Financial Statement Analysis – Tesco

Tesco, one of the giant retailers in the UK has 2291 stores around the world and employs 296,000 people. Tesco plc group sales excluding VAT increased by 11. 3% to 26337m. Therefore, it may seem Tesco performance was good but we will discuss in this report in details about Tesco’s profitability over the last 5 years by benchmarking it against its one of major competitors Sainsbury plc, net asset value ( NAV ) per share for 2003 by explaining why it is different to the market price of the shares and usefulness of performance graph. Profitability ratios satisfy the users of accounts by letting know how much profit a business has made comparing with previous periods. We will discuss Tesco’s profitability by using profitability ratios ( See Appendix 1 for Tesco and 2 for Sainsbury ).

Return On Capital Employed ( ROCE )

ROCE is a fundamental measure of business performance and it is the most important for measuring profitability. Higher ROCE means that management could utilize total assets efficiently to generate profit. ROCE of Tesco has been decreasing from 1999 to 2003 which is 16. 57%, 16. 17%, 16. 06%, 15. 48% and 13.85%. It means Tesco’s performance may not be effective. Although PBIT has been increasing from 1999 to 2003 that is 932m, 1032m, 1179m because capital employed has been increasing from 1999 to 2003, that is 5624m, 6382m, 7343m, 8747m and 11129m. But we will further discuss why ROCE decreased by analyzing net and gross profit margin and net asset turnover because it shapes ROCE ( ROCE = Net Profit Margin * Asset Turnover ).

Gross Profit Margin ( GPM )

Net Profit Margin ( NPM )

Asset Turnover

Capital Employed of Tesco was also higher than Sainsbury. Therefore we can say that Tesco can make a profit more than Sainsbury but Tesco should be careful dealings with making much investment. Because in the future, if Tesco’s ROCE has been decreasing, it can get the liquidity problem. Tesco’s Net Profit Margin and sales were also higher than those of Sainsbury. Only the Net Profit Margin of Sainsbury was 0. 27% higher than Tesco in 1999. Therefore, we can say Tesco could generate sales more effectively by managing inventory cost, cost of goods sold, overall wages, and expenses.

Tesco’s Net Asset

Turnover was also higher than those of Sainsbury from 1999 to 2001. Both generated the same asset turnover in 2002, which was 2. 70 times but in 2003 Sainsbury was higher 0. 03 times than Tesco because Tesco’s capital employed significantly increased from 8747m ( 2002 ) to 11129m ( 2003 ) by making more investments. Therefore, overall Tesco’s performance was good by comparing with Sainsbury but Tesco should control its expanding programs carefully not to impact long term profitability.