A sustainable company needs effective planning and financial management. Ratio analysis is a useful tool to get the financial results and the company’s development tendency. It can be divided into four parts. They are profitability, liquidity, efficiency and gearing. This report discusses the analysis of two companies, one is Sainsbury, and the other is Tesco. It is necessary to compare these companies from the data and information in 2011 and 2012, so that demonstrates the use of an appropriate range of ratios.

Sainsbury is engaged in grocery and related retailing. It is separated three segments: Retailing (Supermarkets and Convenience); Financial services (Sainsbury’s Bank joint venture), and Property investments (The British Land Company PLC joint venture and Land Securities PLC joint venture). In 2012, this company has operated over 1000 stores comprising 572 supermarkets and 440 convenience stores (Sainsbury company information, 2013). In the current competitive food retail market Sainsbury has focused on its clear strength: providing shoppers with an easy alternative to the larger out-of-town supermarkets whilst maintaining a commitment to fresh quality foods (Sainsbury, 2012).

Tesco has the biggest supermarket chain in the UK. It has over 280, 000 employees working with them (Tesco, 2012). It can maintain their market share and profit in the UK, they also use social network to maintain the relationship with the customer. It is the biggest and most profitable supermarket chain in Britain; it has 30 per cent of grocery market. Tesco has over 2200 stores in the whole United Kingdom (Tesco, 2012). It is a superb development of Tesco, it is from a smaller store to be a superstores. Sales of non-food is one of the key parts of their strategy, it contributes to the growth picture in the UK. Tesco is launching a low price strategy; they offer the lower price for the similar product compare to others competitors.

By comparing Sainsbury and Tesco, it is easy to use financial ratio analysis to pinpoint the strengths and weaknesses. This report provides an analysis based on ratio calculation and then compares these companies’ data to help grasp the current performance of the companies and thus showing a financial snapshot of the companies’ position.

Financial Analysis

The following part will analysis the two companies’ performance in the criteria of profitability, efficiency, liquidity and gearing ratios. Ratios are important when companies need to compare the financial health of various businesses in order to understand the performance and position in the industry. Although some companies are relatively larger than the others such as comparing Tesco with Sainsbury’s, different scale of operations can be eliminated using the ratios for the same market (Atrill & McLaney, 2008).

Profitability

The purpose of profitability ratio is to measure the degree of success towards business objectives in terms of profit (Atrill & McLaney, 2008). It express the generated profit such as expenses, labour cost and sales revenue in relation to a company’s business resource. Gross profit margin measures differences between cost of sales and sales revenue, in other words a measure of profitability in purchasing and selling before any other expenses are taken into account. The data shows that gross profit margin had a slight decrease from 5.50% (2011) to 5.43% (2012), although both gross profit and Revenue increased,