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Profitability of Tesco PLC and J. Sainsbury PLC Essay

Overall a favourable profitability and efficiency of Tesco PLC can be seen during the years under consideration. The utilisation of the firm’s resources provided a higher profitability over the years by a steady increase in the return on capital employed. A high percentage in such financial ratios is always desirable because it signifies that the financial performance of the organisation is substantially safe from unforeseen changes in the external business environment, like new competitive measures, economic slowdown and more.

The return on capital employed of J. Sainsbury PLC is also increasing in the time frame selected. However, Tesco PLC holds significantly higher ratios than the this corporation, which is highly applicable for the return on capital employed. However, a horizontal analysis of the profit and loss account reveals that J. Sainsbury PLC managed to increase the profitability in a higher rate than Tesco PLC. In this respect Tesco PLC generated a rise in profits of 16. 14% from 2006 to 2007, while J. Sainsbury PLC enhanced it by 127. 07%.

The operating income margin also implies an increasing trend over the years considered for Tesco PLC. This means that the net profit generated from every ? 100 of sales is rising. The

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other corporation was also capable to manage an increase in such ratio. However, the profitability ratio performed by Tesco PLC is considerably higher, which enforces the prominence argument stated in the previous paragraph. This means that Tesco PLC either holds a more positive sales mix and/or is more efficient in control operating expenditure. 1. 2. 2 Financial Position of Tesco PLC and J. Sainsbury PLC

Liquidity ratios are computed to measure the firm’s ability to meet its short-term financial obligations. The two main liquidity ratios are the current ratio and quick ratio determined in sub-section 2. 1. 2. The current ratio, which portrays the capability of the current assets to cover the current liabilities, has slightly risen over the two years for Tesco PLC indicating a more effective working capital management. Yet the abilities of the most liquid assets to cover the current liabilities decreased by 1X in the same time frame. Further more, the current and quick ratio of J.

Sainsbury PLC is materially higher than those of Tesco PLC implying a better financial position. Another important element that necessitates its attention in order to highlight the movement in working capital noted above is the cash and cash equivalents. The net cash from operating activities of Tesco PLC slightly decreased by 0. 31%. This implies that the cash generated from the operations of the company diminished, which is an adverse feature for the company. In addition, an increase in investment of 19. 42% took place, revealing that more cash is being deployed in investing activities.

The equity shares redeemed by the firm amounting to ? 490 million under the financing activities section were another significant element leading to the reduction in cash and cash equivalents of the company. At this stage, it is pertinent to highlight that investment is not a bad feature for the company particularly if it entails viable projects, which will eventually render more cash inflows to the corporation in the forthcoming financial period. Thus such decrease in cash and cash equivalents may be only transitory for the organisation.

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