Financial Performance Analysis of Tesco and Sainsbury

This project analyzes the financial performance of Tesco and Sainsbury using different financial ratios. It provides recommendations for improving the performance of the poorly performing business and discusses the limitations of relying on financial ratios. It also analyzes investment appraisal techniques and their limitations in long-term decisions.

PORTFOLIOS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Portfolio 1........................................................................................................................................3
Financial ratios.............................................................................................................................3
Performance of both the companies..........................................................................................11
Recommendations on financial performance of the poorly performing business.....................14
Limitations on relying financial ratios to interpret company’s performance............................15
PORTFOLIO 2..............................................................................................................................16
Investment appraisal techniques................................................................................................16
Limitation in long term decisions..............................................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Financial management is denoted as management of company’s financial resources. This
project would analysis different financial perspectives in regards to different companies.
Henceforth, this project would comparatively analysis two companies with the support of
different financial ratios of organisation. Analysis in respect to financial position of both the
companies will be done to identify which company contain better financial position. With the
support of comparative analysis in between both these companies suitable recommendations will
provide over improving the performance of poorly performed organisation. Dependency on
relying over the financial ratios will also do in this project. Furthermore, this project will also
analysis the suitable investment based on different investment appraisal techniques. Limitations
will also state in respect to utilising the suitable investment appraisal technique in long run.
Portfolio 1
Financial ratios
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Current Ratio Current Asset
/ Current
Liability
.69(13511 /
19584)
.59(12480
/ 20973)
.76(7857 /
10302)
.64(7550 /
11849)
Current Asset (2018)
Sainsbury = Stock + Debtor + Cash and Securities
= 1810 + 4104 + 1933
= 7857
Tesco = Stock + Debtor + Cash and Securities
= 2264 + 6052 + 5156
= 13511
Current Liability (2018)
Sainsbury = 10302
Tesco = 19584
Current Asset (2019)
Sainsbury = Stock + Debtor + Cash and Securities
3

= 1929 + 4268 + 1283
= 7550
Tesco = Stock + Debtor + Cash and Securities
= 2617 + 6432 + 3373
= 12480
Current Liability (2019)
Sainsbury = 11849
Tesco = 20973
Quick Ratio
Ratio Formula Tesco Sainsbury
2018 2019 2018 2019
Quick Ratio Quick Asset /
Current
Liability
.57(11247 /
19584)
.47(9863 /
20973)
.59(6047 /
10302)
.47(5621 /
11849)
Quick Asset (2018)
Tesco = Current Asset – Inventory
= 13511 – 2264
= 11247
Sainsbury = Current Asset – Inventory
= 7857 – 1810
= 6047
Current Liability (2018)
Tesco = 19584
Sainsbury = 10302
Quick Asset (2019)
Tesco = Current Asset – Inventory
= 9863(12480 - 2617)
Sainsbury = Current Asset – Inventory
= 5621 (7550 - 1929)
Current Liability (2019)
4

Tesco = 20973
Sainsbury = 11849
Net Profit Margin
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Net Profit
Ratio (NPR)
Net Profit /
Sales * 100
1.73% (994 /
57493 * 100)
1.99%
(1270 /
63911 *
100)
1.09% (309 /
28456 * 100)
.64% (186 /
29007 * 100)
Tesco (2018)
Net Profit = 994
Sales = 57493
Tesco (2019)
Net Profit = 1270
Sales = 63911
Sainsbury (2018)
Net Profit = 309
Sales = 28456
Sainsbury (2019)
Net Profit = 186
Sales = 29007
Gross Profit Margin
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Gross Profit
Margin
Gross Profit /
Sales * 100
2.72% (1566
/ 57493 *
100)
4.13%
(2639 /
63911 *
100)
1.82% (518 /
28456 * 100)
2.072% (601
/ 29007 *
100)
5

Tesco (2018)
Gross Profit = Turnover - Expenses
= 1566 (57493 - 55927)
Sales = 57493
Tesco (2019)
Gross Profit = Turnover - Expenses
= 2639 (63911 - 61272)
Sales = 63911
Sainsbury (2018)
Gross Profit = Turnover - Expenses
= 518 (28456 - 27938)
Sales = 28456
Sainsbury (2019)
Gross Profit = Turnover - Expenses
= 601(29007 - 28406)
Sales = 29007
Gearing Ratio
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Gearing Ratio Debt / (Debt
+ Equity)
204.92 131.15 34.44 97.75
Price earning ratio
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Price earning
ratio
Market value
per share /
earning per
26.39 16.94 27.13 22.75
6

share
Earning per share
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Earning per
share
Net Income –
Dividend
payment /
Total number
of equity
shares
12.11 13.04 12.7 7.5
Sainsbury (2018)
Net income – Dividend
309 – 235
74
Total equity share = 5.82
Sainsbury (2019)
Net income – Dividend
186 – 247
= 61 / 8.33
= 7.5
Tesco (2018)
Net income – Dividend
= 994 – 82
= 912
Total equity share = 75.31
Tesco (2019)
Net income – Dividend
= 1270 – 357
= 913
7

Toal equity share = 70.02
Return on capital employed
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Return on
capital
employed
Earning
before
interest and
tax / capital
employed
.05 (1700 /
33153)
.07 (2464 /
35925)
.05 (544 /
11699)
.04 (620 /
16162)
Tesco (2018)
EBIT = 1700
Capital employed = Total asset – Current liability
= 52737 – 19584
= 33153
Tesco (2019)
EBIT = 2464
Capital employed = Total asset – Current liability
= 56898 – 20973
= 35925
Sainsbury (2018)
EBIT = 544
Capital employed = Total asset – Current liability
= 22001 – 10302
= 11699
Sainsbury (2019)
EBIT = 620
Capital employed = Total asset – Current liability
= 28011 – 11849
= 16162
8

Average inventories turnover period
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Average
inventories
turnover
period
365 /
Inventory
turnover ratio
14.9 (365 /
24.5)
14.54 (365
/ 25.1)
23.4 (365 /
15.6)
24 (365 /
15.2)
Tesco (2018)
COGS = 55927
Average stock = Opening stock + Closing stock / 2
= 2301 + 2264 / 2
= 2283
Inventory turnover ratio = COGS / Average stock
= 55927 / 2283
= 24.5
Tesco (2019)
COGS = 61272
Average stock = Opening stock + Closing stock / 2
= 2264 + 2617 / 2
= 2441
Inventory turnover ratio = COGS / Average stock
= 61272 / 2441
= 25.1
Sainsbury (2018)
COGS = 27938
Average stock = Opening stock + Closing stock / 2
= 1775 + 1810 / 2
= 1793
Inventory turnover ratio = COGS / Average stock
9

= 27938 / 1793
= 15.58
Sainsbury (2019)
COGS = 28406
Average stock = Opening stock + Closing stock / 2
= 1810 + 1929 / 2
= 1870
Inventory turnover ratio = COGS / Average stock
= 28406 / 1870
= 15.19
Dividend payout ratio
Ratios Formula Tesco Sainsbury
2018 2019 2018 2019
Dividend
payout ratio
Total
dividend /
Net profit *
100
8.25% (82 /
994 * 100)
28.11%
(357 /
1270 *
100)
76.05% (235 /
309 * 100)
133% (247 /
186 * 100)
Tesco (2018)
Total dividend = 82
Net profit = 994
Tesco (2019)
Total dividend = 357
Net profit = 1270
Sainsbury (2018)
Total dividend = 235
Net profit = 309
Sainsbury (2019)
Total dividend = 247
Net profit = 186
10

Performance of both the companies
Tesco Company
(Handayani, Indrabudiman and Faeni, 2018)
Tesco Company is one of the leading companies associated with the retail sector.
Company balance sheet project that it has denoted the increasing trend in the overall
performance of organisation. Over the period of time the balance sheet of company project that
organisation has entertained the increasing trend in all its assets which comprises with different
current asset and long term asset (Saus–Sala and et.al., 2020). The increasing trend in assets of
company denotes that it could perform well in market. Except one year the reserve of
shareholders have always increased which denote that profitability in benefiting to the
shareholders of company. In the year 2019 company reserves denoted at the highest level.
Company shareholder funds also denote that it consist the highest level of shareholding in the
year 2019.
11

(Kleynhans and Coetzee, 2019)
The above mentioned income statement of company denote the performance of company
from the year 2016 to 2019. Company could perform positively over the period of time and the
year 2019 denotes the maximum level of profitability of the business. This denotes that company
could perform better in market. EPS also denote that shareholders also getting the good return
against the investment they have done in the Tesco Company. Company’s retained profit also
denotes the increasing trend. In comparison with the Sainsbury Company it is denoted that
company has performed more effectively as compare the other organisation.
Sainsbury Company
12

The above mentioned balance sheet of the Sainsbury Company project the information
from the year 2016 to 2019. Th balance sheet project that company could somehow improve the
financial position of the organisation as it can be seen in the reserve section which can be seen as
the increasing trend in the respective section. Every year company could enhance the total
amount of reserve of the company this indicate that company could perform better profitability
year after year. The above chart project that it can be seen that company’s overall asset has also
increased year after year which denote that company could enhance the growth rate in market
(Marozzi, 2016). Approximately all types of assets such as tangible asset, intangible asset,
investment and other types of asset are denoted the increasing trend which indicates that
company could improve its performance year after year. The liability side of the balance sheet
also denote that company could consistently provide returns to shareholders which indicate in the
shareholder funds. The funds denote the increasing trend of the overall shareholder funds hold by
company. It can be stetted that company could improve its performance in the business as
compare to its previous years perform which can be seen in the financial statements of the
Sainsbury Company. In compare to the Tesco Company this organisation could not perform
well. Tesco Company is a big organisation as compare to the Sainsbury as it is a multinational
company which allow company to generate healthy returns in comparison with the Sainsbury
Company which is kind of regional organisation and small company. The dominance of the
Tesco Company is the key differences in between the financial position of both these companies.
13

(Feranecová and Krigovská, 2016)
The above mentioned income statement of the Sainsbury Company denoted that
company’s net profitability denoted the increasing and decreasing trend. Retained profit of
company also reduced and in the year 2019 companies could project the negative retained
profits. All the above mentioned financial assessment of the company denotes that the
organisation could not deliver the best business operations in comparison with the Tesco
Company.
Recommendations on financial performance of the poorly performing business
Following are the recommendations that can be entertained with the business operations
of the Sainsbury Company. These are the recommendations that can be supported the business
growth of the company.
Improving current assets: Sainsbury Company can improve its current asset as compare to its
current liability. Company can control its current liability so that it can come close to 1. The
ideal ration for current asset and current liability is denoted as 1. This will make better
management of company’s current assets and current liability. Increasing investment in the
current other than debtor will make the organisation more strengthen in the business.
14

Reducing cost of good sold: Company can give emphasis over reducing the overall cost of
goods sold. This would improve the gross profit of the company. Increased gross profit of
company would further enhance the overall profitability of the organisation in market (Yadav
and Kapoor, 2018). This is a key recommendation that would improve the overall financial
performance of the Sainsbury Company as compare to the Tesco Company.
Reduce average inventory turnover period: Sainsbury Company average inventory turnover
period is way more than the average period of the Tesco Company. If the company could control
its cost of goods sold and value of stock than it can reduce its average inventory turnover ratio
(Cherep and et.al., 2020). This would allow the company to control its average inventory
turnover. The lesser time inventory is stuck in the stock the more company carry the opportunity
to enhance the profitability of the organisation.
The above mentioned recommendations are the key changes company can make to
improve the overall performance of organisation.
Limitations on relying financial ratios to interpret company’s performance
Limitations that are associated with the interpretation of financial rations in order to
assess the performance of organisation can be stated in the following manner.
Ratio are based on accounting figure: Financial ratios are totally based on the accounting
figures. Accounting figures are always subject to deficiencies, approximation, diversity in
practice and other types of issues (Malakhova and et.al., 2020). All these factors sometimes do
not project the exact financial position of the organisation.
Ration have inherent problem of comparability: Different organisations sometimes follow
different methods of accounting for reporting the same transactions. This would highlight
different results in the ratio of company.
Accounting ratios are not totally dependable: Accounting ratios are not totally dependable in
nature. They many times do not depict the exact financial position of organisation. Some time
different aspects get to skip while formation of company’s books of accounts.
Do not depict the business environment factors: Financial ratios are calculated based on the
accounting is done of the business. This does not involve business environment factors in
reporting the affairs of company.
The above mentioned limitations are the key limitations associated with the ratio
analysis.
15

PORTFOLIO 2
Investment appraisal techniques
There are a variety of techniques that can be used in order to compare the two investment
options and select the one with maximum benefits for Ross Hill Limited.
Payback Period: Under this method, the net period required for recovering the investment cost is
ascertained (Hassan and Giouvris, 2019).
Project A
Initial Investment = 110000
Salvage value = 0
Year Cash Flows Cumulative CF
2020 45000 45000
2021 45000 90000
2022 45000
2023 35000
2024 35000
2025 25000
Payback Period: 110000 – 90000 = 20000, i.e.,
2 years + (20000/ 45000) * 12 months
2 years + 0.4 * 12 months
2 years + 4.8 months
Project B
Initial Investment = 110000
Salvage Value = 8000
Investment required = 110000-8000 = 102000
Year Cash Flows Cumulative CF
2020 10000 10000
2021 15000 25000
2022 25000 50000
2023 55000
16

2024 65000
2025 50000
Payback Period = 102000 – 50000 = 52000
3 years + (52000 / 55000) * 12 months
3 years + 0.9 * 12 months
3 years + 10.8 months
As per the pay- back period, amongst the two projects, Project A is more suitable for
investment because the payback period time is much shorter as compared to project B which is
beneficial for the company and its profitability overall.
NPV Method: This method mainly indicates the present value of an asset including the time
value of money concept as well (Alkaraan, 2017). Here present values of cash inflows and
outflows are determined and their difference is identified for decision making.
Project A:
Cost of capital/ Discounting Factor = 16%
Initial Investment = 110000
Salvage Value = 0
Year Cash Flows Discounting rate @16% Amount
2020 45000 0.862 38790
2021 45000 0.743 33435
2022 45000 0.64 28800
2023 35000 0.552 19320
2024 35000 0.476 16660
2025 25000 0.41 10250
Total 147255
The NPV of plan A can therefore be indicated as 147255 – 110000 = 37255
Project B:
Cost of capital/ Discounting Factor = 16%
Initial Investment = 110000
Salvage Value = 8000
17

Year Cash Flows Discounting rate @16% Amount
2020 10000 0.862 8620
2021 15000 0.743 11145
2022 25000 0.64 16000
2023 55000 0.552 30360
2024 65000 0.476 30940
2025 50000 0.41 20500
Total 117565
NPV for project B = 117565 – 110000 + 8000 = 15565
The implementation of NPV method also indicates that the return from project A will be
much more beneficial as NPV is higher and positive in that particular project only. This indicates
that the returns i.e. inflows against the outflows will be more in first investment option and the
second one should not be considered.
Therefore, the implementation of two different investment appraisal techniques are a clear
indication of the fact that the Ross Hill Limited should keenly invest on the project A i.e. Plant 1
because overall value and returns of the first plant are comparatively higher and much better in
contrast with the second plant (Harris, 2017). Therefore, Ross Hill should go forward with the
opportunity to invest in Plant 1.
Limitation in long term decisions
The investment appraisal techniques though are a key constituent of capital budgeting and
decision making but yet it is important to understand that there are variety of negative aspects
that are associated with these methods (Bekaert and Hodrick, 2017).
Firstly, every method has a flaw of its own, i.e. some are not considering time value or some
are just ignorant of the other important and dominant market factors that can affect the return or
expected value of the project in future. Another major aspect is that all the investment appraisal
techniques are reliant on future returns and inflows and although these can be forecasted with a
certain degree of accuracy, but there is no 100 percent reliability (Jibril and Jagun, 2018). For
instance, after Covid- 19, it is evident that how quickly future economic predictions, inflations
and growth rate etc.cna change.
18

Additionally, the risk that is associated with the appraisal techniques and their results is very
high because none of the methods takes into account the potential risks that they might incur in
the future or the probability aspect of non- occurrence of any event (Ward and Forker, 2017).
This is by far the biggest lamentation of this method because it is necessary to measure and map
the future risks and the contingencies that might arise from such risks consequently.
The returns that a company has to give i.e. the importance of shareholder understanding and
approval is also not a part of the investment appraisal techniques and in long run this can create a
major rift amongst the investors of the company (Mitchell, 2017). Further, majority of the
techniques use the discounting rate to obtain the relevant results for present day and the accuracy
of the use of these discounting rates is highly questionable. This also inflicts the decisions of the
company negatively.
CONCLUSION
The analysis done in the report above clearly indicates the efficacy of the different financial
statements and their contribution in the decision making for any company. Initially, the financial
ratios were calculate for Sainsbury and Tesco so that performance report for both the companies
could be present before the investors where it was identified that Tesco is a much better company
to be invested in. Further the limitations of financial ratios in decision making of the company
were also identified. In the second part of the report, investment appraisal techniques were used
to identify which plant should be chosen by Ross Hill company and then lastly, the negative
aspects of using these appraisal techniques in the long term decision making were analysed and
presented accordingly in the report.
19

REFERENCES
Books and Journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. Advances in
Mergers and Acquisitions. p.67.
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University
Press.
Cherep, A. and et.al., 2020. Assessment of the level of financial and economic security at
machine-building enterprises: Evidence from Ukraine. Problems and Perspectives in
Management. 18(1). p.33.
Feranecová, A. and Krigovská, A., 2016. Measuring the performance of universities through
cluster analysis and the use of financial ratio indexes. Economics & Sociology. 9(4).
p.259.
Handayani, W. S., Indrabudiman, A. and Faeni, D. P., 2018. PANEL TEST IN FINANCIAL
RATIO: CASE STUDY INDONESIA TELECOMMUNICATION
INDUSTRY. International Journal of Pure and Applied
Mathematics. 119(12).pp.16471-16481.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
Hassan, M. and Giouvris, E., 2019. Financial institutions mergers: a strategy choice of wealth
maximisation and economic value. Journal of Financial Economic Policy
Jibril, J. D. and Jagun, Z. T., 2018. Risk Identification Techniques in Valuation and Investment
Appraisal. International Journal of Engineering & Technology. 7(3.30). pp.70-73.
Kleynhans, E. P. and Coetzee, C., 2019. Assessment of financial conditions of South African
municipalities: a unique model for KwaZulu-Natal. Southern African Business
Review, 23(1).
Malakhova, A. A. and et.al., 2020, July. Reward-to-Variability Ratio as a Key Performance
Indicator in Financial Manager Efficiency Assessment. In Computer Science On-line
Conference (pp. 598-613). Springer, Cham.
Marozzi, M., 2016. Inter-industry financial ratio comparison with application to Japanese and
Chinese firms. Electronic Journal of Applied Statistical Analysis. 9(1). pp.40-57.
20

Mitchell, G.E., 2017. Fiscal leanness and fiscal responsiveness: Exploring the normative limits
of strategic nonprofit financial management. Administration & Society. 49(9). pp.1272-
1296.
Saus–Sala, E. and et.al., 2020. Compositional DuPont Analysis. A Visual Tool for Strategic
Financial Performance Assessment.
Ward, A.M. and Forker, J., 2017. Financial management effectiveness and board gender
diversity in member-governed, community financial institutions. Journal of business
ethics. 141(2). pp.351-366.
Yadav, S.K. and Kapoor, R., 2018. Financial performance ranking of automotive companies in
India using TOPSIS method. International Journal of Business Excellence. 16(2).
pp.149-161.
Online
Sainsbury Financial Report, 2020.[Online]. Available Through:<
http://tools.morningstar.co.uk/t92wz0sj7c/stockreport/default.aspx?
tab=10&vw=is&SecurityToken=0P000090N6%5D3%5D0%5DE0EXG
%24XLON&Id=0P000090N6&ClientFund=0&CurrencyId=BAS >
Tesco Financial Statement, 2020. [Online]. Available Through:<
http://tools.morningstar.co.uk/uk/stockreport/default.aspx?
tab=10&vw=kr&SecurityToken=0P00007OYV%5D3%5D0%5DE0WWE
%24%24ALL&Id=0P00007OYV&ClientFund=0&CurrencyId=BAS >
21

22