Critical evaluation of Tesco’s financial performances:

Financial performance is basically a broader term that gives a description of overall fiscal health
of a company. A strengthened financial performance means that a company’s revenues are
exceeding over its expenses and that the cash inflows are higher than outflows (Nufus et al.,
2020). It is subjective by nature and is gauged by multiple metrics that are measurable. The
information disclosed by financial performance is used by managers, as well as investors who
have a direct and indirect stronger association with the company (Grewatsch and Kleindienst,
2017). Investors use this information to make a decision regarding selling or buying shares of a
company, whereas managers utilize it to forecast about future growth and earnings (Musciotto et
al., 2018). Different ratios are used to justify the financial performance of a company but four
commonly used financial ratios are Liquidity, profitability, efficiency and gearing ratios. These
ratios will be utilized to critically review financial performance of TESCO.

Liquidity Ratio:

Madushanka and Jathurika, (2018) stated that liquidity ratio is used to measure an organization’s
ability to pay its debts. Liquidity ratios tend to have a formidable influence on company’s
credibility and company is subjected to bankruptcy when there is a continuous failure to pay
short-term liabilities. Three of the commonly used liquidity ratios are quick ratio, current ratio
and cash ratio and the denominator in these ratios is level of current liabilities. Abbas et al.
(2021) clarified that cash ratio measures company’s ability regarding different aspects with cash,
as well as investments that are easily convertible in to cash for satisfying short-term obligations.
However, Rashid, (2018) analyzed that quick ratio measures ability of the company to satisfy its
current liabilities without obtaining additional financing or selling inventory. Apart from that,
Husna and Satria, (2019) assessed that current ratio makes a comparison of company’s current
liabilities with its current assets by measuring company’s ability to make a use of its current
assets to pay off the short term liabilities.

Liquidity
(Current Ratio)
  2021 2020 2019 2018 2017
Current assets 16.84 16.83 16.72 18.02 20.41
Current liabilities 22.1 22.91 27.29 25.26 25.68
Current ratio 0.76 0.73 0.61 0.71 0.79
Table 1: TESCO Liquidity Ratio

By making a comparison of Tesco’s current assets and liabilities, it has been assumed that the
company has properly managed and maintained its liquidity. There are no extreme fluctuations in
the year by year liquidity ratio of the company ranging from 2017 to 2021. Tesco’s liquidity ratio
for the year 2017 was 0.79, 0.71 for 2018, 0.61 for 2019, 0.73 for 2020 and 0.76 for 2021. All of
the company’s liquidity ratios for these 5 years are less than 1. A liquidity ratio less than 1 imply
that company is not able to properly satisfy its current obligations, meaning that a liquidity ratio
below 1 is not really favorable for the company. In case of TESCO, the 5 year liquidity ratios
justifies that TESCO is struggling to pay the short term obligations with its assets.

Profitability ratio:

Nalurita, F. (2017) determined that profitability ratio specifies how proficiently organizations
generate value for the shareholders as well as boost profit. A higher profitability ratio means that
the company is capable of eliminating unnecessary operating costs from its operations.
Miransyah and Dempo, (2021) examined that the main objective for any company is to make the
optimum use of its resources and capture higher profits. Share holders are among the main
resources that a company owns and leveling up their confidence towards investing in company’s
share carries enormous importance. Yao et al. (2018) evaluated that profitability ratio matters a
lot, as it plays a handy role in attracting new investors and comparing performance with the
competitors. Baraja and Yosya, (2019) analyzed that investors are more likely to invest when
they get to know that the company has the capability of generating higher revenues. Profitability
ratio can certainly uncover different aspects that are needed to be improved for the purpose of
boosting revenues.

Profitability
Return on Equity
  2021 2020 2019 2018 2017
Net income 7.96 1.241 1.744 1.584 -0.053
Total shareholder equity 15.97 16.94 19.57 13.73 8.49
 8.91
ROE 49.84% 7.33% % 11.54% -0.62%
Table 2: TESCO Profitability Ratio

The above table has stated the profitability ratio of TESCO for a 5 year period. Profitability
ratios are financial indicators that investors and analysts are using to evaluate and assess a
company's potential to earn a profit in relation to revenues and balance sheet assets. By
considering the net income and total share holder equity, the Return on investment captured by
TESCO is calculated for 5 years spanning from 2017 to 2021. The return on investment of
TESCO for the year 2017 was -0.62% which has improved in the year 2018 to 11.54% followed
by a decrease in 2019 to 8.91%. This ratio was further dropped to 7.33% in the year 2020 but the
company has experienced an enormous rise in its return on investment in the year 2020, as the
ratio has jumped from 7.33% to 49.84%. This is due to the fact that there is was a significant
increase in the net income generated by the company in year 2021 as compared to other fiscal
years. Palepu et al. (2020) highlighted that a rising ratio or value is generally sought after by
majority of companies since it indicates that the firm is operating well in terms of revenue
growth, profitability, and money flow.

Gearing Ratio:

A gearing ratio is a type of financial ratio that compares a company's debt to financial indicators
like assets or total equity. These sorts of ratios are often used by investors, borrowers, and
analysts to examine how a firm organizes itself as well as the degree of risk associated with its
preferred capital structure (Rahardjo et al., 2020). Gearing ratios can be used by financiers or
lenders to determine whether or not to grant loans, and by investors to consider whether or not
they should make an investment in a firm. A greater gearing ratio often suggests a higher level of
financial risk (Jiang et al., 2018). Whenever the findings of gearing ratios are contrasted over
time, they can contribute positively to a company's financial management. However, as a one-
time computation, gearing ratios might well be meaningless (Rehan Siddique, 2017). A
corporation with a market monopoly may well be able to operate efficiently even with a high
gearing ratio, but companies that will need to be extremely competitive might stumble (Tepper,
2018).
TESCO’S Gearing Ratio
Total debt to equity ratio  
  2021 2020 2019 2018 2017
Total debt 8.02 7.68 7.49 9.86 12.91
Total equity 15.97 16.94 19.57 13.73 8.49
Total debt to equity ratio 0.50 0.45 0.38 0.72 1.52
Table 3: TESCO Gearing Ratio

Gearing ratio calculations serve to clarify the source of a firm's operating funding, which offers a
better understanding of a company's reliability and capacity to resist phases of economic
instability (MacDiarmid et al., 2018). A higher gearing ratio means that the company is more
susceptible to risk; where as low gearing ratio indicates that the probability of risk is low. Equity
costs more and is expensive due to tax relaxation on debts (Rahardjo et al., 2020). However, a
lower debt to equity ratio indicates that company is over-relying on its equity in the process of
generating funds (Jenik et al., 2017). A company is assumed to be highly geared when the ratio
exceeds 50%, however a gearing ratio ranging from 25% to 50% is predicted to be normal. Table
3 shows that TESCO’s total debt to equity ratio has decreased in the last five years which is a
good sign for the company, because a debt to equity ratio lower than 1.0 is considered good. A
debt to equity ratio lower than 1 implies that company is financing through equity and is not
relying on debts.

Efficiency Ratio:

Alarussi, (2021) declared that efficiency ratios are concerned with measuring company’s ability
to utilize its assets and liabilities for generating sales. Efficiency ratios are utilized for judging
management operations of a company. Maletič et al. (2018) accentuated that when asset-related
ratio is higher, it implies that management is performing efficiently and effectively and making
the optimum use of assets with respect to the amount of sales given. Amanda, (2019) found that
the most commonly used efficiency ratios are; Inventory turnover ratio, asset turnover ratio and
receivable turnover ratio. Farooq, (2019) stated that inventory turnover is basically the
rate at which inventory stock is used, replaced or sold. High inventory turnover often indicates
that a firm is selling products promptly and that its products are in high demand.
Efficiency
  2021 2020 2019 2018 2017
Inventory Turnover ratio 26.06 24.73 22.83 23.92 23.04
Assets turnover ratio 1.26 1.23 1.3 1.28 1.21
Receivable turnover ratio 45.83 46.38 38.97 38.79 37.9
Table 4: TESCO Efficiency Ratio

Table 4 specifies that TESCO has properly managed and improved its inventory turnover ratio
during the span of these five years because a turnover ratio greater than 5 is predicted to be good.
Apart from that, the figure also shows that the company has also experienced an improvement
assets and receivable turnover ratio. Christopoulos et al. (2019) claimed that the receivables
turnover ratio evaluates how efficiently a firm recovers on its receivables or lends credit to
clients. The ratio also counts the number of times a company's receivables were turned into cash
in a given period. Moreover, Patin et al. (2020) examined that the asset turnover ratio assesses a
company's assets' efficacy in increasing profitability or revenues.
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