“The current ratio is a liquidity and efficiency ratio that measures a firm’s ability to pay off its
short-term liabilities with its current assets” (Course, 2018).
In 2015 Tesco had a current ratio of 0.60:1 however in both 2016 and 2017 Tesco
plc had a current ratio of 0.75:1 therefore the current ratio of Tesco PLC
increased by 0.15 this indicates a growth in Tesco PLCs liquidity however Tesco
did not increase its liquidity in 2017 which remained at 0.75 same as the previous
year. As of 2017 Tesco can only pay back 75% of its short-term liabilities.Tesco PLCs
current ratio is well below the ideal of 2:1. The aforementioned lower figures
are a sign of poor inventory management as well as a poor standard of
collecting Trade receivables. If Tesco plc
maintains a current ratio value below 1 for multiple years it could be a strong
indication of bad financial health.
drawbacks to using current ratios, one of the drawback includes the fact inventory is used in the calculation of current
ratios, therefore the final value maybe an overestimation of the actual liquidity of the company.
Acid test ratio.
“The quick ratio or acid test
ratio is a liquidity ratio that measures the ability of a company to
pay its current liabilities when they come due with only quick assets. Quick
assets are current assets that can be converted to cash within 90 days or in
the short-term” (My Accounting Course, 2018).In
2015 Tesco PLC has an acid ratio of 0.45 however that figure increased by 18%
to 0.63 in 2016 but stayed the same in 2017. This increase highlights an increase in
liquidity at Tesco plc. However in 2017 Tesco PLCs acid ratio is well below the
ideal 1:1 therefore the company will need to increase its acid test value by
37% in order to reach the ideal 1:1.
There are many
limitation to using the acid test to understand a company’s financial health.
To start with, Acid test ratio provides no information about the level and
timing of cash flows, these two factors are the key determinants which shows If
Tesco PLC is able to repay its debts.
“Stock turnover ratio is an
efficiency ratio which showcases how effectively stock is managed by comparing
cost of goods sold with average inventory for a period. This measures how many
times average inventory is “turned” or sold during a period” (stock, 2018).
In 2015 Tesco PLC had a stock over
ratio of 21.1 in 2016 this figure rose by 1.3 to 22.4 and rose again in 2017 by
1.9 to 24.3 there has been a continual increase in Tesco’s stock turnover ratio
this a bad indication that Tesco Is holding onto stock for a longer amount of
time. Tesco PLC has to protect its inventory from
theft and damage therefore stock has to be stored in a warehouse and security
will be required all of this adds onto Tesco’s carrying cost therefore
increasing Tesco’s liabilities. Tesco is a major supplier of perishable good these
perishable goods have short shelf life and the quality of the product
deteriorates overtime. customers seek
out the freshest produce since Tesco is holding onto stock for such a long time
the deteriorated fruits and vegetables will be less desired by consumers this
may lead to food wastage, loss of profit and a negative public perception of
Tesco’s food quality which would hurt long term profit.
Stock turnover ratio does have its limitation, conventional wisdom states
Tesco PLC should have a quick stock turnover however holding onto stock does
not conclusively indicate Tesco’s sales or profit is decreasing. (NEED TO
EXPEND THIS POINT)
“Gearing is a measure of the extent to
which there is financial risk indicated in the balance sheet and in the profit
and loss account”. Gearing ratio can be used
to identify how a company would perform during a financial downturn.
In 2015 Tesco plc had a gearing ratio of 273.9% this figure decreased by
60.5 to 213.4% however the figure drastically increased to 454.4%. Tesco needs
to have a sensible level of gearing in order to reduce the tax burden. However
such a drastic increase of 241 from 2016 to 2017 is extremely worrying and
dangerous for Tesco PLC. The ideal gearing ratio is between 25-50% therefore
tescos has been extremely geared for a long period of time. As Tesco becomes
more geared its debt servicing cost increases and its leverage to negotiate
with creditors decreases. Furthermore creditors could use restrictive covenants
in order to stop payments and dividends and redirect Tesco’s PLCs cash for debt
repayment. This would hinder Tesco’s ability to develop new products which
would reduce its competitiveness as well as liquidity. (HAVE LAST PART CHECKED MAYBE TOO FAR
Pretax profit margin.
profit margin comprises of a company’s total revenue after deducting expenses
before tax. To prevent a company’s use of tax shelters or other tax breaks from
influencing the company’s apparent profit margin, (Badly Worded Need Improvement) in 2015 Tesco had a pretax
profit margin of -10.2% in 2016 the figure drastically improved to 0.3% however
it dropped again in 2017 to 0.26%. Although Tesco saw a 9.9% improvement in
pre-tax profit margin from 2015 to 2016 however in 2017 the figure dropped by
0.04. Pre-tax profit margins are used to forecast the profitability of a
company, in 2015 Tesco made the biggest corporate loss in U.K history totaling
6.4 billion pounds this loss came on the heels of Tesco’s accounting scandal.
Although Tesco is showing signs of improvement especially since pre-tax profit
improved so drastically between 2015 and 2016 the fact figures dropped in 2017
is a very worrying trend.
Return on total assets.
return on total assets compares the earnings of a
business to the total assets invested in it. The measure indicates whether
management can effectively utilize assets to generate a reasonable return (use book definition)
In 2015 Tesco had a return on total asset figure of -14.4% however this
number was significantly improved in 2016 reaching 0.37% but in 2017 the figure
dropped again to 0.32%. Returns on total assets ratio is used determine which
of Tesco’s assets are the best performing therefore most profitable and the
assets which are inefficient and wasteful. Return on total Ratio assets can
also be used to see how effectives Tesco’s operational policies are in
generating profit.in 2015 Tesco closed down 43 stores, cut 2000 jobs and in an
effort to cut 250 million pounds and increase efficiency. As the figures show
Tesco was highly successful in reducing cost and increasing effect between 2015 to 2016 but failed to continue
this trend into 2017.
Return on capital,
Return on capital employed is
performance ratio which showcases how efficiently a firm can produce profit from
employed capital. In 2015 Tesco had a return on capital of -26.1 this figure
improved significantly in 2015 to 0.76 however in 2017 the figure decreased to
0.55. Return on capital employed showcases how efficiently Tesco PLCs assets
are being used to produce profit. The trend from 2015 to 2016 was highly
encroaching for Tesco PLC as it went from a negative yield to a positive however
it assets did not yield as high of a return in 2017 as 2016. Since return on
capital showcases efficiency of assets to produce money a drop is highly
worrying that Tesco is decreasing efficacy therefore