(See the formulas of calculations in appendix)
It can be seen from the above table that Tesco’s current ratio is greater than 1(both year 2010 and 2011), indicating that the company has a healthy financial condition, which means the company has the ability to pay its bills. Comparing two years in 2010 and in 2011, the current liquidity ratio for Tesco decreased a little in 2011, which was 2.31:1.
Gearing Ratio
Table below shows the gearing ratio of Tesco
The liability represents more than 50% of capital employed (14,596*100%/2616.0 = 56%), so the company is considered as highly geared. However, it is still a good result because the liabilities are less than 1. Therefore, the company prefers to take shareholders’ funds rather than take loans from external sources; which is good for the company. The result of the gearing ratio for Tesco shows that the ratio in 2010 was higher than that of 2011. This probably means that Tesco minimized the payment problems over the year.
Tesco-ROCE
The table below shows the results for Tesco’s ROCE between 2010 and 2011.
According to the results of Tesco, it was found out that the ROCE ratios are 16%, which is the same for both 2010 and 2011. It means that Tesco generated 16% profit compared to the capital that was invested into the business. However, it cannot be stated whether the results are good or not unless compared with another company in a similar industry which in this case, is Sainsbury (the detailed comparison will be shown in comparison section).
Sainsbury for ROCE
The table below shows the results for Sainsbury’s ROCE between 2010 and 2011.
It can be seen from the table above that the return on capital employed is 12%. This result means that the Sainsbury made 12% profit compared to the total amount of assets. Moreover, the results of both 2010 and 2011 are the same.
Comparison between Tesco and Sainsbury
In order to know if company is doing well in its industry, a similar industry has been compared to it.
The comparison has been done according to the financial figures of both companies, Tesco and Sainsbury. This can be seen through the figures below.
Firstly, from the net profit margin, it can be shown that Tesco had a financial figure of 5.80% in year 2011, which is the most recent financial statement that has been published, while Sainsbury had a net profit margin of 3.92% in 2011. This shows that Tesco increased its profit by 1.88 %( 5.80-3.92), compared to that of Sainsbury, this means that at the end of the financial year in 2011, Tesco had a greater profit than Sainsbury. This may have been as a result of the turnover of Tesco being higher than that of Sainsbury as the company is generally larger than Sainsbury. Therefore, Tesco is more profitable than Sainsbury.
In order to give a clear picture of whether Tesco is doing well or not the liquidity and gearing ratios are needed to be compared between Tesco and Sainsbury. It can be seen from comparison that the liquidity ratios of Tesco seems to be better because Tesco has more current assets that is 3.0 in 2010 and 2.34 in 2011 compared to Sainsbury where the results are 0.64 followed by 0.58. As a result, Tesco has more money to pay the liabilities and deal with its bills better than Sainsbury.
Comparing the gearing ratios of Tesco and Sainsbury, it can be shown that in this case, Sainsbury is doing better as it has a lower proportion of debts. It can be seen from calculations above that the liability of Tesco shows more than 50% of capital employed, while the loans of Sainsbury are lower than 50%. It can be also noticed that Tesco has a small difference between its long-term liabilities and equity shareholders’ funds in comparison to Sainsbury where the amount of liabilities are much lower than shareholders’ funds.
ROCE ratios are also needed to make comparisons between two companies as they are regarded as one of the important ratio information that shareholders can be interested in and this is because it determines how much profit shareholders obtain compared to the total amount of assets that was employed into the business. Generally, there are no great differences between the results of the two companies but Tesco is running better as its ROCE ratio is equal to 16% which is in contrast to Sainsbury’s ratio of 12%.
Profitability Rations
Liquidity Ratio
Below table illustrates the liquidity ration of Sainsbury
Gearing Ratio
Table below shows the gearing ratio of Sainsbury
The table above has shown that the liabilities of 2010 are higher than that of 2011, although they are both less than 1. This means that the shareholders’ funds are greater than the long-term liabilities. It seems that Sainsbury is financed mainly by shares. It can be also be seen that the company’s loans represent 10% of capital employed (529*100%/4966.0 = 10%) which means that making an investment in Sainsbury will not involve risk.
Conclusion and Recommendation
Taking all points into consideration, it can be concluded that the results are all positive according to Tesco’s financial figures. Although there was a comparison between Tesco and Sainsbury, a company in the similar industry as Tesco, the ratios of Tesco were still successful and better than competitors’. We cannot deny the fact that the both Tesco and Sainsbury are successful in their business. However, Tesco is more profitable than Sainsbury. There are a number of reasons why investors should invest money into Tesco. First of all, the profitability ratios are relatively good, hence the investors should be pleased to put money in to the company as Tesco’s trade was successful and also it does not have a large sum of expenses. Under these circumstances, investors’ dividends tend to be high. Secondly, calculating the liquidity ratio, there appeared to be positive results, meaning that Tesco has ability to pay its bills and this is a good fact for investors because the company has sufficient internal resources to pay its liabilities and moreover it will not use shareholder’s money for payment of bills. In the aspect of ROCE ratio’s, counting the results were again positive even when there was a comparison between competitor’s ratios. Tesco had an average of 16% returned profit which is a relatively good result compared to Sainsbury’s, one of the companies considered as a main competitor, which has an average of 12% on return of capital employed. To sum up, it would probably be a good idea to invest money into Tesco’s campaign, reason being as a result of the analysis shown. According to the results shown in the duration of the 2 financial years of Tesco’s business, it can be seen that the financial figures are reasonable and the company is profitable, hence it would be good for money to be invested in it. Not only would this benefit the company, but also the investors as they also would be making a profit.
References
IQSA (2011) Valuation Report: Tesco Plc [Online] Available at: . Accessed: [22nd March, 2012]
Redmayne-Bentley (2012) Tesco [Online] Available at: . Accessed: [22nd March, 2012]
SCRIBD (2012) Tesco and Sainsbury Financial Account [Online] Available at: . Accessed: [22nd March, 2012]
Appendix
Profitability Ratios: Gross profit= Turnover-Cost of sales.
Net profit = Gross profit-Expenses.
Gross Profit Margin= Gross Profit divided Turnover
Net Profit Margin = Net Profit divided Turnover
Tesco’s Gross Profit (2010): £56,910m - £52303m =£4607m
Tesco’s Gross Profit Margin (2010): £4607m
£56,910m*100%= 8.10%
Tesco’s Gross Profit (2011):£60,931m - £55,871m =£5060m
Tesco’s Gross Profit Margin (2011): £5060m
£60,931m*100% = 8.30%
Tesco’ Net Profit Margin (2010): £3176
£56,910 *100% = 5.58%
Tesco’s Net Profit Margin (2011): £3535
£60,931 *100% = 5.80%
Sainsbury’s Gross Profit Margin (2010): £1082
£19,964 *100%= 5.42%
Sainsbury’s Gross Profit Margin (2011): £1160
£21,102 *100% =5.50%
Liquidity Ratios: Current Assets divided Current Liabilities
Tesco’s Current Ratios (2010): £225,985
£73,192 = 3.0:1
Tesco’s Current Ratios (2011): £293,804
£125,668= 2.34:1
Sainsbury’s Current Ratios (2010): £1,797,000
£2,793,000 = 0.64:1
Sainsbury’s Current Ratios (2011): £1, 708, 00
£2, 942, 00 = 0.58:1
ROCE (Rate on the capital employed): Profit for the year divided Equity shareholders’ funds and then multiply 100%
Tesco’s ROCE (2010): £2336
£14596.0 *100 = 16%
Tesco’s ROCE (2011): £2671
£16535.0 *100 =16%
Sainsbury’s ROCE (2010): £585
£4966.0 *100= 12%
Sainsbury’s ROCE (2010): £640
£5424.0 *100= 12%
Gearing Ratios: 1.0 Long Term Liabilities divided Equity Shareholder’s Funds
2.0 Equity Shareholders’ Funds multiply 100% and then divided Long Term Liabilities such as 2616.0 100% 4966.0 100%
14,596 x 529 x
Tesco’s Gearing Ratios (2010): £2616.0
£14,596 = 0.79:1
Tesco’s Gearing Ratios (2011): £1956
£ 16535 =0.118:1
Sainsbury’s Gearing Ratios (2010): £529
£4966.0 = 0.107:1
Sainsbury’s Gearing Ratios (2011): £460
£5424.0 =0.085:1