Company measures its position by conducting financial analysis. Managers always want to do the performance analysis of employees and for this purpose he has to conduct financial analysis. Manager always seeks updated information about the Employee's performance, departments and divisions operations, borrower's ability to pay debt and when the existing capacity can exceed and become the enlarge capacity. An investor wants to update himself/herself about the company's financial position in which he is going to invest his/her money. Financial analysis tells how security of one company is performing better than the security of another company.
Financial analysis is the process of interpretation, assessment and selection of the data related to finance. It provides information that is pertinent to financial data. Decision making process and investments can be done in efficient manner by doing financial analysis of the company. Many companies evaluated their employee's performance by carrying out internal analysis.
Analysis can be drawn on the financial data by taking help from the primary sources. Analyst takes primary data from the annual reports and disclosure that is provided by the company. Income statement, cash flows statement, foot notes and balance sheet are part of the company's annual report.
Nevertheless, other information than the information provided by the financial statements of the company such as securities market price and stock price index of public traded companies is available on financial press and on online sources such as electronic media.
Other sources of the financial information are Gross Domestic Product (GDP) and Consumer Price Index (CPI). These indexes are useful in the assessment of present business or industry and further in the evaluation of performance and future growth of the business or industry for instance a company having many retail outlets need not only financial data but it also needs to have the insight about consumer spending patterns, price of product and market competition in order to analyze the performance of the company and its present and future financial prospects..
Financial analysis has to have the pertinent information related to financial data. Analyst performs analysis on this data and interprets this analysis; this enables the analyst to do judgments on the present and future prospect of business and on the operations of business. Ratio analysis is from on of the tools of financial analysis. Ratio analysis takes information from the financial statement of the company. [1]
Financial performance of the company can be best analyzed by using different tools. Many tools are available for assessing the company's performance. Information is taken mainly from the financial statements of company.[2]
Two companies Tesco plc and Sainsbury plc have been chosen for financial and non financial analysis. They belong to the same industry and they are UK based companies. Ratio analysis has been done to analyze their financial operations and performances. Non financial performances have been evaluated through the models and major strategies that are adopted by these companies for attaining their aims. Findings from both the financial and non financial performances are presented in the conclusion at the end of this study.
Evaluation of Financial performance of Tesco plc and Sainsbury plc
Both Tesco plc and Sainsbury plc are gigantic retail stores and belong to same industry sectors. They have been established in United Kingdom. These stores are playing vital role in the economy of UK as they are operating globally. They are considered as the oldest retail stores of UK and are operating since long time. Performance of these companies has been assessed by making analysis on the financial data taken from the annual reports of the companies. Following ratios have been carried out on the past four years of companies for the financial assessment of both these companies and these ratios are.
Liquidity
Profitability
Efficiency
Past performance and Future Prospects
Liquidity:
It is a set of financial metric that is used to find out a company's capacity to pay off its short-terms debts obligations. That can be done by making a comparison between the company's most readily convertible assets into cash. The higher the value of the ratio the more the chances that the company has the ability to cover its debts that are coming due in the near future and still fund its enduring operations. Whereas a low ratio is a red alert sign for the investors that the company is going through bad times and has a difficulty running its operations and paying off its debts. It includes the conversion of the company's short term assets into cash to pay off loans and debts when creditors to the company are seeking their payments. It shows whether a company will remain an ongoing concern or not.
Common liquidity ratios include: current ratio, quick ratio and working capital / operating cash flow ratio.
Current Ratio:
Current Ratio = Current Assets / Current Liabilities
This ratio shows a company's ability to pay back its short term liabilities with its short term assets. The higher the ratio the higher will be its capability to pay its debts. If the ratio results in less than 1 then the company would be unable to pay back the debts if they are due at that particular time which shows that the company is in a bad financial health.
Quick Ratio (Asset Test Ratio):
Quick Ratio = Quick Assets / Current Liabilities
This ratio shows the company's ability to meet its short term obligations with its most liquid assets. The higher the ratio the more the company is in a good position. [2]
Liquidity ratio of Tesco plc shows the upward trend from the financial year 2007 to 2009 and the slight downward trend in 2010. This trend fabricates the conclusion that company is maintaining its liquidity of assets as in year 2010 ratio is going downward. Same trend has been notice in the quick ratio that is also called the asset test ratio. While in case of Sainsbury's plc, liquidity ratio is showing downward trend from the financial year 2007 to 2009 and the slight upward trend in 2010. Same implies with the asset test ratio or quick ratio.
Liquidity ratio of both Sainsbury and Tesco is below 1 that implies that both companies do not have the ability to meet its current liability from its current assets. Comparison between both companies highlights that both companies are ineffective in terms of their current liabilities and are not fulfilling the standard margin.
Profitability:
Profitability shows how well company is performing, greater the value of Profitability ratios good will be the performance of the company. Profitability ratios include the gross profit ratio, operating profit margin and net profit margin [3]
Profitability can be defined as an ability to earn profit. Profitability is a key to success for those organizations who are working in a fiercely competitive environment. Profitability ratios are used to define the company's ability to generate earnings as compared to expenses over a particular time period in order words it shows the overall performance of the company. It includes the following ratios;
Return on Assets: This ratio is also known as Return on Investment which can be defined as a percentage of after-tax income as compared to total assets of a company.
Return on Equity: This ratio is used to measure the return on the money of the investors. This ratio should be higher which shows that a particular company is performing well with the investor's money.
Net Profit Margin: This ratio is used to measure the profitability after all expenses are paid including taxes, interest, and depreciation.
Goss Profit Margin: This ratio shows that how well a company is managing a cost of its inventory and products. The higher the gross profit margin ratio, the better it will be for the company.
Return on Capital Employed: This ratio shows that how much a company earns profit from the shareholder's investments. This ratio is also known as return on shareholder's funds. [4]
Calculation of Gross profit ratios of Tesco plc is implying that there is fluctuating trend as in the financial year 2007 gross profit margin of Tesco plc is 8.12%, it means company is performing well and earning reasonable profit from business operations of the company. Later on, in financial year of 2008, gross profit decreases to 8%, showing the downward trend in the business performance of the company. It is decreasing further in the year 2009 up to 7.76% and then it is increasing in year 2010 to 8% showing good performance of company over this financial year. In case operating profit margin; in 2007 operating profit margin is 6% going down to 5.9% in financial years of 2008 and 2009 and then moving upward up to 6%. Operating profit margin implying that companies earning from operations are decreasing in 2008 and 2009 and then it is improving again. ROA of company shows how well company is utilizing its assets in order to earn profit. Tesco's ROA is decreasing from 2007 to 2009 and then it shows a bit upward trend. Return on capital employed of the company is from financial year 2007 to 2009 and then moving upward, showing the downward trend of the company's performance. Income from the equity is also decreasing with the previous financial years.
J Sainsbury's plc gross profit margin shows the declining trend from the financial year 2007 to 2010. If gross profit margin ratios are compared with the Tesco's one then it will show that Sainsbury profitability is less than the Tesco's profitability. Operating profit margin is also decreasing from year 2007 to 2008 and then it goes up again in the next financial years. Look on net profit margin shows the declining trend from 2007 to 2009 and then shows good performance in year 2010. Same trend have been shown in the capital employed ratio and in the return on equity ratio.
Interpretation of the profitability ratios of Tesco plc and Sainsbury plc indicates that Tesco is doing well with respect to the profitability as compared to the Sainsbury plc. So Tesco is showing better performance. Ratios calculated are higher for Tesco as compared to the Sainsbury's plc ratios.
Efficiency:
It is used to assess the effectiveness of the company financial performance. For operations of the company, funds from the investors and the creditors are taken. Management of these funds in an effective manner leads towards the success as sales and profitability increase. [5]
In case of Tesco stock turnover rate has increased from year 2007 to 2008 and then it is drooping downwards. It indicates that in 2007 and 2008 company is maintaining its stocks well and doing operations efficiently. Assets turnover ratio is decreasing showing inefficiency of the company. Assets turnover ratio indicates the utilization of assets to increase its sale. Higher the assets turnover ratio, better it will be for the company.
In case Sainsbury's plc stock turnover from2007 to 2008 is decreasing and then onwards it is increasing. Sainsbury's asset turnover ratio is showing fluctuation as it is decreasing from 2007 to 2008 and then it increases in 2009.
By conducting comparison between the efficiency ratios of the companies it can be safely stated that Sainsbury's is performing better than the Tesco Company.
Past performance and future prospects
Companies performances in past are satisfactory and they are trying to improve their business process. Financial analysis proved the satisfactory operations of the companies. However, analysis is incomplete with out taking in account the non financial analysis of the company and they can be understood well from analyzing the strategies and models of the companies that management is applying.
Strategy that Tesco has adopted is the diversified strategy. In order to get growth Tesco considers the diversification strategy as the best strategy [6]. However, Sainsbury has adopted various strategies to get the lead in industry. It carries out innovative programs to appeal its customer[7]. By analyzing both companies performance it can be safe to say that their future prospects are very profitable.
Conclusion:
After conducting the financial and non financial analysis on both companies' performances this conclusion has been fabricated that their performances were good in previous financial years. It can be said that in some areas of operations Tesco is doing well and in some instances Sainsbury is doing good. Both companies are relying on different strategies in order to gain maximum position in the industry. Lastly, overall financial position of both companies shows that Tesco is conducting its business better than the Sainsbury as major ratios shows good performance of the Tesco plc.
