Ratio Analysis: Investing in the Company - Essay Example

The Quick Ratio of the company is 0.63. This measures the ability of the company to pay its short term obligations out of the liquid assets and hence it ignores inventory. As this ratio is less than one it signifies that the liquid assets of the company are not sufficient to meet its short term obligations. The Gross Profit margin of the company is 7.76%. The gross profit of the company is calculated as the excess of Operating income over Operating costs. This can be interpreted as the company is earning an operating margin of 7.

76% (Tesco PLC, “Group income statement”, 2009).The Net profit margin of the company is 3.98%. This can be interpreted as the net profit earned by the company is 3.98% of the sales. Here the net profit refers to the profit after tax i.e. after the adjustment of operating as well as administrative expenses. The ROE of the company is 16.67%. This means that the company is earning a profit margin of 16.67% on the total equity. This is fairly good and shows that the company has been successful in earning a positive return for its equity shareholders.

The ROA earned by the company for the financial year ended February 2009 is 4.70%. This means that the company is earning a profit margin of 4.70% on the assets deployed in the business. It shows that the managers have been fairly efficient in using the assets. There is scope for further improvement in the utilization of the assets. The dividend payout ratio of the company is 0.43. This means that the company is declaring 43 percent of its earnings in the form of a dividend. From this ratio, it is clear that the company is declaring a substantial portion of its earnings in the form of a dividend.

The Price earning (P/E) ratio of the company is 12.11. This is reasonable and indicates that the investors are confident about the growth prospects of the company and hence are willing to pay a high price for it (Yahoo Finance, “Historical Prices”, 2010).RecommendationThe company is earning a fairly good return for its equity shareholders. Besides this, it is declaring a substantial portion of its earnings as dividends making it a viable investment proposition. The liquidity position of the company may be moderate but the returns earned by the company are fairly good.

Therefore it is worth investing in the company.