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Essay on Tesco Plc and Somerfield: Accounting for Limited Companies | Help with Assignment Online

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All the data for ratio calculation has been obtained from the annual accounts of both the companies for the year ended 2005.Tesco is one of the world’s leading international retailers. Since the company first used the trading name of Tesco, in the mid 1920s, the group has expanded into different formats, different markets and different sectors (Tesco at a glance, accessed 24-10-2005). The Group’s principal activity is the operation of food stores and retailing, purchasing, property investment, property development, personal finance and other activities. The Group operates in 2,365 stores around the world providing a variety of services and products such as Tesco express, Tesco Metro, Tesco Superstore and Tesco Extra (Tesco Plc, accessed 24-10-2005). Somerfield plc incorporates Somerfield and Kwik Save supermarkets which together operate over 1,300 stores nationwide Somerfield is a high street supermarket chain with stores in many prominent locations throughout the UK. Offering high quality food with a particular emphasis on fresh foods and convenient shopping, the stores provide a modern retail environment in a convenient location with friendly and efficient service. In the current competitive food retail market Somerfield 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 (Somerfield portfolio, accessed 24.10.2005).

The comparison shown in this report would help to assess the companies’ position in terms of profitability, investment and solvency, which would not only be helpful for the management but also the investors as well as short and long-term creditors of both the companies. The 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.

Part B:

ANALYSIS FOR MANAGEMENT

The profitability of a company reflecting management’s effectiveness can be understood by applying the following ratios to the financial statements. These ratios are used below to assess and compare the profitability of Tesco Plc and Somerfield, both from the same industry.

Return on Investment (ROI)

Tesco Plc

Somerfield

14.95%

5.91%

The above ratio indicates the management capability to use the company’s assets effectively to generate returns, which is 14.95% for Tesco and 5.91% for Somerfield. It shows that Tesco is earning about 14.95%, which is much greater than 5.91% in Somerfield, making it clear that Tesco’s operational management is more efficiently utilising the company’s assets toward more profits as compared to Somerfield as it is getting more returns on the investments made by the company.

Gross Profit Ratio

Tesco Plc

Somerfield

7.3%

3.29%

The gross profit (GP) ratio is a very important profitability measure for any business. it basically measures the trading effectiveness and basic profit earning capability of a firm. The Gross Profit ratio for both the companies shows that Tesco Plc is earning a gross profit of 7.3% on its sales, which is much better than Somerfield’s 3.29%. Again, it indicates the production and distribution efficiency of Tesco Plc that it manages to earn a greater percentage of gross profit on sales than Somerfield.

Net Profit Ratio

Tesco Plc

Somerfield

5.7%

1.28%

Net profit is gross profit minus operating costs: it is the profit remaining after all the firm’s administrative, marketing, distribution and other operating costs have been deducted from gross profit. This ratio indicates that Tesco Plc makes a net profit of 5.7% while Somerfield earns a net profit of 1.28% on sales. The difference between gross profit ratioMyhomeworkwriters Order

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