67%(3)2 out of 3 people found this document helpful
This preview shows page 15 - 17 out of 24 pages.
has a lower reduction. This proves that Sainsbury manufacturing and business are moreefficient than Tesco from early 2019 to early 2020. In long term, Tesco seems a better investment because the ROCE and ROE ratios are higher than Sainsbury. Besides, Tesco always has a high amount of cash in the bank, it plays an important role in emergency issues or unpredicted events such as COVID-19. Tesco and Sainsbury’s quick ratios are both below 1, however, investors don't need to worry about it. In the retail industry, a quick ratio of less than 1 is normal and inventories are easier to convertinto cash. Another positive sign, Tesco’s quick ratio rose more sharply, while Sainsbury’sincreased marginally. Thus, Sainsbury seems to have a little bit risky liquidity problem.The inventory turnover and payable payment period ratio of Tesco both lower than Sainsbury. This shows that the controlling inventory policy of Sainsbury less effective than Tesco. The gearing ratio of Tesco higher than Sainsbury, but it increased less than Sainsbury from 2019 to 2020. Both have no risky in long-term borrowing but Tesco controls long-term debt more effectively. In 2019, Tesco’s dividend ratio over 3 times compared to Sainsbury. However, in 2020, Tesco pays dividends less than Sainsbury because COVID-19 has an affection for their profit. With an attractive P/E ratio from Tesco, investors can consider buying a share of this company while the drop in dividendis only a short term change.6.Limitation of analysis Using analytical methods horizontally and vertically and ratios gives an overview of the financial performance of companies. However, there are some limitations that we need to be aware of.Firstly, this is greatly influenced by the accounting policy. According to annual reports of both companies, financial statements of Sainsbury are made base on United Kingdom Accounting Standards. While Tesco's financial statements follow the International
Principles of Business Accounting AssignmentGroup 17Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). This can make the analysis more confusingSecondly, seasonal factors also affect the company's operations and cause financial ratios to change abnormally. For example, before Black Friday, when inventories are higher than normal, if you use the inventory turnover ratio, you will find that the company has an ineffective performance.Finally, financial statements will not show intangible assets that really bring strength to the business, such as customer files, network relationships, leadership capacity, technology levels ... In many cases, these assets are more important than the assets listed on the financial statements. For example, Tesco has expanded oversea while Sainsbury not, that help the profit of Tesco remain increasing quickly and keep the lead market share year by year7.ConclusionThe appearance of the COVID-19 epidemic in early 2020 leading to a decline in both Tesco and Sainsbury's revenue and profits. In the short term, Sainsbury appears to outperform Tesco with higher pre-tax profits. However, in the long term, Tesco's finance