The current economic crisis is raising difficulties for investors who want to gain higher profit through investing the right companies. With the help of ratio analysis, this report will focus on the performances of Tesco and Sainsbury from year 2008 to 2009, making a comparison between Tesco, which is the largest British retailer by both global sales and domestic market share (Wikipedia, 2009), and Sainsbury, which is the third largest chain of supermarkets in UK with a share of the UK supermarket sector of 16.3% (Wikipedia, 2009). This report will be divided into four parts, profitability and returns to investors, liquidity and working capital cycle, capital structure and financing, a conclusion and recommendation, using trend analysis and cross sectional analysis, taking differences in accounting methods and changes in strategy and structure into account.
Profitability and Returns to Investors:
According to the profitability ratio, ROCE for Tesco has decreased from 14.04% to 11.45% within on year. Compared with Sainsbury whose ROCE had increased 2.36%; Tesco seems had less management efficiency than Sainsbury. However, this is mainly due to the big increase of capital employed compared with the small increase of net profit. The capital employed of Tesco has increased 40.8% accompanied with a decrease of 4.7% for Sainsbury, and for net profit, both companies did not have too much digital difference. This increase of capital employed for Tesco is mainly due to the increase amount of property, plant and equipment, because of Tesco’s long-term strategy including international market, which may need more plants and equipments for the expansion of international market but maybe unfortunately, it didn’t utilize assets in 2009 as well as that in 2008. For return on shareholders’ funds, Tesco decreased 1.23% within one year. Profit for this financial year is slightly larger than last year, but there is much more equity shareholders funds than last year, which means every single shareholder will get less money than last year. Compares with Tesco, Sainsbury’s ROSF decreased 0.07%, which seems shareholder can get more money if they choose Sainsbury to invest. But the figures also show that Tesco is 16.67% while Sainsbury is 6.6% in year 2009 although Tesco’s decreasing amplitude is larger than Sainsbury. As a result, Tesco can seem generate more profit for share holders than Sainsbury.
Other ratios such as PER and dividend cover ratio need to be considered before making investment decisions. For Tesco, EPS increased from 26.95p to 27.50p, which means more money is earned for each share issued and the company is in a good state of using the investors’ money profitably. As for Sainsbury, EPS decreased 2.5P within on year and it is 10.9p less than Tesco in 2009, which indicates Tesco is a good choice for investor under this condition. What is more, Tesco’s PER decreased 2.93 years to 13.53 in 2009 while for Sainsbury, the figure decreased 2.08 years to 17.65 in 2009, which is higher than Tesco. This indicates that Sainsbury is expected to generate higher returns than Tesco and therefore it is relatively appealing than Tesco. However, share prices can be moved by trends in the broad or industry environment as well as company specific factors. For example, the dramatically fell of stock market due to the economic recession. So it must be interpreted with care. Another important ratio is dividend cover ratio. Both Tesco and Sainsbury had decreased slightly within one year. However, Tesco is still 1.12 times bigger than that of Sainsbury in 2009. It highlight that Tesco did better than Sainsbury in the affordability of dividends and the risk-reduce of future payment to shareholders.
Liquidity and the Working Capital Cycle:
Turning to current ratio, if the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial...