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Analysis Of Financial Ratios Of Tesco

Tesco has been the major food retailer with wide range of customer appeal in UK and abroad ever since its establishment by Jack Cohen in 1919. It’s has been always expanding its market share by implementing different business strategies by diversifying its products in the competitive market making its net profit of about 2814 m (2011/2012).

The war veteran Jack Cohen started selling groceries in 1919. Later he also started the tea supply along with the groceries and happened to make a partnership with T.E. Stockwell (Tea Supplier) giving the brand name of TESCO for the first time ever in 1920. The name TESCO is the amalgamation of the first two letters TE from Stockwell and CO from Cohen.

The first Tesco store was founded in Burnt Oak, Edgware, London in the year 1929. The stock exchange entrance was held as Tesco stores limited in 1947 at London Stock Exchange.

Tesco expanded even further, and went for its international expansion. In response to a growing Eastern European market, it opened stores in Poland, Hungary, Slovakia and the Czech Republic. Tesco also expanded into Taiwan, Thailand and South Korea. The company purchased the UK-based T&S, a convenience retailer, while in Poland it bought HIT, a hypermarket operator, in 2002. In a similar way Tesco started booming on and on with the improvement and development of the number of stores as Tesco Express, Metro, Superstore or Extra with different levels of facilities.

Tesco is one of the largest food retailers in the world with revenue in excess of £64539 million, whereas operating profit of 3985 million and Net profit is 3835 million in 2011/2012. It is employing over 470,000 people with 4,331 stores in 14 countries all over the globe.

Key Financial Summary Of Tesco plc. for financial year 2011/2012 in million

Total current assets

£12,863

Total current liabilities

£6,386

Total long term assets

£37,918

Total long term liabilities

£17,731

Revenue

£64,539

Receivables

Payable

£2,657

£11234

Cost of goods sold

£59,278

Operating expenses

£1,276

Interest expense

£241

Inventory

£3,598

Sainsbury’s

Sainsbury’s was founded in 1869 and today operates over 1,000 stores, including 440 convenience stores and employs around 150,000 people. It is a UK based food retailer with business interests in financial services. The company operates supermarkets, convenience stores, internet-based home delivery shopping service and Sainsbury’s Bank.

Sainsbury’s is one of the largest and the oldest supermarkets in the UK. The company has a market share of around 16% and serves over 18 million customers a week. It offers around 30,000 products through 502 supermarkets and 290 convenience stores. The company also operates 169 stores offering internet-based home delivery shopping service.

Sainsbury’s also operates a significant non-food business and sells a range of products including clothing, books and gift items, electronics, kitchen appliances, petrol, pharmaceutical drugs and home wares.

The company recorded revenues of £22294 million during the financial year ended March 2012, an increase of 9.5% over financial year 2011/12. The operating profit of the company is £874 million whereas net profit is £598 million.

Key financial summary of Sainsbury’s for fiscal year 2011/12 in million

Total current assets

£2,032

Total current liabilities

£1,104

Total long term assets

£10,308

Total long term liabilities

£3,575

Sales

£22,294

Receivables

Payables

£286

£2740

Cost of goods sold

£21,083

Operating expenses

£337

Interest expense

£138

Inventory

£938

Other income

£35

Compared Financial Ratios of Sainsbury’s and Tesco

Below I have calculated financial ratios of Tesco Plc. and Sainsbury’s. This can be used to Measure Company’s solvency, liquidity, operational efficiency, and profitability. They are also useful to measures and compare performance of two businesses with each other.

Profitability Ratios

Profitability Ratios measure organisation's capacity to make earnings as par compared to its expenditures and other relevant costs incurred during a specific period. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. (Need correction) copied http://www.investopedia.com/terms/p/profitabilityratios.asp#axzz2FGC0PO00

Gross profit margin

Formula: Gross profit/sales×100

Tesco Plc.

Sainsbury’s

£5,261/£64,539×100 = 8.15%

£1,211 / £22,294×100 = 5.43%

This important ratio measures company’s profitability at the most basic level. Total gross profit (which is net sales - cost of goods sold) compared to net sales. A ratio less than one means company is selling product for less than it costs to produce. If this ratio remains less than one, business cannot achieve profitability regardless of volume or efficiency of the business.

In the year, 2011/12 Tesco made 8.15% of gross profit margin, where its competitor Sainsbury’s could make only 5.43% at the same period. Therefore, Tesco is more profitable compared to Sainsbury’s.

Operating profit margin

Formula: Operating Profit/Sales×100

Tesco Plc.

Sainsbury’s

3985/64539 ×100 = 6.17%

£874/£22,294×100 = 3.92%

Operating profit margin Measures Company’s profitability based on earnings before interest and tax (EBIT). This measure can be used to evaluate the efficiency of the business before considering any financing means (such as debt financing and tax considerations) as well as to compare the operating efficiency between similar businesses.

Net profit margin 3.46%

Formula: Net income/Sales

£764/£22,294×100 = 3.46%

Often referred to as the bottom line, this ratio takes all expenses into account including interest.

Liquidity Ratios

Current ratio 1.84

Formula: Current Assets divided by current liabilities

£2,032/£1,104 = 1.84

Your current ratio helps you determine if you have enough working capital to meet your short term financial obligations. A general rule of thumb is to have a current ratio of 2.0. Although this will vary by business and industry, a number above two may indicate a poor use of capital. A current ratio under two may indicate an inability to pay current financial obligations with a measure of safety.

Quick ratio 0.99

Formula: Current assets minus inventory divided by liabilities

(£2,032-£938)/£1,104 = 0.99

Also known as the 'Acid Test', your Quick Ratio helps gauge your immediate ability to pay your financial obligations. Quick Ratios below 0.50 indicate a risk of running out of working capital and a risk of not meeting your current obligations. While industries and businesses vary widely, 0.50 to 1.0 are generally considered acceptable Quick Ratios.

Operating Ratios

Inventory turnover ratio 22.48

Formula: Cost of goods sold/Inventory

£21,083/£938 = 22.48

This ratio measures the number of times your inventory 'turned-over' during a time period. Generally, the higher this ratio the better your use of inventory. Low numbers indicate a large amount of capital tied up in inventory that may be more efficiently used elsewhere.

Sales to receivables ratio 77.95

Formula: Net sales/Net receivables

£22,294/£286 = 77.95

This ratio measures the number of times your receivables 'turned over'. The higher the number, the more efficient you are at collecting your accounts receivable. A ratio that is too high or one that is increasing over time, may indicate an inefficient use of your working capital. It is important to compare this ratio to other businesses in your industry.

Return on assets 6.25%

Formula: Net income before taxes/Total assets

£771/£12,340 = 6.25%

This ratio helps show how assets are being used to generate profits. One of the most common financial measures, it can be an effective tool to compare the profitability of two companies. If your return on assets is lower than a competitor, it may be an indication that they have found a more efficient means to operate through financing, technology, quality control or inventory management.

Solvency Ratios

Debt to worth ratio 61.08%

Formula: Total liabilities/Net worth

£4,679/£7,661 = 61.08%

Also called the leverage ratio, it is used to help describe how much debt is used to finance the business. While some debt may be prudent, depending on too much debt financing can increase risk.

Working capital £928

Formula: Current assets minus current liabilities

£2,032-£1,104 = £928

Working capital is used by a lender to help gauge the ability of a company to weather difficult financial periods. Working capital is calculated by subtracting current liabilities from current assets. Due to differences in businesses and the fact that working capital is not a ratio but an absolute amount, it is difficult to predict the ideal amount of working capital for your business without making use of other financial measures. (Including the Quick Ratio and the Current Ratio.)

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