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s group of ratios basically compares the income statement account of a company to investigate whether a company is able to generate profits in its operation. Profitability ratios mainly focus on a company’s return on investment (Murthy, 2014). Some of the profitability ratios include ratios like, Return on Capital Employed, Gross Profit Margin, Profit Margin, Return on Assets, as well as Return on Equity. For this report we will only use the Return on Equity and Gross Profit Margin ratios.
Return on Equity ratio is mainly used to compare the profitability of a company to another company in the same industry. For a general case, a company with a higher Return on Equity ratio shows that the company is more profitable. The ratio shows the efficiency with which the shareholders’ equity is turned into profits. The higher the ratio, the more efficient the company is in convert the shareholders’ equity into profits.
From the calculations above, the ROE ratios for TESCO are generally lower than those of Sainsbury. This shows that Sainsbury is more profitable than TESCO. However, the ROE for TESCO in 2014 is higher than of 2013, showing that the company is increasing its profitability efficiency with time. At the same time, the ROE for Sainsbury in 2014 shows that the company keeps on improving the efficiency with which it turns the shareholders’ equity into profits as it is higher than that of 2013.
Gross profit margin is this ratio that is used to investigate the financial health of a company by finding out the profit left after taking care of the cost of goods sold. The higher the gross profit ratio, the healthier the firm is. From the calculations above, TESCO exhibits higher gross profit margins in both years than those of Sainsbury. Generally, TESCO is financially healthier than Sainsbury as there is more profits left in its accounts after it accounts for its cost of goods sold than those of Sainsbury Plc. However, looking at the more recent gross profit