Financial Accounts of the Companies essay

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This paper investigates the literature available on financial analysis of two companies. The paper takes an analytical look at the financial accounts of these companies with a view to comparing their performance during the last financial year. For instance, it focuses on the profit and loss accounts as well as the balance sheet to establish the real financial position of the firms. In addition, the paper elucidates the key accounting ratios including the profitability and liquidity ratios. Further, the paper analyses the comments of the directors of the two companies to ascertain their opinions on the general performance of the firms. According to literature, this accounting information will make it possible to compare realistically the relative performance of the two firms.

The financial position of a company determines how favorably it can compete in the market. Conventionally, companies that are able to contain their expenditure to match up with their incomes have better prospects of surviving the competitive market environment. In fact, the goal of every firm is to strike a clear balance between these two variables so that the company is able to respond appropriately whenever their competitors trigger a competition. That’s why every investor has to make a decision on which company to invest his money in order to reap the most benefits from such investments. Benefits accrued to the investor often take different forms depending on the motives of the particular investor. It may be in the form of high returns, capital security, and security of returns or even reduced risk on investment. This paper therefore seeks to establish the criteria used to choose the most appropriate company to invest in taking into consideration comparisons between their financial statements, key accounting ratios and comments from their respective directors that is depicted on the director’s report regarding the company as the criteria for making the investment decision. Tesco and Sainsbury give a good set of companies for this sturdy since they belong to the same industry that is fair trade goods retailers and they use the same methodology in preparing their financial statements hence easy comparison can be made. For this sturdy, we will use the 2011 financial year statements for the two companies so as to arrive at the best company to invest in (Shawki, 2009).

In order to establish investment criteria, one has to be well acquainted with the financial position of the company he intends to invest on. Apart from the analysis of financial statements, several other factors have to be considered before making an investment and these factors often vary from one company to another and therefore different companies are unique from different perspectives (Barry & Jamie, 2004). Enthusiasm of the company or their general production strategy, their trustworthiness, the sales potential of their products, the level of expertise in the company, the general attitude of employees towards investors are some of these factors. This paper will dwell mostly on the sales potential of the products of both companies, their growth potentials, the financial rewards to be obtained, profit margins, the nature of competition facing each company, size of the investments made by the individual company, potential liquidity and the presence of other co-inventors or the potential to attract them over time (Barry & Jamie, 2004).

From the income statements of both Tesco and Sainsbury, we can note that Tesco made a total before tax profits of 3813 million pounds while Sainsbury made a profit of 827 million pounds before taxation. From this observation, it is evident that Tesco is able to generate more profits and therefore more profitable and lucrative for investment. This also shows the volume of business being handled by the companies and therefore Tesco has more potential for expansion compared to Sainsbury (Shawki, 2009).

The benefit enjoyed by investors is mainly through an increase in earnings per share or the actual value. Therefore considering the values of earnings per share in both companies, Tesco provides the basic share at 33.10p resulting into a change of 13.8%. Sainsbury on the other hand has earnings per share of 34.4p with a change of 7.2% from the previous financial year. We can also see from this analysis that Tesco is more profitable (Poovey, 1998).

From the balance sheet of Tesco we can see that it has net assets of 16,623 million pounds while Sainsbury has net assets of 5,424 million pounds as at the end of 2011 financial year. Again Tesco has more financial security than Sainsbury since it is more established and on liquidation, it is easy to recoup the money it owes the investors. It is thus safer to invest the money with Tesco rather than Sainsbury (Barry & Jamie, 2004).

From the two criteria, Tesco can be considered as the most profitable and safest investment company and thus more desirable to investors, it is also capable of expanding more and thereby would be in a pole position to maximize the wealth of investors. Apart from the financial statement analysis, we can also use key accounting ratios to make decisions regarding where to invest (Shawki, 2009).

Liquidity ratio

Liquidity ratios are those that are derived from the balance sheet and often measure how liquid a company is as at a given time in its cycle. They help in determining how able the company is in meeting its long and short term obligations. The rations include; debt to equity ratio, quick ratio and current ratio (Poovey, 1998).

 

Tesco company

Sainsbury Company

Current ratio

0.6694

0.585

Quick ratio

0.4911

0.3046

The current ratio is obtained by dividing the total current assets of the company by its total current liabilities. It establishes the working capital of the company and thus the assets that are available to meet the obligations of the company. From the two companies, Tesco has a current ratio higher than that of Sainsbury and hence preferred. Quick ratios serves the same purpose as current ratio only that they subtract inventories from the current assets of the company (Barry & Jamie, 2004).

Profitability ratios

 

Tesco

Sainsbury

Gross profit margin

2011 – 8.30%

2010 – 8.10%%

2011 - 5.49%

2010 – 5.73%

Operating profit margin

2011 – 5.80%

2010 – 5.58%

2011 – 3.92%

2010 – 0.14%

The gross profit margin is mainly used to illustrate how capable the company is in managing the costs of its inventories and its products and how effectively the costs are passed to the consumers. Therefore a higher gross profit margin indicates that the company’s products are doing well in the market. From the analysis of the two companies Tesco has a higher gross profit margin as compared to that of Sainsbury. It also shows an increase from the previous financial year and thus shows increasing yield in production and improvement in organization of inventory costs (Shawki, 2009).

The operating profit margin depicts the operating efficiency of the company and therefore the higher this value is, the better it is to worth investing in. Tesco is therefore the best company to invest in according to the profitability evaluation simply implying it is more profitable and will therefore maximize the investors’ wealth (Barry & Jamie, 2004).

Conclusion

From the managerial statement of Sainsbury company indicate their contentment with the level of profits they managed to obtain in that financial year. This shows that they have hit their target which is not high enough to compete that of Tesco and therefore, Tesco has that entrepreneurial enthusiasm that make them a better company to invest in. Tesco company also registered an increase in dividend by about 10.8% from the previous year thus it is growing.

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