Debt to measure the amount of income that can

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) measures
the percentage of fund provided by creditors. The debt ratios indicate that
Tesco’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 dependent
on the creditors’ funds. From 2014 to 2016, the debt ratio was increasing till
it reached the highest in 2016 with 69.10%. The time-interest-earned ratio is
used to measure the amount of income that can be used to pay the interest
expenses by calculating the percentage of the income before interest and tax to
the interest expenses. Tesco’s financial records show that its performance was
better in 2013 and 2014 compared to the last 3 years. The main reason behind
this decline is the decline in the revenues which affected the gross profits
and we can add to that the rise in the interest expenses.

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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 management
ratios

The Profitability Ratios:

The profitability ratios in table (1.5) measure to which extent the
company is making profits from its operations, assets and equity. These ratios
are important to show the value of the company and how it is performing
financially. Starting from the operating margin which shows the ratio of the
gross profit to the total assets, Tesco was performing well in 2013 and 2014
then it struggled with a loss in the operating margin in 2015 and start
recovering after that loss in both 2016 and 2017. Still the operating margin
might not show the real profitability as it counts on the gross profit unlike
the profit margin which shows the ratio of net income to sales. Tesco’s profit
margin indicated that the company is not performing well and through the last 5
years, 2014 was the best with 1.53 profit margin compared to 2016 with 0.25 and
2017 with a 0.07 loss. Profit margin analysis indicates that Tesco are struggling
with high costs.

The basic earning power shows the earning of the company before
counting the taxes and interest rates. Tesco had 8.16% basic earning power in
2013 which decreased through 2015 to 4.78% loss and it start recovering through
2016-2017 with 6.50% and 6.33% respectively. Another ratio to measure the
company’s profitability is the return on assets ratio which calculates the
ratio of the net income to the total assets. Tesco’s return on assets has the
same result as the profit margin with 2014 as the best performing year with
1.94 compared to 2013 and 2016, while 2015 and 2017 recorded 12.98 and 0.09 losses
respectively. This point can be related again to the high value of the assets
compared to the profit that it has been generated from them. Looking at the return
on equity which is an important ratio for the stockholders and the investors
who are assessing the performance of the company, we can see that Tesco’s is
facing an uncertainty as the return on equity was going up and down through the
last 5 years; from 0.75% on 2013 to 6.62% in 2014 which considered the best in
our 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 to
0.62% 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 depends
on the debt and how much it depends on its equity and Tesco was more stable in
2013 and 2014 from this perspective. During the last 3 years, the rise in the
debt to equity ratios indicates that Tesco is depending highly on the debts and
that 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 strong
brand name with a long history of success. Tesco start expanding its brand in
many countries through Asia and Europe and it increased the numbers of its
stores in the UK to reach many areas outside the big cities. Tesco is trying
also to diversify it work by entering new markets such as the financial market
after opening Tesco bank in the UK. Many factors led the company to a difficult
situation financially starting from the recession that affected the people’s
shopping behavior and they start depending on the small stores or the
discounters while Tesco and the other big supermarkets witnessed a decrease in
the number of their customers through the last 5 years.

Through our analysis we found that the main issue for Tesco is the
high cost which can be the result of having many stores that are not generating
significant profits compared to their value. Another issue is increasing the
debt to equity ratio which shows that the company is more dependent on the debt
than the investors equity and by going back to the data we can see that the total
equity have been declined dramatically from £16,643 million in 2013 to £6,438
million in 2017 and this is an indicator that Tesco is becoming a risky company
for the investors and we can see that also from the decline in the share price
from £372.25 in
2013 to £190 in
2017.

Tesco is trying to find some solutions to solve its financial issues,
according to Boles (2017) Tesco start selling the right to build houses above
its stores.  

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