Ratio analysis

Topics: Sainsbury's, Generally Accepted Accounting Principles, Corporate finance Pages: 7 (897 words) Published: October 17, 2014
Profitability ratio’s

Liquidity ratio’s

The aim of this report is to conduct an analysis of the financial statements of J. Sainsbury plc and Tesco plc for the year ending 2013, comparing both companies by looking at the ratios calculated and looking at the importance of supplementing financial analysis with non-financial considerations. Tesco is Britain’s leading food retailer and the third largest in the world. Tesco opened in 1929. After joining the eighties trend for large out-of-town supermarkets, in the 1990’s the company started pioneering many new innovations. Tesco has over 530,000 colleagues over 12 countries serving up to 75 million transactions every week. J. Sainsbury is into grocery, retail and financial services. It has a 16.8% UK market share. It has 157,000 colleagues, 23 million customer transactions per week, and 1,106 stores. The information in appendix 1 and 2 was extracted from both companies’ annual reports, for Sainsbury’s year ended March 2013 and February2013 for Tesco. Analysis

An operating profit of £9.25 was made on every £100 of capital employed from Sainsbury’s. Compared to Tesco, an operating profit of £7.02 was made on every £100. Looking at the two figures Sainsbury utilizes their capital more efficiently than Tesco, because looking at their revenue scale Tesco is has 2188 compared to Sainsbury which only has 887. Using the 10 year benchmark in the UK, the risk free return rate is at 2.87% in the UK ( (Bloomberg). Therefore comparing Tesco and Sainsbury against the risk free return they are both performing well. Gross profit

J. Sainsbury made £5.48 in gross profit for every £100 of revenue whilst Tesco is performing better at £6.31 in every £100.

The gross profit margin of both companies is mostly affected by global economic recession but Tesco is doing quite well. Sainsbury find itself in difficult probably due to high competition with other high street supermarket like Asda, Morrison, and Somerfield.

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Operating profit
The operating profit margin is lower than the gross profit margin (£3.81 operating profit for every £100 of revenue) because it takes account of total expenditure Current ratio
J. Sainsbury has £0.61 of current assets for every £1 of current liabilities in 2013. This means that there will be no problem for J. Sainsbury’s in covering their current liabilities if their current creditors had to be all paid at once. Tesco also has £0.70 for every £1 of current liability. They also are able to pay back their current creditors if needs be. Acid test

Current assets include the inventory which cannot be converted into cash at a short term notice (Accounting for managers 2012) therefore the acid test ratio is the ration which takes this into account. The acid test shows the relationship between liquid assets and current liabilities (POWERPOINT). J. Sainsbury has £0.30 of liquid assets for every £1 of their current liabilities in 2013. This means they may experience difficulty in paying their debts if they need to pay them at once. Tesco currently has more liquid assets than Sainsbury; however they only have £0.49 of liquid assets for every £1 of their current liabilities. However Tesco would still struggle in repaying all their debts at once. Gearing

Gearing if the amount of borrowings relative to shareholders equity (Accounting for managers 2012). J. Sainsbury’s gearing in 2013 was lower, with long-term debt up to 29.04% compared to Tesco which was at 46.50% An answer of more than 50% indicates that the business is 'highly geared', since it has to make large monthly debt repayments. This can become a problem (especially if the economy heads into a recession or the industry goes into decline) because the business will...
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