Financial Analysis of Tesco and Sainsbury: A Ratio Analysis

This report provides a comprehensive analysis of the financial performance of Tesco and Sainsbury through ratio analysis. It examines liquidity, profitability, and other key financial ratios to evaluate the financial health of the companies. Recommendations for improving financial performance are also provided.

Finance

INTRODUCTION...........................................................................................................................3
PORTFOLIO 1................................................................................................................................3
PORTFOLIO 2................................................................................................................................3
Investment Appraisal Techniques................................................................................................3
Limitation of using Investment Appraisal Techniques in long term decision making................4
REFERENCES................................................................................................................................7

INTRODUCTION
Finance is the establishment of every business and to choose legitimate and sensible
circumstance of money related situation of every business is as significant as bread for a person
(Abdin and Noussan, 2018). In this particular condition, there are various instruments and
strategies those can be used as a technique for choosing the money related circumstance of a
business. This action is basic so ensuing to looking at into money related circumstance of that
firm, successful imperative masterminding should be feasible for future course of action. This
report is disconnected into two portfolios. Starting section is zeroing in on examination of
financial circumstance of Tesco plc and Sainsbury's plc through gadget of extent assessment.
Excess dependence of financial extents is in like manner not a good technique in since a long
time prior run and it is moreover explained in this report. Also, second portfolio is examining
criticalness of adventure assessment techniques which are used to choose and recognize right and
fitting theory decision for an association.
PORTFOLIO 1
Ratio analysis
Tesco plc
Name of ratio Calculation Result
2018 2019
Current ratio Current assets/ current
liabilities
13,726 / 19,238
= 0.713484
12668/2
0680
=
0.61257
3
Quick ratio Quick assets/ current
liabilities
4379/ 19238
= 0.227622
3373/ 20680
= 0.163104
Net profit margin Net profit/ total sales (1206/57491)*100 (1322/63911)*100

=2.097% = 2.068%
Gross profit margin Gross profit/ total sales (3350/57491)*100
= 5.827%
(4144/63911)*100
= 6.484%
Gearing ratio
(Debt to Equity Ratio)
Total debt/ total equity 44862/10480
= 4.280%
49047 / 14858
= 3.301%
P/E ratio Market value per share/
Earnings per share
229/ 9.35
=24.49
213.6/13.65
= 16.97
Earnings per share Income available/ total
number of shares
outstanding
9.35 13.65
Return on capital
employed
Operating profit/
capital employed
5.13 6.86
Average inventories
turnover period
Net sales/ average
inventory
57491/2282.5
= 25.91 days
63911/2240.5
= 28.52 days.
Dividend pay-out ratio Dividend paid/ net
income
82/1206
= 0.68.
357/1322
= 0.27
Sainsbury plc
Name of ratio Calculation Result
2018 2019
Current ratio Current assets/ current
liabilities
7857/10302
=0.73
7550/11849
=0.63
Quick ratio Quick assets/ current
liabilities
1933/10302
=0.19
1283/11849
=0.19
Net profit margin Net profit/ total sales 309/28456
=0.11%
186/29007
=0.006%
Gross profit margin Gross profit/ total sales 518/28456
=0.018%
601/29007
=0.02%
Gearing ratio
(Debt to Equity Ratio)
Total debt/ total equity 34.44 97.75
P/E ratio Market value per share/ 238.80/0.22 213.40/46

Earnings per share =10.85
=4.64
Earnings per share Income available/ total
number of shares
outstanding
22 46
Return on capital
employed
Operating profit/
capital employed
4.65 3.84
Average inventories
turnover period
Net sales/ average
inventory
28456/1792.5
=15.87 days.
29007/1869.5
=15.51 days.
Dividend pay-out ratio Dividend paid/ net
income
235/309
=0.76
247/186
=1.33
Interpretation
1. Current ratio: This is a proportion, in which the relation between current assets and current
liabilities is determined. This is a representation of liquid position of a business (Ambrose and
Buch, 2016). This is the measure of capacity of company to pay off their current assets its
current liabilities. This is the ability of management of a firm to clear accounts of current
liabilities using the funds received in account of current assets. Current liabilities are those who
have to be cleared down in coming one year. This paying off process is done from the funds
which are to be received in same time period of one year. In accordance of various theories and
methodologies, the ideal mark for this ratio is 2:1. In the given situation of two real companies,
Tesco and Sainsbury, the investigation into liquidity position is done for over two years and
Tesco has the ratio of 0.71 and 0.61 in the year of 2018 and 2019, respectively. On the other
hand, Sainsbury has the current ratio of 0.73 and 0.63, respectively in same time period of two
years. The situation of liquidity position is almost similar in both companies. It can be elucidated
from this situation, that both the companies are performing almost on the same level and utilizing
their working capital in similar pattern. Ratio is not as per the ideal mark and according to
results, it is low and current assets are not enough to pay out current liabilities.

2. Quick ratio: It is the relation between the quick assets and current liabilities. It is the true
presentation of true liquid postion of the company (Anish and Majhi, 2016). This proportion is
taking only pure liquid assets (often known as liquid assets) into consideration. In simple words,
it can be described as that position in which the company stands and has the capacity of paying
off the current liabilities from only the receipts of funds in the category of quick assets. Quick
assets includes only cash and cash equivalents. According to common theories and models, it is a
known fact that 1:1 is the ideal benchmark for the ratio. In the given case of Tesco and
Sainsbury, their ideal ratios are not up to the mark. The situation is better in Tesco as compared
to the other company. Though, both the companies are performing very low as compared to the
ideal benchmark.

3. Net profit margin: It is actually the representation of company’s profitability measure. This
ratio is measuring the company’s performance in terms of value of profit generated in the
specific time period. The amount of revenue is compared to that of totral sales. The profit is
calculated through deducting the amunt of expenses from that of total amount of sales. This is
very known fact that higher the amount of profit, higher will be the profitability and financial
feasibility of a company. The amount of profit and this profit margin ratio is depending upon
number of various factors and they are indirect expenses, taxation, internal accounting policies,
such as depreciation and other expenses as well (Ascher, Li and You, 2020). In the present
situation of investigation procedure of financial performance of companies, Tesco and
Sainsbury, profitability measure is not visualising any significant increase ober the time period of
two years those have been considered for analysis. Instead, it is to be noted down that
profitability index is coming down. If comparison is done for performance of both the
companies, than it is to be stated that Tescpo is a better performer.

4. Gross profit margin: It is the introduction of gross productivity of the firm. Around the day's
end, it will when all is said in done be clarified as the pointer of execution of affiliation going
before causing naughty costs (Basher and Raboy, 2018). As the name proposes, it tends to net
benefit of the affiliation and its root execution. The standard factor that impacts this degree of
benefit is deals volume and direct costs in the firm. In given illustration of guaranteed
affiliations, execution of the two affiliations is declining, in any case in association it will as a
rule be conveyed that Tesco is acting in a way that is better than Sainsbury.

5. Gearing ratio: It is a type of is a financial extent that considers some sort of owner's worth (or
cash) to commitment, or resources gained by the association. Preparing is an assessment of the
component's money related impact, which shows how much an affiliation's activities are
financed by financial specialists' resources versus credit supervisor's resources. The equipping
extent is an extent of money related impact that shows how much an affiliation's exercises are
upheld by esteem capital versus commitment financing (Carneiro, 2020). In the given case of
Tesco and Sainsbury, Tesco is having less weight of commitment and afterward once more,
Sainsbury is having a profound load of commitment. Tesco has decreased the weight over two
years and Sainsbury has almost increased it up.
6. Price to Earning ratio: It is generally called esteem unique or pay various. This is essentially a
marker of assessment of current market cost of offer and per share benefit. This is an extent that
is important for theorists and inspectors and they use these extents to survey distinctive endeavor
choices that are open for them. If one decision is having more critical yields on commonly low
market rate, than that decision is seen as more valuable. In given condition of Tesco and
Sainsbury, cost to pay extent is lessening consistently. In relationship, it is incredibly sure that
past is performing better that the last referenced (Featherstone, Taylor and Gibson, 2017).
.

7. Earnings per share: It is generally the pointer of advantage that is gotten by the speculator. It is
controlled by apportioning hard and fast association's advantage by total number of uncommon
proposals watching out. It is a normal thought, that higher the EPS, higher will be the advantage
extent of the association. In given situation, the condition is almost better in Sainsbury, as the
EPS is higher in this association in assessment with Tesco (Heine, Thatte and Tabares-Velasco,
2019). The two associations are encountering an improvement is EPS bar and consequently, it
will in general be communicated that the two associations are performing splendidly to the extent
advantage.
8. Return on capital employed: It is on a very basic level a money related extent that is used to
reflect advantage and position of adequacy of use of capital in the association. In fundamental

words, it might be explained as the pointer of the gauge that presents the association's display in
making profits by its capital hypothesis. It is significant mechanical assembly for money related
bosses, accomplices and besides expected theorists and they use this extent as a gadget for
researching possible profitability in the wake of making revenue into association (Hossain,
Mekhilef, and Olatomiwa, 2017). In given situation, this condition is better in Tesco, rather than
the following association. Moreover tesco is envisioning improvement in the extent. Of course,
Sainsbury is rising up to diminish.
9. Inventory turnover average period: This extent is a marker of the time span that ordinary stock
takes to sell completely. This suggests it is the time period, which the association is taking to sell
a lot of stock and bringing the redesigned one. More restricted this period, infers the association
is having a high arrangements volume. In the given case, Sainsbury is taking more restricted
period of time, along these lines, it will in general be communicated that last has higher
arrangements volume (Kärenlampi, 2020).

10. Dividend payout ratio: It is the connection between's total amount of benefit paid to
speculators and the absolute pay of the association. It addresses the degree of benefit paid to
speculators to the extent benefit out of in general addition of association (Krueger, 2016). The
total that isn't paid to financial specialists is held by the association to deal with commitment or
to reinvest in focus exercises. It is every so often basically implied as the 'payout extent.' In the
given example of assessment among Tesco and Sainsbury, the condition is better in last as it is
countering improvement in the chart and moreover past is envisioning decline in the extent.
Recommendations

From the about report it has been proposed that association should screen and access stock
level on the off chance that it is administered satisfactorily. This will help in improving Quick
extent (Pinto, 2020).
• For improving liquidity extent, association should run headways and offer cutoff
points on their things to decrease stock and make advantage.
• Company should lead an assessment for the interest of the things and recognize what
factors are liable for prodding low interest. This improves interest incorporation
extent. This also joins buying behavior of customers, competitors examination, and
associations advancing frameworks, etc
• To improve advantage extent in cash by then association needs to reduce its working
expenses and work towards boosting generally speaking income. There can in like
manner be a quick and dirty assessment of cost and assessing structure. This will help
the association in looking unprecedented.
• If association turns excessively high, by then it isn't likely that association couldn't
pass on enough stock to fulfil its customers' prerequisites. So for that, association
should screen its stock and reliably saves right harmony for their stock.
• A low Assets turnover extent shows that association isn't working at its full cutoff and
not utilizing its assets suitably. So for this, association should inspect its assets
fittingly.
PORTFOLIO 2
Investment Appraisal Techniques
Considering the current scenario, the most suitable tool for evaluation of the available
alternative is Net Present value Method. Calculation for it can be done as:
Project A
Net Profits Discounting Rate Present Value
45000 0.86 38790
45000 0.74 33435

45000 0.64 28845
35000 0.55 19320
35000 0.48 16660
25000 0.41 10250
Total 147300
Less: Initial Investment 110000
Net Present Value 37300
Project B
Net Profits Discounting Rate Present Value
10000 0.86 8620
15000 0.74 11145
25000 0.64 16025
55000 0.52 30360
65000 0.48 30940
58000 0.41 23780
Total 120870
Less: Initial Investment 110000
Net Present Value 10870
Interpretation
Net Present Value is the amount calculated after computing the present value considering
the discount factor rate and deducting the initial cash outflow. As per this concept the project

with the higher net present value are more profitable for a company. From the above calculation
it can be concluded that, Project A has a higher NPV then Project B. and the company is
recommended to select Project A as it will be more profitable.
Limitation of using Investment Appraisal Techniques in long term decision making
The investment Appraisal technique is used by organisations for overall strategies and
decision making for the capital investments. In general terms, it is used for ranking projects. A
company compares the projects available with these techniques and determines the one with the
highest return (Samsiana, 2019). There are various investment appraisal techniques like Payback
Period, Internal Rate of Return, Net Present Value method, etc.. in the given case the most
suitable technique was NPV and certain limitations of it are listed below:
 Selection of appropriate discounting rate- In this technique the most notable challenge
is for calculation of the discounting factor rate. Discounting rate is general alternative
which is used for determining the present value of all future cash flows. These rates are
dependent on a number of factors like the risk associated with an option available,
arithmetic accuracy, etc.. All such factors are to be considered appropriately for
determination of a correct discounting rate. If not done accurately this may lead to
complete failure of the operation and the company may incur huge financial losses.
 Determination of Cost of capital and cash flows- Cost of capital is the value of
company's funds. And form the investor's view point it is the required return to be earned
form the portfolios of company's security. It is a technique used for evaluation of firm's
new projects. It helps the company to evaluate that whether the returns on the
investments are worth with the risk associated with it. For deciding on whether to invest
or not in a particular project, it is required to set an accurate cost of capital. If it is aimed
too high, resulting in investments as not worthy and increases the probability of missing
an opportunity. Whereas in case of low low cost of capital, the investment may not be
worthwhile. In case of investments not guaranteeing fixed returns, it becomes difficult for
determining the cash flows of an investment. It can sometimes done for inverting in new
equipments, or other projects of business expansion of a firm. The company can estimate
the kind of cash flow on such investments but there is a probability that there could be a
off by some significant percentage.

 Investment Size- It refers to the size of position in a particular portfolio or the amount
which an investor is willing to trade with. It is used by investor for determination of the
units to be purchased which helps them for controlling risk and maximising returns.
There is a common notion that higher NPV is a representation of better investment
option. But it is not the actual fact, in case of two investment alternatives to be chosen by
the management and one of it having higher outlay or scale will have a high NPV but in
the case of vice versa the smaller outlay will have a low NPV (Wang, 2018). So, this
technique is proved to be indeterminate and unclear for evaluating the projects of unequal
investment size. For getting the appropriate view of an investment option, is is important
to concentrate on the calculations of returns instead of computing the present value of
cash flows.
 Additional Cost-Net present value method is a narrow concept as it only considers the
cash flows generated during a project life cycle. This technique fails in recognising the
costs which are important for considering the profitability of the project. Opportunity
Cost can be a type of such costs which is important to be considered for choosing an an
investment alternative as they are also important cost associated with selection of a
project, but this technique ignores such type of costs.
 Manipulations of Financial Statements- Ratio analysis are based on the data form the
financial statements. It can be easily manipulated by the firms for making their
performance better in comparison with their actual performance. So it does not reflect the
actual and true performance of the companies. There are chances of misrepresentation
and mistake in any available information but such mistakes are not being detected form a
simple analysis. It is a crucial factor for detecting such mistakes by the analyst and make
conclusions after evaluating such manipulations.
 No Common Standard- The limitation of this technique is that it is burdensome for
calculating common standards for comparison between different situations and the
companies with different nature. It can be illustrated as a firm having ratio of 2:3 may not
be in a condition of paying off its liabilities at a time due to unfavourable distribution of
assets (Zewde, 2020). Whereas on the other-hand another company having similar ratio
may have the ability of paying its debts because of having favourable conditions. So,

ratio analysis does not have any common standards for calculation of the real
comparison.
CONCLUSION
From the above report, it can be inferred that only the process of analyzing the financial
statements is not necessary to proceed with the planning for future course of action. It is
important for key managerial personnel of the company that they are evaluating different options
for investing funds of the company. This analysis will be helpful in proper utilization of funds
and also to improve profitability measure of the company. As finance is most important part of
every company, therefore, it is necessary that company is taking care of their funds at every step
and ensuring they are being utilized in optimum manner.

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