In acid test, ratio 2013 0.69 0.49 2014

In the next section we will go through the analysis of the
financial ratio to get a closer view of their financial performance through the
last 5 years (all numbers in

Revenue and net income:

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The analysis starts with an overview of Tesco’s revenue and net
income over the last 5 years. Table (1.1) shows the decline in the revenues and
the highlighted row shows the loss that Tesco had in 2015. According to the
information above we can see that the main issue for the loss was increasing
the cost of revenue that came as a result of the stores’ costs that had low
sales and also the raise in the minimum wage rates in the UK. In that year
Tesco recorded £62,284 million revenue while the costs of revenue exceed that
amount with a £2,112, leaving the company with a £5,741 million loss as net
income.

Year

Revenue

Cost of revenue

Gross profit

Net income

£ million

£ million

£ million

£ million

2013

64,826

60,737

4,089

124

2014

63,557

59,547

4,010

974

2015

62,284

64,396

-2,112

-5,741

2016

54,433

51,579

2,854

138

2017

55,917

53,015

2,902

-40

Table (1.1) Tesco’s revenue and net
income

 

 

 

 

 

 

Liquidity Ratios

These ratios show the ability of the company to pay their short
term liabilities. According to the current ratios in table (1.2), Tesco has
improved their liquidity ratios after the 2015 drop; however, they might face
some difficulties in meeting their short term debts if they didn’t have a long
term recovery plan. The quick, acid test, ratios show that the company
decreased their dependency on selling the inventory to pay their short term
debts. In 2013, inventories represented 28.59% of the current assets while in
2017, the percentage decreased to 14.93%.

Year

Current Ratio

Quick, acid test, ratio

2013

0.69

0.49

2014

0.73

0.56

2015

0.60

0.45

2016

0.75

0.63

2017

0.79

0.68

Table (1.2) Tesco’s liquidity ratios

Asset Management Ratios:

The asset management ratios measure the effectiveness of the
company in managing their assets and we can find all the data regarding these
ratios in the table (1.3). The inventory turnover ratios indicate that Tesco is
managing its inventory in an effective way; in 2013 the inventory items were
sold and replaced around 17.3 times a year while this number have been improved
to reach to 24.3 in 2017. The days’ sales outstanding have witnessed an improvement;
in 2013, Tesco was receiving the cash after selling any item in a period of
14.22 days, in 2015 it decreased to 12.43 days and by 2017 it reached to 9.63
days. Moving to the fixed assets turnover which measures the effectiveness of
the company in managing its plant and equipment; the numbers show an increasing
from 2.61 in 2013 to 3.09 in 2015 which means that Tesco are generating more
sales from their fixed assets. In this ratio the numbers might not reflect the
real situation due to two reasons; first, the issue of recording the fixed assets
with their historical costs (the price of the asset when it has been purchased
in the past), and the second in our case is the fact that Tesco was selling
some of their plants and equipment after the loss they had in 2015; Tesco’s net
property and equipment have been reduced from £24,870 million in 2013 to £18,108
million in 2017 which can explain the rise in the fixed asset turnover ratios. Finally,
the total assets turnover show that Tesco is facing an issue in managing their total
asset as it recorded the lowest number in 2017 within the last 5 years which
can be a result of what we mentioned before “falling in the value of property”,
which means that the company’s assets was not generating enough sales compared
to the assets value.

Year

Inventory turnover ratio

Days sales outstanding

Fixed assets turnover

Total assets turnover

2013

17.31

14.22

2.61

1.29

2014

17.77

12.58

2.60

1.27

2015

21.06

12.43

3.05

1.41

2016

22.40

10.78

3.04

1.24

2017

24.30

9.63

3.09

1.22

Table (1.3) Tesco’s asset management
ratios

Debt Management Ratios:

Tesco financed its assets with a combination of retained earnings,
short-term debts and long term debts. The debt ratio in the table (1.4) shows the
ability of the company to meet its liabilities (current liabilities + long term
debt) with its assets. The debt ratios indicate that Tesco’s best year through
the last 5 years was 2016 as the debt ratio was the highest with 69.10%.
However, in 2017, the ratio was 62.67% which still a high number compared to
2013 and 2014. The time-interest-earned ratio is used to measure the amount of
income that can be used to pay the interest expenses by calculating the
percentage of the income before interest and tax to the interest expenses. Tesco’s
recorded data show that its performance was better in 2013 and 2014 compared to
the last 3 years. The main reason behind this decline is the decline in the
revenues which affected the gross profits and the rise in the interest
expenses.

Year

Debt ratio

Time-Interest-Earned ratio

2013

57.71

9.19

2014

60.97

8.97

2015

68.60

-4.23

2016

69.10

5.73

2017

62.67

5.61

Table (1.4) Tesco’s debt management
ratios

The Profitability Ratios:

 

Year

Operating margin

Profit margin

2013

6.31

0.19

2014

6.31

1.53

2015

-3.39

-9.22

2016

5.24

0.25

2017

5.19

-0.07

 

 

 

 

 

 

 

According to Boles (2017) Tesco start selling the right to build
houses above its stores.