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Financial Analysis Of Tesco Assignment Sample

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Financial Analysis Of Tesco Assignment Sample


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Tesco is a huge retail organisation and supermarket in the United Kingdom which was established by J Cohen in 1919. The business came under the spotlight when Cohen started trading his own groceries in the retail market from one of his stores located in the East area of London. After the very beginning, Cohen received huge responses from individuals in the market and therefore in the year 1932. In 1947, Tesco entered into the London Stock Exchange with a usual price of 25p which was another milestone for the organisation. Throughout the year, Tesco grew continuously and became one of the largest industries in the retail market of the nation.
The company has established on its own in the nation and therefore it expanded their business in the part of Europe with the means of both inorganic and organic substance expansion in various regions. Ireland’s Quinsworth was taken over by Tesco Plc in 2016 and due to which the organisation was able to grow in the Irish market related to food and commodities. The current number of workers of Tesco Plc exceeds 450000 and it runs across 10 nations around the globe. The reason behind Tesco’s success is that the firm is capable enough to monitor its overall resources which is a key tool to manage and enhance the ongoing business in the market. The organisation additionally needs to zero in on their dispersion as well as store and network the board. This amazing deal of work has been springing up to produce a worthy discernment. It likewise assists with lessening the cost of principal items to build their deals.
According to a yearly report the yearly revenue generated by Tesco in the year 2021 is around £ 53 billion and it has increased as compared to the previous year's turnover by the organisation. Currently the price for each share of Tesco Plc is around £ 291 while on the other hand its competitors like J Sainsbury Plc and Morrisons have the share price of £ 270 and £ 286 respectively. The objective of this report is to provide a detailed review of Tesco Plc which will be beneficial enough for the potential investors to keep in mind before investing in this organisation. In the report a financial analysis of Tesco Plc will be discussed in order to evaluate the company's performance in recent years. The strategic analysis of the organisation will also be a part of this report and additionally an analysis of Tesco’s competitors will be discussed. The report will also conclude with a recommendation of investment for the potential investors of Tesco Plc.

Financial analysis of both the companies

The financial analysis of the firm is going to proceed as per the viewpoint of a potential investor of the organisation. This analysis will cover 5 essential areas which influence the business and performance of Tesco Plc along with its competitor, J Sainsbury. One of the direct competitors of Tesco PLC is Sainsbury PLC which stands at third position as a food-based organisation in the UK. In the year 1995, Sainsbury PLC was overtaken by disco and became the leader in the food retail market when the company achieved 20 years of success in fast growing. The number of workers of Sainsbury is around 1,45,000and the company is known for trading various items of food in the market (Jangid et al. 2018). The supermarket of Sainsbury is known for serving around 11 million consumers per week and it has more than 460 stores in the UK.

Profitability ratios

In terms of profitability, Tesco Plc has performed effectively in recent years where the gross margin of the firm for the year 2019 has been determined as 6.48. The next year the margin of Tesco’s gross profit expanded and was valued at 7.07. The margin of gross profit generated by Tesco in the year 2019 and 2020 is ideal and the company has performed well. However, in the year 2021 the value of gross margin of the firm is again increased and becomes 7.51 which shows that Tesco Plc has effectively performed more attractive than previous two year (Zhao, 2021). On the other hand, the gross margin generated by Sainsbury PLC was 6.92 in the year 2019 which expanded in the year 2020 and becomes 6.95. However, because of viral epidemic the gross earning of J Sainsbury is decreased in the year 2021 and valued as 6.08. As the ratio of Tesco’s gross profit is increased in the year 2021, it is considered ideal for the company in a viral epidemic situation. As per the net margin of the company's profit it has been analysed that Tesco has not generated effective net profit in the recent year where the margin of profit in the year 2019 has been valued as 2.07. The profit margin generated by the organisation in 2020 is reduced to 1.44. However, the net margin again fallen in the year 2021 and became 1.24 (Ren, 2021). The margin of Sainsbury’s net profit is not very attractive and in the year 2019 the ratio of its net profit has been determined as 0.75. this margin of Sainsbury net profit is valued as 0.52 in the year 2020 and -0.96 in the year 2021. This shows that the profit-making ability of J Sainsbury not much stable where because of a net loss in the year 2021 the net earning and financial position of the company impacted. Therefore, after analysing the profitability of Tesco plc it can be said that the gross margin of the company has been attractive to the investors while the net margin of it is very low in 2019 and 2020 but it increased in 2021 which could be a reason to invest in the company (Joy, 2021). Therefore, it has been determined that even in terms of profitability Tesco PLC is more attractive for the potential investors to invest in which has a higher Profit margin as compared to its direct competitor Sainsbury Plc.

Liquidity ratios

The liquidity of an organisation shows how it is capable to meet and fulfil the daily activities and exercise in the business for a short time period. In order to determine the liquidity of Tesco Plc, current and quick ratios of the firm have been evaluated in the recent year. The current ratio generated by Tesco Plc in the year 2019 was 0.61 which is not very attractive while in the next a growth has been experienced by Tesco Plc when its ratio increased to 0.73. This ratio shows that every 0.73 volume of current assets of Tesco is equivalent to every 1 current liabilities of the organisation. Again, in the year 2021, the value of Tesco’s current ratio shifted and decreased to 0.68. In the year 2019 the current ratio of J Sainsbury PLC is generated as 0.66. In 2020, The current ratio generated by J Sainsbury PLC was 0.63 which shows that the ratio has been increased for Tesco PLC on this same ratio generated by sensory PLC is decreased. Again, in the year 2021, J Sainsbury PLC has experienced the ratio as 0.60. The quick ratio created by Tesco Plc in the year 2019 was 0.49 which isn't exceptionally appealing while in the following year of 2020 a development was enabled by Tesco Plc when its quick ratio was expanded to 0.60 (Kar et al. 2021). This proportion shows that each 0.60 volume of total inventory along with current assets of Tesco is comparable to each 1 current liabilities of the association. Again, in the year 2021, the value of Tesco's present quick ratio moved and diminished to 0.55. The quick ratio of Sainsbury PLC has been determined as 0.49 and 0.47 in the year 2020 and 2021 respectively. As per the above analysis of Tesco’s liquidity it has been analysed that the performance of the organisation is average in the recent year in order to enhance it the company is required to increase the resources and current assets into the business to meet day-to-day activities of it. In the last three years the liquidity of both the organizations has not been very effective (Woohyoung et al. 2020). Therefore, it has been analysed that the liquidity of Tesco PLC is more stable than Sainsbury PLC in the last three years it shows that in order to meet the daily requirements and day to day activities of the business, Tesco PLC is more effective for the investors.

Efficiency ratios

In terms of efficiency, the turnover ratio of assets of Tesco Plc is determined as 22.84 in the year 2019 while in the next year the ratio has become 24.73. Again in 2021, the value of inventory turnover ratio expanded and became 25.88. In the last 3 years, the capability of Tesco plc of generating inventory for its every 1 sale has been effective and it is potentially a good choice for the investors to put their investment in this retail organisations for successive growth (Sangwa, 2021). The ability of Tesco plc to create resources for all its 1s deals is compelling and it is possibly a decent decision for the financial backers to place their interest in retail association for progressive development. The outstanding days sales of Tesco is 9 days while the inventory days of 15 with 56 days of payable period which shows that the organisation has negative value of cash in the conversion cycle. Basically, it means that the debtors of Tesco plc are paying to the organisation in a fast way when it is compared to the payment made by the organisation to its creditors. The efficiency of both the association is exceptionally alluring however over the most recent three years the presentation of Tesco was superior to Sainsbury as far as proficiency and accordingly it is more appealing for the financial backer to contribute when contrasted with its rival. Comparing the efficiency of both the organisations, the turnover proportion of inventory of Sainsbury was 14.00. While in the following year the ratio has become 15.58 for Sainsbury. Again in 2021, the value of inventory turnover proportion for Sainsbury became 16.79 which this time increased in case of Sainsbury. Therefore, it can be said that the efficiency of both the organisation is very attractive but in the last three years the performance of Tesco was better than Sainsbury in terms of efficiency and therefore it is more attractive for the investor to invest as compared to its competitor (Jangid et al. 2018). Consequently, it has been investigated that the efficiency of Tesco PLC is steadier than Sainsbury PLC over the most recent three years it shows that to meet the day-by-day necessities and everyday exercises of the business, Tesco PLC is more viable for the financial backers.

Gearing ratios

The gearing ratio enables and shows the total debt and leverage the organisation currently has and also the gearing capability of it to cover the debt and finish it in time. the association is profoundly equipped and isn't really great for speculation. Over the most recent long term, this proportion connected with the general obligation of the organisation is exceptionally low which shows that the capacity of getting the obligations free from Tesco plc is alluring and could be an expected motivation to contribute for the financial backers. In the year 2019, Tesco plc has experienced a debt equity ratio of 0.49 which is called an ideal. Again, in the year 2020, the ratio related to debt of the company is increased and valued at 1.29 which means to clear off the debt the company has not been as attractive as the previous year (Fadeyi, 2020). In 2021, the debt equity ratio of Tesco Plc again determined as 1.27 where the company has not experienced any such major changes as compared to the prior year. A ratio above 2 is called to be very high, which means that the organisation is highly geared and is not good for the investment. In the last three year this ratio related to the overall debt of the company is not very high which shows that the capability of clearing the debts from it of Tesco plc is attractive and could be a potential reason to invest for the investors. In terms of leverage the debt ratio of Sainsbury PLC for the year 2019 has been determined as 0.24. In the year 2020 the debt ratio of Sainsbury PLC is determined as 0.92 (Singh et al. 2021). In 2021 Sainsbury experienced the debt equity of 1.04. Therefore, it has been analysed that in the year 2019-2021, Sainsbury PLC has lower debt on it as compared to the Tesco PLC and its capability to deal with its debt issues is much attractive. Also, the ratio of debt to asset has been calculated of both the organisations where the ratio for the year 2019 has been experienced as 0.15 by Tesco Plc and 0.09 by Sainsbury. For the year 2020, the ratio of debt to assets has been generated as 0.33 by Tesco and 0.26 by Sainsbury. Again, the ratio of both is increased in the year 2021 and becomes 0.34 and 0.27 respectively. As it has been noticed that the ratio of Sainsbury is lower and attractive which shows higher assets availability s compared to Tesco Plc.

Investment ratios

In order to determine whether the companies are good choice for investment, ratio of return on investment has been calculated of both the organisations. Tesco Plc has been generated investment return ratio of 6.01 for the year 2019. In the next year i.e., in 2020, this ratio has decreased and becomes 4.49 for Tesco Plc. Subsequently the ratio of return on investment again decreased in the year 2021 for Tesco Plc and becomes 3.66 in the year 2021. J Sainsbury Plc has been created investment return proportion of 0.02 for the year 2019. In the following year i.e., in 2020, this ratio has remained constant as 0.02 for J Sainsbury Plc (Muli, 2019). However, the proportion of investment return again diminished in the year 2021 for J Sainsbury Plc and shows a negative ratio of -0.04. Therefore, from the above analysis it is clear that in terms of investment, Tesco is much more attractive as compared to J Sainsbury Plc which provided a higher return on its investment in the last 3 years. While on the other hand, J Sainsbury Plc is not very effective and attractive for investment where the company has provided very less return on its investment in the last three year and for the investors it will not be beneficial for investment.

Limitations of the analysis

There are various objectives of ratio analysis which enables the organisation to look their financial areas and enhance their performance to bring some changes as improvement. But there are also some limitations of this analysis which are going to be discussed in this part.

  • This analysis is made by utilising the costs and activities of past and therefore some major areas such as decrease or increase of prices because of inflation are ignored which is a major limitation of this analysis (Woohyoung et al. 2020).
  • One another limitations of this analysis is that the ratios of accounting mainly focus on the quantitative and money related areas of the organisations and due to which the qualitative areas of the organisation are being ignored.
  • Also, the financial ratios just show the position of the organisation and it does not provide complete solution to tackle with such problems.
  • This analysis is made by using the expenses and exercises of past and hence a few significant regions, for example, decline or increment of costs on account of expansion are disregarded which is a significant constraint of this ratio analysis (Joy, 2021).

In this analysis of ratios for both the companies some essential areas of information have been not carried out such as EPS, ratio of PE and dividend, and this impacted the investment report. The investment report is somehow not fully complete without taking the considerations of such essential ratios and information’s which enables the investors to make decision of investing. Some more data with respect to the speculation of both these organizations ought to have been made to push the investors to think fundamentally that which organization will be the most ideal choice for contributing (Singh et al. 2021). Each other limits of this examination is that the proportions of bookkeeping chiefly centre around the quantitative and cash related region of the associations and because of which the subjective region of the association are being overlooked. Some more information regarding the investment of both these companies should have been made in order to push the shareholders to think critically that which company will be the best option for investing.

Investment recommendation and conclusion

In the pandemic, Tesco's market has increased. 3 percent trading in sales has been increasing in the lockdown. In the last six months the trading has been increasing unexpectedly. Group sales without fuel have risen 3 percent to £27.3B. That can be ignored to generate an effect on the exchange rate. During the pandemic, sales volume also rose upwards. Therefore, the company’s operating profit also rose. The profit is 41 percent to £1.5B. One also can check their full year retail operating profit. It also helps to guide one to know the upgraded version. Therefore, it also can be expected the outcome will be between £2.5B to £2.6B (Tang, 2018). A buyback share also has been announced that will be worth £500M. There retail sales also increased upto 8 percent during the pre-covid situation (Foabeh and Achaleke, 2020). Tesco also needs to focus on their market demand that also is increasing over the past years. Therefore, a digital demand also arises to accelerate the sales in a pandemic. The company has been fulfilling 1.3M orders during the pandemic each week all over the United Kingdom. There are various kinds of things that need to be aware of. If a person wants an extra product, then service charge will be extra. Through their websites the company generates profits. One also can check the company’s half year performance that can be driven through the United Kingdom and Republic of Ireland. There also sales rose 2.4 percent to £25.0B (Rosnizam et al. 2020). It also helps to get non-currency pension free contributions that also help to associate with the Asians. Therefore, the net debt also can be included. It also can be added as a retail free cash flow. The lease obligations can be reduced to £10.2B from £12B. The company also has 700,000 happy customers since the covid starting period. Tesco also makes sure that more happy customers are counting. The company’s online market has increased to 14.6 percent within the total UK sales (Volkov, 2020). The company also needs to make more trendy products to maintain stability in the market. Therefore, investing in Tesco is very beneficial for the investor which can give them attractive returns in the upcoming years. Additionally, it can be said that the financial situation of Tesco is much more stable than thanks very and it can provide massive returns for the investors of the company.

Reference List

Adamyk, K., 2019. PESTLE Analysis on Tesco PLC.
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Awadari, A.C. and Kanwal, S., 2019. Employee participation in organizational change: A case of Tesco PLC. International Journal of Financial, Accounting, and Management, 1(2), pp.91-99.
Fadeyi, A.P., 2020. An Analysis on the Application of Motivational Theories at Workplace and the Impact on Employee Engagement: A Study of Tesco Ireland (Doctoral dissertation, Dublin, National College of Ireland).
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Jangid, H., Singhal, S., Shah, R.R. and Zimmermann, R., 2018, April. Aspect-based financial sentiment analysis using deep learning. In Companion Proceedings of the The Web Conference 2018 (pp. 1961-1966).
Joy, J., Implication of the cyber threats and its issues in the business process organization; A case study of Tesco.
Kar, S.K., Bansal, R. and Mishra, S., 2021. Tesco: Entry and Expansion Strategy in India. Emerging Economies Cases Journal, 3(2), pp.65-76.
Kopun, D., 2020. Application of Data Mining Techniques in the Detection of Financial Statement Fraud. Journal of Accounting and Management, 10(2), pp.97-114.
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Ren, J., 2021, December. The Research of Tesco’s Current Investment Portfolio and Some Recommendations. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 1461-1465). Atlantis Press.
Rosnizam, M.R.A.B., Kee, D.M.H., Akhir, M.E.H.B.M., Shahqira, M., Yusoff, M.A.H.B.M., Budiman, R.S. and Alajmi, A.M., 2020. Market opportunities and challenges: A case study of Tesco. Journal of the Community Development in Asia (JCDA), 3(2), pp.18-27.
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Singh, P., Ranjith, P.V., Fathihah, N., Kee, D.M.H., Nuralina, N., Nurdiyanah, N. and Nursyahirah, N., 2021. Service Quality Dimension and Customers' Satisfaction: An Empirical Study of Tesco Hypermarket in Malaysia. International Journal of Applied Business and International Management (IJABIM), 6(3), pp.102-114.
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