RATIO ANALYSIS

Ratio Analysis of Tesco & Sainsbury for 2008 And 2009

Ratio Analysis of Tesco & Sainsbury for 2008 And 2009

INTRODUCTION

This report is about the financial analysis of two retail companies, Tesco and J Sainsbury Plc. The aim of this report is to compare both companies against each other to find out which company is doing better then the other. This report will start off with Tesco's two years financial report and followed by Sainsbury's two years financial report and the conclusion will be on which company doing well and why is it doing well. The financial ratio analysis comprises of four parts, which are as follows (Gowthrope, 2009):

Performance Ratios: It is used to assess the relative success or failure of business performance.

Working Capital Efficiency Ratios: It is used to assess the extent to which asset and liability items are well utilised and well managed.

Investment Ratios: It is used to assess various items of particular interest to investors.

Financial Status: It is used to assess the extent to which a business can comfortably cover its liabilities.

These ratios will be used to calculate how both companies are performing.

TESCO

Tesco, which specialise in women's clothing and fashion accessorise is a design - led retailer. Peter Simon founded the company in 1972. The company also operate with another name, Accessorize, which deals with ladies fashion accessorise. Tesco provides its customers with product differentiation and customer service by recognising its people, particularly its continuing ability to inspire, motivate and reward them. When Tesco was first opened it focused on clothes with ethnic origins mainly from Malta and Far East and in 1984 an exciting and strongly differentiated high street concept for fashion accessories was introduced when Tesco created Accessorize.

The followings are the financial ratio analysis for Tesco:

i. Performance Ratios

a. Return on Capital Employed (ROCE) Profit before Taxation and Interest Total Assets less Current Liabilities Year 2009 38,187 + 547 73,661 = 53% Year 2008 32,062 + 23 58,370 = 55% ROCE for the year 2009 has fallen by 2%, which means that although the trend is good, the company is not quite efficiently using assets to generate profit.

b. Asset Turnover Sales___________ Total Assets less Current Liabilities Year 2009 231,180 73,661 = 3.1 Year 2008 203,577 58,370 = 3.5 Asset turnover has fallen by to 3.1 compared to last year, which is 3.5. This shows that the asset turnover is not good and does not generate sales that very well compared to last year.

c. Net Profit Margin Profit before tax and interest payable Sales Year 2009 38,187 + 547 231,180 = 16.8 % Year 2008 32,062 + 23 203,577 = 15.8 % The net profit margin is good. It has increased from 15.8 % to 16.8 % in 2009. This shows that the sales are generating profits.

From the above three ratios, it is obvious that asset turnover and net profit margin reflect ROCE. The ROCE for the year 2009 is low because there is a decrease of 0.4 in asset turnover, which affects the ...