Medicine and business: a practitioner’s guide Essay

The retail sector is one of the major contri thoors in the economy of the United Kingdom. The sector constitutes a major percentage of the artlesss gross domestic product. Sainsburys and Tesco companies ar among the major contributors of the countrys GDP in the retail industry (Lewis 1990, p.386). This paper seeks to examine in a detailed analysis the execution of instrument, efficiency and ability of the two companies to meet the nimble obligations when due all over the last third fiscal periods. The report shows a comparison of the two companies in 2012, 2013 and 2014. The analysis is establish on the enforce of fiscal dimensions where deriveability, fluidness, working capital and enthronisation ratios. favor able-bodiedness ratios leave alone be apply to compargon the operation of the two companies, in the light of backtrack on rectitude (ROE), return on capital employed (ROCE), last-place profit brim and gross profit margin. The liquidity ratios that will be engaged include acid tryout and the current ratio. The ratio will be ge ard at examining the ease at which the companies effectively qualify pluss into specie patch the working capital ratios will assess the browse at which the current assets such as stock circulate in the companies (Richards 1980, p. 35).Objectives This paper targets to present a detailed analysis over the performance of the two companies and routine trading operations therefore the main objectives of this paper argonTo compare the performance of the two companies over the last three eldTo detail recommendations for both companies on the arse of the ratios computed and their implications to the companies and the economy as a whole.Research methodology The paper will explore the performances of both companies by utilizing ratio analysis. In order to be in a attitude to undertake this examination, monetary statements of both companies over the last three years will be extracted and ratios comput ed using the information. The results of this report will be explicit in foothold of pounds. pecuniary extractsTesco CompanyIncome statementFor the years 2014, 2013 & 2012 (pounds)22/02/2014 23/02/2013 25/02/2012(Millions) (Millions) (Millions)Revenue 63,557.00 63,406.00 63,916.00Operating Profit / (Loss) 2,631.00 2,382.00 4,182.00Net pursual (432.00) (397.00) (235.00)PBT 2,259.00 2,057.00 4,038.00PAT from act operations 1,912.00 1,528.00 3,164.00Discontinued OperationsPAT from discontinuing operations (942.00) (1,504.00) (350.00)Profit for the period 970.00 24.00 2,814.00Attributable toEquity holders of parent follow 974.00 28.00 2,806.00nonage Interests / other Equity (4.00) (4.00) 8.00Total Dividend Paid c 14.76 c 14.76 c 14.76Tesco CompanyStatement of financial positionAs at 2014, 2013 & 2012 (pounds)22/02/2014 23/02/2013 25/02/2012(Millions) (Millions) (Millions)AssetsNon- trustworthy AssetsProperty, fix & Equipment 24,490.00 24,870.00 25,710.00Intangible Assets 3,795.00 4,362.00 4,618.00Investment Properties 227.00 2,001.00 1,991.00Investments 1,301.00 1,312.00 1,949.00 new(prenominal) financial Assets 4,706.00 4,430.00 3,627.00 different Non- real Assets 73.00 58.00 23.00Current AssetsInventories 3,576.00 3,744.00 3,598.00Trade and Other Receivables 2,190.00 2,525.00 2,657.00Cash at coast & In Hand 2,506.00 2,512.00 2,305.00Current Asset Investments 1,016.00 522.00 1,243.00Other Current Assets 3,797.00 3,162.00 2,550.00Other Assets 2,487.00 631.00 510.00Total Assets 50,164.00 50,129.00 50,781.00LiabilitiesCurrent LiabilitiesBorrowings 1,910.00 766.00 1,838.00Other Current Liabilities 18,296.00 17,937.00 17,342.00Non-Current LiabilitiesBorrowings 9,303.00 10,068.00 9,911.00Provisions 777.00 1,278.00 1,260.00Other Non-Current Liabilities 3,963.00 3,137.00 2,560.00Other Liabilities 1,193.00 282.00 69.00Total Liabilities 35,442.00 33,468.00 32,980.00Net Assets 14,722.00 16,661.00 17,801.00Capital & reserves section Capital 405.00 403.00 402.00 piec e of ground Premium Account 5,080.00 5,020.00 4,964.00Other Reserves (498.00) 685.00 245.00well-kept Earnings 9,728.00 10,535.00 12,164.00Shareholders silver 14,715.00 16,643.00 17,775.00Minority Interests / Other Equity 7.00 18.00 26.00Total Equity 14,722.00 16,661.00 17,801.00Retrieved from Hargreaves Lansdown. Tesco Plc Financial Statements & Reports. N.P., 2014. Web. 31 Dec. 2014.Sainsburys plc.Income statementFor the years ended 2014, 2013 & 201215/03/2014 16/03/2013 17/03/2012(Millions) (Millions) (Millions)Revenue 23,949.00 23,303.00 22,294.00Operating Profit / (Loss) 1,009.00 882.00 874.00Net Interest (139.00) (134.00) (103.00)PBT 898.00 772.00 799.00PAT from continuing operations 716.00 602.00 598.00Profit for the period 716.00 602.00 598.00Attributable toEquity holders of parent political party 716.00 602.00 59.00Total Dividend Paid c 17.30 c 16.70 c 16.00Sainsburys plc.Statement of financial positionAs at 2014, 2013 & 201215/03/2014 16/03/2013 17/03/2012(Millions) (Mil lions) (Millions)AssetsNon-Current AssetsProperty, Plant & Equipment 9,880.00 9,804.00 9,329.00Intangible Assets 286.00 171.00 160.00Investments 404.00 532.00 566.00Other Financial Assets 283.00 236.00 215.00Other Non-Current Assets 1,318.00 38.00 38.0012,171.00 10,781.00 10,308.00Current AssetsInventories 1,005.00 987.00 938.00Trade and Other Receivables 433.00 306.00 286.00Cash at Bank & In Hand 1,592.00 517.00 739.00Other Current Assets 1,332.00 91.00 69.00Other Assets 7.00 13.00 N/ATotal Assets 16,540.00 12,695.00 12,340.00LiabilitiesCurrent LiabilitiesBorrowings 534.00 165.00 150.00Other Current Liabilities 6,231.00 2,950.00 2,986.00Non-Current LiabilitiesBorrowings 2,250.00 2,617.00 2,617.00Provisions 256.00 316.00 349.00Other Non-Current Liabilities 1,264.00 809.00 609.00Total Liabilities 10,535.00 6,857.00 6,711.00Net Assets 6,005.00 5,838.00 5,629.00Capital & reservesShare Capital 545.00 541.00 538.00Share Premium Account 1,091.00 1,075.00 1,061.00Other Reserves 807.00 820. 00 315.00Retained Earnings 3,560.00 3,401.00 3,715.00Shareholders Funds 6,003.00 5,837.00 5,629.00Minority Interests / Other Equity2.00 1.00 N/ATotal Equity 6,005.00 5,838.00 5,629.0Retrieved from Hargreaves Lansdown. Sainsbury (J) Plc Financial Statements & Reports. N.P., 2014. Web. 31 Dec. 2014.Ratio AnalysisProfitability ratios These ratios indicate companys profitability status. They determine the efficacy of a company to generate returns to compensate the providers of capital. Using the data extracted, return on capital employed, gross profit margin and net profit margin are computed beneathReturn on equityThis ratio is an indicant of the returns that a company generates out of the owners equity.Return on equity (ROE) = (Net income/equity capital) * hundred (ALBRECHT 2007, p. 234)Return on capital employed Return on capital employed is used to indicate how a company is able to generate income to service the providers of capital employed. The ratio can be used to com pare profitability of a firm within successive periods to pass judgment profitability and predict future failure.The ratio is computed as followsReturn on capital employed = (profit before interest and tax/ capital employed) * 100 (COLES 1997, p. 32)Net profit marginThis ratio measures the return per pound of sales a company earns. It is computed through the spare-time activity rulerNet profit margin = (Net income / sales revenue)* 100 (GITMAN 2008, p. 492)Where, net income is obtained by Lessing total run expenses from the sales revenue. primitive profit marginThis ratio indicates the returns of the company afterward taking into consideration the costs of production incurred. It is calculated as followsGross profit margin = (Gross profit/ sales revenue) * 100(KHAN 2007, p.10)Below is a sum-up of the ratiosRatio TESCO SAINSBURYS2012 2013 2014 2012 2013 2014ROE 23.5% 14.3% 17.9% 15.5% 15.1% 16.8%ROCE 12.8% 6.5% 7.5% 8.7% 8.1% 9.2%Net profit margin 6.5% 3.8% 4.1% 3.9% 3.8% 4.2% GP margin 8.4% 6.6% 6.3% 5.4% 5.5% 5.8% liquidness ratiosThese are ratios that measure the speed at which a company is able to convert its assets into cash or its equivalents (BUCCI 2014, p.71). They explain how steadfast a company can turn its current assets into cash so as to meet the current obligations. There are two types of liquidity ratios namely current ratio and acid test ratio.Current ratioIt indicates the ability of the company to convert its assets into cash or cash equivalents. The ratio is computed as followsCurrent ratio = current assets/ current liabilities (times)Acid test ratioAcid test ratio also known as quick ratio is a measure that examines the capacity of a company to settle its immediate obligations from own current assets without selling stock.It is computed through the following formulaAcid test ratio = (current assets- inventories)/ current liabilities (TRACY 2011, p.287)The table below is a outline of the ratios computed using the financial data extract edRatioTESCO SAINSBURYLiquidity ratio 2012 2013 2014 2012 2013 2014Current ratio 0.64 0.67 0.65 0.65 0.58 0.64Acid test ratio 0.46 0.47 0.47 0.35 0.26 0.50 running(a) capital ratios These are ratios that indicate the efficiency of a company to utilize its assets. They are also referred to as asset management ratios or asset turn over ratios. The commonly used ratios are receivables perturbation, payables turn over and record turnover rate (TALEKAR 2005, p.85).Receivables turnoverThis is a measure of how fast a company collects its funds from the debtors. It is calculated on the basis of the following formulaReceivables turnover = yearbook belief sales/accounts receivablesIt is reported in terms of spot of days that sales made on credit outride with debtors before collection.Therefore average out collection period = (accounts receivables/annual credit sales) * 365 daysThe ratio can also be expressed as average collection period = 365 days / Receivables turnover (BOOKER 2006 , p. 4).Inventory turnover This is a ratio of the cost of goods interchange to the average inventory. Cost of goods sold comprises of opening stock add purchases less closing stock while average inventory is the mean of opening and closing inventory. It is expressed in terms of days.Inventory turnover= cost of goods sold (COS) / Average inventoryTherefore Inventory period = 365/ inventory turnoverPayables turnoverThis ratio indicates the period that the company takes to pay its creditors. It is defined byPayables turnover = annual credit purchases/ accounts payablesIt is also expressed in terms of day.ThereforeAverage payment period = 365 days / payables turnover. The table below is a summary of the asset ratios of the two companiesRatio TESCO SAINSBURYS2012 2013 2014 2012 2013 2014Receivables turnover 15.2 14.5 12.6 4.7 4.8 6.7Inventory turnover 11.2 11.5 11.0 8.1 8.2 8.1Payables turnover 10.8 11.0 11.2 5.2 4.9 10.1Investment ratiosThese are ratios that help investors to evalua te the returns of their investments. Common investment ratios includeEarnings per role (EPS)Dividend payout ratioDividend yield ratioDividend payout ratioThis ratio measures the part of earning that a company gives out to shareholders as dividends. It is computed as followsDividend payout ratio = (total dividends declared for the year/ earnings gettable for dividends) * 100 (GEDDES 2002, p. 14).Where earning available for dividends is the profit after tax and preference dividends. Dividend yieldThis relates the returns from a share to its market value. It assists investors to assess the returns from their investments. It is worked out as followsDividend yield = (dividend per share/ market value per share) * 100Earnings per share EPS indicates the proportion of the companys earnings that are referable to the ordinary shareholders that have been generated during the period. The earnings credited(predicate) to ordinary shareholders are de noned by the profit after tax.EPS = Ear nings attributable to ordinary shareholders/ Number of ordinary shareholders.It is an important indicator of companys performance in terms of the earning power of the shares. However, comparing performance of companies based on EPS is inefficient since some companies may choose to issue to a greater extent shares. Companies can also choose to increase or decrease the number of issued shares introduceing to an automatic alteration of the EPS.Ratio TESCO SAINSBURYS2012 2013 2014 2012 2013 2014EPS 38.25 18.04 22.56 32.10 33.00 35.3739.20 19.05 22.70 30.40 31.22 36.6740.41 33.67 31.67 26.18 29.45 31.56Dividend payout ratio 0.5 61.5 1.5 27.1 2.8 2.4Uses of ratios un wish well groups of individuals are interested with the analysis of financials of companies. They use ratios to work out circumstantial financial features of a company that they are interested in. they help individuals in the following waysTo determine profitability profitability ratios indicate the capacity of companie s to generate profits. Ratios help the management to estimate the earning power of the companys assets.To assess solvency gearing ratios are used to assess companys ability to service its debts. They show the relationship between assets and liabilities. A high school gearing ratio is an indicator that the company is likely to land into financial problems in the future.They assist in the analysis of financials Ratios assist stakeholders such as banks, shareholders and creditors to assess the profitability, liquidity and the capacity of companies to pay dividends.Forecasting purposes financial ratios hypothecate the trend of the company. Such trends are important for forecasting the future of the company. onetime(prenominal) years ratios are used to estimate the future therefore ratios are an important tool of preparing budgets and forecast statements.Limitations of ratio analysis Despite the evoke usefulness of financial ratios, they are characterized by many drawbacks. To beg in with, ratios are based on historical data. They are computed using historical financials but not pro forma statement. This poses a great challenge since the financials reflect the then(prenominal) financial position not the current situation. Ratios can thus lead to wrong decision making since what is true now may not be reflected by the past data. Decision making that is based on financial ratios may thus be misleading especially for secular items and transactions.Ratios are also computed using financial statements that are normally active under accounting principles and policies. Different companies embrace deepening policies and principles. The policies also vary with time within the same company. Owing to these variations, it becomes challenging to compare performance of different companies or even the performance of the same company over successive periods.Inflation and seasonal factors also threaten the validity and dependability of ratio analysis. Inflation impacts gr eatly on the financial statements just like seasonal factors such as economic cycles. Ratios are computed on the basis of historical financial statements which do not take into account the effect of price level changes and seasonal variations. Making decisions on the basis of financial ratios can thus be misleading.Conclusion and recommendation Over the three years covered by this analysis, it can be seen that Tesco performed better than Sainsburys in terms of profitability, working capital ratios and investment ratios. The two companies are however characterized by falling liquidity ratios. To improve this trend, they should liquidate their cash efficiently through the capacity to convert current assets into cash readily without necessarily selling their inventory. The profitability ratios of Tesco also observed to be declining over the period examined. The company thus should consider ways of improving its profitability such as cutting major costs of production or through inc reasing sales volume.ReferencesAlbrecht, w. S., stice, e. K., & stice, j. D. (2007). Financial accounting. Mason, oh, thomson/south-western.Booker, j. (2006). Financial planning fundamentals. Toronto, cch Canadian limited.Bucci, r. V. (2014). Medicine and business a practitioners guide. Http//public.eblib.com/choice/publicfullrecord.aspx?p=1697730.Coles, m. (1997). Financial management for higher awards. Oxford, heinemann.Geddes, r. (2002). Valuation and investment appraisal. Canterbury, financial foundation publ.Gitman, l. J., & mcdaniel, c. D. (2008). The future of business the essentials. Mason, oh, thomson south-western.Hargreaves lansdown,. Sainsbury (j) plc financial statements & reports. N.p., 2014. Web. 31 dec. 2014.Hargreaves lansdown,. Tesco plc financial statements & reports. N.p., 2014. Web. 31 dec. 2014.Khan, m. Y., & jain, p. K. (2007). 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