In the era of twenty-first centuries, one can observe massive progress in the businesses worldwide. A business has different kinds of operations. One of the most important operations is the financial operation of a business. In this regard, it needs to be mentioned that it is important for every business organization to measure the financial success of their businesses (Wang and Wang 2012). The measurement of financial successes of a business provides the management with the view about the effectiveness and efficiency of the management of the company. Different kinds of measures are available for the measurement of the financial performance of the business organizations (Wagner, Grosse-Ruyken and Erhun 2012). The measurement of financial performance with the help of the financial ratios is a crucial and effective way for the companies. Four kinds of ratios are there to measure the financial performance of the business organizations; they are profitability ratios, liquidity ratios, stability ratios and activity ratios (Healy and Palepu 2012). In addition, the management of working capital is an important financial aspect. The main aim of working capital management is to make it sure that there is enough capital to run the daily business operations. In the process of working capital management, two of the most important aspect is the management of receivables and the management of inventories (Jain, Singh and Yadav 2013). Effective management of these two aspects is essential to measure the success of the financial activities of the business organization. The major objective of this report is to analyze and compare the financial performance of two non-financial company of United Kingdom; they are Sainsbury and Tesco.
Working capital management refers to the process of managing the business activities and processes related with the working capital. The process of working capital management ensures that there are sufficient amount of cash in the business to run the daily business operations. The financial managers of the businesses need to consider the aspects of the management of receivables and inventories in managing the working capital in the businesses.
Management of Receivables: Accounts receivable refers to the amount of money that the business organizations have right to receive from their customers as the company had provided the customers with goods and services on the credit basis. Out of the total amount of assets, accounts receivables typically comprise more than 25 percent. The amount of money is blocked due to the credit sales. The effective management of receivables assists the financial managers in the decision-making process regarding overall credit of the companies, collection policies, analysis of the credit applicants and others (Wu, Olson and Luo 2014). For this reason, the management of receivables is also considered as the management of trade credits. In case, the business organizations sell various products and services to their customers on credit, they do not get the money immediately as the money needs to be collected in the near future. Thus, this money is termed as Receivables. In order to take decisions of investments in the current assets, the effective management of receivables is necessary. The major objective of receivable management is to promote profits and sales of the organization. The receivables have important role to play in the quickening the distributions of the businesses (Michalski 2012). Three of the major advantages of management of receivables are to increase the sales, to increase the market share and to increase the profits of the businesses. It needs to be mentioned that the management of receivables is a costly process. Three major costs in receivable management are opportunity cost, collection cost and bad debts.
Figure 1: Purpose of Maintaining Receivables
(Source: Naser, Nuseibeh and Al-Hadeya 2013)
Management of Inventories: The management of inventories refers to the process of supervising the non-capitalized assets of the business organizations. In the supply chain of the organizations, it is needed to manage the inventory of the businesses. The significance of the management of inventories depends on the investment in the inventories (Michalski 2013). In the business organizations, two major objectives work behind the management of inventories. The first objective is to uphold sufficient amount of cash balance in order to meet the daily demands of the business operations. The second objective is to develop various financial interpretations for the minimization of unproductive inventories and for the reduction of inventory and carrying costs. There are various components of management of inventories. These components include raw materials, work-in- progress, finished products and stores and spares. Raw materials refer to those units that are transformed into the finished products. Wok-in-progress refers to a particular stage between the raw materials and finished products. Finished products refers to those products that have been transformed into finished goods and the companies can sell them to the customers. Lastly, stores and spares refer to the office and plant cleaning machines.
Figure 2: Components of Inventory
(Source: Heizer 2016)
Different motives of the business organizations work behind management of inventories. The first motive is the transaction motive. There is a time lag between the demand and supply of the finished products. For this reason, it is needed for the organizations to hold raw materials. The second motive is the precautionary motive. It is needed for the firms to hold a certain amount of raw materials in order to avoid any unpredictable changes in the forces of supply and0 demand. The third motive is the speculative motive. The business organizations use to purchase and stock the raw materials that have more demand in the market (Brigham and Ehrhardt 2013).
The objective of this report is to compare the financial performance of two non-financial companies of London Stock Exchange. For this reason, Sainsbury and Tesco are selected. Both the companies are top retail companies of United Kingdom. The comparison of these two companies is done below:
Figure 3: Days of Inventory
(Source: Created by Author)
As per the above figure, both Sainsbury and Tesco have improved their days of inventory in 2016 as compared to 2015 and 2014. However, the comparison is between the inventory days of Sainsbury and Tesco, Sainsbury is more efficient than Tesco (annualreports.com 2017). The reason is that Sainsbury has comparatively taken less time than Tesco to clear the inventories of the company.
Figure 4: Working Capital Turnover
(Source: Created by Author)
As per the above figure, both Sainsbury and Tesco have negative working capital turnover and this is a negative sign for the financial performance of the companies. When comparing between these two companies, it can be seen that the working capital turnover ratio for Sainsbury is worse than that of Tesco (annualreports.com 2017).
Figure 5: Accounts Receivable Turnover
(Source: Created by Author)
As per the above figure, Sainsbury has better accounts receivable turnover then Tesco. Over the three years, Sainsbury has improved their days of collection from the debtors. On the other hand, the accounts receivable turnover has become higher over the three years.
Figure 6: Asset Turnover Ratio
(Source: Created by Author)
As per the above figure, the asset turnover ratio of Tesco is in the better position than that of Sainsbury as the asset turnover ratio has been almost stable over the three years. However, the same ratio of Sainsbury has decreased over the three years. It implies that the turnover from the assets is decreasing for Sainsbury (annualreports.com 2017).
Figure 7: Current Ratio
(Source: Created by Author)
The above figure shows that both Sainsbury and Tesco have good current ratio. It indicates that both the companies have sufficient current assets to fulfill the current obligations. When comparing between these two companies, Sainsbury has almost a stable current ratio where the current ratio of Tesco fluctuates over last three years (tescoplc.com 2017).
Figure 8: Quick Ratio
(Source: Created by Author)
As per the above figure, it can be seen that both Sainsbury and Tesco have very weak quick ratios over 2016, 2015 and 2014. As per the industry standard, the quick ratio of the companies needs to be more than one.
Figure 9: Debt Ratio
(Source: Created by Author)
It is expected that that debt ratio should be less than 0.5. As per the above figure, both Sainsbury and Tesco have debt ratios more than 0.5. It implies that both the companies use debts for their business operations (tescoplc.com 2017). However, between Sainsbury and Tesco, Tesco has worse debt ratio over the three years.
Figure 10: Debt to Equity Ratio
(Source: Created by Author)
As per the above figure, both the companies have higher debt to equity ratio. It indicates that both the companies have used more long term dents than equity shares to finance their businesses and this is not a good sign. Tesco has higher debt to equity ratio than Sainsbury (tescoplc.com 2017).
Figure 11: Equity Ratio
(Source: Created by Author)
The above figure says that both Sainsbury and Tesco have low equity ratio over the three years. Higher equity ratio is suitable for the organizations. Between the two companies, Sainsbury has higher equity ratio than Tesco.
Figure 12: Gross Profit Margin
(Source: Created by Author)
As per the above figure, the gross profit margin of Sainsbury is stronger than that of Tesco as the gross profit margin has increased over the three years. In case of Tesco, fluctuations can be seen in gross profit over the three years. In 2015, Tesco had to face massive fall in gross profit.
Figure 13: Net Profit Margin
(Source: Created by Author)
As per the above figure, the net profit margin of Sainsbury is stronger than Tesco. Fluctuations can be seen in the net profits of these two companies. However, it can be seen that the net profit margin of Tesco is very poor as the company suffered from massive losses. Sainsbury also suffered from net losses in the year of 2015.
Figure 14: Return on Equity
(Source: Created by Author)
As per the above figure, Sainsbury has stronger return on equity than that of Tesco. However, the return of equity of Sainsbury decreased over the last three years. In case of Tesco, return on equity decreased massively over the last three years as the company has negative return on equity in 2015.
Conclusion
The report sheds lights on the financial position of both Sainsbury and Tesco. After the analysis, it can be seen that both the companies have mixed financial condition. As per the activity ratios, Sainsbury has less inventory clearance days than Tesco. Both the companies have negative working capital turnover over the last three financial years. Tesco is strong in accounts receivable turnover than Sainsbury. Liquidity position of both the companies has been not good as they ratios are below the industry standard. Both the companies use long-term debts more than equity that is not an optimal option for the companies. The profitability portion of Sainsbury is better than Tesco. Based on the above analysis, some recommendations are provided below:
References
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