Financial Analysis Management & Enterprise Solved Assignment (Doc)

Financial Analysis
Management & Enterprise

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Presenting detailed analysis of vertical, horizontal and financial ratios of Sainsbury and
Tesco plc......................................................................................................................................1
2. Explaining importance of working capital analysis of Sainsbury and Tesco........................13
3. Showing critical analysis of cash flow statements of both companies..................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
APPENDIX ...................................................................................................................................17

INTRODUCTION
A process consisting with analysis of financial performance of the centrepiece and and
comparing it with company's past and budgeted position in order to determine actual financial
performance of the firm (Hasche and et.al., 2018). Further, Financial management is nothing, but
a process performed by financial managers of the company in order to formulate strategies and
plan various procedures for the firm so that it could achieve its financial goals efficiently. The
present report shows report prepared by financial advisor to be submitted to the board of
directors of Asian food manufacturer. The report includes a comparison of financial performance
of Sainsbury and Tesco plc. It describes an analysis of vertical and horizontal financial
statements of both the companies along with analysis of their financial ratios as order to evaluate
financial efficiency of both the companies. Moreover, the report also mentions importance of
working capital analysis for both Sainsbury and Tesco. In addition, it also presents an indepth
analysis of cashflow position of both businesses. At the end of report, it shows different financial
statements of both companies as an evidence of above mentioned analysis.
MAIN BODY
1. Presenting detailed analysis of vertical, horizontal and financial ratios of Sainsbury and Tesco
plc
Liquidity ratio analysis
Quick ratio
Year Tesco Sainsbury
2015-16 .61 .52
2016-17 .68 .53
2017-18 .60 .59
2018-19 .49 .50
1

Current ratio
Year Tesco Sainsbury
2016 .75 .66
2017 .79 .74
2018 .71 .76
2019 .61 .66
2

Interpretations
Liquidity ratio derived from the financial data of a company helps in analysing the
efficiency of a company in maintaining sufficient amount of cash and cash equivalents within the
company (Suh and Kang, 2019). Companies having liquidity ratios between 1.5 to 3 are being
considered as healthy enterprises.
By analysing the liquidity position of Sainsbury, it can be evaluated that it's liquidity
position increased from 2015-16 to 2017-18. Company’s efficiency declined at an higher rate in
2018-19. Further, its liquidity ratio kept lie between 0.5 to 0.60. Thus, it can be said that it has
been failed to maintain healthy liquidity position.
In addition, with analysis of Tesco' liquidity position, it can be said that there is a
frequent change in the amount of cash and cash equivalents maintained by the firm in order to
maintain repay its creditors.
Thus, it can be said that financial statements of both the companies are not showing their
healthy financial positions.
Investment ratios
Dividends per share
Year Tesco Sainsbury
2015-16 - .12
2016-17 - .12
2017-18 .03 .1
2018-19 .11 .1
3

Earnings per share
Year Tesco Sainsbury
2015-16 0.05 .23
2016-17 (0.01) .17
2017-18 .44 .13
2018-19 .41 .08
4

Interpretation
Investment ratios consists all those ratios derived from the financial statements that
provides information to the shareholders regarding the risk involved in the investment made by
them into the firm. Along with this, these ratios are also used by the companies in order to help
the investors in their decision making regarding the company. Earning per share and dividend
per share are two major ratios used to provide sufficient information to the shareholders.
Company with higher value of investment ratios and increasing trends in these ratios are
considered as profitable companies as per the views of investors.
The investment ratios of Sainsbury shows stability in payment of dividend. On the other
hand, Earning per share of the company is declining over the year. Talking about, investment
ratios of Tesco plc, it can be said that till the year 2016-17 company was not paying dividend to
its shareholders. After it, company's dividend paying capacity shows increasing trend. Further,
earning per share of Tesco reduced in the year 2016-17 to -0.01 which improved in the year
2017-18 to 0.44. Further, the EPS reduced in the year 2018-19 as well to 0.41.
Thus, it can be said that both company's position is not profitable from the point of view
of an investor, as investment ratios of both the companies are showing declining trend.
Efficiency ratio analysis
5

Interpretation
Efficiency ratios of a company are being calculated by the financial managers in order to
determine the efficiency of the company in generating income from its various resources held by
it during the period (Kacker and et.al., 2019). Inventory turnover ratios, total assets turnover
ratios are covered under Efficiency ratios of financial analysis. As per the guidelines mentioned
in the financial and accounting standards, 50% efficiency ratio of the company should be
considered as an optimal percentage regarding efficiency of the firm. In addition, inventory
turnover ratio of a company should lie between 4 to 6. In addition, in case of of assets turnover
ratio, higher value of ratios of the company shows higher efficiency of the company in
generating revenue from the fixed assets held by it during the year.
6

With analysis of efficiency ratios of Sainsbury, it can be seen that inventory turnover
ratio of the company is having declining position over the year. Whereas, it is showing
increasing trend in case of Tesco Plc. Further, assets turnover ratios of Sainsbury is also having
declining trend. On the other hand, in the Tesco, the ratio is increasing with the passage of year.
Thus, it can be said that efficiency of financial managers of Sainsbury is declining over
the year. Whereas, Tesco's managers are improving their efficiency of earning maximum profits
from different resources held by it. Thus, it can be evaluated that Tesco is more efficient
company as compare to Sainsbury in context to earning revenues from the assets held by it.
Solvency ratios
Interpretation
The Debt equity ratios shows the leverage position of the company. It shows the capacity
of an organisation in repayment of its debts. The ideal debt equity ratio varies from business to
business due to their different requirement of maintaining debts within the business. Talking
about large public companies like Sainsbury and Tesco, the ideal ratio for solvency or debt
equity ratio is considered as 2 or more.
7

In the Sainsbury, company's capabilities of repaying its debts are declining over the year.
On the other hand, Tesco's debt equity ratio is also having declining trend as per the financial
statements of last four years. Thus, it can be stated that both companies are not capable to repay
their debts. It increases the risk for creditors of companies. Thus, this ratio may influence the
decision of creditors in negative way.
Profitability Ratios
8

Interpretation
As the name describes, profitability ratios are those that shows profit generation capacity
of the company. Gross profit ratio and net profit ratios are two major ratios used for this purpose.
Gross profit ratio helps the financial managers in determination of profit generation capacity of
the company from its general business operations. On the other hand, net profit ratios shows
capability of a company in deriving profits from its overall operations including operating and
non operating business activities. Higher value of these ratios shows higher capabilities of the
company. Thus, a profitable company always have increasing trend in its profitability ratios.
The profitability positioning of the company can be computed on the basis of income
statements of the business. The computation of profitability ratios of the Sainsbury shows that
company's ability to generate profits from its normal course of business is increasing over the
year. Although, in case of earning profit from overall operations including non operating
incomes is showing declining trend in Sainsbury over the year. On the other hand, taking about
Tesco, it can be stated that the gross profit ratio of Sainsbury reduced in the year 2016-17 as
compare to 2015-16. Although it contains increasing trend after 2016-17 till the last year. Same ,
evaluation of net profit ratio of Tesco shows that its condition of generating profits from various
operating and non operating activities is showing increasing trend.
9

Although, for the comparison purpose it can be stated that profitability position of
Sainsbury is stable. On the other hand, profitability of the Tesco is increasing at higher rate over
the year. Thus, it can be said that Tesco is more potential company than Sainsbury.
Horizontal financial analysis
The horizontal financial statements are those that shows improvement or decline in the
financial performance of the company over the year (Horizontal Analysis of Financial
Statements, 2019). It is the tool of financial management that is used by the financial managers in
order to analyse the trend within the business.
Horizontal income statement of Sainsbury
Interpretation
With analysis of Horizontal income statement of Sainsbury, it can be stated that in the
year 2016 company's revenue generation capacity was changed by 11.6% which was declined in
the year 2017 by 8.5% and kept declining. With further analysis, it can be seen that other factors
10

of income statements such as gross profit changed with frequent ratio. Further, it does not show
any perfect trend in the change. Further, talking about net income of company, it is negatively
changed by -20% in 2016 which was further more declined to -18% in 2017 and to -29.1% in
2018. Thus, it can be seen that overall financial position of the company is declining with the
time.
Horizontal Income statements of Tesco
Interpretation
Horizontal income statement prepared through the data of Tesco plc shows that company
contains increasing trend in revenue generation capacity of the company. it changed with 2.73%
in 2016 which was increased to 2.81% in the year 2017 and 11.17% in the year 2018. Moreover,
net income of the company does not contain any specific trend in context to changing. Thus, it
can be stated that income generation capacity of the company does not contain any specific
trend. Thus, it can be said that company is growing in the economy with unstable rate and trend.
Horizontal balance sheet of Sainsbury
11

Interpretation
Horizontal balance sheets of the company shows change in financial positioning of the
company. With analysis of horizontal balance sheet of Sainsbury, it can be seen that both current
and fixed assets of the company is declining with passage of year. Along with this, total
liabilities of it is also declining with the time being. total liabilities in the company is changing
with reducing rate. Further, as total liabilities of Sainsbury is reducing with higher rate as
compare to the total assets of the company, it can be said that overall positioning of the company
is improving over the year.
Horizontal balance sheet of Tesco
12

Interpretation
With the above analysis, it can be seen that total assets of the company is changing with
unstable rate. It reduced in the year 2018 as compare to 2017 which increased with the higher
rate in the year 2019. Further, the total liabilities of Tesco changed negatively in the year 2018 to
-0.9% which increased with higher rate of 7.5% in the year 2019. Talking about change in
shareholder's equity, it can be said that it increased with higher rate in 2018 as it turned to 62.8%
from -25.4% which further reduced to 41.8% in the year 2019. Therefore, it can be said that
financial position of the company is unstable.
Vertical financial statements
The vertical financial statements of the company helps the business in determining
percentage of change in one factor of financial statements as compare to the another factor
(Kremer, 2018). It also shows trend of changes in the financial performance of company by
comparing relative changes in the factors of financial statements over year.
13

Vertical income statements of Sainsbury
Interpretation
The vertical income statement of Sainsbury shows that company's overall position is
remaining constant over the year i.e. it is improving with the constant rate. Change in gross profit
is maintained at approximately 6% over the year. On the other hand, net income of the company
is reducing with the time being. Thus, it can be said that overall profit generation capacity of it is
reducing over the year.
Vertical income statements of Tesco
14

Interpretation
The above vertical income statement is prepared on the basis of revenues of company.
Further, by analysing other elements of income statement, it can be said that overall operating
profit generation capacity of Sainsbury is increasing over the time. It changed with increasing
rates with the time. Further, change in the income statement is unstable over the year.
Vertical balance sheet of Sainsbury
15

Interpretation
The vertical statement of financial position states that Sainsbury maintain increasing
trend in the amount of assets held by it. current assets of Sainsbury changes to 26.2% in 2017
which became 32% in 2018. Further, it changed to 35.8% in 2019. Analysis of amount of
liabilities held by it shows that its total liability is also increasing with the time being. Therefore,
by making overall analysis of vertical balance sheet of Tesco, it can be said that it's total overall
financial position of the company is improving over the year.
Vertical balance sheet of Tesco
16

Interpretation
The above statement shows that change in current assets is reducing with the time,on the
other hand, change in the non current assets of Tesco plc is increasing with the time being.
Moreover, total percentage of liability of the company is reducing with the time. Thus, with this
analysis, it can be said that overall financial position of Tesco is improving with the passage of
year.
2. Explaining importance of working capital analysis of Sainsbury and Tesco
Working capital requirements shows the amount of fund that the business would require
after paying all the current liabilities of the firm. It shows difference of current assets and current
liabilities of the organisation (Corbet and et.al., 2018).. Higher amount of working capital shows
higher value of inefficiency of the firm. Thus, it can be said that Involvement of an effective
working capital management is required to improve the sustainability of firm.
Analysis of working capital requirement shows that in the year 2016-17 working capital
requirement was 1878. It increased to 2251 in the year 2017-18. The requirement of working
capital more increased to 2436 in the year 2018-19. Therefore, it can be said that company's
efficiency of working capital management is reducing over the year.
Further, with analysis of working capital requirements in Tesco, it can be seen that
efficiency of working capital management is reducing in the Tesco. Its working capital
requiremeny in the year 2015-16 was 4886. Due to change in the amount of current assets and
current liabilities it reduced to 3988 in the year 2016-17. Further, it increased to 5512 in the year
17

2017-18. Thus, through the unstable change in the working capital requirements it can be said
that Tesco's financial managers could not maintain effective working capital requirement within
the firm.
Therefore, it can be said that it is required to maintain effective management of working
capital management within the firm. Due to unstable working capital requirement, company
efficiency of managers in maintaining sufficient amount of liquidity within the firm that may
reduce the sustainability of the business in long run.
3. Showing critical analysis of cash flow statements of both companies
Cash flow statements are those that provides details regarding flow of cash and cash
equivalents within the firm. With the help of this statement, the financial managers get to know
about different areas of usage of the cash and cash equivalents and areas from which company
generates cash for fulfilling its liquidity requirement as well (Kaur, 2018). The cash flow
statement divides overall business operations in 3 broad categories namely operational activities,
financing activities and investment activities. Each category provides information regarding flow
of cash in different types of business activities.
The cash from Operational activities Contains details regarding flow of cash within
different activities regarding normal course of business operations. by evaluating cash flow from
operations of Tesco plc, it can be seen that there is unsuitability in the net cash flow derived
from operating activities. It is reducing in case of Sainsbury plc over the year.
Further, with analysis of cash flow from investing activities, it can be said that
Sainsbury's cash flow is negative in case of investing activities. Although, its cash outflow from
investing activities is reducing over the year. Whereas, in Tesco, company's cash inflow from
investing activity is in increasing trend, although it reduced with the higher amount in 2019.
Talking about financing activities, this part of cash flow statement provides details
regarding the areas from which company has generated funds for smooth working of overall
business activities (Ma and et.al., 2019) . In Sainsbury, it is reducing over the time. Cash flow
statement of the firm shows that company's outflows are more than its inflows in case of its
financing activities. Further, in case of Tesco plc, the amount of cash inflow is less than its cash
outflows. Thus, it is not efficient in maintaining flow of cash from financing activities.
By comparing cash flow statements of both Sainsbury and Tesco plc, it can be said that
cash flow position of Tesco plc is much better than that of Sainsbury. As, company's cash flow
18

position from its operating activities is showing efficiency of its financial managers, it would be
able to sustain in the market in long run.
CONCLUSION
The above study of financial statements of Tesco plc and Sainsbury shows that financial
statements of a company helps the financial managers in analysing overall efficiency of the
business. With the help of financial ratio analysis, the managers can determine the financial
performance of the business. Further, with the help of preparing horizontal and vertical financial
statements, the managers become able to identify the trend in the financial performance of the
company. Moreover, it can also be concluded that involvement of effective working capital
management within the firm helps in improving sustainability of the company. With the help of
cash flow statement, company's efficiency in maintaining sufficient amount of liquidity
maintained by the firm. Further, by analysing overall financial performance of Tesco and
Sainsbury, it can be concluded that Tesco is more financially healthy company as compare to the
Sainsbury.
19

REFERENCES
Books and Journals
Hasche, L. and et.al., 2018. SERVICE NEEDS AMONG OLDER ADULTS AT RISK FOR
FINANCIAL ELDER ABUSE. Innovation in Aging, 2(suppl_1), pp.527-527.
Suh, H. and Kang, T.S., 2019. The Impact of US Monetary Policy upon Korea’s Financial
Markets and Capital Flows: Based on TVP-VAR Analysis (in Korean). Economic Analysis
(Quarterly), 25(2), pp.132-176.
Kacker, S., and et.al., 2019. Financial impact of alternative approaches to reduce bacterial
contamination of platelet transfusions. Transfusion, 59(4), pp.1291-1299.
Kremer, S., 2018. Antecedents to sequencing: an analysis of the role of slack within financial
resources, cultural intelligence, and global mindset on sequencing strategies in Dutch and
German SMEs (Master's thesis, University of Twente).
Corbet, S., and et.al., 2018. Exploring the dynamic relationships between cryptocurrencies and
other financial assets. Economics Letters, 165, pp.28-34.
Kaur, M., 2018. Combining financial statement analysis and technical analysis to enhance stock
portfolio performance: A study of Indian stock market (Doctoral dissertation, Punjab
Agricultural University, Ludhiana).
Ma, W. and et.al., 2019. Empirical analysis of fractional differential equations model for
relationship between enterprise management and financial performance. Chaos, Solitons
& Fractals, 125, pp.17-23.
Online
Horizontal Analysis of Financial Statements. 2019. [Online]. Available through :
<https://www.readyratios.com/reference/analysis/horizontal_analysis_of_financial_statem
ents.html>.
20

APPENDIX
Ratio analysis of Sainsbury
Particulars Formula
Profitability ratio
analysis
2016 2017
2
0
1
8 2019
Gross Profit 1456 1634
1
8
8
2 2007
Net profit 471 377
3
0
9 219
Sales revenue 23506
2622
4
2
8
4
5
6 29007
GP ratio Gross profit / sales * 100 6.19%
6.23
%
6
.
6
1
% 6.92%
NP ratio Net profit / sales * 100 2.00%
1.44
%
1
.
0
9
% 0.75%
Liquidity ratio
analysis
2016 2017
2
0
1
8 2019
Current assets 4444 6322
7
8
6
6 7589
Current liabilities 6724 8573 1 11417
21

0
3
0
2
Inventory 968 1775
1
8
1
0 1929
Prepaid expenses
Quick assets 3476 4547
6
0
5
6 5660
Current ratio
Current assets / current
liabilities 0.66 0.74
0
.
7
6 0.66
Quick ratio
Current assets - (stock +
prepaid expenses) 0.52 0.53
0
.
5
9 0.50
Solvency ratio
analysis
Long-term debt 2234 2114
1
5
0
5 1003
Shareholder's equity 6365 6872
7
4
1
1 8456
Debt-equity ratio
Long-term debt /
shareholders’ equity 0.35 0.31
0
.
2
0 0.12
Efficiency ratio
analysis
2016 2017
2
0
1
8 2019
22

Cost of goods sold 22050
2459
0
2
6
5
7
4 27000
Average Inventory 983 1372
1
7
9
3 1870
Turnover or sales
revenue 23506
2622
4
2
8
4
5
6 29007
Average total assets 16755
1835
5
2
0
8
6
9 22771
Average fixed assets 12280.5
1297
2
1
3
7
7
5 15043.5
Stock turnover
ratio (In times) 22.44 17.93
1
4
.
8
3 14.44
Total assets
turnover ratio 1.40 1.43
1
.
3
6 1.27
Fixed assets
turnover ratio 1.91 2.02
2
.
0
7 1.93
Investment ratios
2016 2017
2
0
1
8 2019
Earnings per share (Net income - preferred 0.23 0.17 0 0.08
23

dividend) / Number of
shares outstanding
.
1
3
Dividends per share
Annual dividends /
Number of shares 0.12 0.12
0
.
1 0.1
Ratio analysis of Tesco
Particulars Formula
Profitability ratio
analysis
2016
2
0
1
7
20
18 2019
Gross Profit 2854
2
9
0
2
33
50 4144
Net profit 138
-
4
0
12
06 1322
Sales revenue
5443
3
5
5
9
1
7
57
49
1 63911
GP ratio Gross profit / sales * 100
5.24
%
5
.
1
9
%
5.8
3
% 6.48%
NP ratio Net profit / sales * 100
0.25
%
-
0
.
0
7
%
2.1
0
% 2.07%
Liquidity ratio analysis
2016 2
0
1
20
18
2019
24

7
Current assets
1482
8
1
5
4
1
7
13
72
6 12668
Current liabilities
1971
4
1
9
4
0
5
19
23
8 20680
Inventory 2430
2
3
0
1
22
63 2617
Prepaid expenses 319
Quick assets
1207
9
1
3
1
1
6
11
46
3 10051
Current ratio Current assets / current liabilities 0.75
0
.
7
9
0.7
1 0.61
Quick ratio
Current assets - (stock + prepaid
expenses) 0.61
0
.
6
8
0.6
0 0.49
Solvency ratio analysis
Long-term debt
1062
3
9
3
3
0
70
32 5580
Shareholder's equity 8626
6
4
3
8
10
48
0 14858
Debt-equity ratio
Long-term debt / shareholders’
equity 1.23
1
.
4
5
0.6
7 0.38
25

Efficiency ratio
analysis
2016
2
0
1
7
20
18 2019
Cost of goods sold
5157
9
5
3
0
1
5
54
14
1 59767
Average Inventory 2694
2
3
6
6
22
82 2440
Turnover or sales
revenue
5443
3
5
5
9
1
7
57
49
1 63911
Average total assets
4405
9
4
4
8
7
9
45
35
8 46955
Average fixed assets
3066
6
2
9
7
5
6
30
78
6 33757.5
Stock turnover ratio
(In times)
19.1
5
2
2
.
4
1
23.
73 24.49
Total assets turnover
ratio 1.24
1
.
2
5
1.2
7 1.36
Fixed assets turnover
ratio 1.78
1
.
8
8
1.8
7 1.89
26

Investment ratios
2016
2
0
1
7
20
18 2019
Earnings per share
(Net income - preferred dividend) /
Number of shares outstanding 0.05
-
0
.
0
1
0.4
4 0.41
Dividends per share Annual dividends / Number of shares - -
0.0
3 0.11
Balance sheet of sainsbury
27

Balance sheet of Tesco plc
28

Cash flow statement of Sainsbury
29

Cash flow statements of Tesco
30