Abstract
The purpose of this assignment is to critically examine the performance of two companies using Ratio analysis over the a period of five years (2008-2012), in order to recommend the best company for investment, justified by the data collected, analysed using ratio analysis and interpreted
The assignment, will compare two of the largest retail outlets in th UK in sainbury and Tesco. It will show that Tesco has higher Profitability, Liquidity and Gearing ratios than Sainsbury, While in investment ratios Sainsbury exceeds Tesco. However it will also show that over the five year period Sainsbury as more consistent ratio outputs than Tesco, whom go into a steep declines in various ratios during the 2012 period.

This assignment will show that Sainsbury on the basis of consistence is a better investment option, while highlighting that the ratio cannot be the only tool used in analysing comparatively the two companies.

Table of Contents
Introduction1
Selection of companies2
3. Ratio Analysis3
3.1 Profitability Ratios4
3.1.1Return On Capital Employed4
3.1.2 Gross Profit Margin6
3.1.3 Profit Margin7
3.2 Liquidity Ratios8
3.2.1 Current8
3.2.2 Liquidity9
3.3 Gearing Ratio10
3.4 Investment Ratios12
3.4.1Dividen Yield12
3.4.2Pric to Earning13
4.0 Critical Analysis15
5.0 Conclusion16
APPENDIX17
Bibliography

Table of Tables

Table 1.1……………………………………………………………..4
Table 1.2……………………………………………………………..6
Table 1.3……………………………………………………………..7
Table 2.1……………………………………………………………..8
Table 2.2……………………………………………………………..9
Table 3.1……………………………………………………………..10
Table 4.1……………………………………………………………..12
Table 4.2……………………………………………………………..13

Table of figures
Figure 1.1……………………………………………………………..4
Figure 1.2……………………………………………………………..6
Figure 1.3……………………………………………………………..7
Figure 2.1……………………………………………………………..8
Figure 2.2……………………………………………………………..9
Figure 3.1……………………………………………………………..10
Figure 4.1……………………………………………………………..12
Figure 4.2……………………………………………………………..13

1.0. Introduction
The purpose of this assignment is to critically examine the performance of two companies using Ratio analysis over the a period of five years (2008-2012), in order to recommend the best company for investment, justified by the data collected, analysed using ratio analysis and interpreted

This will be undertaken by using Ratio analysis, in the format of three (3) profitability ratios, two (2) liquidity ratios, Gearing ratio and two (2) Investment ratios.
In this regard the ratios that have been selected for this purpose are as follows: i. Profitability ratios: * ROCE * ROE * Net/Gross PROFIT margin ii. Liquidity Ratios: * Current Ratio * Acids Test Ratio iii. Gearing ratio iv. investment Ratios: * Dividend yield /Price earnings ratio * Earnings per share

The two companies that have been selected are both from within the retail sector, the suitability of which are discussed in the following chapter, the companies being Tesco Plc and J Sainsbury Plc
At the end of the assignment, the reader should be able to determine between the two companies which is in a better position for investment from the other, while establishing the benefits and draw backs of Ration analysis.

2.0. SELECTED COMPANIES
The two selected companies being Tesco Plc and J Sainsbury Plc are both leaders in their sector of the retail market and are thus viable to be compared, with the comparison being over a five year period (2008 -2012). 3.1. Tesco Plc
According to a report on the company obtained from the FAME database (refer to appendix 1.1), Tesco plc is one of the world’s leading international retailers in the United Kingdom. The company's principal activity is food retailing, with more than 2,500 stores worldwide. In 1919, Jack Cohen founded the company when he began to sell surplus groceries from a stall in the East End of London.
Its products include food and non-food products. The company's non-food products include electrical goods, home entertainment, clothing, health and beauty, stationery, cook shop and soft furnishings, and seasonal goods such as barbecues and garden furniture. Some of the company's stores also have opticians and pharmacies.

3.2. J Sainsbury Plc
According to a report on the company obtained from the FAME database (refer to appendix 1.2), “The company, founded in 1869, is a leading UK food retailer with interests in financial services. John James and Mary Ann Sainsbury founded the company and opened their first small dairy shop in Drury Lane, London. The company's products are sourced from all over the world--from the UK and Europe to Africa, Asia and the Americas.
The company's businesses include Sainsbury's Supermarkets, which is Britain's longest-running major food retailing chain; Sainsbury's Online; Sainsbury's Property; Sainsbury's Bank; Bells Stores; Jackson's Stores; and JB Beaumont.
.Tesco and Sainsbury are suitable for the assignment, in that their financial data is readily available through the company’s websites as well as thorough financial databases such as FAME, from which the two Companies accounts have been obtained, OSIRIS and other such financial platforms.
As two of the leading companies in the food retail sector, the companies are primly positioned to be compared financially, as they compete in both food related and non-food related retail products.

3.0. RATIO ANALYSIS OF COMPANIES
Ratio Analysis according to 2012, Campbell R. Harvey (2012) is “A way of expressing relationships between a firm's accounting numbers and their trends over time that analysts use to establish values and evaluate risks.”
Ratio analysis is important in that they facilitates decision making, and give an image of the company’s present and future position. It gives an easy to understand picture of the company’s financial position.
Ratio analysis is used by various and potential stakeholders in the company, it allows for the analysis of financial statements for the purpose of establishing the company’s financial situation for decision making. They help in judging efficiency of the company in that it shows how able-bodied the company is to utilise its assets and its profitability.
Ratio analysis is easy to understand and thus helps interpret financial data in to a simple to understand form, for users that don’t have a financial background, while also allowing for a picture of the company’s performance to be established with ease.

Ratios to be used * Profitability ratios: * Return on capital employed (ROCE) * Gross profit Margin * Profit margin * Liquidity Ratios: * Current Ratio * Acids Test Ratio * Gearing ratio: * Investment Ratios: * Dividend yield * Price to earnings ratio

4.3. PROFITABILITY RATIOS
Profitability Ratios measure a company's overall efficiency and performance. In that they asses how well the company has employed its capital, equity and funds to generate returns. While also determining the margin of its sales that can be translated into profits at the various time that sales are measured. 4.4.1. RETURN ON CAPITAL EMPLOYED (ROCE)
Table 1.1 YEAR | Tesco Plc | J Sainsbury Plc | 2008 | 10.55 | 6.55 | 2009 | 10.58 | 9.09 | 2010 | 11.99 | 9.78 | 2011 | 12.05 | 8.68 | 2012 | 6.29 | 8.23 |

Figure 1.1

Interpretation:
Over the five year period, Tesco’s ROCE has remained steadily between 10% and 12% for four years (2008-2011), with its highest point being 12.05% in 2011. While for the four years between 2008 and 2011 Tesco’s ROCE has risen, it drastically dropped in 2012 to 6.26%.
In regards to Sainsbury’s ROCE, in the first year of the five years (2008) it had a ROCE of 6.55%; it’s lowest over the five year period. After which for the remaining four years (2009-2012) the ROCE remained between 8% and 10%, with the ROCE ratio peaking in 2010 at 9.78%.
On the basis of the ROCE ratio Tesco maintained a relatively high level in the four years between 2008- 2011, while Sainsbury remained below Tesco throughout the same period. However the fluctuation in 2012 in regards left Tesco laying below Sainsbury in that Tesco dropped drastically to 6.29%, while, Sainsbury’s in a marginal decline but relatively stable ROCE of 8.23%. Based on the graph shown above, Sainsbury’s has a marginally better ROCE over the five year period than Tesco in that it take a increase initially and remains relatively steady throughout the 2009-2012 with slight increase and declines occurring, while Tesco with a higher ROCE is constantly raising at a steady rate decline drastically in 2012, thus showing that in creating returns on capital employed Sainsbury is more consistent.

4.4.2. GROSS PROFIT MARGIN
Gross profit margin=total revenue-total cost of goods sold÷ total sales
Table 1.2 | Gross | Year | 2008 | 2009 | 2010 | 2011 | 2012 | Tesco Plc | 7.76 | 8.10 | 8.30 | 8.15 | 6.31 | J Sainsbury Plc | 5.48 | 5.42 | 5.50 | 5.43 | 5.48 |

Figure 1.2

Interpretation:
Representing the gauge of margin performance strictly on cost of goods sold. From the gross profit margin, we can deduce that Tesco over the five year period has maintained a higher gross profit margin than Sainsbury, with Tesco for the period of 2008 -2010 maintained a steady yet slight growth in its gross profit margin from 7.76% to 8.30%, on succumbing to a drastic decline in 2012 to a margin of 6.31% as illustrated by the above graph. While Sainsbury maintain a stable gross profit margin over the five year period maintain a level between 5.4% and 5.5% percent. This shows that although Tesco has a higher gross profit margin it seems to begin a decline in recent times, while its competition in Sainsbury although with lower margins maintains a more consistent margin throughout the five year period. 4.4.3. NET PROFIT MARGIN
Profit Margin= Profit before tax÷ Total Sales
Table 1.3. YEAR | Tesco Plc | J Sainsbury Plc | 2008 | 5.44 | 2.46 | 2009 | 5.58 | 3.67 | 2010 | 5.80 | 3.92 | 2011 | 5.94 | 3.58 | 2012 | 3.02 | 3.38 |

Figure 1.3

Interpretation
The net profit margin measures operating performance, in this as shown above Tesco has a maintained a profit margin over a period of the four years from 2008-2011 where its margins is maintained within 5.00% to 6.00% shows that it was stable during the four year period while it drastically drops from 5.94% in 2011 to 3.02% in 2012. While Sainsbury while with its margins lower than Tesco, it margins varying from 2.46% to 3.38%. However as show in the graph above (figure 1.3), Tesco’s larger scale produced consistent profit margins from 2008-2011, however has taken a major dip in 2012, while Sainsbury from 2008 to 2012 has maintained a more consistent gradient in its profit margin.

4.4. LIQUIDITY RATIOS
Liquidity Ratios are used to determine to what extent a company is able to remunerate its short term debts. It measures the company’s liquid assets against its short term liabilities. 4.5.4. Current Ratio
Current ratio= Current Assets ÷ Current Liabilities
Table 2.1 Year | Tesco Plc | J Sainsbury Plc | 2008 | 0.78 | 0.54 | 2009 | 0.73 | 0.66 | 2010 | 0.65 | 0.58 | 2011 | 0.68 | 0.65 | 2012 | 0.69 | 0.61 |

Figure 2.1

Interpretation:
The ideal current ratio is 2:1 as this shows that the companies are able to cover their current liabilities with their current assets. However both Tesco and Sainsbury are both greatly below the desired levels, with both companies below a 1:1 ratio, Tesco having a high in 2008 of 0.78:1 thus showing that throughout the five year analysis they are unable to cover its current liabilities. Sainsbury is also unable to also meet its current liabilities as illustrated in the above shown graph. Sainsbury only peaks at 0.66:1 in 2009.

4.5.5. Liquidity Ratio
Liquidity ratio = (Current Assets – Inventory) ÷ Current liabilities
Table 2.2 Year | Tesco Plc | J Sainsbury Plc | 2008 | 0.63 | 0.30 | 2009 | 0.56 | 0.41 | 2010 | 0.47 | 0.31 | 2011 | 0.49 | 0.35 | 2012 | 0.49 | 0.30 |

Figure 2.2

Interpretation:
The liquidity ratio although similar to the current ratio, it takes the most liquid assets and determines whether or not its most liquid assets can meet the short term obligations, the desired ratio is 1:1. Tesco and Sainsbury are both unable to meet its short term obligations as illustrated in the above graph (figure 2.2). Tesco liquidity ratio over the period of the five (5) years is in the 0.47 to 0.63 margin. While Sainsbury liquidity ratio is within the 0.30 to 0.41 margin, thus in terms of both companies ability to service their short-term obligations with current assets, both fail to do so.

4.5. Gearing ratio
Gearing ratio is a financial leverage that compares a company’s debt against its owner funds, in that it shows to what extent the company’s equity is made up from shareholders funds and borrowed funds. 4.6.6. Gearing ratio
Gearing Ratio= (Long-term debt + Short-term debt + Bank overdrafts) ÷Shareholders' equity
Table 3.1 Year | Tesco Plc (%) | J Sainsbury Plc (%) | 2008 | 149.14 | 66.09 | 2009 | 116.35 | 63.81 | 2010 | 86.66 | 57.28 | 2011 | 91.70 | 66.18 | 2012 | 91.93 | 69.98 |

Figure 3.1

Interpretation:
The gearing ratio looks at the relationship between the companies capital, in that it shows to what the relationship between the company’s debt and its shareholder equity. In this the higher the gearing ration the more debt makes up the company’s capital. In relation to Tesco and Sainsbury both have high gearing ratios with Tesco having the higher percentages, ranging from 91.00% to 150.00% thus showing that the majority of Tesco is capital stems from debt. While Sainsbury also relatively high above 50% it is lower than Sainsbury ranging from 57.28% to 69.98%, also showing that Sainsbury has a high debt to equity ratio but greatly less than that of Tesco, thus putting Sainsbury in a better position than Tesco over the five year period.

4.6. Investment ratios
Investment ratios shown the relationship between the amount of money a company invested and the profits made for the invested capital.

4.7.7. Dividend Yield
Dividend Yield is as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock.
Table 4.1 Year | Tesco Plc (%) | J Sainsbury Plc (%) | 2008 | n/a | n/a | 2009 | 4.60 | 4.20 | 2010 | 3.10 | 4.30 | 2011 | 3.60 | 4.30 | 2012 | 4.60 | 4.30 |
[http://www.lse.co.uk/]
Figure 4.1

Interpretation:
In regards to the dividend yield as illustrated in the graph above, it shows that Tesco has had a during the 2009 and 2012 higher dividend yields than Sainsbury, with Tesco’s dividend yield for both years standing a 4.60%, while having lower dividend yields in 2010 and 2011 than Sainsbury. However Sainsbury has had a relatively consistent dividend over the four year period of 2009 and 2012. Thus in this regard Sainsbury’s more consistent dividend yield makes Sainsbury a more stable investment than Tesco’s fluctuating yield.

4.7.8. Price/ Earnings Ratio
Price/ Earnings Ratio= stock price per share÷ earnings per share
Table 4.2 Year | Tesco Plc (%) | J Sainsbury Plc (%) | 2008 | n/a | n/a | 2009 | 11.50 | 14.80 | 2010 | 13.20 | 13.90 | 2011 | 11.10 | 13.20 | 2012 | 7.90 | 10.80 |
[http://www.lse.co.uk/]

Figure 4.2

Interpretation:
In regards to price to earning, Sainsbury has been consistently higher than Tesco over the four year period that was analysed. With Sainsbury having a high of 14.80% and a low of 10.80%, in 2009 and 2012 respectively while during the same period Tesco has only had a high of 13.20% and a low of 7.90% in 2010 and 2012 respectively. However the graph illustrates that both companies price to earnings ratios have been going into a decline. Although Sainsbury is the better investment option in this regard the decline in both companies price to earnings should also be considered.

4.0. Critical examination
In this aspect on the basis of the above ratio analysis it needs to be considered that Tesco in the majority of ratios in=s better performance than Sainsbury makes it a desirable company to invest in, when also regard specifics, Sainsbury has a more stable outlook in regards to performance in the ratios, while also being better in the investment ratio aspect than Tesco. On this basis I would advise an investment in Sainsbury in the fact that its ratios are more stable than Tesco’s as is illustrated in the above chapter.
However I would also state that an investment decision cannot be made on the ratio analysis alone as it falls short, in that as shown in the investment ratios not all the data was readily available such as data for the year 2008 in the dividend yield and the price to earnings ratio.
Also the fact the Ratio analysis doesn’t take into account the variations that can occur due to the company’s accounting methods, which can greatly impact on how the data is interpreted. Also ratio analysis doesn’t account for the impact of inflation and seasonal factors which can distort a company’s balance sheet, and other financial statements.
Ratios although beneficial also don’t create a clear picture on their own, making it difficult to fully asses if the company is weak or strong, as well as not being definite. Ratios can also be manipulated to create a favourable or unfavourable picture depending on the individual preparing the ratios and from whom and the reason they are being prepared.
So I would advise that before making an n investment decision ratio analysis should not be solely used, but used in tandem with other analysis methods in order to present a clearer picture of the companies in question, Tesco and Sainsbury, investment potential

5.0. Conclusion

In conclusion, it was found that from the five year analysis from 2008-2012; that Tesco was dominant in most aspect, but in 2012 fell into a decline, while Sainsbury had more consistence than Tesco. Overall ratio analysis is beneficial in building a picture of the company that is easy to understand and to interpret, while suffering from major draw backs in that they are not a viable tool to analysis investment potential alone.
On the basis of the ratio analysis, I would advise a an investment in Sainsbury for the sole fact that it maintained a consistence that Tesco failed to demonstrate especially coming into the latter years, as well as the fact that in regards to the investment rations used Sainsbury was in a better position than Tesco.
However it should be noted in a real scenario I would also undertake further analysis in order to support the ratio analysis and thus make a better informed recommendation and decision as to the better prospect between the two retail giants.
Appendix