Investment Analysis of Tesco, and Marks And Spencer Research Paper

Investment Analysis of Tesco, and Marks And Spencer - Research Paper Example (Penman, 2003). In other situation, investors make investment decisions following his or her instinct or based on the information provided by the market. Here, Penman (2003) referred to Investors who make investment decisions following their instinct as intuitive investors, while those who make investment decisions following market data are passive investors (Penman, 2003). This study is aimed at carrying out a comparative analysis of two United Kingdom based retail companies with particular focus on its financial performance and share valuation for the two periods under review, to enable the researcher gain a reasonable basis for providing recommendations to investors on which company's stock they should buy, sell, keep or hold. The remaining part of the paper looks at the two company under review. Like macroeconomic analysis the analysis of the industry is important because it enables the analysts to make abnormal profits arising from information asymmetry between the proper analyst and competitors who fail to carry out a proper analysis. Just as it is difficult for a firm to do well in a poor macroeconomic environment, so too is it difficult for a firm to perform well in a troubled industry. (Bodie et al, 2002). Similarly, as performance can vary across countries, so too does it varies across industries. (Bodie et al, 2002). 2.1 Tesco Plc Tesco PLC is an international retailer. The principal activity of the Company is food retailing with over 2,000 stores in the United Kingdom, the Republic of Ireland, Hungary, Poland, the Czech Republic, Slovakia, Turkey, Thailand, South Korea, Taiwan, Malaysia, Japan and China. It activities include, simple travel insurance, Tesco personal finance, telecom and retail outlets. Financial Ratio Analysis for Tesco Plc. a) Profitability Ratios for Tesco Plc Ratio Formula1 2006 2005 Profit margin Return on Capital Employed Return on Equity Return on Investment The profitability ratios show that the company is doing quite well. In 2006 for example the was an improvements in all the profitability ratios when compared to 2005. Compared with the ratios for the other firm (Mark & Spencer) we see that Tesco performed better than the industry average, and better than M&S. However, Marks and Spencer also proves to be a profitable company. b) Liquidity Ratios for Tesco Plc Ratio Formula2 2006 2005 Current Ratio Quick Ratio Cash Ratio Tesco current ratios have also witnessed improvements in 2006. The current ratio and quick ratio show that Tesco has enough current assets to cover its short-term liabilities without facing business risk that is the risk that it might not meet its short-term commitments. However, the cash ratio shows that Tesco could only cover 50% of its short-term liabilities in 2005 and 90% in 2006. It is again doing better in this domain than its M&S. c) ) Long-Term Solvency Ratios Solvency Stock Measures From above, it can be observed that the company uses more debt than equity in financing its activities. This is evidenced by the debt-to-equity ratio of 1.4. There is