1. Learning Objective Today’s learning objective is: To be able to use RATIO ANALYSIS to interpret the financial accounts of Tesco

2. P7, M3, D2 P7 - illustrate the financial state of a given business. M3 - interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation D2 - evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples

12. EASY TO DO P7 and M3 TOGETHER For Pass you only need to calculate the ratios For Merit you need to show formulae and the workings

13. Calculations to do PROFITABILITY RATIOS Gross Profit Margin Net Profit Margin Return on Capital Employed SOLVENCY RATIOS Current Ratio Acid Test PERFORMANCE RATIOS Stock Turnover Debtor’s collection period For each one: Definition Formula Workings Explain what it means SPECIFICALLY TO THE BUSINESS To be able to use RATIO ANALYSIS to interpret the financial accounts of Tesco

14. D2 Evaluate the adequacy of accounting ratios as a means of monitoring the state of the business in a selected organisation, using examples 1. Choose 3 or 4 ratios you calculated in P7/M3 answer the following points: Why does the business need to know the information? (You must show further knowledge and understanding of the ratios) What does the business do with the information? Decide if the ratio is good measure of how well the company if performing Give an example to support your decision What are the limitations of the ratio? 2. Write a conclusion about the general limitations of ratio analysis (use the final slide in the PowerPoint as a starting point). Make sure you include a judgement (decide based on your reasoning from each ratio) whether ratios are a good way of monitoring the state of your business.

15. ROCE is a measure of the return that Tesco get back from the capital employed. Capital employed equals a company's Total Assets − Current Liabilities so all the long-term funds used by the business. ROCE shows the efficiency and profitability of Tesco’s capital investments. The ROCE for Tesco is 10% which shows that the business has good return on the money invested. Tesco could now use this information to decide on future investments. ROCE is a good way to determine how much the business is getting back from their investments because capital employed is the best measure of the total resources that the business has available to it. For example, if Sainsbury’s has a ROCE of 8% then it would suggest to Tesco that their ROCE is good as it is better than one of their main competitors although if it was 15% then Tesco may need to rethink their investments as they might not been as beneficial to the business as they could be. ROCE is sometimes known as the “primary” ratio as most businesses use it to measure how well the company is performing. One limitation of ROCE is the fact that it does not account for the depreciation which means that a company with depreciated assets may find its ROCE increases without an actual increase in profit. This could happen to Tesco as they have vehicles and machinery that would depreciate.