Financial Analysis Management And Enterprise Assignment

Financial analysis
management and
enterprise

Table of Contents
INTRODUCTION...........................................................................................................................1
Ratio Analysis..................................................................................................................................1
Liquidity ratios: ...........................................................................................................................1
Turnover ratios: ..........................................................................................................................4
Profitability ratios: ......................................................................................................................6
Analysis of working capital position.............................................................................................13
Interpretation of cash flow statement.............................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES .............................................................................................................................16
APPENDIX....................................................................................................................................17

INTRODUCTION
Financial analysis management plays a crucial role in determining profitability and
liquidity state of a company. In a broader sense, financial performance refers to a degree which
help organisations to measure their cash flow position by diversifying the transactions into
operating, financing and investing activity. Also, in order to obtain an accurate picture of
financial stability of a company, ratio analysis is considered to be the best technique. For this
report, a large Asian food manufacturer is chosen i.e. Nestle who has two major clients which are
Sainsbury's and Tesco. They both are large supermarkets based in London, UK and offer a wide
range of products & services to the customers under a single roof. The following report
highlights on a vertical, horizontal ratio analysis for both the organisations, importance of
working capital management. Also, a detailed analysis of cash flow position of the companies
are also included under this report (Brustbauer, 2016).
Ratio Analysis
Ratio analysis refers to a technique of comparing the line items in financial statements of
a company. It has a broader aspect and covers a variety of ratios like liquidity, profitability,
efficiency, turnover etc. Some of them are mentioned below in reference with Sainsbury's and
Tesco.
Liquidity ratios:
This ratio tells how fast a firm can convert its current assets into cash so that it can easily
pay off the liabilities (Crowther, 2018). It is a short-term liquidity ratio which affects the
credibility of a company in paying off its debts. Two ratios are included under this category i.e.
current and quick.
Current ratio: It measures the financial strength of a company and its ability to pay off
the debts. Generally, an ideal current ratio is assumed to be 2:1 which reflects that a firm should
have twice of its assets than liabilities.
Formula: Current assets/current liabilities
Current ratio Sainsbury's Tesco
2015-16 0.66 0.75
2016-17 0.74 0.79
1

2017-18 0.76 0.71
2018-19 0.66 0.61
Sainsbury's Tesco
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.66
0.750.74
0.79
0.76
0.71
0.66
0.61
Current ratio
2015-16
2016-17
2017-18
2018-19
Interpretation: The current ratio for Sainsbury's in both the years 2015-16, 2018-19 is
stabilized by 0.66 which states that the company's liquidity position in proportion to current
assets and liabilities has not improved during the years. The current ratio for Tesco in the year
2015-16 is 0.58 and in 2018-19 is 0.61 which states that the organisation has not improved to a
large extent and it needs to work on its assets and concentrate on paying off its dues so that the
liquidity position remains balanced. This also indicates that both companies should tighten their
credit period offered to debtors in order to receive the payment faster. Also, it is advised that
Sainsbury's should raise more shares and debentures so that level of cash generated is enough to
pay off the dues. But, still the current ratio is less than the ideal comparison which is considered
to be 2:1 that implies both companies are having difficulties in paying off the debts and
Sainsbury's & Tesco should consider increasing their current assets in order to dispose off the
liability.
Quick ratio: Also known as acid test or liquid ratio, this is the best way to measure the
liquidity of a firm. A portion of inventories and prepaid expenses are deducted from the
2

numerator in order to obtain quick assets. Generally, an ideal acid test ratio is considered to be
1:1.
Formula: Quick assets/current liabilities
Quick ratio Sainsbury's Tesco
2015-16 0.52 0.63
2016-17 0.53 0.68
2017-18 0.59 0.6
2018-19 0.49 0.48
Sainsbury's Tesco
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.52
0.63
0.53
0.68
0.59 0.6
0.49 0.48
Quick ratio
2015-16
2016-17
2017-18
2018-19
Interpretation: The quick ratio for Sainsbury's in the year 2015-16 is 0.52 which
declined in 2018-19 to 0.49 which states that the company is not able to manage its liquid assets
which in turn affects the liquidity position of the firm. However, the acid test ratio for Tesco in
2015-16 is 0.63 which also diminished in the year 2018-19 to 0.48 which also explains the dis-
proportion between current assets and liabilities apportioned in the balance sheet. This shows
that the company is not performing well in paying off the liabilities before time which suggests
Tesco's liquidity position is falling down and is not able to generate cash for the purpose of
3

managing expenses incurred with the year. It implies that both companies have failed to manage
their quick assets in comparison with current liabilities since both are declining. Although, both
the ratios in current as well as previous year are close to industry average, but still less than the
ideal ratio which is considered to be 1:1. It implies that Sainsbury's and Tesco should consider
investing in a bank account or other securities in order to raise their liquid assets.
Working notes:
Current ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Current assets 4444 6322 7866 7589
Current liabilities 6724 8573 10302 11417
Current ratio
(Tesco)
2015-16 2016-17 2017-18 2018-19
Current assets 14828 15417 13726 12688
Current liabilities 19714 19405 19238 20680
Quick ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Quick assets 3508 3476 4547 6056
Current liabilities 6724 8573 10302 11417
Quick ratio
(Tesco)
2015-16 2016-17 2017-18 2018-19
Quick assets 9001 12398 13116 11463
Current liabilities 19714 19405 19238 20680
4

Turnover ratios:
These ratios are used to check efficiency of a company that how it uses assets to earn
profit (Farrell and Gallagher, 2015). It includes a wide range of ratios like, capital employed,
total asset, inventory & payable turnover etc.
Inventory turnover ratio: It is also refereed to as stock turnover which is used to
measure number of sales generated from its inventory and how well a company is using it.
Formula: Inventory/cost of sales*365
Inventory turnover ratio
(days)
Sainsbury's Tesco
2015-16 16 days 17 days
2016-17 26 days 16 days
2017-18 24 days 15 days
2018-19 26 days 16 days
Interpretation: The inventory turnover period for both Sainsbury's and Tesco in the year
2015-16 are seen to be equally stable in line whereas for the upcoming years i.e. 2018-19, stock
holding period for Sainsbury's have raised as comparison to Tesco. This shows that in the recent
time, the first company has increased its inventory collection period by ordering enough raw
material for various products from the warehouse before due date. Although, Tesco's duration of
days is seen to be stable still the company manages to control over its stock by ensuring adequate
quantity is supplied to every dealer across the city.
Total asset turnover ratio: This ratio determines a relation between revenue generated
by a company with its total assets and check how efficiently they are used to generate profit.
Formula: Sales/Total assets
Total asset turnover (times) Sainsbury's Tesco
2015-16 1.38 times 1.24 times
2016-17 1.33 times 1.22 times
2017-18 1.29 times 1.28 times
5

2018-19 1.23 times 1.3 times
Interpretation: The total asset turnover ratio for Sainsbury's and Tesco in the year 2015-
16 is 1.38, 1.24 times whereas in the year 2018-19 this has declined majorly for both the
companies to 1.23, 1.3 times. This implies that total assets of Sainsbury's are rising immensely
over the period of time but for Tesco there is not any certain direction of movement. It shows
that the company should analyse as well as assess its net assets in order to get effective results in
the future since these will provide an economic benefit and are considered to be a major element
of any organisation.
Working notes:
Inventory
turnover ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Inventory 968 1775 1810 1929
Cost of sales 22050 24590 26574 27000
Inventory
turnover ratio
(Tesco)
2015-16 2016-17 2017-18 2018-19
Inventory 2430 2301 2263 2617
Cost of sales 51579 53015 54141 59767
Total assets ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Sales 23506 26224 28456 29007
Total assets 16973 19737 22001 23541
Total assets ratio 2015-16 2016-17 2017-18 2018-19
6

(Tesco)
Sales 54433 55917 57491 63911
Total assets 43904 45853 44862 49047
Profitability ratios:
These ratios measure, analyse and evaluate an organisation's financial stability during an
accounting year (Grace and et.al., 2015). They shows how efficiently a company utilizes its
assets to generate profit and provide return to the shareholders. A number of ratios are included
under this category which are discussed below:
Gross profit margin: These ratios represent the ability of a firm to convert its sales into
profit during a specific period of time. It is a measure of profitability that shows the percentage
of revenue which exceeds COGS.
Formula: Gross profit/revenue*100
Gross profit margin Sainsbury's Tesco
2015-16 6.19% 5.24%
2016-17 6.23% 5.19%
2017-18 6.61% 5.83%
2018-19 7.00% 6.48%
7

Sainsbury's Tesco
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
6.19%
5.24%
6.23%
5.19%
6.61%
5.83%
7.00%
6.48%
Gross profit margin
2015-16
2016-17
2017-18
2018-19
Interpretation: The gross profit for Sainsbury's and Tesco in the year 2015-16 is 6.19%,
5.24% whereas in the upcoming year it immensely raised by 7% and 6.48% in 2018-19 which
shows with the time duration the company has improved its profitability position is doing
efficiently well in performing its business operations. So, it is advised that both the firms should
maintain this growth rate by investing in potential projects.
Net profit margin: It is a ratio of net profits to revenue for a company and is expressed
in a percentage form. A portion of operating expenses is deducted from the gross profit figure in
order to obtain NP.
Formula: Net profit/revenue*100
Net profit margin Sainsbury's Tesco
2015-16 2.00% 0.25%
2016-17 1.44% -0.07%
2017-18 1.08% 2.10%
2018-19 0.75% 2.07%
8

Sainsbury's Tesco
-0.005
0
0.005
0.01
0.015
0.02
0.025
2.00%
0.25%
1.44%
-0.07%
1.08%
2.10%
0.75%
2.07%
Net profit margin
2015-16
2016-17
2017-18
2018-19
Interpretation: The net profit margin for both the companies i.e. Sainsbury's and Tesco
for the year 2015-16 is 2%, 0.25% which shows that the firms are having a lot of issues
regarding stabilizing their profitability position and if it is not improved that might affect the
future perspectives. Although, the net profit margin figure for Tesco in the year 2018-19 has
improved to a good extent which highlights that the company has recovered from its debt state
but if we see the result of Sainsbury's, it has severely declined which implies that it is not doing
certainly well and have incurred large number of losses that should be improved otherwise it will
negatively affect the operations of the company.
Operating profit: It is a ratio which looks at earnings as a percentage of sales before
charging interest expense and income tax (Wu, Olson and Dolgui, 2015). Usually, companies
with high operating margin are considered to be more well-efficient in paying of their debts.
Formula: Operating profit/sales*100
Operating profit Sainsbury's Tesco
2015-16 3.00% 1.80%
2016-17 2.45% 2.09%
2017-18 1.82% 2.72%
2018-19 1.07% 3.25%
9

Sainsbury's Tesco
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
3.00%
1.80%
2.45%
2.09%
1.82%
2.72%
1.07%
3.25%
Operating profit margin
2015-16
2016-17
2017-18
2018-19
Interpretation: The operating profit margin for both the companies in 2015-16 is 3%
and 1.8% implies that in the beginning Sainsbury's was doing pretty well in performing its
business transactions but Tesco was on the starting phase. But, with time as seen above the
operating profit margin figures for both Sainsbury's and Tesco have either decreased or increased
to 1.07% and 3.25.
This shows that with time Tesco has improved its business activities but Sainsbury's has
failed to do so and that negatively impacts its profitability position.
Working notes:
Gross profit
ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Gross profit 1456 1634 1882 2007
Sales 23506 26224 28456 29007
Gross profit 2015-16 2016-17 2017-18 2018-19
10

ratio (Tesco)
Gross profit 2854 2902 3350 4144
Sales 54433 55917 57491 63911
Net profit ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Net profit 471 377 309 219
Sales 23506 26224 28456 29007
Net profit ratio
(Tesco)
2015-16 2016-17 2017-18 2018-19
Net profit 138 -40 1206 1322
Sales 54433 55917 57491 63911
Operating profit
ratio
(Sainsbury's)
2015-16 2016-17 2017-18 2018-19
Operating profit 707 642 518 312
Sales 23506 26224 28456 29007
Operating profit
ratio (Tesco)
2015-16 2016-17 2017-18 2018-19
Operating profit 980 1168 1564 2077
Sales 54433 55917 57491 63911
11

Horizontal analysis: It is an analysis done for the income statement of various
companies. A horizontal analysis of both companies i.e. Tesco & Sainsbury's is mentioned below
with relevant details:
12

As observed from the above vertical analysis of income statements for both the
companies for the years 2015-18 states that for Sainsbury's the profitability position has severly
declined over the years which is implies that the company is not doing efficiently well in
performing its activities (Lange, Mendling and Recker, 2016). Also, it can be concluded that net
profit figure in 2016 has diminished from the current year i.e. 2017. However, afterwards it has
certainly increased in 2019 which shows that there is a chance for improvement. For Tesco, the
profit margins have increased with the yaers which shows that the company is doing quite well in
selling its goods and services. Although, it can be seen that net profit percentage for Tesco has
immensely declined which is considered to be a bad sign for performing company's operations.
Vertical analysis: It is an analysis done for the balance sheet of various companies. A
vertical analysis of both companies i.e. Tesco & Sainsbury's is mentioned below with relevant
details:
13

As observed from the above done vertical analysis of balance sheet line items, it can be
seen that the total asset turnover for Sainsbury's has declined by severe margins which indicates
that the company is having troubles in paying off its liabilities and this can address difficulties
for the firm in the future. So, it is advised that Sainsbury's should monitor its liquidity position
by analysing the funds available for paying the dues. If we observe the line items in balance
sheet of Tesco, it is analysed that total assets for the company have partially declined but still
doing well and is able to pay off the dues on time. It acts as a benefit for the company as the
proportion of its current assets is much more than liabilities which will help Tesco in the future
by analysing any potential projects and investing in them to get better returns (Vernon and
Aharoni, 2014).
Analysis of working capital position
It is important for both the companies i.e. Sainsbury's and Tesco to analyse their working
capital position before taking any decisions. This serves as a tool for organisations as it helps
them to get an idea about their cash flow position and ability to pay off the debts before time.
Generally, it is advised that prior to decision making firms should analyse their liquidity and
profitability state so that proportion of expenses to earnings can be done easily (Lundqvist,
14

2014). With the help of working capital management, the respective organisations can can
improve their credit profile as well as solvency, attain high profitability, attract favourable
projects etc. The main goal of working capital management is to maximise operational efficiency
and maintain smooth running of operations in order to gain competitive advantage.
For the selected organisations i.e. Sainsbury's and Tesco, working capital management
acts as an assessing tool which helps them to identify any potential projects by putting in the
required funds (Maskell, Baggaley and Grasso, 2017). Also, with the assistance of this tool the
firms can manage and monitor their business transactions appropriately by paying off the debts
on time. It includes two aspects i.e. current assets and liabilities. In order to be achieve
organisational goals and objectives, both Sainsburys and Tesco should consider calculating
different set of ratios which include liquidity, profitability, turnover ratios etc. One of the most
important element for organisations is their cash flow state which can be measured with the help
of current or quick ratio. These will help the companies in attaining satisfactory returns in terms
of profit margins.
Interpretation of cash flow statement
A cash flow statement comprises of all the inflows and outflows of cash during a
financial year (Morden, 2016. It can be categorised under various activities which are prepared
for individual purposes like operating, investing and financing. A critical analysis of the annual
CFS of both the companies i.e. Sainsbury's and Tesco is explained below:
After analysing the cash flow position of both the companies i.e. Sainsbury's and Tesco,
it can be concluded that the firms have acquired plenty of investments and other properties as
observed from the investing activity (Oliva, 2016). In the current year i.e. 2018 we see that the
attained amount states 'cash used in investing activity' which is less than the amount in previous
year. This implies that the company has improved its operating from the prior year results and is
focusing more on selling properties or investments instead of buying them (Cash flow statement
of Sainsbury's, 2019). The results of financing activity shows that both enterprise lack in issuing
shares among the public which results in a negative outcome as it displays 'cash used in
operating activity' in both years. Due to this, the amount of long-term borrowings and dividend
paid is increasing which leads in affecting the overall profitability as well as liquidity position of
the selected organisations. The decisions made by the managers of both companies help them in
15

performing several tasks by analysing the liquidity and profitability state of their business
transactions as recorded in the cash flow statement (Olson and Wu, 2015).
In relation to this, the results from operating activity works in favour for Tesco &
Sainsbury's in both the years i.e. 2017 & 2018 due to other non-cash items listed in the cash flow
statement (Cash flow statement of Tesco, 2019). The outcome from working capital changes is
considered to be beneficial for the companies since there have been more increase in current
liabilities and downfall in current assets (Peiris, Jung and Gallupe, 2015). There are no
investment gains for Sainsbury's in both the years which impacts its position by lowering down
the profits as compared with Tesco. However, in Tesco investment gains have occurred which
uplifts the profit game for the enterprise in a positive manner. These activities help organisations
in the process of decision making by interpreting as well as analysing the prospective results and
investing in items accordingly (Olson and Wu, 2015). It aids the management of both companies
in such a way that they become efficient in analysing potential projects for the overall
development of their firm.
CONCLUSION
At the end it can be concluded from the above report that in order to stabilize the liquidity
and profitability position of companies, interpretation as well as analysis of ratios plays a crucial
role in forming judgements. For effective and efficient decision making, it is important to
evaluate the line items in balance sheet, income statement etc. A critical analysis of cash flow
statement adds up another competitive advantage for both Sainsbury's and Tesco as it helps them
in categorising the business transactions based on operating, financing and investing activities.
After interpreting the line items in detailed, it can be said that overall operations of Tesco are
better than Sauinsbury's as comprehended by the results seen in the cash flow statement.
16

REFERENCES
Books and journals
Brustbauer, J., 2016. Enterprise risk management in SMEs: Towards a structural
model. International Small Business Journal. 34(1). pp.70-85.
Crowther, D., 2018. A Social Critique of Corporate Reporting: A Semiotic Analysis of Corporate
Financial and Environmental Reporting: A Semiotic Analysis of Corporate Financial
and Environmental Reporting. Routledge.
Farrell, M. and Gallagher, R., 2015. The valuation implications of enterprise risk management
maturity. Journal of Risk and Insurance. 82(3). pp.625-657.
Grace, M. and et.al., 2015. The value of investing in enterprise risk management. Journal of Risk
and Insurance. 82(2). pp.289-316.
Lange, M., Mendling, J. and Recker, J., 2016. An empirical analysis of the factors and measures
of Enterprise Architecture Management success. European Journal of Information
Systems. 25(5). pp.411-431.
Lundqvist, S. A., 2014. An exploratory study of enterprise risk management: Pillars of
ERM. Journal of Accounting, Auditing & Finance. 29(3). pp.393-429.
Maskell, B. H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Morden, T., 2016. Principles of strategic management. Routledge.
Oliva, F. L., 2016. A maturity model for enterprise risk management. International Journal of
Production Economics. 173. pp.66-79.
Olson, D. L. and Wu, D. D., 2015. Enterprise risk management in finance. Springer.
Olson, D. L. and Wu, D. D., 2015. Enterprise risk management(Vol. 3). World Scientific
Publishing Company.
Peiris, K. D. A., Jung, J. and Gallupe, R. B., 2015. Building and evaluating ESET: A tool for
assessing the support given by an enterprise system to supply chain
management. Decision Support Systems. 77. pp.41-54.
Vernon, R. and Aharoni, Y., 2014. State-Owned Enterprise in the Western Economies
(Routledge Revivals). Routledge.
Wu, D., Olson, D. L. and Dolgui, A., 2015. Decision making in enterprise risk management: A
review and introduction to special issue.
Online
Cash flow statement of Sainsbury's. 2019. [Online]. Available through:
<http://financials.morningstar.com/cash-flow/cf.html?
t=SBRY&region=gbr&culture=en-US>
Cash flow statement of Tesco. 2019. [Online]. Available through:
<http://financials.morningstar.com/cash-flow/cf.html?
t=TSCDY&region=usa&culture=en-US>
17

APPENDIX
Financials of Sainsbury's
Income statement
Balance sheet
18

19

Financials of Tesco
20

Income statement
Balance sheet
21