Sainsbury’s have seen the number of times their assets have been used to produce revenue over the past 5 years with an average of 3.

7 times asset turnover. This rate has steadily increased over the years since 2002. There has been a rise of 0. 4 times since 2005. The figure of 2006 may be the result of the new management of Sainsbury’s and may bring further success in the coming years. Furthermore, Tesco’s asset turnover had been on average 4. 3 times in the last five years.

However, the number of times the asset turnover has taken place has fallen over the years since 2002, but not any dramatic fluctuations.This shows that although the company is increasing turnover their assets required to fund the increasing turnover are reducing. This may possibly be due to its international investments and focus into different markets such mobile telecom, insurance, etc.

However, this is not a cause for concern for a fairly profitable company as like Tesco. Gross profit margin (GPM) The gross profit margin measures a company’s manufacturing and distribution efficiency as a percentage of its sales revenue. It illustrates the percentage of gross profit over its revenue or sales left after subtracting the cost of goods sold.

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It also helps specify how proficiently a business is utilising its materials and labour. The higher the gross profit margin is, the better it is, as it shows that the company is making reasonable amount of profit on the sales made. But this will only be true if the company controls and keeps its overheads as low as possible. If the company is not reaching its proper gross profit margin, it will be unable to provide for its expenditure.

In essence, it is ideal for a company to earn gross profit that is consistent and that it doesn’t fluctuate from one period to another.This ratios main use would be to compare against previous years performance profitability and be also used against competitors. Also, it is used to measure the efficiency and trading profitability of the company. Looking below at figure 1 Tesco Plc has maintained a constant but steady incline of its GPM, with an average GPM for 5 years of 7. 22%. This means that for every  earned through sales, there is a gross profit margin of 0. 72p. This is good, as it indicates that for every  of expenditure, there is adequate amount of profit margin to cover the expenditure.

However, the investor potential indication shows that the GPM is increasing from recent years. Looking at J Sainsbury Plc’s figures below in figure 2, it shows the gross profit margin for the last five years has steadily decreased to 4. 12% from the year 2002 to 2005, but has picked up by 2. 52% since, as shown in the 2006 GPM figure of 6. 64%. This sudden slump in 2005 in the steady figure suggests that the reason why the decline occurred was again due to the reorganization of the company, whereby sales had to be reduced, as were the prices of the products.

The average GPM of J Sainsbury Plc over the last 5 years shows as it to be 6. 75% (every  of sale, there’s a gross profit of 0. 68p). Furthermore, the results below show that from 2002 to 2004 J Sainsbury plc was experiencing a steady increase. This can be considered as a positive sign for potential investors in following years to come.

Overall, J Sainsbury Plc’s figure seems to be more promising than Tesco plc, as Tesco figures show an increase only and no fluctuations.This can be a dangerous sign for potential investors due to the fact that perhaps in the following years to come Tesco may experience a sudden drop in profits, as this theory is also backed by financial analysts who suggest that Tesco may not be at the top for long. But this is only a mere theory not based on any hard evidence.

Although having said that, it is still difficult to say that the J Sainsbury Plc is in a better financial state than Tesco Plc, even after considering the overall performance of both of the companies.Although the gross profit margin is very useful in analysing retail companies by providing an investor with a direct analysis of management’s skill in buying and selling at the best price, further analysis will bring more light into this subject. For further analysis of a company, another ratio called ‘Net profit margin’ is used. This ratio measures the performance of a company on the basis that whilst the company is achieving maximum sales as possible, costs are consistently kept to a minimum. It tells the amount of net profit earned through every  1 of turnover made.This Net profit margin number indicates how effective a company is at cost control.

The higher the net profit margin means the more effective the company is at converting sales into actual profit. The ratio is one of the main performance indicators for a business. The analysis of low profit margin helps a company under review take appropriate cost control procedures, which may be done by either reducing excess costs or increasing selling prices.

When comparing the performance between different companies within the same industry, using the Net profit margin is very useful.This is because such companies generally undergo similar problems and face similar issues being in the same business industry. However, the net profit margin ratio has also proven to be a good tool to make comparisons between companies in different industries. This enables a company performing this type of measurement to test which industries are comparatively more profitable.The net profit margin for Tesco Plc has increased steadily over the past five years (see below figure 3) rising from 4. 75% in 2002 to 5.66% in 2006; this must indicate that Tesco have managed their costs effectively, thus showing that they have potential effectiveness for converting sales into actual profit.

The average Net profit margin for the past 5 years is 5. 05%.After analysing Tesco Plc account for the 5 year period shows that there has been a steady increase from the period of 2002 to 2005 this may show that Tesco’s was tying up an increasing amount of resources, since then there was a drop in the ratio by 0. 07, this could be the result of an investment in fixed assets such as new branches spreading all over UK and overseas.However, this fluctuation of the current ration is not as worrying because Tesco has proved to be very successful and profitable in the past years and presently, experiencing a rising number of sales.

This means that Tesco would be able to meet their short-term liabilities. On the other hand, we see Sainsbury Plc’s current ratio quite stable, with an average of 0. 83:1 over the 5 years.

This may be the case as in recent years they have sold some overseas assets and provided an increased cash flow.As for sales, there has been a drop in sales, and the numbers of product being sold have also been reinstated so that they are in line with market competitors products. However, the rising value of the current ratio may be a result in overstocking, which is not good as it would prove to have a negative affect with the tying up of increasing proportions of resources. The action to be taken would be at this moment to increase sales dramatically as Tesco Plc’s overall profitability has been on an unstable trend through the years, as the previous ratio analysis has indicated.