DEBT & EQUITY

Debt & Equity

Debt & Equity

Introduction

This paper discusses the difference between Debt and Equity. Further, it critically analyzes the ratios of two non financial companies that are traded on London Stock Exchange. For this purpose, the chosen companies are Tesco PLC and Sainsbury.

Debt or Equity

Financing is a very vital part of any business organization. Financing maybe required at any point in time for the business to perform well. Not only is a start up capital important but in order to meet the day to day running costs financing is required. Financing also provides for a business to expand further. However there are many possible sources of financing available to a business, it has to be chosen wisely as the most suitable form of financing varies from the nature of business to business. Larger organisations often have more sources of financing available to them when compared with smaller companies (Petersen, 1994).

Tesco Plc & Sainsbury

TESCO is World's fourth largest and UK's # 1 Grocery Retailer. It has 5380 stores alone in UK and dozens more under the fresh banners in three continents namely, Europe, Asia and North America. It has diversified portfolio of companies in different industries; supermarket, superstores (Tesco Extra), small urban stores (Tesco Metro), convenience, and gasoline retailing (Tesco Express), and financial services (Tesco Personal Finance). Tesco.com is Britain's leading Internet delivery service. Tesco's recipe for growth is to build new stores, diversify into new countries, and to add new products and services. Indeed, it has moved beyond groceries and far beyond the UK to become a global retailer of general merchandise, as well as food. The strategy appears to be a winning one for Tesco, which saw its sales rise from £51.5 billion in fiscal 2008 (ends February) to £67.6 billion in fiscal 2011. Over that time, Tesco added more than 1,600 stores and saw a steady increase in profits. The British retailer is also struggling in the US where it launched a new convenience store chain; it lost nearly $300 million through fiscal 2011 (ends February).

Discussion

Ratio Analysis of Tesco Plc

Liquidity Ratios

2010

2011

2012

Current Ratio

0.73

0.68

0.67

Quick Ratio

0.18

0.14

0.12

Payable in days

34.31

35.84

36.18

Ratio analysis is conducted of Tesco Plc for gaining financial insight of the company. Past 3 years performance is analyzed, from year 2010 till 2012. The liquidity ratios of the company tell that to what extent company has the near cash available to pay off its current obligations. The current ratio of Tesco Plc shows a decreasing trend, where decreased from .73 to 0.67. However, it is not favorable for the company, since it cannot pay off its liabilities even once in a year from its current assets. Further, Quick ratio is a much rigorous measure of liquidity, where inventory is subtracted from the current assets to get a much clear picture of cash availability in the company. The quick ratio has been dropping too low from past 3 years, from 0.18 to 0.12. This reflects that Tesco Plc does not have cash in hand to pay off the current liabilities on immediate ...