Analyzing Financial Health and Performance of Tesco, Sainsbury and Morrison’s Plc

This report analyzes the financial health and performance of Tesco, Sainsbury and Morrison’s Plc. It includes profitability analysis, management effectiveness, efficiency ratio analysis, liquidity ratios, and non-financial ratios. Recommendations are provided to improve financial performance.

Accounting and Finance for Managers

Table of Contents
INTRODUCTION...........................................................................................................................3
SECTION A.....................................................................................................................................3
a. Analyzing financial health and performance of Tesco, Sainsbury and Morrison’s Plc...........3
b. Writing a memo to managing director regarding the performance of firm along with the
recommendations.......................................................................................................................10
c. Outlining the limitations of financial ratios...........................................................................11
SECTION B...................................................................................................................................12
a. Using net present value technique to assess whether three year contract is profitable or not
...................................................................................................................................................12
b. Explaining approach of taxation in appraisal........................................................................14
c. Discussing the techniques that can be used for the evaluation of project..............................14
d. Stating the other factors that need to consider while taking final decision...........................15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Accounting and finance management are vital for the organizational growth and success.
In the business organization, manager places high level emphasis on maintaining accounting
records and information which in turn helps preparing suitable statements. Hence, by making
analysis of financial statements through the means of ratio analysis both internal and external
stakeholders can take suitable decision. This report is based on three major retail or supermarket
stores such as Tesco, Sainsbury’s and Morrison Plc. All these retail stores are listed on the
recognized stock exchange of UK and known for delivering high quality products. The present
report will light on the extent to which financial condition of company is sound over others. It
will develop understanding regarding the investment appraisal techniques and its significance in
the decision making aspect.
SECTION A
a. Analyzing financial health and performance of Tesco, Sainsbury and Morrison’s Plc
Profitability analysis
 Gross margin ratio: It has been assessed from ratio analysis that GP margin of Tesco
decreased over the years and accounts for 6.31% respectively. Besides this, from 2010 to
2014 GP ratio. Due to sale revenue and high direct expenses Morrison fluctuated. In
2014, gross profit ratio of Morrison’s Plc was 6.07%. In comparison to this, Sainsbury’s
GP margin was 5.79% in 2014. Due to the existence of more competition business units
failed to generate more sales and profit. Hence, by considering such aspects, it can be
stated that GP margin of all such business units were not good.

 Operating profit ratio: Outcome of ratio analysis shows that declining trend took place in
the operating margin of Tesco Plc. In 2012, operating margin was account for 6.54%,
whereas in 2014 such ratio implies for 4.14%. From 2010 to 2013 operating profit margin
of Morrison’s was lied between the ranges of 5.24% to 5.89%. On the contrary to this,
such ratio was negative .54% which entails that business unit sales has been failed to
manage general administration expenses. In comparison to Tesco and Morrison’s Plc,
operating ratio of Sainsbury’s Plc accounts for 4.21%. Hence, by considering such trend
or performance level it can be stated that operating margin of Tesco and Sainsbury’s Plc
was good.

 Net profit ratio: Graph clearly shoes that net margin of Tesco Plc increased from 4.09%
to 4.94% from 2010 to 2012. Hence, after such period, net profitability aspect of firm
after the fulfillment of obligations was 2.42% and 3.01% in the year of 2013 and 2014.
On the other side, NP margin of Morrison Plc moved from positive to negative trends. In
2014, NP ratio of Morrison Plc was -1.35% which in turn presents that profitability of
company was worst. On the other side, net profit margin of Sainsbury’s Plc was within
the range of 2 to 3%. Sainsbury’s net profit was 2.99% at the end of 15 March 2014.
Thus, overall evaluation presents that Tesco generated suitable margin by making
effectual control on expense level.
Management effectiveness
 Return on assets: ROA of Tesco was 6.46%, 3.03% and 3.81% from 2012 to 2014. As
compared to Tesco, Morrison’s ROA reduced significantly from 7.04% to -2.24%. It
presents that Morrison failed to generate more funds or returns through assets. In against
to other rival firms returns generated by Sainsbury’s Plc was within 4 to 6%. Such trend
or competitor analysis shows that Sainsbury’s Plc performance of was good in the year of
2014 over others.

 Return on equity: ROE of Tesco was 18.40% in 2012 which in turn indicates that
company had made effective use of equity to some extent. In contrast to this, return on
equity measure of the company was 12.22% which shows that performance level
decreased significantly. Morrison’s ROE was negative such as -4.80% which shows that
strategic framework of company was not highly sound. Ratio analysis results show that
ROE of Sainsbury’s Plc increased from 10.42% to 12.09% 2014. Thus, Tesco and
Sainsbury Plc had made their best efforts for generating higher revenue through the
means of shareholders fund.

Efficiency ratio analysis
 Inventory turnover ratio: Financial statement analysis presents that inventory turnover
ratio declined from 19.38 to 16.27 times. On the other side, such ratio of Morrison’s Plc
also shows declining trend in the performance level. Stock turnover ratio of Morrison’s
was 26.79, 25.24 & 23.54 respectively. On the contrary to this, such ratio of concerned
business organization accounts for 21.96 & 20.34 times. In addition to this, Sainsbury’s
turnover ratio also shows decreasing trend from 27.15 times to 22.65. The above
mentioned trend shows that all these three companies are facing difficulties in relation to
generate more money through sales due to the rise in competition and changes in the
needs, wants as well as expectation level of customers (Collier, 2015). In comparison,
Sainsbury’s stock turnover ratio was good as compared to others.
 Asset turnover ratio: By applying the tools of ratio analysis, it has been assessed that
asset turnover ratio was 1.30 times in both 2011 & 2012. On the other side, assets
turnover ratio of Morrison’s Plc declined from 1.81 to 1.66 times. Along with this,
declining trend or in the Sainsbury’s Plc performance level pattern was seen. Hence, by
considering the outcome of ratio it can be stated that all such supermarkets failed to
generate enough sales by making use of assets. In comparison to all the firms, Tesco Plc
had generated more sales from both fixed and current assets.

 Receivable turnover ratio: Outcome of ratio analysis entails that Tesco generated money
from debtors within the less time frame in 2014 as compared to the past years. Whereas,
receivable turnover ratio of Morrison’s Plc was 87.31 in 2014. In contrast to this, debtor’s
turnover ratio of Sainsbury’s Plc significantly declined from 129.22 to 25.04 days. Out of
all the supermarkets Tesco received money from debtors within the less time frame.
However, working capital aspects of Sainsbury’s and Morrison’s Plc was fluctuated
negatively due to inappropriate credit policy.
Liquidity ratios

 Current ratio: Graphical presentation shows that current ratio of Tesco Plc was declined
from .71 to 0.61 times at the end of 2014. Hence, during the period of 5 years company’s
capability in relation to fulfilling obligations decreased significantly. On the other side, in
2010 current ratio of Morrison’s Plc was .51, whereas it reached on .50 times in 2014.
During the same time period, current ratio of Sainsbury’s Plc also decreased from .66
to .64 times. Hence, in 2014, all these companies were failed to maintain enough current
assets. Thus, it can be stated that liquidity position of all three supermarket was not good
because ideal ratio implies for 2:1 (Francis and et.al., 2015). However, as compared to
other firms liquidation position of Sainsbury Plc was good.
 Quick ratio: From ratio analysis, it has been assessed that quick ratio of Tesco,
Morrison’s and Sainsbury’s Plc was fluctuated from the period of 2010 to 2014. In 2014,
quick ratio of Tesco, Morrison and Sainsbury accounts for .42, .16 and .48 times
respectively. In this year, quick ratio of Tesco and Sainsbury’s Plc was near to the ideal
ratio such as .5:1. By considering this, it can be stated that both the organizations
maintained enough current assets other than inventory and prepaid expenses that can
easily be converted into cash (Nielsen, Mitchell and Nørreklit, 2015). However, quick
ratio performance of Sainsbury shows that it was not highly capable in relation to
meeting immediate payments.

Non-financial ratios
 Revenue/Employee: In the accounting year 2014, employee revenue of Tesco,
Morrison’s and Sainsbury’s Plc was £124513, £337953 & £484798 respectively. By
making evaluation of performance, it has been identified that workforce of Sainsbury’s
Plc is highly efficient and made significant contribution in the revenue level.
 Operating Income/Employee: Below mentioned graph presents that operating income
generated by Morrison’s employees are highly lower as compared to Tesco &
Sainsbury’s Plc. Thus, Morrison is required to frame competent HR policies and
strategies to enhance employee performance (Ferrell and Fraedrich, 2015).
b. Writing a memo to managing director regarding the performance of firm along with the
recommendations
To,
Managing Director of Morrison’s Plc
Date: 21st March, 2017
Subject: Financial performance results

From financial statement analysis, it has been assessed that profitability aspect of the company was worst in the
year of 2014. During such period, both operating and net profit margin of firm was negative which in turn closely
influence the future monetary aspects of firm. Further, it has been identified that liquidity position of the company
was not sound. Moreover, as compared to ideal ratio business unit was maintained only 25% of current assets. This
in turn entails that company was not highly capable during the period of 2014 to meet its current liabilities. Along
with this, company was also failed to incorporate high return from assets such as, debtors, inventory etc. Thus, it is
suggested to the firm to follow below mentioned aspects which will help it in enhancing financial performance:
Business organization should focus on advertisement campaign and sale promotion activities. Hence, by providing
suitable information to the large number of customer regarding the quality and price of product sales revenue and
thereby profitability can be maximized. Along with this, for making control over cost level Morrison Plc should
undertake budgeting technique.
In addition to this, Morrison should lay more emphasis on maintaining current assets such as cash etc by reducing
the level of expenses. It can be done by the firm through the means of continuous monitoring. By this, firm can
maintain high liquidity and thereby would become able to meet obligations on time.
Further, by encouraging personnel to give their best efforts Morrison’s Plc can make optimum utilization of assets
and thereby would become able to generate high profit margin.
Hence, by following all such measure's Morrison Plc can make significant improvement in the profitability and
liquidity aspects. All these aspects will help company in gaining competitive edge over others.
Recommendation: by applying these financial ratios the organization can increase their
performance level and also it help them to take major decisions or major steps for making profits
in long run. The company can improve its worst performance by applying these ratios analysis.
Through these ratios the organization can change its strategies and pricing policies to meet the
need of the people in long run.
Sincerely
Financial analysts
c. Outlining the limitations of financial ratios
Limitations

 Different rules and regulations: Accounting policies which are undertaken by different
organizations highly differ. Moreover, some organization considers UK GAAP, whereas
other considers IAS and IFRS for both recording and reporting (Reckers and Samuelson,
2016). Different rules and regulation in the financial ratio has major deal with the
organization because if any small mistake is happen than the organization have to bear
huge amount of loss.
 Inflation: Rate of inflation changes over the years or time frame which in turn closely
influences the financial health and performance (Anderson and et.al., 2015). Hence, rate
of inflation highly varied from one year to another. In this, it is not possible to evaluate
company’s performance over the years. Company’s balance sheet have been badly
distorted due to inflation. company must interpret with judgment so that it is not
necessary that the judgment is good.
 Historical evaluation: Financial statement analysis presents information regarding the
past performance. However, it does not reflect trend in relation to future performance and
aspects (Bebbington, Unerman and O'Dwyer, 2014). Due to this evaluation organization
does not takes its major decisions. Hence, by considering this it can be stated ratio
analysis tool does not help in making suitable decision regarding investment.
SECTION B
a. Using net present value technique to assess whether three year contract is profitable or not
To
John Green
Financial director, Sound Equipments Ltd
Date: 21st March, 2017
Subject: Investment appraisal analysis
Introduction: This report present the evaluation of the financial and non financial ratio to the organization for

getting the positive return. It shows that to make effective decision by applying these ratios in this report.
From evaluation, it has been assessed that business unit will get positive returns of £51842.2 by making contracts for
three years. Stakeholders Invests in the particular projects by applying these ratios. Outcome of investment appraisal
analysis is based on the aspect that firm will make payment of tax in the next year. By considering 18% cost of
capital it has been identified that Sounds Equipment's Ltd will generate positive returns from such proposal.
Comment: It is to be concluded that the organization take major steps and achieving the higher amount of profit
with satisfy the needs and wants of the customers by applying the facts and figures of the financial and non financial
ratio analysis.
Sincerely
Financial analysts
Calculation of cash inflow
Particulars Year 1 Year 2 year 3
Sales revenue / turnover 180000 216000 259200
Material 60000 63000 66150
Labor 40000 42000 44100
Depreciation 11250 11250 11250
total outflow 111250 116250 121500
EBIT 68750 99750 137700
Taxation 0 22687.5 32917.5
EAT 68750 77062.5 104783
Add: Depreciation 11250 11250 11250

Cash inflow 80000 88312.5 116033
Working note: Depreciation
Initial investment 150000
Scrap value (25% of initial investment) 37500
Cost – scrap 112500
Depreciation (Cost – scrap value) / life of
machinery 11250
Net present value: net present value(NPV) denotes the difference between the cash inflow and
initial investment. It is the best method of capital budgeting for taking the best project decision.
It is very common and easy method, mostly every organization whether it is small or big uses
this method’s facts and figure before getting the project.
Calculation of NPV
Year
Cash
inflow
PV
factor @
18%
Discounted
cash inflow
1 80000 0.847 67796.6
2 88312.5 0.718 63424.7
3 116033 0.609 70621
Total discounted cash inflow 201842
Initial investment 150000

NPV (Total discounted cash
inflow – initial investment) 51842.2
Interpretation: Net present value is positive than the project should be accepted otherwise
rejected. Here, this project provides the positive NPV with high amonut so that the organization
must need to choose this project for getting the profit in long run.
b. Explaining approach of taxation in appraisal
Under investment appraisal technique tax policy helps in determining earning which
business unit will get after taxation. In this, by adding the value of depreciation analysts can
determine the value of cash inflow (Upton and et.al., 2015). Thus, by making treatment of
taxation analyst of Sounds Equipment Ltd can assess suitable cash flow and thereby become able
to fund NPV which is associated with proposed investment. This approach determining the
actual profit of the organization after considering the tax amount so that the organizer would
identify the actual benefit of the project so that they can take decision about the opting the
project or not.
c. Discussing the techniques that can be used for the evaluation of project
Sound Equipment Ltd can also undertake following techniques for the purpose of project
evaluation is enumerated below:
Payback period: By applying the payback period technique business unit can assess the
time frame within which it would become able to recover initial investment. Hence, by
employing such technique Sound Equipments Ltd can identify the time period after which it
become able to generate profit margin (Goodman and et.al., 2013). However, in the present
investigation such method is not undertaken by analysts because it not renders information about
the cash flows which will be generated by the firm after payback period (Investment Appraisal,
2017). Along with this, such method does not offer solution by taking into account the value of
money concept. Hence, such aspect closely influences the significance of such method and
thereby affects overall decision making.

Post pay back period: The post pay back period determine that the profitable year, it
defines the times which the organization receives the benefits. By applying these tools and
techniques John Greek determine the amount of time on which it can earn money. By using these
techniques organization takes decisions about the choosing of the projects.
Profitability index: Profitability index determine the value pay off ratio, it means this
ratio determine the time period in which the amount of money recovered. It is ease to convey and
presentation of it is also very good. It can be easily under stable and measurable by the people in
the organization.
Average rate of return: Company can also take decision about the selection of proposal by
making considering ARR technique. Moreover, such technique provides deeper insight to the
firm about the average return which will be generated by it from proposed investment proposal
(Dyson and Berry, 2014). In this, by considering such aspect Sound Equipments Ltd can suitable
proposal which aid in the profitability aspect of firm (Beck, Raj and Britzelmaier, 2013). Such
method offers solution for decision by considering profit margin rather than annual cash flows.
Further, it also avoids time value of money concept and thereby influences decision making.
d. Stating the other factors that need to consider while taking final decision
There are several factors which business unit should consider at the times of making
decision in relation to the selection of proposal (Götze, Northcott and Schuster, 2015). It includes
technological advancement, improvement in the business operations and functions etc. By
applying these factors john Green determine the best possible facts and figures through which it
makes the best possible solution. Hence, by considering such factors John Green can take
suitable decision regarding investment.
CONCLUSION
From the above report, it has been concluded that out of competitor’s financial position
and performance of Tesco and Sainsbury’s Plc was sound. It can be seen in the report that
Morrison’s Plc is required to take corrective measures or actions for making improvement in the
performance level. Moreover, financial condition and position of firm has high level of impact
on the decision making aspect of investors. This report presents that the John Greek makes its

business more profitable and producible in long term and also achieves the long term goals and
targets. Through these policies it achieve more amount of benefits by satisfying the needs and
wants of the customers. Thus, by making significant modification in the strategic and policy
framework Morrison can build its effectual image at marketplace. Besides this, it can be revealed
from the report that Sound Equipments Ltd should select investment proposal which will prove
to be more beneficial for it.

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Online
Investment Appraisal. 2017. Online. Available through: <http://knowledgegrab.com/learners-
zone/study-support/decision-making-financial-management/investment-decision/appraisals-
16/>. [ Accessed on 21st March 2017].
Note: All feedback problem has been solve except one i.e. The graph and chart has not been
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