"Tesco PLC Ratio Analysis 1 Table of ContentsTable of Contents .......................................................................................................................... 2Executive Summary ...................................................................................................................... 31: Introduction .............................................................................................................................. 41.1: Aim, Scope and Structure of the Report ......................................................................... 41.2 Company Overview ............................................................................................................ 41.2.1: Tesco History and Profile of Activities ..................................................................... 41.2.2: Tesco Similarities with its main competitors ........................................................... 51.2.3: Industry Trends .......................................................................................................... 62: Profitability Ratios ................................................................................................................... 72.1 Gross Profit Margin (%) .................................................................................................... 72.2: Operating Profit Margin Ratio ........................................................................................ 82.3: Return on Capital Employed ............................................................................................ 92.4: Return on Shareholders Fund ........................................................................................ 103: Efficiency Ratios ..................................................................................................................... 123.1: Average Inventory Turnover Period (AITP) ................................................................ 123.2: Average Settlement Period for Receivables .................................................................. 133.3: Average Settlement Period for Payables ....................................................................... 133.4: Operating Cash Cycle ..................................................................................................... 143.5: Sales revenue to Capital employed................................................................................. 153.6: Sales Revenue per Employee .......................................................................................... 163.7: Recommendations for the Management ........................................................................ 174.1: Current ratio .................................................................................................................... 194.2: Acid Test Ratio (Quick Ratio) ........................................................................................ 194.3: Gearing Ratio ................................................................................................................... 204.4: Interest Coverage Ratio .................................................................................................. 214.5: Recommendations ............................................................................................................ 225: Investment Ratios ................................................................................................................... 245.1: Dividend Payout Ratios ................................................................................................... 245.2: Dividend Cover Ratio ...................................................................................................... 245.3: Gross Dividend Yield Ratio ............................................................................................ 255.4: Price/Earning Ratio ......................................................................................................... 265.5: Recommendations for Investors ..................................................................................... 276: Cash flow Statement Analysis ............................................................................................... 296.1 Cash flow from different activities .................................................................................. 296.2: Cash Flow per Share ....................................................................................................... 337: Limitations .............................................................................................................................. 35References .................................................................................................................................... 36References .................................................................................................................................... 36Appendices ................................................................................................................................... 40Appendix 1: Ratio Analysis .................................................................................................... 40Appendix 2: Financial Statements ......................................................................................... 44Financial Statements 2012-13 .............................................................................................. 44Financial Statement 2010-11 ................................................................................................ 47Financial Statements 2009 .................................................................................................... 50 2 Executive SummaryTesco PLC is a British based multinational retail company that deals in grocery andgeneral merchandise. Tesco operates in many countries like the United Kingdom, China,Malaysia, Korea, Ireland and India. It offers various kinds of products that include food, generalmerchandise, clothing, and electrical products.In the last 5 years, the company has showed an improved performance and was able to expand itsmarket share. It has been observed that Tesco PLC faced a weaker performance in context to netoperating profit when its ratios were compared with its competitors (Sainsbury, Morrisons, andMarks & Spencer). The main motive of this report is to analyse the financial performance of Tesco PLC inthe retail industry and compare its performance with its main competitors in the same industry.3 1: Introduction1.1: Aim, Scope and Structure of the ReportThe performance of Tesco Plc is analysed in this report and Tesco PLC is a retail industrythat is compared with its competitors, which are Sainsbury Plc, M&A and MorrisonsSupermarkets PLC.The overview of the company is presented first, where the history and the profile of thecompany is described. In the next chapter, the similarities and differences between Tesco PLCand its competitors will be outlined. After this, the performance of Tesco will be analysed fromdifferent perspectives. Finally, recommendations are provided which will help the company toimprove its performance. 1.2 Company Overview1.2.1: Tesco History and Profile of ActivitiesTesco is the UK based retail store which operates in grocery sector and primarily offersfood products, electronic products and general merchandising. It is the third largest retail store interms of revenue and has diversified its products. It is working in retail banking; financialservices operate in the sector of property and help in analysing the data in terms of property. Ithas about 3146 stores in the UK and about 2131 stores in Asia with about 6612 stores in differentparts of the world. It is a type of company which works around its customers and colleagues (Abusiness for a new decade. 2011).It was founded by Jack Cohen in the year 1919, who was working in a market stall in theEast End of London. It is operating in about 12 different countries across the globe. It haslaunched first online grocery store in Central Europe and is providing a number of fresh andfrozen food products to its customers.It has also launched an Everyday Value range which has 4 its main focus on three areas, namely quality, healthier food products and improved packagingthat will help the customers to recognise the products easily (Tesco PLC, 2014). It has segmented the market area into four different categories which are Tesco Extra,Metro, Express and Superstore. The three big ambitions of the company are to create a largenumber of opportunities for the customers, improve the health of the customers by providing thebest food products and the aim at reducing the wastage of food. The essentials of the companyare that the company trades its responsibility such that the impact on environment is reduced.The local community is supported by the essentials of Tesco and is behaving as a great employer(Tesco PLC, 2014).1.2.2: Tesco Similarities with its main competitorsThe competitors of Tesco are Sainsbury Plc, M&A and Morrisons Supermarkets PLCwhich are operating in retail sector. The similarity between these stores is that these stores have asimilar business operation and these companies sell drinks, food, non-food articles and groceryproducts to the customers. All these companies provide the food particles and focus manly on thequality of the food particle, maintain the food such that the wastage of the food material can bemaintained and fresh food products are provided to the customers so that the health of thecustomers can be preserved. All these retail stores work by keeping in mind the impact of itsactivities on the environment. They have developed a multi-channel to provide the products andreach easily to the customers (Tesco, 2014, M&S, 2014, Morrisons, 2014 and Sainsbury, 2014).The dissimilarity between these stores can be analysed in terms of number of storesoperating in the UK shown below: ? Tesco- 1507 stores in the UK (Annual Report and Financial Statements, 2013) ? M&A- 766 stores in the UK (Annual Report and Financial Statements,2013) 5 ? Sainsbury- 1106 stores in the UK (Annual Report and Financial Statements, 2013)? Morrisons- 569 stores in the UK (Morrisons, 2014). 1.2.3: Industry TrendsMarket ShareThe UK retail sector employs about 10% of the UK workforce and consistently accountsfor more than five percent of the value generated by the UK economy each year. The UK retailmarket is dominated by five large retailers that account for about 75% of the total food and drinkmarket. 6 2: Profitability Ratios2.1 Gross Profit Margin (%)Gross Profit Ratio 16.00% 14.00% 12.00% Tesco PLC 10.00% Sainsbury 8.00% M & S 6.00% Morrisons 4.00% 2.00% 0.00% 2009 2010 2011 2012 2013 Gross profit RatioYear2009 2010 2011 2012 2013Tesco PLC 7.81% 8.14% 8.29% 8.62% 6.30%Sainsbury 5.07% 6.46% 6.07% 5.84% 5.86%M & S 13.31% 13.73% 13.65% 13.36% 12.28%Morrisons 6.60% 7.24% 7.43% 7.44% 7.37%(Source: Ratio’s calculations and the respective company’s annual reports 2009-2013)Gross profit margin calculates the amount of gross profit earned on the amount of totalsales. It reflects the difference between the total sales revenue to cost of sales. It is the bestindicator of profitability as it shows the profits earned on the amount of total expenses incurred.Tesco PLC shows a weaker performance as compared to Marks and Spencer.7 On looking at figures of gross profit and cost of sales separately, it can be concluded thatboth the amounts have increased in the last five years. Gross profit has increased at a higher rateas compared to cost of sales. 2.2: Operating Profit Margin RatioOpearting Profit Margin 12.00% 10.00% 8.00% Tesco PLC Sainsbury 6.00% M & S 4.00% Morrisons 2.00% 0.00% 2009 2010 2011 2012 2013 Operating Profit Margin RatioYear2009 2010 2011 2012 2013Tesco PLC 4.66% 5.03% 4.98% 4.87% 3.37%Sainsbury 3.14% 2.99% 3.39% 3.46% 3.39%M & S 8.64% 9.19% 9.53% 8.79% 6.98%Morrisons 4.65% 5.17% 5.47% 5.56% 5.29%(Source: Ratio’s calculations and the respective company’s annual reports 2009-2013)Operating profit margin ratio indicates the relation of operating profit to sales revenue.This ratio is regarded as the most important measure of profitability as it measures thecompany’s operational performance.8 When the operating profit ratio of Tesco PLC is compared to its competitors, it is foundthat Tesco PLC has low operating profit margin. This ratio was decreased by 1.50 % in the year2013 when it was compared with the ratio in the year 2012. It is due to decrease in administrativeexpenses and increase in sales revenue from the previous year (Sagner, 2010).2.3: Return on Capital EmployedReturn on Capital Employed 20.00% 18.00% 16.00% 14.00% Tesco PLC 12.00% Sainsbury 10.00% M & S 8.00% Morrisons 6.00% 4.00% 2.00% 0.00% 2009 2010 2011 2012 2013 Return on Capital EmployedYear2009 2010 2011 2012 2013Tesco PLC 11.13% 13.06% 14.42% 14.98% 11.80%Sainsbury 7.83% 10.21% 10.01% 9.23% 9.15%M & S 15.21% 17.24% 19.01% 18.72% 14.43%Morrisons 11.24% 11.83% 13.23% 13.44% 12.11%(Source: Ratio’s calculations and the respective company’s annual reports 2009-2013) 9 The return on capital employed reflects the earnings of the firm earned on the capitalinvested in the assets of the firm. The return on capital employed shows the percentage of returna company earns from its assets. It can be calculated through dividing the net income by averagetotal assets. While comparing ROCE of Tesco PLC with its competitors, it was found that it hasmaintained a higher profitability as compared to other major players in the industry. There is asignificant increase in the return on capital employed by Tesco from 14.98% in 2012 to 15.51%in 2013. However, it can be concluded that competitors of Tesco PLC were able to use theirfunds more efficiently in order to generate more revenue (Fridson and Alvarez, 2011). 2.4: Return on Shareholders FundReturn on Shareholders Fund 25.00% 20.00% Tesco PLC 15.00% Sainsbury M & S 10.00% Morrisons 5.00% 0.00% 2009 2010 2011 2012 201310 "