TESCO

Analysis & Evaluation of TESCO Financial Performance



Analysis & Evaluation of TESCO Financial Performance

The financial statements of a company predicts its current and future financial performance for a given time period. The statements of a firm are used internally and externally to evaluate its financial strengths and weaknesses. I will here asses the audited financial statements of Tesco plc in order to perform a financial analysis that is effective. This was possible by downloading the annual reports of Tesco for 3 years that is 2009, 2010 and 2011 from Tesco's website. I have also obtained some of the analysis and information from London Stock Exchange (LSE) website where all the listed companies submit their financial reports every year. Alone judging the financial performance of Tesco is not sufficient unless you compare it with some other company's results hence, I have also done a Sainsbury analysis in order to compare Tesco plc with it and make the financial analysis a meaningful one.

Financial Analysis

Through ratio analysis one can evaluate the strength of the companies financially. Ratio analysis is used almost by every business worldwide. Managers and owners of the firm are more interested in a two or three year ration analysis of the firm and same time has significance for share holders, investors and analyst who work outside the company. There are various types of ratios particularly, profitability, liquidity, debt, and asset ratios. Financial ratios can also give misleading results when compared one company to another. It is very hard to believe that two companies are the same even though they are competitors in the same industry or market since their business and financial profile is different to each other. Companies may have total different ratios and capital structure too. It is no way a useful analysis if a company that is equity based is compared with the one that is geared based.

It is even more complex at times to interpret whether a ratio is good or bad. A current ratio that is high may show a strong liquidity position which is good and bad as well since excessive cash is bad. Ratio analysis determines the past, present and future financial aspects of the business. Now we will look at the most important ratios that a company needs to calculate and evaluate along with the Sainsbury analysis to see Tesco's financial performance.

Liquidity Ratios

Liquidity ratios tell the firm's ability to meet its short term debt obligations from the current assets that are available with the company. It is an important ratio to any business. The higher the liquidity ratio, the safer it is that a business can cover up its short term liabilities. Given below are the liquidity ratios for Tesco plc.

Current Ratio

Year

2011

2010

2009

Tesco plc

0.66

0.73

0.77

Sainsbury

0.58

0.66

0.54

The current ratio of a firm tells whether or not it has an ability to pay off its short term liabilities. It is the measure of a company's liquidity and also called a working capital ratio. In Tesco plc's case the current ratio in the year 2011 is ...