INTERPRETING FINANCIAL STATEMENTS FOR

STRATEGIC FINANCIAL DECISION MAKING

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Table of Contents
1. Introduction of the Company.......................................................................................................3

2. Analysis of financial position and comparison with benchmark data.........................................5

(i) Ratio calculations..................................................................................................................5

(ii) Analyse and evaluate the ratio results over the 2 consecutive years....................................6

References........................................................................................................................................7

Appendices......................................................................................................................................8

Appendix 1: Acid Test Calculation.............................................................................................8

Appendix 2: Operating Profit Margin Calculation......................................................................9

Appendix 3: ROE Calculation...................................................................................................10

Appendix 4: Net Asset Turnover Calculation...........................................................................11

Appendix 5: Debt Gearing Calculation.....................................................................................12

Appendix 6: Dividend Cover.....................................................................................................13

Appendix 7: Interest Cover Calculation....................................................................................14

Appendix 8: ROCE Calculation................................................................................................15

Appendix 9: Gross Profit Margin Calculation...........................................................................16

Appendix 10: Working Capital Cycle Calculation....................................................................17

 1. Introduction of the Company
“Tesco Plc” is one of the biggest British-originated retailers that works as a multinational
organisation. The company has been operating in more than 80 countries all over the world with
a headquarter in Welwyn Garden City, Hertfordshire, England. The company has been found in
1919. During the foundation, it was in Hackney, London, England. The name of the founder is
Jack Cohen. The company has stores in 4,673 places where 354,744 people work. The company
is a public limited company and is listed in LSE (Catalão, 2022).

Figure: “Tesco” logo (Naveen, et al, 2022)

Mission

To develop a better shopping experience with high-quality goods

Vision

To ensure the best value in the market with customer-driven development

Market Structure

An oligopoly market is seen where “Tesco” operates where four main organisations dominate the
market including “Tesco”. Other organisations include “Asda”, “Morrisons”, and “Sainsbury's”.
The rest of the organisations are present but do not have enough power to manipulate the market.
New organisations can enter easily but can’t be a bigger threat due to the market structure
(Smith, 2023).

Key Competitors

In the groceries industry “Tesco” competes with “Asda”, “Morrisons”, “Sainsbury’s”, and other
UK-based and multinational grocery stores. The company also competes with online retailers
like “Amazon”. These organisations offer similar products with similar prices and quality
(Krummel, 2022).

Market Performance

“Tesco” reported revenue of £57.5 billion for the 2021-22 financial year, an increase of 0.6%
compared to the previous year’s figures. The company got a 77% increase in online sales
throughout the Covid-19 pandemic situation. The company has been growing with time from the
start and customers are getting integrated services with better technology actions and continuous
development (Chen, 2022).
 2. Analysis of financial position and comparison with benchmark data
(i) Ratio calculations
a. Acid-Test Ratio

Formula: Acid Test Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current
Liabilities

The acid test indicates the usable current asset and ability to pay the interest. An ideal ratio is 1:1
which is the rule of thumb. Here, the ratio for 2021 is 0.55:1 and the ratio for 2022 is 0.61:1.

b. Operating Profit Margin

Formula: Operating Profit Margin = Operating Profit / Revenue * 100%

This brings up the view of the ability of profitability where “Tesco” has 2.67% and 4.17% for the
years 2021 and 2022 consecutively.

c. ROE

Formula: Return on Equity (ROE) = Net Income / Shareholder’s Equity x 100%

This brings up the ability to profitability in terms of equity which helps to understand the
utilisation rate of total equity (Naveen, et al, 2022). “Tesco” has this ratio of 49.37% and 9.47%
for the years 2021 and 2022 consecutively.

d. Net Asset Turnover

Formula: Net Asset Turnover = Revenue / Average Total Assets

Average Total Assets = (Initial Total Asset + Closing Total Assets) / 2

This brings up the ability of “Tesco” to utilise its assets where the company has a ratio of 1.17
and 1.30 for the years 2021 and 2022 consecutively.

e. Debt Gearing

Formula: Debt Gearing = Total Debt / (Total Debt + Equity)

This shows the debt ratio in the total working equity where “Tesco” has 0:74:1 and 0.70:1 debt
gearing based on the total asset for the years 2021 and 2022 consecutively.

f. Dividend Cover

Formula: Dividend Cover = Net Income / Dividend Paid

This shows the portion of the dividend from “Tesco” is covered through its profits. The ratio for
the company is 0.99 times and 2.10 times for the years 2021 and 2022 consecutively.

g. Interest Cover

Formula: Interest Cover = Operating Profit / Interest Expense

This shows the overcoming of interest expenses from “Tesco” through its profits. The ratio for
the company is 2.12 times and 3.94 times for the years 2021 and 2022 consecutively.

h. ROCE

Formula: Return of Capital Employed (ROCE) = (Net Operating Profit / Total Capital
Employed) * 100%

Total Capital Employed = Total Assets - Current Liabilities

This shows the profitability compared to the company’s invested capital. “Tesco” has resulted in
a ratio of 5.24% and 7.71% for the years 2021 and 2022 consecutively.

i. Gross Profit Margin

Formula: Gross Profit Margin = Gross Profit / Revenue * 100%

This shows the profitability of an organisation like “Tesco” in terms of the effectiveness of using
its resources. This ratio has resulted in 6.52% and 7.71% for the years 2021 and 2022
consecutively.

j. Working Capital Cycle

Formula: Working Capital Cycle = Inventory Days + Receivables Days - Payables Days

Inventory Days = (Average Inventory / Cost of Goods Sold) x 365

Receivables Days = (Accounts Receivable / Total Credit Sales) x 365

Payables Days = (Accounts Payable / Cost of Goods Sold) x 365

Average Inventory = (Initial Inventory + Closing Inventory)/2

This shows the ability of “Tesco” to convert the current assets to utility for short-term needs
which is a conversion cycle (Smith, 2023). This ratio has shown results as -34 days and -38 days
for the years 2021 and 2022 consecutively.
 (ii) Analyse and evaluate the ratio results over the 2 consecutive years

a. Acid-Test Ratio

We can see the acid test ratio has gone from 0.55:1 in 2021 to 0.61: 1 which indicates the
increasing ability over years for “Tesco”. Here the company has increased its ability to meet the
need in short term through the utilisation of the current assets but it is still not acceptable because
the ideal ratio is 1:1 and most of the organisations in the industry have got an average of 0.8:1
(Krummel, 2022).

b. Operating Profit Margin

The operating profit margin is also increasing over the years where it has increased from 2.67%
to 4.17% in 2022 compared to the previous year. This is higher than the average ratio in the
industry which is 2.4%. This shows that the company is successfully conducting all the
operations in the market as well as in the organisation (Catalão, 2022).

c. ROE

The ROE of “Tesco” seems to be drastically decreasing where the company has dropped to
9.47% in 2022 compared to the previous year (49.37%). This shows that the company is
becoming way less efficient in utilising the shareholder’s equity to generate profit but it is still
higher than the average that average roe (4.8%) in the industry.

d. Net Asset Turnover

The NAT or Net Asset Turnover has increased from 1.17 times in 2021 to 1.3 times in 2022
which indicates the ability of the company is growing for utilising the assets to generate profit.
The average NAT for the industry comes to 1.81 times which is higher than that of “Tesco”
(Chen, 2022).

e. Debt Gearing
The debt gearing for “Tesco” is decreasing by 4% in 2022 compared to the previous year which
says that the company is less relying on debt. The average ratio for the retail industry is 0.7:1
which is the current rate for the company (Kasbar, et al, 2022).

f. Dividend Cover

The dividend cover has increased from 0.99 in 2021 to 2.10 in 2022 for “Tesco” which indicates
that the company is getting enough earnings for covering the dividend. This is a positive sign for
the stakeholders, especially the investors (Smith, 2023). The average of this ratio for the retail
industry is 1.9 which is below that of the company.

g. Interest Cover

The interest cover has increased from 2.12 times in 2021 to 3.94 times in 2022 for “Tesco”
which indicates that the company is getting enough earnings for covering the interest payments.
This is a positive sign for the bodies that provide long-term loans (Kasbar, et al, 2022). The
company is very lower than the average (8.6 times) in the industry.

h. ROCE

The ROCE for “Tesco” has increased in 2022 by 2.45% compared to the previous year which is
a clear indicator of an increasing ability to generate profit from the capital. The company’s
current ROCE is 7.71% which is higher than the industry average (7,6%).

i. Gross Profit Margin

The gross profit margin has increased from 6.62% (2021) to 7.55% (2022) which is an indicator
of using its resources properly and the efficiency is increasing. The average in the industry is
24.2% which is very high and it can be said that the company is lacking in very disappointing
efficiency.

j. Working Capital Cycle

The working capital cycle for “Tesco” seems to be in a negative figure which has also decreased
by 4 days in 2022. This indicates that they pay the short terms deb faster than changing inventory
and receiving the sales. This is very good in the short term but such a long time like -38 days can
be a negative effect in long term. Because minus figure shows that the company will lose its cash
reserve soon which is a potential problem. The average and optimum for the industry is 12 days
which must be maintained (Naveen, et al, 2022).
 References
Adel, N. and Anis, J., 2022. The Impact of Corporate Social Responsibility on Financial
Performance: The Case of United Kingdom’s Companies. European Research Studies Journal,
10(4), pp.41-54.

Ajibola, E.B., 2022. An investigation into talent management in the Irish retail sector: a case of
Tesco, Aldi and Super Valu (Doctoral dissertation, Dublin, National College of Ireland).

Catalão, I.D.P., 2022. Equity research: Tesco PLC (Doctoral dissertation, Instituto Superior de
Economia e Gestão).

Chen, J.J., 2022. Tesco Plc. In International Cases of Corporate Governance (pp. 27-44).
Singapore: Springer Nature Singapore.

Honkanen, A.M., 2022. IFRS Standards and Executive Remuneration: The Influence on
Accounting Manipulation.

Kasbar, M.S.H., Tsitsianis, N., Triantafylli, A. and Haslam, C., 2022. An empirical evaluation of
the impact of agency conflicts on the association between corporate governance and firm
financial performance. Journal of Applied Accounting Research, (ahead-of-print).

Krummel, D., 2022. Expansion in the Retail Sector—Market Entry Strategies in Consideration of
Formal and Informal Institutions: A Tesco Case Study. Open Access Library Journal, 9(2), pp.1-
19.

Naveen, G.N.K.D.G., Siva, P.S.R.D.P., Sai, M.S.R.K.M. and Krishna, R., 2022. Performance
Analysis Through Financial Modelling. BOHR International Journal of Finance and Market
Research, 1(1), pp.36-40.

Peng, L., The Research about Organizational Management Adaptability in The Process of
Localization in China: The Case Study of Tesco.

Smith, H.W., 2023. GUPPI In Supermarket Mergers: the UK’s Asda/sainsbury Case. Antitrust
Economics at a Times of Upheaval, by J. Kwoka, T. Valleti and L. White (Editors),
Forthcoming.
 Appendices
Appendix 1: Acid Test Calculation
Formula

Acid Test Ratio = (Current Assets - Inventories - Prepaid Expenses) / Current Liabilities

2021

Acid Test Ratio = (£10,807 - £2,069 - £0) / £15,997

= £8737 / £15,997

= 0.55:1

2022

Acid Test Ratio = (£12,189 - £2,339 - £0) / £16,139

= £9850 / £16,139

= 0.61:1
 Appendix 2: Operating Profit Margin Calculation
Formula

Operating Profit Margin = Operating Profit / Revenue * 100%

2021

Operating Profit Margin = £1,547 / £57,887 * 100%

= 2.67%

2022

Operating Profit Margin = £2,560 / £61,344 * 100%

= 4.17%
 Appendix 3: ROE Calculation
Formula

Return on Equity (ROE) = Net Income / Shareholder’s Equity x 100%

2021

Return on Equity (ROE) = £5,954 / £12,059 x 100%

= 49.37%

2022

Return on Equity (ROE) = £1,481 / £15,644 x 100%

= 9.47%
 Appendix 4: Net Asset Turnover Calculation
Formula

Net Asset Turnover = Revenue / Average Total Assets

Average Total Assets = (Initial Total Asset + Closing Total Assets) / 2

2021

Average Total Assets = (£53,070 + £45,512) / 2

= £98,582 / 2

= £49,291

Net Asset Turnover = Revenue / Average Total Assets

= £57,887/£49,291

= 1.17 times

2022

Average Total Assets = (£45,512 + £49,351) / 2

= £94863 / 2

= £47,431.5

Net Asset Turnover = Revenue / Average Total Assets

= £61,344/£47,431.5

= 1.3 times
 Appendix 5: Debt Gearing Calculation
Formula

Debt Gearing = Total Debt / (Total Debt + Equity)

2021

Debt Gearing = £33,453/ (£33,453 + £12,059)

= £33,453/ £45,512

= 0.74:1

2022

Debt Gearing = £33,707/ (£33,707+ £15,644)

= £33,707/£48,351

=0.70:1
 Appendix 6: Dividend Cover
Formula

Dividend Cover = Net Income / Dividend Paid

2021

Dividend Cover = Net Income / Dividend Paid

= £5,954/£5,982

= 0.99 times

2022

Dividend Cover = Net Income / Dividend Paid

= £1,481/£704

= 2.10 times
 Appendix 7: Interest Cover Calculation
Formula

Interest Cover = Operating Profit / Interest Expense

2021

Interest Cover = £1,547/ £729

=2.12 times

2022

Interest Cover = £2,560 / £650

=3.94 times
 Appendix 8: ROCE Calculation
Formula

Return of Capital Employed (ROCE) = (Net Operating Profit / Total Capital Employed) * 100%

Total Capital Employed = Total Assets - Current Liabilities

2021

Total Capital Employed = Total Assets - Current Liabilities

= £45,512 - £15,997

= £29,515

ROCE = £1,547 / £29,515 * 100%

= 5.24%

2022

Total Capital Employed = Total Assets - Current Liabilities

= £49,351- £16,139

= £33,212

ROCE = £2,560 / £33,212 * 100%

= 7.71%
 Appendix 9: Gross Profit Margin Calculation
Formula

Gross Profit Margin = Gross Profit / Revenue * 100%

2021

Gross Profit Margin = £3,776 / £57,887 * 100%

= 6.52%

2022

Gross Profit Margin = £4,633 / £61,344 * 100%

= 7.55%
 Appendix 10: Working Capital Cycle Calculation
Formula

Working Capital Cycle = Inventory Days + Receivables Days - Payables Days

Inventory Days = (Average Inventory / Cost of Goods Sold) x 365

Receivables Days = (Accounts Receivable / Total Credit Sales) x 365

Payables Days = (Accounts Payable / Cost of Goods Sold) x 365

Average Inventory = (Initial Inventory + Closing Inventory)/2

2021

Average Inventory = (£2,433 + £2,069)/2

= £4,502/2

= £2,251

Inventory Days = (£2,251/ £53,727) x 365

= 15 days

Receivables Days = (£1,263/ £57,887) x 365

= 8 days

Payables Days = ((£8,399/ £53,727) x 365

= 57 days

Working Capital Cycle = 15 + 8 - 57

= -34 days

2022

Average Inventory = (£2,069 + £2,339)/2

 = £4,408 /2

= £2,204

Inventory Days = (£2,204/ £56,750) x 365

=14 days

Receivables Days = ((£1,263/ £62,344) x 365

= 7 days

Payables Days = ((£9,181/ £56,750) x 365

= 59 days

Working Capital Cycle = 14 + 7 - 59

= -38 days