Financial Management - Essay Example

The company is deemed to be the third largest retailer with respect to the amount of revenue that it produces (Potter, 2011; Deloitte, 2010). To examine and analyze the financial performance of the company, the ratio analysis technique needs to be used. Ratio analysis is a technique which uses a set of different financial measures known as financial ratios, in order to analyze the financial performance of a company. These financial ratios of the company would be compared with its prior year ratios to understand whether there is any improvement in the performance of the company (Shim et al, 2000).

The financial ratios for Tesco plc are as follows: Ratios 2010 2009 Liquidity Ratios Current ratio 0.73 : 1 0.75 : 1 Quick ratio 0.44 : 1 0.61 : 1 Gearing Ratios Gross debt-equity ratio 74.9% 109.6% Net interest cover 3.1 times 7 times Profitability Ratios Gross Profit Margin 8.22% 7.76% Net Profit Margin 4.1% 3.99% Investment ratios Earnings per share 29.33 cents 27.50 cents (Annual Report, Tesco plc, 2011) . Liquidity Ratios evaluate a company’s ability to pay off their debts when they fall due.

Basically it gives a basic picture of a running position of a company. Current ratio illustrates a company’s ability to pay off its short term obligation/ current liabilities (amount due within 12 months time) with the current assets that it holds whilst the quick and the cash ratio illustrates a company’s ability to pay off their debts with the most liquid assets and cash respectively. Current ratios on the other hand analyze a company’s ability to pay off their respective debts/liabilities through their most liquid (easily converted to cash) assets.

The ratios in the above table indicate that the liquidity position of the company has worsened in 2010 as compared to 2009; both the current and the quick ratios have deteriorated over the year. The current ratio has fallen from being 0.75:1 in 2010 to 0.73:1 in 2009. The quick ratio has also fallen from being 0.61:1 in 2010 to 0.44:1 in 2009. This should be a concern for the company as the liquidity ratios are a measure of company’s subtleness and long term sustainability. With the help of the profitability ratio, a company can ascertain the increase/decrease in the level of costs, revenues and profits over any given period of time.

These ratios help in ascertaining the company’s performance with respect to the profits that the company/organization has generated. Gross Profit Margin/Net Profit Margin ratios help in ascertaining a company’s gross profit/net profit with respect to the revenue that the company has generated; this ratio helps in understanding the changing trends of the operational costs within any particular period of time. Both the Gross Profit and the Net Profit margin ratios have improved for the company over the one year concerned.

This is a good sign for the company with respect to its growth, the company’s gross profit margin has improved from being 7.76% in 2009 to 8.22% in 2010, this is both because of the fact the company has increased its sales revenue and it has controlled its cost as well. The net profit margin has also increased from being 3.99% in 2009 to 4.1% in 2010, although the change is not a huge one but still for a large company like Tesco plc, this change is worth noting as it has increased the company’