INCOME STATEMENT 2020 2019 2018 2017

Revenue 57,152.0 63,692.0 62,814.0 56,440.0

Cost of sales (53,011) (58,996) (58,312) (52,693)
SG&A (1,936) (1,963) (2,067) (1,786)
Operating profit 2,205.0 2,733.0 2,435.0 1,961.0
Net non-recurring income or expense (508.0) (811.0) (138.0) 209.0
Pre-tax profit/loss of Tesco Bank (175.0) 193.0 199.0 173.0
Investment and interest income 41.0 49.0 46.0 69.0
Interest expense (738.0) (849.0) (868.0) (1,114.0)
Profit before taxes 825.0 1,315.0 1,674.0 1,298.0
Tax expense (104.0) (380.0) (354.0) (306.0)
Profit after taxes 721.0 935.0 1,320.0 992.0
Profit/Loss to Non-Controlling Interest (4.0) (2.0) 2.0 (2.0)
Profit or loss 717.0 933.0 1,322.0 990.0

BALANCE SHEET 2020 2019 2018 2017

ASSETS
Non-current tangible assets 23,085.0 26,033.0 25,960.0 25,384.0
Non-current intangible assets 4,782.0 5,205.0 5,238.0 1,588.0
Minority equity investments 85.0 220.0 618.0 599.0
Other non-operating investments 23.0 1.0 173.0 361.0
Net investment in Tesco Bank 2,121.0 2,527.0 2,499.0 2,560.0
Deferred tax asset 485.0 223.0 74.0 117.0
Derivatives 1,462.0 1,146.0 1,230.0 1,144.0
Total non-current assets 32,043.0 35,355.0 35,792.0 31,753.0

Trade receivables 1,211.0 1,331.0 1,621.0 1,482.0

Inventories 1,844.0 2,177.0 2,326.0 1,951.0
Other current assets 5.0 21.0 6.0 -23.0
Cash and cash equivalents 3,457.0 4,639.0 3,373.0 5,088.0
Total current assets 6,517.0 8,168.0 7,326.0 8,498.0

Assets held for sale 605.0 240.0 98.0 149.0

Total assets 39,165.0 43,763.0 43,216.0 40,400.0

LIABILITIES AND SHAREHOLDERS' EQUITY

Shareholders’ equity 12,343.0 13,275.0 14,858.0 10,480.0
Non-Controlling Interest in Equity -18.0 -22.0 -24.0 -22.0

Non-current debt 15,297.0 18,138.0 15,797.0 17,711.0

Deferred tax liability 48.0 40.0 236.0 87.0
Derivatives 1,283.0 948.0 639.0 663.0
Other non-current liabilities 109.0 170.0 384.0 364.0
Total non-current liabilities 16,737.0 19,296.0 17,056.0 18,825.0

Current debt 1,655.0 2,088.0 1,599.0 1,477.0

Trade payables 4,915.0 5,330.0 5,509.0 5,178.0
Other current liabilities 3,533.0 3,796.0 4,218.0 4,462.0
Total current liabilities 10,103.0 11,214.0 11,326.0 11,117.0

Liabilities held for sale 0.0 0.0 0.0 0.0

Total Liabilities and Shareholders' Equity 39,165.0 43,763.0 43,216.0 40,400.0

SEGMENT INFORMATION 2016 2015 2014 2013

U.K. and Ireland
Store space (sq. ft. millions) 50.20 50.20 50.30 43.40
Revenue (£ billion) 53.20 52.90 51.60 44.90
Operating profit (£ millions) 2,079.0 2,230.0 1,537.0 1,053.0
Net operating assets (£ billion, unadjusted for
operating leases) 21.10 20.90 13.60 9.40

Central Europe and Asia

Store space (sq. ft. millions) 13.40 37.10 40.70 44.20
Revenue (£ billion) 4.00 10.80 11.20 11.50
Operating profit (£ billion) 127.0 582.0 472.0 418.0
Net operating assets (£ billion, unadjusted for
operating leases) 1.90 5.20 4.70 4.80
Question 1

CONDENSED STATEMENTS OF EARNINGS 2020 2019 2018 2017

Revenue 57,152.0 63,692.0 62,814.0 56,440.0
Net Operating Profit after Tax 1,427.3 1,426.7 1,824.6 1,697.4 Net operating profit after taxes (NOPAT)= Net profit - Net investment profit after tax + Net interest expense after tax
Group profit 721.0 935.0 1,320.0 992.0
- Investment profit after tax 108.5 -196.0 -198.5 -195.8
+ Interest expense after tax 597.8 687.7 703.1 901.2
= Net operating profit after tax 1,427.3 1,426.7 1,824.6 1,697.4
of which: Net non-recurring expense after tax 411.5 656.9 111.8 -169.1
= Net non-recurring expense (income) 508.0 811.0 138.0 -209.0
x (1 – Tax rate) 81% 81% 81% 81%
= Net Other Expense after Tax 411.5 656.9 111.8 -169.1
+ Net Investment Profit after Tax -108.5 196.0 198.5 195.8 Net investment profit after tax (NIPAT)= (Investment income + Interest income) x (1 - Tax rate)
= Investment and Interest income -134.0 242.0 245.0 242.0
x (1 – Tax rate) 81% 81% 81% 81%
= Net Investment Profit after Tax -108.5 196.0 198.5 195.8
– Interest Expense after Tax 597.8 687.7 703.1 901.2 Interest expense after tax= Interest expensex (1 - Tax rate)
= Interest expense 738.0 849.0 868.0 1,114.0
x (1 – Tax rate) 81% 81% 81% 81%
= Interest Expense after Tax 597.8 687.7 703.1 901.2
= Group Profit 721.0 935.0 1,320.0 992.0

CONDENSED BALANCE SHEETS 2020 2019 2018 2017

Ending Net Working Capital -2,530.4 -2,412.4 -2,633.3 -3,408.0 Net Operating working capital = (Current assets - Excess cash and marketable securities) - (Current liabilities - Current debt and current portion of non-current debt)
Operating cash (@ 5% of revenue) 2,857.6 3,184.6 3,140.7 2,822.0
+ Trade receivables 1,211.0 1,331.0 1,621.0 1,482.0
+ Inventories 1,844.0 2,177.0 2,326.0 1,951.0
+ Other current assets 5.0 21.0 6.0 -23.0
– Trade payables 4,915.0 5,330.0 5,509.0 5,178.0
– Other current liabilities 3,533.0 3,796.0 4,218.0 4,462.0
= Ending Net Working Capital -2,530.4 -2,412.4 -2,633.3 -3,408.0
+ Ending Net Non-Current Operating Assets 28,374.0 31,449.0 31,243.0 27,119.0 Net non-current operating assets= Non-current tangible and intangible assets + Derivatives - (Net) deferred tax liability - Non-interest-bearing non-current liabilities
Non-current tangible assets 23,085.0 26,033.0 25,960.0 25,384.0
+ Non-current intangible assets 4,782.0 5,205.0 5,238.0 1,588.0
+ Derivatives (assets net of liabilities) 179.0 198.0 591.0 481.0
– Deferred tax liabilities (net of assets) -437.0 -183.0 162.0 -30.0
– Other non-current liabilities (non-interest-
bearing) 109.0 170.0 384.0 364.0
= Ending Net Non-Current Operating Assets
28,374.0 31,449.0 31,243.0 27,119.0
+ Ending Investment Assets 2,828.4 4,202.4 3,522.3 5,786.0 Ending Investment Assets=Minority equity investments + other non-operating investments + excess cash
Excess cash 599.4 1,454.4 232.3 2,266.0
Minority equity investments 85.0 220.0 618.0 599.0
+ Net Investment in Tesco Bank 2,121.0 2,527.0 2,499.0 2,560.0
+ Other Non-Operating investments 23.0 1.0 173.0 361.0
= Ending Investment Assets 2,828.4 4,202.4 3,522.3 5,786.0
= Total Business Assets 28,672.0 33,239.0 32,132.0 29,497.0

Ending Debt 16,952.0 20,226.0 17,396.0 19,188.0

Current debt 1,655.0 2,088.0 1,599.0 1,477.0
+ Non-current debt 15,297.0 18,138.0 15,797.0 17,711.0
+ Preference shares 0.0 0.0 0.0 0.0
= Ending Debt 16,952.0 20,226.0 17,396.0 19,188.0
+ Ending Group Equity 11,720.0 13,013.0 14,736.0 10,309.0
Shareholders' equity 12,343.0 13,275.0 14,858.0 10,480.0
+ Non-controlling interests -18.0 -22.0 -24.0 -22.0
- Net assets held for sale 605.0 240.0 98.0 149.0
= Group Equity 11,720.0 13,013.0 14,736.0 10,309.0
= Total Capital 28,672.0 33,239.0 32,132.0 29,497.0
Question 1

CONDENSED STATEMENTS OF EARNINGS 2020

Revenue 57,152.0
Net Operating Profit after Tax 1,427.3
+ Net Investment Profit after Tax -108.5
– Interest Expense after Tax 597.8
= Group Profit 721.0

CONDENSED BALANCE SHEETS 2020

Ending Net Working Capital -2,530.4
+ Ending Net Non-Current Operating Assets 28374
+ Ending Investment Assets 2,828.4
= Total Business Assets 28,672.0

Ending Debt 16952

+ Ending Group Equity 11720
= Total Capital 28,672.0
Questions 2 and 3

ROE (including non-recurring expense)

2020 2019 2018 2017
Return on equity 6.2% 7.2% 9.0% 9.6% Additional information for question 3:
The return on net operating assets much better reflects of the actual return earned on the retailer’s
net investment than the traditional return on assets:
Traditional decomposition of ROE (including non-recurring expense) • Tesco owns a significant amount of non-operating investments, in particular the net assets of
Ratio 2020 2019 2018 2017 Tesco Bank (5.4 percent of total assets in 2020) and excess cash (1.5 percent of total assets in 2020,
Net profit margin (ROS) 1.3% 1.5% 2.1% 1.8% but 3.3 percent in 2019). Excluding these assets from the calculation of net operating assets
× Asset turnover increases returns.
1.46 1.46 1.45 1.40 • Retailers such as Tesco make use of supplier financing, which causes their net working capital to
= Return on assets (ROA) 1.8% 2.1% 3.1% 2.5% be negative.
× Financial leverage 3.34 3.36 2.93 3.92
= Return on equity (ROE) 6.2% 7.2% 9.0% 9.6%

Alternative decomposition of ROE (including non-recurring expense)

Ratio 2020 2019 2018 2017
Net operating profit margin 2.5% 2.2% 2.9% 3.0%
× Operating asset turnover 2.21 2.19 2.20 2.38
= Return on Operating Assets 5.5% 4.9% 6.4% 7.2%

Return on Operating Assets 5.5% 4.9% 6.4% 7.2%

x (Operating Assets/Business Assets) 0.90 0.87 0.89 0.80
+ Return on Investment Assets -3.8% 4.7% 5.6% 3.4%
x (Investment Assets/Business Assets) 0.10 0.13 0.11 0.20
= Return on Invested Capital 4.6% 4.9% 6.3% 6.4%

Spread 1.1% 1.5% 2.3% 1.7%

× Financial leverage 1.45 1.55 1.18 1.86
= Financial leverage gain 1.6% 2.3% 2.7% 3.2%

ROE = Return on Invested Capital + Financial leverage gain 6.2% 7.2% 9.0% 9.6%

ROE (excluding non-recurring expense)

2020 2019 2018 2017
Return on equity 9.7% 12.2% 9.7% 8.0%

Traditional decomposition of ROE (excluding non-recurring expense)

Ratio 2020 2019 2018 2017
Net profit margin (ROS) 2.0% 2.5% 2.3% 1.5%
× Asset turnover 1.46 1.46 1.45 1.40
= Return on assets (ROA) 2.9% 3.6% 3.3% 2.0%
× Financial leverage 3.34 3.36 2.93 3.92
= Return on equity (ROE) 9.7% 12.2% 9.7% 8.0%

Alternative decomposition of ROE (excluding non-recurring expense)

Ratio 2020 2019 2018 2017
Net operating profit margin 3.2% 3.3% 3.1% 2.7%
× Net operating asset turnover 2.21 2.19 2.20 2.38
= Return on Operating Assets 7.1% 7.2% 6.8% 6.4%

Return on Operating Assets 7.1% 7.2% 6.8% 6.4%

x (Operating Assets/Business Assets) 0.90 0.87 0.89 0.80
+ Return on Investment Assets -3.8% 4.7% 5.6% 3.4%
x (Investment Assets/Business Assets) 0.10 0.13 0.11 0.20
= Return on Invested Capital 6.0% 6.9% 6.6% 5.8%

Spread 2.5% 3.5% 2.6% 1.1%

× Net financial leverage 1.45 1.55 1.18 1.86
= Financial leverage gain 3.6% 5.4% 3.1% 2.1%

ROE = Return on Invested Capital + Financial leverage gain 9.7% 12.2% 9.7% 8.0%
Question 4

Common-sized income statement and profitability ratios

2020 2019 2018 2017 Additional information for question 4:
Line items as a percent of sales • In 2019 and 2020 Tesco’s NOPAT margins were affected by the non-recurring charges. These
Sales 100.0% 100.0% 100.0% 100.0% charges were the consequence of restructurings, goodwill impairment, and impairment of financial
assets. After excluding these non-recurring charges, the retailer’s NOPAT margin and return on net
Cost of sales -92.8% -92.6% -92.8% -93.4% operating assets appear steady and turn out to have slightly improved between 2017 and 2020. The
SG&A -3.4% -3.1% -3.3% -3.2% improvement in NOPAT margin occurred primarily in the retailer’s domestic market; in 2020, its
Non-recurring income/expense -0.9% -1.3% -0.2% 0.4% operating margins in Central Europe and Asia worsened.
• In 2020, Tesco Bank reported a net loss. Consequently, the retailer’s 2020 return on non-operating
Net operating profit before tax 3.0% 3.0% 3.7% 3.8% investments was negative, which helped lower on return on invested capital and return on equity.
Interest and investment income -0.2% 0.4% 0.4% 0.4% • Tesco managed to increase its financial leverage gain, also by increasing leverage in 2019, which
Interest expense -1.3% -1.3% -1.4% -2.0% had a positive influence on return on equity.
Tax expense • Tesco’s PP&E turnover and cash conversion cycle were close to constant during 2018 – 2020.
-0.2% -0.6% -0.6% -0.5% • Overall, these ratios illustrate that Tesco managed to sustain its margins and turnover and
Net profit 1.3% 1.5% 2.1% 1.8% exhibited steady performance during the period 2018 – 2020, which potentially underlines the
success of the retailer’s transformation.
Asset management ratios
Ratio 2020 2019 2018 2017
Operating working capital/Sales -4.4% -3.8% -4.2% -6.0%
Net non-current assets/Sales 49.6% 49.4% 49.7% 48.0%
PP&E/Sales 40.4% 40.9% 41.3% 45.0%
Net non-current asset turnover 2.01 2.03 2.01 2.08
PP&E turnover 2.48 2.45 2.42 2.22
Trade receivables turnover 47.19 47.85 38.75 38.08
Days’ receivables 6.8 6.7 8.3 8.4
Inventories turnover 28.75 27.10 25.07 27.01
Days’ inventories 11.1 11.8 12.8 11.8
Trade payables turnover 10.79 11.07 10.58 10.18
Days’ payables 29.7 28.9 30.2 31.4
Cash conversion cycle -11.8 -10.4 -9.2 -11.2

Debt and coverage ratios

Ratio 2020 2019 2018 2017
Liabilities-to-equity 2.29 2.34 1.93 2.90
Net debt-to-equity 1.45 1.55 1.18 1.86
Net debt-to-net capital 0.59 0.61 0.54 0.65
Interest coverage (earnings based) 2.12 2.55 2.93 2.17

Segment analysis

U.K. and Ireland 2020 2019 2018 2017

Revenue per sq. ft. 1.06 1.05 1.03 1.03
Net operating assets per sq. ft. 0.42 0.42 0.27 0.22
Operating profit margin 3.91% 4.22% 2.98% 2.35%
Net operating asset turnover 2.52 2.53 3.79 4.78

Central Europe and Asia 2020 2019 2018 2017

Revenue per sq. ft. 0.30 0.29 0.28 0.26
Net operating assets per sq. ft. 0.14 0.14 0.12 0.11
Operating profit margin 3.18% 5.39% 4.21% 3.63%
Net operating asset turnover 2.11 2.08 2.38 2.40