Profitability analysis

Describe about the Financial Ratios for A Practical Guide?

Tesco and Sainsbury are one of the well known retail organizations in UK. Both the companies are listed in the London stock exchange (Tesco.com, 2015).  Both the supermarkets focus on the grocery segments.  A brief comparison of the financial performance of both the companies has been done in terms of profitability and return to the investors. The companies have diverged their business from the grocery segment to the non food items, clothing, insurance and banking services (Sainsburys.co.uk, 2015). The data of 5 years of both the companies has been collected from the financial report. The profitability and investors performance of Tesco and Sainsbury has been analyzed from the year 2010 to 2014. A brief idea of the financial performance of both the companies has been obtained. It will serve as a tool for the make their investment decisions in these companies.

Profitability ratios measure an organization’s ability to gain profit from the sales. As profits are utilized to reserve capital use and pay profits, these measures will be imperative to experts and nearly observed as far as industry correlations. Different profitability ratios to be considered are Gross Profit Margin and Net Profit Margin. Overall revenue considers income less the expense of merchandise sold. An organization’s terrible net revenue might likewise be seen as an estimation of creation effectiveness. An organization with overall revenue higher than that of its rivals, or the business normal, is esteemed to be more effective and is subsequently, taking all things into account, favored. Net overall revenue considers the net pay once all expenses are uprooted. With this, the edge could be seen as controlled by a scope of variables including rivalry or increasing expenses (Lee, 2006).

In the present study the profitability of Tesco and Sainsbury has been analyzed for 5 years. The profitability has been analyzed from the year 2010 to 2014. This will help to judge the performance of the company in the subsequent years. The profitability analysis of Tesco from the year 2010 to the year 2014 has been done using the following ratios (Tesco plc, 2015).

Gross Profit Margin

The gross profit margin indicates the profit margin of the company over the sales. The cost of goods sold is deducted from sales to get the value of revenue. The gross profit of Tesco from the year 2010 to 2014 has been fluctuating. The profit margin of the company was increasing till 2012. The profit margin declined from 2012 to 2013. The margin of gross profit stagnated to 5% in the year 2014 (Tesco plc, 2015).

Net Profit margin: It indicates the profitability of the company from sales. The profit of the company after payment of taxes is considered as net profit. The analysis of the net profit margin of Tesco shows that the net profit margin was increasing till 2012. There was a sharp decline in the net profit in the year 2013 due to huge burden of tax. There was no profit gain from sales in the year 2013 after payment of taxes. The net profit margin increased to 2% in the year 2014 (Businessweek.com, 2015).

Tesco Profitability Analysis

Return on Assets: The return of the company on investment in assets is determined by the return on assets ratio. The return on assets for Tesco has been rising till 2012. A sharp decline of ROA was seen in the year 2013 and it increased to 2% in the year 2014.

The return on capital employed ratio determines the earnings of the company from the capital employed by the organization. The return on capital employed for Tesco has been increasing from the year 2010 to the year 2012. There was a sharp decline in the ratio in the year 2013 from 17% to 11%. The ROCE increased to 12% in 2014.

The major reason behind the decline of the profitability of Tesco from the year 2012 to 2013 is the existence of tough competitors in the market. The competitive edge of the company has reduced and it has to revive its strategy of business to regain its position in the International market and home market (redmayne.co.uk, 2015).

The profitability analysis for Sainsbury for 5 years from the year 2010 to 2014 has been done using the following ratios.

Gross profit margin: The gross profit margin for Sainsbury shows that the profit margin of the company on sales has declined in the year 2013. However the profit margin has been stable to 4% in the year 2010 to 2012 and 2014.

Net profit margin: The net profit margin of Tesco has remained steady from the year 2010 to the year 2014. It has maintained a standard level of 3% throughout the 5 years (J-sainsbury.co.uk, 2015).

Return on Assets: The return on assets from Sainsbury has declined from the year 2010 to the year 2014. It shows that Sainsbury is not being able to utilize the assets efficiently to generate profit (Businessweek.com, 2015).

Return on capital employed: The return on capital employed for Sainsbury has been 12% till 2011. It has declined in the year 2013. However it has regained its position and maintained its standard level of 12% (redmayne.co.uk, 2015).

Price -earning (P/E) ratio is normally utilized while taking venture choices by numerous speculators. P/E proportion is the degree between the business sector cost and income every offer. The proportion shows the business sector cost of an offer versus its income. As per one perspective, bring down the P/E degree, the better it is for speculators, as there are possibilities of higher appreciation. The higher the P/E, the more is being paid for an expected stream of profit. Financial specialists normally are ready to pay a higher P/E for organizations they judge will be becoming quicker than the standard despite the fact that they don’t pay those income out in profits however hold them to reserve future development. The cost of the organization’s stock typically becomes quicker than the cost of an organization with a slower development or higher profit paying organization. In this way, the higher P/E produces more noteworthy upside potential (Baker & Powell, 2005).

Sainsbury Profitability Analysis

The investor’s performance indicators from investment in Tesco have been assessed by the following ratios. The analysis has been done from 5 years from 2010 to 2014.

Price-Earnings Ratio – The price earnings ratio indicates the earning of share holders on the investment on a single share. The price earnings ratio for Tesco has been fluctuating. The earnings of the share holders have declined in the year 2012 to 7.9 from the year 2011 which was 11.1. The decline of the price –earnings of Tesco has been due to the decline in the Profitability of the company in the year 2012 from the previous year.

Dividend Yield Ratio – The ratio measures the dividend earned by the investors on the price paid by the investor. The dividend yield on investment in the shares of Tesco has been increasing. The yield has been highest in the year 2012. This shows that the company has been paying regular dividend to the share holders.

Return on Investment: The ratio measures the return of the share holders on the investment in the share. The return on investment in the shares of Tesco has been highest in the year 2012. The ROI has declined in the year 2013 with a increase in ROI in the year (Financials.morningstar.com, 2015).

Price – Earnings ratio – The price earnings ratio for Sainsbury shows that it has been fluctuating. The price –earnings ratio has declined in the year 2014.

Dividend Yield – The yield in the form of dividend on investment in the share of Sainsbury has been increasing. It has increased from the year 2010 to the year 2014. The highest yield has been in the year 2014.

Return on Investment – The return on investment for Sainsbury has declined in the year 2013 from the previous years. There was increase in the ROI in the year 2014 from 2013 , it raised by 6% (Financials.morningstar.com, 2015).

Comparison of Gross profit Margin of Tesco and Sainsbury

Comparison of Net profit Margin of Tesco and Sainsbury

Comparison of Return on Assets of Tesco and Sainsbury

The comparison of the profitability of Tesco and Sainsbury for the year 2010 to the year 2014 shows that the gross profit margin for Tesco has been relatively higher than Sainsbury. While there has been significant decline in the gross profit for Tesco in the year 2013 and 2014 but it was higher than that of Sainsbury.

The comparison of net profit margin shows that for Tesco it has declined sharply in the year 2013. But in the other years it was higher than Sainsbury. On the other hand, the net profit margin has been constant at 3% throughout the five years.

The comparison of the return on assets shows that there was a sharp decline in return on assets in the year 2013. But it recovered from the decline in the year 2014. The return of assets for Sainsbury has remained fixed.

The return of capital employed for Tesco and Sainsbury for the five years has shown similar movement (Diegelmann & Deter, 2005).

Comparison of Dividend Yield Ratio of Tesco and Sainsbury

Comparison of Return on Investment Ratio of Tesco and Sainsbury

The price earnings ratio for Tesco and Sainsbury shows that the earnings of the shareholders on investment in the shares have been fluctuating. Both the companies show a decline in the P/E ratio from the year 2013 to 2014. However the earnings shareholder of Tesco has been higher than that of Sainsbury (Bull, 2007).

The dividend yield ratio of Tesco and Sainsbury for five years shows that the dividend yield of Sainsbury has been higher than that of Tesco.

The return on investment for Tesco and Sainsbury shows that the ROI for Tesco and Sainsbury has been fluctuating with the fluctuations in the share price of the companies. But the ROI has been higher for Sainsbury than Tesco from 2010 to 2014 (Tracy, 2012).

Conclusion and recommendations

The profitability analysis and investors performance analysis of Tesco and Sainsbury for the past 5 years shows that the profit margin of both the companies has been declining from 2010 to 2014. The variation in the profitability led to the fluctuations of the return of the investors.

Both the companies must revive their business strategies in the home country as well as in the International market to gain their competitive advantage over tough competitors like Aldi.

References

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Diegelmann, M., & Deter, H. (2005). 100 IFRS Financial Ratios.

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