INTRODUCTION

Analysis of the financial situation of

TESCO PLC

Reasons for choosing the Topic & Company:

 Opportunity to do Financial Analysis of a real
organisation.
 Personal interest in financial analysis
 Easily available company information
 Impressed with Tesco’s growth

Aims and Objectives:

 Assess financial position of Tesco for the fiscal year

ended February 2006 and February 2007
 Study how Tesco achieved its growth
 Analyse the group’s strategy, its scope and how it
helped Tesco achieve success.
INTRODUCTION OF COMPANY

 Tesco was founded by Jack Colen, son of a Polish

Jewish tailor. He used to sell groceries in the
markets of East End from 1919.

 The Tesco Brand first appeared in 1924.

 Tesco is leading UK based International grocery

and general merchandising retail chain.

 They also provide non-food products and financial

retailing such as banking and insurance.

 Tesco is well established in Ireland, Central

Europe, Asia and is about to enter US market
 ANALYSIS

A thorough look at the financial

reports of the company and the
calculation of various ratios would
make clear the financial situation of
Tesco plc

Ratios carried out are:

 Sales Split
 Profitability
 Liquidity
 Efficiency
 Gearing
 ANALYSIS OF SALES
 In the year ended February
2007 group sales were
announced to be £46.6 billion.
In comparison to group sales of
£42.02 billion in year ended
February 2006, this is
phenomenal increase of 10.9%
in sales. GROUP REVENUE

45000
 At actual rates Tesco’s 40000
35000
international sales rose by 30000

17.9% along with strong 25000

£m
20000
increase of 9% in UK market. 15000
10000
5000
0
2003 2004 2005 2006 2007
Year
UK Rest of Europe Asia
 FINANCIAL ANALYSIS
PROFITABILITY RATIOS
 Gross Profit Margin:
Gross Profit Margin increased from by 5.87%
from 7.67% in 2006 to 8.12% in 2007.
Reasons can be such as lower purchase cost,
PROFITABILITY
change in selling price or inventory valuation
9
 Net Profit Margin: 8
Net Profit Margin increased from 4.02% in 7
2006 to 4.41% in 2007. The administrative 6
Expenses rose up by 9.91% compared to 5
Previous year

%
4
3
 Operating Margin: 2
Operating Margin is measure of profit 1
generated from sales. It increased from 0
5.78% in 2006 to 6.21% in 2007 resulting in a 2006 2007
7.43 rise Year

Gross Profit Margin Operating Profit Margin Net Profit Margin

 ROCE AND RETURN ON
SHAREHOLDERS FUNDS

 ROCE:
Return on Capital Employed (ROCE)
assesses profits with the amount of
funds (capital) employed to make
the profits Tesco return on capital
employed has increased from
12.7% in 2006 to 13.6% in 2006, ROCE Vs RETURN ON SHAREHOLDERS FUNDS
showing a rise of 7.1%.

 ROSF: 24.90%
26.70%
30.00%
Return on share holder’s funds is
based on the same principles of 25.00%
ROCE, but it gives a more restricted 20.00% 13.60%
view. The return on shareholder 12.70%

funds has also increased by 7.23% % 15.00%

as it was 24.9% in year ended 10.00%

February 2006 compared to 26.7% 5.00%
of year ended February 2007.
0.00%
2006 2007
Year

Return on Capital Employed

Return on shareholders funds
 LIQUIDITY RATIOS
 Current Ratio
The current ratio shows
whether the company is in the
position to meet its liabilities as
they fall due. Normally, current
ratio that exceeds 1 and is less
than 1.5 should be expected.
Tesco’s current ratio increased LIQUIDITY ASSESSMENT
from 0.52 in 2006 to 0.56 in
2007 0.6
0.521282256
0.561334642

0.5

 Quick Ratio 0.4

0.326549614 0.324460255
Quick Ratio does not take into

Ratio
0.3

consideration of inventory in 0.2

currents assets. An acceptable 0.1

quick ratio is 0.8. Tesco’s quick
ratio has remained stable with a 0
2006 2007
very slight fall 3.03%. Year

C urrent Ratio Quick Ratio

 GEARING
 Gearing:
Tesco gearing ratio has changed
from 48.07% in 2006 to 47.82%
in 2007. Businesses having
gearing below 50% are
considered to be less risky

 Earning Per Share:

Tesco earning per share rose
from 20.2p in 2003 to 23.61p in
2007. EPS Vs DPS

 Dividend Per Share: 20.2

23.61

Tesco DPS rose from 8.63p in 25

2006 to 9.24p in 2007 resulting 20

in 7.07% growth. Pence Per 15

Share
8.63
9.64

10

5
 Dividend Cover: 0
Dividend Cover increased from 2006 2007
Year
2006 to 2007. It was at 2.34p in
2006 and went up to 2.45p in Earnings Per Share Dividend Per Share

2007.
EFFICIENCY RATIOS
 Accounts Payable Days:
This ratio shows how long, on
average does a company take to
pay its suppliers. The credit
period rose from 50.93 days in
2006 to 56.01 days in 2007.
RECEIVABLE DAYS Vs PAYABLE DAYS

70
 Accounts Receivable Days: 60

This ratio represents the 50

number of days debtors take to 40

Days
pay back the company. The 30

Debtor days have increased 20

from 8.25 days in 2006 to 9.24 10

days in 2007 resulting in a 12% 0

2006 2007
increase. Year

Payable Days Receivable Days

 CONCLUSION
Tesco has all positive ratios.
Hence Suggesting that the
company is growing
successfully in UK and in other
countries where it is currently
operating.

Main growth of areas:

 International Markets

 Non-Food Operations