Limited Companies (Tesco and Sainsbury) Case Study

Limited Companies (Tesco and Sainsbury) - Case Study Example The stance of both the companies is illustrated with the help of financial ratios, to read between the lines of the companies’ financial statements and to completely understand the financial data presented by the companies in their annual reports. The structure of the report comprises the companies’ financial performance analysis for the year ended 2005 from management, investors and lenders’ outlook because all these three groups are interested in the companies’ position and performance with different perspectives. Therefore, the comparison presented in this report would be helpful for the company’s management, investors and lenders altogether to form a base for their future decisions.Tesco and Sainsbury have been in the retail business for a long time. These companies operate on the international level, but have most number of their stores in UK, which is the major market of these companies. Tesco is the largest and most profitable superstore chai n in Britain. It is the fourth largest supermarket in the world. Tesco operates 2,318 stores in 12 countries around the world and employs 326,000 people, 237,000 of them in Britain where it is the largest private employer (TESCO: A Corporate Profile, accessed 29.11.2005). The principal activity of the Group is the operation of food stores and associated activities in the UK, Republic of Ireland, Hungary, Poland, Czech Republic, Slovakia, Turkey, Thailand, South Korea, Taiwan, Malaysia and Japan (Tesco Annual Report, accessed 28.11.2005). Sainsbury is the UK's third-largest grocery retailer (after Tesco and ASDA) operates the long-struggling Sainsbury's Supermarkets chain -- some 464 supermarkets in the UK (accounting for nearly 85% of sales). The supermarkets get about 40% of their sales from private-label products. In addition to supermarkets, the company operates 260 convenience stores under the Sainsbury's Local, Bells and Jacksons banners. Sainsbury also owns 55% of Sainsbury's Bank (in a joint venture with Scottish bank HBOS) and a property development company (J Sainsbury plc overview, accessed 28.11.2005). PART B: ANALYSIS & COMPARISON OF FINANCIAL PERFORMANCE Tesco and Sainsbury are two popular companies in the United Kingdom. But the latest annual reports issued by these two companies reveal diverse results in the companies' financial performance for the year ended 2005. A deeper analysis of the differences between these companies' financial results is presented below with the help of some ratios peculiar to the analysis in terms of company's management, lenders and investors: FROM MANAGEMENT'S OUTLOOK The following analysis and comparison is done to help the companies' management to assess their performance and capabilities in the light of the companies' recent financial results: Gross Profit Margin Tesco Plc 7.3% Sainsbury Plc 4.12% The Gross Profit ratio analyses the company's profit margin before accounting for various operating costs. The gross profit margin of Tesco is higher than Sainsbury, which indicates that Tesco's management has efficiently managed to obtain more profit out of its sales after accounting for cost of sales incurred during the process of making the goods and services available to customers than Sainsbury. Net Profit Margin Tesco Plc 5.7% Sainsbury Plc 0.65% The net profit ratio analyses a company's profitability after taking into account all the operating costs. The above ratio calculation shows that Tesco has had significantly higher net profit margin than Sainsbury whose profit margin after the operating cost