Comparative Analysis of Financial Statement and Ratio Analysis of Tesco and Sainsbury

The report analyses the financial statements and significant ratios of Tesco and Sainsbury to make an investment decision. It includes a comparative analysis of income statement and balance sheet, and ratio analysis of net profit, current ratio, and debt equity ratio. The report also discusses the limitations of ratio analysis and information from other sources. The conclusion recommends investing in Sainsbury.

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Finance
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Table of Contents
Introduction................................................................................................................................2
Comparative Analysis of Financial statement............................................................................2
RATIO ANALYSIS...................................................................................................................3
Limitations of ratio analysis.......................................................................................................5
Information’s from other sources...............................................................................................5
Conclusion..................................................................................................................................6
Reference....................................................................................................................................7
Appendices.................................................................................................................................8

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Introduction
In this report, an attempt is made to analyse two companies in order to make decision
for investment. The two companies that have been selected for analysis are Tesco and
Sainsbury. In order to make the investment decision the financial statements and significant
ratios of both the companies are compared. The report also discusses the limitation of the
ratio analysis and the information from the other sources. The main aim of the report was to
make the decision in which company the investment should be made.
Comparative Analysis of Financial statement
Income Statement
On analysing the income statement of Tesco Group, it can be observed that revenue
from operation for the year 2016 was £53,933m and this increased to £55,917m in the year
2017. As a result of which the cost of sales has also increased from £51,089m in the year
2016 to £53,015m in 2017. Hence, from the above figures it was found that the gross profit of
the company has increased to £2,902m in the current financial year. During the year 2016, the
operating profit for the company was £1,072m that slightly increased to £1,017m in 2017.
However, it can be observed that despite of increase in operating profit and the amount of
gross profit, there was significant decline in the amount of profit before tax of the company
(Baltes et al., 2015). The Profit before tax of the company in 2016 was £202m which
decreased to £145m in 2017. This decrease in the amount of profit was due to increase in the
figure of finance cost and administrative expenses. As a result of this decline in the profit
before tax, there was an overall loss of the company.
On analysing the income statement of Sainsbury, it can be seen that the sales of the
business have increased by 12.7%. However, the underlying profit before tax of the company
has declined by 1%.

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Balance sheet
On analysing the balance sheet of the Tesco, it can be seen that the current assets of
the company has increased. By 4%. On the other hand, it can be seen that the current assets
of the Sainsbury has increased by 43% during the year. On analysing the liability side of the
balance sheet it can be seen that in case of Tesco the liability has increased by 8% whereas in
case of Sainsbury the current liability has increased by 28%.
RATIO ANALYSIS
As per the income statement and statement of financial position of both the
companies, three vital ratios are undertaken in order to assess the financial strengths and
weaknesses of the companies. These three ratios includes Net Profit Ratio, Current Ratio and
Debt Equity Ratio.
Net Profit ratio
Statement Showing Net Profit ratio (Amount in Million)
Particulars Tesco Sainsbury
2017 2016 2017 2016
Net Profit £ 58.00 £ 256.00 £ 377.00 £ 471.00
Sales/ Revenue £ 55,917.00 £ 53,933.00 £ 26,224.00 £ 23,506.00
Net Profit Margin 0.10% 0.47% 1.44% 2.00%
The ratio that indicates the profitability of the company after deduction of all
expenses of the business is called the net profit ratio. The net profit ratio is represented in
terms of percentage. In the current scenario, the net profit for Tesco for 2016 was 0.47% that
declined to 0.10% in 2017. Similarly for Sainsbury as well the amount of net profits have
declined in 2017 compared to 2016. In 2016 the net profit margin for Sainsbury was 2.00%
which declined to 1.44% in 2017. Therefore, it can be found that for both the companies, the
net profits have declined in the current financial year compared to that of the year 2016.

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Current ratio
Statement Showing Current ratio (Amount in Million)
Particulars Tesco Sainsbury
2017 2016 2017 2016
Current Assets £ 15,073.00 £ 14,448.00 £ 6,312.00 £ 4,413.00
Current Liability £ 19,234.00 £ 17,866.00 £ 8,573.00 £ 6,720.00
Current Ratio 0.78 0.81 0.74 0.66
Secondly, the ratio that gauges the liquidity position of a company is termed as the
current ratio. On analysing the current ratio, the company’s ability to pay-off short term debts
can be measured (Grant, 2016). In this case the current ratio of Tesco for the year 2016 was
0.81 and it declined to 0.78 in the year 2017. This means the liquidity position of Tesco is
declining and it is not in a situation to pay off its obligations and debts. On the other hand, it
was observed that in 2016 the current ratio of Sainsbury was 0.66 which increased in 2017 to
become 0.74. This is a good indication for the company as it is maintaining it liquidity
position. Thus is can be found overall that the liquidity position of Sainsbury in better than
that of the Tesco who current ratio is declining.
Debt equity Ratio
Statement Showing Debt Equity ratio (Amount in Million)
Particulars Tesco Sainsbury
2017 2016 2017 2016
Debt (long term) £ 20,034.00 £ 17,422.00 £ 4,292.00 £ 3,884.00
Equity £ 6,414.00 £ 8,616.00 £ 6,872.00 £ 6,365.00
Net Profit Margin 3.12 2.02 0.62 0.61
Thirdly, the financial ratio through which the amount of debt and equity that the
company is using to finance its assets can be gauged is called the debt equity ratio. The
amount of debt and equity must be in such a proportion that there must not exist much risk
due to excessive debt neither the cost of capital shall be more which ensures more equity. In

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2017 the debt equity ratio of Tesco was 3.12 while for Sainsbury it was 0.62. This clearly
indicates that Tesco uses more debt compared to the amount of equity it uses as a result of
which there lies more risk in the business. On the other hand, Sainsbury is using more equity
than debt which result in an increase in the cost of capital of the company. Thus is can be
recommended that the debt and equity shall be utilised in an appropriate proportion.
Limitations of ratio analysis.
As the ratio analysis have various benefits, it also have several limitations as well.
Few major limitations of the ratio analysis are provided below.
1. Historical Data – The estimations and prediction that are made regarding the
financial position of the company are based on historical data. There are no guarantee
that that same consequences will happen in the future as well.
2. Inflation – Another major limitation of ratio analysis is inflation. The number will no
longer remain comparable if there exist inflation in the particular time period that is
taken under review.
3. Changes in Operation – The results of ratio analysis might went wrong if the
company chooses to change or alter its current process or mode of operation. As a
result of this the estimation of ratio analysis will no longer be application under such
circumstances.
4. Changes in Policies – Similar to the operation, it the company changes or alters its
accounting policies then the results of ratio analysis will no longer remain valid and it
cannot be comparable. Thus in case of change in accounting policies as well the
estimations of ratio analysis will not be applicable.

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Information’s from other sources
As far as the information from other sources are concerned, it can be found that with
respect to TESCO Group, they have focused on three major areas during the financial year. It
was learnt from the Chairman’s report that the three areas were corporate governance, the
members of the board are vested with responsibilities to help the business to grow and get
benefits and lastly to explore more future opportunities for growth. From the Chairman’s
Report it was also learnt that in July, 2016 Steve Golsby was appointed as the new Non-
Executive Director for the group. Apart from this, in January 2017, Deanna Oppenheimer
was also appointed as the Senior Independent Director. In addition to these, in November
2016 the Tesco Bank’s Debit Cards was under fraudulent attack. The company reacted
immediately and ensured that there exist no leak or breach of system or customer information
and they all are protected.
Now as far as Sainsbury is concerned, it can be learnt from the chairman’s report that
the company has fixed the dividend cover at 2x cover. A final dividend of 6.6 pence per share
has been recommended by the company. John Rogers has been appointed as the company’s
CFO in September 2016. Furthermore, from the report of Corporate Responsibility and
Sustainability Committee it was learnt that the company undertook several initiatives like
Waste less, Save More Campaign to show the respect towards the environment.
Conclusion
Based on the above analysis it can be seen that the profitability ratio of the Sainsbury
is higher than that of Tesco. However, the debt equity ratio of Tesco is higher that implies
higher risk for the investors. That means the risk involved in Tesco is higher than Sainsbury
but the return is less so it can be said that investment should be made in Sainsbury.

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Reference
Baltes, N., Dragoe, A. G. M., & Ardelean, D. I. (2015). Study regarding the determination of
the financial performance of a company through market rates. Studia Universitatis
Vasile Goldis Arad, 24(3), 1-10.
Grant, R. M. (2016). Contemporary Strategy Analysis Text Only. John Wiley & Sons.

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Appendices
Sainsbury

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Tesco

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