Analysis of Financial Performance and Position of Sainsbury and Tesco

This document provides an analysis of the financial performance and position of Sainsbury and Tesco. It includes liquidity ratios, profitability ratios, gearing ratios, and investor ratios. The analysis highlights the weaknesses and strengths of both companies and provides recommendations to improve their financial performance.

MANAGERIAL FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
PORTFOLIO 1................................................................................................................................1
a) Financial Ratios of Sainsbury and Tesco for the year ending 2018 & 2019...........................1
b) Analysis of performance, financial position and the investment potential of Sainsbury and
Tesco............................................................................................................................................3
c. Recommendation on improving the financial performance of company.................................6
d. Limitation of relying over financial ratios in interpreting performance of company..............7
PORTOFOLIO 2.............................................................................................................................7
a. Use of appropriate investment appraisal techniques for project A and project B....................7
b. Limitation of using the investment appraisal techniques in long term decision making.......11
REFERENCES..............................................................................................................................13

PORTFOLIO 1
a) Financial Ratios of Sainsbury and Tesco for the year ending 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 0.50 0.59 0.48 0.59
Profitability ratio
Sainsbury Tesco
2019 2018 2019 2018
Employed
Capital
(Total Assets -
Current
Liabilities) 12124 11699 28269 25502
Net profit 1331 738 1320 1210
Return on
capital
employed
Net operating
profit/Employed
Capital 10.98% 6.31% 4.67% 4.74%
Net Income 1331 738 1320 1210
Shareholder's
Equity 8456 7411 14858 10502
Return on
Equity
Net Income /
Shareholder's
Equity 15.74% 9.96% 8.88% 11.52%
Sainsbury Tesco
2019 2018 2019 2018
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Cost of Sales 27000 26574 59767 54141
Sales 29007 28456 63911 57493
Gross Margin
Total Sales –
COGS/Total
Sales 6.92% 6.61% 6.48% 5.83%
Net profit 1331 738 1320 1210
Sales 29007 28456 63911 57493
Net profit
ratio
Operating
Income/ Net
Sales 4.59% 2.59% 2.07% 2.10%
Efficiency Ratios
Sainsbury Tesco
2019 2018 2019 2018
Trade
Payables 4444 4322 9354 8994
Trade
Receivables 661 744 1640 1504
Net Assets 8456 7411 14858 10502
Cost of Sales 27000 26574 59767 54141
Sales 29007 28456 63911 57493
Inventory
turnover
ratio
Sales /
Inventory 3.43 3.84 4.30 5.47
Accounts
Payable Days
Sales /
Inventory *365 55.92 55.44 53.42 57.10
Account
receivable
days
Sales / Accounts
Receivable *
365 8.32 9.54 9.37 9.55
Gearing Ratios
Sainsbury Tesco
2019 2018 2019 2018
Debt 12166 13990
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Equity 8456 7411 14858 10502
Debt equity
ratio Debt/ Equity 0.00% 0.00% 81.88% 133.21%
Investor Ratios
Sainsbury Tesco
2019 2018 2019 2018
Share Price 2.669 3.02 2.42 2.42
Earnings per
share (pence) 0.22 0.20 0.14 0.14
P/E ratio Debt/ Equity 12.132 14.804 17.29 17.29
Earnings 502 465 1320 1210
Number of
Shares 2198 2429 9686 8165
Earnings per
share (Pence) Debt/ Equity 0.23 0.19 0.1363 0.1482
Dividend
(pence) 0.102 0.097 0.0577 0.041
Net Income
per share 0.22 0.20 0.1400 0.1400
Dividend
pay-out ratio Debt/ Equity 46.36% 47.55% 41.21% 29.29%
b) Analysis of performance, financial position and the investment potential of Sainsbury and
Tesco
Financial analysis refers to assessing the financial performance and position of the
company. It helps in assessing the internal working procedures of the company. The
management and operational efficiency of the companies could be identifies using the ratio
analysis to assess the profitability, liquidity, efficiency and solvency of the company.
Sainsbury is among the largest chains of supermarket in UK. The company sells
groceries, home wares, clothing, electrical and others. Company has been adequately operating
since years.
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and multinational retailer having headquarters in UK. It is 9th largest retailer in world by
the revenues. It is having shops in the seven countries across Europe and Asia and is also market
leader of the groceries in UK.
Liquidity Ratios
Current ratio is used for assessing the ability to repay the liabilities using the current
assets of company. Sainsbury is having current ratio of 0.66 that has reduced 0.76 in 2018. There
has been decline in current ratio of company. On the other current ratio of Tesco is 0.61 in 2019
and 0.71 and 2018. It could be assessed that both companies are suffering from critical stage in
liquidity position (Guo and Wang, 2019). The ratio shows that company is not having enough
assets for making repayments for its short term obligations.
Quick Ratio of Sainsbury has declined to 0.5 in 2019 from 0.59 in 2018. There has been
decline in quick ratio. While the Tesco is having ratio of 0.48 which was 0.59 last year. It could
be evaluated that the both the companies are having acid test ratio below the standard of 1.5. The
liquidity position of companies is very weak. They are required to take immediate steps to
improve their liquidity using effective cash operating cycle. The strong liquidity position is very
essential for the business to retain the interest of suppliers.
Profitability ratios
Gross Profit Margin is used to assess the ability of management in carrying out the
trading activities. The GP ratio of Sainsbury has improved to 6.92% from 6.61% in previous
year. The GP of Tesco was 5.83% in 2018 and it has also improved to 6.48% in 2019. This
shows that the steps taken by management have helped in increasing the revenues of the
company (Gill, 2018). However, it could be assessed that the GP of both the companies is weak
but Sainsbury has shown higher growth. The management is required to adopt further cost
effective strategies to increase the GP of company so that it could meet the other costs essential
for running the business.
Net Profit Margin of the Sainsbury is 4.59% which was 2.59% in the year 2018. It
could be evaluated that it has increased the net profit to double as compared from last year. NP
of Tesco is 2.7% and has not shown any significant change as compared with last year. It could
be assessed that Sainsbury has been able to improve its position as compared with Tesco. The
increasing net profits would increase the confidence of shareholders. The management strategies
have helped in improving the net profits of Sainsbury (Alt, Berezvai and Agárdi, 2020). Tesco is
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also required to take actions to improve the net profitability. It is essential for the business to
increase the return to shareholders and attracting new shareholders for the business
Gearing Ratio
Debt equity is used to assess the debt rose by company against its equity. The Sainsbury
is having debt of 32.57% which has declined from last year which was at 44.33%. The decline in
ratio show company has repaid its debts. Tesco on the other is having ratio of 81.88% in 2019
and it was 133.21% in 2018. Though debts have declined the financial risk of the company is
still high. It could be evaluated that Sainsbury is having lower financial risk as compared with
the Tesco. A company with higher financial risk is more risky. The capital structure of Sainsbury
is more adequate in comparison with Tesco.
Investor Ratios
P/E ratio is used for valuing company which measures share price as against the earning
per share. PE is used by the investors and the analysts for determining value of shares of
company. The P/E ratio of Sainsbury is 12.13 in 2019 and 14.084 in 2018. There has been a
decline in PE ratio. On the other PE ratio of Tesco has remained at 17 in both the years. As per
the industry trends it could be evaluated that the PE ratio of Tesco is having more adequate than
Sainsbury (Mbama, 2018). This shows that Sainsbury is required to enhance the PE ratio. The
share prices of Sainsbury are higher than Tesco and it could be seen that the lower prices does
not attract the investors. It shows that the company is not operating effectively in the market.
Earnings per share are ratio showing profit of company per share which is calculated
on the annual basis. It is arrived at by dividing the net income for the year from the total number
of shares outstanding. EPS of Sainsbury is 23 pence and has improved from 19 pence in previous
year. On the other the Tesco is having EPS of 14 pence and this has also improved from 15
pence. It could be evaluated that EPS of Sainsbury is higher than the Tesco. Higher EPS shows
higher returns to the investors and have higher growth prospects. It attracts the attention of
investors and increases the demand for shares.
Return on capital employed is 10.98% and it has improved from 6.31% last year of
Sainsbury. There has been upward movement of the return on capital employed. The ratio is used
to assess the efficiency of management in running the operations of company. On the other
Tesco is having ROCE is 4.67% and significant change has not been seen in return
(Zábojníková, 2016). Also the return is very low of company showing that the management is
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required to undertake steps to improve the return. Lower ratio creates risk for the investors as it
reflects inefficiency of management in utilising the assets effectively.
Inventories Turnover of Sainsbury is 3.43 and on the other of Tesco it is 4.30. Inventory
turnover of both the companies have declined as compared with previous year. It could be
evaluated that Tesco is having high turnover ratio in comparison with Sainsbury. Higher turnover
reflects management efficiency to generate sales.
Dividend Payout ratio of the Sainsbury is 46.36% any major changes has not been seen.
The Tesco is having payout of 44.38%. Higher payout ratio shows that investors are getting
adequate returns over their investments.
From the above analysis it could be evaluated that financial performance, position and the
investor ratios of Sainsbury are adequate as compared with Tesco.
c. Recommendation on improving the financial performance of company
With the above analysis it is clear that company is having low financial performance as
compared to the other company. Thus, for this some of the major recommendation to improve
the financial position are as follows-
The major recommendation to the company is to manage and try to decrease the expenses
of the company. This is majorly required because of the reason that when the company will limit
their expenses then this will increase the profitability of the company.
Another major recommendation for the company in improving the financial position is to
hire a professional or an expert in the field of investment management. This is particularly
because of the reason that when the company will hire a professional then this will increase the
efficiency of the company in taking decision relating to the better allocation of the limited funds.
Along with this another major recommendation for the company is that they must
increase their current assets so that the current liabilities can be paid off easily. Further it is
advisable to company that they must maintain the ideal current ratio of 2: 1 so that they have
enough liquidity of the funds.
In addition to this another major recommendation to improve the financial position of the
company is that try to increase net profit ratio of the company. This is particularly because of the
reason that when the company will have higher net profit ratio then it reflects that the company is
earning higher profits.
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d. Limitation of relying over financial ratios in interpreting performance of company
Financial ratio analysis is most common technique used to interpret company's
performance (Michael and et.al., 2020). It helps the company to depicts the important financial
parameters, however being useful tool it has some limitation also.
a) Based on only Historical:
Financial ratios are based on historical information which is irrelevant because the technique
assumes that history repeat but it’s not accurate when business model and product line has
changed.
b) Does not considered the market condition:
Financial Ratios analysis does not corporate with changing market condition. Its Interpretation is
based on only previous data so its interpretation is neither accurate nor practical (Sriram, 2020).
c)Considered the position of Business on particular date:
Financial ratio analysis uses the company's balance sheet information to interpret the company's
position which not accurate as its figures are based on historical data.
d)Does not considered the impact of inflation:
Ratio analysis does not consider the price rise and uses only historical prices that tend to predict
historical position only which is biggest limitation of financial ratio analysis. Ratio analysis is
based on financial statements prepared by company so it only considered quantitative data and
not qualitative which is biggest limitation (Kadim, Sunardi and Husain, 2020).
PORTOFOLIO 2
a. Use of appropriate investment appraisal techniques for project A and project B
Payback period
project A
year cash inflow cumulative c/f
2020 45000 45000
2021 45000 90000
2022 45000 135000
2023 35000 170000
2024 35000 205000
2025 25000 230000
20000
0.44
payback period 2.44 years
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project B
year cash inflow cumulative c/f
202
0 10000 10000
202
1 15000 25000
202
2 25000 50000
202
3 55000 105000
202
4 65000 170000
202
5 50000 220000
5000
0.08
payback period 4.08
Net present value
project A
year
cash
inflow
PV factor
@16%
discounted cash
flow
1 45000 0.862068966 38793
2 45000 0.743162901 33442
3 45000 0.640657674 28830
4 35000 0.552291098 19330
5 35000 0.476113015 16664
6 25000 0.410442255 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 0.862068966 8621
2 15000 0.743162901 11147
3 25000 0.640657674 16016
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4 55000 0.552291098 30376
5 65000 0.476113015 30947
6 50000 0.410442255 20522
total discounted cash
flow 97108
less: initial investment 110000
Net present value -12892
Internal rate of return
project A
year cash flow
0 -110000
1 45000
2 45000
3 45000
4 35000
5 35000
6 25000
Internal rate of return 27%
project B
year cash flow
0 -110000
1 10000
2 15000
3 25000
4 55000
5 65000
6 50000
Internal rate of return 12%
Average rate of return
project A
year cash flow
1 45000
2 45000
3 45000
4 35000
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5 35000
6 25000
Average profit 38333.33
Average investment 55000
Average rate of return 70%
project B
year cash flow
1 10000
2 15000
3 25000
4 55000
5 65000
6 50000
Average profit 36666.67
Average investment 59000
Average rate of return 62%
Interpretation- as per the review of above all the different techniques of the investment
appraisal it is clearly evident that the company must invest in the Project A as this is more
beneficial for the company in comparison to project B. the first investment technique applied
was the payback period method and this method assist the company in identifying the period of
time in which the invested amount can be regained or recovered. For the project A it was 2.44
year and for project B it was 4.08 years. Thus, it is clearly visible that the company Ross Hill Ltd
must go for the project A. The major reason underlying this fact is that when the company will
invest the amount of money in plant A then they will be able to recover their amount of
investment in 2.44 years only which is very high in project B that is 4.08 years.
On the other side another technique of investment appraisal that is the NPV that is net
present value the company comes to know the present value of the future cash flow which they
will be generating after the investment in the project. Thus, with the above calculation it was
clear that the NPV of the project B is in negative that means that the earning in the future has the
no current value and thus investing in that option will not be beneficial for the company. Thus,
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on the basis of the NPV technique as well the project A is of more benefit and the company must
go for this option only.
In addition to this the internal rate of return that the IRR technique of investment
appraisal was also used by Ross Hill limited in order to analyse both the projects. This is a tool
which is being used by the company in order to analyse and estimate the profitability of the
option of investment being available with the company. Hence, with the above table of IRR for
both the project it is clearly visible that project A has the IRR of 27 % whereas the project B is
having 12 %. In comparison of both the IRR the project A is having more IRR and thus it is
recommended to company to go for project A as this will provide more of the return to the
company.
In the end the last investment appraisal technique used by Ross Hill limited is the ARR
that is average rate of return. This is a tool which assist the company in analysing the total
average annual amount of case which is being generated over the whole life of the investment.
For the project A, the ARR is 70 % and for project B it is 62 %. Hence, it is advisable to Ross
Hill limited to invest the money in the project A only as this will be more beneficial to the
company and will yield more of the profits in future as compared to the other project.
b. Limitation of using the investment appraisal techniques in long term decision making
The investment appraisal techniques are the techniques which assist the company in
analysing the profitability of the option of investment (Warren and Seal, 2018). Analysing all the
investment option is very essential as this depicts the profitability of the option and then invest in
that option. Thus, this assist the company in analysing the option of investment thoroughly and
the decide whether they must invest in the option or not. But there are some of the limitation
attached using the investment appraisal techniques in the long term decision making which are as
follows-
The major limitation is that the business environment is very dynamic and changing and
thus there are many different types of risk and uncertainties attached with the environment and
this affect the working of the investment appraisal techniques to a great extent.
Furthermore, in addition to this another major limitation is that the size of the investment
also makes a lot of impact over the use of investment appraisal techniques. For instance, if both
the option of the investment has the same payback period then it is difficult to decide that which
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option will be better for the investment (Alkaraan, 2017). Thus, this sometimes creates issues
and problem in deciding that whether the option will be beneficial or not.
In addition to this another major limitation is that the payback period method also ignores
the time value of the money and this is the biggest limitation for the company as during the
analysis of the investment the company does not consider the time value of money (Tokede,
Ayinla and Wamuziri, 2018).
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REFERENCES
Books and Journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. InAdvances in
Mergers and Acquisitions. Emerald Publishing Limited.
Alt, M.A., Berezvai, Z. and Agárdi, I., 2020. Harmony-oriented retail innovations and financial
performance. European Journal of Innovation Management.
Gill, N.S., 2018. Relationship between diversity on the board of directors’ and firm financial
performance (Doctoral dissertation).
Guo, L. and Wang, Z., 2019. Ratio analysis of J Sainsbury plc financial performance between
2015 and 2018 in comparison with Tesco and Morrisons. American Journal of Industrial
and Business Management. 9(2). pp.325-341.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting. 6(5). pp.859-870.
Mbama, C., 2018. Digital banking services, customer experience and financial performance in
UK banks (Doctoral dissertation, Sheffield Hallam University).
Michael, O. U. and et.al., 2020. Financial Ratios as Predictors of Financial Distress: A Study on
Some Select Deposit Money Banks in Nigeria (1991-2014). International Journal of
Management Science and Business Administration. 6(3). pp.29-42.
Sriram, M., 2020. Do firm specific characteristics and industry classification corroborate
voluntary disclosure of financial ratios: an empirical investigation of S&P CNX 500
companies. Journal of Management and Governance. 24(2). pp.431-448.
Tokede, O., Ayinla, A. and Wamuziri, S., 2018. The Fuzzy Analytic Hierarchy Process in the
Investment Appraisal of Drilling Methods. In Fuzzy Hybrid Computing in Construction
Engineering and Management. Emerald Publishing Limited.
Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: The
cultural political economy of electricity generation. Accounting, Organizations and
Society. 70. pp.16-32.
Zábojníková, G., 2016. The audit committee characteristics and firm performance: Evidence
from the UK.
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