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Ratio Analysis Of Tesco And Sainsbury With Comparison

Ratio Analysis Of Tesco
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Introduction

The financial position of TESCO will be discussed in this report. Financial analysis is an integral part of the financial and non-financial decision-making process. It gives vital information about a business conduct to the investors and stakeholders to estimate its performance. Here, the financial analysis will be conducted for TESCO, one of the finest groceries and general merchandise retailers operating in the UK. The company has started its business in 1919 and it is being carried for almost 102 years. The company is quite big and having a registered in the London Stock Exchange. As of 2019 the company had almost 6800 operational shops. The service area is also big as the company is servicing it over the United Kingdom, Ireland, India and others. However, the majority of the business is made in the UK. For an effective financial analysis, a competitor bench marking is required to estimate and comment on the company’s performance. In the given case, the financial ratios will be the tool that will be heeling in estimating the overall performance. It will be compared with the Sainsbury, which is almost the same in category and size.

Financial ratios 

In the given case, both companies’ financial ratios are that Tesco’s and Sainsbury’s is calculated and categorised into Profitability, liquidity, efficiency, and gearing.

Profitability ratios

The profitability ratios uphold a company’s profitability position, which shows its earning capacity related to sales and investment.

Gross Profit ratio 

The gross profit ratio is one of the most common financial ratios used to calculate the gross profit-earning capacity of a company by comparing the gross profit earned and the sales made. The gross profit is the excess earnings that the company has made to cover its other cost over the cost of sales.

Gross Profit Of Tesco

The gross Profitability of Tesco was 7.3% in 2019 but is decreased to 7.1%.The major reason for such a decrease in the cost of sales. The company has increased its sale sin 2020 compared to sales in 2019. The increase in sales is amounting to be 1% (Husain & Sunardi, 2020). 

Gross Profit ratio
Particulars20202019Trend
Gross Profit £    4,580.00 £    4,696.00-2%
Sales £ 64,760.00 £ 63,911.001%
    
Gross Profit ratio7.1%7.3%-4%

Gross Profit Of Sainsbury

Sainsbury has earned 7.9% gross profit in 2019, which is higher the gross profit earned by Tesco. However, in 2020 the gross Profit of Sainsbury is decreased by 12%, causing gross Profit to structure at 7%. The fall in gross Profitability for Sainsbury is higher than fa; in Tesco.

Net Profit Ratio 

The net profit ratio is calculated by comparing the net profit earned by a company to its sales. Higher net Profit will indicate the potential of a company to convert more of its sales to net profits and create a return to the shareholders (Abdul, 2017).

Here, the net Profit of Tesco decreased by 24% as it earned a net profit of 2% on sales in 2019 but earned only 1.5% in 2020. Also plagiarism free assignment help experts deduces The decrease in net Profitability is indicated by the decrease in gross profit levels and an increase in operational cost.

Net Profit Ratio
Particulars20202019Trend
Net Profit £        973.00 £    1,270.00-23%
Sales £ 64,760.00 £ 63,911.001%
    
Net Profit Ratio1.5%2.0%-24%

Simultaneously, the net Profitability of Sainsbury is stood at 0.6% in 2019, which is decreased to 0.5%. Thus, the sales decrease is not higher than Tesco, but it is very poor than Tesco (Laitinen, 2017).

Net Profit Ratio
Particulars20202019Trend
Net Profit £        152.00 £        186.00-18%
Sales £ 28,993.00 £ 29,007.000%
   #DIV/0!
Net Profit Ratio0.5%0.6%-18%

Liquidity Ratio

Current Ratio

The current ratio can be calculated by comparing the current assets and current liabilities. A current ratio of 2 or more seems highly liquid as the company will have adequate current assets to pay off its short-term liquidity.  A current ratio lower than 1, is a matter of concern (Nuryani & Sunarsi, 2020).

Tesco

The current ratio of Tesco is 0.6 in 2019, which is increased to 0.73:1 in 2020. The increase in the current ratio for Tesco is because of an increase in current asset and a decrease in current liabilities by 15%.

Current Ratio
Particulars20202019Trend
Current assets£  13,164.00£  12,578.005%
Current Liabilities£  17,927.00£  20,973.00-15%
    
Current Ratio0.730.6022%

Simultaneously, the current ratio of Sainsbury is very low, which is almost near to 0.6 in 2019 and 2020. The Sainsbury’s current ratio is not good at all as it has current liabilities compared to the current assets.

Current Ratio
Particulars20202019Trend
Current assets £    7,586.00 £    7,558.000%
Current Liabilities £ 12,047.00 £ 11,849.002%
   #DIV/0!
Current Ratio0.630.64-1%

Quick ratio 

 The quick ratio is almost identical with the current ratio; however, it is considered a slow sale item. Therefore, it is not included in the inventory. The quick ratio helps in estimating Real time solvency for the company. If the company is having a quick ratio of 1 or more than that, in such case, it will be in an advantageous position (Öztürk&Karabulut, 2018). Know more about quick ration and its key roles from online assignment help Perth experts of SourceEssay.

TESCO

The quick ratio of Tesco was 0.47 in 2019, which is not a favorable position; however, bu increasing the current assets and decreeing the inventory the company has helped with controlling the is solvency position. In 2020 the company’s quick ratio was increased to 0.60, which is almost 26% increase.  Furthermore, the company can lower its current liability by a huge margin.

Quick Ratio
Particulars20202019Trend
Current Assets £ 13,164.00 £ 12,578.005%
Less: Inventory £    2,433.00 £    2,617.00-7%
Current liabilities £ 17,927.00 £ 20,973.00-15%
Quick Ratio0.600.4726%

Sainsbury

The quick ratio of Sainsbury was 0.475 in 2019, which increased to 0.486. Here, the company cannot increase its short-term liquidity position as the quick ratio is extremely poor and inferior. Here the company can control its inventory position, but that is not sufficient to increase its competency (Allad, 2017).

Quick Ratio
Particulars20202019Trend
Current Assets £    7,586.00 £    7,558.000%
Less: Inventory £    1,732.00 £    1,929.00-10%
Current liabilities £ 12,047.00 £ 11,849.002%
Quick Ratio0.4860.4752%

Efficiency Ratio

The efficiency ratios show the performance metric of the company, which are highly related to the Profitability and asset management. Online Assignment help Sydney defined if a company is competent in terms of efficiency, then in those cases, it will be effective in earning shareholders confident as well as profits.

 In the given case, the following three ratios will be calculated.

Debtors Turnover

The debtor’s turnover ratio indicates making sales and realising the company’s ability to make sales. A higher debtor’s turnover will indicate high trade volumes (Adjirackor et al., 2017).

Tesco

In the given case the company was having a debtor’s turnover of 43.11 times in 2019, which is increased to 43.96 in 2020. The increase in the debtor’s turnover might not seem very high, but depending upon the retail sector’s inductor, the company has adequate debtors’ turnover. 

Debtors Turnover ratio
Particulars20202019Trend
Sales £ 64,760.00 £ 63,911.001%
Average Debtors £    1,473.00 £    1,482.50-1%
    
Debtors Turnover ratio43.9643.112%

Sainsbury

The debtor’s turnover of the Sainsbury is slightly lower than the debtor’s turnover ratio for Tesco. In 2019 the debtor’s turnover ratio for Sainsbury was 40.26, which is increased to 40.24. It indicates that the company’s performance related to debtor’s management neither increased nor decreased.

Debtors Turnover ratio
Particulars20202019Trend
Sales £ 28,993.00 £ 29,007.000%
Average Debtors £        720.50 £        720.500%
   
Debtors Turnover ratio40.2440.260%

Creditors Turnover

The creditors turnover ratio shows how efficiently the company is paying the credits that it has taken form accounts payment for the supply of products and services. The accounting payable are a reliable source of getting no-cost credit, but the borrower needs to pay the dues on time. A good creditors turnover ratio will be an indication of that. You can also check credibility of the creditors using plagiarism checker tool.

Tesco

In the given case the creditors turnover of Tesco was 6.61 in 2019. However, the company’s creditors’ turnover is increased by a small percentage and now amounting to be 6.67 times. It indicates that the company has increased its payment position. However, change is not big.

Creditors Turnover
Particulars20202019Trend
Cost of sales £ 60,180.00 £ 59,215.002%
Average Payables £    9,026.50 £    8,952.001%
    
Creditors Turnover6.676.611%

Sainsbury

Like that performance of Tesco, the creditors turnover for Sainsbury is increased by a small percentage of 1%. Earlier the company is having a creditors turnover of 7.80 times which is increased to 7.88 in 2020.

Creditors Turnover
Particulars20202019Trend
Cost of sales £ 26,977.00 £ 26,719.001%
Average Payables £    3,424.00 £    3,424.000%
   #DIV/0!
Creditors Turnover7.887.801%

Inventory Turnover

 The inventory turnover ratio is calculated by comparing the cost of sales with an average inventory. A company with higher inventory turnover will be having, and inventory turnover indicates a higher income probability as it sells its frequent compared to others. Furthermore, a company with adequate inventory turnover ratio will be asking for low inventory requirement (Farooq, 2019).

Tesco

 The company’s inventory turnover ratio was 24.26 times in 2019, which decreased to 23.83 times in 2020. The decrease in the asset indicates a decrease in performance and ability of the company to sell its inventory.

Inventory Turnover
Particulars20202019Trend
Cost of sales £ 60,180.00 £ 59,215.002%
Average inventory £    2,525.00 £    2,440.503%
    
Inventory Turnover23.8324.26-2%

Sainsbury:

Compared to the results of Tesco, it is identified that the inventory turnover of the Sainsbury is on a lower side as it was having an inventory turnover of 14.6 times in 2019 and 14.74 in 2020. The inventory turnover ratio of Sainsbury is almost half than the inventory turnover of Tesco.

Inventory Turnover
Particulars20202019Trend
Cost of sales £ 26,977.00 £ 26,719.001%
Average inventory £    1,830.50 £    1,830.500%
    
Inventory Turnover14.7414.601%

Gearing Ratio 

The gearing ratios reflect the capital structure of a company. A company having high gearing will be indicating high-risk exposer compared to a company having low gearing position.

Debt To Equity 

The debt-to-equity ratio is calculated by comparing the involvement of debt compared to equity. Online thesis help experts said,A company with a higher debt to equity ratio will carry high risk (Nuryani & Sunarsi, 2020).

Tesco

 In the given case, the debt-to-equity ratio of Tesco was 0.53 in 2019, aging increased to 0.57 in 2020. The increase in debts by 5% is the main cause behind it.

Debt to Equity
Particulars20202019Trend
Debt £    7,495.00 £    7,143.005%
Equity £ 13,253.00 £ 13,432.00-1%
    
Debt to Equity0.570.536%

Sainsbury:

The Sainsbury is relatively lowering its debt levels as its debt position is decreased by 22% between 2019-20. The company then had a debt to equity of 0.2, which is decreased to 0.17 (Guo, & Wang, 2019).

Debt to Equity
Particulars20202019Trend
Debt £    1,296.00 £    1,660.00-22%
Equity £    7,773.00 £    7,782.000%
   
Debt to Equity0.170.21-22%

Conclusion

Based on the above discussion, Tesco and Sainsbury’s profitability, liquidity, efficiency, and solvency ratios aree discussed. Based on the above calculation, the profitability position of both companies is almost similar; however, in terms of liquidity and efficiency, Tesco is performing better than Sainsbury. In terms of debt-to-equity Sainsbury is having a lead over Tesco. Based on the above calculation, it is ascertained that it is better to invest in Tesco as it has adequate profitability and efficiency ratio and an adequate solvency position.

References

Abdul, A. A. A. (2017). The Relationship between Solvency Ratios and Profitability Ratios: Analytical Study in Food Industrial Companies listed in Amman Bursa. International Journal of Economics and Financial Issues7(2), 86.

Adjirackor, T., Asare, D. D., Asare, F. D., Gagakuma, W., & Okogun-Odompley, J. N. (2017). Financial Ratios as a Tool for Profitability in Aryton Drugs. Research Journal of Finance and Accounting8(14).

Allad,  (2017)I. A Study on Selected Indian Software Developing Companies Based on Debtors Turnover Ratio.

Farooq, U. (2019). Impact of inventory turnover on the Profitability of non-financial sector firms in Pakistan. Journal of Finance and Accounting Research1(1), 34-51.

Guo, L., & Wang, Z. (2019). Ratio analysis of J Sainsbury plc financial performance between 2015 and 2018 in comparison with Tesco and Morrisons. American Journal of Industrial and Business Management9(2), 325-341.

Husain, T., & Sunardi, N. (2020). Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review2(2), 13-26.

Laitinen, E. K. (2017). Profitability ratios in the early stages of a startup. The Journal of Entrepreneurial Finance19(2), 1-28.

Nuryani, Y., & Sunarsi, D. (2020). The Effect of Current Ratio and Debt to Equity Ratio on Deviding Growth. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi Akuntansi)4(2), 304-312.

Nuryani, Y., & Sunarsi, D. (2020). The Effect of Current Ratio and Debt to Equity Ratio on Deviding Growth. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi Akuntansi)4(2), 304-312.

Öztürk, H., & Karabulut, T. A. (2018). The relationship between earnings-to-price, current ratio, profit margin, and return is an empirical analysis of the Istanbul stock exchange. Accounting and Finance Research7(1), 109-115.

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