Financial Analysis of Sainsbury and Tesco

This document provides a detailed financial analysis of Sainsbury and Tesco for the years 2018 and 2019. It includes calculations of financial ratios such as liquidity, profitability, efficiency, and gearing ratios. The analysis highlights the performance and position of both companies and provides recommendations for improvement.

PORTFOLIO

TABLE OF CONTENTS
PORTFOLIO 1.................................................................................................................................1
a) Calculating the financial ratios of both the companies for year 2018 & 2019. ......................1
b) Analysing the financial performance and position of two companies for year 2018 and
2019. ............................................................................................................................................4
c) Recommendations for improving performance of Sainsbury .................................................7
d) Limitations of financial ratios..................................................................................................7
PORTFOLIO 2.................................................................................................................................8
a) Using appropriate investment appraisal techniques choosing the most beneficial project. ....8
b) Limitations of using the different investment appraisal techniques......................................11
REFERENCES..............................................................................................................................13

PORTFOLIO 1
a) Calculating the financial ratios of both the companies for year 2018 & 2019.
FINANCIAL ANALYSIS
Liquidity ratio
Sainsbury Tesco
2019 2018 2019 2018
Current assets 7589 7857 12570 13600
Current liability 11417 10302 20680 19233
Inventory 1929 1810 2617 2264
Quick Assets 5660 6047 9953 11336
Current ratio
Current assets /
current liabilities 0.66 0.76 0.61 0.71
Quick Ratio
(Current Assets -
Inventory) / Current
Liabilities 0.5 0.59 0.48 0.59
Profitability ratio
Sainsbury Tesco
2019 2018 2019 2018
Employed Capital
(Total Assets -
Current Liabilities) 12124 11699 28269 25502
Operating profit 312 518 2153 1839
Return on capital
employed
Net operating
profit/Employed
Capital 2.57% 4.43% 7.62% 7.21%
Operating profit 312 518 1320 1210
Shareholder's Equity 8456 7411 14858 10502
Return on Equity
Net Income /
Shareholder's Equity 3.69% 6.99% 8.88% 11.52%
Sainsbury Tesco
2019 2018 2019 2018
Cost of Sales 27000 26574 59767 54141
Sales 29007 28456 63911 57493
Gross Margin Total Sales – 6.92% 6.61% 6.48% 5.83%
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COGS/Total Sales
Net profit 312 518 1320 1210
Sales 29007 28456 63911 57493
Net profit ratio
Operating Income/
Net Sales 1.08% 1.82% 2.07% 2.10%
Efficiency Ratios
Sainsbury Tesco
2019 2018 2019 2018
Trade Payables 4444 4322 9354 8994
Trade Receivables 661 744 1640 1504
Inventory 1929 1810 2617 2264
Net Assets 8456 7411 14858 10502
Cost of Sales 27000 26574 59767 54141
Sales 29007 28456 63911 57493
Inventory turnover
period
(Inventory/ Cost of
Sales)*365 26 25 16 15
Accounts Payable
Days
Accounts payable
/Cost of Sales *365 60 59 57 61
Account receivable
days
Accounts Receivable
/Cost of Sales * 365 9 10 10 10
Gearing Ratios
Sainsbury Tesco
2019 2018 2019 2018
Total Debt 15085 14590 34213 34404
Shareholder's Equity 8456 7411 14858 10502
Gearing ratio Total Debt/ Equity 1.78 1.97 2.30 3.28
Investor Ratios
Sainsbury Tesco
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2019 2018 2019 2018
Share Price 2.669 3.02 2.42 2.42
Earnings per share
(pence) 0.22 0.2 0.14 0.14
P/E ratio Share price /EPS 12.132 14.804 17.29 17.29
Earnings 502 465 1320 1210
Number of Shares 2198 2429 9686 8165
Earnings per share
(Pence)
Earnings / Number
of shares 0.23 0.19 0.1363 0.1482
Dividend (pence) 0.102 0.097 0.0577 0.041
Net Income per share 0.22 0.2 0.14 0.14
Dividend pay-out
ratio
Dividend / Net
Income per share 46.36% 47.55% 41.21% 29.29%
b) Analysing the financial performance and position of two companies for year 2018 and 2019.
The financial analysis is an important task to be performed by decision makers to
evaluate the efficiency, effectiveness of management and the current position and performance
as compared with previous years and whether there has been growth or it has become more
worse. The tool used for analysis is ratio analysis that makes the stakeholders of the company to
assess the financial figures of company (Abdul, 2017). There are different ratios which are used
by the users of financial statement such as profitability, efficiency, liquidity and solvency ratios.
They enable to form their decisions about company based on their respective interests.
Financial analysis of Sainsbury and Tesco is performed
Tesco plc is recognised as multinational grocery and a general merchandise retailer. It
serves in many countries successfully. From the annual report it could be evaluated that is was
strong year for company and has made progress in plans for creating customer value and
delivering good return to the shareholders with operating profit as 2bn for first time in the last
four years.
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Sainsbury on the other is 2nd largest supermarket chain in UK. Company had performance
history with revenues of 29.007 billion and net income of 219 million. The company has been
committed to delivering values to the customers with adequate returns to the shareholders. The
company has seen growth of 7.8% in underlying PBT. It has also seen reducing in the carbon
emissions and achieved target for 2020.
Current Ratios
It is calculated for evaluating the financial liquidity of company. It tells about ability of
company in making payments for the short term liabilities with the available current assets. A
company is supposed to have standard current assets twice of current liabilities. IT is considered
as strong and good liquidity position. Current ratio of Sainsbury in 2018 was 0.76 and 0.66 in
2019. There has been downward movement in current ratio. While Teso had 0.71 in 2018 and
0.61 in 2018. It has also shown decline from last year. The decreasing liquidity ratio is a serious
concern as both company are already having very liquidity position. They are not having enough
current assets to meet the liabilities or short term obligations (Chiaramonte and Casu, 2017). The
consequences of this could result in suppliers reducing their supplies and requiring quick
clearance of payments. It would create extra burden on companies causing them to take more
funds to make payments increasing their financial costs. The cash operating cycle of both the
firms is not adequate. Management is required to take active actions to improve the liquidity
position as it may impact the business. It has to control its increasing short term obligations by
raising funds through long term modes and also by improving the collection systems of
organisation.
Quick Ratios
The ratio is also liquidity ratio used for identifying ability to repay the short term
financial obligations from existing current assets. The difference is that this ratio does not
consider inventor as current asset it could not be sold quickly in the market. QR of Sainsbury
was 0.59 in 2018 and 0.5 it has also decreased. Tesco had QR of 0.59 in 2019 and 0.48 in 2018.
It could be seen there has been decline in ratio showing that it is required to be improved
(Madushanka and Jathurika, 2018). It requires that financial obligations has to be decreased.
Quick ratio has to be improved by restructuring the existing processes for cash cycle and funding
sources that will help in maintaining adequate capital structure.
Net Profit Margin
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It could be considered as most important ratio that is assessed by every stakeholder. This
reflects the ability of company to manage all activities and operation to earn adequate profits. It
is the final outcome of carrying out every business. NP of Sainsbury is 1.08% in 2019 and 1.82%
in 2018. It has decreased this year also. On the other Tesco is having NP of 2.07% and was
2.10% in 2018. The profits have shown decline (Bayrakdaroglu, Mirgen and Kuyu, 2017). Both
the companies have faced decline but it could be seen that NP of Sainsbury is more lower than
Tesco and the decrease is also higher from Tesco in current year. It shows that the business
performance of company is constantly declining which requires management to undertake steps
that would improve the profitability of both firm.
Gross Profit Margin
It is also a profitability ratio used to assess the trading effectiveness of the company. It
evaluated whether it had been successful in controlling the costs and generate adequate profits.
GP of Sainsbury was 6.61%in 2018 and 6.92% in 2018 which shows improvement as compared
with previous year. Tesco was having GP at 5.83% in 2018 and 6.48% in 2019. It could be
evaluated that the GP of both the firm is improved from last year but NP has been decreased
(Laitinen, 2017). The revenues of companies has increased from last year due to effective
marketing strategies and new collaborations. The growth of Tesco is higher than Sainsbury in GP
which shows strategies of Tesco are working effectively and it is required to implement effective
governance to monitor the policies for improvements and growth. Both the companies are
required to adopt technology that is more cost efficient and productive for them. It will help in
reducing their costs of production and increasing the profits.
Gearing Ratio
It is the ratio used for determining the risks associated with the company. It provides
whether there is adequate capital structure or not of the firm. As capital structure determines the
costs of capital of company. Sainsbury is having gearing ratio of 1.78 in 2019 and it was 1.97
last year. It has declined. On other Tesco is having GR of 2.30 in 2019 that was 3.28 last year.
Ratio has moved downward. The ratios of both companies have declined but Tesco has shown
major fall than Sainsbury. Downward movement shows that debts have been repaid and the
existing financial structure has been improved. Financial risk associated with business has
decreased.
P/E Ratio
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This ratio is used for valuing company which measures the current share prices relative to
earnings per share. PE is also known as earnings multiple. These are used by the experts to
determine relative value of the shares in apple to apple comparison. It provided the share price
represents projected EPS accurately (Jitmaneeroj, 2017). P/E of Sainsbury is 12 in current year
where of Tesco it is 17. The P/E of Sainsbury has declined where Tesco has not major change. It
could be evaluated from the analysis that share prices are correctly priced. The declining
performance of Sainsbury has declined the PE and share prices too which is not good for
company.
Earning Per share
It represents earnings per share available to the shareholders of company. EPS of
Sainsbury is 0.23 and 0.13 of Tesco. The EPS of Tesco is lower as the number of shareholders
are very high as compared with Sainsbury. It could also be evaluated that EPS of Sainsbury has
increased from last year and declined of Tesco. Increase is seen due to decrease in shareholders
and increase in profits. It shows that Sainsbury is making efforts to increase earnings to the
shareholders.
Return on capital employed
The ratio is used to analyse the effectiveness of management in generating returns over
the existing resources of company. It is an important ratio that provides the investors whether
company will be able to utilise the resources appropriately or not. Sainsbury has seen fall in
ROCE from 4.43% in 2018 to 2.57% in 2019. While Tesco had ROCE of 7.62% 2019 and it was
7.21%. There has been no significant fluctuations in ROCE of Tesco but the ratio of Sainsbury
has fallen to half from last year (Pivac, Barać and Tadić, 2017). Sainsbury is required to improve
the ROCE as it shows the existing management strategies are not working effectively to generate
adequate returns for the business. It has to assess existing methods and do restructuring or
implement new practices for making optimum utilisation to generate better returns.
Average inventory turnover period
It tells about the time within which management is making the inventory to convert in
cash. It comes under efficiency ratio as it management efficiency in rotating the inventory. The
ITP of Sainsbury is 26 days which was 25 in last year. Tesco is having ITP of 16 days in 2019
and 15 days in 2018. Turnover period of Tesco is short which shows that the management is
more efficient than Sainsbury. Lower period means inventory is converted into cash quickly.
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Dividend Payout ratio
Proportion of profits generated by company are distributed to the shareholders as return.
The Dividend Payout of Sainsbury 46.36% and Tesco has increased payout to 41.21%. Higher
payout boost shareholder confidence as they invest in company for earning adequate returns
(Moore, 2020). Higher payout will satisfy existing customers and also attract new investors for
firm.
c) Recommendations for improving performance of Sainsbury
Sainsbury has shown decrease in the revenues from last year and so in profits. The Brexit
had significant influence on revenues of company as EU will have to pay tax for buying goods
from UK. It has to improve the liquidity by adopting long term finances rather than short
borrowing with higher financial charges for meeting working capital requirements. To improve
the profitability it has undertake new marketing strategies to increase the customer base and also
select effective supply chain to cover increased geographic areas. At the same time it is also
required to keep effective monitoring over the costs adopting methods such as lean
manufacturing, TQM and such other methods that will reduce wastage and costs. Also the
management has to adopt new strategies that will improve the inventory turnover period.
d) Limitations of financial ratios
 Though the tool is highly used by the decision maker to evaluate performance and
position of company it has some limitation as follows
 It is based over historical figures which means it provides information only about events
that has already occurred. It loses effectiveness with change in business model.
 It does not accounts for changing market conditions and its influences on business to
evaluate the performance.
 It compares the financial information related to particular date that may not have all the
information relating to company about future or contingent events.
 Factors such as economic fluctuations, inflations and other factors are not considered
which makes the comparison between the periods somewhat questionable.
 It focuses only over quantitative data while there are many qualitative factors that affects
the business significantly.
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PORTFOLIO 2
a) Using appropriate investment appraisal techniques choosing the most beneficial project.
Net Present Value
Project A
year cash inflow
PV factor
@16%
discounted
cash flow
1 45000 0.862 38793
2 45000 0.743 33442
3 45000 0.641 28830
4 35000 0.552 19330
5 35000 0.476 16664
6 25000 0.410 10261
total discounted
cash flow 137059
less: initial
investment 110000
Net present value 27059
Project B
year cash inflow
PV factor
@10%
discounted
cash flow
1 10000 0.86 8621
2 15000 0.74 11147
3 25000 0.64 16016
4 55000 0.55 30376
5 65000 0.48 30947
6 50000 0.41 20522
total discounted
cash flow 97108
less: initial
investment 110000
Net present value -12892
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Internal Rate of Return
Project A Project B
Year Cash flow Year Cash flow
0 -110000 0 -110000
1 45000 1 10000
2 45000 2 15000
3 45000 3 25000
4 35000 4 55000
5 35000 5 65000
6 25000 6 50000
Internal
rate of
return 27.00%
Internal rate
of return 12.00%
Accounting Rate of Return
Project A Project B
Year Cash flow Year Cash flow
1 45000 1 10000
2 45000 2 15000
3 45000 3 25000
4 35000 4 55000
5 35000 5 65000
6 25000 6 50000
Average
profit 38333.33
Average
profit 36666.67
Average
investment 55000
Average
investment 59000
Average
rate of
return 70.00%
Average rate
of return 62.00%
Payback Period
Project A Project B
9

year cash inflow
cumulative
c/f year cash inflow
cumulative
c/f
2020 45000 45000 2020 10000 10000
2021 45000 90000 2021 15000 25000
2022 45000 135000 2022 25000 50000
2023 35000 170000 2023 55000 105000
2024 35000 205000 2024 65000 170000
2025 25000 230000 2025 50000 220000
20000 5000
0.44 0.08
payback
period 2.44 years
payback
period 4.08
Analysis
The viability of projects is evaluated using the investment appraisal techniques that
shows which project is better than other. Different techniques used for the capital budgeting
purpose includes NPV, IRR, ARR and payback method. The evaluation shows that NPV of
project A is positive and negative of project B (Sarfo, 2019). It could be evaluated that project A
will derive profits while B will suffer losses as cash flows are not enough to cover initial
investment costs.
IRR of project A is 27% where of B is 12% Project having better return should be
adopted for the business. If IRR is lower it means it would not be able to generate good returns
for the company. It shows Project A as more beneficial. ARR is used for evaluating the return
based on accounting profits which is 70% of project A and 62% of project B. It is metric used for
measuring the returns from project in percentage terms. It could be evaluated from the analysis
that A have higher rate as compared to B. It also suggests A is more profitable for the business.
Payback period used for evaluating the time within which the costs of investments will be
recovered. The method does not consider time value of money for computing the period. On
above calculation it could be seen that Payback of project A is 2.44 years while of project B is
4.08 years. Payback period is higher of B that shows it will be take more time in recovering the
cost of project while project A is lower.
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It could be evaluated from the overall analysis that Project A is having higher NPV, IRR,
ARR and lower payback period. This makes it viable for the company in comparison with other.
Firm would derive adequate profits by choosing this project for the business.
b) Limitations of using the different investment appraisal techniques
The investments appraisal techniques are essential techniques used for assessing the
viability of project but all techniques has some or the other drawbacks that make the analysis
unreliable. NPV techniques is hard and complex method as it involves calculation of discounting
rate for the project. If rate is not determined properly it will make the whole calculations wrong.
Also the method do not considers cash flows occurring after life of project.
Internal rate of return which is discounting rate or internal return does not consider time
value of money for computing the results. As it only considers cash flows the rate generated is
not accurate and makes reliability of results questionable (Ndanyenbah and Zakaria, 2019). In
the case of ARR also TVM is not used and it only focus over accounting profits and not over the
cash flows. It provides the return rate without considering time factor. It could be manipulated
easily as based over profits by making changes in the depreciation methods.
Payback period which is important technique for assessing the return period does not
consider time factors for computing the results. The cash flows in this method receives higher
weight in beginning period than later years. The investment techniques are useful tool for
business decision making as it involves considerable capital investments (Pawlak and Zarzecki,
2020). If techniques are not able to evaluate the future cash flows at present the results drawn
would be ineffective and would lead the management to make wrong decisions.
The business is highly dynamic and there are number of changes that are to be
considered. These techniques do not consider other factors that could influence the project
significantly.
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REFERENCES
Books and Journals
Abdul, A.A.A., 2017. The Relationship between Solvency Ratios and Profitability Ratios:
Analytical Study in Food Industrial Companies listed in Amman Bursa. International
Journal of Economics and Financial Issues. 7(2). p.86.
Bayrakdaroglu, A., Mirgen, C. and Kuyu, E., 2017. Relationship between profitability ratios and
stock prices: an empirical analysis on BIST-100. PressAcademia Procedia. 6(1). pp.1-10.
Laitinen, E.K., 2017. Profitability ratios in the early stages of a startup. The Journal of
Entrepreneurial Finance. 19(2). pp.1-28.
Pivac, S., Barać, Ž.A. and Tadić, I., 2017. An analysis of human capital investments, profitability
ratios and company features in the EUures in EU. Croatian Operational Research Review,
pp.167-180.
Chiaramonte, L. and Casu, B., 2017. Capital and liquidity ratios and financial distress. Evidence
from the European banking industry. The British Accounting Review. 49(2). pp.138-161.
Madushanka, K.H.I. and Jathurika, M., 2018. The impact of liquidity ratios on
profitability. International Research Journal of Advanced Engineering and Science. 3(4).
pp.157-161.
Jitmaneeroj, B., 2017. Does investor sentiment affect price-earnings ratios?. Studies in
Economics and Finance.
Moore, J., 2020. Glamour among value: P/E ratios and value investor attention. Financial
Management. 49(3). pp.673-706.
Sarfo, F.A.U.S.T.I.N.A., 2019. Investment appraisal techniques underlying Ghanaian oil
marketing companies investment decisions, a case of Goil Company Limited (Doctoral
dissertation, University of Education, Winneba).
Ndanyenbah, T.Y. and Zakaria, A., 2019. Application of Investment Appraisal Techniques by
Small and Medium Enterprises (SMEs) Operators in the Tamale Metropolis, Ghana.
Pawlak, M. and Zarzecki, D., 2020. Investment Appraisal Practice in the European Union
Countries. European Research Studies Journal. 23(Special 2), pp.687-699.
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