Return on capital employed- Tesco has seen a strong growth in year on year return on capital employed. From 12% in 2004 to 14% in 2008, this shows that the company is using its assets well compare to Sainsbury which has seen a low return on its capital, in 2005 it went to as low as 0.23 from 7% in 2004. The ROCE for Tesco suggest that the company is getting value for its current borrowing and Sainsbury’s return has increased to 6% in 2008, but it has not been consistent over the few years.Profit Margin- It is important to compare the profit margins of the two companies because they are in the same sector and share same customer base.
Tesco year on year growth has been very marginal but, it has been consistent, profits margins have been consistently over 5% for past years. Sainsbury plc has seen a slow growth especially in 2005 and 2006; the growth was down to 0.10%. It shows uncertainty in the company to generate good revenues.Stock Turnover- This ratio is important as both the companies are in a food retail business. Therefore, faster the turnover time, the less wastage of inventory and the companies can depend just in time delivery.
But, both the companies are shows consistent and fast turnover time. Tesco is slightly better. Interest cover- The interest cover for both companies fell in 2008 from previous year. Interest cover ratio shows whether the companies are earning enough profits before interest and tax to pay its interest costs comfortably. Tesco’s interest cover is high because its highly geared compared to Sainsbury, but the fall in interest cover needs to be looked at carefully.Gearing Ratio- The higher a company’s degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry.
A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength. Tesco has geared up highly over the years to 87% in 2008, but has also increased it EPS due to consistent rise in sales and share buy backs. In comparison to Sainsbury which has a gearing of 54 %, Tesco could face risks if its sales fall.P/E Ratio- A strong P/E represents strong investor confidence in the company and its future. Tesco has a much higher P/E ratio compared to Sainsbury for the year 2008. The current share is also factored has factored in investor expectations of growth in profits and EPS in the future.
Dividend yield- It is the dividend return a shareholder currently expects on the shares of a company. Tesco did not pay dividends for the past few years and therefore, its zero. But, this can be related to the Tesco corporate strategy of expansion in positively NPV projects. Sainsbury’s dividend yield has been 3.02 but it has not been consistent. This is due to changes in annual dividend.
Corporate Strategy: Tesco and SainsburyTesco Tesco has a long term strategy for growth, based on four key parts: growth in the Core UK, to expand by growing internationally, to be as strong in non-food as in food and to follow customers into new retailing services. Growth in the UK business comes from new space, extensions to existing stores and a multi-format approach. Sales of non food, which are growing significantly faster than the rate of food, also contribute to the overall growth picture.Tesco International is based upon acquisitions and mergers with local companies. But, it is important to see whether their international expansion has increased shareholder value and the impact of such strategies on the performance of the firm. Geographic expansion in to the new may increase shareholder wealth if there is little or no competition in the new market.
Looking at two relevant out of the four hypotheses on M&A motives:1. The market for corporate control- The corporate control refers to the monitoring, supervision and direction of a corporation or other business organization. (Megginson, Smart, Lucey).
Tesco launched its Asian business through the acquisition of the Lotus chain in Thailand in 1998. Today over eight million customers every week shop in 636 stores across Asia: in China, Japan, Malaysia, South Korea and Thailand.2. Synergy Hypothesis-This refers creating synergy of the target firms resources to improve performance and market share through economies of scale. For example Tesco is developing a very good market position in Malaysia, with plans to add a further 22% of space in 2006.
The eight Makko stores that Tesco acquired in January will double the space when converted.(tescocorporate.com).