Financial Statements of Two Companies - Essay Example

Business Comparison Introduction Comparing two businesses in the same industry is an interesting proposal, as one of those may be a bigger company than the other. The companies taken for comparison, in order to decide which company is better than the other for investment purposes, are Tesco Plc and J. Sainsbury Plc. In this write up a review of the financial statements of both companies has been taken up; and also ratio analysis has been used for the purposes of financial assessment of performances. The objective was to select the best company out the two for investment purposes. The Financial Statements The sales revenue for Sainsbury Plc. for 2007 was ₤17151m giving a gross profit of ₤1172m an operating profits of ₤520m. Earning per share basic and diluted for 2007 were 19.2p and 18.9p per share respectively. On the other hand Tesco Plc. earned sales revenue of ₤42641m giving a gross profit of ₤3463m and operating profits of ₤2648m. Tesco Plc. provides basic and diluted earning share 23.61p and 23.31 respectively. The above figure suggest that turnover, profitability and EPS wise Tesco Plc. is a bigger company than Sainsbury Plc. The EPS (basic) of Tesco Plc. 23.61p speaks a lot about the company’s profitability performances as compared to the EPS (basic) of Sainsbury Plc. The shareholders are concerned with earnings. The sheer bigness of turnover size and terrific EPS speak volume about the authority of Tesco in the industry. The main balance sheet figures for 2007 are compared as under: Amount in £ in millions Tesco Plc. Sainsbury Plc. Total Assets 24807 9576 Net Current Assets/ Liabilities (-) - 3576 -781 Non- Current Liabilities 6084 2506 Total Equities 10571 4349 The above figures again give an idea that Tesco Plc. is a bigger organization with huge total assets of ₤24807m as against £9576 of Sainsbury. The important thing to note is that both companies are in red so far as net assets are concerned. Both have net current liabilities. This indicates the liquidity of both is fragile. The long term liabilities ₤6084m of Tesco Plc. does not indicate any major dependence on outside capital for total assets financing in view of huge £10571m of equity capital. Similar is the situation with Sainsbury Plc.whose equity capital is ₤4349m as against long term liabilities of £2506m. The assets of this company are also greatly financed by equities. The features of assets, liabilities, equities and profitability are almost similar for both the companies, except that in sheer size Tesco Plc. is a bigger company as compared to Sainsbury Plc. Financial assessment through Ratio Analysis Ratio analysis has been used to financially analyze both companies from different perspectives of profitability, liquidity, efficiency and capital structuring. Liquidity: Current ratios indicating liquidity are calculated as under: Current ratio of 2:1 is considered as optimum ratio in any industry. Current ratios of both companies are even less than one. That means both companies are facing liquidity crunch and may be finding difficult to meet their current obligations as they become due. Profitability: Ratios used to analyze profitability are Gross Margins, Net Profit Margins and Return on Equity calculated as under: Tesco is leading in profitability calculated from three different perspectives. Gross Margins tells the effective use of resources for the operations of the company. Tesco Plc. is leading at 8.12% as compared to 6.83%. Net profit results considered here are profit before interest and taxes. Tesco has better control over its overheads and that is reason its gross margins has reached to 6.21% after meeting indirect costs. Whereas Sainsbury has comparatively less control on overheads and its gross margins of 6.83% reached at 3.03% after meeting overheads. Tesco has shown operational efficiency better than Sainsbury. Returns on equity shows the profits earned on investments of equity holders. The profits considered here are EBIT reduced by finance expenses and taxes. Here also Tesco has taken the lead with ROE at 17.96 as compared ROE of Sainsbury at 7.45. Over all profitability assessment suggests that Tesco has performed much better than Sainsbury because of its complete control on operational expenses. Efficiency To assess the comparative efficiency of both companies, the ratio used are Inventory turnover and assets turnover calculated as under: Inventory turnover of Sainsbury is remarkable at 27.08 times as compared to 20.4 times of Tesco. That means Sainsbury is utilizing inventory faster and more effectively than Tesco. Similarly assets turnover of Sainsbury is slightly better than Tesco. This indicates that Sainsbury, though smaller company than Tesco, is very effectively utilizing its resources for its operational purposes. It appears that none of the assets of Sainsbury remained unutilized or underutilized during 2007. Capital Structure Debt ratio reflecting capital gearing or leverage of capital structure of both the companies is calculated as under: Both companies are low geared as their assets are mostly financed by equities than loan capital or long term borrowings. In fact in both cases there are no preference capitals. Long terms borrowings are much less than equities. The companies are not taking any benefit of capital gearing ort leverage, as after meeting interest expense and dividend for loan capital the entire earning belongs to equity holders. In case more earning equity for the company, equity holders get more benefited under highly geared companies. That is not the case here as both companies are low geared. Directors’ Comments Directors of Tesco Plc. are very positive while review the yearly performance of the company. As per annual report 2007 of the company, the objectivities of the company are, “to grow UK core business, to become a successful international retailer, to be as strong in non- food as in food, and to develop retailing services such as Tesco Personal finance, Telecoms, and Tesco. Com.” (Tesco Annual Return 2007, p3). The future of Tesco Plc is very bright in view of these high profile objectives of the company. So far as Sainsbury Plc. is concerned, it has already set the following targets for the future: “to grow sales by ₤2.5 billions, to invest at least £400 millions to improve product qualities, to deliver operative cost efficiencies of at least £ 400 millions, and to generate neutral underlying cash flows” (Corporate Objectives, Sainsbury Plc.). these objectives were set by the company in 2005-06 and the company is moving steadfastly for completion of these objectives. Both companies are thinking in big terms and for the benefits of their investors. Conclusion Tesco. Plc. is definitely bigger company than J.Sainsbury Plc, as is clear from above stated financial analysis. However, J Sainsbury is also moving fast and hopes to come near to Tesco. Plc. Looking at the 2007 financial statements of both companies, and financial assessments of the companies, it is suggestible that better investment would be with Tesco Plc. The reason is that not only it is a leading company so far as profitability is concerned, but in ‘earning per share’, Tosco Plc.is much ahead of J. Sainsbury Plc. Accordingly under the present circumstances; Tesco Plc. provides better investment opportunity than J.Sainsbury Plc. References J Sainsbury Plc. Annual Report 2007, http://www.jsainsburys.co.uk/ar07/index.shtml J.Sainsbury Plc, Corporate objectives, http://www.jsainsburys.co.uk/ar07/businessreview/corporateobjectives.shtml Tesco Annual Return 2007, page3 http://www.tescocorporate.com/page.aspx?pointerid=40B6E68B255B44ECADF894ACA012D4FF Read More