Critical Analysis Of Retail Sector In Uk

Introduction The purpose of the report is to critically examine the financial condition of the two retail companies, TESCO and Sainsbury. The financial statements of both companies will be analysed and compared to understand the interconnected figures with the help of ratio analysis. This research will help to better understand the performance and financial position of both retail companies. Babalola and Abiola (2013, p.132) states that 'Financial ratio analysis is a process of determining and interpreting relationships between the items of financial statements to provide a meaningful understanding of the performance and financial position of an enterprise'. By the help of this critical analysis it would be easy to determine the future profitability and risks for both the companies.

Key Highlights of the Report

In this report, ratio analysis has been conducted to evaluate the performance of two retail companies TESCO and Sainsbury. This analysis will help to understand the ratios and will be used to make interpretations about both company's financial condition. It will also clear after analysis that how much attractive which company for investment. The operations and business policies and strategies of the companies will also be identified. Although rank wise TESCO is on number one and Sainsbury is on number 2 but both are working in same sector as a competitors. So it is a great opportunity to understand their financial situation through ratio analysis. By the help of this report understanding about ratio analysis has been raised for the writer as well as it will be significant for the reader. Significance of the report

By ratio analysis the two sets of figures from both retail organizations will help to understand the financial condition of TESCO and Sainsbury. It will give better understanding of financial analysis to the reader that can be the shareholders and equity investors because it can help them to make their decisions for investments. All analytical tools used in this report will help in the future projections and planning of the entrepreneurs and shareholders as well. Due to the analysis, it will be easy for analyst to evaluate the financial operations and market position, mistakes and make future plans.

Selection of Retail Sector The retail sector has been selected from all other sectors because the retail sector play major role in the economy of UK. Robertson (2012, p.3) states that 'Retailing plays a central role in British life. Unlike many other business sectors we are close to people wherever they are'. The financial condition of both companies after comparative analysis will be clearer. The analysis will be centred on calculation of financial ratios for each company over a period of 5 years (2008- 2012). It would contrast the performance of both companies which are considered to be a very close business match. The ratios include profitability ratios, Liquidity Ratios, Gearing Ratios and Investment Ratios. Ratio analysis will be most influential when the results for the TESCO plc. will be compared with the Sainsbury plc., a close competitor of TESCO. The financial data collected from FAME will be accurate and will help to analyse both firms intensely.

Financial Analysis To examine the financial condition of the organizations financial statements will be analysed. According to Maheshwari et al (2011, p. 205) 'Financial statements are prepared with the objective of knowing the profitability and financial soundness of the firms'. The four major ratios will be used for financial analysis which includes 1. Profitability Ratios 2. Liquidity Ratios 3. Gearing Ratios 4. Investment Ratios. Evaluation After financial ratio analysis it is clear that both firms are performing in the same environment and market and struggling to maintain their benchmarks. Overall performance of TESCO and Sainsbury is observed by their ratios. The profitability ratios including ROCE, Net profit ratio and Gross profit ratios TESCO performs better then Sainsbury and show that it has strength to face adverse economic conditions from 2008 to 2012. But in case of Fixed Asset Turnover and Net Asset Turnover Sainsbury performed competently in utilizing the assets and earn more than TESCO. Gearing ratios describes that TESCO is performing under high debts as compare to Sainsbury, but due to high investment the generation of revenue is also high. So overall performance of TESCO is better than Sainsbury and is on stronger position in market. Conclusion The aim of this report was to evaluate and compare the five years financial data to find out the financial health of bot TESCO and Sainsbury. By using financial ratio analysis it became easy to find out strengths and weaknesses of the firms. There is no any correct and adequate means to monitor cash levels by any single ratio. But by using the combination of ratios it became easy to decide that which firm is on risk and on which firm the investment will be useful. ROCE indicates that TESCO and Sainsbury utilize capital efficiently and generating shareholder's value but from 2008 to 2010 it declined little a bit but after short period of time it again rises till 2012. Sainsbury performed better but not efficiently like TESCO but its overall position is better as it didn't decline from 2008 to 2012.The liquidity ratios indicates that Sainsbury has become less liquid than TESCO. In case of activity ratios Sainsbury is more efficient to utilize the assets and earn more by efficient sales generation. Gearing Ratios indicates that TESCO has higher ratio of debt so there is strong market share of TESCO than Sainsbury. During whole analysis it is concluded that both firms are working efficiently but on the basis of ranking it is analysed that TESCO is on number one and Sainsbury is on second number. TESCO is more financially healthy than Sainsbury. Recommendations Collectively the TESCO performs efficiently better than Sainsbury but it have to give attention to ROCE as ratios shows the decline in few years, So Palmer(2012) describes that ROCE can be improved by increase the Fixed Assets Turnover. There should be more defined pricing strategies to avoid loss in Fixed asset turnover and Nat asset Turnover. Managers must have clear policies to confirm availability of cash for all operations and activities. There may be insufficient capital of Sainsbury to meet short term obligations so there should be careful attitude of managers to use capital and try to be more efficient in use of assets. Weaknesses in Ratio The investment ratios were not given by FAME database which created problems in analysis and it was difficult to understand the financial position of TESCO and Sainsbury. There are the ratios in liquidity ratios, which have mentioned that Sainsbury has not enough short term debts to meet short term obligations but if Fixed asset turnover and net asset turnover will be observed then it describes that Sainsbury perform well in utilizing assets and earn more. It creates confusion among analysts. Post report Reflection This report was about financial position of two companies. It was a great opportunity for me to understand the usage of financial ratios and their comparative analysis. It is also found the importance of retail sector in the economy of any country especially in UK. It is now clear that any one ratio cannot explain the financial position of the firm all ratios play important role in understanding the position of the firm. Financial ratio analysis helps to correct the mistakes in previous years by observing financial and also help to increase improvement in the future.