Student ID : 1232941

Student Name : Manasi J S

Subject : Accounting and Financial Management

Subject Number : 7AC002

Activity title : Assignment - Accounting and Financial Management

Due Date : 21.04.2013

Date Submitted : 16.04.2013

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 Table of contents

CHAPTER 1 : EXECUTIVE SUMMARY ...................................................................................................... 3

CHAPTER 2 COMPANY PROFILE............................................................................................................. 4
Profitability ratios ......................................................................................................................... 14
CHAPTER 4 : SOURCES OF FINANCE ...................................................................................................... 19
The approach to growth and returns .......................................................................................... 21
CONCLUSION......................................................................................................................................... 22

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 TESCO PLC

EVALUATION OF FINANCIAL PERFORMANCE OF TESCO PLC

FOR 2012- 2013

CHAPTER 1 : EXECUTIVE SUMMARY

This report aims to analyse the financial position of Tesco Plc from a prospective investor’s
point of view. The analysis is based on the recent financial statements available for Tesco.

TESCO PLC is a largest grocery retail business segment which primary deals with food,
general merchandise, clothing and electrical products. It is world’s largest retailers with over
530,000 employees with presence in 12 countries and serving millions of customers a week.

This research paper aims to evaluate the company’s overall financial position of the firm
during the year 2011-2012 and 2012-2013. Through the analysis it was identified that the
group finances its operations with combination of retained profits, long term and medium
term debt capital market, commercial paper, bank borrowings and leases. Through
analysing the policy of the firm, it was found that the company follow the debt maturity
profile. It maintains a commercial paper programme of £2 billion and USD 4 billion. It also
has a bank facility of £2.725 billion of which £2.6 billion of revolving credit facilities which
will mature in August 2018 and £0.125 billion of bilateral credit facilities with a maturity
period of December 2015

3
CHAPTER 2 COMPANY PROFILE

Tesco Plc is headquartered in Cheshunt, Hertfordshire, England, United Kingdom. It is a

British multinational grocery and general merchandise retailer. It was founded by Jack
Cohen in 1919 as a group of market stalls. The name Tesco was appeared in 1924 after
Cohen purchased a shipment of tea from T.E Stockwell and combined those initials with
the first two letters of his surname Tesco is the world’s second largest retailer measured
by profits and third largest retailer measured by revenue. Tesco is listed on the London
Stock Exchange and is a constituent of the FTSE 100 Index. It had a market capitalisation
of approximately £24.4 billion as of 15 January 2012, the 15th-largest of any company
with a primary listing on the London Stock Exchange. (Source:
http://en.wikipedia.org/wiki/Tesco). Tesco is operating all over 14 countries and also
employing almost 530000 people and serving millions of people every week in stores
and online.

Tesco international operations are in Europe, Asia and United States. Subsidiaries of
Tesco are Tesco Stores Ltd, Tesco Bank and Tesco mobile. Tesco plc has grown through
organic and in-organic growth in the past. Organic growth is when a company strives to
increase its output/production in order to attain greater profits. In this the company
does not expand by means of mergers or acquisitions but carries on its course of
business. This is generally termed as the most reliable way of growth for the companies.
It is also a prime indicator of how effectively the management has used it resources. The
company benefits from increased revenue which could refer to an increase in customer
base and market share. Organic growth does not need outside investment and is safer
than brisk growth. This is due to the tried and tested business models where the profits
are reinvested into the company avoiding outside sources of finance.

Vision

The characteristics which are central to the vision of the business are, they built around
customers and colleagues, high-quality assets around the world and multiple opportunities
for growth – and these characteristics are central to our Vision for the business

4
Tesco wants to be the most highly valued business by: the customers they serve, the
communities in which they operate their loyal and committed colleagues and their
shareholders. For these things to be possible the Vision for the business has five elements –
each of them describes the sort of company Tesco aspires to be.

Board of Directors

 Sir Richard Broadbent :- Non-executive Chairman

 Philip Clarke :- Group Chief Executive
 Laurie Mcllwee :- Chief Financial Officer
 Patrick Cescau :- Senior Independent Director
 Gareth Bullock :- Non-executive Director
 Stuart Chambers :- Non-executive Director
 Olivia Garfield :- Non-executive Director
 Ken Hanna :- Non-executive Director
 Deanna Oppenheimer :- Non-executive Director
 Jacqueline Tammenoms Bakker :- Non-executive Director
 Jonathan Lloyd :- Company Secretary

Stakeholders

 Customers
 Colleagues
 Investors
 Industry
 Local communities
 Suppliers

Corporate objectives

 Offers the best value of money and the most competitive prices to the customers.
 Meeting the needs of customers by constantly seeking, and acting on, their opinions
regarding innovation, product quality, choice, store facilities and service.

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  Providing shareholders with progressive returns on their investment improving
profitability through investment in efficient stores and distribution depots, in
productivity improvements and in new technology.
 Working closely with suppliers to build long term business relationships based on
strict quality and price criteria.
 Participating in the formulation of national food industry policies on key issues such
as health, nutrition, hygiene, safety and animal welfare.
 Supporting the well-being of the community and the protection of the environment.

Tesco Businesses

TESCO
DUNNHUMB UK TESCO
Y CHINA

TESCO TESCO
BANK INDIA

FRESH & TESCO

EASY MALAYSIA

TESCO
TESCO TESCO
KIPA KOREA

TESCO TESCO
SLOVAKIA LOTUS

TESCO
TESCO
CZECH
POLAND
REPUBLIC
TESCO TESCO
IRELAND HUNGARY

Important Highlights of Tesco as on 2013

 £3.5bn trading profit – year-on-year performance largely reflects UK reinvestment

 Final dividend maintained at 10.13p, giving full-year dividend of 14.76p
 Good progress in the UK, delivering improved results – for customers and for Tesco
 Strong online performance: Group sales of over £3bn for the first time – up 13%
 Confirming exit from the United States – process well-advanced
 Clear approach to future growth, capital expenditure, returns and cash, providing
clarity for shareholders

6
Competitive strategies of Tesco.

 Inrecent years, Tesco has greatly diversified, extending its business lines from food
into non-food, clothing, financial. services, and telecommunications
 Tesco launched "Operation Checkout," which included price reductions and
centralized purchasing for all its stores. As a result, its market share rose by 4 Percent
 Tesco used its food brands "Finest" and "Value" to expand into non food items.
 Many British retailers attempting to build international businesses have failed. Tesco
has responded to the need to be sensitive to local expectations in foreign countries by
entering into joint ventures with local partners, such as Samsung Group in South
Korea (Samsung-Tesco Homeplus), and Charoen Pokphand in Thailand (Tesco Lotus)
 Tesco announced that it was selling its operations in Taiwan to Carrefour and
purchasing Carrefour stores in the Czech Republic and Slovakia. Both companies
stated that they were concentrating their efforts in countries where they had strong
market positions
 An inclusive offer” is how Tesco describes its aspiration to appeal to upper, medium-,
and low-income customers in the same stores.
 Tesco implemented the Clubcard rewards program to gather customer information,
which is then used to cater to specific potential customer needs and wants. When
shoppers sign up for the card, they automatically submit their ages, genders, and
incomes
 Tesco’s marketing strategies involves entering in to foreign market through joint
ventures , acquisitions and Greenfield investment

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INDUSTRY ANALYSIS:

Strengths
1. Tesco holds a 13% share of the UK
retail market. Its multi-format
capability means that it will continue
to grow share in food, while
increasing space contribution from
hypermarkets will allow it to drive a
higher share in non-food.

2. Tesco has grown its non-food

division to the extent that its
revenues now total 23% of total
group earnings. Tesco’s international business segment is growing steadily, and is predicted
to contribute nearly a quarter of group profits over the next five years. If geographical
spread continues to grow, this will ensure Tesco’s continued regional strength.

3. Tesco.com is the world’s biggest online supermarket and this year the group had sales of
over £577 million, an increase of 29% on last year. Tesco online now operates in over 270
stores around the country, covering 96% of the UK. With over a million households
nationwide having used the company’s online services, the company has a strong platform
to further develop this revenue stream.

4. Profits for Tesco’s operations in Europe, Asia and Ireland increased by 78% during the last
fiscal year. The company has a strong brand image, and is associated with good quality,
trustworthy goods that represent excellent value. Tesco’s innovative ways of improving the
customer shopping experience, as well as its efforts to branch out into finance and
insurance have also capitalized on this.

5. Tesco has developed a successful multiformat strategy that has accelerated its
advantage. Its UK sales are now 71% larger than Sainsbury’s. Also the Competition

8
Commission’s report makes it very difficult for a competitor to challenge its scale and has
effectively scuppered Wal-Mart’s chances of stealing UK leadership. Therefore, Tesco is in
an enormously strong position in its domestic market.

Market share and performance of Tesco when compared to competitors

According to the news reported in the “ The Gauardian “ dated 19th Novemeber 2013 ,
Britain's four biggest supermarkets all lost market share for the first time in at least a
decade over the last three months as they continue to be squeezed by discounters and
upmarket grocers.

Tesco, Sainsbury's, Asda and Morrisons all lost ground to cut-price competitors led by Aldi
and Lidl, which over the most recent weeks have together accounted for nearly 7% of the
grocery market, according to the latest data from Kantar Worldpanel. Almost a third of
British households visited a German-owned Aldi discount store in recent weeks. At the same
time sales of the big supermarkets' luxury ranges have all been growing fast as squeezed
shoppers try to treat themselves without eating out.

Releasing Sainsbury's half year results last

week, King repeatedly pointed out that
Sainsbury's was the only one of the "big four"
grocers to increase market share in the past
year. While the supermarket continues to
increase sales at 2.6% – a much stronger pace
than major rivals Tesco, Asda and Morrisons –
even Sainsbury's growth fell short of the
overall market growth of 3.2%. It also looked weedy in comparison to impressive growth
from Lidl and Aldi .

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Aldi's sales rose a spectacular 31.1% in the 12 week period, compared to the same period a
year before, while Lidl stepped up its growth to 13.8%. Much of Aldi's growth is coming
from new stores – but they are attracting shoppers away from the bigger grocers.

Over the past year, Aldi and Lidl have added nearly 1 percentage point of market share in
the UK – equivalent to about £1bn – taking their total grip on the market to nearly 7%. Aldi
has led the way in stealing shoppers from rivals, particularly Tesco and Asda, according to
research by analysts Verdict released 2013.

The major supermarkets are also losing market share to premium players Waitrose and
Marks & Spencer, both of which have ambitious plans to open new stores. Waitrose saw an
8.8% rise in sales in the 12 week period, contributing to an unbroken rise in market share
since 2009, according to Kantar.

The retailer is benefiting from an increasing interest in the quality of food in the wake of the
horse meat scandal which broke early this year.

Aldi and Lidl are trying to attract more up-market customers with advertising campaigns
promoting luxury items such as Serrano ham and fresh lobster for Christmas. Lidl launched
its first ever British television advertising campaign this month, several days before any of
the major grocers' festive ads hit the small screen.

(http://www.theguardian.com/business/2013/nov/19/britain-supermarkets-market-share-
fall-tesco-sainsburys-lidl, “Britain's big supermarkets lose ground to cut-price rivals and
upmarket grocers Viewed on 9th January 2014)

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CHAPTER 3 FINANCIAL ANALYSIS
Financial Statement Analysis
The financial statements provide prosperous information about the operational results of a
business unit and much can be learned from a cautious examination of these statements.
The main purpose of financial statement is for decision making. Financial analysis is the
procedure of determining the significant operating and financial characteristics of a firm
from accounting data. The profit and loss account and Balance sheet are indicators of two
important factors- profitability and financial reliability.

Objectives of financial analysis

 To calculate the earning capacity of the firm.

 To guage the financial performance and financial position of the firm.
 To find out the long term liquidity of the funds.
 To evaluate the solvency of the firm.
 To find out the debt capacity of the firm.
 To choose future prospects of the firm.
 To identify the progress of the firm
 To calculate the efficiency of operations.

Methods of Financial Analysis

Ratio Analysis
Comparative financial statement analysis
 Comparative Balance Sheet
 Comparative Income Statement
Common size statement analysis
 Common size balance sheet
 Common size income statement
Ratio Analysis
Ratio Analysis is one of the important tools of financial analysis. It aims at making
quantitative information for decision making. Some ratios indicate the trend or progress or
downfall of the firm. It helps the financial management in evaluating the financial position
and performance of the firm.

YEAR 2012 2013

Current Ratio 0.67times 0.69times
Quick Ratio 0.37times 0.41times

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Stock Turnover 17.54 times 16.55 times
Ratio
Stock Days 20.81days 22.06 days
Gross Profit Ratio 8.15% 6.31%
Net Profit Margin 6.3% 3.4%
Return on Capital 22.68% 11.76%
Employed
Asset Turnover 1.32 times 1.28 times
Ratio
Return on Assets 5.73% 0.25%
Return on Equity 16.30% 0.72%

Liquidity Ratios
Liquidity is the capacity of the firm to meets its current liabilities as they fall due.

The following are the important liquidity ratios:

 Current Ratio: Current ratio is the most common ratio for calculating liquidity. It signifies
the ratio of current asset to current liabilities. It is also called working capital ratio.

Current ratio = Current Asset/ Current Liabilities

Year 2012 (Amt in £m) 2013(Amt in £m)

Current Ratio 12,863/19,249 0.67times 13,096/18,985 0.69
times

Interpretation

The standard norm of current ratio is 2:1, it is considered as an ideal one. So the current
ratio of Tesco is not satisfactory. The аbоve figure shows that the trend in the current ratio
does not reach the standard; low ratio indicates inadequate working capital. Current ratio of
Tesco has a slight increase as compared to the previous year i.e. from 0.67 to 0.69 which
means that Tesco’s ability to pay its short term debt is increasing.

 Quick Ratio: Quick ratio is also known as ‘Acid Test Ratio’ or ‘Liquidity Ratio.’ It is the
relationship between quick assets to current liabilities.

Quick ratio = (Current asset-stock)/ Current Liabilities

12
 Year 2012 (Amt in £m) 2013 (Amt in £m)
Quick Ratio (12,863-3598)/ 0.48 (13,096- 0.49 times
19,249 times 3744)/ 18,985

Interpretation

The satisfactory level of Quick ratio is considered as 1:1. But the ratio level in both years are
less than 1:1 which means the quick assets does not have the ability to pay off their
liabilities. A company would not want their quick ratio less than 1:1 because this period may
badly affect the ability to pay off their current debt.

Financial Risk/Working Capital Management Ratios

 Stock Turnover Ratio: This ratio shows whether investment in inventory is efficiently
used or not. It explains whether investment in inventories is within proper limits or
not. There is no standard ratio for inventory turnover. Each field and kind of business
has its own standard.

Stock Turnover ratio = Cost of goods sold/Average stock

Year 2012 (Amt in £m) 2013 (Amt in £m)

Stock turnover 58519/3,598 16.26 60737/3,744 16.22
times times

Interpretation

Tesco is doing a good job in managing their inventories. Comparing with the previous year
there is a slight difference in the ratio. There is no standard ratio for the inventory turnover.
The ratio levels relatively close to each other, so the difference in the ratio level cannot be
considered as low.

 Stock days: It shows how many days of stock (inventory) are held on average.

Stock days = Number of days in a year/Stock turnover

Year 2012 (Amt in £m) 2013 (Amt in £m)

Stock days 365/16.26 22.45 365/16.22 22.50
days days

13
Profitability ratios

 Gross Profit Ratio: The ratio expresses the relationship between gross profit and
sales. The ratio helps in determining whether the average percentage of mark up on
the goods is maintained or not.

Gross profit ratio = Gross profit/ net sales*100

2012 (Amt in £m) 2013 (Amt in £m)
Gross Profit 5397 4089
Sales 63916 64826

Year 2012 (Amt in £m) 2013 (Amt in £m)

Gross profit 5,397/63,916*100 8.44% 4,089/64,826*100 6.31%
margin

Interpretation

The table shows the gross profit ratio reduced in 2013. It indicates that the company
was not much successful in managing their operations than the previous year. The
decrease in the gross profit ratio is due to the increase in the cost of goods without
a corresponding increase in the selling price of the goods sold.

 Net Profit Ratio : This ratio is also called as the net profit to sales or net profit
margin ratio. This ratio is used to measure the overall profitability of the business.

Net profit margin = Net profit before tax/Sales*100

2012 (Amt in £m) 2013 (Amt in £m)
Net profit before tax 4038 1960
Sales 63916 64826

Year 2012 (Amt in £m) 2013 (Amt in £m)

Net Profit 4038/63,916*100 6.31% 1,960/64,826*100 3%
margin

Interpretation

Net profit margin is the indicator of how efficient a company is and how well it
controls its costs. The Net profit margin of Tesco in 2013 is reduced; it shows that
the efficiency of the company is lesser in comparison with the previous year. The low
profit margin indicates the low margin of safety.

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  Return on Capital Employed: This ratio is also known as Return On Investment (ROI).
The primary objective of making investment in any business is to obtain satisfactory
return on capital invested.
ROCE = Profit before interest and tax/ Capital, reserves and long-term
liabilities*100

Year 2012 (Amt in £m) 2013 (Amt in £m)

ROCE 4038/17801*100 22.68% 1960/16661*100 11.76%

Interpretation

This ratio shows how productively a business is using its capital by relating overall profit
performance to the amount of capital employed in business. Here the return on capital
employed in 2013 is lesser than 2012. ROCE is a relative profit measurement that
demonstrates the return the business is generating from its gross assets. ROCE decreased
during the year, reflecting the trading profit performance.
 Asset Turnover Ratio: This ratio shows the efficiency of an entity’s capacity to use its
assets to generate sales.

Asset Turnover Ratio = Sales/ Total Assets

Year 2012 (Amt in £m) 2013 (Amt in £m)

Asset Turnover 63916/50781 1.3times 64,826/50129 1.3times

Interpretation

Asset turnover ratios in both the years are similar.

 return on Assets: It is an indicator of how profitable a company is relation to its total

assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings. it is calculated by dividing a company's annual earnings by its
total assets

ROA = Net profit / Total Assets*100

2012 (Amt in £m) 2013 (Amt in £m)

15
Net Profit after tax 2814 120
Total assets 50781 50129

Year 2012 (Amt in £m) 2013 (Amt in £m)

ROA 2,814/50781*100 5.54% 120/50129 0.24%
*100

Interpretation

The return on asset in 2013 is lower than the previous year which means the company has
to focus more to generate more revenue.

 Return on Equity: This ratio indicates the return earned on the book value of
the equity share holders’ equity. Owners are more interested with this since it
indicates the success of the company.

ROE = Profit after tax/ Share Capital + Reserves*100

2012 (Amt in £m) 2013 (Amt in £m)

Net Profit after tax 2814 120
Share capital & Reserves 17801 16661

Year 2012 (Amt in £m) 2013 (Amt in £m)

ROE 2,814/17801 16% 120/16661 0.74%

Interpretation

Return on equity in 2013 is 0 .74% which is lower than the previous year i.e. in 2012 the ROE
is 16%, which indicates that the return produced for the shareholders are decreasing.

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 Comparative financial statement analysis

The preparation of comparative financial statements is an important device of horizontal

financial analysis. Financial data becomes more meaningful when compared with similar
data for a previous period or a number of prior periods. These statements are very helpful in
measuring the effects of the conduct of a business during the period under consideration.

 Comparative Balance Sheet

The comparative Balance sheet analysis is the study of the trend of the similar items,
collection of items and computed items in two or more Balance Sheets of the same business
enterprise on different dates. The changes in the periodic Balance sheet items reflect the
conduct of the business. The changes can be observed by comparison of the balance sheet
at the beginning and at the end of the period and these changes can help in forming an
opinion about the progress of the enterprise.

Table 6 explain Comparative Balance sheet of Tesco Plc

Interpretation

The comparative Balance sheet shows the increase or decrease of the assets and liabilities
and the amount of increase or decrease. If the current assets increases and current liabilities
decrease the cash will decrease and if the current assets decreases and current liabilities
increase the cash will increases here the current asset increased by 1.81%. Fixed assets
reduced in 2013 compared to the previous year by 3.23% In case of current liabilities, there
is a decrease of 1.37% so there is also decrease in the cash. Non-current assets were
reduced by.036

 Comparative Income Statement

Comparative Income Statement is a statement prepared to get an idea of the progress of a

business over a period of time. The changes in absolute data in money values and
percentages can be determined to analyse the profitability of a business.

Refer Table 7 : represent Comparative Income Statement of Tesco Plc

Interpretation

The table shows that the net sale was increased by 1.42%in 2013 and the cost of sales also
increased. Gross profit rate was decreased by 24.24%. Operating profit and net profit also
decreased by 48% and 95.73 respectively in 2013.It shows that the profitability of the
company was not in a good condition.

17
 Common Size statement analysis

Common size statements are prepared to show the relationship of different individual items
with some common items. These are the comparative statements that give only the vertical
percentage ratio for financial data without giving rupee values.

 Common Size Balance Sheet

It is a statement in which Balance sheet items are expressed as percentage of each asset to
total of assets and percentage of each liability to total of liabilities.

Refer table 8 Common Size Balance Sheet of Tesco Plc

Interpretation

In common size analysis the percentage of each assets are calculated to its total assets and
liabilities to the total liabilities. In 2012 the percentage of fixed asset is 66.7% of total assets
and in 2013 the percentage is 65.5. In the case of current assets the percentages is 33.34
and 34.49 in 2012 and 2013 respectively. Current liabilities are of 51.95% in 2012 and
53.26% in 2013.

 Common Size Income Statement

A Common Size Income Statement is a statement in which each item of expense is shown as
a percentage of net sales. A significant relationship can be established between items of
income statement and volume of sales. Increase in sales will certainly increase the selling
expense not the administration and financial expenses which are mostly fixed in nature. In
case the volume of sales increases to a considerable extent, administration and financial
expenses may also go up.

Refer table 9 Common Size Income Statement of Tesco Plc

Interpretation

Each item in common size income statement is expressed as a percentage of net sales.
Gross profit is of 8.44% of net sales in 2012 and 6.31 % in 2013. Operating profits are of 0
.26% and 0.27% in 2012 and 2013 respectively. The profit of the year is 4.40% in 2012 and
0.01% in 2013.

18
 CHAPTER 4 : SOURCES OF FINANCE
Financial discipline of TESCO for the future

The Tesco of the future will pursue more focused growth, consume less capital and generate
more free cash flow. Making this transformation in all its aspects will of course not be
without its challenges.

1. Current Performance of TESCO

Group Sales

Tesco plc is a well known international grocery and general merchandising retail chain based
in Britain. In the financial year2012-13 it has a turnover of £72. 4 billion with a group trading
profit of £ 3.5 billion. The financial statistics for the group sales are as follows:

2012-13 2011-12 Increase/Dec

rease
Group Sales 72,035 328
Add Add
UK : £48216m UK : £ 47,355m
Asia : £12317m £72,363m Asia: £11,627m
Europe : £10809m Europe: £11,371m
Tesco Bank : £1021m US: £638m
Tesco Bank: £1,044m
Group Revenue £64,826m 64,539 287

Group trading profit £3,453m 3,761 -308

Add Add
UK : £2,272m UK : £2,480m
Asia : £661m Asia : £737m
Europe: £329m Europe: £529m
Tesco Bank : £191m US (loss): £ (153) m
Tesco Bank : £168m

Underlying profit before tax £3,549 3,915 -366

Underlying diluted earnings 35.97p 37.41 -1.44
per share
ROCE 12.7
Capex 3.0bn
Source http://www.tescoplc.com/files/pdf/results/2013/prelim/prelim_2012-
13_results_statement.pdf

While comparing the financial year 2013 with the previous year 2012, it was found that the
group sale increased by 1.3% and follows a constant growth rate of2.5%. However the group
trading profit declined by 13%.

19
The impact on group trading profit is as follows :

UK (8.3) %
Asia (10.3)%
Eureope (37.8)%
Tesco Bank (15.1)%
Source http://www.tescoplc.com/files/pdf/results/2013/prelim/prelim_2012-
13_results_statement.pdf

Group trading profit declined by (13.0)%, reflecting investment in the UK, the impact of
regulatory changes in South Korea and the challenging economic conditions in Europe. This
trading performance coupled with reduced JV income and higher net finance costs led to a
decline in Group underlying profit before tax of (14.5)%

According to Philip Clarke, the Chief Executive of Tesco group, the main objective of the
group is set out for sustainable and disciplined growth. The business environment in UK
remains controllable in nature even though faced a small discernible impact on frozen and
chilled convience food sales. But outside the UK the business environment remain
challenging especially in regulatory matters.

UK

Tesco have made the investment as they planned and it has led to a clear improvement in
their performance, both in absolute terms and relative to the market. Total sales rose by
2.6% excluding petrol, and like-for-like performance improved during the course of the year.
The plan laid out by Tesco last year had described the impact of the investment in terms of a
rebasing of trading margin to 5.2% and the progress they have made in the UK has been
achieved whilst delivering a margin absolutely in line with these expectations.

Asia

The performance of Asia was in line with expectations and was dominated by the South
Korean regulatory changes concerning trading hours. Sales of Asia were reduced by 0.2% i.e.
from the constant rate of 6.1% to 5.9%. Asia’s revenue (excluding VAT, impact of IFRIC 13)
was also have fluctuated from the constant rate of 6.2% to 6.0%.

Europe

Markets in Europe remain fundamentally attractive; this year’s performance of Tesco was
disappointing. The company faced significant headwinds throughout the year, as

20
macroeconomic uncertainties continued to impact businesses. This had a particularly
marked impact on the general merchandise businesses across the region, holding back the
overall like-for-like sales performance.

Tesco Bank

Tesco made progress through the year in banking products, with good growth in both
customer accounts and balances. Our insurance business was held back by a very
challenging market, with strong downward price pressure in motor insurance. Throughout
this period, we focused on ensuring we offer the best products and prices to our loyal Club
card customers.
In recent years, the Bank’s profit has been impacted by a couple of non-trading factors – the
first, fair value releases and the second, the run-off of our legacy insurance agreement with
Direct Line Group. Before these, profits grew well and are up 13% with a particularly
pleasing performance in customer lending. Tesco Bank

DIVIDEND

The offset of business in one direction is not effecting the overall growth of the firm. The
current year 2013, also the company paid a final dividend of 10.13 p per share. This
demonstrate the confidence among the investors and the shows the growth strategy

Future Prospects of the company

By implementing financial discipline , the TESCO PLC aims in driving sustainable growth by
giving priorities in three segment :

1. Continuing to strengthen the UK business

2. Sustainable growth through multichannel.
3. Pursuing disciplined international growth

This means that, in the current economic environment, investors can expect us to deliver:

 Mid-single digit trading profit growth

 Return on capital employed within a range of 12% to 15%
 Dividend growth, broadly in line with underlying earnings*, with a target cover of
more than 2 times

The approach to growth and returns

21
key financial areas of Financial Appraisal of a loan request

Normally five stages are involved while assessing loan request by the bank. They are
1. Identification of the customer : before assessing the loan application, the banker will
evaluate the identiy of the customer and the nature of business of the customer
2. Assessing the application by the customer
3. Review of application
4. Evaluation
5. Monitoring and control

At the time of assessing and review of the application the bank adopts two methods:

1. Financial appriasl methods

2. Non financial appraisal methods

The financial appraisal by the bank focused on mainly three broad area

Financial structure of the firm

Liquidity of the firm
Profitability

22
 1. Financial structure of Tesco

Equity capital

Increase/Decrease
2012 2013
Amt in £m Amt in £m Amount Percentage %

Share Capital 402 403 1 0.25

Share premium 4964 5020 56 1.13
All other reserves 245 685 440 179.59
Retained earnings 12164 10535 -1629 -13.39
Equity contributed to parent company 17801 16661

During the financial year, 19 million (2012: 23 million) ordinary shares of 5p each were
issued in relation to share options for an aggregate consideration of £57m (2012: £69m).

During the financial year, 4 million (2012: 33 million) shares of 5p each were issued in
relation to share bonus awards for an aggregate consideration of £0.2m (2012: £1.6m).
Between 24 February 2013 and 12 April 2013 options over 1,288,429 ordinary shares were
exercised under the terms of the Savings-related
Share Option Scheme (1981) and the Irish Savings-related Share Options Scheme (2000).
Between 24 February 2013 and 12 April 2013 options over 2,741,490 ordinary shares have
been exercised under the terms of the Executive Share Option Schemes (1994 and 1996)
and the Discretionary Share Option Plan (2004).
As at 23 February 2013, the Directors were authorised to purchase up to a maximum in
aggregate of 804.0 million (2012: 803.6 million) ordinary shares.

While analysing the equity capital structure the company follows a strong financial structure

Debt

Current financial cost and net debt :

The total borrowings of the firms are as follows.

Total borrowings 2013 2012

23
 In £ millions In £ millions

Current 766 1838

Non current 10068 9911

The current boorwoing include the bank loans , overdraft, loans from joint venture and
other financial lease. And the non current borrowings incorporates with long term loans and
bonds

From a lenders point of view if we look into the group sales , there was an increase by 1.3 %
to £72.4bn. At constant exchange rates, sales increased by 2.5% (including petrol) and 3.1%
(excluding petrol. During the financial year 2012- 2013 , the existing borrowing was
increased due to resitriction in opening hours in Korean market, deteriorating of economic
environments in Cenrtal Europe and partial closing down of operation in US market. The
major impact of gross profit was due to the following reasons ;

 UK property write-down of £(804)m, following an in-depth review of our forward

pipeline
 Goodwill impairment of £(495)m, reflecting the impact of differing growth prospects
in Poland, the Czech Republic
 Increase of £(115)m in provision for potential Payment Protection Insurance claims
against Tesco Bank

2013 2012
In £ millions In £ millions

Profit before tax 1960 4038

Net finance cost 282 235
Cash generated from 3813 5685
operation
Changes of net debt 6597 6838

Net finance costs increased to £282m, from £235m last year, largely due to the revaluation
of the liability relating to the purchase of the minority interest in our Korean business in July
2011. While analysing the cash flow statement it was found that there was a reduction of
£2.9bn (2011/12: £3.8bn) on cash from operating activities. It was reduced with overall
increase in working capital. The increase in working capital was due to the result of
regulatory impacts in the economy.

However as an strategy to improve the cash flow it has opened the Tesco Lotus Retail
Growth Freehold and Leasehold Property Fund (TLGF) with 17 malls in Thailand in March
2012

24
Geraring ratio

Gearing ratio % 39.6 %

Debt ratio 46.98
Debt to equity ratio .44

Gearing ratio means the proportion of net assets financed through debt rather than equity,
calculated as net debt divided by total equity. The gearing ratio of remained relatively flat
reflecting stable debt position and growing investment in assets. When comparing the debt
ratio and debt to equity ratio, the company is in a strong financial position to acquire more
loan. It has debt ratio of 46.98

Evaluation on share price :

Tesco reported weak trading figures for the vital Christmas period with UK like-for-like sales
falling 2.4%. The market expected sales to decline on average by 1.5% so this result is worse
than expected and comes against the backdrop of strong sales growth at rival, Sainsbury’s,
who reported a 0.2% rise in third quarter like-for-like sales yesterday.

The market range for Tesco sales performances was between a 0.5% fall and 2.5% fall and so
their performance lies at the very bottom end of market forecasts.The UK performance was
impacted by a weaker grocery market and a tough comparative.

Tesco now expects to report full year results in line with the current market consensus range,
which is £3.15bn to £3.41bn (mean estimate £3.33bn.

Tesco also suffered declines in like for like sales internationally by -2.2%, a figure which was
negatively impacted by foreign exchange movements. Before FX impact, sales declined by
0.6% internationally – with trading in Asia falling by 0.6% and Europe declining 0.8%.

Trading Tesco shares

Spread betting and CFD trading Tesco shares of late has been somewhat of a challenge. The
failure to break above the 390p level over much of 2013 added pressure on the stock, and
traders were happy to short the share price back down to support levels of around 320p.

25
26
CONCLUSION

While going through the fiancnial statement analysis , it was found that the company is
flourishing despite of downturn in UK and World’s economy. Having an experience of more
than 100 years, it is enjoying a good market share in the business. Tesco earns great respect
and benefits from its loyal customers. This has helped the company to stay profitable and
keep a positive position even in its troubled times. Things are still looking encouraging for
company even though recession has done much harm to the economy and the businesses in
general.

27
 Appendices

1 current ratio

2012 2013
Amt in £m Amt in £m
Current Assets:
Inventories 3598 3744
Trade & other receivables 2657 2525
Loans & advances to customers 2502 3094
Derivative financial instruments 41 58
Current tax assets 7 10
Short term investments 1,243 522
Cash & cash equivalents 2305 2512
Other Assets 510 631
Total Current Assets 12863 13096
Current Liabilities
Trade& other payables 11234 11094
Financial liabilities:
Borrowings 1838 766
Derivative financial instruments &
other liabilities 128 121
Customer deposits & deposits by
bank 5465 6015
Current tax liabilities 416 519
Provisions 99 188
Other Liabilities 69 282
Total current liabilities 19249 18985

2. Quick ratio

2012 2013
(Amt in £m) (Amt in £m)
Total Current Assets 12863 13096
Less: Inventories -3598 -3744

28
 Quick Assets 9265 9352
Current Liabilities 19249 18985

3. Stock turnover ratio

2012 (Amt in £m) 2013 (Amt in £m)

Cost of goods sold 58519 60737
Average stock 3598 3744

4. Return on Capital employed

2012 (Amt in £m) 2013 (Amt in £m)

Share Capital 402 403
Share premium 4964 5020
All other reserves 245 685
Retained earnings 12164 10535
Non-controlling 26 18
interests
Total 17801 16661
Profit before interest & tax 4038 1960

5. asset Turnover ratio

2012 (Amt in 2013 (Amt in

£m) £m)

Total Current Assets 12863 13096

Fixed Assets:
Property, plant & equipment 25710 24870
Total Fixed Assets 25710 24870
Non-current Assets
Goodwill & other intangible assets 4618 4362
Investment property 1991 2001
Investments in joint ventures & associates 423 494
Other investments 1526 818
Loans & Advances to customers 1901 2465

29
Derivative financial instruments 1726 1965
Deferred tax assets 23 58
Total noncurrent assets 12208 12163
Total Assets(Current assets + Fixed assets +non- current
assets) 50781 50129
Sales 63916 64,826

6. Comparative balance sheet

Increase/Decrease
2012 2013
Amt in £m Amt in £m Amount Percentage %
Current Assets:
Inventories 3598 3744 146 4.06
Trade & other receivables 2657 2525 -132 -4.96
Loans & advances to customers 2502 3094 592 23.66
Derivative financial instruments 41 58 17 41.46
Current tax assets 7 10 3 42.86
Short term investments 1,243 522 -721 -58.00
Cash & cash equivalents 2305 2512 201 8.72
Other Assets 510 631 121 23.72
Total Current Assets 12863 13096 233 1.81
Fixed Assets:
Property, plant & equipment 25710 24870 -840 -3.26
Total Fixed Assets 25710 24870 -830 -3.23
Non-current Assets
Goodwill & other intangible assets 4618 4362 -256 -5.54
Investment property 1991 2001 10 0.50
Investments in joint ventures & associates 423 494 71 16.78
Other investments 1526 818 -708 -46.39
Loans & Advances to customers 1901 2465 564 29.67
Derivative financial instruments 1726 1965 239 13.85
Deferred tax assets 23 58 35
Total noncurrent assets 12208 12163 -45 -0.36
Total Assets 50781 50129 -652 -1.28
Current Liabilities
Trade& other payables 11234 11094 -140 -1.25
Financial liabilities:
Borrowings 1838 766 -1072 -58.32

30
 Derivative financial instruments & other
liabilities 128 121 -7 -5.47

Customer deposits & deposits by bank 5465 6015 550 10.06

Current tax liabilities 416 519 103 24.76
Provisions 99 188 89 89.89
Other Liabilities 69 282
Total current liabilities 19249 18985 -264 -1.37
Non-current liabilities
Financial liabilities:
Borrowings 9,911 10,068 157 1.58
Derivative financial instruments and
other liabilities 688 759 71 10.31
Post-employment benefit obligations 1,872 2,378 506 27.02
Deferred tax liabilities 1,160 1,006 -154 -13.26
Provisions 100 272 172
Total non-current liabilities 13731 14483 752 5.48
Share Capital 402 403 1 0.25
Share premium 4964 5020 56 1.13
All other reserves 245 685 440 179.59
Retained earnings 12164 10535 -1629 -13.39
Non controlling interest 26 18 -8 -30.76
Total 17801 16661 -1140 -6.40
Total Liabilities 50781 50129 -652 -1.28

7. Comparative income statement

2012 2013 Increase/Decrease

Amt in Amt in
£m £m Amount Percentage %
Net Sales 63916 64826 910 1.42
Less: Cost of sales 58519 60737 2218 3.79
Gross Profit (A) 5397 4089 -1308 -24.24
Operating expenses
Administrative expenses 1612 1562 -50 -3.10
P/L arising on property related items -397 339 58 14.61
Total operating expenses (B) 1215 1901 686 56.46
Operating Profit (A-B) 4182 2188 -1994 -47.68
Add: Share of post tax profits of
Joint Venture & associates 91 54 -37 -40.66

31
Financial Income 176 177 -1 -0.56
4449 2419 -2030 -45.62
Less: Finance cost 411 459 48 11.67
Profit before tax 4038 1960 -2078 -51.46
Less: Taxation 874 574 -300 -34.32
Profit for the year from continued
operations 3164 1386 -1778 -56.19
Discontinued operations:
Loss of the year from discontinued
operations 350 1266 916
Profit for the year 2814 -120 2694 -95.73

8. common size balance sheet

2012 2013
Amount Amount
(in £m) Percentage (in £m) Percentage
Fixed Assets:
Property, plant &
equipment 25710 50.63 24870 49.61
Total Fixed Assets 25710 50.63 24870 49.61
Current Assets:
Inventories 3598 7.09 3744 7.47
Trade & other receivables 2657 5.23 2525 5.04
Loans & advances to
customers 2502 4.93 3094 6.17
Derivative financial
instruments 41 0.08 58 0.11
Current tax assets 7 0.01 10 0.02
Short term investments 1243 2.45 522 1.04
Cash & cash equivalents 2305 4.54 2512 5.01
Other assets 510 1.00 631 1.26
Total Current Assets 12863 25.33 13096 26.12
Non-current Assets
Goodwill & other
intangible assets 4618 9.09 4362 8.70
Investment property 1991 3.92 2001 3.99
Investments in joint
ventures & associates 423 0.83 494 0.99
Other investments 1526 3.00 818 1.63

32
Loans & Advances to
customers 1901 3.74 2465 4.91
Derivative financial
instruments 1726 3.39 1965 3.92
Deferred tax assets 23 0.05 58 0.12
Total noncurrent assets 12208 24.04 12163 24.26
Total Assets 50781 100 50129 100
Current Liabilities
Trade& other payables 11234 22.12 11094 22.13
Financial liabilities:
Borrowings 1838 3.62 766 1.53
Derivative financial
instruments & other
liabilities 128 0.25 121 0.24
Customer deposits &
deposits by bank 5465 10.76 6015 11.99
Current tax liabilities 416 0.82 519 1.03
Provisions 99 0.19 188 0.38
Other Assets 69 0.14 282 0.57
Total current liabilities 19249 37.90 18985 37.87
Non-current liabilities
Financial liabilities:
Borrowings 9,911 19.52 10,068 20.08
Derivative financial
instruments and other
liabilities 688 1.35 759 1.51
Post-employment
benefit obligations 1,872 3.69 2,378 4.74
Deferred tax liabilities 1,160 2.28 1,006 2.00
Provisions 100 0.19 272 0.54
Total non-current
liabilities 13731 27.03 14483 28.89
Share Capital 402 0.79 403 0.80
Share premium 4964 9.76 5020 10.01
All other reserves 245 0.48 685 1.37
Retained earnings 12164 23.95 10535 21.02
Non controlling interest 26 0.05 18 0.04
Total 17801 35.05 16661 33.24
Total Liabilities & Equity 50781 100 50129 100

33
9. Common size income statement

2012 2013
Amount Amount
(in £m) Percentage (in £m) Percentage
Net Sales 63916 100 64826 100
Less: Cost of sales 58519 91.56 60737 93.69
Gross Profit (A) 5397 8.44 4089 6.31
Operating expenses
Administrative expenses 1612 2.52 1562 2.41
P/L arising on property related
items -397 0.62 339 0.52
Total operating expenses (B) 1215 1.9 1901 2.93
Operating Profit (A-B) 4182 6.54 2188 3.38
Add: Share of post tax profits of
Joint Venture & associates 91 0.14 54 0.08
Financial Income 176 0.26 177 0.27
Less: Finance cost 411 0.64 459 0.71
Profit before tax 4038 6.32 1960 3.02
Less: Taxation 874 1.37 574 0.89
3164 4.95 1386 2.14
Loss of the year from
discontinued operations (350) 0.54 (1266) 1.95
Profit of the year 2814 4.40 120 0.01

34
Group Balance Sheet

23 25 February
February2013 2012
(Amt in £m) (Amt in £m)
Non –current assets
4362 4618
Goodwill & other intangible assets
24870 25710
Property, plant & equipment
Investment property 2001 1991
Investments in joint ventures & associates 494 423
Other investments 818 1526
Loans & Advances to customers 2465 1901
Derivative financial instruments 1965 1726
Deferred tax assets 58 23
37033 37918
Current assets
Inventories 3744 3598
Trade & other receivables 2525 2657
Loans & advances to customers 3094 2502
Derivative financial instruments 58 41
Current tax assets 10 7
Short term investments 522 1,243
Cash & cash equivalents 2512 2305
12465 12353
Assets of the disposal group and non-current assets
classified as held for sale 631 510

13096 12863
Current liabilities
Trade& other payables (11094) (11234)
Financial liabilities:
Borrowings (766) (1838)
Derivative financial instruments & other liabilities (121) (128)
Customer deposits & deposits by bank (6015) (5465)
Current tax liabilities (519) (416)
Provisions (188) (99)
(18703) (19180)
Liabilities of the disposal group classified a held for
sale (282) (69)

35
Net current liabilities (5889) (6386)
Non-current liabilities
Financial liabilities:
Borrowings (10,068) (9,911)
Derivative financial instruments and other liabilities (759) (688)
Post-employment benefit obligations (2,378) (1,872)
Deferred tax liabilities (1,006) (1,160)
Provisions (272) (100)
(14483) (13731)
Net assets 16661 17801
Equity
Share Capital 403 402
Share premium 5020 4964
All other reserves 685 245
Retained earnings 10535 12164
Equity attributable to owners of the parent 16643 17775
Non-controlling interests 18 26
Total equity 16661 17801

36
Group Income Statement

Year ended 23 February 2013 52 weeks 52 weeks

2013 2012
(Amt in £m) (Amt in £m)
Continuing operations
Revenue 64826 63916
Cost of sales (60737) (58519)
Gross profit 4089 5397
Administrative expenses (1562) (1612)
Profit/losses arising on property related items (339) 397
Operating profit 2188 4182
Share of post-tax profits of joint ventures and 54 91
associates
Finance income 177 176
Finance costs (459) (411)
Profit before tax 1960 4038
Taxation (574) (874)
Profit of the year from continuing operations 1386 3164
Discontinued operations
Loss for the year from discontinued operations (1266) (350)
Profit for the year 120 2814

37
Group Cash Flow Statement

Year ended 23 February 2013 52 weeks 52 weeks

2013 2013
(Amt in £m) (Amt in £m)
Cash flows from operating activities
Cash generated from operations 3,873 5,688
Interest paid (457) (531)
Corporation tax paid (579) (749)
Net cash generated from operating activities 2,837 4,408
Cash flows from investing activities
Acquisition/disposal of subsidiaries, net of cash (72) (65)
acquired/disposed
Proceeds from sale of joint ventures and associates 68 –
Proceeds from sale of property, plant and equipment, 1,351 1,141
investment property and non-current assets classified
as held for sale
Purchase of property, plant and equipment, (2,619) (3,374)
investment property and non-current assets classified
as held for sale
Purchase of intangible assets (368) (334)
Net (increase)/decrease in loans to joint ventures and (43) 122
associates
Investments in joint ventures and associates (158) (49)
Net proceeds from sale of/(investments in) short-term 1,427 (767)
and other investments
Dividends received from joint ventures and associates 51 40
Interest received 85 103
Net cash used in investing activities (278) (3,183)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 57 69
Increase in borrowings 1,820 2,905
Repayment of borrowings (3,022) (2,720)
Repayment of obligations under finance leases (32) (45)
Purchase of non-controlling interests (4) (89)
Dividends paid to equity owners (1,184) (1,180)
Dividends paid to non-controlling interests – (3)
Own shares purchased – (303)
Net cash used in financing activities (2,365) (1,366)
Net increase/(decrease) in cash and cash equivalents 194 (141)

38
Cash and cash equivalents at beginning of the year 2,311 2,428
Effect of foreign exchange rate changes 26 24
Cash and cash equivalents including cash held in 2,531 2,311
disposal group at the end of the year
Cash held in disposal group (19) (6)
Cash and cash equivalents at the end of the year 2,512 2,305

Bibliogarphy

http://www.tescoplc.com/files/pdf/results/2013/prelim/prelim_2012-
13_results_statement.pdf

http://www.manishabraham.com/blog/tesco-plc-an-overview-of-performance-and-
strategy-for-the-year-2013

http://www.tesco.com/investorInformation/report95/corpobj.html

http://www.svtuition.org/2008/10/comparative-financial-statement.html

http://opentuition.com/wp-content/blogs.dir/1/files/group-documents/29/1351808879-
RAP8Tesco.pdf

http://financials.morningstar.com/ratios/r.html?t=TSCDY

http://www.hl.co.uk/shares/shares-search-results/t/tesco-plc-ordinary-5p/financial-
statements-and-reports

http://www.tescoplc.com/index.asp?pageid=17&newsid=783

http://www.ivoryresearch.com/samples/business-essay-example-tesco-swot-pestel-porter-
five-forces-and-value-chain-analysis/

http://www.cityindex.co.uk/market-analysis/market-news/22757302014/tesco-shares-turn-
volatile-after-2-4-decline-in-uk-sales-over-christmas/

39