Financial Accounting Assignment
The overall studies were conducted to analyze the financial performance of Tesco limited which help in better understanding the use of financial ratios in analyzing financial statements for the company. Financial ratios are calculated on the financial Data of the company and certain recommendations are provided for the betterment of the company. Tesco limited is taken as an example for understanding a practical perspective of a business and financial ratio interpretation in respective of a practical business company.
Financial Analysis of Company
Profitability ratios– The profitability ratio is a key financial ratio that helps the management of stakeholders to identify the financial performance of the company for theirs. Profitability ratios are considered as most attractive financial ratios for stakeholders and investors for their purposes (Tesco Limited, 2021). This ratio provides details which can be the reason for taking decisions of investment in the company or non-investment in the company. The financial ratio helps to analyze the balance sheet and profit and loss but the profitability ratio provides a better assessment of the profit generation capability is of the company.
As for the financial analysis conducted on Financial data of the company in which margin profit on sale and return on capital employed is calculated. These two ratios reflect that company had declined in the returns which the provided on capital employed and margin profit is stable on sales in the last three years which indicates that the company can generate adequate and stable profit but they are not providing sufficient profit to their stakeholders or investors as the return on capital employed (Tesco Limited, 2021). Here in the graph in 2018 margin sale is 40% which is undergoing 2020 and right now it is 35% of the sales which is 5% less than the last two years. Margin profit on the sale of flats 4% stable profitability from last year although it had it increased 1% from 2018 to 2020.
Liquidity Ratios – Liquidity ratio the ratio b is used to identify the cash and cash equivalents capabilities of the company to settle off their quick liabilities in their routine business operations. Liquidity ratio for used for better assessment for the working capital management and the capabilities of management to settle down the urgent requirement to get cash and cash equivalents reserve for their business activities (Corporate Finance Institute 2020). This ratio provides a better assessment of the investor for the liquidity status of the company throughout the year are also provides butter evolution of their capability is and the assets which they can liquidate on an emergency basis.
As for the financial analysis conducted liquidity ratios are represented in a graphically Representation which indicates that the company is Better at providing their quick ratios as compared to the last 2 years but they are not appropriate to settle out overall quick liabilities of the company. The analysis conducted on the financial statement of Tesco limited reflects that the company can pay 60% of their current liabilities to quick assets and when it comes to the current ratio than 73% of current liability can be settled down through current assets for 2020 which is lower than the standard ratios of industry (Abdelsalam, A., &Nobanee, H, 2020). Here investor needs to think about the capability of the company to cope up with liquidity crisis in near future as a company reflect growth through from last three years that indicates the company is more focusing on recovering their current ratio and quick ratios in near future.
Efficiency Ratio – Investor and stakeholders used efficiency ratio for better assessment of the effectiveness of their operational and business strategies and efficiency in their production lines for better performance of the company in the market or the industry so that they can provide sustainable goals and achieve adequate market shares. Efficiency ratio analysis financial data related to operation activities provide a better assessment of their production efficiency and operational excellence for the year (Soboleva et. Al., 2018). Further, the efficiency ratio helps management in identified the key variants factor so that management can prepared rectified strategies and overcome gradients to achieve sustainable goals for the company. As per the perspective of investors look out the efficiency ratio for the stability of the company to produce products and better operational activities which can help them to achieve profit maximization goals for the company as well as for the stakeholders.
As per the graphical representation stock turnover is 15 days through the last three years which indicates that the company or management of Tesco limited rotate their invented in 15 days which drivers the company to operates cycles of twenty-four numbers for their inventory rotation. When it comes to debtors turnover periods which indicates the number of rotations of credit sales on net sales for the year the company (Haralayya, B., 2021). Tesco limited reflects that company had 10 days rotation of the debtor turnover period in 2018 which increased up to 50 days in 2019 and again in 2022 it is on the lower lowest turnover in days which is 9 days to take a debtors turnover cycle for the year.
Gearing Ratios – The gearing ratio indicates the overall gearing of debts our profit for the year. This ratio indicates the overall financial cost which company to bear on profitability for the company (Tran et. Al., 2017). The gearing ratio is usually used by an investor to identify the cover of secured or unsecured loans which helps management in better assessment of their finance cost for the company.
As per the analysis conducted on gearing ratio which indicates that the company had improved their gearing ratio from 2018. In 2018 gearing ratio is 3.6 to which became 2.59 in 2020. When it comes to interest coverage ratio in 2018 interest coverage ratio is 5.86, in 2019 it is 3.94 and in 2020 it is 3.76 which means the company regularly overcomes their finance cost so that the world can be reduced on the net margin of the company. Further, this reflects company is having lower abs in 2020 as compared to 2018 which indicates the company is more engaged in repayment software labs and loans were the year that increased the potential for investors or shares trading options. Prospective of investors this can be a good sign to overcome gaining ratio and interest coverage ratio from last 2 years for the company.
Investor Ratios -Investor issues are the most attractive ratios for the prospective investor or the person who invested in the shares of the company. Tesco limited have a global presence which makes company already a brand in their way but investor ratios help the company to build up their image or brand in the mind of the investor to their investment issues which reflects the net earnings for the year which shareholder received from the company. It is Provides an overall assessment of notional returns which can be achieved if the investor invests department in the company in near future. Majorly investor decides based on investor ratios for the company.
Earnings per share is a financial ratio that reflects the running of shareholders for or each share hold in the company. This ratio majorly impacts the financial decision of stakeholders for investors to invest their funds in the shares of the company. As per the analysis, Tesco limited provides a return of 14.72 % on each shareholding in 2018 which decreases in 2019 up to 13.13 %. In current year company providing a return of 9.99 % to their shareholders which is by far the lowest return provided by the company in last 3 years. Financial information of Tesco limited reflex company continuously declines and they are earning per share ratio which indicates that the company is not able to pay high returns to the shareholders which is a major drawback as per the perspective of investors.
Recommendationon the financial performance of the company
Here are some of the conditions are suggested based on the analysis conducted for the financial statement of Tesco limited. This recommendation is based on the analysis conducted in which other factors are not considered for Tesco Limited.
- Profitability ratio management should focus on the return on capital employed so that they can provide better returns to the capital invested in the company. The company earning an equal return and last three years but they are not providing returns to the capital employed same as per last three years
- As per the liquidity ratio company should focus on increase their current assets for quick assets so that they can set off their current liabilities. As of now, the company is struggling settlement of the current liabilities so that they need to rethink and planned positive strategies to overcome current obligations and expanded their current assets for better working capital management.
- As per the gearing ratio analysis company should be focused on adopt more financial resources like debentures and other secured loans so that they can Acquire additional funds for their business activities.
- As per the analysis conducted on stock turnover ratio and debtors turnover periods, the company should rethink credit policies so that they can increase the debtor turnover ratio and generate more sales from the business activities.
- Tesco limited continues straight decline in their EPS which demotivated investor for investment funds in the company so management needs to rethink on their Earning Distribution strategies and also then it to focus on wealth maximization instead of profit maximization so that IT company can attract a potential investor for their shares in the market.
The overall assignment is conducted to analyze the finished performance of Tesco limited which is evaluated and analyzed by financial ratio analysis. The study financial ratios are interpreted on five different perspectives which evaluate various factors of the company which investors lookout for investing their funds in the company. In the end, overall recommendations are provided based on insulation analysis on the financial data of Tesco limited.
- Tesco Limited, 2021, Annual Reports – 2020, [Online]. Tesco Limited. Available at: https://www.annualreports.com/Company/tesco-plc[ Accessed on 25.08.2021]
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- Abdelsalam, A., & Nobanee, H, 2020, Financial Statement Analysis of Google, Available at SSRN 3647444.
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