Ratio Analysis Report
Name: Emilia Andres-Szarko
Course: HND Accounting
Student Number: EC1405434
INTRODUCTION
I was asked to write a report for TESCO Plc company which should include two relevant accounting ratios from each category of profitability, liquidity, efficiency and capital structure and also four relevant ratios from the investment category.
Ratio analysis is one of the estimated methods that are essential in decision making to check the progress of a company. In this report I will do the calculation of some chosen ratios of TESCO Plc over the two years. With the calculation results of these ratios, an analysis and appraisal will be carried out to compare the performance of the company and finally conclusion will be made. The analysis will basically be using the most recent data from the 2016-2017 annual financial reports of the Tesco Plc company.
Profitability Ratios
This ratio fundamentally compares the income statement account of a company to examine if a company is able to generate profits in their operation. Profitability ratios are mainly focus on a company’s return on investment. It means that profitability ratio measures the performance of management of the company to recognize if a business can be worthwhile investment occasion and to evaluate company performance compare to their competitors.
Let’s start from (ROCE) Return on Capital Employed which indicates how much risk can be concave to invest in the company and also how much return investors will receive from their investment.
ROCE = Earnings Before Interest and Tax / Capital Employed *100%
ROCE
2016 2017
Earnings Before Interest and Tax 1 260 -2 220
Capital Employed 8 616 6 414
ROCE for TESCO Plc 14.6% -34.6%
We can’t say that we see improvement if we want to compare actual figures is visible that we have minus figure in your income before interest and tax in 2017.
The return on capital employed ratio shows how much profit each pound of employed capital generates. Obviously, a higher ratio would be more favorable because it means that more pounds of profits are generated by each pound of capital employed.
For instance, a return of 2 indicates that for every pound invested in capital employed, the company made 20 pence of profits.
Investors are interested in the ratio to see how efficiently a company uses its capital employed as well as its long-term financing strategies. Companies’ returns should always be high than the rate at which they are borrowing to fund the assets. If companies borrow at 10 percent and can only achieve a return of 5 percent, they are losing money.
Gross profit ratio
Gross profit ratio = Gross profit / Net sales * 100%
Gross profit ratio
2016 2017
Gross profit 2 844 2 902
Cost of sales 51 089 53 015
GP for TESCO Plc 5.6% 5.5%
Gross profit ratio we can say is on the same level than year before, we can see that percentage of 2017 which is 5.5% is only slightly lower than in 2016 which is 5.6%. The reason of this slightly difference can by higher cost of sales figures and worse results of stock management.
Net profit ratio
Net Profit Ratio = Net profit / Sales * 100%
Net profit ratio
2016 2017
Net profit 1 017 1 072
Cost of sales 51 089 53 015
GP for TESCO Plc 2.0% 2.0%
Net profit ratio we can see is on the same level than year before, we can see that the same percentage is visible for both years 2%. As we mentioned above that cost of sales is higher in 2017 because of 53 015 compares to 2016 which is 51 089. Also, net profit in 2016 is a little bit higher (1072v1017).
Liquidity Ratios
Liquidity ratio means having adequate resources to meet your debts in appropriate time. It means that our resources must be sufficiently liquid to meet liabilities. If we can’t to make payments to our creditors when proper time is coming it doesn’t look good for our company.
Current Ratio
Current Ratio = Current Assets : Current Liabilities
Current ratio
2016 2017
Current assets 14 448 15 073
Current Liabilities 17 866 19 234
CR for TESCO Plc 0.81 0.78
Our calculations of current ratio show us that in 2016 Tesco Plc could only cover 81% of their liabilities and in 2017 is even lower because only 78%. Debts of the company become insolvent, as ideal current ratio should be above the 1. Unfortunately, in our case is below 1 and I think that should be sign for the company management to solve this problem. In this case we can see that that our current ratio decreases of 3% over the year.
The Acid Test Ratio
The Acid Test Ratio = Current Assets – inventory / Current Liabilities
Acid test ratio
2016 2017
Current assets – stock 12 018 12 772
Current Liabilities 17 866 19 234
ATR for TESCO Plc 0.67 0.66
In Acid Test Ratio we can observe that the company liabilities are covered by assets in case of solvency this time inventory as stock which might be difficult to sell fast. So, as we could see above, again Tesco Plc is in dangerous position as their assets don’t fully cover the company liabilities, her we can notice slightly lower figure in 2017 because only 66% compare to 2016 which was 67%.
Efficiency Ratios
Profitability is affected by the way in which business assets are used. If our company use plant and machinery only for a few hours each day then it implies that the business is not used the assets efficiently. This may be due to insufficient demand, or purposeful limit in supply to force up the market price or it could be due to a lack of skilled labor. It is management responsibility to be sure that the company is run as efficiently as possible.
Assets Turnover
Assets Turnover = Net Sales / Total fixed Assets
Assets Turnover ratio
2016 2017
Net Sales 53 933 55 917
Total fixed Assets 29 220 30 436
ATR for TESCO Plc 1.85 1.84
This ratio measures how efficiently a business uses its assets to generate sales, so a higher ratio is always more favorable. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn’t using its assets efficiently and most likely have management or production problems. Again, Assets Turnover ratio in the same level for both years as we can see 1% of difference 1.85 for 2016 and 1.84 for 2017.
Rate of Inventory Turnover
Rate of Inventory Turnover = Cost of Sales / Average stock
Inventory Turnover ratio
2016 2017
Cost of Sales 51 089 53 015
Inventory 2 430 2 301
ITR for TESCO Plc 21.02 23.04
Inventory turnover is a measure of how efficiently a company can control their commodity, so it is important to have a high turn. This shows that the company does not overspend by buying too much inventory and wastes stock by storing non-salable inventory. It also shows that the company can effectively sell the inventory which they buy. In our case we can see company improvement of inventory management cycle by 2.02 times in accounting year. This shows to us improvement stock control and sales speed abilities.
Capital structure Ratios
Capital structure is concerned with liquidity also but from a long-term view of the business. So, they are more concerned with the strategic more than the operational level.
Debt Ratio
Debt Ratio = Total Liabilities / Total Assets
Debt ratio
2016 2017
Total Liabilities 35 288 39 268
Total Assets 43 904 45 853
DR for TESCO Plc 80% 86%
Tesco Plc. debt ratio is high and not safe but it also indicates that the company is effective because they use leverage to increase profits. In 2017 debt increased. We can notice 6% difference however, ratio is still in the high level so I will recommend decreasing leverage because if we want to compare to other supermarket let say J. Sainsbury Plc which their debt ratio for 2016 was 75% and 76% for year 2017.Because debt ratio is high Tesco Plc might be risky investment in case of economic downturn. I would suggest to the company management to observe liabilities of the company because it looks that debt ratio increased because Post-employment benefit obligations increased twice.
Interest Cover
Interest Cover = Profit before interest and tax / interest charges
Interest Cover
2016 2017
Profit before interest& tax 1 072 1 017
Interest Charges 878 874
IC for TESCO Plc Times 1.22 1.16
If the coverage measurement is above 1, it means that the company is making more than enough money to pay its interest obligations with some extra earnings left over to make the principle payments. Most creditors look for coverage to be at least 1.5 before they will make any loans. So, Tesco Plc operational profit in 2017 is 1.16 times which is not the best result. My advice is to monitor by management of the company and to prepare a plan which will improve trading condition.
Shareholder Ratio
These ratios are used to by potential shareholders to make investment decisions and also, they are very often used if we want to advice our clients on raise potentials of the companies.
Dividend Yield
There was no any dividend which was paid during this two years by Tesco Plc. The problem can be because Tesco Plc is struggling to competitors. After 2007 when was a credit crunched most supermarkets strategy was changed. The most important thing is to collect funds as reserve or use for restructuration within company. One more important thing is matching price system which is difficult because customers are more aware of the prices now and they are looking for the best prices and promotions.
Earning Per Shares
Earning P/Shares = Net Profit after tax less dividends / No. of ordinary shares in issue
Earning Per Shares
2016 2017
Net Profit after tax less dividends 1 270 -2 206
No. of ordinary shares in issue 407 409
EPS for TESCO Plc 3.10 0
There was no earning per share in 2017 proper to a loss of the company for year 2017. In 2016 earnings per share was only 3.10p. and we can see the result is really poor and potential investors will unlikely buy Tesco Plc shares if they will have based on this result.
Using financial ratio analysis has we can say that we have advantages and its disadvantages. Some of its advantages is that it simplifies financial statements, it helps compare current years’ performance with previous ones and between itself and its competitors, it also helps in identifying the company’s problems and for that solutions can be sort. It also has its disadvantages in that the information used is historic and not current, ratio analysis does not take considerations on external factors such as recession and it does not take into account the human element in the company.
