Managing Financial Resources on Tesco and Sainsbury - Essay Example

? Managing Financial Resources Introduction J. Sainsbury plc is the second largest supermarkets in United Kingdom. The current operations of Sainsbury includes convenience stores, standard supermarkets, online grocery stores, merchandise website, clothing. There are basically two main format of Sainsbury, one is Sainsbury’s convenience stores and other is Sainsbury’s supermarket. The company uses large self-service food stores in the United Kingdom about fifty years ago. In 1995 Tesco overtook Sainsbury and became the largest grocery retailer in UK. Tesco PLC is a multinational grocery store located in Cheshunt, United Kingdom. It is presently the second largest retailer in the world in terms of revenues. It has its presence in 14 countries across Europe, Asia and North America. Tesco was originally a grocery retailer and has diversified geographically into many areas like books, clothing, retailing, furniture, electronics, petrol and software. It also has its presence in telecoms, financial services and internet services, music downloads and DVD rental. This report will take a look at the financial performances of the two companies; discuss possible users of such analysis and what they can do with this information. Discussion Profitability ratios Three profitability ratio for Sainsbury and Tesco are shown below Profitability Ratio for the year ended 2013 Sainsbury Tesco Gross profit margin 0.05 0.06 Net Profit margin 0.03 0.02 Return on Equity 0.11 0.08 Gross Profit margin is used to measure the financial health of a company. It reveals the amount of money which is left over after deducting the cost of goods sold from the revenues. It is the source of paying for additional expenses and future savings. It indicates the manufacturing efficiency of the production process for the company. A high gross profit margin signifies that a company can make profit while keeping the overhead cost in control. A low margin indicates that a company is not able to control its production cost. Retail Industry average of Gross profit margin is around 10%. But for both the companies it is below the industry standard. For Sainsbury it is 5% and for Tesco it is 6%. For both the company the cost of sales is high as percentage of its sales. For Sainsbury the cost of goods sold comprises of 95% of the sales figure and for Tesco it is 94%. Both the company must try to reduce its operating cost to improve its efficiency. There are ways to improve the gross profit margin. The company should look to optimise its price structure and should not look at discounting their prices. The company should try to sell goods at higher margins. The company should try to improve the inventory systems like less theft, stock obsolescence. Net Profit Margin The Net profit margin is how much dollar is earned by the company ultimately for each dollar of sales achieved by them. Similar to gross profit margin, their ratio shows the efficiency of the company. This ratio shows the company’s pricing policies and how efficient the company is in running its operation. Retail Industry average of Net Profit margin is 10%. For both the companies the ratio is well below the industry average. For both the companies the Net profit margin is nearly the same. They must try to improve their ratio so that the efficiency increases. The companies should try to increase their volume of goods sold. They should aim to decrease their purchase cost, increase their conversion rate of raw materials, and sell goods at higher margins. Return on Equity Return on Equity is another measure of efficiency of the management in generating the returns for the capital invested by the shareholders. The higher is the ratio the better it is for the shareholders to invest their money into the company. In retail industries companies require huge capital to invest in their business. Hence the companies should generate high returns. The industry average of ROE is 15%. Both the companies are both below their standard figure. ROE of Sainsbury is higher than that of Tesco. This shows that management of Sainsbury is much more efficient than Tesco’s. Profit earned by Tesco is about 56% more than that of Sainsbury but it uses much more capital in achieving it. Hence the ROE of Sainsbury is much higher than Tesco. The company should try to improve the profit margins and return on sales. The asset turnover ratio should be improved which can increase the ratio since with rise in asset turnover the sales will increase and hence the profitability will also improve. Liquidity Ratios Liquidity Ratio for the year ended 2013 Sainsbury Tesco Current Ratio 0.61 0.69 Quick Ratio 0.30 0.49 Net Working capital -1201.00 -5889.00 Current Ratio Current ratio indicates the liquidity position of the company. It shows how much of current asset the company is able to generate out of its liabilities that it has generated. Industry standard is 50%. Both the companies have achieved the industry average. Current ratio of Tesco is 69% as compared to 61 % of Sainsbury. This shows that Tesco has been able to generate asset more than that of Sainsbury. The current liabilities of Sainsbury are much higher than Tesco. Both the companies can look to increase its current ratio even further. The company should look to get rid of the unproductive assets, since it is just increasing the storing cost (Vandyck 47). The company should look to at its overhead costs which can have a direct impact on its profitability. Quick Ratio Quick Ratio indicates the short term liquidity of the company. It indicates the ability use the quick assets to pay off its current liabilities. Ideally the quick ratio should be 1:1. Both the company has a low Quick Ratio as compared to the industry average. Quick Ratio of Tesco is higher than that of Sainsbury. This is because the Inventory of Tesco is much higher than Sainsbury. This improves the Quick Ratio of Tesco. This shows that Tesco uses more inventories to carry on its business. Both the companies should try to improve the ratio. The companies can increase the quick ratio by managing its quick assets in generating huge profitability. A high stock turnover ratio will definitely improve this ratio. Working capital Working capital shows the amount of capital needed to meets its day to day expenses. Working capital for both the companies is negative. This shows that the cash generated from their business is used to pay off their obligations instead of keeping large cash balance with itself. This indicates efficiency of the business. Hence from the above figure we see that Tesco has paid off its obligations much faster than Sainsbury and hence possess much better working capital management. There are two categories of users who need this financial information. One is the external users who are outside of the business. These users mainly consist of prospecting investors or tax authorities. This may include other authorities including customers, Suppliers, Regulatory authorities, Bankers and competitors. They all use this information to analyse the company (Drake, Pamela Peterson & Frank J. Fabozzi 85). Another is the internal users including managerial accountants who are inside the business organisation. These include people like Owners of the businesses like the partners, sole owners and shareholders. Managers of the company including CFOs, COOs, CEOs and decision makers use this information to their advantage. The information is also looked at by the employees (Gibson 141). Inadequacies of the financial performance measures, have led to the generation of non-financial indicators like intangible assets, intellectual capital etc. Non-financial indicators are equally important as compared to the financial indicators. Non-financial indicator represents a closer link to the long-term strategies of the organisation. Financial performance generally focuses on short-term annual performance. They don’t deal with the financial objective which is important to the customers in achieving long term strategic goals. New product development is an important non-financial parameter which is important from the point of view of strategic goals. Through the delivery of non-financial information, the company can communicate the objectives and strategic plans of the company. The intangible assets like intellectual capital and customer loyalty is critical to the success of the company more than the hard assets on the balance sheet. Though it is hard to quantify intangible assets in terms of financial figures, it can give indirect quantitative indicators to the firm’s intangible assets. Non-financial indicator can give a better indicator of the future financial performance of the company. Though the aim of any company is to maximize the financial performance, it may not reflect the long-term benefits of the company. Hence both the financial as well as non-financial information is needed to reflect the true position of the company. Conclusion Both the companies Tesco and Sainsbury are a retail giant multi chain retail stores. Both the companies are companies have achieved profitability in the financial year 2013. Looking at the financial statement both the companies are in relatively safe position in terms of profitability. On the overall Sainsbury has a better profitability margin than Tesco. With regards to the Liquidity ratio both the company are in a similar position. Both the companies should look at improving their financial performance to improve their return to the shareholders. Works cited Drake, Pamela Peterson and Frank J. Fabozzi. Analysis of Financial Statements. New Jersey: John Wiley & Sons, 2012. Print. Gibson, Charles H. Financial Reporting and Analysis, 13th ed. Mason: Cengage Learning, 2012. Print. Vandyck, Charles K. Financial Ratio Analysis: A Handy Guidebook. Victoria: Trafford Publishing, 2006. Print. Read More