“The current ratio is a liquidity and efficiency ratio that measures a firm’s ability to pay off itsshort-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 Tescoplc had a current ratio of 0.75:1 therefore the current ratio of Tesco PLCincreased by 0.15 this indicates a growth in Tesco PLCs liquidity however Tescodid not increase its liquidity in 2017 which remained at 0.75 same as the previousyear. As of 2017 Tesco can only pay back 75% of its short-term liabilities.
Tesco PLCscurrent ratio is well below the ideal of 2:1. The aforementioned lower figuresare a sign of poor inventory management as well as a poor standard ofcollecting Trade receivables. If Tesco plcmaintains a current ratio value below 1 for multiple years it could be a strongindication of bad financial health. There aredrawbacks to using current ratios, one of the drawback includes the fact inventory is used in the calculation of currentratios, therefore the final value maybe an overestimation of the actual liquidity of the company. Acid test ratio.
“The quick ratio or acid testratio is a liquidity ratio that measures the ability of a company topay its current liabilities when they come due with only quick assets. Quickassets are current assets that can be converted to cash within 90 days or inthe short-term” (My Accounting Course, 2018).In2015 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 inliquidity at Tesco plc. However in 2017 Tesco PLCs acid ratio is well below theideal 1:1 therefore the company will need to increase its acid test value by37% in order to reach the ideal 1:1. There are manylimitation to using the acid test to understand a company’s financial health.
To start with, Acid test ratio provides no information about the level andtiming of cash flows, these two factors are the key determinants which shows IfTesco PLC is able to repay its debts. Stock turnover: “Stock turnover ratio is anefficiency ratio which showcases how effectively stock is managed by comparingcost of goods sold with average inventory for a period. This measures how manytimes average inventory is “turned” or sold during a period” (stock, 2018).
In 2015 Tesco PLC had a stock overratio of 21.1 in 2016 this figure rose by 1.3 to 22.4 and rose again in 2017 by1.9 to 24.3 there has been a continual increase in Tesco’s stock turnover ratiothis a bad indication that Tesco Is holding onto stock for a longer amount oftime.
Tesco PLC has to protect its inventory fromtheft and damage therefore stock has to be stored in a warehouse and securitywill be required all of this adds onto Tesco’s carrying cost thereforeincreasing Tesco’s liabilities. Tesco is a major supplier of perishable good theseperishable goods have short shelf life and the quality of the productdeteriorates overtime. customers seekout the freshest produce since Tesco is holding onto stock for such a long timethe deteriorated fruits and vegetables will be less desired by consumers thismay lead to food wastage, loss of profit and a negative public perception ofTesco’s food quality which would hurt long term profit.Stock turnover ratio does have its limitation, conventional wisdom statesTesco PLC should have a quick stock turnover however holding onto stock doesnot conclusively indicate Tesco’s sales or profit is decreasing.
(NEED TOEXPEND THIS POINT) GEARING RATIO “Gearing is a measure of the extent towhich there is financial risk indicated in the balance sheet and in the profitand loss account”. Gearing ratio can be usedto identify how a company would perform during a financial downturn. In 2015 Tesco plc had a gearing ratio of 273.9% this figure decreased by60.5 to 213.4% however the figure drastically increased to 454.
4%. Tesco needsto have a sensible level of gearing in order to reduce the tax burden. Howeversuch a drastic increase of 241 from 2016 to 2017 is extremely worrying anddangerous for Tesco PLC. The ideal gearing ratio is between 25-50% thereforetescos has been extremely geared for a long period of time. As Tesco becomesmore geared its debt servicing cost increases and its leverage to negotiatewith creditors decreases. Furthermore creditors could use restrictive covenantsin order to stop payments and dividends and redirect Tesco’s PLCs cash for debtrepayment. This would hinder Tesco’s ability to develop new products whichwould reduce its competitiveness as well as liquidity.
(HAVE LAST PART CHECKED MAYBE TOO FARFERTCHED) (COMPLETE) Pretax profit margin. Theprofit margin comprises of a company’s total revenue after deducting expensesbefore tax. To prevent a company’s use of tax shelters or other tax breaks frominfluencing the company’s apparent profit margin, (Badly Worded Need Improvement) in 2015 Tesco had a pretaxprofit margin of -10.
2% in 2016 the figure drastically improved to 0.3% howeverit dropped again in 2017 to 0.26%. Although Tesco saw a 9.9% improvement inpre-tax profit margin from 2015 to 2016 however in 2017 the figure dropped by0.
04. Pre-tax profit margins are used to forecast the profitability of acompany, in 2015 Tesco made the biggest corporate loss in U.K history totaling6.
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 profitimproved so drastically between 2015 and 2016 the fact figures dropped in 2017is a very worrying trend. Return on total assets. Thereturn on total assets compares the earnings of abusiness to the total assets invested in it. The measure indicates whethermanagement 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 thisnumber was significantly improved in 2016 reaching 0.37% but in 2017 the figuredropped again to 0.
32%. Returns on total assets ratio is used determine whichof Tesco’s assets are the best performing therefore most profitable and theassets which are inefficient and wasteful. Return on total Ratio assets canalso be used to see how effectives Tesco’s operational policies are ingenerating profit.in 2015 Tesco closed down 43 stores, cut 2000 jobs and in aneffort to cut 250 million pounds and increase efficiency. As the figures showTesco was highly successful in reducing cost and increasing effect between 2015 to 2016 but failed to continuethis trend into 2017.
Return on capital, Return on capital employed isperformance ratio which showcases how efficiently a firm can produce profit fromemployed capital. In 2015 Tesco had a return on capital of -26.1 this figureimproved significantly in 2015 to 0.76 however in 2017 the figure decreased to0.55. Return on capital employed showcases how efficiently Tesco PLCs assetsare being used to produce profit.
The trend from 2015 to 2016 was highlyencroaching for Tesco PLC as it went from a negative yield to a positive howeverit assets did not yield as high of a return in 2017 as 2016. Since return oncapital showcases efficiency of assets to produce money a drop is highlyworrying that Tesco is decreasing efficacy therefore