Debt Management Ratios:Tesco financed its assets with a combination of retained earnings,short-term debts and long term debts.
The debt ratio in the table (1.4) measuresthe percentage of fund provided by creditors. The debt ratios indicate thatTesco’s best year through the last 5 years was 2013 as it was the lowest with 57.71%.Low debt ratios are preferable as it shows that the company is less dependenton the creditors’ funds.
From 2014 to 2016, the debt ratio was increasing tillit reached the highest in 2016 with 69.10%. The time-interest-earned ratio isused to measure the amount of income that can be used to pay the interestexpenses by calculating the percentage of the income before interest and tax tothe interest expenses. Tesco’s financial records show that its performance wasbetter in 2013 and 2014 compared to the last 3 years. The main reason behindthis decline is the decline in the revenues which affected the gross profitsand we can add to that the rise in the interest expenses. Year Debt ratio Time-Interest-Earned ratio 2013 57.71 9.19 2014 60.
97 8.97 2015 68.60 -4.23 2016 69.10 5.73 2017 62.67 5.61 Table (1.
4) Tesco’s debt managementratiosThe Profitability Ratios:The profitability ratios in table (1.5) measure to which extent thecompany is making profits from its operations, assets and equity. These ratiosare important to show the value of the company and how it is performingfinancially. Starting from the operating margin which shows the ratio of thegross profit to the total assets, Tesco was performing well in 2013 and 2014then it struggled with a loss in the operating margin in 2015 and startrecovering after that loss in both 2016 and 2017. Still the operating marginmight not show the real profitability as it counts on the gross profit unlikethe profit margin which shows the ratio of net income to sales. Tesco’s profitmargin indicated that the company is not performing well and through the last 5years, 2014 was the best with 1.53 profit margin compared to 2016 with 0.25 and2017 with a 0.
07 loss. Profit margin analysis indicates that Tesco are strugglingwith high costs. The basic earning power shows the earning of the company beforecounting the taxes and interest rates. Tesco had 8.16% basic earning power in2013 which decreased through 2015 to 4.78% loss and it start recovering through2016-2017 with 6.50% and 6.
33% respectively. Another ratio to measure thecompany’s profitability is the return on assets ratio which calculates theratio of the net income to the total assets. Tesco’s return on assets has thesame result as the profit margin with 2014 as the best performing year with1.94 compared to 2013 and 2016, while 2015 and 2017 recorded 12.98 and 0.09 lossesrespectively.
This point can be related again to the high value of the assetscompared to the profit that it has been generated from them. Looking at the returnon equity which is an important ratio for the stockholders and the investorswho are assessing the performance of the company, we can see that Tesco’s isfacing an uncertainty as the return on equity was going up and down through thelast 5 years; from 0.75% on 2013 to 6.62% in 2014 which considered the best inour period of analysis. The worst result had been recorded in 2015 with 81.
19%loss then there was a small recovery with 1.60% in 2016 but it dropped again to0.62% loss in 2017.
Year Operating margin Profit margin Basic earning power Return on assets Return on equity 2013 6.31 0.19 8.16 0.25 0.75 2014 6.
31 1.53 7.99 1.94 6.62 2015 -3.39 -9.
22 -4.78 -12.98 -81.19 2016 5.24 0.25 6.50 0.
31 1.60 2017 5.19 -0.07 6.33 -0.09 -0.62 Table (1.
5) Tesco’s profitability ratios Market Value Ratios:Debt to Equity Ratio:This ratio shows the capital structure of the company, how much it dependson the debt and how much it depends on its equity and Tesco was more stable in2013 and 2014 from this perspective. During the last 3 years, the rise in thedebt to equity ratios indicates that Tesco is depending highly on the debts andthat make it a risky company for both investors and creditors. Table (1-6)shows the rise in the debt to equity ratio through the last 5 years. Year Debt to equity ratio 2013 64.36 2014 75.42 2015 177.
17 2016 155.91 2017 184.68 Table (1.6) Tesco’s debt to equity ratio Conclusion and recommendation:Tesco is one of the big companies in the UK and it has a strongbrand name with a long history of success. Tesco start expanding its brand inmany countries through Asia and Europe and it increased the numbers of itsstores in the UK to reach many areas outside the big cities. Tesco is tryingalso to diversify it work by entering new markets such as the financial marketafter opening Tesco bank in the UK.
Many factors led the company to a difficultsituation financially starting from the recession that affected the people’sshopping behavior and they start depending on the small stores or thediscounters while Tesco and the other big supermarkets witnessed a decrease inthe number of their customers through the last 5 years.Through our analysis we found that the main issue for Tesco is thehigh cost which can be the result of having many stores that are not generatingsignificant profits compared to their value. Another issue is increasing thedebt to equity ratio which shows that the company is more dependent on the debtthan the investors equity and by going back to the data we can see that the totalequity have been declined dramatically from £16,643 million in 2013 to £6,438million in 2017 and this is an indicator that Tesco is becoming a risky companyfor the investors and we can see that also from the decline in the share pricefrom £372.25 in2013 to £190 in2017.Tesco is trying to find some solutions to solve its financial issues,according to Boles (2017) Tesco start selling the right to build houses aboveits stores.