Tesco: why this FTSE 100 company's turnaround bodes well for investors

In investing, knowing which numbers you should pay attention to and which you should discard is half the battle. Honing in on the measures that tell us what’s really going on can save us a lot of time and pain.

At Stockopedia, we strive to identify these key measures. One of the most useful we have found so far is Piotroski’s F-Score - and the F-Score has good news for shareholders of large cap style neutral Tesco (LON:TSCO), which operates in the Consumer Defensives sector. 

Tesco appears to be successfully executing its turnaround strategy after a tough few years for domestic supermarkets. For the fiscal year ended 23 February 2019, revenues increased 11% to £63.91bn and net income jumped by 33% to £1.32bn.

We can see this turnaround in action by looking at the group's five year operating performance:

Why the Piotroski F-Score matters

Followers of renowned accounting professor Joseph Piotroski are well aware of the checklist that made him famous in 2002. Piotroski is behind the F-Score: a simple indicator to highlight neglected stocks with improving prospects.

What's good about the F-Score is that it is essentially an entire quality and fundamental momentum screen in a single number, succinctly summing up the financial health trend of a company. Applying it as a filter on top of almost any strategy can help to increase returns and reduce risk.

Tesco's F-Score: what does it mean?

Tesco scores 8 out of a possible 9. In his landmark academic paper "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers", Piotroksi showed that by investing in companies scoring 8 or 9 by these measures over a 20-year test period through to 1996, investor returns could be increased by an astounding 7.5% each year. 

Below, you can see exactly how Tesco stacks up against the checklist.

What does this mean for potential investors?

Tesco has an F-Score that suggests it could be a promising investment candidate worthy of further research - but it's only a first step. Higher F-Score stocks can still have weaknesses and may trade at premium prices compared to other stocks. We've identified some areas of concern with Tesco that you can find out about here.