Introduction
Tesco PLC is an international retailer of general goods and services. It was founded in Britain in 1924 and has become one of the most famous retailers since then (Tesco PLC, no date b). The company leads its business both in online and offline retailing through different stores located both in the UK and all around the world. It is the first and the most fast-growing retailer in Britain and third in the world in general (Tesco PLC, no date a). The company manages 2700 stores that provide people with groceries and other goods.
The Sources of Finance
The leading source of finance for Tesco is retained income. The company invests a certain percentage of its yearly earnings to further development and expansion. The sum of the reinvestment changes every year and depends on the amount of income the company gets for a particular period (Statista, 2021). COVID-19 has significantly influenced the financial performance of the company since Tesco’s share prices are decreasing and currently constitute 289.25 pounds on the 31st of December 2021 (Tesco PLC, 2021a). Another significant internal source of finance for Tesco is fixed assets or assets that cannot be sold or used during the usual business performance. This group includes land, buildings, machinery, equipment, or vehicles that are used for transporting and delivering goods. However, this source of finance has quite a significant disadvantage since it is very hard to get money from it in the short term in case of emergency because the process of their selling takes time and effort.
The more secure and fast-reaching source of finance is current assets which is the key source of funding for the Tesco company. They can be converted into cash more easily than fixed assets, so they can be used in case of any urgent need. The only thing relating to the current assets for the Tesco company to ensure concerns the fact that their sum should be higher than the sum of current liabilities (Reuters, no date). In other words, the company needs to be sure that it always has enough money to pay off its debts. Investments are the next massive source of the company’s finance after the current assets. However, over the past year, the amount of investments into the Tesco business has significantly decreased and provoked a drop in the share prices (Tesco PLC, 2021a). More and more wealthy people do not want to invest their money in the company, which may result in a complicated financial situation or even bankruptcy in the long-term perspective.
In order to understand the current financial situation in the Tesco company and establish further perspectives for the company on the point, it is necessary to assess its financial situation over the recent years. The paper will focus on the period from 2017 to 2021 and will analyze mainly the ratios of current assets, current liabilities, and total comprehensive income. The information will be taken from the company’s annual reports from 2017 to 2021.
In 2017, the general amount of Tesco’s current assets constituted 15.417 million pounds. In comparison, the company’s current liabilities at that period of time were approximately 19.234 million pounds (Tesco PLC, 2017). Total comprehensive income for the year constituted 2220 million pounds. When comparing the current assets and the current liabilities of the Tesco company, it is possible to see that the sum of debt is higher than the amount of money the company may easily spend on paying off the debts. Hence, the company may need to find extra investments or involve money of non-current assets to be able to cover the current liabilities.
When analyzing Tesco’s financial statistics for 2018, it is clearly seen that the ratios of current liabilities and current assets changed. The current assets sum dropped and constituted 13.726 million pounds in comparison with 19.238 million pounds of current liabilities that slightly increased in comparison with 2017 (Tesco PLC, 2018). Total comprehensive income in 2018 has significantly grown in comparison with the previous year and constituted 4000 million pounds. It proves the fact that the company remained profitable and managed to increase the income despite the significant differences between the ratios of the current assets and current liabilities in favor of the latter.
The situation with current assets and current liabilities changed dramatically in 2019. The sum of the first had decreased by almost one thousand million pounds in comparison with 2018 and constituted 12.668 million pounds. The current liabilities ratio, on the contrary, had increased and was 20.680 million pounds (Tesco PLC, 2019). Thus, it is seen that the gap between these two indicators has become more and more significant every year. The total comprehensive income of Tesco had also drastically dropped in 2019 and constituted only 1791 million pounds in comparison with the 4002 million in 2018. It is seen that the company faced a severe financial challenge at that time.
In 2020 Tesco’s current assets started to rise slowly. Thus, their sum constituted 13.164 million pounds in February 2020 (Tesco PLC, 2020). The current liability ratio, on the contrary, abruptly decreased. The sum of debt in 2020 was 17.927 million pounds which is almost three million pounds less than in 2019 (Financial Times, 2021b). Tesco’s total comprehensive income in 2020 significantly decreased and constituted only 609 million pounds which are twice less than in the previous year. Hence, it may be concluded that the financial challenges the company faced in 2019 continued in 2020 and led to the drop in the total comprehensive income ratio.
When speaking about the current situation in the company, it is important to assess the financial indicators that are mentioned in Tesco’s financial report in 2021. Thus, the current assets of the business constituted 10.807 million pounds which are lower than in the previous year (Tesco PLC, 2021b). The current liabilities ratio decreased as well, and their sum in February 2021 was 15.721 million pounds, which is three million pounds less than in 2020. Tesco’s total comprehensive income in 2021 has increased more than five times and constituted 4.917 million pounds, while the sum of the previous year was 609 million (Tesco PLC, 2021b). Thus, it is seen that the financial situation in the company was quite promising at the beginning of 2021, but it is still unclear whether these positive results were preserved throughout the year. The uncertainty is caused by the fact that the company’s share prices have decreased at the end of 2021.
In order to figure out the company’s perspectives and directions for further development, it is necessary not only to assess its financial strategy and statistics but also the policies of its competitors. One of the leading opponents of the Tesco company is Sainsbury’s. When comparing their financial indicators for 2021, it is possible to see that their ratios of total comprehensive sales are quite different – the one of Sainsbury’s is 695 million pounds, and the one of Tesco is 4917 (Tesco PLC 2021b, Sainsbury’s, 2021). Thus, the amount of income for the latter is larger, so one may conclude that it is a more profitable company among the two. When comparing the ratios of current assets of Tesco and Sainsbury’s, it is evident that Tesco had more in 2021 since it possessed 10.807 million pounds while Sainsbury’s had only 7.073 million (Tesco PLC 2021b, Financial Times, 2021a). However, the current liabilities of the latter are lower since they constituted 11.717 million pounds while Tesco had 15.721 million. Thus, it may be concluded that Tesco still makes more profit than Sainsbury’s despite the financial challenges and unstable situation inside the company.
Assessment of Tesco’s Financial Performance in 2021
Assessment of a company’s financial performance is needed to see the way and dynamics of its performance and development in the market. It also helps figure out its strong and weak points and establish future strategies and policies or change those that already exist. The present section of the report will analyze financial indicators of the Tesco company for 2020 and 2021 in a more profound way since the brief analysis was presented in the previous section. The objects of the analysis will be the company’s profitability ratios, liquidity ratios, and efficiency ratios. Each of them will be analyzed separately, and the concluding statement of the section will contain a brief general summary of the results of the analysis.
Profitability Ratios
The company’s profitability ratios show the dynamics of the company’s finance and enable the economists to establish the current financial tendencies for the business. When comparing the gross margin of the Tesco company for 2020 and 2021, it is possible to note that the numbers in 2021 are lower, but not significantly. The gross margin in 2020 was 4098 million pounds, while in 2021, its sum constituted 3965 million pounds (Tesco PLC, 2021b). The operating margin in 2021 also decreased – from 2206 million pounds in 2020 to 1736 million in 2021 (Tesco PLC, 2021b). Hence, it is possible to conclude that the Tesco company is currently facing financial losses, and if the tendency preserves in the future, it will go from profit to loss within several years.
When analyzing Tesco’s earnings per share (EPS) for 2020 and 2021, it is possible to see the lowering amount of stakeholders’ revenues. Diluted earnings per share in 2021 constituted 11.94 pounds, while in 2020, the sum was 18.98 pounds which were 37% higher than the EPS in 2021 (Tesco PLC, 2021b, p. 23). Statutory basic earnings per share in 2021 decreased as well as their amount was 7.54 pounds while in 2020 it constituted 7.60 pounds (Tesco PLC, 2021b). Hence, it is seen that the company is slowly going from profit to loss and may face serious challenges in the future if the current situation is preserved.
Liquidity Ratios
In order to see the company’s liquidity, it is necessary, first, to establish its current ratio and quick ratio. The current ratio enables the stakeholders and financial analytics to see if the company has enough money to cover liabilities that occur or may occur (Tesco PLC, 2021b). To establish the current ratio, it is necessary to divide current assets by current liabilities. Thus, the current ratio for the Tesco company in 2021 constitutes 10.202 million pounds/15.721 million pounds = 0.64. It is seen that the company cannot cover its current liabilities by the current assets it currently has. It is necessary to establish the current ratio for 2020 in order to see the dynamics of Tesco’s financial situation. The current ratio for 2020 is 13.608 million pounds/18.656 million pounds = 0,72 (Tesco PLC, 2021b). When comparing the two ratios, it is possible to see that though the current ratio in 2020 was higher than in 2021, so the company had a more stable financial situation.
In order to see if the company has enough money to cover current or long-term liabilities, it is necessary to establish a quick ratio for the company. To calculate it, one should subtract inventory and other current assets from total current assets and divide the sum by total current liabilities. Quick ratio for Tesco in 2021 is 10.202 – (2069 + 37)/15.721 = 0,51. The quick ratio for 2020 is 13.608 – (2433 + 63)/18.656 = 0.59 (Tesco PLC, 2021b). The comparison of these two ratios shows that the company possessed more assets for covering its liabilities in 2020 that confirms the hypothesis of its slow motion from profit to loss.
Efficiency Ratios
The company’s efficiency ratio shows the percentage that the expenses constitute of the revenue. The efficiency ratio, basically, indicates how much money the company spends to make a dollar’s profit. The ratio is used to measure the company’s ability to adequately use the assets it has at its disposal to make revenues. In order to establish the efficiency ratio of a particular company, it is required to divide the operating expenses by its revenues. Tesco’s annual reports do not contain the exact sum of the operating expenses, so it will be counted by summation of administrative expenses, auditor’s remuneration, employment costs, including Directors’ remuneration, and operating profit (loss). Hence, the approximate sum of the operating expenses in 2021 will constitute 2229+ 13 + 7449 + 7218 = 16.909 million pounds (Tesco PLC, 2021b). The amount of possible operating expenses in 2020 will be established the same way. Hence, it will be 1892 + 9.7 + 6869 + 2518 = 11288. 7 or 11.289 million pounds (Tesco PLC, 2021b). These figures are approximate since the company may have other expenses that were not mentioned in the paper.
Since both revenues and operating expenses for the Tesco company in 2021 and 2020 are established, the efficiency ratio may be calculated. As it was already stated, its formula is the company’s operating expenses divided by the revenues. Hence, the efficiency ratio for the Tesco company in 2021 will constitute 16.909 million pounds/ 57.887 million pounds = 0.29 or 29%. The efficiency ratio of 2020 will, thus, be 11.289 million pounds/58.091 million pounds = 0.19 or 19% (Tesco PLC, 2021b). It means that in 2020 the Tesco company spent 0.19 pounds for every pound earned in revenue, while in 2021, it spent 0.29 pounds on every pound of income. It is seen from the calculations that the company spent less money on making revenue in 2020 than in 2021 that may lead to increased expenses in the future.
Summary
The analysis of the profitability, liquidity, and efficiency ratios of the Tesco company has shown that the business is slowly going from profits to losses because all the ratios have decreased. The company’s directors acknowledge this fact themselves since the 2021 Annual Report says that Tesco currently faces decreasing in profits due to the complicated situation with taxes and the COVID-19 pandemic (Tesco PLC, 2021b, p. 23). Hence, the company needs to reassess its financial strategy in terms of its accuracy and profitability and take up some new measures that will let it change the situation and move from losses to profit.
Recommendations for Further Improvement
The company’s revenue is quite ambiguous and fast-changing value. Since the companies usually have different sources of profit apart from selling their goods or services, it is necessary to assess the profitability of all the sources of income in order to establish a financial strategy that will ensure high revenues in the future. Despite the scale of the business, financial analytics single out three common ways of increasing income. They are boosting the number of sales, decreasing the expenses and the markdowns, or increasing prices (Improve your business’s financial strategy, 2021). When the company’s managers plan the strategy of the business’s development and modernization, they should take into account these three measures and find a relevant way to increase the company’s profits in the future. The simultaneous implementation of these three measures may not give any noticeable results at the same time since not all the techniques are short-term oriented.
Specifically for the Tesco company, it seems reasonable to shift the focus from offline trade towards online trade. The COVID-19 pandemics have already significantly influenced the company’s profit in a negative way, but online trade may be a good helping tool since it prioritizes the customers’ comfort and safety (Tesco PLC, 2021b). It is worth watching the positive dynamics concerning the revenues of such online retailer as Amazon that has significantly increased its income due to the popularity of online shopping that comes of people’s fear of getting infected. In addition, online trade will help decrease expenses because the company will not spend money on rent and buying machines and other stuff for offline shops. What is more, online retailing is, first of all, customer-oriented, and if people see that the company cares for them and for their interests, they will become the loyal clientele of the shop and may also help it gain new customers which also helps increase profits.
Apart from that, it is necessary to mention that the company should develop Key Performance Indicators (KPIs) that also influence the profitability ratios. It is possible to single out several of the most influential ones among them. The first one concerns the customers; satisfaction. It was partly mentioned in the previous paragraph on online shopping, but it is important to consider it for offline retail as well since this indicator is vital for the business as it shows the ratio of customers’ trust in the company and helps figure out the strong and weak points in its policies (FinanccDirect, no date).
The next KPI to consider is the quick ratio that was described in the previous section. It shows the company’s flexibility and ability to adequately use its quick assets to cover any short-term liabilities (FinanccDirect, no date). The quick ratio enables the finance managers to see where and how the financial strategy of the company may be improved.
In addition, there is one more Key Performance Indicator that needs to be paid attention to. It is LOB expenses’ comparison with the actual budget of the company. This KPI is important because it help see and understand where and how the money from the company’s budget were spent (FinanccDirect, no date). It also shows the way of further budget-formation that will help decrease the expenses and increase profits. All in all, the development of the financial strategy of the company is a quite complicated matter. Hence, it is necessary o the finance managers to attentively study its financial dynamics and key indicators in order to create a financial plan that will work.
Reference List
FinanccDirect (no date) 12 key financial performance indicators you should be tracking. Web.
Financial Times (2021a) J Sainsbury PLC balance sheet. Web.
Financial Times (2021b) Tesco PLC balance sheet. Web.
Improve your business’s financial strategy. (2021) Web.
Reuters (no date) Tesco PLC. Web.
Sainsbury’s (2021). 2021 Annual Report. Web.
Statista (2021) Annual revenue of Tesco Group in the United Kingdom (UK) and the Republic of Ireland from financial year 2015 to 2021. Web.
Tesco PLC (no date) About us. Web.
Tesco PLC (no date) Our history. Web.
Tesco PLC (2017) 2017 Annual Report. Web.
Tesco PLC (2018) 2018 Annual Report. Web.
Tesco PLC (2019) 2019 Annual Report. Web.
Tesco PLC (2020) 2020 Annual Report. Web.
Tesco PLC (2021a) Share price information. Web.
Tesco PLC (2021b) 2021 Annual Report. Web.