FINANCE

Financial Analysis

Financial Analysis

Introduction

This paper analyses the financial aspects of the firm to gain understanding of its long term stability. For this purpose, the chosen company is Tesco PLC, whose in depth ratio analysis is conducted. However, to have better insight of company's financial performance, a ratio comparison shall be made with the competitor from the same industry, named Sainsbury.

Discussion

Tesco Plc Overview

TESCO is termed as world's third largest retail grocery store after Wal-Mart of United States and Carrefour of France. In UK alone it has managed to open 5,380 stores and many more in three other continents under the new names. Those continents are Asia, Europe and North America. Tesco has been able to diversify its portfolio in order to gain advantage of various other business industries.

Ratio Analysis of Tesco Plc

Liquidity Ratios

2010

2011

2012

Current Ratio

0.73

0.68

0.67

Quick Ratio

0.18

0.14

0.12

Payable in days

34.31

35.84

36.18

Ratio analysis is conducted of Tesco Plc for gaining financial insight of the company. Past 3 years performance is analyzed, from year 2010 till 2012. The liquidity ratios of the company tell that to what extent company has the near cash available to pay off its current obligations. The current ratio of Tesco Plc shows a decreasing trend, where decreased from .73 to 0.67. However, it is not favorable for the company, since it cannot pay off its liabilities even once in a year from its current assets. Further, Quick ratio is a much rigorous measure of liquidity, where inventory is subtracted from the current assets to get a much clear picture of cash availability in the company. The quick ratio has been dropping too low from past 3 years, from 0.18 to 0.12. This reflects that Tesco Plc does not have cash in hand to pay off the current liabilities on immediate notice. The company is not able to manage its current assets and current liabilities in an efficient manner.

We can see the inclining trend of the payable in days, which is favorable for the company. The later company pays its obligations, the more liquidity it shall have in the company. Payable days have been increased from 34 days to 36 days. Further, the illustration given below clearly shows that current ratio and quick ratio have been too poor of Tesco Plc.

Efficiency Ratios

2010

2011

2012

Receivable Turnover

36.7

36.47

31.92

Inventory Turnover

19.3

18.97

17.54

Total asset Turnover

1.24

1.31

1.32

Receivable turnover shows that how many times company receives it collection from its customers in a given financial year. The receivable turnover has improved in the past 3 years, from 36 days to 32 days approximately. However, the company should neither have a lenient credit policy nor a very strict credit policy. A lenient credit policy may lead the company to lose its liquidity over time, while a strict credit policy may lead the company to lose its customers.

Further, inventory turnover shows that how many times inventory has been sold and replenished. Higher the number means better the performance, since higher ratio would mean that sales of the company have become too robust. However, the inventory turnover of Tesco has decreased ...