Lilli2020
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Hi, I have following questions any guidance would be appreciated!

Have to financially assess Tesco performance (profit, investing activities)
This includes the ratios, cash flow statement, and income statement.

Here are some ratios:
Profitability
Finance Expenses % 1.9% 1.7%
Gross Profit % 7.1% 7.3%
Operating Profit% 4% 4%
Asset Turnover 3.1 3.1
ROCE 12.1% 12.9%
Gearing
Gearing 36.1% 34.7%
Interest cover 2.0 2.4

I need guidance on how to interpret these and what investments this company has made etc
https://www.tescoplc.com/investors/r...ual-report-202
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MindMax2000
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I don't know what level this is for. For all I know, you could be asking a simple GCSE question or a full financial analyst report. I can easily overdo it for questions like these, so you might want to set the expectations first.

Presuming the second ratios are for the year following the first ratios, and ignoring the ratios that haven't changed over the 2 years...
Finance expenses have gone down
Gross profit has gone up
ROCE has gone up whilst operating profit has remained the same

When expenses have gone down but profit and revenue have been roughly the same, it means costs are cut.

Gearing ratio has gone down - less debt
And interest cover has gone up - the company is better able to pay the debt owed

The company seems to have cut back on debt, which principally explains why finance expenses have dropped and ROCE has gone up.

I haven't looked at the link, so the above analysis could be wrong (or the figures could be the other way around).
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Lilli2020
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(Original post by MindMax2000)
I don't know what level this is for. For all I know, you could be asking a simple GCSE question or a full financial analyst report. I can easily overdo it for questions like these, so you might want to set the expectations first.

Presuming the second ratios are for the year following the first ratios, and ignoring the ratios that haven't changed over the 2 years...
Finance expenses have gone down
Gross profit has gone up
ROCE has gone up whilst operating profit has remained the same

When expenses have gone down but profit and revenue have been roughly the same, it means costs are cut.

Gearing ratio has gone down - less debt
And interest cover has gone up - the company is better able to pay the debt owed

The company seems to have cut back on debt, which principally explains why finance expenses have dropped and ROCE has gone up.

I haven't looked at the link, so the above analysis could be wrong (or the figures could be the other way around).
Thank you is a 1st year degree level, so it 'acting as a financial analyst' I've resubmitted below, 2019 left and 2018 right :

DEBT: 7,495 7,143
Capital Employed (debt + equity) 20,748 20575
interest payable 1,244 1,089
current liquid 0.7 0.6
acid/quick 0.6 0.5
gearing 36.1 34.7%
interest cover 2.0 2.4
inventory 15 16
trade rece 3 3
trade pay 34 35
cash cycle -16 -16
finance 1.9% 1.7
Gross pr 7.1% 7.3
Opera pr 4 4%
asset turn 3.1% 3.1
ROCE 12.1 12.9%

Comment and the reasons why for the changes, as well as interpreting financial statement and cash flow statement for potential investors that the questions
Last edited by Lilli2020; 2 months ago
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MindMax2000
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(Original post by Lilli2020)
Thank you is a 1st year degree level, so it 'acting as a financial analyst' I've resubmitted below, 2019 left and 2018 right :

DEBT: 7,495 7,143
Capital Employed (debt + equity) 20,748 20575
interest payable 1,244 1,089
current liquid 0.7 0.6
acid/quick 0.6 0.5
gearing 36.1 34.7%
interest cover 2.0 2.4
inventory 15 16
trade rece 3 3
trade pay 34 35
cash cycle -16 -16
finance 1.9% 1.7
Gross pr 7.1% 7.3
Opera pr 4 4%
asset turn 3.1% 3.1
ROCE 12.1 12.9%

Comment and the reasons why for the changes, as well as interpreting financial statement and cash flow statement for potential investors that the questions
General outlook:

  • Debt has gone up
  • Inventory has gone down
  • ROCE has gone down
  • Gross profit has gone down, but operating profit has remained the same, implying expenses were cut
  • Since gross profit is roughly 7%, the COGS is ridiculously expensive, and the business's viability is subject to changes in cost of materials - not good
  • Everything else has mroe or less been the same

There is probably a dip in revenue, and the business needed to reduce inventory for that. Interesyingly, debt has gone up, but I can't seem to figure out what they did with the extra finance - asset related ratios have not changed, so it's likely it's to reduce expenses or clear previous debts/help with sale of assets. Despite a dip in sales, trade receivables have remained the same, implying either it's the short term customers are buying less, or that they're not that good for credit control.

Personal comments
Since the figures have not changed much, I'm also presuming it's a mature company or a company operating in a mature market with little change and very little innovation. They probably like to keep things the same, and there is probably a bit of bureaucracy involved. They don't like risk, and they are not likely trying to do something different any time soon. It's likely a blue chip company with stable costs. If I was an investor and my investment profile involves high growth investments, I'd most likely avoid this like the plague.
The operating profit margins are low, so the likelihood I will get good dividends and dividend yields is low. I'm also not a fan of the low GP margins, which can mean the company will not be able to handle price shocks very well. If we had something similar to the pandemic affecting prices of the cost of goods sold, I'd expect the company to tank like crazy unless the cost of materials/inventory is controlled by some government or there is some sort of strong reason the cost of goods sold is stable.
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