Financial Analysis of Tesco and Sainsbury

This assignment analyzes the financial performance of two major UK retail companies, Tesco and Sainsbury. It focuses on their income statements, examining profitability, tax rates, and other relevant information to assess how effectively they meet stakeholder expectations. The report also emphasizes the benefits of adopting IFRS and GAAP accounting standards for transparency and comparability in financial reporting.

Financial Analysis and Management
1

Table of Contents
INTRODUCTION................................................................................................................................3
Assignment 2........................................................................................................................................3
TASK 1.................................................................................................................................................3
Presenting the report on the financial performance of Tesco and Sainsbury ..................................3
TASK 2.................................................................................................................................................4
Giving advise upon the level of disclosure which is used by both the companies in the published
annual reports...................................................................................................................................4
TASK 3.................................................................................................................................................5
Stating the extent to which both the retail organizations have addressed the need of the different
stakeholders by presenting the report .............................................................................................5
CONCLUSION ...................................................................................................................................7
REFERENCES.....................................................................................................................................8
2

INTRODUCTION
Financial analysis is the tool which enables business entity to evaluate the level to which
firm is liquid, solvent, stable and profitable. In this way, financial analysis and its outcomes provide
high level of assistance to the firm in framing competent strategic policies which aid in increasing
productivity and profitability of business. Further, business organization can also take strategic
actions by conducting financial analysis of competitors. In this context, report will describe the
manner through which financial report can be drafted and presented in a structure way. Besides this,
it will also describe the aspects of annual report which satisfy the information need of decision
maker to a large extent.
ASSIGNMENT 2
TASK 1
Presenting the report on the financial performance of Tesco and Sainsbury
Ratio analysis of Tesco and Sainsbury for the five years from 2012-2016
Profitability ratios
 Gross profit ratio: The above mentioned ratio analysis presents that GP ratio of Tesco in
2013 and 2014 was 6.31%. On contrary to this, gross profit margin of Sainsbury increased
from 5.48% to 5.75% at the end of accounting year 2014. However, in comparison to Tesco,
GP margin of Sainsbury is lower. This aspect shows that Tesco had generated high amount
of sales and also, effectively maintained its direct expenses in against to Sainsbury. From the
period of 2012-2016 GP ratio of the firm is showing decreasing trend. On the contrary to it,
net profit margin of the firm inclined from 5.4% to 6.2% at the end of the accounting year
2016.
Year Tesco Sainsbury
2012 8.4% 5.4%
2013 6.6% 5.5%
2014 6.3% 5.8%
2015 -3.9% 5.1%
2016 5.2% 6.2%
3

 Net profit ratio: Net margin of Tesco inclined from .19% to 1.53% in the financial year
2014 but it is highly lower in comparison to the market trend. Besides this, in 2014, net
margin of Sainsbury also increased from 2.63% to 2.99%. Hence, by considering such
aspect, it can be said that Tesco had incurred high level of expenses on promotional and
other business activities which in turn resulted in reduced growth in the profit margin.
Further, with an aim to enhance the sales, Tesco offered more discount to the customers
which resulted in decreasing its net profit. Hence, it can be stated that profitability aspect of
Sainsbury is sound in comparison to Tesco. On the basis of this aspect, Tesco needs to frame
competent strategies to exert control on expenses (Ozsoylev and et.al., 2014). Through this,
business unit would become able to enhance its profit margin to a great extent. The below
mentioned graphical presentation states that net profit margin of Sainsbury is higher than
Tesco.
Year Tesco Sainsbury
2012 4.35% 2.68%
2013 0.19% 2.63%
2014 1.53% 2.99%
4
2012 2013 2014 2015 2016
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%

2015 -9.22% -.70%
2016 0.25% 2%
Liquidity ratio
 Current ratio: From ratio analysis, it has been assessed that both Sainsbury and Tesco are
not in sound position from liquidity aspect. In 2014, current ratio of Tesco and Sainsbury
was .65:1 and .36:1. During the period of 2014, current ratio of both the firms has reduced
which is not a good indicator for them. Moreover, current ratio of both companies is very far
from ideal ratio which is 2:1. Thus, it can be said that both the firms did not have enough
amount of current assets to meet their financial obligations. Hence, Tesco and Sainsbury are
required to focus on the maintenance of current assets (Khatik and Varghese, 2015). This in
turn helps them in improving their liquidity. Table and graphs clearly present that both the
retail business organization needs to make improvement in its current ratio which is highly
lower than the ideal ratio.
Year Tesco Sainsbury
2012 .67 .65
2013 .69 .61
2014 .73 .64
5
04/07/1905 05/07/1905 06/07/1905 07/07/1905 08/07/1905
-0.1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
Tesco
Sainsbury

2015 .60 .65
2016 .75 .66
\
 Quick ratio: Acid test ratio of both the retail organizations inclined in 2014 as compared to
2013. In the accounting year 2013 and 2014, quick ratio of Tesco was .25 and .47. Along
with this, during the same period, quick ratio of Sainsbury was .29 and .28. However, in
comparison to Sainsbury, Tesco had enough amount of current assets which can be easily
converted into cash. Hence, in comparison to Sainsbury, Tesco is highly capable in relation
to meet its quick current liabilities. Thus, Sainsbury needs to take effectual measures which
help it in gaining the ideal ratio such as .5:1. Below mentioned graphs show that from the
period of 2012-2016 Tesco and Sainbury has enough amount of quick current assets to meet
the obligations.
Year Tesco Sainsbury
2012 .43 .33
2013 .44 .28
2014 .43 .49
6
2012 2013 2014 2015 2016
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Tesco
Sainsbury

2015 .42 .48
2016 .59 .50
Solvency ratio
 Debt-equity ratio: Output of the analysis presents that debt-equity ratio of Tesco was .60 and
.63 in the accounting year 2013 and 2014. In contrast to this, debt-equity ratio of Sainsbury
was .46 and .37 in the same year respectively (Debt to Equity Ratio, 2015). Hence, debt-
equity ratio of both the organizations is very near to the ideal ratio which is .5:1. Thus,
solvency position of both companies is sound. In 2015 and 2016, debt-equity ratio of Tesco
is higher than the ideal ratio which is not good indicator. Thus, business unit needs to make
focus on making balance in the financial structure. On the other hand, Saibury has
maintained ideal ratio to the significant level.
Year Tesco Sainsbury
2012 .56 .46
2013 .60 .46
2014 .63 .37
2015 1.51 .45
2016 1.24 .34
7
2012 2013 2014 2015 2016
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Tesco
Sainsbury

 Time-interest ratio: From this ratio, it has been identified that Sainsbury is highly capable
in relation to meet its interest expenses in comparison to Tesco. Moreover, in the accounting
year 2014, time interest ratio of Tesco and Sainsbury was 1.72 and 4.50. Thus, Tesco needs
to take actions which enhance its ability in relation to meet the interest expense. Moreover,
decision making of suppliers and other investors is highly influenced from such aspect
(Hoskin, Fizzell and Cherry, 2014).
Efficiency ratios
 Total asset turnover ratio: This measure of both; Sainsbury and Tesco reduced in 2014 in
comparison to the past year. Moreover, in 2013 and 2014, total asset turnover ratio of Tesco
was 4.95 & 4.08. On contrary to this, such ratio of Sainsbury declined from 1.84 to 1.45. By
taking into consideration such ratio, it can be said that Tesco has made optimum use of total
assets for the generation of more sales in against to Sainsbury. Hence, Sainsbury needs to
make focus on the proper maintenance of assets like machinery, fixtures, etc. By this,
company would become able to get the desired level of outcomes or success.
Year Tesco Sainsbury
2012 1.32 1.88
2013 1.28 1.86
8
2012 2013 2014 2015 2016
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Tesco
Sainsbury

2014 1.27 1.64
2015 1.32 1.44
2016 1.24 1.40
 Account receivable turnover ratio: From ratio analysis, it has been assessed that Tesco had
received money from debtors earlier in comparison to Sainsbury. In 2014, account
receivable turnover ratio of Tesco and Sainsbury was 29.02 and 55.31. Thus, Sainsbury is
required to make modification in its credit sales policy because it closely influences the
working capital aspect of firm.
Year Tesco Sainsbury
2012 - 219.65
2013 36.36 195.82
2014 17.48 189.32
2015 15.09 235.39
2016 21.57 238.64
9
2012 2013 2014 2015 2016
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2

 Payment turnover ratio: The above mentioned figures present that payment turnover ratio
of Tesco and Sainsbury was 64.94 and 43.55. Hence, by taking into consideration such
aspect, it can be said that Tesco has opportunity to make payment to creditors later as
compared to Sainsbury.
To,
Board of Directors
Date: 8th October 2016
It is reported to the higher management that in the accounting year 2014 Sainsbury performed
effectually from the financial perspective in comparison to Tesco. From annual report, it has been
assessed that sales of both the firm inclined in 2014 as compared to 2013. However, high amount
of sales generated by Tesco in 2014 in against to its rival firm such as £63557. On the other hand,
sales revenue of Sainsbury was £23949 at the end of financial year 2014. Irrespective of this, net
profit margin of Tesco is lower. Moreover, Tesco offered high discount to the customers with the
aim to influence their decision making aspect. Hence, due to this company failed to attain high
profit margin. Thus, Tesco is required to make focus on enhancing the quality aspect rather than
offering continuous discount to the customers. Moreover, now customers give more preference to
the quality aspect while making purchasing of products. Thus, by exerting control over the
expenses business unit can maximize its net profitability aspect to the large extent. Hence, from
overall evaluation it can be said that profitability aspect of Sainsbury was good in 2013 and 2014
10
2012 2013 2014 2015 2016
0
50
100
150
200
250
300

as compared to Tesco.
Further, by making analysis of the balance sheet it has been identified that both Tesco and
Sainsbury are not highly capable in relation to meeting the current financial obligations over
current assets. Moreover, outcome of ratio analysis presents that both the companies failed to
maintain the liquidity position according to the ideal ratio. Besides this, it also has been reported
that quick ratio of Tesco was in line with the ideal ratio. Further, in 2014, quick ratio of Sainsbury
was .28. Hence, Sainsbury was not highly capable to meet the quick obligations because it did not
have enough amount of current assets which can be converted into cash. Thus, it is advised to both
the organizations to make focus on maintaining the current assets which in turn helps in improving
the liquidity position.
It also has been reported to the higher management that in 2014 debentures of both the companies
were reduced to the significant level. During this period, debenture of Tesco and Sainsbury was
£9303 and £2250. Further, in 2014, equity share of Tesco decreased from £16661 to £14772. This
aspect shows that Tesco had made redemption of shares in 2014. On the contrary to it, more shares
were issued by Sainsbury in 2014. However, by taking strategic action business organization has
maintained the sound financial structure. Along with this, Sainsbury had made effectual use of
assets and thereby generated more sales.
TASK 2
Giving advise upon the level of disclosure which is used by both the companies in the published
annual reports
In published annual reports of TESCO and Sainsbury, the two companies have adopted IFRS
principles. With the adoption of these principles the organizations are able to disclose the required
amount of information. It assists the firms to maintain transparency among its various stakeholders.
In addition to it, the annual reports of these firms consist graphs, charts and tables which assists the
users to create better understanding of the annual reports. However, disclosure is related with the
accounting policies, legal contingencies of the company which may be sometimes repetitive in the
discloser statements of the company (Parashar, 2014). As a result, it can affect the understanding of
the viewers which leaves negative impact. The cited companies applies appropriate accounting
policies in order to maintain quality disclosers.
In order to avoid repetition of policies, the two companies uses cross referencing. It assists
in avoiding duplication of policies and legal regulations of the firms. In addition to it, this aids the
11

reader to get knowledge over relevant and extra information about the companies. The two
companies adopt appropriate ways to disclose information which assist the management to maintain
transparency. In order to implement further improvements, the cited organizations can consider
additional ways to present the annual reports effectively. Footnotes can be added to the financial
statements of the firms where it includes detailed explanation of the information. It helps the reader
to get appropriate meaning of the stated information (Pyo and Chung, 2015). To improve the
process, two companies can also use the concept of quarterly disclosures. In addition to it, grouping
of disclosure by its nature can help the companies to improve their process. Executive summary can
also be added in the presentation so that it would reduce the problem of over burden.
The concept of materiality is required to considered while preparing financial statements of
the companies. The organizations can also includes presentation of certain disclosure which are not
included in financial statements. However, there are some areas that are necessarily been dis
closured by the two companies such as risk factors, legal proceedings and the key stakeholders of
the company. In order to improve the same the companies can eliminate repetitive information
which will help the user to get appropriate information.
However, firms can adopt significant accounting policies with consideration of UK GAAP.
It will help the firm to maintain appropriate methods and principles. It is also seen that there are
number of organizations that have started focusing on taking effective initiative on improving
disclosures. It will help the companies to make more meaningful for which the organizations needs
to take immediate actions. It will ultimately help both the company and its investors to get the crux
of the information (Ozsoylev and et.al., 2014). The profitability of the two companies is purely
based their services and required providence of the information. If it is done effectively, then the
goals and objectives of the organization can be attained effectively. In addition to it, having
appropriate knowledge of the company proceeding and its information can result into increasing
number of investors.
TASK 3
Stating the extent to which both the retail organizations have addressed the need of the different
stakeholders by presenting the report
Both Tesco and Sainsbury has accountability to prepare and publish audited financial
statements to satisfy the information need of varied stakeholders. Moreover, there are several
stakeholders who make use of the financial statements for the purpose of decision making. In this
regard, Tesco and Sainsbury has satisfied the information need of different stakeholders in the
following manner:
12

 Management: BOD or manager of the firm makes use of financial statements to assess the
extent to which the organizational goals have fulfilled. Moreover, income statement clearly
presents the profitability which is earned by the firm during the year. Besides this, balance
sheet renders information about the liquidity and solvency aspect of the business unit.
Further, cash flow statement provides deeper insight to the higher management about the
level to which effectively financial resources used by the firm. Hence, by considering such
aspect higher management can set suitable vision, mission and objective for the upcoming
year.
Further, by using such statements BOD can make comparison of organizational performance
in against to the competitor. However, it is to be critically evaluated that different business
organization adopts varied rules for the calculation of inventory, depreciation. Due to this, financial
performance and position of the firms are highly influenced to the large extent. In this, it is not
possible for BOD to make comparison of the financial performance of the firm in against to the
competitors in an appropriate way. Employees: Personnel of the company make use of financial statement to get information
about the stability and profitability aspect of the firm. Moreover, job security, growth in the
salary and other financial benefits are highly influenced by the profitability aspect of the
firm. In this regard, income statement which is published by Tesco and Sainsbury highly
satisfies the need of human resources of the firm (Cen and et.al., 2014). On the critical note,
it can be said that in the financial statements and report companies do not provide
information about the percentage to which salary of personnel will increase. Investors: With the aim to assess the risk and return aspect investors make use of the
financial statements for doing ratio analysis. Hence, in this regard, both Tesco and Sainsbury
satisfies the need of investors by publishing income and cash flow statement as well as
balance sheet. Moreover, by making use of such statements investors would become able to
assess the profitability, liquidity, solvency, efficiency and investment ratio (Khatik and
Varghese, 2015). This aspect shows that both the retail organizations have addressed the
need of investors to the large level. Bank or other lending institution: Before granting loan to the business organization bank
and other lending institution evaluates the repayment capability to it. In this regard,
solvency position of the firm is assessed by the lending institution. Hence, by using balance
sheet lending institution can identify the level to which financial obligations can be fulfilled
by the firm from assets. Thus, both the business organizations present clear information
about the assets and liabilities in their balance sheet. Hence, by considering such aspect it
13

can be said that annual accounts which are published by the firm has fulfilled the need of
decision makers. Suppliers: They are highly concerned about getting the financial information which provide
deeper insight to them about company's ability in relation to making payment. Thus, by
evaluating the cash flow and profitability aspect suppliers of Tesco and Sainsbury can
identify that company has ability to make payment of credit amount when it becomes due. In
this regard, both the companies address the information need of suppliers by including all
the information about operating, investing and financing activities in cash flow. Further,
income statement also presents the information about the profitability aspect of the firm.
Moreover, capability of the firms in relation to making payment are highly influenced by the
profit margin generated. Along with this, by making use of balance sheet suppliers can
determine the working capital by making use of current assets and current liabilities
(Sharma, Sharma and Arif, 2015). Hence, information regarding all such aspects are clearly
published by both the firms in the annual reports or statement.
 Government: Legal tax authorities make evaluation of the income statement to assess that
companies have paid suitable amount of tax or not. In this regard, both the companies
mention information about the profitability, tax rate and amount etc. in the income
statement. Hence, this aspect shows that both the retail firms have performed their
responsibilities towards stakeholders to the large extent.
Tesco and Sainsbury can provide high level of benefits to the stakeholders by adopting the
rules and regulations of IFRS. Moreover, when companies undertake standard accounting rules for
the preparation and disclosure of financial information then it facilitates transparency in the records.
Moreover, when all the companies make use of similar rules for assessing the value of inventory
and depreciation etc. then stakeholders would become able to make comparison effectually. In this
way, by making comparison of the financial performance stakeholders like investors can make
suitable decision about the company in which they need to invest financial resources. Further,
management of Tesco and Sainsbury would also become able to frame competent strategic
framework for the near future by making analysis of the financial performance of competitors.
CONCLUSION
From the above report, it has been articulated that by adopting the various measures
company can make improvement in the cash flow. In addition to this, it can be summarized that
Tesco and Sainsbury can improve the disclosure system by taking into account the rules and system
of IFRS as well as GAAP. It has been stated that company has addressed the need of stakeholders
14

by including all the necessary information in the financial statements.
15