Financial Analysis Management & Enterprise Solved Assignment

Financial Analysis Management &
Enterprise

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Vertical, horizontal and ratio analysis of financial statements of Sainsbury and Tesco..........1
2. Importance of analysing the working capital prior to decision making.................................13
3. Critical analysis of Cash flow statements..............................................................................14
CONCLUSION .............................................................................................................................15
REFERENCES..............................................................................................................................17
APPENDIXES...............................................................................................................................19
Calculations of ratio analysis.....................................................................................................19
Balance sheets............................................................................................................................22
Cash Flow statements................................................................................................................24

INTRODUCTION
Financial analysis can be defined as a systematic procedure of evaluating the budgets,
processes, projects and other financial aspects of a business enterprise for the purpose of
ascertaining the performance of business. In other words, financial analysis is exercised in order
to find out the stability, solvency, profitability and liquidity of a business for assessing that
company is in position to pay back the monetary investments of the investors. The present
project report is about financial analysis of two supermarket chains namely, Sainsbury and Tesco
for the purpose of assessing the financial position of these companies (Williams and Dobelman,
2017). Both the companies are large organisations in United Kingdom that offers consumer
products, personal care products, food and beverages.
The motive behind such analysis is that Asian food Manufacturer desires of increasing
their market share for which it is thinking of selling its products to one of these supermarket
chain. This analysis will help the manufacturer in knowing who could be its potential client.
Further, it will include analysis of cash flow statements of both the companies, importance of
analysing the working capital for making quality decisions and ratio analysis of both the
supermarket chains for finding out their profitability and stability.
MAIN BODY
1. Vertical, horizontal and ratio analysis of financial statements of Sainsbury and Tesco
Vertical analysis:
It is one of the technique of analysing the financial statements of a company wherein
each of the component of profit and loss statement and balance sheet are presented as % of base
amount within the financial statements. In P&L statement, component are listed as % of gross
sales while on the other hand, in Balance sheet, component can be presented as % of total assets
or total liabilities (Corbet and et.al., 2019). Below is vertical analysis of both Sainsbury and
Tesco's financial statements :
Sainsbury’s Income Statement
1

Interpretation
It can be seen from the above analysis that each of the line item in the comparative table
is presented as % of gross sales. It can be observed that cost of revenue accounts for 93.3% of
gross sales while gross profit is 5.2% of the total sales. When it is compared with 2018, it can be
said that change in % is quite and the gross profits is even showing an increasing trend, however,
when net profits are compared it can be said that it is showing downward trends. This is because
operating costs of company is increasing year by year. This might have a negative impact on
decision making of Asian Food manufacturer for selecting this food chain as its preferred client.
Analysis of Balance Sheet
2

Interpretation:
It can be observed from the above calculations that percentage change in total current
assets over the years have been stable and has showed a increasing trend till 2018 until in the
year 2019 when it fell by 3.6%. While on the other hand, the current liabilities is showing
increasing trend and % change in increasing year by year that depicts that company's liabilities
are relatively increasing more as compared to current assets. This will impact the decision
making of Asian Food Manufacturer.
Vertical analysis of Tesco
Income statement
3

Balance Sheet
4

Interpretation:
From the above vertical analysis of Tesco's financial statements, it can be observed that
change in cost of revenue for the last four years has been quite stable. Also, gross profit as a
percentage of total sales is also showing increasing trend over the years since the figures are
increasing by year which is an impressive thing that could favour the decision of Asian food
manufacturer towards Tesco. Also, net profit after a significant dip in its earning in 2017, it
became stable in 2018 and 2019 which is also positive sign for the manufacturer for selling its
products to Tesco.
The balance sheet shows that percentage change in total current asset is dipping
continuously over the years which means that company has lesser liquidity as compared to
Sainsbury.
Horizontal analysis:
It is technique which compares the components of financial statements with the
corresponding components of company's financial statements. Financial statements for two or
more period are considered for this analysis and older figures are taken as base amounts against
percentage change in components of p&l and balance sheet is found out (Robinson and et.al.,
2015). Below is the vertical analysis of Sainsbury and Tesco:
Sainsbury’s Income Statement
5

Balance sheet
6

Interpretation:
It can be analysed from the above calculations that there has been increase in revenue in
the year 2017 as compared to 2017 by 11.6% which tends to have decreased over the years like
in 2018, revenue increased by only 8.5% while in 2019 it increased by just 1%. This reflects that
company has not been to generate higher sales. Further, it can be observed that company has
made less profit in the year 2017 as compared to 2016 as it was 20% less than previous year. The
net profits are highly fluctuating for the company.
BY looking at the balance sheet of the company it can be said that total assets of the
company has increased to a satisfactory level which is 16.3% in the year 2017. However, total
assets increased in the year 2018 to only 11.47% which further went down in year 2019 wherein
it increased by only 7%. Total liabilities of the company is also showing decreasing trend which
7

depicts good financial position of the company. This will encourage the Asian Food
manufacturer in selecting Sainsbury as its client.
Tesco's income statement
Balance sheet
8

Interpretation
It can be interpreted that change in the total assets of the company is highly fluctuating as
in year 2017, assets has been increased by 4.4% while in the year 2018, there has been a
decreased in the total assets by 2.2% which ten increased to 9.3% in the year 2019. This shows
the lack of stability in the assets of company. Further, total liabilities has decreased over the
years which is positive sign for the Asian Manufacturer since company has less liabilities and is
in a good position to repay its liabilities conveniently.
By observing the P&L of the company, it can be seen that Tesco's revenue is
continuously increasing year by year as in 2017 revenue increased by 2.73% which in 2019
increased to 11.17% . This shows that company is able to increase its sales volume over the years
and is generating good cash inflows for the business for meeting its requirements. However, due
to higher operating expenses and high taxes, the net profits of the company are fluctuating. Thus,
9

it can be said that manufacturer shall go with the Tesco since it have better financial performance
over the last few years as compared to Sainsbury’s.
RATIO ANALYSIS
Ratio analysis refers to the tool of obtaining an in-depth knowledge about business's
efficiency, profitability, solvency and liquidity by the way of comparing the information which is
contained in the financial statements of the company (Demerjian and Owens, 2016).
Below is the ratio analysis of Sainsbury and Tesco's financial statements:
Gross profit ratio :
It is one of profitability ratio which displays the relationship between gross profit and
sales of a business (Laitinen, 2018).
companies/
Year
2016 2017 2018 2019
Sainsbury 6.19% 6.23% 6.61% 6.92%
Tesco 5.24% 5.19% 5.83% 6.48%
Interpretation:
It can be interpreted from the above table that, gross profit ratio of Sainsbury is highly
stable over the last four years. This is a great indication of company's financial prosperity. While
on the other hand, Tesco's GP ratio is reflecting an increasing trend and showing great potential
of expansion and growth. Thus, manufacturer must go with the Tesco since it is growing in the
industry.
10

Net profit ratio:
This ratio measures the amount of net income earned by business with penny of sales
generated by it. In short, it shows the relationship between company's net profits and revenues.
Year / companies 2016 2017 2018 2019
Sainsbury
2.00% 1.44% 1.09% 0.75%
Tesco 0.25% -0.07% 2.10% 2.07%
Interpretation:
From the above table, it can be said that Sainsbury's net profit has been declining
continuously from the year 2016 when it was 2% which went on to decline to 1.44% in 2017,
1.09% in 2018 and 0.75% in 2019. This shows the company's expenses are increasing year by
years as compared to its revenue. For Tesco, the net profit ratio was negative in 2017 after which
company become a bit stable in its earnings and made higher profits than Sainsbury. Therefore, it
can be said that food manufacturer must select Tesco.
Current ratio:
It is one of a liquidity ratio which measures the ability of business to repay its short term
liabilities with its available current assets. The ideal ratio is 2:1 (West and Bhattacharya, 2016).
11

Year / companies 2016 2017 2018 2019
Sainsbury
0.66 0.74 0.76 0.66
Tesco 0.75 0.79 0.71 0.61
Interpretation:
It can be interpreted from above table that current ratio of Sainsbury over the last four
year is below 1. This means that debts of company in current year are higher than company's
current assets. Tesco's current ratio is also below 1 but it has better liquidity position as
compared to Sainsbury. This implies that Asian food manufacturer must sell its products to
Tesco.
Quick Ratio
This is a measure which indicates the short term liquidity position of the company and
signifies the capability of organisation in repaying its short term liabilities. In calculating this
ratio, prepaid expenses and inventory is excluded from current asset (Kim and et.al., 2016).
Year / companies 2016 2017 2018 2019
Sainsbury
0.52 0.53 0.59 0.5
Tesco 0.61 0.68 0.6 0.49
12

Interpretation:
It can be interpreted from the above table that Sainsbury's quick ratio is above 0.50 which
is quite satisfactory as the Ideal ratio is 1:1. This means that company is able to meet its short
term liabilities with its most liquid assets. On the other hand, Tesco's quick ratio is higher than
that of Sainsbury in the years 2016,2017,2018. This indicates that manufacture shall sell its
products to Tesco.
Debt-equity ratio
This ratio measure the financial leverage of a business organisation. It is calculated by
dividing total liabilities by its equity. Higher DE ratio indicates that company has higher business
risk.
Year / companies 2016 2017 2018 2019
Sainsbury
0.35 0.31 0.2 0.12
Tesco 1.23 1.45 0.67 0.38
13

Interpretation:
It can be said that Sainsbury's debt equity is lower which means that company's equity is
higher than its debts which puts it in a good position. Whereas, Tesco's ratio is higher as
compared to Sainsbury. By looking at this aspect, manufacturer must select Sainsbury since its
solvency position better than Tesco.
Inventory turnover ratio:
It is one efficiency ratio which entails regarding how well the company has dealt with its
inventory by comparing cost of sales and average inventory for an accounting period.
Year / companies 2016 2017 2018 2019
Sainsbury
22.44 17.93 14.83 14.44
Tesco 19.15 22.41 23.73 24.49
14

Interpretation:
It can be interpreted that inventory turnover ratio of Sainsbury is decreasing
continu7ously after the year 2016. Lower ratio means that company takes more time for clearing
out its entire inventory which in turn depicts that organization has weak inventory control
system. On the other hand, Tesco's inventory turnover ratio is increasing after the year 2016
which signifies that company is being to convert its stock into cash more effectively than
Sainsbury. Thus, manufacturer must choose Tesco over Sainsbury.
Earnings per share (EPS)
It is that part of organisation's profit which is assigned to every outstanding share of
common stock. This gives a picture of company's financial soundness (Lang and Stice-
Lawrence, 2015.).
Year / companies 2016 2017 2018 2019
Sainsbury
0.23 0.17 0.13 0.08
Tesco 0.05 -0.01 0.44 0.41
15

Interpretation:
From the above table, it can be analysed that Sainsbury's EPS is decreasing over the year.
It was highest in the year 2016 when it was 0.23 after which it has continuously decreased.
Tesco's EPS In the year 2016 was low which event went negative in 2017. However, the
company bounced back strongly in the year 2018 when its EPS was 0.44. Manufacturer must sell
products to Tesco for its expansion purpose because higher EPS indicates that company is
profitable enough to distribute more money to its shareholders.
2. Importance of analysing the working capital prior to decision making
Working capital refers to money which is required by a business in carrying out its day-to
day operations. In other words, it can also be defined as difference between current assets and
current liabilities. The food manufacturer must analyse the working capital of both the
companies namely Sainsbury and Tesco before making any decision regarding where should it
make investments and sell its products through which chain (Flower, 2018).
A business always desires of having a positive working capital which is greater current
assets and lower current liabilities. This signifies that company is in a safe position to meet its
short term liabilities without any difficulty. All the companies wishes to have a working capital
ratio between 1.2 to 2 wherein company have enough current assets to meet its obligation (What
is Working Capital and Why is it Important, 2014).
16

The working capital ratio of Sainsbury of the year 2019 is (7,589-11,417) which is
negative $ 3828. This indicates that company is not in a good position to confront its short term
liabilities with its available short term assets. On the other hand, working capital ratio of Tesco
of the year 2019 is (12,668-20,680) which is negative $ 8012. This amount is higher than that of
Sainsbury which makes the latter more preferable than the former.
A company possessing more working capital signifies that it can run business with less
difficulties. The efficiency and short term financial health of the business organisation is
assessed by the way of working capital. If a company is needing higher amount of working
capital indicates that it is less effective in managing its daily operations which is in turn
unnecessarily increases the cost of operations for the business. This eventually reflects in the
lower net profits for the company. Analysing the working capital of a company offers various
benefits to different stakeholders of the business entity (Gitman, Juchau and Flanagan, 2015).
For example, investors are interested in analysing the working capital of the company as it
facilitates them with gaining the knowledge regarding the capability of company in dealing with
its financial troubles. Further, it aids the management in anticipating any financial trouble that
could arise in the future.
Working capital is of great significance for large corporations like Sainsbury and Tesco
since it directly impacts the borrowing capability of the company, positive working capital ratio
increases the share prices of the organisation. Working capital is one of the measure of assessing
the useful insights about the liquidity of the company which impacts the credit worthiness of the
business in the future (Murphy, 2016).
3. Critical analysis of Cash flow statements
Cash flow statement refers to the financial statement which contains the information
regrading all the data that has contributed towards cash inflows and cash outflows in/out of the
business for an accounting period. The cash flow is divided into three categories such as Cash
flow from operating activities, cash flow financing activities and cash flow from investing
activities of the business which in turn provides a complete view of all cash related aspects of the
business for a particular period (Guay, Samuels and Taylor, 2016).
Cash flow operating activities includes all the operational transactions of the business.
It consist of net income and there is reconciliation of all the non cash items to cash components.
17

In other words, this part of cash flow involves all the cash inflow and outflows from the core
business activities. Sainsbury's cash flow from operations in the year 2018(03) was 1365 against
the year 2019(03) when it was 618. The cash inflow has decreased in the current year
significantly. This is due to the fact that company has not made impressive revenue in the current
year which has led to lower cash inflow for the business. Tesco's cash flow from operations was
2782 in the year 2018(02) against the year 2019(02) in which it was 1966. Although the cash
inflow in the current year is less than the previous year , but it is till higher than that of
Sainsbury.
Cash flow from investing activities includes the money paid and received by company
in the name of investments made by it. The cash flow from investing activity of Sainsbury in the
year 2018(03) was negative 474 which means that company acquired new assets and equipments
for the business and in 2019(03), the net cash used was 474 which meant that company's
investments has increased in the current year. Tesco's cash flow from investing activities in the
year 2018 (02) was 666 which means that company had cash inflows from investing incomes
while in year 2019(02), the cash used was 1143 which means that company has paid more
money in acquiring more assets and machineries.
Cash flow from financing activities is the third segment of cash flow statement which
entails the usage of cash in financing the activities of the business. Cash received or repayment
of loan, from capital fundraising efforts, such as equity or debt, are all included here
(Christensen, Nikolaev and Wittenberg‐Moerman, 2016). Sainsbury's cash used in the
financing activities was 244 in the year 2018(03). This outflow is a result of repayment of long
term debt, repurchase of treasuries, dividend paid etc. In the year 2019(03), net used in financing
activities was 752 wherein repayment of the long term loan was the major contributing factor for
cash outflow.
Tesco's cash from financing activities in 2018(02) was 3236 as against 1981 in 2019(02)
wherein company paid huge amount in repaying its long term debts in both the years.
Thus, it can be said that Tesco has better liquidity than Sainsbury because of major of its
cash flows are from operating activities which is a good indication that company is efficient in its
core business activities. All the cash inflows are higher than Sainsbury in the year 2018 and
18

2019. Therefore, Asian Food manufacturer must select Tesco as its client for selling its products
in the UK markets.
CONCLUSION
From the above project report, it can be concluded that financial analysis is very
necessary for the purpose of decision making process. It can be done through various tools and
techniques such as ratio analysis which entails the liquidity, profitability, efficiency and solvency
of the busi9ness organisation, vertical and horizontal analysis. Further, it was summarised that
efficiency, profitability and liquidity of Tesco is much better than the Sainsbury by analysing
their financial statements. Such analysis helped in recommending the Asian Food Manufacturer
that it should go with the Tesco for expanding its market share by selling its products to this
supermarket chain in United Kingdom.
19

REFERENCES
Books and Journals
Christensen, H.B., Nikolaev, V.V. and Wittenberg‐Moerman, R., 2016. Accounting information
in financial contracting: The incomplete contract theory perspective. Journal of
Accounting Research, 54(2), pp.397-435.
Corbet, S and et.al., 2019. Cryptocurrencies as a financial asset: A systematic
analysis. International Review of Financial Analysis, 62, pp.182-199.
Demerjian, P.R. and Owens, E.L., 2016. Measuring the probability of financial covenant
violation in private debt contracts. Journal of Accounting and Economics, 61(2-3), pp.433-
447.
Flower, J., 2018. Global financial reporting. Macmillan International Higher Education.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Guay, W., Samuels, D. and Taylor, D., 2016. Guiding through the fog: Financial statement
complexity and voluntary disclosure. Journal of Accounting and Economics, 62(2-3),
pp.234-269.
Kim, J.B and et.al., 2016. Financial statement comparability and expected crash risk. Journal of
Accounting and Economics, 61(2-3), pp.294-312.
Laitinen, E.K., 2018. Financial Reporting: Long-Term Change of Financial Ratios. American
Journal of Industrial and Business Management, 8(09), p.1893.
Lang, M. and Stice-Lawrence, L., 2015. Textual analysis and international financial reporting:
Large sample evidence. Journal of Accounting and Economics, 60(2-3), pp.110-135.
Murphy, C., 2016. Competitive intelligence: gathering, analysing and putting it to work.
Routledge.
Robinson, T.R and et.al., 2015. International financial statement analysis. John Wiley & Sons.
West, J. and Bhattacharya, M., 2016. Intelligent financial fraud detection: a comprehensive
review. Computers & security, 57, pp.47-66.
20

Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters, pp.109-169.
Online
What is Working Capital and Why is it Important.2014. [online]. Available through
<https://kashoo.com/blog/what-is-working-capital-and-why-is-it-important>
21

APPENDIXES
Calculations of ratio analysis
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
22

debt /
shareholders’
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
atio analysis of Tesco
Particulars Formula
Profitability ratio
analysis
2016 2 201 2019
23

0
1
7 8
Gross Profit 2854
2
9
0
2
335
0 4144
Net profit 138
-
4
0
120
6 1322
Sales revenue 54433
5
5
9
1
7
574
91 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
7
201
8 2019
Current assets 14828
1
5
4
1
7
137
26 12668
Current liabilities 19714
1
9
4
0
5
192
38 20680
Inventory 2430 2
3
226
3
2617
24

0
1
Prepaid expenses 319
Quick assets 12079
1
3
1
1
6
114
63 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 10623
9
3
3
0
703
2 5580
Shareholder's equity 8626
6
4
3
8
104
80 14858
Debt-equity ratio
Long-term debt /
shareholders’ equity 1.23
1
.
4
5
0.6
7 0.38
Efficiency ratio
analysis
2016
2
0
1
7
201
8 2019
Cost of goods sold 51579 5
3
0
1
541
41
59767
25

5
Average Inventory 2694
2
3
6
6
228
2 2440
Turnover or sales
revenue 54433
5
5
9
1
7
574
91 63911
Average total assets 44059
4
4
8
7
9
453
58 46955
Average fixed assets 30666
2
9
7
5
6
307
86 33757.5
Stock turnover ratio
(In times) 19.15
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
Investment ratios
2016
2
0
1
7
201
8 2019
Earnings per share
(Net income - preferred
dividend) / Number of
shares outstanding 0.05
-
0
.
0
1
0.4
4 0.41
26

Balance sheets
Sainsbury's
27

Tesco
28

Cash Flow statements
Sainsbury's
Tesco
29

30