This ratio shows the number of times the earnings per share covers the dividends per share, this has increased in 2004 but the different is not very significative. For a company like Tesco the dividend cover is a little tight, but since the main objective of the company is growth, during this proccess is likely to have a low divedend cover. There are some limitations or problem in financial ratio analysis. They can be useful, but analysts should be aware of these problems and make adjustments as necessary in order to outfit the firm’s operations.Different operating and accounting practices distort comparisons: every company may use their own accounting and financial system different from other which can limit the analysis by contrast between them.
Most ratios by themselves are not highly meaningful. They should be viewed as indicators, with several of them combined obtain a statement of the firm’s situation. In other words, ratios should not be analyzed in isolation, instead, must be compared to historical values of the same firm, the firm’s forecasts or ratios of similar firms, however No two companies are the same, even when they are competitors in the same industry or market.
Using ratios to compare one company with another could provide misleading information. Businesses may be within the same industry but having different financial and business risk . Average values should be used when they are available because year-end sometimes is not illustrative or symbolic in the sense that certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors (i. e. low point in business activities) and such changes may misrepresent the value of the ratio.Ratios are subject to the limitations of accounting methods and ratios will inherit the limitations of the financial statements on which they are based. Regarding the liquidity ratio, both, current and quick ratios only provide an estimate of a company’s liquidity. They are not accurate enough to be used to predict whether or not a company is capable of paying the liabilities.
Sometimes is hard to tell if a ratio is good or bad sign of the company and therefore it is difficult to know whether a company is, on balance, in strong or weak position.For example a high current ratio may indicate a strong liquidity position, which is good or excessive cash, which is bad. In the case of TESCO, the liquidity ratios (current and acid test) are low as has been shown above but that does not means the company has weak position but only that it may have not liquidity at the year-end. Financial statements used as the basis of the ratios are found on historical cost. Where historical cost convention is used, asset valuations in the balance sheet could be misleading.
Ratios based on this information will not be very useful for making decisions.Out date information in financial statement: attempting to predict the future of the company using past result is problematic in the sense that may give erroneous numbers as result of the analysis with figures at least several months out of date. There are some techniques like “window dressing” that can make statements and ratios look better than they really are. To analize TESCO’s financial situation it has been used the ratio analysis, specially those applicable for the interest of the emploees of the company.Once the numbers has been shown, it is obvios that an emploee would stay working for the company. If I was an emploee I would take into account that the stock is capable to become cash in a short time period, which means that it is very likely that I would get paid regularly without any problem. Furthermore, as has been seen, the investor ratios are increased from 2003 to 2004 showing a reflect of the company activity.
This would give me good assurance of TESCO performance.