Ian McIsaac

Tailored and Public Courses

5

Tesco Financials and Ratios

Tesco’s financial ratios have been remarkably robust over the last five years. The profitability ratios have been very consistent reflecting the retailer’s ability to pass back benefits to the consumer and thereby increase sales (a virtuous circle unlike Marks and Spencer which tried to increase its margins dramatically in the 1990s but quality and service both suffered).

The cash conversion cycle (explained in the Guide to Financial Statements) has varied between –11 and –14 days. In other words, the faster the company grows, the more cash it generates from its working capital cycle. However despite this source of cash to the business, the huge capital expenditure programme of the last few years led to an increase in gearing between 2000 and 2003. This reduced in 2004 as a result of the £810 million placement of shares. The company also raised cash through an innovative property deal at the beginning of 2004.

It is interesting to note the steady decline in the asset turnover ratio (sales generated from total assets) until 2003. The key to Tesco’s future success is perhaps best summed up by Lex in the FT in September 2004: “Investment is good if it makes decent returns. Historically UK food retailing has proved excessively capital intensive and generated poor returns. The problem with UK supermarkets is their habit of spending profits on UK supermarkets, not shareholders. Tesco, in spite of its recent dazzle, now risks falling into an old trap.”

A spreadsheet for Tesco is also shown below.

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