Tescos and Sainsburys

TOTAL DEBT/TOTAL CAPITAL RATIO

|  |  |2006 |2007 |2008 |2009 |2010 |

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Tesco has a high level of debt compared to Sainsburys, the more important thing for a company is to have positive earnings and a steady cash flow. A higher ratio generally means that a company has been aggressive in financing its growth with debt, this can result in volatile earnings if at all there any and an additional change in interest or even might lead to bankruptcy. However during 2009 to 2010 there was a sharp increase in borrowing by Tesco but it gradually came down in 2011 which shows that Tesco has efficiently and effectively managed its debt to finance its operations. Some of these increases in debt do not explicitly affect the capital structure because there is no market value of finance from suppliers and they pay no interest , larger firms with safe tangible assets and high taxable income are better off financing their operations with debt as compared to total capital.

Sainsburys between 2006 to 2007 had an increase in debt financing but there after a similar trend was kept which means debt has been used efficiently by the company.

Both company are using debt as part of their capital to finance their operations and have managed to maintain it at a low level and steady enough no to scare off investors.

GEARING RATIO = TOTAL DEBT/ TOTAL EQUITY

|  |  |2006 |2007 |2008 |2009 |2010 |

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Both the companies have an unsustainably high debt to equity ratio or very low interest coverage ratio which means they run a high risk of value- destruction events taking place as the interest expenses might become unaffordable. Looking at the graph for Tesco between 2009 to 2010 experienced an upward movement in debt financing compared to Sainsburys this could mainly be because...