Using financial ratios to analyse companies Essay

Using financial ratios to analyse companies - Essay Example The gross profit margin of Tesco has declined by almost 4% as shown in Table 2: Gross profit margin. The ratio shows that the costs of goods of the company have increased and it is unfavourable for the company if the same trend is followed because it will further reduce the profits of the company. Therefore the management needs to make sure that gross profit ratio is increased. The net profit margin of Tesco in the year 2012 is 4.36% however it was previously 4.42% thus it is showing a decline of 1.31%. Net profit margin of the company can be seen in Table 3: Net profit margin. Decline in the net profit is unfavourable for the Tesco as it is showing that the costs and expenses of the company have increased from last year. By further analyzing the financial statements, it can be found that the total revenue as well as net profit of Tesco has increased as identified in Table 1: Key Elements from Financial Statement, but by carefully analyzing the profit margin ratio it can be seen that the costs and expenses have increased at a higher rate than last year which has reduced the profit margin ratio. ROE of Tesco has decline by 1.6% as calculated in Table 4: ROE and it is unfavourable for Tesco as the profits of Tesco has been declining and thus it has also influenced the ROE of the company as well. The equity as well as profits have increased as indicated in Table 1: Key Elements from Financial Statement but the rate of increase in profits is less than the increase in equity thus it has resulted in declining the ROE. ROA of Tesco has shown a decline by 2% as revealed in Table 5: ROA and this is unfavourable for the company as the profits have not increased at the same rate in comparison to the increase in assets as identified in Table 1: Key Elements from Financial Statement. Thus it has resulted in declining of the ROA ratio of the company. Table 6: Operating Profit Margin reveals that Operating profit of Tesco has declined by