Financial Analysis Management & Enterprise Assignment Solution

Financial Analysis
Management &
Enterprise

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Vertical and horizontal ratio analysis of the financial Statements of two companies........3
2. Working capital analysis..................................................................................................20
3. Evaluation of the Cash Flow............................................................................................21
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................24

INTRODUCTION
The financial analysis can be defined as a kind of technique which is related to the
assessing and interpreting the financial reports and statements of companies (Langston and
Lauge-Kristensen, 2013). This is very important for companies to analyse the financial
transactions of organisations so that financial position of organisations can be evaluated. As well
as proper financial analysis leads to effective management of financial situation of company.
Herein, the project report Sainsbury's and Tesco company has been chosen. As well as in the
project report, financial performance of both companies is analysed. In this analysis vertical and
horizontal of financial statements of two companies is included . Along with role of analysing
the working capital of both the companies in decision making is mentioned. In the end of project
report, annual cash flow of above companies is analysed for two years. The aim of project report
is to recommending to Asian food manufacture to choose the Tesco and Sainsburry's company as
client.
MAIN BODY
1. Vertical and horizontal ratio analysis of the financial Statements of two companies.
The ratio analysis can be defined as a kind of technique which is related to the analysing
the financial position of companies with the use of various types of ratio (WANG and WANG,
2012). Basically, the ratio analysis consists a wide range of ratios that are being calculated and
interpreted by companies for purpose of decision making. Herein, below some types of ratios of
Sainsburry's and Tesco company are mentioned below:
Profitability ratio- The profitability ratios can be defined as a kind of ratios which are being
calculated to provide information about level of profits earned by companies at the end of any
particular time period. This ratio consists some types of ratios which are as follows:
 Gross profit ratio- It is a kind of ratio that is being computed by companies to get
information about profitability of various activities regarding to the production (Pinto,
and Garvey, 2016). As well as this ratio is being calculated by this formula: Net sales/
Gross profit. Herein, below gross profit ratio of above two companies is mentioned below
for four years:

GP ratio
Year / companies Sainsbury Tesco
2015-16 6.19% 5.24%
2016-17 6.23% 5.19%
2017-18 6.61% 5.83%
2018-19 6.92% 6.48%
Interpretation: As per the above calculation of Sainsbury's gross profit ratio, it can be
analysed that company's gross profit ratio is increasing continuously. Such as in year 2015-16, it
was of 6.19% . Same as in the 2017-18 year their gross profit ratio is of 6.61%. So it can be
interpreted their financial position is better in terms of gross profit (.Annual report of
Sainsbury’s, 2015-16).
In the aspect of Tesco company, their GP ratio is of 5.24% in year 2015-16 as well as in
next year it decreased and became 5.19%. While in year 2017-18, it was of 5.83%, so it can be
interpreted that their gross profit ratio is inconsistent (Annual report of Tesco, 2015-16).
 Net profit ratio- This can be defined as a kind of ratio which is being calculated by
companies to get the information about effectiveness of business activities. In this ratio,

net income of companies for a particular year is calculated in terms of net profit ratio.
The formula of calculating this ratio is: (Net sales/ Net profit). Herein, below four year's
net profit ratio is mentioned below:
NP ratio
Year / companies Sainsbury Tesco
2015-16 2% 0.25%
2016-17 1.44% -0.07%
2017-18 1.09% 2.10%
2018-19 0.75% 2.07%
Interpretation: As per the above net profit ratio of Sainsbury's net profit ratio, it can be
analysed that company's net profit ratio is inconsistent. This is so because in year they were
getting the net profit of 2% in year 2015-16 which was changed in profit and became 1.44 in
year 2016-17. Then in next years in again decreased and became 1.9% in further years. So
overalll it can be interpreted that their net profit ratio is inconsistent.
While in the Tesco company, their was net profit of 0.25% in the year 2015-16 which
changed and became as loss of 0.07% in the year 2016-17. As well as in year 2017-18 it again
increased and became 2.10% and in year 2018-19 in raised to 2.07%. So it can be interpreted that
their net profit ratio is inconsistent. Due to more increasing and decreasing in net profits.
Liquidity ratio - The liquidity ratio is a kind of ratio which is being calculated to analysis the
liquidity position of companies (Michalski, 2013). In other words, with the use of it

organisations can determine about need of liquidity for day to day activities. This ratio consists
two types of ratios which are current ratio and liquidity ratio that are mentioned below:
 Current ratio- This is a kind of ratio which presents the relation between the current
assets and liabilities. The ideal current ratio is of 2:1 which means companies should
have 200% assets to pay 100% liabilities or debts. Along with this ratio is calculated by
formula which is (current assets / current liabilities). Below current ratio of both the
companies is mentioned
Year / companies Sainsbury Tesco
2015-16 0.66 0.75
2016-17 0.74 0.79
2017-18 0.76 0.71
2018-19 0.66 0.61
Interpretation: On the basis of above current ratio analysis of Sainsbury company, it is
being analysed that company's current ratio is not in ideal condition. This is why because in year
2015-16 their current ratio was of 0.66 which increased in next years continuously like in year

2016-17, it was of 0.74. As well as in last two years this ratio was of 0.76 and 0.66. Hence, it can
be interpreted that company's current ratio is not in ideal condition but their ratio is increasing
continuously except last year.
In the Tesco company, their current ratio is of 0.75 in year 2015-16. As well as in next
year 2016-17, it was of 0.79 but in year 2017-18, it decreased in became 0.71. So overall, it can
be interpreted that company's liquidity position is weak because they do not have enough current
assets to pay their creditors. Along with the company is far away from ideal position of current
ratio which is of 2:1.
 Quick ratio- This can be defined as a kind of ratio that presents the relation between the
quick assets and current liabilities (Yinping, 2015). As well as it is being calculated by a
particular formula which is: [Current assets- (stock+ prepaid expenses)/ Current
liabilities]. Herein, below four years.
Quick ratio
Year / companies Sainsbury Tesco
2015-16 0.52 0.61
2016-17 0.53 0.68
2017-18 0.59 0.6
2018-19 0.5 0.49
Interpretation: As per the quick ratio of Sainsbury's company it can be analysed that their
quick ratio is increasing continuously. It is so because in year 2015-16, this was of 0.52 which

increased in further years. In 2016-17, it was of 0.53 as well as in next it became of 0.59. In the
current year 2018-19, their quick ratio was of 0.50. So it can be interpreted that company's quick
ratio is not in ideal condition which is of 1.5:1.
On the other hand, in the Tesco company their quick ratio is of 0.61 in year 2015-16
which is increasing and decreasing in next years. Like in year 2016-17, it was of 0.68 which
increased then previous year. As well as in next year 2017-18, it decreased and became of 0.6 but
in next year again it decreased and became of 0.49. It shows that their quick ratio is inconsistent.
So it can be interpreted that company's quick ratio is not in better condition due to below of ideal
standard of ratio that is of 1.5:1. In the comparative manner, both company's quick ratio is not so
good because for better position companies need 1.5% assets to pay 1 % of current liabilities.
Though as per the individual performance, the Tesco company's liquidity position is better as
compare to Sainsburry's. For example in time duration between 2015-18, Sainsbury's ratios are
just below 0.60 but Tesco company's ratios are more then 0.60 and highest is of 0.68 (Annual
report of Tesco, 2016-17). Hence, it can be interpreted that Tesco's liquidity position is better
then Sainsburry.
Solvency ratio- It can be defined as a kind of ratio which is related to the determining the
long term liabilities of companies (Zhao, Hwang, Pheng Low, 2014). In other words, this ratio is
beneficial for assessing the about way in which organisations are meeting to their debts. In this
context if this is ratio is maximum then it indicate that company's financial position is in better
condition. Herein, below various types of solvency ratio are mentioned below:
 Debt- equity ratio- This may be defined as a type of ratio that defines the relation
between the debt and equity. The debt to equity ratio analyse about availability of
equities to pay the debts of company. Eventually, the ideal debt to equity ratio should be
1.5:1 which means company should have 1.5% equities to pay the 1% debtors. As well as
this ratio is being calculated by following formula which is: (total debts/ shareholders
fund). Herein, below four years debt to equity ratio is mentioned below of above two
companies:
Debt-equity ratio
Year / companies Sainsbury Tesco
2015-16 0.35 1.23

2016-17 0.31 1.45
2017-18 0.2 0.67
2018-19 0.12 0.38
Interpretation - As per the above ratios of Sainsbury's company it can be analysed that
company's debt to equity ratio is decreasing continuously. Like in year 2015-16, this ratio is of
0.35 which decreased continuously and in year 2016-17 it became just 0.31. Apart from it, in
next years this ratio decreased again and became 0.2 and 0.12 respectively. So it can be
interpreted that their debt to equity ratio is weak which shows that their liquidity position is not
so good (Annual report of Sainsbury’s, 2016-17).
In the aspect of Tesco company, their debt to equity ratio is inconsistent which is
increasing and decreasing. Like in year 2016, their ratio was of 1.25 which increased in next year
and became 1.45, further in next year it again decreased and became 0.67. In last year 2019, it
decreased by huge criteria and became just of 0.38. Hence, it can be interpreted that company's
ability to pay the liabilities is weak (.Annual report of Tesco, 2018-19).

 Interest coverage ratio- This can be defined as a kind of ratio which is related to the
analysing about company's efficiency to pay the interest related expenses (Witt, Brooke
and Buckley, 2013). This ratio is being calculated by formula which is :(earning before
interest and tax/ interest expenditures). The ideal ratio is being considered 2.
Particular 2018(in £) 2017(in £) 2016(in £) 2015(in £)
Sainsbury's:
Earning before interest and tax
Interest Expense
Interest coverage ratio
518
140
3.7
642
136
4.72
707
167
4.23
81
180
0.45
TESCO:
Earning before interest and tax
Interest Expense
Interest coverage ratio
1566
431
3.63
1154
517
2.23
971
498
1.95
(4832)
499
(9.68)
2018 2017 2016 2015
-12
-10
-8
-6
-4
-2
0
2
4
6
Sainsburry
Tesco
Interpretation: On the basis of above ratios of Sainsbury's interest coverage ratio is of
0.45 in year 2015 which raised in next year and became 4.23. As well as in year 2017, it was of
4.72 but in next year again it decreased and became 3.7. So overall company's ratio was

fluctuating in four years continuously. Hence, it can be interpreted that company's situation is
better except year 2015 because in all the years their ratio is above 2.
In the aspect of Tesco company, their interest coverage ratio is of (9.68) in negative
manner which increased in next year and became 1.95. Along with in year 2017, this ratio was of
2.23 that increased in year 2018 and became 3.63. So overall company's solvency condition is
average.
Horizontal analysis- This can be defined as a kind of ratio which is related to evaluation
of trend situation (Zhiyong, 2013). This kind of analysis done with the use of income statement
and balance sheet. Eventually, the main objective of this technique is to analysing the difference
in the financial statements during a particular time period. In this a year is selected which is
called as base year.
Herein, below horizontal analysis is done with the use of income statement and balance sheet of
both above companies:

Interpretation: On the basis of horizontal analysis of both the companies it can be analysed
that net profits of companies are decreasing continuously in compare to base year. Herein, the
base year is take of 2015-16. Apart from the similarities, herein below differences in the of above
analysis is mentioned below:
 As per the above analysis, it can be analysed that Tesco company's sales revenue is
flexing in a positive manner. This is so because change is a beneficial manner which is of
2.73% , 2.18% and 11.17% significantly. Apart from it, in the aspect of Sainsburry
company, their change in the sales revenue is decreasing. This is so because change is
decreasing in such manner: 11.6% then 8.5% and in end it decreased by 1.9%.
Eventually, it is important for Asian food manufacturer to get information about sales
revenue of both organisations. This is why because it is necessary to determine the ability
of selling of products and services.

 Additionally, it can be seen from above analysis is that Tesco company's changes in sales
is increasing positively. While in Sainsburry's company, the changes are decreasing in a
negative manner.
Vertical analysis- This is a kind of technique which is related to the analysis of performance
of the companies over years by taking one variable of financial statement as a variable by which
it can determine the way in that variables are moving in relation to base variable (Evdoshenko
and Kotenev,2015). Below sales revenue is considered as base variables while rest of variables
are analysed in relation of sales:

Interpretation- On the basis of above vertical analysis, it can be analysed that expenditures
are increasing in similar way of both companies. This is so because due to intense competition
both companies are doing expenditures on marketing. Apart from these similarities, companies
have some differences too. Like in the context of Sainsbury's company their profits are
increasing continuously and sales is decreasing. On the other hand, in Tesco company, their sales
and profits both are increasing in a significant manner. So in comparison Tesco is effective
because of their way of managing sales and expenses effectively.
2. Working capital analysis.
This analysis can be defined as a kind of analysis which is used to assessing the liquidity
condition of a company (Elgharbawy and Abdel-Kader, 2013). Under it, difference between
current assets and liabilities is measured that helps in determining the liquidity position.
Eventually, with the help of this type of analysis companies can evaluate the need of cash to pay
day to day expenditures. This is also named by net working capital analysis. Herein, below
working capital analysis for four years(2015-18) of Sainsburry and Tesco company is mentioned
below:

Interpretation - As per the above analysis of working capital of both companies it can be
analysed that their liquidity position is not better. This is so because their current assets are less
then to the current liabilities. In comparison, Sainsburry company's working capital situation is in
good condition. This is why because there is less difference between current assets and liabilities
in Sainsburry company while in Tesco company, there is huge difference between current assets
and liabilities in four years. So it can be interpreted that both companies' liquidity position is
weak but in compare Sainsburry is in better situation then to Tesco.
Importance of analysing working capital:
 The working capital analysis is important in assessing the return value of companies on
the invested money.
 Additionally, it is also important for evaluating solvency condition of companies.
 As well as this analysis is crucial for determining the need of working capital to pay day
to day liabilities.
So these are the importance of working capital analysis of both companies. Such as for Asian
food manufacturers this analysis can become a framework to chose one company from both. As
per the above analysis Sainsburry company is in better condition because there is less difference
between current assets and liabilities.
3. Evaluation of the Cash Flow.
The cash flow statement can be defined as a kind of statement that defines about in and
out flow of cash in a company for a particular time period. Basically, in the cash flow there are
three types of activities are included which are financing, investing and operating activities.
Herein, below cash flow analysis of above companies is mentioned below:

For Tesco: in GBP million
Year Cash flow
2018 Operating activities: 2782
Investing activities: 666
Financing activities: (3236)
2019 Operating activities: 1966
Investing activities: (1143)
Financing activities: (1981)
For Sainsburry: in GBP million
Year Cash flow
2018 Operating activities: 1365
Investing activities: (470)
Financing activities: (244)
2019 Operating activities: 618
Investing activities: (474)
Financing activities: (752)
Interpretation - As per the above table of cash flow of Tesco company, it can be
analysed that in year 2018, company is getting inflow of cash from both activities operating and
investing. While in the financing activities, there is outflow of cash which is of (3266). Though
in year 2019, there is out flow of cash from investing and financing activities.
In the Sainsburry company, there is inflow of cash only from operating activities of 1365
and 618 in year 2018 and 2019 respectively. While in the financing and investing activities there
is out flow of cash in both the years that shows negative aspect of company. So it can be guided
to the Asian food manufacturer to chose Tesco company because their cash flow condition is in
better condition (Annual report of Sainsbury’s, 2018-19).

CONCLUSION
As per above project report it can be concluded that financial analysis is very important
for companies because this helps in effective decision making. In the project report, different
kind of ratios are concluded such as profitability ratio, liquidity ratio, solvency ratio etc. are
concluded. Along with horizontal and vertical analysis is also concluded of income statement
and balance sheets. Apart from it, cash flow and working capital analysis is also done in the
report. As well as to Asian food manufacturer should chose the Tesco company because their
working capital is in good condition.

REFERENCES
Books and journals:
Langston, C. and Lauge-Kristensen, R., 2013. Strategic management of built facilities.
Routledge.
WANG, J. F. and WANG, Y., 2012. Research on the Problem of Development of Small-Micro
Enterprise in China [J]. Commercial Research. 9.
Pinto, C. A. and Garvey, P. R., 2016. Advanced risk analysis in engineering enterprise systems.
CRC Press.
Michalski, G., 2013. Płynność finansowa w małych i średnich przedsiębiorstwach (Financial
Liquidity Management in Small and Medium Enterprises). Plynnosc Finansowa w
Malych i Srednich Przedsiebiorstwach, PWN.
Yinping, Z., 2015, December. The research of the enterprise financial model based on
information entropy and correlation model reorganization theory. In 2015 International
Conference on Intelligent Transportation, Big Data and Smart City. (pp. 910-913).
IEEE.
Zhao, X., Hwang, B. G., Pheng Low, S. and Wu, P., 2014. Reducing hindrances to enterprise
risk management implementation in construction firms. Journal of Construction
Engineering and Management. 141(3). p.04014083.
Witt, S. F., Brooke, M. Z. and Buckley, P .J., 2013. The Management of International Tourism
(RLE Tourism). Routledge.
Zhiyong, K., 2013. Technology choice, input intensity, and enterprise innovation performance
[J]. Science Research Management. 6.
Evdoshenko, V .V. and Kotenev, A .D., 2015. KEY PRINCIPLES OF FUNCTIONING OF
CRISIS MANAGEMENT AT THE ENTERPRISE. In Актуальные проблемы науки:
от теории к практике (pp. 72-75).
Song, B., Zhu, J.M. and Li, X., 2015. The Research of Enterprise Financial Early Warning Based
on Big Data. Journal of Central University of Finance & Economics. 6. pp.55-64.
Elgharbawy, A. and Abdel-Kader, M., 2013. Enterprise governance and value-based
management: a theoretical contingency framework. Journal of management &
governance. 17(1). pp.99-129.
Online
Annual report of Tesco 2015-16. 2016. [Online]. Available through:
<https://www.tescoplc.com/media/264194/annual-report-2016.pdf>
Annual report of Tesco 2016-17. 2017. [Online]. Available through:
<https://www.tescoplc.com/media/392373/68336_tesco_ar_digital_interactive_250417.p
df>
Annual report of Tesco 2018-19. 2019. [Online]. Available through:
<https://www.tescoplc.com/media/754415/tesco_ara2019_full_report_web.pdf >
Annual report of Sainsbury’s 2015-16. 2016. [Online]. Available through:
<https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-
presentations/annual-reports/annual-report-2016.pdf >

Annual report of Sainsbury’s 2016-17. 2017. [Online]. Available through:
<https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/pdf-downloads/
sainsburys-ar-2017-full-report.pdf >
Annual report of Sainsbury’s 2018-19. 2019. [Online]. Available through:
<https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-
presentations/annual-reports/sainsburys-ar2019.pdf>