Tesco Financial Reporting and Analysis Overview Assignment Sample

Introduction: Tesco Market Position and Financial Overview

Tesco is the UK’s leading supermarket chain or retailer that operates and sells clothing, groceries, and electronics products. This means the company has many physical stores as well as they operate their business from online platforms also. Management report is very useful to investors since it contain information on Tesco’s financial position, strategies, and place in the market. It contains current or foreseeable earnings and cash flow, risk assessment, and industry outlook, enabling investors to make rational decisions. They can evaluate Tesco’s profitability, stability, and growth prospects, which will help them to make their investment decision in this aspect analyzing the ratios is essential for the investors.

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Analysis and discussion

Figure 1: Financial ratio analysis

(Source: Self-created)

1. Profitability ratio

The analysis of Tesco’s profitability ratios shows that various important coefficients have decreased from 2022 to 2023. The Profit Margin stood at 7.78% in the previous year which came down to 6.72, which portrays that the company is converting a low proportion of its sales into profit. Also, the Operating Profit Margin was reduced from 4.17 percent to 2.28 percent, which also showed an operating inefficiency (Alexander, et al, 2020). The net profit margin also decreased from 2.41% to 1.13%, showing that the company’s net income was reduced about its sales. Gain on shareholder’s equity, ROE, and ROA declined, which portrayed a low return on every available equity, asset. The ROCE reduced from 8.61% in the prior year to 5.97%, therefore if more capital was being used in the business it was being utilized less efficiently. These trends point to a deceleration in Tesco’s profit and operational performance trajectory in 2023.

2. Liquidity Ratios:

Tesco has been experiencing a little deterioration in terms of the Current Ratio to 0.70 in 2023 down from 0.73 of 2022 which provides evidence of a company’s weakness when it comes to meeting short-term obligations using the current assets. Tesco has a current ratio below 1, which suggests that liquidity is a concern because the organization lacks adequate assets to cover its current liabilities (Alexander, et al, 2020). Likewise, the Quick Ratio reduced from 0.59 to 0.55, which omits inventory from current assets. This means that Tesco has been substantially deteriorating in its capacity to use its cash and near cash to retire current obligations. Both ratios indicate that it may be pressured to meet short-term financial obligations, may have less cash back or use more inventory to clear the obligations.

3. Financial Efficiency Ratios:

Tesco’s Inventory Turnover Period also shows good inventory control, as it slightly declined from 15.09 in 2022 to 15.04 in 2023. That means that the company is got of managing its inventories effectively and at the right time. Another efficiency, the Trade Receivables Collection Period not only rose from 27.19 days to 28.57 days, implying that Tesco required more days to recover the shareholders’ funds through customers’ payments. It may suggest reduced selling rates or time taken to complete credit sales (Baumüller and Sopp, 2022). Likewise, the Trade Payables Payment Period increased from 36.45 days to 38.13 meaning Tesco might be taking a long time to pay suppliers. On the bright side, the Asset Turnover received an upgrade from 1.24 to 1.42, indicating enhanced ability at managing assets to generate sales, as well as upgraded operating efficiency in 2023.

4. Financing Ratios:

Tesco’s Gearing Ratio has raised from 89.94% in the year 2022 to 103.90% in the year 2023 indicating that debt is a dominant source of financing for this company. This rise implies higher financial leverage and, consequently, increased financial risk. The Interest Cover Ratio was reduced from 4.18 to 2.48 and consequently, Tesco reduced its capability to cover interest through operating income including such concern for creditors (Christensen, et al, 2021). In the same vein, the Debt-to-Equity Ratio improved from 98.07% to 123.23% pointing to the company’s reliance on debts. The Capital Gearing Ratio has declined a little from 91.72% to 84.31% and with an overall higher amount of debt, there is a danger of adding more financial risk to Tesco's position that is ultimately going to change investor perception.

5. Investment Ratio:

Tesco’s EPS declined from 0.19 in the year ending 2022 to 0.10 in the year according to the half-year report ending 2023 showing that the per-share earnings have reduced. This lower returns investors are willing to get on each share of stock and this is a key reason why this sort of decline is not allowed. The Dividend per Share was at 0.11 which is constant which shows the company still has a strong policy to maintain its dividend payout (Pizzi, et al, 2021). However, the Dividend Cover ratio declined dramatically from 1.78 to 0.92, that is, the current earnings do not adequately cover the dividend distribution. This took a drop implying that Tesco employs more profits to fund the dividends which may have long-term effects of future dividend cuts if profitability fails to rise.

Critically evaluation

Ratio analysis is one of the oldest and most efficient techniques employed in analyzing a firm’s financial status and its performance. It offers an overview of the profitability, liquidity, efficiency, and solvency of the enterprise for evaluation of its financial strength and future development. However, it has limitations (Revsine, et al, 2021). Finally, it tends to rely heavily on historical data which can be misleading when future market conditions are involved owing to the volatility in the current world. Besides, ratios depend on accounting policies, which can result in unsuitable comparisons between different companies. What is more, ratios do not contemplate qualitative changes, such as those resulting from managerial actions or decisions, trends in certain markets, or in whole economies. Therefore, even though ratio analysis is effective it is more useful to incorporate other methods of forecasting.

Conclusion

In conclusion, it can be said that the analysis of Tesco’s financial ratios revealed quite a few important aspects of the company’s performance, though it suffers from the main weakness of the majority of financial methods, namely it is based solely on historical data and accounting practices. Ratio analysis should then be employed along with other forecasting tools while bearing in mind other quantitative indicators such as management decisions and trends within the market.Students often struggle with concepts like net present value, internal rate of return, and payback period. For those seeking expert guidance, our Capital Budgeting Assignment Help ensures accurate, well-researched solutions that enhance learning and improve grades.

Reference List

Journals

Alexander, D., Jorissen, A., Hoogendoorn, M. and Kirwan, C., 2020. International Financial Reporting & Analysis. Cengage Learning, Inc..

Alexander, D., Jorissen, A., Hoogendoorn, M. and Kirwan, C., 2020. International Financial Reporting & Analysis. Cengage Learning, Inc..

Baumüller, J. and Sopp, K., 2022. Double materiality and the shift from non-financial to European sustainability reporting: review, outlook and implications. Journal of applied accounting research, 23(1), pp.8-28.

Christensen, H.B., Hail, L. and Leuz, C., 2021. Mandatory CSR and sustainability reporting: Economic analysis and literature review. Review of accounting studies, 26(3), pp.1176-1248.

Pizzi, S., Rosati, F. and Venturelli, A., 2021. The determinants of business contribution to the 2030 Agenda: Introducing the SDG Reporting Score. Business Strategy and the Environment, 30(1), pp.404-421.

Revsine, L., Collins, D.W. and Johnson, W.B., 2021. Financial reporting & analysis. McGraw-Hill.