Accounts Receivable

Current liabilities

Tesco Sainsbury’s
 Tesco Managing Operations and Finance 9

5,841 £m 1,782 £m
17,927 £m 11,417 £m
2.03 0.15

The quick ratio that Tesco reported demonstrated that the company was in a rather

healthy status given that it could use its highly liquid assets including cash and receivables to

meet its short-term objectives. Compare to the current ratio, the liquid ratio is higher implying

that the company still holds much of the highly liquid assets and it did not buy a lot of inventory

for the financial year. The decision by the management to hold the highly liquid assets may have

been motivated by the unpredictability resulting from the COVID 19 outbreak. Nevertheless, the

company managed to record high a high quick ratio that was higher than its competitor

Sainsbury’s.

2.5

1.5

0.5

0
Quick Ratio

Tesco Sainsbury's

Return on Equity (ROE)

ROE is an important financial ratio for evaluating the profitability of an organization.

This ratio is calculated by dividing net income by dividing shareholders' equity (Golis, Mooney,

and Richardson 2010). This tool assists analysis and the management understand the profitability

of the organization concerning the stockholders’ equity. This tool is also effective in evaluating

sustainable dividend growth and the growth rate of an organization. It can be used for projecting

the rate of growth of a company’s stake and the degree to which the company will attract

ROE = Net Income × 100%

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investors. Understanding whether the ROE of an organization is healthy will depend on the

industry average.

Tesco Sainsbury’s
1,315 £m × 100% 239 £m × 100%
3,090 £m 630 £m
42.46% 37.94%

Tesco reported the ROE of 42.46% indicated that the shareholders' equity significantly

contributes to the profitability of the organizations. This information is important for the

management of the organization to understand the sustainable growth rate. The sustainability

growth rate refers to the rate at which an organization can grow without the need for external

finance to facilitate growth. This information is also vital for the shareholders because it

determines the prices of the stocks in the future. The differences in ROE between Tesco and

Sainsbury are inconsequential implying that the former is running a sustainable operation that

will compete with Tesco in the long run.

43
42
41
40
39
38
37
36
35
Return on Equity (ROE)

Tesco Sainsbury's

Net Profit Margin

The net profit margin can be simply understood as to how much net profit of an

organization in a given year is generated as a percentage of revenue. It measures the relationship

between the net profits of an organization before taxation with the total revenue (Delen, Kuzey,
 Tesco Managing Operations and Finance 11

and Uyar 2013). This ratio is usually expressed in percentage and presents the percentage of

Sterling pounds that a company collects and how this money is translated to profit. This ratio can

be used to evaluate the profitability of the company as well as the effectiveness of the managers

of an organization (Drake and Fabozzi 2012). The net profit margin is often brought forth as a

metric for measuring the performance of the managers as well as company executives.

Tesco Sainsbury’s
1,315 ×100% £m 239 × 100% £m
64,760 £m 29,007 £m
2.03% 0.83%

Tesco reported a net profit margin of 2.03% in the 2020 financial years. This net profit

margin falls within the industry average indicating that Tesco is running a profitable business

that can sustain the competition in the market. Sainsbury on the other hand had a difficult year

reporting a net profit margin of Sainsbury’s. These difficulties may be attributed to the COVID

19 breakdown which crippled the services of the company. Tesco which reported a healthy

financial outcome on the other hand shows that the company can sustain its profitability even

when the market changes.

2.5

1.5

0.5

0
Net Profit Margin

Tesco Sainsbury's
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Conclusion
In conclusion, the financial analysis of Tesco for the financial year 2020 has shown that

the company can maintain sustainable profitability and stay ahead of the competition. Tesco is

the biggest grocery store retailer in the United Kingdom in terms of revenues as well as brand

value. The company has managed to stay ahead of its competition for years commanding the

biggest share of the market. Sainsbury’s which is Tesco’s biggest competition also commands a

large portion of the market. However, the financial analysis of the two companies has shown that

the latter is ahead of the competition and can maintain its market position through more sales.

Tesco also leverages on the size of its assets which returns a lot of profit.
 Tesco Managing Operations and Finance 13

References
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Retrieved March 17, 2021, from https://www.statista.com/statistics/238667/tesco-plc-

number-of-outlets-worldwide/

Coppola, P. by D., & 6, J. (2021, January 6). Great Britain: Grocery market share 2017-2020.

Retrieved March 17, 2021, from https://www.statista.com/statistics/280208/grocery-

market-share-in-the-united-kingdom-uk/

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A

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 Tesco Managing Operations and Finance 14

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Appendices
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