Financial Statement Analysis Essay Example | Topics and Well Written Essays - 3750 words

Financial Statement Analysis - Essay Example For this reason, the actual presentation of financial statements with the absolute figures becomes meaningless as it does not provide a rational basis for comparing with the competitor or with the industry. The industry and competitor might have several differences due to which it is not practically justified that the analysis between the two should be made. For instance, if a company has revenues of $5 million and one of its competitors has the revenues of $500,000 then on the basis of these absolute figures, there is no comparison between the two companies. However, if the growth in revenue of the former company is, let’s say 6% and the latter company has growth in revenues of around 8%, then there is a rationale of analyzing both the companies as the same footing for comparison is available now. In short, in the absence of reasonable commonalities between the financial aspects of the two companies, the comparison of the two companies turns out to be meaningless. The best wa y to make a comparison in financial aspect between the two companies is to undertake financial ratio analysis. This analysis provides a common platform for the companies so that their performance can be compared on reasonable basis. Issues like absolute figures, size of the firms, differences in the operating activities and other issues are relaxed when financial statements are analyzed on the basis of ratios. The technique of ratio analysis works on the basis of common figures that are comparable. These comparable figures are computed as a percentage of some figures. For instance, what is the percentage of net profits with respect to sales, with respect to total asset, with respect to equity, and so on? But if stand alone figure of net profit is taken into account, then due to difference in size of the company, its value, its nature of operations, its capital structure and other elements, that net profit figure would not reflect a true picture. Structure of Article This article is developed in such a manner that the profitability analysis of two UK companies, Sainsbury PLC and Tesco PLC, has been conducted on the basis of ratio analysis. As far as the size of the two companies is considered, Tesco PLC is bigger than Sainsbury PLC. So what exactly be the measure which should be used in order to bring both of these firms to a common platform is the ratio analysis. The introductory part of the analysis briefly highlights the description of both the companies regarding their industry, history, products, branches etc. Next part focuses comprehensively upon the importance, meaning and interpretation of each of the profitability ratio. Third part of this report conducts an analysis on the basis of earlier explained ratios. Those ratios are divided into two categories such that first part of the analysis emphasizes upon the performance of each individual company on the basis of its past performance in the form of trend analysis. Second part of the analysis makes a pr ofitability comparison between the two firms on the basis of their own important heads of accounts. At the end of this report the calculation of the ratio analysis is presented in the appendix. Tesco Tesco is one of the largest retailers. It operates more than 2,300 convenience stores and supermarkets. The total number of employees working