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Financial Ratios And Analysis Of Sainsbury And Tesco Finance Essay

In today globalize world and mixed markets, it has become imperative to ascertain the financial positions of companies and also the performance level. These information helps in determining the viability or otherwise of a business enterprise. Knowing the true financial state of a business entity is also necessary for financial investors to a company because according to Wahlen (2010) and Lev et al. (2010), the investor must be informed of the financial condition of the companies in order for the investor to make a right decision. As a consultant, I decide to make use of financial ratios in order to be well informed and make the right decision.

2.0 Reasons for Using Ratio

I am of the belief that financial ratios are factors that determine the viability and performance of a company. For instance, Fagiolo and Luzzi (2006) tried and investigated and analyzed how liquidity ratio impacts the growth of a company. If a firm is experiencing hard times and is near bankruptcy, financial ratios are employed to expose such firm (Oliveira & Fortunato, Fortunato

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3.0 Ratios used

For full analysis of the financial status of the organization having this financial statement, I will make use of the following financial ratios to determine the state of the organization’s state:

4.0 Liquidity Ratio

This ratio is a measure of a firm’s short-run capability to pay for its obligations which are already mature (Kieso et al., 2004). According to Weygandt et al. (2004), financial institutions which offer short-term loan and other investors into a particular business function are usually interested in this ratio for them to determine the likelihood of such firm going bankrupt. It is affected by the timing of cash inflows and outflows along with prospects of future performance (Larson, et al., 2006). Common ratios to measure liquidity are the current ratio and acid test ratio. These ratios are based on accrued data and are calculated at a particular point of time. Using data from the cash flows will correct this deficiency (Schmidgall, et al., 1993). The following cash flow ratios will measure liquidity of a company.

5.0 Quick Ratio

This is also a measure of a company’s ability to meet its short-term obligations with its assets considered liquid. The higher the ratio the better and vice versa (Tracy, 2004). According to Gallagher (2003), when the ratio is higher, it augurs well for the company.

6.0 Solvency Ratio

This is also one of the ratios that are used in measuring a firm’s ability meet its long-term financial obligations. With regards to Gargallo (2008), it is often used in ascertaining whether a firm will default from its debt.

7.0 Gearing

This is also known as financial leverage. The financial analysis is used to explain how a company gets money to finance its operations, which is by comparing the company’s long term debt over equity.

8.0 Profitability Ratio

This is a group financial ratios that determine whether a company is making profit. This involves assessing a company’s ability to make revenue by comparing it to the expenses and other allied costs. The following profitability ratios are used for this purpose profit margin, return on asset and return on equity.

9.0 Profit Margin

Profit margin is often used internally to compare profits among business entities in the same. The answer got would tell whether a particular company, as compared to others in the same industry is making profit.

10.0 Return on Asset

This is a financial ratio which is used to calculate the profit a company makes for every cash in the disposal of such company. It is a useful tool which is also used in making comparison between companies in the same industry (Susan et al, 2008)

11.0 Return on Equity

This ratio calculates the rate at which a company is generating profit from each unit of shareholders’ money (Richard, 2000).

12.0 Return on Capital Employed (ROCE)

This ratio is very similar to return on asset. It gives an indication of how efficient and profitable a company’s capital investment is. It is often advisable that ROCE should be higher than the rate at which a company is borrowing.

13.0 Return on Total Asset

This financial ratio is a measure of a company’s earnings prior to paying interests and taxes against the company’s total net asset. It measures how efficient a firm uses the asset in is custody to generate earning (Susan, 2008).

14.0 Asset Turnover

This financial ratio refers to the quantity of sales a firm generates for every dollar’s value placed on their asset. The higher this number is the better (Bodie et al., 2004)

15.0 Efficiency Ratio

This financial ratio is used in measuring how well a firm uses its assets and liabilities.

16.0 Stock Holding Days

This is a ratio of the number of days a company’s inventory is held. If the value of this ratio is too low, it portrays a bad omen but for companies dealing in perishables, it is a good sign if the ratio has a low value.

17.0 Cost of Sales

This ratio is just a measure of how a company is able to convert its assets to profits (Kieso, 2000)

18.0 Earnings per share

This is a measure of the amount of earnings for each outstanding share of a company stock listed on the exchange. It indicates the level of a company’s profitability.

19.0 Earnings yield

Earnings yield is the quotient of earnings per share divided by the share price It is reciprocal to the P/E ratio.

20.0 Dividend yield

The dividend yield or the dividend-price ratio of a share is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share. It is often expressed as a percentage (Hussman, 1998).

21.0 Dividend cover

Dividend cover is the ratio of company's earnings over the dividend paid to the shareholders and calculated as earnings per share divided by the dividend per share

22.0 Debt to Equity Ratio

The debt-to-equity ratio (D/E) is a financial ratio which gives an indication of the relative proportion of shareholders' equity and debt a firm uses to finance a it’s assets. It is also known as gearing or leverages (Peterson, 1999). This ratio is also affected by changes to non-financial instruments (Welch, 2000)

23.0 Efficiency

Efficiency refers to the use of resources so as to maximize the production of goods and services (Sullivan, 2003). It is generally believed that market economies is more efficient than any other of its type (Sen, 1993)

24.0 Efficiency ratio

This ration analyze how well a company uses its assets and liabilities internally

25.0 Financial Statement

A financial statement is also called a financial report and is a formal record of the financial activities of a person, business, or other entity (ASB, 2001); (IAS, 2001)(IASB, 2007).

26.0 Limitation of Financial Ratios Used

Although the listed financial ratios and statement stated above come handy while assessing the financial condition of the firm listed, these ratios have some limitations which are:

Some companies operate under different conditions and to a large extent, these conditions influence the result obtained (Guzman, 2004; Altman, 1968).

Financial accounting information, to a large extent, is affected by estimates and assumptions as these are allowed in accounting practice. These assumptions affect the result of the ratios (Heine, 2000; De la Torre Martinez et at., 2002; Kahl, 2001; Beaver, 1966).

Financial ratios explain the relationships between information that are past while users of the information are more interested in current and future information (Alexander, 1949; Brown, 1993; Berne et al., 1986)

.

27.0 Interpretation of Ratios

Current Ratio measures the company’s short term debt paying ability. The values for this ratio fluctuated back and forth for both banks but it is more pronounced on Tesco than SAINSBURY and this does not augur well for the both companies.

Quick Ratio also showed a very strong trend over the five years for both Tesco and SAINSBURY presented in the bank statements. For Tesco, It is lowest in the current year and highest in the adjoining years but the value remains cataclysmic for SAINSBURY.

ROCE also fluctuated in the years observed but highest in the current year and the preceding years for Tesco as this is a good omen but on closer analysis, SAINSBURY presented values that are not fair and this means that for the same financial year, Tesco is stronger than SAINSBURY in this aspect.

Returns on Equity is slightly lesser for Tesco as compared to the previous years but for this value, it is still strong enough. However, SAINSBURY looks stronger, meaning that the amount made on equity is more than Tesco’s.

Returns on Total Asset by comparing the values for both companies, Tesco has a higher value than SAINSBURY, making SAINSBURY better for the years under review.

Profit Margin Ratio is highest in 2012 for Tesco but faltered along the previous years. For SAINSBURY, the value also remained high which means that the two companies made profit this year than previous years.

Asset Turnover of the Tesco needs some impetus for better performance while asset turnover for SAINSBURY remained strong. Although the values also oscillated back and forth, the companies still maintain a good financial stand.

Stock Holding Days decreased along the previous years but high in the current year for Tesco. That shows that investors still have faith in the company. On a closer analysis, SAINSBURY maintained value which is high and this translates that investors still believe that

Cost of Sales at the current rate, cost of sales is lower for this year than previous years for Tesco. With this trend, the company still stands to make more profit. In the same light, SAINSBURY also stand to make enough profit as well given the value for the company’s cost of sales.

Dividend Yield: for both companies, the value is highest in the current year of review as opposed to adjoining years which is lesser. Investors will have confidence in the company.

Dividend Cover is also a good one for both companies as well. Standing at the current rate, it is much better than before.

Earning per Share: The same situation applies to Tesco and SAINSBURYwhich is indicative the earning which is accruable per share of the company. The value is appreciable and denotes confidence on the company.

Earning Yield is highest in the current year of review and least in 2008 for both Tesco and SAINSBURY. That means that both companies are investor friendly.

28.0 Conclusion

On closer analysis, the various financial ratios utilized shed quite a number of lights on the financial position of the company over the years. Going by liquidity ratio, the company still maintains a strong financial stand considering the readings from previous years

29.0 Recommendation

With regards to the analysis carried out on the financial statement of this company, the company has a stable financial stand and still has the propensity to make more. This can be possible if the company finds a way of reducing overhead cost in the processing of manufacturing and strive to ensure that the earning per share ratio is good enough to entice investors.

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