Tesco Ratio Analysis Essay

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Efficiency Ratios: Efficiency has been highlighted as a key financial objective for each company – as it is inherent in optimising profit from any business and helping sustain core business – which is the primary objective of both groups. It is also a good indicator of healthy cash flow management – a specific Sainsbury’s objective. Efficiency ratios reveal how effectively a company uses its assets and liabilities and is a good general indicator of how well the day to day operations are managed. (McLaney, 2009) Overall analysing the figures in Tables 5&6 – there is very little in the way of dramatic increases or decreases in efficiency over the period in question. A key ratio used to measure overall business / sales performance, however, is…show more content…
Receiving payment after 14.22 days whilst only settling with suppliers after 66.51 days (in 2013). Compare this with Sainsbury’s whose settlement period for trade payables is 45.07 days in 2013. Their settlement period for trade receivables is almost 3 times less than Tesco’s however – this may be due to the proportion of their business which is based on over the counter immediate transactions relative to Tesco. The basic aim of any business is to maximise cashflow by getting payment in as soon as possible for goods sold whilst delaying paying for goods purchased as long as is possible and reasonable. By Tesco delaying paying suppliers for an additional 21 days more than Sainsbury’s it is effectively availing of free finance for an additional 3 weeks. Going some way to achieving their objective of ‘generating positive free cash flow’. (This figure may be skewed somewhat by the breakdown of ‘Trade Payables & Others in the financial statements. Using the breakdown figure from the notes delivers a much closer figure for both companies). Tesco have been criticised, however, in recent years for extending their payment terms for suppliers, particularly of non-food items. (IBE, 2013) Sainsbury’s relatively shorter settlement period may reflect a more ethical standpoint in terms of fair supplier treatment – despite some reports to the contrary (IBE, 2013). Unfortunately Sainsbury’s are missing out on available free finance and are therefore not fully meeting their strategic objective of maximising cash