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Overview of Financial Analysis
To take effective investment decisions, investors usually do financial analysis. Financial analysis is also referred to as Financial Statement Analysis (hereafter FSA). FSA is an assessment of the profitability, viability and the stability of an organization (Cinnamon & Larsen, 2006). The usage of FSA is of manifold, as users of different sectors analyze the financial statement from different angles (Christian, 2007). The main goal of FSA is to analyze and then interpret the financial health of the organization in an understandable manner. Financial ratios computation is an activity frequently used under the umbrella of financial analysis.
Comparative Analysis of Profitability
Tesco Plc is better than Sainsbury although Sainsbury Plc has high revenue and net income figures. It can be said that Tesco Plc is more cost efficient that that of Sainsbury Plc. The NPM of Tesco was around 8% for year (FY) 2006 as compared to 0.40% of Sainsbury for the same year. The year 2007 was the greatest year for Tesco because the Net profit of the company increased by 9.33% as compared to the same period of last year. The NPM of Sainsbury plc is consistent from the period of 2007 to 2009. The year 2009 was the worst year for Tesco, the company experienced negative growth in that period and the NPM of Tesco decreased by 10.89% for the year. The year 2009 was quite heavy on the almost all the corporations worldwide due to the severity of the current economic downturn. Sainsbury is amongst those companies who performed wonderfully well even at the time of economic hardship. From the analytical figures and chart one can say that both the companies are profitable as revenue and net income generation is concerned. The mean NPM of Tesco Plc is comparatively higher than that of Sainsbury Plc 319 basis points which is a clear indication of the ad hoc growth of Tesco Plc.
Comparative Analysis of Efficiency
This particular analysis regarding the ROA is also in the favor of Tesco Plc. The ROA of Tesco Plc was way high for three consecutive years of 2006, 2007 and 2008 as compared to the ROA of Sainsbury Plc. An increase of 3.20% in ROA had been envisaged in the fiscal year of 2008 for Tesco while the ROA of Sainsbury has been constant from 2006 to 2009 and increased heavily by almost 3% in the year 2010 as compared to the same period of last year. From this analytical table and chart, one can say that the operating assets of Tesco Plc are more productive and efficient as compared to Sainsbury Plc because the mean ROA of the company is manifesting a figure of 5.05% while the mean ROA figure of Sainsbury Plc is 3.08%, highlighting a clear difference between the assets efficiency of Tesco Plc
Comparative Analysis of Liquidity
The analysis of liquidity depends upon the current ratio. The current ratio of Tesco is relatively good then its major competitor Sainsbury Plc throughout the analytical period except for one year which is 2008. High CR then the competitor highlighting better operation management from Tesco Plc which shows that the store is more efficient and aggressive then its competitor to meet its financial promises. However the company must also tries to increase this proportion more than 1 to be called as more competitive
Comparative Analysis of Collection Period
After the calculation we analyze that the receivable collection period of Sainsbury Plc is better than Tesco Plc because the receivable collection period of Sainsbury Plc comprises of 4 days while for Tesco Plc its comprises on 9 days. It means that Sainsbury Plc receive money from their debt holders early as compared to Tesco Plc. Volume of the sales and Account receivable plays a decisive role while comparison. We can see that from the table that the average account receivable and sales revenue of Tesco Plc is far higher than that of Sainsbury Plc, which ultimately affects the receivable period to increase.
We have selected Tesco Plc and judge its performance with its major competitor Sainsbury Plc. We have found that both of these companies are fruitful in terms of revenue recognition and for the investment purpose. Comparing the financials of these two companies intimate that Tesco Plc is more productive than Sainsbury Plc because of its high NPM and ROA margins, but the company has to increase its current as well ROCE ratio in order to have an added advantage over its major competitors. We have computed the intrinsic value of the company and have found that the shares of the company are undervalued and have traded on higher prices in LSE. By considering these facts, one would recommend a buy strategy for the company's stocks. The company has been adding values continuously for its costumers and shareholders from last 40 years and will be doing it in future as well.