Financial Analysis Management & Enterprise - Assignment

Financial Analysis Management
& Enterprise

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Financial statement of Sainsbury and Tesco...........................................................................1
2. Importance of analysing working capital in the organisation ..............................................15
3. Evaluation of cash flow of last 2 year of the company.........................................................17
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................19
APPENDIX....................................................................................................................................20

INTRODUCTION
Financial analysis is the process of analysing and evaluating the budget, project cost and
other expenses of transaction related to the finance to find the productivity and sustainability of
the company in given period. It can be done by visualising the financial report such as income
statement, cash flow and balance sheet. Sainsbury and Tesco are the two leading company of UK
in retail sector. The growth of the company is depended on its productivity and performance in
the market and how often people are loyal to the products and services. The aim of the study is to
present the financial performance of the Sainsbury and Tesco and analyse the result of the
company. It also focuses on the importance of working capital in the organisation. The report
highlights the cash flow statement of Sainsbury and Tesco of last two year.
MAIN BODY
1. Financial statement of Sainsbury and Tesco
Profitability ratio analysis
GP ratio
NP ratio
1

Interpretation
Profitability ratio is used by the company to evaluate the generated profit in the
organisation in particular time period. The gross profit ratio present the generated profit from the
operating activities of company and net profit ratio help to estimate the profit generate from non
operating activities. The comparison of gross profit ratio of Sainsbury and Tesco present that
Sainsbury improves its performance and generate the higher profit in compare to Tesco but the
growth ratio of Tesco is Higher than the Sainsbury because in 2015 it bears the losses and in
2019 Tesco is able to compete with Sainsbury.
The comparison of net profit ratio of Tesco and Sainsbury present that in last 4 year
Tesco generate the higher profit. The net profit of Sainsbury is decline from the year 2016 to
2019 but the net profit of the tesco is increasing day by day which help them to maintain the
position in the market.
Liquidity ratio analysis
Current ratio
2

Quick ratio
Interpretation
Liquidity ratio is used determine the liquidity of the company or ascertain its financial
position. It provides the information to determine the ability of the debtor to pay the debt of the
company within the debt period. The current ratio of Sainsbury and tesco is increasing in the
initial year but in 2019 it declines. But the current ratio of both company is below to the ideal
current ratio which is 2:1.
The quick ratio of Sainsbury and Tesco is declining. In initial year the ratio of the
company is increasing but in late year it start to decline. It presents that the company is able to
pay the debt of the organisation. But from the comparison of the company financial position it
can be found that the decline ratio of Tesco is below to the Sainsbury. The quick ratio of
Sainsbury is decline with higher rate.
The liquidity ratio of the company is declining which present that the managers has to
control the activity and increase the cash level to paying the debt of the company. They also have
to manage the liability and collect the debt from the debtors to maintain the current assets.
3

Solvency ratio analysis
Debt-equity ratio
Year / companies Sainsbury Tesco
2015 0.44 1.49
2016 .35 1.23
2017 .31 1.45
2018 .20 0.67
2019 .12 .38
Interpretation
The solvency ratio of the company is used to determine that the company is able to pay
the long term or short debt or not. It was also used by the lenders and investors to take the
decision of investment in the company by estimating its cash level in the company. The debt
equity ratio of Sainsbury and Tesco is declining from the year 2015 to 2019 which present that
the company is able to manage its debt by its equity.
From the above comparison it can be concluded that the declining ratio of Sainsbury is
quite higher to the Tesco which indicate that Tesco is performed better in market in compare to
Sainsbury performance. The declining ratio of company indicate that manager has to manage the
debt and prepare the various plan and strategies to increase the equity of the firm by attracting
the investors and lenders. They also have to reduce the debt of the company by collecting them
from the debtors and regulate the period of paying debt.
Efficiency ratio analysis
Inventory turnover ratio
Year / companies Sainsbury Tesco
2015 22.63 21.78
2016 22.44 19.15
2017 17.93 22.41
2018 14.83 23.73
2019 14.44 24.49
Total assets turnover ratio
4

Year / companies Sainsbury Tesco
2015 1.44 1.41
2016 1.40 1.24
2017 1.43 1.25
2018 1.36 1.27
2019 1.27 1.36
Fixed assets turnover ratio
Year / companies Sainsbury Tesco
2015 1.98 1.93
2016 1.91 1.78
2017 2.02 1.88
2018 2.07 1.87
2019 1.93 1.89
Interpretation
Efficiency ratio of the company indicate the performance of the manager that how they
are able to manage the assets and liabilities of the company. It helps to determine the financial
position of company by evaluating the assets and liabilities. The inventory turnover ratio of
Sainsbury is declining from the last year which present that the inventory level of the company is
declining. The higher efficiency ratio of company suggest that the company is able to use the
assets and liabilities.
The inventory turnover ratio of Tesco is increasing which present that Tesco is efficiently
managed the inventory level in the stores and warehouses. The higher the ratio suggest the higher
efficiency.
Investment ratios
Earnings per share
Year / companies Sainsbury Tesco
2015 -0.09 -2.12
2016 .23 0.05
2017 .17 (0.01)
2018 .13 .44
5

2019 .08 .41
Dividends per share
Year / companies Sainsbury Tesco
2015 0.1 -
2016 .12 -
2017 .12 -
2018 .1 .03
2019 .1 .11
Interpretation
The investment ratio is used to provide the information to the investor regarding the
investment decision. It helps them to take the decision that whether they have to invest in the
organisation of not. It also presents the risk and uncertainty of income generated from the
investment. The earning per share and dividend per share ratio of Sainsbury is decreasing. It
presents that if investor invest in Sainsbury than the income generated from the investment is
also reducing.
The earning per share ratio and dividend per share of the Tesco is decreasing. There is
frequent change in the investment ratio of Tesco which indicate that there is high level of risk
and uncertainty in the organisation and they have to adopt the new policies and strategies to
increase the investment from the investors.
Horizontal analysis
The horizontal analysis of income statements refers to compare the income level of the
organisation from its previous year performance. It helps the manager to analyse the trend of
growth in the company. It also provides brief knowledge to m manager about the company
performance.
Sainsbury: Income statement
6

Interpretation
The income statements of Sainsbury present that the performance of the company is
reduces year by year. The profit of t eh company is reduces so they have to manage the income
and expenditure of the company. The reducing income level affect the image of Sainsbury in the
market. It indicates that the director and manger of the company has to analyse the performance
and prepare the proper plan and strategies to improve the performance.
7

Tesco: Income statement
8

Interpretation
The income statement of the company is help to compare the performance from the past
year performance which indicate that the performance of the company is declining due to the
reducing income level. It indicates that the Tesco has to manage the activities and expenditure to
increase the net income.
Sainsbury: Balance sheet
Particulars 2015 2016
%
chan
ge in
2016
2017 % change
in 2017 2018
%
change
in 2018
Assets
Total current
assets 4,505 4,444
-
1.35
%
6,322 42.26% 7,866 24.42%
Total non-
current assets. 12,032 12,529 4.13
% 13,415 7.10% 14,135 5.37%
Total assets 16,537 16,973 2.64
% 19,737 16.30% 22,001 11.47%
Liabilities and
stockholders
equity
9

Total current
liabilities 6,923 6,724
-
2.87
%
8,573 27.50% 10,302 20.20%
Total non-
current
liabilities
4,075 3,884
-
4.69
%
4,292 10.50% 4,288 -0.09%
Total
liabilities 10,998 10,608
-
3.55
%
12,865 21.30% 14,590 13.41%
Total
stockholders'
equity 5,539
6,365 14.91
% 6,872 8.00% 7,411 7.84%
Total
liabilities and
stakeholders
equity
16,537 16,973 2.64
% 19,737 16.30% 22,001 11.47%
Interpretation
The horizontal balance sheet of the company present that the financial position of the company
is decreasing year by year. It also indicates the manager has to evaluate the productivity and
activity of the company to improve financial position in market.
Tesco: Balance sheet
10

Interpretation
The horizontal balance sheet of Tesco indicate that the financial position of the company
is reduced in 2018 with the higher rate. It refers that the Tesco has to manage the assets and
liabilities of the company by the proper planning and execution of strategies.
Vertical analysis
Vertical analysis refers to analyse the financial activity by the revenue earned or
generated by company in particular time period.
Sainsbury: Income statement
Particulars 2015 % of
2015 2016 % of
2016 2017 % of
2017 2018 % of
2018
Revenue 23,775 100.0% 23,50
6
100.0
% 26,224 100.00
%
28,45
6
100.00
%
Cost of 22,567 94.9% 22,05 93.8% 24,590 93.77% 26,57 93.39%
11

revenue 0 4
Gross profit 1,208 5.1% 1,456 6.2% 1,634 6.23% 1,882 6.61%
Total
operating
expenses
1,127 4.7% 749 3.2% 992 3.78% 1,364 4.79%
Operating
income 81 0.3% 707 3.0% 642 2.45% 518 1.82%
Interest
Expense 154 0.6% 142 0.6% 130 0.50% 135 0.47%
Other income 1 0.0% 0.0% 0.00% 26 0.09%
Other
expenses 0.0% 17 0.1% 9 0.03% 0.00%
Income before
income t... -72 -0.3% 548 2.3% 503 1.92% 409 1.44%
Provision for
income t... 94 0.4% 77 0.3% 126 0.48% 100 0.35%
Net income -166 -0.7% 471 2.0% 377 1.44% 309 1.09%
Tesco: Income statement
Particulars 2015 % of
2015 2016 % of
2016 2017 % of
2017 2018 % of
2018
Revenue 62,284 100.00
%
54,43
3
100.00
% 55,917 100.00
%
57,49
1
100.00
%
Cost of
revenue 64,396 103.39
%
51,57
9 94.76% 53,015 94.81% 54,14
1 94.17%
Gross profit -2,112 -3.39% 2,854 5.24% 2,902 5.19% 3,350 5.83%
Total
operating
expenses 2,695
4.33% 1,874 3.44% 1,734 3.10% 1,786 3.11%
Operating
income -4,807 -7.72% 980 1.80% 1,168 2.09% 1,564 2.72%
Interest
Expense 499 0.80% 498 0.91% 517 0.92% 431 0.75%
Other income 0.00% 0.00% 0.00% 165 0.29%
Other
expenses 1070 1.72% 320 0.59% 506 0.90% 0 0.00%
Income before
income t... -6,376 -
10.24% 162 0.30% 145 0.26% 1,298 2.26%
Provision for
income t... -657 -1.05% -54 -0.10% 87 0.16% 306 0.53%
12

Net income -5,741 -9.22% 138 0.25% -40 -0.07% 1,206 2.10%
Interpretation
Vertical income statement of Sainsbury present that the company is able to generate the
income and manage the expenditure in the organisation. It also indicates the manager are able to
control the organisation activities to generate the income. The vertical income statement of Tesco
indicates that the financial performance and efficiencies of the company is decreasing and
fluctuating with the higher rate.
Sainsbury: Balance sheet
Particulars 2015
%
of
201
5
2016 % of
2016 2017 % of
2017 2018 % of
2018
Assets
Total
current
assets
4,505 27.2
% 4,444 26.2% 6,322 32.0% 7,866 35.8%
Total non-
current
assets.
12,032 72.8
% 12,529 73.8% 13,415 68.0% 14,135 64.2%
Total assets 16,537 100.
0% 16,973 100.0% 19,737 100.0% 22,001 100.0%
Liabilities
and
stockholders
equity
Total
current
liabilities
6,923 41.9
% 6,724 39.6% 8,573 43.4% 10,302 46.83%
13

Total non-
current
liabilities
4,075 24.6
% 3,884 22.9% 4,292 21.7% 4,288 19.49%
Total
liabilities 10,998 66.5
% 10,608 62.5% 12,865 65.2% 14,590 66.32%
Total
stockholders
' equity 5,539
33.5
% 6,365 37.5% 6,872 34.8% 7,411 33.68%
Total
liabilities
and
stakeholders
equity
16,537 100.
0% 16,973 100.0% 19,737 100.0% 22,001 100.00
%
Tesco: Balance sheet
2015 % of
2015 2016 % of
2016 2017 % of
2017 2018 % of
2018
Assets
Total
current
assets
11,958 27.0% 14,828 33.8
% 15,417 33.6% 13,726 30.6%
Total non-
current
asse...
32,256 73.0% 29,076 66.2
% 30,436 66.4% 31,136 69.4%
Total assets 44,214 100.0
% 43,904 100.
0% 45,853 100.0% 44,862 100.0
%
Liabilities
and stockh...
14

Total
current
liabilit...
19,810 44.8% 19,714 44.9
% 19,405 42.3% 19,238 42.9%
Total non-
current
liab...
17,333 39.2% 15,564 35.5
% 20,010 43.6% 15,144 33.8%
Total
liabilities 37,143 84.0% 35,278 80.4
% 39,415 86.0% 34,382 76.6%
Total
stockholders
' equity
7,071 16.0% 8,626 19.6
% 6,438 14.0% 10,480 23.4%
Total
liabilities
and
stakeholders
equity
44,214 100.0
% 43,904 100.
0% 45,853 100.0% 44,862 100.0
%
Interpretation
The vertical balance sheet of Sainsbury and Tesco present that the overall financial
position in the market is improving and they are able to manage the assets and liability of the
company but the financial position of tesco is change with the higher rate in compare to the
change in the financial position of Sainsbury.
2. Importance of analysing working capital in the organisation
Working capital : The difference between the current assets (cash, account receivables, debtors,
inventories, current assets etc.) and current liability (account payable, bank overdraft, creditors
etc.) is known as working capital or net working capital. The management of working capital is
required by the organisation to evaluate the financial health and operation of the company. It also
helps the organisation to control and monitor the working capital components (Ruggiero, 2015).
Sainsbury and Tesco operate their business in retail industry which requires maintaining the
inventory and cash in the company to pay the short term debts and fulfil the demand of the
15

customer by providing require goods and services on time. The importance of working capital in
the organisation are as follows :
Importance
 Sainsbury and Tesco analyse the working capital of the company to maximize or increase
the efficiency of the product and services provided by the firm.
 The management of the working capital of Sainsbury and Tesco in the organisation help
them to improve the earnings and profitability of the organisation by evaluating the
current assets and recover the debt from the debtor within the debt period.
 Inventory management and determination of inventory level in the organisation of
Sainsbury and Tesco help them to maintain the required inventory in the company and
reduces the warehouse maintenance cost.
 Management of working capital is important to the Sainsbury and Tesco because it helps
them to earn the market share and increase the share value in the market by paying the
expenses and debt of the company within proper time.
 It helps the company to ascertain its financial position and provide the different ways to
pay the debt of the company and improve its market image to earn the higher profit.
Sainsbury and Tesco are the leading company they require managing the position in t he
market to compete with the competitors. The management of working capital help them
to manage their position.
 WC management is also important for Sainsbury and tesco to evaluate the liquidity of the
organisation. It does not provide the guarantee to paying the debt of t eh company but
help them to evaluate the debt and maintain the cash level (Sainsbury, 2017).
 The positive working capital shows the current assets of the company is grater than its
liability. Positive WC of Sainsbury and Tesco help them to pay the debt on time. But it
does not provide the guarantee to pay the debt in cash.
 It helps the company to manage the current assets and liabilities by regulating the flow of
transaction and debt of the company which help them to increase the earning by
controlling the unnecessary transaction.
16

 It is also important for the organisation to measure the reason behind the excessive
working capital and manage those assets or transaction which are not invested in the any
business. It helps Sainsbury and Tesco to regulate the store to measure the inventory and
available cash to pay the debt.
3. Evaluation of cash flow of last 2 year of the company
Sainsbury
The cash flow statement of Sainsbury present that the liquidity ratio of the company is
declining year by year. Further the cash level of the company is decreasing from 2018 which
present that Sainsbury has to manage the cash level in the company to pay the short term and
long term debt (Utami, 2018). The cash generated from the operating activities is also reduced
which indicate that Sainsbury has to develop the different policies and strategies to manage the
cash level and attract the customer and investor to generate the income in the organisation. The
decreasing cash flow of Sainsbury also affects its efficiency level and affect the performance in
the market.
Tesco
The cash flow statement of tesco present that from the last two year the cash level of the
company is decreasing which present that the company has to manage the cash level in the
organisation. Cash flow statement present that the cash and cash equivalent in the organisation is
decreasing. It indicates that they have to manage the cash level by developing the new strategies
and policies to attract the customer and investors. The cash generated from the operating and
financing activity ion last two year is also decreasing (Randall, 2017.). The rate of decreasing
cash generated from financing activity is higher than the operating activity which present that the
manager had to control and monitor the performance of the company and regulate the financial
position on regular basis so they can improve the financial position and pay the debt of company
on time.
CONCLUSION
The study of the financial data summarizes the performance of Sainsbury and Tesco in last 4
year. The comparison of the ratios of Tesco and Sainsbury indicate the financial position of the
company in the market and their ability to pay the debt and liabilities of the organisation. It can
17

be concluded from the study that Tesco and Sainsbury has to manage the debt level and adopt the
different strategies and policies to attract the investors towards the company to generate the
higher income. It can also summarise from the study that company require managing the
working capital of the company to reduces the debt of the organisation. Management of working
capital help to increase the efficiency of the company. It can be concluded that the company
require managing the cash level in the organisation to meet the day to day requirement. s
18

REFERENCES
Books and Journals
Randall, D.C., 2017. Two futures: financial and practical realities for parents of living with a life
limited child. Comprehensive child and adolescent nursing, 40(4). pp.257-267.
Ruggiero, V., 2015. Financial crime after the crisis in the UK. Archivos de Criminologia,
Seguridad Privada y Criminalistica. pp.33-48.
Sainsbury, R., 2017. 'WAMBLING PINS'AND'DIM MINDS': OLDER PEOPLE AND
AGEING IN TWO ON A TOWER. The Thomas Hardy Journal, 33. pp.100-142.
Utami, M.W., 2018. THE ROLE OF NATIONAL CULTURE IN THE EMERGENCE OF
FINANCIAL STATEMENT FRAUD: COMPARISON OF JAPANESE AND BRITISH
CULTURE IN THE CASES OF OLYMPUS AND TESCO.
19

APPENDIX
Ratio analysis of Sainsbury
Particulars Formula
Profitability ratio
analysis
2016 2017 2018 2019
Gross Profit 1456 1634 1882 2007
Net profit 471 377 309 219
Sales revenue 23506 26224 28456 29007
GP ratio
Gross
profit /
sales * 100 6.19% 6.23% 6.61% 6.92%
NP ratio
Net profit /
sales * 100 2.00% 1.44% 1.09% 0.75%
Liquidity ratio analysis
2016 2017 2018 2019
Current assets 4444 6322 7866 7589
Current liabilities 6724 8573 10302 11417
Inventory 968 1775 1810 1929
Prepaid expenses
Quick assets 3476 4547 6056 5660
Current ratio
Current
assets /
current
liabilities 0.66 0.74 0.76 0.66
Quick ratio
Current
assets -
(stock +
prepaid
expenses) 0.52 0.53 0.59 0.50
Solvency ratio analysis
Long-term debt 2234 2114 1505 1003
Shareholder's equity 6365 6872 7411 8456
Debt-equity ratio Long-term 0.35 0.31 0.20 0.12
20

debt /
shareholder
s’ equity
Efficiency ratio analysis
2016 2017 2018 2019
Cost of goods sold 22050 24590 26574 27000
Average Inventory 983 1372 1793 1870
Turnover or sales revenue 23506 26224 28456 29007
Average total assets 16755 18355 20869 22771
Average fixed assets 12280.5 12972 13775 15043.5
Stock turnover ratio (In
times) 22.44 17.93 14.83 14.44
Total assets turnover
ratio 1.40 1.43 1.36 1.27
Fixed assets turnover
ratio 1.91 2.02 2.07 1.93
Investment ratios
2016 2017 2018 2019
Earnings per share
(Net income
- preferred
dividend) /
Number of
shares
outstanding 0.23 0.17 0.13 0.08
Dividends per share
Annual
dividends /
Number of
shares 0.12 0.12 0.1 0.1
Ratio analysis of Tesco
Particulars Formula
Profitability ratio
21

analysis
2016 2018 2019
Gross Profit 2854 3350 4144
Net profit 138 1206 1322
Sales revenue 54433
5749
1 63911
GP ratio
Gross profit / sales *
100 5.24%
5.83
% 6.48%
NP ratio Net profit / sales * 100 0.25%
2.10
% 2.07%
Liquidity ratio analysis
2016 2018 2019
Current assets 14828
1372
6 12668
Current liabilities 19714
1923
8 20680
Inventory 2430 2263 2617
Prepaid expenses 319
Quick assets 12079
1146
3 10051
Current ratio
Current assets / current
liabilities 0.75 0.71 0.61
Quick ratio
Current assets - (stock
+ prepaid expenses) 0.61 0.60 0.49
Solvency ratio analysis
Long-term debt 10623 7032 5580
Shareholder's equity 8626
1048
0 14858
Debt-equity ratio
Long-term debt /
shareholders’ equity 1.23 0.67 0.38
Efficiency ratio
analysis
2016 2018 2019
Cost of goods sold 51579 5414 59767
22

1
Average Inventory 2694 2282 2440
Turnover or sales
revenue 54433
5749
1 63911
Average total assets 44059
4535
8 46955
Average fixed assets 30666
3078
6
33757.
5
Stock turnover ratio
(In times) 19.15 23.73 24.49
Total assets turnover
ratio 1.24 1.27 1.36
Fixed assets turnover
ratio 1.78 1.87 1.89
Investment ratios
2016 2018 2019
Earnings per share
(Net income - preferred
dividend) / Number of
shares outstanding 0.05 0.44 0.41
Dividends per share
Annual dividends /
Number of shares - 0.03 0.11
cash flow statements of Sainsbury
23

24

cash flow statements of Tesco
25