Supermarket Giants: Financial Performance Analysis

This assignment requires a comprehensive analysis of the financial performance of two major supermarket chains, Sainsbury's and Tesco, for the years 2015 to 2017. Students need to calculate and interpret various financial ratios including Return on Capital Employed (ROCE), Return on Assets (ROA), Debt-Equity Ratio, Total Asset Turnover Ratio, Fixed Assets Turnover Ratio, and Inventory Turnover Ratio. This analysis will provide insights into the companies' profitability, solvency, liquidity, and activity, enabling students to draw conclusions about their financial health and performance.

FINANCIAL STATEMENT ANALYSIS
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Backgound of companies and their position in the industry............................................................1
Justification of methodology and approaches to analyze and interpret financial statements..........2
Discussion of results........................................................................................................................2
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
APPENDIX......................................................................................................................................7

INTRODUCTION
Ratio analysis is the one of the important approach that is used to meaure firm
performance. In the current report, performance of Tesco and Sainsbury is analyzed in detail and
by considering ratios of both firms detail discussion is carried out on their performance. In start
of the report backgroud of companies and their current state in industry is explained. In middle
part of the report, methodology that is used for analysis of facts is justified. At end of the report,
results that were obtained are discussed in detail and comments are made on the firms
performance. Reasons behind such kind of performancce are also identified in the report. It can
be said that scope of present research is wide and detailed analysis of firms is done in the report.
Backgound of companies and their position in the industry
Tesco and Sainsbury are the two one of the largest retail firms in the UK that are looking
for consistently expanding their business at rapid rate. In current time period it can be observed
that both firms are stuggling to maintain thweir position. Presently, both firms comes in top 5
retailers in UK. Hence, it can be said that position of both firms is very strong in the industry.
Low profitability is observed in both firms and it is major matter of concern for them (Financial
performance, 2017). Competion become more fierce adter advent of two German retailers which
are Lidl and Aldi. These firms are making available products at very cheaper rate and due to this
reason they are able to attract customers towards their business. Hence, it can be said that Lidl
and Aldi due to cheaper price of the product are successfully able to give tough competion to
both Tesco and Sainsbury. However, currently also both latter firms are in good position in the
industry but if same condition remain in existence then in that case situation may become worse
then estimated. Tesco in order to make its position strong is closing stores that are runing in loss
and is using advanced tools and techniques like Analytics to make its position more stronger and
developing deep knowledge about customers. By targeting customers in better manner firm is
planning to expand its business at rapid rate. Sainsbury on other hand, is making every attempt to
maintain its position in the industry and in this regard it is launching many attractive promotion
offiers to the customers so that more and more can be created and retained in the business
(Sainsbury warns over pay squeeze as profits slide, 2017). Hence, it can be said that bothh firms
condition is not so strong but currently also they control leading positions in the industry.
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Justification of methodology and approaches to analyze and interpret
financial statements
Ratio analysis approach is used to evaluate firms performance and it can be assumed that
appropriate method is used to meausre performance. This is because percentage change approach
can also be used to measure performance but it can not give accurate picture of the firm
performance like ratio analysis give. On this basis of this, it can be said that ratio analysis use to
evaluate financial statements is wise decisions. Firm performance can be compared with itself on
yearly basis and on this basis it can be identified whether firm perform good or bad = and due to
this reason firms performance are compared with each other so that it can be identified whether
firm successfully bear its rivals. Due to all these reasons it can be said that methodology of
analysis is appropirate. Use of charting make this analysis more effective because merely by
looking at chart one can easily identify that firm on yearly basis perform well or successfully
give compeition to rivals.
Discussion of results Effeciency ratios: Effeciency ratio reflect the effeciency level with which firm is make
use of assets in its business (Ozturk and Acaravci, 2013). It can be seen from table given
in apendix that total assets turnover ratio of Sainsbury is stable and its value is low which
means that firm is not able to make best use of assets in its business. On other hand, in
case of Tesco ratio value decline slightly from 1.32 to 1.24 which clearly indicate that
firm effeciency level decline in past years. This happened because revenue is not growing
at a speed at which assets increased. Fixed assets turnover values increased slightly from
2.44 to 2.65 but inventory turnover ratio of sainsbury declined. This means that Sainsbury
is not able to convert its product at fast rate in sales in business. In case of Tesco fixed
asset turnover ratio value incrase from 2.77 to 3.11. At same time in case of Tesco
inventory turnover ratio improved. It can be said that Tesco perform better then
Sainsbury.UK economic condition currently is not good and due to this reason people are
spending less amount of money on products. They wants cheapest products and due to
this reason are attracting towards low price retails Lidl and Aldi to fulfill their needs. Due
to high price of products relative to German retailers less customers are received in the
business. On other hand, both firms are expanding their business consistently. Due to this
reason either there is stability or performance of the firm declined.
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 Liquidity ratios: In case of Sainsbury current ratio value increased from 0.64 to 0.74
which reflect that liquidity increased in business but this number must be more big. In
case of Tesco also value of ratio increased from 0.6 to 0.79. It can be said that both firms
are giving similar performance and they need to increase liquidity more in business. This
is because both firms currently are not able to pay all of current liabilities by using
current assets. Due to receipt of less number of customers in business less revenue is
earned in the business and due to this reason firms are not able to pay short term debt on
time. Due to poor economic condition and chances of job loss more money saving
behaviour is increasing among people and due to this reason people spend less and saving
rate increased. Due to this reason less number of people are prefferd to make purchase of
products from Tesco and Sainsbury stores (Xu., 2014). This lead to earning of less
revenue and scarcity of working capital in the business. Thus, current liability is
increased in the business so that day to day needs can be met. Hence, it can be said that
earning of less revenue in the business is one of major reason behind decrease in current
ratio.
Interesting fact is that in case of acid test ratio for Sainsbury value of ratio decline
sharply from 0.21 to 0.16 which means that inventory cover major portion of current
assets and due to its conversion in case at slow speed liquidity position of the firm is not
so good. In comparison to this Tesco is in satisfactory position as value of ratio increased
from 0.42 to 0.66. Value of ratio is above standard 0.50 which means that Tesco if
inventory is ignored can pay current liability sufficiently in comparison to Sainsbury.
This means that Tesco is manging its invenory in prudent manner and less cash is
blocked in unused assets. Investment: In case of ROCE ratio value increase from -0.97 to 5.03 which reflect firm
give good performance in its business. In case of Tesco also performance improvement is
observed but it is less sufficient as ratio value increased from -23.54 to 1.67. It can be
said that both firms are giving positive returns to their shareholders but same is very low.
Sainsbury is performing better then Tesco. This may happened because Sainsbury reduce
its equity capital sharply and earn profit at same rate (Rodríguez‐Pérez., 2011). Due to
this reason suddenly ROCE value rise in case of relevant firm. Same strategy is followed
by Tesco but it does not reduce its equity at large scale and due to this reason very less
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amount of ROCE is observed in its case. On front of return on assets, value increased for
Sainsbury from -1 to 2.050. However, value remain negative in case of Tesco and on this
basis it can be said that Sainsbury perform well then Tesco but it is not sufficient.
Earning of low amount of profit and consistent growth of business which lead to increase
in asset is the one of the main reason due to which ROA of both firms is very low. Profitability: Gross profit percentage in case of Sainsbury increased from 5.08% to
6.23% in case of Sainsbury but value of same is very low in case of Tesco as it increased
from -3.90% to 5.20%. However, it can be said that latter firm show good recovery in its
profitability but still it can not be assumed good (Zimlichman, 2013). Charging of less
margin on each unit sold at retail store is one of the main factor that is responsible for
earning of less amount of gross profit in the business. In case of net profit profiability
increased from -0.69% to 1.44% for Sainsbury. In case of Tesco net profit is in range of -
9.22% and it is -0.07% in 2017. It can be said that Sainsbury slightly perform better then
Tesco but both of them have very less control their indirect expenses and due to this
reason less profit is earned by both firms in their business. General financial data and share price movement: It can be seen that in last five years
sales revenue of Tesco decreased consistently and due to this reason share price of the
company shares reduced regulalry. Due to this reason investors face huge loss on
investement. This is evidenced from the fact that in year 2013 Tesco revenue was 64826
and it decreased to 55917in 2017 and share price in year 2013 was 387 which now
declined to 178. This proved that due to decline in sales revenue and profitability firm
shares tubeled by great percentage. Similarly, in case of Sainsbury revenue was 23303
and it increased to 26224 in year 2017 which reflect that revenue increased but if net
income will be observed then it can be seen that was 614 in year 2013 and decreased to
377 in year 2017 which means that firm does not perform good in its business. Share
price of Sainsbury awas 336 in year 2013 which declined to 225 and this again reflect
that due to earning of less profit in the businss share price of shares decline at fast rate
(Podobnik, 2011). Hence, there is need to do lots of things from firms side in order to
improve performance. If on time effots will not be taken then in that case situation may
become worse and both firms may losse their leading positions to German retailers in
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easy manner. Cost cutting tools need to be employed in the business so that cost
effeciency can be bring in the business.
CONCLUSION
On the basis of above discussion it is concluded that ratio analysis is the one of the
important method that is used to meausre firm performance. Managers must use ratio analysis
time to time to measure firm performance and making business decisions. It is also concluded
that condition of both firms is not good and in some areas Sainsbury give better performnace
then Tesco but both needs to do a lot in their business so that profitability can be increased at fast
rate and be able to give tough competition to rivals.
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REFERENCES
Books and Journals
Ozturk, I. and Acaravci, A., 2013. The long-run and causal analysis of energy, growth, openness
and financial development on carbon emissions in Turkey. Energy Economics, 36, pp.262-
267.
Podobnik, B., Et al., 2011. Asymmetric Lévy flight in financial ratios. Proceedings of the
National Academy of Sciences. 108(44). pp.17883-17888.
Rodríguez‐Pérez, G.,Et al 2011. Assessing the Impact of Fair‐Value Accounting on Financial
Statement Analysis: A Data Envelopment Analysis Approach. Abacus. 47(1). pp.61-84.
Xu, W.,Et al 2014. Financial ratio selection for business failure prediction using soft set
theory. Knowledge-Based Systems. 63. pp.59-67.
Zimlichman, E.,Et al., 2013. Health care–associated infections: a meta-analysis of costs and
financial impact on the US health care system. JAMA internal medicine. 173(22). pp.2039-
2046.
Online
Financial performance, 2017. [Online]. Available through:<
https://www.tescoplc.com/investors/reports-results-and-presentations/financial-
performance/> .
Sainsbury warns over pay squeeze as profits slide, 2017. [Online]. Available through:<
https://www.theguardian.com/business/2017/may/03/sainsburys-pay-squeeze-profits-
supermarket-argos>.
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APPENDIX
Liquidity Ratios
Sainsbury Tesco
Ratios Formula 2015 2016 2017 2015 2016 2017
Current Assets 26.73 26.18 31.98 11958 14828 15417
Current
Liabilities 41.86 39.62 43.44 19810 19714 19405
Current Ratio
current assets /
current liabilities 0.64 0.66 0.74 0.6 0.75 0.79
Quick Assets 8.8 7.89 7.01 6.58 16.44 18.74
Acid test Ratio
quick assets/
current liabilities 0.21 0.20 0.16 0.42 0.59 0.66
Profitability Ratios
Sainsbury Tesco
Ratios Formula 2015 2016 2017 2015 2016 2017
Gross profit 1208 1456 1634 -2112 2854 2902
Sales 23775 23506 26224 62284 54433 55917
Net profit -166 471 377 -4325 1994 1966
Gross profit
ratio
Gross Profit / sales
revenue *100 5.08% 6.19% 6.23% -3.90% 5.30% 5.20%
Net profit ratio
Net Profit / sales revenue
*100 -0.69% 2.00% 1.44% -9.22% 0.25% -0.07%
Financial Performance Ratios
Sainsbury Tesco
Ratios Formula 2015 2016 2017 2015 2016 2017
Capital employed 17113.4 7212.86 7495.03 7071 8626 6438
Return on Capital
Employed
Net Profit / Capital
employed -0.97 6.530 5.030 -23.54 2.15 1.67
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Return on Assets -1 2.810 2.050 -12.17 0.31 -0.09
Solvency Ratios
Sainsbury Tesco
Ratios Formula 2015 2016 2017 2015 2016 2017
Shareholders Equity 33.49 37.5 34.82 15.99 19.65 14.04
Long term Debt 14.13 12.1 9.75 23.79 24.2 20.35
Debt-equity ratio
Shareholders equity /
long term debt 2.37 3.10 3.57 0.67 0.81 0.69
Activity Ratios
Sainsbury Tesco
Ratios 2015 2016 2017 2015 2016 2017
Total Asset Turnover Ratio 1.44 1.4 1.43 1.32 1.24 1.24
Fixed Assets Turnover Ratio 2.44 2.42 2.65 2.77 2.84 3.11
Inventory Turnover Ratio 22.54 22.44 17.93 19.71 19.15 22.41
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