Managing Financial Resources on Tesco and Sainsbury Essay

Managing Financial Resources on Tesco and Sainsbury - Essay Example 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 the 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. 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 it s 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 compan y’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 b elow their standard figure. ROE of Sainsbury is higher than that of Tesco. This shows that