A company exists for the benefit of its shareholders. Its objective is not to educate the public about its financial condition, but to maximise its shareholders’ wealth. Reporting financial results in a transparent and straightforward fashion is a means to an end (Fridson & Alvarez, 2002). The financial performance of a company can be discerned by the different financial ratios in accounting that tries to evaluate the overall financial condition of a company.
The different financial ratios can be categorised into liquidity ratios, activity ratios, debt ratios and profitability ratios. Liquidity ratios measure the company’s availability of cash to pay its obligations and debts. Activity ratios measure the ability of the company to convert non-cash assets into cash. Debt ratios measure the company’s capability to repay long term obligations. Profitability ratios measures how the company controls its expenses and uses its assets in order to generate an acceptable rate of return.
Based on the financial statements and financial ratios calculated, Tesco is more liquid than Sainsbury and Morrison. The liquidity of the company is measured by the current assets ratio as well as the acid test ratio. An asset is liquid if can be readily converted to cash, while a liability is liquid if it must be repaid in the near future. The current assets ratio compares the assets that will turn into cash within the year to the liabilities that must be paid within the year. The acid test ratio is a more conservative liquidity measure where the numerator of the current ratio is reduced by the value of its inventory. (Higgins, 1995)
The trends of Tesco’s liquidity ratios are increasing from 2007 to 2009. This means that the company has better capability to pay its debts in the 2009 than the other two companies. It is also noteworthy to show that Sainsbury is experiencing some liquidity problems because its current ratio and acid test ratio are decreasing in