Financial Ratio Analysis

2574 words - 11 pages

Financial Ratio Comparison of Tesco Plc and Sainsbury Plc
Introduction
Abraham Brilloff once said, “Financial statements are like a fine perfume-to be sniffed but not swallowed.” This means to make rational decisions in keeping with objectives of the firm by busing the financial statements (Helfert, 2003), it is important to critical and analytical sniff but to simply swallow the statistical information from the statements. Using what tools to get into the deep sight of financial statement and see the beautiful sight of the financial world is what the essay focuses about (Matsumoto, Melkote & James, 1995). This essay centers on demonstrating and understanding of the purpose of ...view middle of the document...

Financial ratios are the most frequent checkup tools to analyze and evaluate on the health degree of the financial condition of Tesco Plc and Sainsbury Plc. And financial ratios analysis contains five crucial parts, including profitability, efficiency, liquidity, financial gearing and shareholder position.
Profitability
It widely accepted that franchise retailing company such as Tesco Plc and Sainsbury Plc should be profitable. However whether Tesco Plc and Sainsbury Plc are actually making net income is questionable until using the financial ratio of profitability to testify. Profitability ratios are a series of ratios presenting the relationship between variety of profits and company assets, equity and sales revenue and indicating the firm’s overall effectiveness of operation. Profitability contains ROE, Return on capital employed, gross profit margin, net profit margin, Sales per employee, and Sales to capital employed (Cunningham & John, 1995).
ROE (Return on equity) equals to Net profit after taxation/ (Ordinary share capital + Reserves) x 100. Both Tesco Plc and Sainsbury Plc were experiencing a decrease from 2011 to 2012 but Sainsbury Plc (9.97%) dropped more dramatically than Tesco Plc (2.00%). It can be seen from Appendix two from 2011 to 2012, the rate of ROE of Tesco Plc was decreasing from 16.15% in 2011 to 15.85% in 2012 and that of Sainsbury Plc was decreasing from 11.08% in 2011 to 10.62% in 2012. However, the average rate of ROE of Tesco Plc (15.99%) is bigger than that of Sainsbury Plc (11.21%). Return on capital employed, which is Net profit before long-term interest and taxation/(Share capital+ Reserves+ Long-term liabilities)*100, presented a stable trend from 2011 to 2012 maintaining 12.29%, however, had a 1.76% decent to 12.17% in 2012 in the case of Tesco Plc. Regarding Sainsbury Plc, the Return on capital employed was also decreased from 10.06% to 9.50%. Gross profit margin indicates the relation of Gross profit/Sales revenue*100%, and this time the performance of gross profit margin of Tesco Plc had a more serious decent performance at the rate of around 3.84% (from 8.49% to 8.15%). And Gross profit margin of Sainsbury maintained a relatively stable and averagely smaller rate at 5.46%. Net profit margin (Net profit before long-term interest and taxation/Sales revenue*100) was performing stable but decreasing rates during the two years for both Tesco Plc (from 6.02% to 5.94%) and Sainsbury Plc (from 4.03% to 3.92%) with a decrease of 1.34% and a bigger drop of 2.79%% respectively. When it comes to sales per employee (sales/Number of employees) and sales to capital employed (sales/Capital employed), though Tesco Plc had been doing better profitability performance than Sainsbury Plc in the other aspects of profitability, Sainsbury Plc had average better performance than Tesco Plc. However, the decrease of Sales to capital employed of Sainsbury Plc (2.93%) was still larger than that of Tesco Plc. What is comforting...

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