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Tesco ratio analysis
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DescriptionTesco ratio analysis
A Brief over View:
Before we start our detailed look at the ratios for Tesco Plc, it is useful to take a quick look at what information is obvious from the financial statements. This may help us to identify issues that the ratios would not pick up. It may also highlight points that could help us in our interpretation of the ratios. Starting at the top of the balance sheet, the following can be noted:
Expansion of noncurrent asset:
These have increased by about 6.77 %( from £ 32,085 million to £ 34,258 million). Note 11 mentions purchasing of other asset, (consists of plant, equipment, fixture and motor vehicle) which may account for much of the additional investment in non current asset. We are not told when this happened, but it is quite possible that it was well into the year. This could mean that not much benefit was reflected in terms of additional sales revenue or, cost savings during 2010. Sales revenue, in fact, expanded by about 5.59 %( from £ 53,898 million to £ 56,910 million), smaller than the expansion in non current asset.
Major expansion in the elements of working capital:
Inventories increased by about 2.25%, trade receivables by about 3.74% and trade payables by about 8.97% between 2009 and 2010. These are major increases, particularly in trade receivables and payables
Reduction in the cash balance:
The cash balance fell from £3,509 million to £2,819 million, between 2009 and 2010. The bank may be putting the business under pressure to reverse this, which could raise difficulties.
Apparent debt capacity:
Comparing the non current asset with the long term borrowing implies that the business may well be able to offer security on further borrowing. This is because potential lenders usually look at the value of the assets that can be offered as security when assessing loan requests. Lenders seem particularly attracted to land and, to a lesser extent, building as security. For example, 27 February 2007, noncurrent asset had a balance sheet value of £ 34,258 million, but long term borrowing was only £ 14,681 million. Balance sheet values are not normally, of course, market values. On the other hand, land and buildings tend to have a market value higher than their balance sheet value due to inflation in property value.
Higher operating profit:
Sales revenue expanded by about 5.59% between 2009 and 2010, both cost of sales and operating expenses rose by 5.21% and 21.96%leaving both gross profit and operating profit slightly increased.
Profitability ratios measure the company's use of its assets and control of its expenses to generate an acceptable rate of return. Businesses generally exist with the primary purpose of creating wealth for their owners. Profitability ratios provide an insight to ...
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