Fundamentals of Accounting II
Tesco’s Financial Statement
Tesco is a company that provides an expensive range of quality products in the grocery shopping, electronics, and clothing industry. It is one of the largest retailers in UK with 31% of market share with turnover of £51.8bn, employing 440000 staff, and establishing operation in 13countries. This analysis uses financial ratio to determine the strength of the company from 2004 to 2008. Tesco has many advantages that contribute to its success. Since it was founded, Tesco has managed to sustain favorable economic growth and achieved excellent financial performance and is predicated to do the same or better both locally and internationally.
Companies that pay a hugepremium for a brand realize that the investment is not worth it in the long run; therefore it is in the advantage of the company to develop their brand and tailor the product according to their customer’s need. Tesco has created their brand, which are cheaper and of good quality. The company’s clothing line and online store are hugely popular with consumers because it is cheaper than UK’s high-endstore. The real success has been Tesco’s brands led by Cherokee, and Florence & Fred. They're now amongst the fastest growing fashion brands in UK.
Ratio analysis brings two figures together and then expressing one as a percentage of another; for example sale, is of no use without comparing it to another figure in order to put them into perspective. Ratio analysis shows correctresults only if the accounting data provided is accurate. Investors look at ratio analysis to decide if the business is improving compared to last year and it also shows the performance of a business compared to another in the same industry. Ratio analysis helps management and shareholders of Tesco to analyze the past result and to plan for future
Profitabilityratios measure the ability for the company to generate earnings given a period of time. It shows the performance of the company to obtain profit margin from sale and from capital employed. Investors also see this ratio to measure how profitable Tesco is.
This indicates the company’s ability to meet its short-term expenses. The potential investor of Tesco analyses its ability topay short-term debts. This ratio measures financial health of a company. The investors are not only concerned about the profit, but they are also concerned with its working capital. If the working capital of Tesco is very low then the investor will not invest in the company. If the business is not very liquid, this will result in the inability to pay its debt. If Tesco ties up large amount ofmoney in working capital, the investors may switch their investment to another company, which manages working capital more efficiently. Cash acts as lifeblood of every business no matter the nature or size of business.
The current ratio measures the company’s ability to pay its short-term debt. This ratio is also known as working capital ratio. In 2004 the Current Ratio of Tescowas 0.56:1, which slightly improved in 2005 and became 0.567:1 and in 2006 it was 0.521:1, improved 2007 and improved further in 2008 and became 0.631:1. This ratio is low for Tesco. This shows that Tesco cannot cover its short term liabilities with current ratio. A current ratio of 1.5:1 to 2.0:1 is considered being reasonable, above 2:1 is not consider to be satisfactory because so much capitalis tied up in stock, debtors and so much money is present in the bank. Tesco needs to improve this ratio because all sales are cash and there are no debtors. The current ratio for Tesco’s main competition (Sainsbury) in 2007 was 0.73:1, which was reduced to 0.618:1 in 2008.This ratio is low but slightly better than Tesco. The shareholder judges from this ratio that the liquidity position of...