Essay: Ratio Analysis of Tesco Plc for the year 2006

Sample Essay

Liquidity Ratios (Measuring the ability to pay current liabilities):

1. Current Ratio: (Current Assets/ Current Liabilities) 3751/7518= 0.50
2. Acid Test Quick Ratio: (Current Assets –[stock in trade-trade deposits and short term prepayments]/Current Liabilities) 3751 -(1464-86)/7518= 0.32
3. Cash Ratio: (Cash + Marketable Securities/ Current Liabilities) 1395/7518= 0.19

Activity / Turnover / Efficiency /Performance Ratio/Assets Management Ratios (Measuring the ability to sell inventory and collect receivables):

1. Inventory Turnover: (Cost of goods sold/Average Inventory) 36426/1464= 24.89
2. Accounts Receivables Turnover: (Net Credit Sales/Average Accounts Receivables) 39454/806= 48.95
3. Average Collection Period: (365/Accounts Receivables Turnover) 365/48.95= 7.46
4. Asset Turnover: (Sales/Total Assets) 39454/22563= 1.75
5. Fixed Assets Turnover: (Sales/Fixed Assets)= 39454/23200= 1.70

Debt Management Ratios (Measuring the ability to pay long term debts or leverage ratios):

1. Debt to Equity Ratio: (Total Debt/Total Equity)= 5921/9380= 0.64
2. Debt to Asset Ratio: (Total Debt/Total Assets)= 5921/22563= 0.27
3. Fixed Charges Coverage Ratio: (EBIT+Depreciation/Interest+[repayment of loan/1-tax rate) 2280+838/64+2.20 = 50.92
4. Times Interest Earned Ratio: (EBIT+Depreciation/Interest) 2280+838/64= 48.72

Profitability Ratios (Measuring Profitability of the business):

1. Gross Profit Ratio: (Gross Profit/Sales x 100) 3028/39454 x 100= 8%
2. Operating Margin: (Operating Profit/Sales x 100) 2280/39454 x 100= 6%
3. Rate of Return on Total Assets: (Net Income/Average Total Assets) 1570/22563= 0.07%
4. Rate of Return on Equity: (Net Income less Preferred Dividends/ Average Equity) 1570/9380= 0.17%
5. Rate of Return on Capital Employed: (Net Income/Average Total Assets- Current Liabilities) 1570/22563-7518= 0.11%
6. Earning Power Ratio: (EBIT/Average Total Assets) 2280/22563= 0.11%

Market Ratios (Analyzing stock as an investment):

1. Price/Earnings Ratio: (Market price per share/Earnings Per Share) 19.61/0.20= 98.05
2. Dividend Yield: (Dividend per share/ Market price per share) 0.09/19.61= 0.01
3. Book Value per share: (Equity/No. of shares outstanding) 9380/7894.48= 1.19
4. Market Value per share: (Market value per share/book value per share) 19.61/1.19= 16.48

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