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Executive Summary

Tesco’s earnings per share have increased steadily over three years,
from 22.36 pence to 29.12 pence, making it a good target for potential
investors. The dividends paid to shareholders have also increased
which can be expected considering its excellent increase in earning
per share value. Apart from the profit and share price the company
came top in other categories of the business also namely quality of
goods & services provided to the customers, marketing value. Tesco’s
sparkling growth pushed its main rivalry Sainsbury to third position
which was the biggest grocer in UK until 1995. From then onwards
Tesco became the UK’s leading grocer and still maintaining its position
in the market ahead of the tough competition with Morrison and
Sainsbury. The company’s performance is analyzed more deeply using
ratio analysis.

The purpose of this report is to prepare an analytical review of the
financial position of Tesco PLC, using the analysis of ratios as a
financial tool. This report is prepared for the investors (shareholders),
based on the latest available Tesco’s annual report, to identify and
reconcile the company’s profit position and identify trends in the
business performance.

The information used will be taken from the company’s annual report
of 2007, 2008 and 2009.

This report will also compare Tesco, with its competitors J Sainsburys
PLC and Morrisons

Background Information
Tesco PLC is the 3rd largest grocery retailer in the world. It has 4331
stores in 14 countries, although United Kingdom market still
represents the largest source of income.

In the UK, it operates through small grocery stores under Tesco metro
brand name, smaller neighbourhood stores called Tesco express and
big supermarkets (Tesco Extra and 24-hour stores).

Apart from grocery, which is the core business, Tesco PLC has also
diversified into non-food items like household goods, electrical
appliances, clothing, home furnishings, petrol stations, online
shopping, telecoms and financial services.
Its main strategies are to maintain a strong UK core business, become
as strong in non-food as in food, extend operations into retailing
services (Tesco Finance,, Telecoms), develop international
operation and actively support the local communities.

Tesco PLC has continued to grow despite the current economic

downturn. It has recently acquired the remaining 50% of Tesco
personal finance from Royal Bank of Scotland.

Tesco has 37 green stores across the group; including the most
recently opened and the greenest in Manchester, United Kingdom.

Tesco has also been involved in charity and has raised £6.2 million for
Marie Currie Cancer Care.

Ratio Analysis
Financial ratios are used to look at the financial position and
performance of Tesco PLC to be able to look at the financial strengths
and weaknesses.

The accounting policies adopted by Tesco PLC have been consistent

(International Financial Reporting Standards), although there were few
changes this year, as noted in the financial report. The changes were
in financial instruments and service concession arrangements. These
however have no impacts on this year’s net assets.

As there are no standard rates for depreciation or goodwill, they may

have been exaggerated. These may lead to inconsistency in reporting.

Financial statement prepared for Tesco PLC in previous years had

been 52 weeks (year end 23rd February). This year is 53 weeks (year
end 28th February).

1. Profitability ratio

According to McLaney and Atrill (2008, pg 183) profitability ratios

provide insight into whether a business is making profit and to what
extent. The ratios used to evaluate profitability are return on capital
employed (ROCE) return on ordinary shareholders’ funds (ROSF),
gross profit margin and operating profit margin

The profitability ratios of Tesco PLC, Morrisons and J Sainsbury

(2009 only for comparison) are:

Profitability ratios 2007 2008 200 SAINSBU Morrison

9 RY 2009 s 2009
Return on capital 12.6 12.9 13. 9.0 12
employed (ROCE) % 0

Return on ordinary 26.7 25.1 23. 10.6 14.72

shareholders’ fund (ROSF) 9

Gross profit margin (%) 8.12 7.67 7.7 5.48 6.28


Operating profit margin 6.20 5.90 5.9 3.56 4.62

(%) 0

Table 1: Profitability ratios (calculated/extracted from data in

appendix A, C & D)