Tesco and Carrefour Companies’ Financial Analysis

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Introduction

In this report, the performance of Tesco and Carrefour is evaluated by using financial and non-financial information available in the public domain and compared in the last three years from 2016 to 2019. Furthermore, their decision to make a strategic alliance is discussed along with recommendations for their businesses.

Financial Ratio Analysis

Tesco – Profitability

The profitability ratios of Tesco are given in Appendix A. It is noted that the gross profit margin of the company has improved in the last four years, from 5.40% in 2016 to 7.55% in 2019. Although its revenue only increased by 15.81%, its gross profit increased by 61.99% in that period, which shows that the company managed to lower its cost of sales. The operating profit also increased slightly from 1.82% in 2016 to 3.89% in 2019. It indicates that the company continued to face business difficulties that forced it to incur high operating expenses. The company made a net loss in 2016, and its net profit margin remained weak in later years.

Furthermore, the Return on Equity (ROE) increased to 11.51% in 2017 after a year of net loss. However, its value declined in 2018 and 2019, which was a significant concern for shareholders (Wahlen, ‎Baginski, and ‎Bradshaw, 2018). Overall, the profitability of the company remained weak despite small improvements in its ratios.

Carrefour-Profitability

The profitability analysis of Carrefour is given in Appendix B. It is noted that the company’s gross profit margin slightly declined in the last four years. Moreover, its operating profit margin fell drastically in 2017 due to the high-incurred operating expenses. In 2017 and 2018, the company made a net loss but made significant improvement in 2019 as could be noted from the net profit margin and ROE values. Overall, the profitability position of the company was highly volatile.

Tesco – Efficiency

The sales revenue/capital employed indicates that the company generated £2.11 in revenue for every £1 in its capital. However, this value fell to just £1.88 in 2019, which shows that the inability to efficiently utilize its capital. However, the sales revenue/employee ratio value slightly improved from 0.12 in 2016 to 0.15 in 2019 because of the reduction in its number of employees. The debtor turnover of Tesco improved from 80.23 in 2016 to 85.55 in 2019, after a decline in 2017 and 2018. It implies that it took lesser time to receive cash from its credit sales. The creditor turnover was comparatively low, which implies that the company took a long time to pay its creditors. There was also a slight improvement in its inventory turnover in the last four years, which means that the company did not see any major improvement in its retail business. Finally, the non-current asset turnover also weakened as its value was 1.84 in 2016 and 1.64 in 2019. Overall, it could be stated that the company’s efficiency improved but did not significantly change.

Carrefour – Efficiency

The company’s revenue per €1 invested in capital declined in the last four years with a significant drop recorded in 2019. However, its revenue per employee slightly improved in 2019 after three years of no change. The debtor turnover of the company declined in the last four years, which implies that it took a long time to receive cash from its credit sales. The credit turnover of Carrefour was very low, which reflects its strategy to prolong its cash conversion cycle. The inventory turnover was also slow as the company’s stores and warehouses held inventories for a longer period. The non-current asset turnover also fell in the last four years. Overall, the company’s efficiency weakened in the selected years.

Tesco – Liquidity

The current ratio and quick ratio values of Tesco were well below the standard value of one (Wahlen, ‎Baginski, and ‎Bradshaw, 2018). It indicates severe liquidity issues that the company faced, which could adversely affect its business in the coming years. Overall, the liquidity position of the company remained weak in the last four years.

Carrefour – Liquidity

Carrefour’s current ratio and quick ratio values were less than one, which implies that its current liabilities exceeded its current assets. Overall, the liquidity position of the company was weak.

Tesco – Gearing

The loans/capital employed analysis shows that the company managed to reduce its debt in 2017 and 2018, but failed to generate sufficient earnings to keep its leverage low in 2019. Furthermore, it is noted that the company’s ability to generate high operating profit was affected in the last year as the interest cover ratio value declined significantly from 8.79 in 2018 to 3.34 in 2019. Overall, the solvency position of the company was volatile.

Carrefour – Gearing

Carrefour’s loan to capital employed ratio did not change, but there was an increasing trend since 2017. The company’s interest cover improved after a significant decline in 2017. Overall, it is noted that the company’s leverage position was stable.

Horizontal Common Size Analysis

It is noted that Tesco’s revenue was 15.81% higher than the base year in 2019. Furthermore, its operating income was 147.59% higher than in 2016 in 2019. Although the net income of the company also increased, it fell significantly in 2019. The horizontal analysis of the balance sheet indicates that the company’s current assets were much lower than in 2016. The company invested heavily in acquiring non-current assets over the last four years. Furthermore, there was a decline in the company’s current and total liabilities as compared to 2016. The company’s equity improved as Tesco accumulated large earnings in the last four years.

Moreover, Carrefour revenue was 5.88% lower in 2019 than in 2016. Its gross profit and operating income were much lower than in 2019 as compared to 2016. However, its net income in 2019 was 52.21% higher than the base year. The horizontal analysis of the balance sheet indicates that the company’s current assets were slightly lower than in 2016, whereas its non-current assets were higher. On the other hand, its current liabilities declined in 2019, but total liabilities increased. The company’s equity deteriorated in the last four years due to net losses in 2017 and 2018.

Vertical Common Size Analysis

The vertical analysis indicates that the current assets of Tesco declined as a proportion of total assets, and its non-current assets increased. On the other hand, it is noted that the company’s current liabilities and total liabilities declined as a proportion of total assets, whereas its total equity increased.

The current assets of Carrefour also declined as a proportion of total assets, and its non-current assets increased. On the other hand, it is noted that the company’s current liabilities and total liabilities increased as a proportion of total assets, whereas its total equity declined.

Comparative Analysis of Tesco and Carrefour

The analysis given above indicates that Tesco performed better than Carrefour in terms of profitability. However, both companies faced significant uncertainties as competition intensified, and it is noted that both companies had financial losses in the last four years. Furthermore, the analysis shows that Tesco had stronger efficiency management as compared to Carrefour. Still, both companies faced cash-flow problems that forced them to delay payments to the suppliers, which could affect their relationships in the coming periods. Both companies had poor liquidity due to their high inventories and slow inventory movement. The gearing position of both companies was similar as they had maintained their capital structure and had low operating profits in the last four years.

Evaluation of Performance

The analysis showed that both companies lacked the strategic will and ability to face the increasing competition from physical-store retailers and online companies. Other companies were able to achieve stronger results due to their strong product diversification and acquisition strategies. Both Tesco and Carrefour focused on expanding their sales network due to which they lost their focus on primary high-profit markets, which allowed competition to strengthen and impose greater challenges for these companies.

Analysis of the Alliance

The strategic alliance between Tesco and Carrefour signed on July 2, 2018, was expected to enhance their product choices and supply chain management through the development of effective and efficient relationships with suppliers. Both companies opted for this alliance to improve the shopping experience of customers and increase their sales and profitability. However, it is noted that the revenues of both companies increased in 2019, but Tesco’s profitability weakened, whereas Carrefour made a significant recovery in the last year. The results showed that these companies did not have the low-price competitive advantage anymore, and they need to redevelop their strategies to avoid the declining phase in their lifecycles.

Conclusions and Recommendations

The primary weakness of Tesco and Carrefour is that they lost their focus on primary markets that generated high profits for them in previous years. Moreover, these companies failed to accept and address the challenges imposed by low-cost online companies. It is recommended that both companies should focus more on diversifying their product lines and improving the quality of branded items. Furthermore, they should lower their operating costs by closing down low-profit generating big retail stores, and investing additional amounts in their online businesses. These companies should invest in opening small stores that have greater customer reach. Both firms must work with local and international suppliers who can promise a high quality and timely delivery of products.

Reference List

Wahlen, J. M., ‎Baginski, S. P. and ‎Bradshaw, M. (2018) Financial reporting, financial statement analysis and valuation. 2nd ed. Boston, MA: Cengage Learning.

Appendix A – Tesco Ratios

	2019	2018	2017	2016
Profitability
Gross Profit Margin	7.55%	6.60%	5.91%	5.40%
Gross Profit	4,889	4,216	3,399	3,018
Total Revenue	64,760	63,911	57,491	55,917
Operating Profit Margin	3.89%	3.37%	3.20%	1.82%
Operating Profit	2,518	2,153	1,837	1,017
Total Revenue	64,760	63,911	57,491	55,917
Net Profit Margin	1.50%	2.07%	2.10%	-0.07%
Net Profit	971	1,322	1,206	(40)
Total Revenue	64,760	63,911	57,491	55,917
Return on Equity	7.31%	8.90%	11.51%	-0.62%
Net Profit	971	1322	1206	-40
Total Equity	13,275	14,858	10,480	6,438

Efficiency
Sales Revenue / Capital Employed	1.88	2.25	2.24	2.11
Total Revenue	64,760	63,911	57,491	55,917
Capital Employed	34,375	28,367	25,624	26,448
Sales Revenue / Employee	0.15	0.14	0.13	0.12
Total Revenue	64,760	63,911	57,491	55,917
Number of Employees	423,092	464,505	448,988	464,520
Debtor Turnover	85.55	71.41	79.08	80.23
Total Revenue	64,760	63,911	57,491	55,917
Debtors	757	895	727	697
Creditor Turnover	10.68	10.35	9.95	10.73
Cost of Revenue	59,871	59,695	54,092	52,899
Creditors	5,605	5,770	5,436	4,931
Stock Turnover	26.62	24.42	25.40	24.30
Total Revenue	64,760	63,911	57,491	55,917
Inventory	2,433	2,617	2,263	2,301
NCA Turnover	164.27%	175.21%	183.77%	183.72%
Total Revenue	64,760	63,911	57,491	55,917
Non-Current Assets	39,423	36,477	31,285	30,436
Debtor Turnover Period	4.27	5.11	4.62	4.55
365	365	365	365	365
Debtor Turnover	85.55	71.41	79.08	80.23
Creditor Turnover Period	34.17	35.28	36.68	34.02
365	365	365	365	365
Creditor Turnover	10.68	10.35	9.95	10.73
Stock Turnover Period	13.71	14.95	14.37	15.02
365	365	365	365	365
Stock Turnover	26.62	24.42	25.40	24.30

Liquidity
Current Ratio	0.72	0.61	0.71	0.79
Current Assets	12,879	12,570	13,577	15,417
Current Liabilities	17,927	20,680	19,238	19,405
Acid Test	0.58	0.48	0.59	0.68
Current Assets	12,879	12,570	13,577	15,417
Inventory	2,433	2,617	2,263	2,301
Current Liabilities	17,927	20,680	19,238	19,405

Gearing
Loans / Capital Employed	0.50	0.26	0.34	0.45
Loans	17,061	7,272	8,621	11,993
Capital Employed	34,375	28,367	25,624	26,448
Interest Cover	3.34	8.79	4.98	2.33
Operating Profit	2,518	2,153	1,837	1,017
Interest Expense	753	245	369	436

Appendix B – Carrefour Ratios

	2019	2018	2017	2016
Profitability
Gross Profit Margin	21.70%	21.90%	22.49%	22.83%
Gross Profit	16,088	17,067	18,215	17,985
Total Revenue	74,142	77,917	80,975	78,774
Operating Profit Margin	1.43%	0.97%	0.86%	2.47%
Operating Profit	1,060	758	700	1,943
Total Revenue	74,142	77,917	80,975	78,774
Net Profit Margin	1.52%	-0.72%	-0.66%	0.95%
Net Profit	1,128	(560)	(531)	746
Total Revenue	74,142	77,917	80,975	78,774
Return on Equity	11.35%	-6.11%	-5.28%	7.16%
Net Profit	1,128	(560)	(531)	746
Total Equity	9,939	9,169	10,060	10,426

Efficiency
Sales Revenue / Capital Employed	2.67	3.22	3.27	3.32
Total Revenue	74,142	77,917	80,975	78,774
Capital Employed	27,741	24,216	24,739	23,750
Sales Revenue / Employee	0.23	0.21	0.21	0.21
Total Revenue	74,142	77,917	80,975	78,774
Number of Employees	321,383	363,862	378,923	384,151
Debtor Turnover	47.07	54.72	56.51	58.74
Total Revenue	74,142	77,917	80,975	78,774
Debtors	1,575	1,424	1,433	1,341
Creditor Turnover	4.25	4.30	4.16	3.95
Cost of Revenue	58,054	60,850	62,760	60,789
Creditors	13,646	14,161	15,082	15,396
Stock Turnover	12.64	12.70	12.10	11.19
Total Revenue	74,142	77,917	80,975	78,774
Inventory	5,867	6,135	6,690	7,039
NCA Turnover	2.32	2.71	2.79	2.65
Total Revenue	74,142	77,917	80,975	78,774
Non-Current Assets	31,927	28,708	28,997	29,697
Debtor Turnover Period	7.75	6.67	6.46	6.21
365	365	365	365	365
Debtor Turnover	47.07	54.72	56.51	58.74
Creditor Turnover Period	85.80	84.94	87.71	92.44
365	365	365	365	365
Creditor Turnover	4.25	4.30	4.16	3.95
Stock Turnover Period	28.88	28.74	30.16	32.62
365	365	365	365	365
Stock Turnover	12.64	12.70	12.10	11.19

Liquidity
Current Ratio	0.82	0.81	0.82	0.76
Current Assets	18,875	18,670	18,816	19,148
Current Liabilities	23,061	23,162	23,074	25,095
Acid Test	0.56	0.54	0.53	0.48
Current Assets	18,875	18,670	18,816	19,148
Inventory	5,867	6,135	6,690	7,039
Current Liabilities	23,061	23,162	23,074	25,095

Gearing
Loans / Capital Employed	0.63	0.57	0.52	0.56
Loans	17,343	13,789	12,975	13,405
Capital Employed	27,741	24,216	24,739	23,750
Interest Cover	3.31	3.09	2.05	4.81
Operating Profit	1,060	758	700	1,943
Interest Expense	320	245	342	404

Appendix C – Horizontal Analysis

Tesco PLC \| Income Statement \|
	2019		2018		2017		2016
Revenue	64,760	15.81%	63,911	14.30%	57,491	2.81%	55,917
Gross Profit	4,889	61.99%	4,216	39.70%	3,399	12.62%	3,018
Operating Income	2,518	147.59%	2,153	111.70%	1,837	80.63%	1,017
Net Income	971	-2527.50%	1,322	-3405.00%	1,206	-3115.00%	(40)

Tesco PLC \| Balance Sheet \|
	2019		2018		2017		2016
Total Current Assets	12,879	-16.46%	12,570	-18.47%	13,577	-11.93%	15,417
Total Non-Current Assets	39,423	29.53%	36,477	19.85%	31,285	2.79%	30,436
Total Current Liabilities	17,927	-7.62%	20,680	6.57%	19,238	-0.86%	19,405
Total Liabilities	39,027	-0.98%	34,189	-13.26%	34,382	-12.77%	39,415
Total Equity	13,275	106.20%	14,858	130.79%	10,480	62.78%	6,438

Carrefour SA \| Income Statement \|
	2019		2018		2017		2016
Revenue	74,142	-5.88%	77,917	-1.09%	80,975	2.79%	78,774
Gross Profit	16,088	-10.55%	17,067	-5.10%	18,215	1.28%	17,985
Operating Income	1,060	-45.45%	758	-60.99%	700	-63.97%	1,943
Net Income	1,128	51.21%	(560)	-175.07%	(531)	-171.18%	746

Carrefour SA \| Balance Sheet \|
	2019		2018		2017		2016
Total Current Assets	18,875	-1.43%	18,670	-2.50%	18,816	-1.73%	19,148
Total Non-Current Assets	31,927	7.51%	28,708	-3.33%	28,997	-2.36%	29,697
Total Current Liabilities	23,061	-8.11%	23,162	-7.70%	23,074	-8.05%	25,095
Total Liabilities	40,863	6.36%	38,209	-0.55%	37,753	-1.73%	38,419
Total Equity	9,939	-4.67%	9,169	-12.06%	10,060	-3.51%	10,426

Appendix D – Vertical Analysis

Tesco PLC | Balance Sheet |

	2019		2018		2017		2016
Total Current Assets	12,879	24.62%	12,570	25.63%	13,577	30.26%	15,417	33.62%
Total Non-Current Assets	39,423	75.38%	36,477	74.37%	31,285	69.74%	30,436	66.38%
Total Assets	52,302	100.00%	49,047	100.00%	44,862	100.00%	45,853	100.00%
Total Current Liabilities	17,927	34.28%	20,680	42.16%	19,238	42.88%	19,405	42.32%
Total Liabilities	39,027	74.62%	34,189	69.71%	34,382	76.64%	39,415	85.96%
Total Equity	13,275	25.38%	14,858	30.29%	10,480	23.36%	6,438	14.04%

Carrefour SA \| Balance Sheet \|
	2019		2018		2017		2016
Total Current Assets	18,875	37.15%	18,670	39.41%	18,816	39.35%	19,148	39.20%
Total Non-Current Assets	31,927	62.85%	28,708	60.59%	28,997	60.65%	29,697	60.80%
Total Current Liabilities	23,061	45.39%	23,162	48.89%	23,074	48.26%	25,095	51.38%
Total Liabilities	40,863	80.44%	38,209	80.65%	37,753	78.96%	38,419	78.65%
Total Equity	9,939	19.56%	9,169	19.35%	10,060	21.04%	10,426	21.35%

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