Financial Ratio Analysis of Tesco - Case Study Example

Financial Analysis Of Tesco And Sainsbury For Years Table of Contents Part One: Financial Ratio Analysis 3 Profitability ratio analysis 3 Efficiency ratio analysis 5 Liquidity ratio analysis 6 Gearing analysis 7 Part Two: Model Analysis 9 Altman’s Model 9 Findings of Altman’s Study 10 Tobin’s Q Model 11 Limitations of Altman’s Model 12 Limitations of Tobin’s Q Model 12 Univariate Analysis 13 Part Three: Limitations of ratio analysis 15 Part Four: Forecasting the Final Accounts 17 Conclusion 19 References 20 Part One: Financial Ratio Analysis Profitability ratio analysis PROFITABILITY RATIOS (in %)    TESCO SAINSBURY 2012 2011 2010 2012 2011 2010 Return on shareholders’ fund   21.58 21.38 21.76 14.19 15.25 14.76 Return on capital employed    12.05 11.99 10.58 8.68 9.78 9,09 Return on total assets     7.55 7.49 6.9 6.47 7.26 6.75 Operating profit    5.94 5.8 5.58 3.58 3.92 3.67 Gross profit    8.15 8.3 8.1 5.43 5.5 5.42 The profitability ratio analysis of Tesco and Sainsbury reflects that return on shareholders’ fund in Tesco has decreased from 2010 to 2011 and then showed a slight increase in 2012. But in case of Sainsbury it has increased from 2010 to 2011 and later decreased in 2012 to 14.19%. This ratio indicates how efficient the firm in managing its shareholders fund is. It is the objective of management to maximize shareholders return. The return on capital employed is the barometer of overall performance of the firm. It indicates the earning capacity of the company on the resources deployed in firm. This has been increasing in case of Tesco while in case of Sainsbury it has increased in 2011 but later on decreased in 2012. Return on total assets reflects the firm’s earning capacity in respect of the total assets been deployed in the firm. This has also been increasing in case of Tesco while in case of Sainsbury it has increased in year 2011 and later on decreased in year 2012. The operating profit ratio indicates the extent of sales revenue available for interest, tax and dividend payments. So, firm should aim at reasonably high operating profit ratio. This has showed a gradual increase over the years in Tesco while in case of Sainsbury this has increased in year 2011 but decreased in 2012. Gross profit ratio shows light at the degree of managerial efficiency in production and sales performance. It speaks of ability of the firm to widen the gap between sales and cost of sales. A high gross profit ratio reveals that the firm is able to produce goods at a relatively lower cost. It may also result from selling of goods at relatively higher price. A high gross profit ratio is the indication of good management. In Tesco, this has increased in 2011 from 2010 and later on it decreased to 8.15% in 2012. In Sainsbury, it has increased from 2010 to 2011 to 5.5% but in 2012 it decreased to 5.43%. Comparing the overall profitability performance of both the companies, Tesco is showing higher and better profitability position in all respect as compared to Sainsbury which has been reflected in the above table (Altman and Hodgkiss, 2006). Efficiency ratio analysis   EFFICIENCY RATIOS           TESCO  SAINSBURY 2012 2011 2010 2012 2011 2010 Net asset turnover    2.03 2.07 1.9 2.42 2.5 2.48 Fixed asset turnover   1.7 1.7 1.66 2.16 2.18 2.22 Stock turnover    17.94 19.27 20.85 23.77 25.99 28.44 Creditors payment (days)    33.77 34.64 32.61 31.16 31.76 32.58 Net asset turnover ratio indicates the degree of managerial efficiency in utilization of net assets deployed in the firm. A high net assets turnover ratio reveals firm’s ability to generate larger volume of sales with respect to a given amount of net assets and low net assets turnover ratio signifies inefficiency in net assets utilization. In case of Tesco, this has increased from 2010 to 2011 i.e. from 1.9 times to 2.07 times while it has decreased to 2.03 times in 2012. In Sainsbury, it has increased from 2010 to 2011 to 2.5 times but decreased to 2.42 times in 2012. Through fixed assets turnover ratio, the degree of efficiency in utilization of fixed assets can be understood. A high fixed assets turnover ratio indicates that the firm is using its fixed assets more efficiently. In Tesco, it has increased from 2010 to 2011 and has remained constant in 2012. In Sainsbury, it has been showing a decline reflecting its inefficiency in utilizing fixed assets. Again, stock turnover ratio throws light at the degree of efficiency in inventory management. A high stock turnover ratio is the indicator of sound inventory management. A low inventory turnover ratio is an indicator of excessive inventory levels than it is warranted by volume of operation. In both Tesco and Sainsbury, it has shown a decline for past three years. Creditor’s payment in days reflects the credit facility enjoyed by firm from suppliers. Lengthy credit period is apparently favorable for firm as the strain on working capital will be lower then. But a shorter credit period indicates that the firm is required to pay its suppliers immediately after purchase. Tesco has enjoyed a relatively longer credit period in 2011 than 2010 but its credit period decreased in 2012. Sainsbury has faced shorter credit periods in 2011 and 2012 as compared to 2010 indicating its liability to pay its creditors quickly (Antrill and Mc Laney, 2005, p.30). Liquidity ratio analysis LIQUIDITY RATIOS      TESCO SAINSBURY 2012 2011 2010 2012 2011 2010 Current ratio   0.68 0.65 0.73 0.65 0.58 0.66 Liquid ratio   0.49 0.47 0.56 0.35 0.31 0.41 The liquidity position or short term solvency of the firm is measured by current ratio. It is indicator for what amount of current assets does the company held for each amount of current liabilities. The standard current ratio taken is 2:1 which defines that each rupee of current liabilities is required to be backed by current assets of two rupees valuation (Bitter,2010, p.98).Its logic states that even if the current assets actual value gets reduced to half, the firm will not face any problem in meeting its current liabilities. The current ratio shown by Tesco and Sainsbury is not meeting the standard ratio. Liquid ratio or acid test ratio or quick ratio is a refinement over current ratio. As it excludes inventory from current assets, it can more effectively measure the short term debt paying ability. Conventional standard acid test ratio is 1:1 requiring backing of each rupee of quick liabilities by quick assets of equal value. Acid test ratio is the more penetrating test of liquidity than current ratio. The liquid ratios shown by Tesco and Sainsbury over the past three years are not meeting the standard ratio. Overall liquidity analysis of both the companies does not reflect a sound liquid position of these companies (Beaver et al., 2008, p.80-85). Gearing analysis   GEARING RATIOS        TESCO   SAINSBURY   2012 2011 2010 2012 2011 2010 gearing ratio   0.79 0.78 1.05 0.63 0.55 0.62 debt equity ratio   0.31 0.32 0.39 0.28 0.27 0.29 interest coverage ratio   7.88 8.31 6.48 6.78 8.12 5.95 A firm with capital gearing ratio more than 1 is called highly geared firm while a firm with capital gearing ratio less than 1 is called low geared firm. The firm with gearing ratio 1 is called evenly geared company (Brigham, 1998). The implication of gearing ratio may be considered from the view point of long term solvency of firm and return of equity shareholders. A high gearing ratio means greater dependence of the firm on debt and preference capital. It indicates that the firm has assumed a high degree of financial risk. It has to pay fixed interest on debt regardless of profit and pay dividend on preference capital at fixed rate subject to availability of profit. (Faria and Mollick, 2010, p.402). So a too high gearing ratio is not preferable from solvency point of view. The gearing ratio of Tesco has decreased from 2010 to 2011 and has shown a slight increase in 2012. The gearing ratio of Sainsbury has decreased in 2011 from 2010 and has again increased in 2012. Debt equity ratio is an indicator of the respective claim of owners and outsiders, or, equity shareholders (Kinserdal, 1995). So it enumerates a firm’s financial soundness. Higher debt equity ratio indicates higher dependence of firm on outside fund. In this case the firm is exposed to greater financial risk. This is due to the reason that if the firm does not perform well for some reason or other, it will face problem in payment of interest and repayment of principal in time whereas a firm having low debt equity ratio gives a higher margin of safety to outside suppliers of capital. They become sure about return of their capital in time. The hardship to be faced by the management in payment of interest in difficult situation is also relatively lesser. However, debt capital is generally cheaper. In favorable market condition, a firm with high debt equity ratio can enhance the return of equity shareholders. So debt equity ratio to be maintained should be carefully planned keeping in view the market condition, profitability of the firm and other related factors (Nobes, 1997). The standard debt equity ratio has been set as 2:1. Both Tesco and Sainsbury have up to the mark debt equity ratio over the past three years. Interest coverage ratio indicates firm’s ability to meet its interest obligation. It shows how many times interest is covered by earning available for its payment. For safety a high interest coverage ratio is preferable. Interest coverage ratio in both Tesco and Sainsbury has increased in 2011 from 2010 and then decreased in 2012. Part Two: Model Analysis Altman’s Model Edward I. Altman has developed a multivariate model for predicting corporate failure by using multiple discriminate analyses. Multivariate approach to failure prediction is defined as the simultaneous consideration of several variables during prediction process. In other words, multivariate approach considers the combined influence of several factors at a time in the distress prediction, which have significant bearings on stability and survival of firm (Pendlebury and Groves, 2001). This approach is based on multiple discriminate analyses (MDA), a statistical technique to draw a boundary between failed firms and non failed firms. Altman took a sample of 33 failed and 33 non failed firms which has been elected by paired sample design. In his model, failure firms were those firms which were legally bankrupt. As predictors of failure, twenty two accounting and non accounting variables were considered in various combinations. to draw a boundary between failed firms and non failed firms. To determine the bankruptcy status of firm, the best overall job can be done by the following discriminant function – Z = 0.012 X1 + 0.014 X2 + 0.033 X3 + 0.006 X4 + 0.999 X5 Where X1 = Working Capital / Total Assets (it measures liquidity) X2 = Retained Earnings / Total Assets (it measures reinvested earnings) X3 = Earnings before interest and tax / Total Assets (it measures profitability) X4 = Market value of equity / Book value of total debt (it measures) X5 = Sales / Total assets (it measures the sales-generating ability of the firm’s assets) Findings of Altman’s Study Out of 22 tested ratios, only 5 ratios could give the best performance for measuring corporate sickness. All firms that had a Z score greater than 2.99 fell into non bankrupt class, whereas all firms having Z score smaller than 1.81 score were bankrupt (Russ et al., 2009, p.94). The group of firms falling between 1.81 and 2.99 are considered to be in the Grey area or zone, which is consisting of both bankrupt and non bankrupt firms. So, firms with their Z scores falling in Grey area is required to have further investigation in determining their solvency status. Altmans Z score (in mn GBP)   Tesco Sainsbury 2012 2011 2010 2012 2011 2010 X 1 -0.119 -0.133 -0.092 -0.089 -0.107 -0.086 X2 0.342 0.341 0.308 0.412 0.428 0.408 X3 0.086 0.085 0.081 0.075 0.082 0.081 X4 -0.012 -0.013 -0.012 -0.08 -0.089 -0.09 X5 1.27 1.29 1.236 1.806 1.851 1.839 Z score= 1.2 X1+ 1.4 X2+ 3.3 X3+ 0.6 X4+ 1.0 X5 Z score value 1.884 1.882 1.819 2.479 2.542 2.52 The Z score of both Tesco and Sainsbury for the past three years shows values in the range of 1.81 and 2.99 which indicates that both the firms have been lying in Grey area for the past three years. Tobin’s Q Model Tobin’s Q ratio has been formulated by James Tobin of Yale University who is a Nobel laureate in economics. He hypothesized that the current market value of all the economies existing on stock market should be equal to their replacement costs. Q ratio is calculated as market value of a company divided by the replacement value of the asset of the firm (Tobin and Brainard, 1997). Q ratio = total market value of firm/ total value of asset. If the Q ratio is between 0 and 1, it means that the cost of replacement of a firm’s asset is greater than its stock value. It implies that the stock is undervalued. Whereas, if Q ratio is greater than 1, it will indicate that the stock of the firm is more expensive than the cost of replacing its assets reflecting overvaluation of its stock. In Tobin’s model, this stock valuation measure is the driving factor associated with the investment decision (Bull, 2007, p.24). Calculation of Q ratio (in mn GBP)     Tesco Sainsbury 2012 2011 2010 2012 2011 2010 total market value of firm (i) 402 402 399 538 535 532 total value of assets (ii) 50781 47206 46023 12340 11399 10855 Q Ratio (i/ii) 0.007916347 0.008515867 0.00867 0.043598 0.046934 0.04901 The Q ratio for both Tesco and Sainsbury for the past three years is lying between 0 and 1, which indicates undervaluation of their stock. The cost of replacement of their asset is greater than their stock value. Though Altman’s Z score model and Tobin’s Q model is provides better approach for failure prediction, it has got certain limitations. Limitations of Altman’s Model Altman’s Model could not discriminate between failed and non failed firms in an accurate manner when the horizon for prediction could be more than two years before bankruptcy. The variables considered were firm oriented like coverage and profitability ratios. The macro economic variables have been ignored here (Troy,2006, p.24). Limitations of Tobin’s Q Model Tobin’s Q ratio is dependent on accuracy and equilibrium of both replacement values and market used in equation. Market value can reflect irrational prices, effect of rumor or crashes in market. Replacement value is difficult to estimate as intangible assets are often treated as expenses rather than assets (Tyran, 1996, p.150). Although these two models give a lots of help to forecast how healthier the companies will be, there are some other methods also can predict bankrupt of a company. One of them can be univariate models for distress prediction. When the distress prediction model considers only a single variable, it is known as univariate approach for distress prediction. In this model, at first some particular ratio is selected and then some failed and non failed firms are selected and categorised. Then the selected financial ratio for failed and non failed firms is computed for several years prior to failure and trend of ratio of those two groups of companies are compared to make a generalisation of its predictive power of corporate sickness (Boeninger, 2012).Univariate model is based on two assumptions. The trend of variable for failed firms and the trend of variable of non failed firms differ systematically and secondly, the trend difference can be exploited for the purpose of prediction. Univariate Analysis Beaver’s Study Beaver’s study was unique as it focussed on the ability of financial ratios towards prediction of corporate failure. All non financial factors were excluded in his study in failure prediction. He selected 79 failed and 79 non failed firms. In the sample, for each failed firm, a non failed mate of similar size was selected from the same industry. Data of financial statement for failed firms were collected for five years before failure. Thirty two conventional financial ratios were computed for each firm in sample. At the first stage, he examined if there was any significant difference in the mean financial ratio between failed and non failed group of firms (Raiyani, 2010, p.150). At the second stage, the predictive ability of ratios was examined with dichotomous classification test. His study got the following findings – The comparison of mean ratios between failed and non failed firms showed that the failed firms were showing a deteriorating trend in financial ratios over the period of five year. The ratios of failed firms were worse than the non failed firms. The dichotomous test applied for examining the predictive ability of ratios indicated that the most successful predictor was the ratio of cash flow to total debt. Only 10% of firms were misclassified in the first year using this ratio immediately before the year of failure and 22% with the ratio of fifth year before failure. The ratio of net income to total assets predicted second best. The percentage of misclassification before failure was 12 and 25 in first and fifth year. The current ratio proved as the worst predictor where the percentage of misclassification was 20 and 31 percent in first and fifth year before failure. The mixed ratios representing income or cash flow in numerator and assets or liabilities in denominator outperformed the short term solvency ratio. L.C. Gupta’s study L.C. Gupta conducted a study of prediction of corporate sickness using univariate analysis. His sample consisted of 41 cotton textiles companies and 39 non textile companies. Gupta made a good match between sick and non sick companies in textile group but no proper matching were done for many sick companies in non textile group. So his study was based essentially on the textile samples. Gupta selected profitability ratios and balance sheet ratios from published financial statements for 13 years period. He employed percentage classification error to judge the predictive power of financial ratios. The ratio with least percentage classification error at earliest possible time was deemed to have highest predictive power. The two best ratios found by him in predicting corporate sickness were earning before depreciation, interest and tax (EBDIT) to sales and operating cash flow (OCF) to sales. EBDIT was considered superior to EBIT as it can compare profitability of different companies irrespective of their varying depreciation policies, size and age of fixed assets. However, the cash flow generating capacity per unit of sales was closely related with survival prospect of firm. The next three best ratios were EBDIT to total assets, OCF to total assets and EBDIT to (Interest + 0.25 of debt). Part Three: Limitations of ratio analysis Ratio analysis is a widely used technique for assessing the operating performance and financial position of a firm. But it has got some inherent problems which must not be lost sight of before undertaking such analysis. Some of these problems or limitations are as follows:- Dependency on correct data – The efficacy of ratio analysis is dependent upon the sanctity of accounting data. If accounting data are fabricated, the ratio analysis will also give misleading conclusion. Incomparability- With the help of ratios, inter-firm comparison becomes meaningful only when firms adopt uniform accounting procedures and principles. But it is quite unlikely that two firms will follow uniform accounting principles. For example, one firm may follow straight line method while another firm may follow reducing balance method of depreciation. Comparison of their asset turnover ratio in this case will only be misleading. Changes in price level- Trend analysis done with the help of ratios often get distorted due to the changes in price level. For example, fixed assets turnover ratio in 2005 will be higher than in 2000 even if there is no change in fixed assets and efficiency in utilization of assets remains same. This is due to increase in price level. Ratios account for one variable only- Since ratios account for only one variable, they cannot always give correct picture. For example, no definite conclusion should be made regarding the performance of a firm even if its rate of return has been increasing over the last ten years. Presentation of misleading picture- Ratio analysis often gives misleading picture. For example, one firm increases its production from 1000 units to 2000 units and the progress is 100%. Another firm increases production from 3000 units to 5000 units and the progress is only 44%. In this case, judging the efficiency based on percentage increase of sales only will not be appropriate. The absolute figures are required to be considered. Historical – Ratios are generally computed from past financial statements and are not true indicators of the future. Lack of standards- One of the ways of ratio analysis is comparison of actual ratios with the standard ratios. But fixing of standard ratio is not an easy task. Moreover standard ratio of two related items may vary from industry to industry. For example, standard fixed assets turnover ratio of electricity industry and the same for wagon industry must not be same for obvious reason that the latter is less capital intensive. Solution of real problem not possible- Ratio analysis may only identify the problem but cannot solve the same. It is only the starting point and for solving the problem, it requires further investigation. For example, if sales margin ratio of current year is lower than that of last year, it can only be understood that profitability has been deteriorated. To know the real cause of this deterioration and for its removal, further investigation and necessary action are required to be taken. Part Four: Forecasting the Final Accounts The lack of planning and good control of cash resources is the reason often given for the failure of many businesses in today’s society. However, good forecasting can help reduce business risk. Combine with the balance sheet and income statement in 2012, using ratios forecast the final accounts of Tesco and increased by 10% of cash trading. There might be some assumptions can be found according to the new balance sheet and new ratios’ sheet. Firstly, if cash trading increases by 10% the profitability ratios might be decreased. There is an example of Tesco for the year 2012. According to the formulas of Gross profit margin ratio and operating profit ratio, when the cash trading is increased by 10%, the amount of gross profit will not change but the sales will be increased by 10% so the gross profit ratio for 2012 will become 7.41% which decreased from 8.15% as before. Similarly with the operation profit ratio it has decreased to 5.61% from 5.94%, when the cash trading increased by 10%. Gross profit margin of Tesco for 2012 = {Gross profit/ [Sales+(sales*10%)]} *100 = {5261/[64539+(64539*10%)]}*100=7.41% Operating profit margin of Tesco for 2012 = {Operating profit(loss)before tax / [Sales+(sales*10%)]} *100 ={3985/[64539+(64539*10%)]}*100=5.61% Secondly, there are many activities which might be influenced by the increased cash trading such as, the investment activities, operating activities and the financial activities. The efficiency ratio might be increased. If the cash trading increases by 10%, the cost of sale will be increased so it will stimulate the investment activity. In the meantime, the foreign trade financing and the fixed assets, especially the tangible assets will be increased. The turnover revenue will be increased and therefore the net assets turnover might be increased. It increased from 2.03 to 2.23 times in the year 2012. Net asset turnover of Tesco for 2012= [Sales+ (sales*10%)]/ Net asset(total assets less current liability) = [64539+ (64539*10%)]/31832=2.23 Thirdly, in the part of liquidity ratio, the cash flow liquidity ratio determines how successfully a company can manage its short term debt. If the cash trading increases by 10% both the current ratio and quick ratio will be increased. Current ratio of Tesco for 2012= current assets/current liabilities= 0.68times New: Current ratio= current assets+ (current assets*10%)/current liabilities = [12863+(12863*10%)]/18949=0.75times Quick ratio of Tesco for 2012 = Quick assets/ Current liabilities= 0.49 times New Quick ratio= Quick assets+ (Quick assets*10%)/ Current liabilities Quick assets = current assets – stock – prepaid expenses Quick assets= 12863-3598-420 = 8845 Quick ratio=[8845+ (8845*10%)]/18949=0.51 times Fourthly, the debt to equity ratio might be increased. It means the enterprise will have the ability to pay off the debt before due date. If the cash trading increases by10%, there will be enough cash to pay off the debt (Tesco LPC, 2012). Conclusion The analysis carried out here is limited combining the financial ratios and two models which are Altman’s Z score and Tobin’s Q. Although it can help us to predict the bankruptcy of firms and can help to analyze how healthier the company will be but the limitations of these ratios and models cannot be ignored. These ratios demonstrated some good trend of Tesco in the last three year; however, the problems of Tesco are obvious shown. In the last part, the essay to forecast the final account if cash trading increases by 10% will help the business to operate well in the future. References Altman, E., and Hodgkiss, E., 2006. Corporate Financial Distress And Bankruptcy. 3rd edition. New Jersey:John Wiley & Sons. Atrill, P. and McLaney, E., 2005. Financial Accounting for Decision Makers, 4th edition, Financial Times Prentice Hall. Beaver, W. and et al., 2008. Financial Statement Analysis and the Prediction of Financial Distress, United States: Now Publishers Inc. Bitter, M., 2010. Analysis Of The Effect Of Financial Distress On Trade Credit. Brigham, E. F. and Houston, J. F., 1998. Fundamentals of financial management, Fort Worth Dryden Press. Faria, J.R. and Mollick, A.V., 2010. Tobins q and U.S. inflation, Journal of Economics and Business, Vol 62. Kinserdal, A., 1995. Financial Accounting: An International Perspective, United States: Pearson Professional Nobes, C.W., 1997. Introduction to financial accounting, 4th edition. Oxford, International Thomson Business Press Pendlebury, M. and Groves, R., 2001. Company Accounts-Analysis, Interpretation and Understanding, 5th edition, United states of America: Thomson Learning. Russ, R.W., Achilles, W.W. and Greenfield, J., 2009, The Altman Z-score Revisited, Journal of International Finance & Economics, Vol 9-4. Tobin, J. and Brainard, W.C., 1977, Asset markets and the cost of capital, Private Values and Public Policy Bull, R., 2007, Financial Ratios: How To Use Financial Ratios To Maximise Value and Success For Your Business, CIMA Publishing. Troy, l., 2006, Almanac of Business and Industrial Financial Ratios, Cch Incorporated.  Tyran, M., 1986, Handbook of business and financial ratios, Prentice-Hall.  Boeninger, C., 2012. Where can I find industry and company financial ratios? [online]. Available at: [Accessed on Feb 28, 2013]. Raiyani, J., 2010. Financial ratios and financial statement analysis, New Century. About us Tesco LPC, 2012. [online]. Available from: . [Accessed on Feb 28,2013]. Accounting tools, Gearing Ratio (2012). [Online]. Available from: . [Accessed on Feb 28,2013]. Company Report SOURCE FROM: FAME-company report of Tesco PLC and Sainsbury PLC Tesco Sainsbury Years 2012 2011 2010 2012 2011 2010 revenue 64539 60931 56910 22294 21102 19964 gross profit 5261 5060 4607 1211 1160 1082 operating profit 3985 3811 3457 874 851 710 profit before tax 3835 3535 3176 799 827 733 total current asset 12863 11438 11765 2032 1721 1853 total current liabilities 18949 17731 16015 3136 2942 2793 inventories 3598 3162 2729 938 812 702 total non-current asset (fixed) 37918 35768 34258 10308 9678 9002 total asset 50781 47206 46023 12340 11399 10855 net asset 17775 16535 14596 5629 5424 4966 finance cost (Interest expense) 557 483 579 138 116 148 total non-current liabilities (long-term liabilities/ debts) 14057 12940 15412 3575 3033 3096 cost of sales 59278 55871 52303 21083 19942 18882 retained earnings 12164 11197 9356 3715 3374 2963 debtor 2657 2330 1888 286 343 215 creditor 5971 5782 5084 2740 2597 2466 total liabilities 33006 30671 31427 6711 5975 5889 capital employed 31832 29475 30008 9204 8457 8062 profit before interest 4392 4018 3755 937 943 881 APPENDIX FORMULAES 1 Profitability Ratio 1.1 Return on capital employed (ROCE) Year/ Tesco 2012: Return on capital employed (ROCE) = Operating profit before interest /Capital employed *100 = Operating profit before interest/ (Shareholders funds + long term debt) *100 =3985/ (17775+(-14057))*100= 12.05% 2011: Return on capital employed (ROCE) = Operating profit before interest /Capital employed *100 = Operating profit before interest / (Shareholders funds + long term debt) *100 = 3811/ (16535+(-12940))*100=11.99% 2010: Return on capital employed (ROCE) = Operating profit before interest /Capital employed *100 = Operating profit before interest / (Shareholders funds + long term debt) *100 = 3457/ (14596+(-15412))*100=10.58% 1.2 Gross profit margin Year/ Tesco 2012: Gross profit margin = Gross profit/Sales *100 = 5261/64539*100=8.15% 2011: Gross profit margin = Gross profit/Sales *100 = 5060/60931*100=8.30% 2010: Gross profit margin = Gross profit/Sales *100 = 4607/56910*100=8.10% 1.3 Operating profit margin Year/ Tesco 2012: Operating profit margin = Operating profit(loss)before tax/Sales *100=3835/64539*100=5.94% 2011: Operating profit margin = Operating profit(loss)before tax /Sales *100=3535/60931*100=5.80% 2010: Operating profit margin = Operating profit(loss)before tax /Sales *100=3176/56910*100=5.58% 1.4 Net asset turnover Year/ Tesco 2012: Net asset turnover = Sales/ Net asset(total assets less current liability) = 64539/31823=2.03 2012: Net asset turnover = Sales/ Net asset =60931/29475=2.07 2012: Net asset turnover = Sales/ Net asset =56910/30008=1.90 2 Efficiency 2.1 Average stock (inventory) turnover period Years/ Tesco Average stock (inventory) turnover period= inventories/cost of sale*365=22 Average stock (inventory) turnover period= inventories/cost of sale*365=20 Average stock (inventory) turnover period= inventories/cost of sale*365=19 2.2 Trade receivable days/ Debtor days Year/Tesco 2012: Debtors/Annual Sales *365 = 15.02 2011: Debtors/Annual Sales *365 = 13.95 2010: Debtors/Annual Sales *365 = 12.10 2.3 Trade payable days/ Creditor day Year/Tesco 2012: Creditors/Annual purchases * 365 = 33.76 2011: Creditors/Annual purchases * 365 = 34.63 2010: Creditors/Annual purchases * 365 = 32.60 3 Liquidity 3.1 Current ratio Year/Tesco 2012: Current ratio= current assets/current liabilities= 0.67times 2011: Current ratio= current assets/current liabilities= 0.64 times 2010: Current ratio= current assets/current liabilities= 0.73 times 3.2 Quick ratio(acid test ratio) Year/Tesco 2012: Quick ratio= Quick assets/ Current liabilities= 0.48 times 2011: Quick ratio= Quick assets/ Current liabilities= 0.46 times 2010: Quick ratio= Quick assets/ Current liabilities= 0.56 times 4 Gearing ratio Year/ Tesco 2012: Gearing ratio = Long term debt/Capital employed = 0.79 2011: Gearing ratio = Long term debt/Capital employed = 0.78 2010: Gearing ratio = Long term debt/Capital employed = 1.05 4.1 Debt to equity ratio Year/Tesco 2012: Debt to equity ratio= long turn debt/ net assets(shareholders’ equity)= 0.31 2011: Debt to equity ratio= long turn debt/ net assets(shareholders’ equity)=0.32 2010: Debt to equity ratio= long turn debt/ net assets(shareholders’ equity)=0.39 4.2 Interest coverage ratio Year/Tesco 2012: Interest coverage ratio= profit before interest/ interest payable*100=7.88% 2011: Interest coverage ratio= profit before interest/ interest payable*100=8.31% 2010: Interest coverage ratio= profit before interest/ interest payable*100=6.48% Calculation of Altmans z score (in mn GBP)   Tesco     Sainsbury       2012 2011 2010 2012 2011 2010 working capital (i) -6086 -6293 -4250 -1104 -1221 -940 total assets (ii) 50781 47206 46023 12340 11399 10855 X1 (i/ii) -0.119847975 -0.133309325 -0.09235 -0.08947 -0.10711 -0.0866               retained earnings (iii) 17373 16133 14197 5091 4889 4434 X2 (iii/ii) 0.342116146 0.341757404 0.308476 0.412561 0.428897 0.408475               EBIT (iv) 4392 4018 3755 937 943 881 X3 (iv/ii) 0.086489041 0.085116299 0.08159 0.075932 0.082727 0.081161               market value of equity (v) 402 402 399 538 535 532 book value of total debt (vi) -33006 -30671 -31427 -6711 -5975 -5889 X4 (v/vi) -0.012179604 -0.013106844 -0.0127 -0.08017 -0.08954 -0.09034               sales (vii) 64539 60931 56910 22294 21102 19964 X5 (vii/ii) 1.270928103 1.290746939 1.236556 1.806645 1.851215 1.839152               z score 1.884179211 1.882255794 1.819236 2.479347 2.542407 2.52073 Read More