Custom «Accounting Assessment: Tesco Company and Sainsbury Plc» Essay Paper

Introduction

This paper seeks to analyze information for two companies in an effort to determine which company one can invest in its undertakings. The analysis will be with the help of financial statements majorly income statement and balance sheet that contain the companies’ financial information. Before making any investment, in any business or company, it is essential for the investor to have sufficient and enough financial information concerning the businesses he or she wishes to invest. The companies in focus, in this paper, are Tesco and Sainsbury that fall under the category of fair-trade goods retailers. In understanding financial position and progress of any business, we make use of financial ratios, which help us in calculating the actual company financial position. The financial information used in this paper is for the recent years of 2009 and 2010. In addition, as an investor the director’s report for the two companies will be essential in making the decision on where to invest.

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Discussion

Starting with the financial information for Sainsbury Plc, we examine the company’s financial stability. According to the 2010/09 financial, report the company records over 19million customer transaction on weekly average, which is a considerable improvement from 2009’s records. In 2009, customer transactions stood at 18million weekly. On market share Sainsbury, company owns 16.1% in the UK that again has gone up by 0.2% from 2009. There is growth in the complementary, non-food section that has grown three times since its introduction. From the records, the non-food section will grow at a faster rate as compared to the food section. There was business expansion during the 2010 period with 38 new supermarkets opening in new areas and extending 13 other supermarkets. Finally, the market value of the company’s freehold property portfolio increased to 9.8 billion euro. The increase in this area included 0.7billion euro of property value under development and investment activity.

Focusing on Tesco’s 2010 financial performance there is a record of 6% increased revenue. Considering the company-closed business in 2009 with an operating loss of $ 14.4million, 2010 was an improvement as they closed business with an operating income of $ 15.2 million. During this financial year, the top drive business comprised 64% of the total revenue and all of the net operating income. According to the financial statements and the performance graph provided by the company management, it shows substantial fluctuations in earnings and revenue and Tesco attribute this to various reasons. Among the reasons for the fluctuating revenues and earnings are the level of drilling activity, variability of customer orders, new products offered, and many others.  There is fluctuation in the company’s tax rate dropping from 70% in 2009 to 49% in 2010 (Bodie, Kane & Marcus, 2011).

Further assessment of the financial stability of the two companies will be by the use of the two key accounting ratios under profitability and liquidity ratios. Profitability ratios enable an investor to know the company’s overall performance and efficiency and these are paramount to any investor.

Profitability ratios

The main aim of gross profit margin is to establish how well a business manages the cost of its inventory and manufacturing of its products and afterward pass on the costs to its customers. In this case, higher gross profit margins indicate the company is doing well in the business. From the above calculations, Tesco Company data indicate higher gross profit margin compared to Sainsbury Company. Tesco records a 78% and 80% for 2009 and 2010 respectively that means there is an improvement in the manner in which the company organizes its inventory costs. It is advisable to invest in Tesco Company because of its high gross profit margin unlike Sainsbury Plc that has a remarkably low value. Operating profit margin helps the investor in gauging overall operating efficiency, including all of the expenses of ordinary, daily business activity. The higher the operating profit margin the better the company is for investment and in this case, Tesco Company has records of higher value. According to the profitability evaluations of both companies, it is advisable for an investor to make investments with Tesco Company rather than Sainsbury Company (Reynolds, Cuthbertson & Bell, 2004).

Liquidity Ratios

Most investors prefer high current ratio as it lessens their risk in the company’s investment. Tesco’s current ratio is higher as compared to Sainsbury Company in both periods when the calculation is made. Therefore, it will be a better idea to invest in Tesco Company, as there is a lower risk on the investment. In as much as the company, records show fluctuating revenues and earnings its better to invest in Tesco because of its higher current ratio. On the other hand, Sainsbury Company has a stagnant current ratio that means that its liquidity state is neither improving nor decreasing. It is essential for any business to post or have any changes so that it can encourage and attract more investors. Talking of quick ratios it is also used to evaluate the liquidity state of the business the only difference being that it subtracts inventory from the current assets (Webster, 2004). 

Conclusion

According to Sainsbury Company, directors report the business did perfectly well with records of profits. There was good profit growth and underlying earnings per share grew over 12%. Over the past year, Sainsbury has progressed in attaining its strategic objectives particularly in expanding their selling space and opening more variety on the complimentary non-food offer. The directors’ report seems to be contented with the progress of the company for the last financial year. Tesco’s directors’ report indicates an improvement in the company’s overall performance from the previous year. Since 2008, the company was closing business with a net debt of 29 million dollars and in 2010 finished business with a net cash position of 60.6 million dollars. This is an improvement and a clear sign of efficiency in the company. The directors’ report also explains the reasons for the fluctuating values in the company’s revenues and earnings that seem to be reasonable. Evaluating the above reports, it is still advisable for investments to be made with Tesco Company because it has efficiency and stability compared to Sainsbury Company.

Presentation on the company’s evaluation

• Introduction of the subject
• Provide the audience with a brief summary of the two companies and their nature of businesses
• Produce financial statements for the two companies for the last two years that will be helpful in evaluating the financial position of the businesses.
• Explain the financial position of the two companies using financial statements (income statements and balance sheet) for the years 2009 and 2010.
• Explain the accounting ratios worked out above so as to show the profitability and liquidity positions of the two companies
• Using the above information give explanations on the decision reached for investing in Tesco Company and not Sainsbury Company
• Summarize the presentation with information from the directors’ reports and any other information that is relevant in making the investment decision