Higher the ratio, higher is the margin of safety for the creditors. Main ratios used in the analysis are:
For looking at long term trends in performance key ratios (as above) were obtained for the years 2005 to 2008. Comparison of these ratios over these four years shows the trend for the enterprise whether it is upward, downward or stagnant.
It was also thought prudent to see how the enterprise stands as compared to the industry. In view of the fact that at present the economy is going through an exceptional downturn, it was thought best to analyze the past performance by averaging the data from 2005 to 2008. The average of figures from 2005 to 2008 obtained was then taken as base to calculate the analytical ratios. These ratios were then compared with the industry ratios to highlight the areas in which Tesco’s performance is better than its competitors.
Profitability- In terms of profitability Gross Profit Margin is range bound showing only a marginal decline of 0.11% over four year period from 2005 to 2008. Thus there is no significant change in terms of operating cost or sale price in the years under consideration.
Net Profit Margin has shown slight improvement in the comparative analysis by half a percent i.e., 0.508. Thus even though gross profit ratio is almost stagnant there is slight upward trend in net profit, this could be due to higher turnover wherein the net profit tends to increase after reaching breakeven point for every increase in sales.
The other two profitability ratios also indicate the effectiveness of management in managing the resources and they reveal a small but definite upward trend over the four years. Return on assets has grown by 0.501% from 2005 to 2008. Return on equity shows even better growth of 2.301%. Thus retained earnings seem to have yielded increased profit over the years.
The Liquidity Ratios on the other