Financial Analysis Management & Enterprise Report: Sainsbury and Tesco

This report, prepared by a financial manager, analyzes the financial performance of Sainsbury and Tesco Plc, focusing on providing recommendations for an Asian food manufacturer in selecting a prospective client. It includes a detailed vertical and horizontal analysis of the companies' financial state...Read More

Financial Analysis
Management &
Enterprise

Table of Contents
INTRODUCTION...........................................................................................................................3
1. Detailed vertical and horizontal analysis and ratio analysis of the financial statements of
Sainsbury and Tesco Plc.............................................................................................................3
Importance of working capital analysis of companies prior to decision making......................19
Evaluation of cash flow statements ..........................................................................................19
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21
APPENDIX ...................................................................................................................................22

INTRODUCTION
Financial analysis refers to a detailed study of each financial transactions of the company,
summarising all those transactions and prepare the financial reports for the company in such a
way so that they could show the actual financial performance of the business to its stakeholders
(Muda and et.al., 2018). Further, financial management is a process of evaluate overall financial
performance of the company compare it with its set objectives and goals and formulate plans and
procedures for the company so that the financial performance of the firm could be improved in
the competitive market. The present assignment shows a report made by a financial manager for
Asian food manufacturer for the purpose providing recommendations to the company in context
to the most prospective client between Sainsbury and Tesco Plc.
The report includes a detailed vertical and horizontal analysis of the company along with
brief comparision of both the companies on the basis of their financial statements. In addition to
this, the assignment also shows importance of the woring capital analysis of a firm in context to
taking several decisions for the company. Further, the report also shows a critical analysis of
both the companies on the basis of their cash flow or the liquidity position. At the end of report,
it shows several statement showing financial performance of the company.
1. Detailed vertical and horizontal analysis and ratio analysis of the financial statements of
Sainsbury and Tesco Plc
Profitability ratio analysis
GP ratio
Year / companies Sainsbury Tesc
2016 6.19% 5.24%
2017 6.23% 5.19%
2018 6.61% 5.83%
2019 6.92% 6.48%
NP ratio
Year / companies Sainsbury Tesc

2016 2% .25%
2017 1.44% -0.07
2018 1.09% 2.10%
2019 .75% 2.07%
Interpretation
Profitability ratio of a company shows profit generation capacity of the company from its
normal course of business activities. This ration analysis covers Gross profit and net profit
analysis of the company (Wilson and Marrer, 2019). The gross profit shows ratio of profit
generated by the business through its operating activities. On the other hand, net profit ratio
shows amount of net profit generated by the business from both operating and non operating
activities. By analysing the gross profit ratio of the company of Sainsbury, it can be seen that its
capacity of generating profits from the operations is increasing over the year. Although, the net
profit analysis of the company shows that its net profit is reducing over the year. It may cause
due to inefficiency of its managers in developing strategies for the business in earning profits
from various activities other than its normal course.
With evaluation of gross profits ratio, it can be seen that the company's capacity of
earning income from its normal course of business is increasing. Further, net profit ratio of the
company also have an increasing trend. In this regard, it can be seen that company's capacity of
the company in generating profits from both operating and non operating activities is increasing
over the year.
Liquidity ratio analysis
Current ratio
Year / companies Sainsbury Tesc
2016 .66 .75
2017 .74 .79
2018 .76 .71
2019 .66 .61
Quick ratio
Year / companies Sainsbury Tesc

2016 .52 .61
2017 .53 .68
2018 .59 .60
2019 .50 .49
Interpretation
Liquidity analysis ratio is a part of financial ratios helps the business in showing liquidity
position of the company. 1 is the ideal ratio of liquidity ratio. A company having its liquidity
ratio as 1 is seen as having sufficient amount of cash and cash equivalent within the business. By
analysing liquidity ratios of sainsbury, it can be seen that liquidity position of the company keeps
changing frequently. Further, as both current ratio and quick ratio is less than 1 in the Sainsbury,
it can be said that the company fails to maintain sufficient amount liquidity within the business.
On the other hand, analysis of liquidity position of the Tesco Plc shows that company's
current and quick ratios are keep reducing over the year. In this regard, it canbe said that its
performance and efficiency of maintaining sufficient liquidity within the business is keep
reducing. Thus, its managers needs to develop their effective plans and policies in order to
improve firm's liquidity position. failure of managers in maintaining sufficient liquidity may
result in putting the company into the liquidity state.
Solvency ratio analysis
Debt-equity ratio
Year / companies Sainsbury Tesc
2016 .35 1.23
2017 .31 1.45
2018 .20 0.67
2019 .12 .38
Interpretation
As the name describes, solvency ratio shows the capacity of the company shows solvent
position of the company. It shows the capacity of company in repayment of all its debts. As per
the generally accepted principles, 1 to 1.5 ratio of solvency of a company shows the ideal
solvency position of the business. Ratio above 1.5 shows excessive of resources with the
company. On the other hand, ratio less than 1 shows incapability of the company in repayment of
all its debts. With analysis of debts equity ratio of Sanisbury, it can be said that company's

position of repayment is keep reducing over the year. Whereas, Tesco's capacity of repayment is
also reducing over the year. Thus managers of both companies need to maintain strategies for the
business in improving its capacity of maintaining resources within the firm in repayment of all
its debts.
Efficiency ratio analysis
Inventory turnover ratio
Year / companies Sainsbury Tesc
2016 22.44 19.1
2017 17.93 22.4
2018 14.83 23.7
2019 14.44 24.4
Total assets turnover ratio
Year / companies Sainsbury Tesc
2016 1.40 1.24
2017 1.43 1.25
2018 1.36 1.27
2019 1.27 1.36
Fixed assets turnover ratio
Year / companies Sainsbury Tesc
2016 1.91 1.78
2017 2.02 1.88
2018 2.07 1.87
2019 1.93 1.89
Interpretation
Efficiency ratios are being calculated in order to determine the efficiency of business in
using its various resources and generation of income from them. Higher the value of these ratios
shows higher level of efficiency of company in using its different assets (Lee and et.al., 2018).
Different efficiency ratios such as fixed assets turnover ratio, inventory turnover ratio, etc. of

Sainsbury shows that efficiency of generting profits from different assets held by it is keep
increasing over the year.
Further, all the efficiency ratios of Tesco Plc also showing raoid increase in the
capabilities of business in generating profit through different assets held by it.
Investment ratios
Earnings per share
Year / companies Sainsbury Tesc
2016 .23 0.05
2017 .17 (0.01
2018 .13 .44
2019 .08 .41
Dividends per share
Year / companies Sainsbury Tesc
2016 .12 -
2017 .12 -
2018 .1 .03
2019 .1 .11
Interpretation
Investment ratios are being derived in order to determine the opportunities for the
investors in earning income by investing their funds in the business. Further, these ratios also
help the investors in determination of risk and uncertainties included in the investment to be
made in the business. Analysis of investment ratios of Sainsbury shows a reductopn in the
earning per share and divdend per share of the business. It shows that if a investor invests their
fund into the business, the amount of income from their investment into the firm would keep
reducing.
On the other hand, study of investment ratios of Tesco shows a frequent change in both
earning per share and dividend per share of the company. Thus, it can be said that investment in
the Tesco plc contains a huge amount of risk and uncertainties.
Horizontal analysis of Sainsbury and Tesco

Horizontal analysis of income statement can be defined as a comparison of financial
statements of the company with its own previous year's income statement. These income
statements are being used by the managers in order to compare the financial performance of
company and change in its efficiency as well.
Income statement: Sainsbury
Particulars 2016
%
chang
e in
2017 2017
%
chang
e in
2018 2018
%
chang
e in
2019
20
19
Revenue
23,50
6 11.6%
26,22
4 8.5%
28,456
1.9%
29,
00
7
Cost of revenue
22,05
0 11.5%
24,59
0 8.1%
26,574
1.6%
27,
00
0
Gross profit 1,456 12.2% 1,634 15.2% 1,882 6.6%
2,0
07
Total operating
expenses 749 32.4% 992 37.5% 1,364 24.3%
1,6
95
Operating income 707 -9.2% 642 -19.3% 518 -39.8%
31
2
Interest Expense 142 -8.5% 130 3.8% 135 -38.5% 83
Other income 26 -61.5% 10
Other expenses 17 -47.1% 9
Income before income
t... 548 -8.2% 503 -18.7% 409 -41.6%
23
9
Provision for income t... 77 63.6% 126 -20.6% 100 -80.0% 20
Net income 471 -20.0% 377 -18.0% 309 -29.1%
21
9
Interpretation
The horizontal analysis of Sainsbury's income statement states that company's overall
financial performance is reducing over the year. Each percentage of the horizontal income
statement is reducing with the time. Therefore, it can be said that it is necessary for the diorectors
of Sainsbury to formulate their effective strategies and plans for the company as failure of their
financial plans for the firm may result in putting the business into an alarming position.
Income statement: Tesco

Particulars 2016
%
change
in 2017 2017
% change
in 2018 2018
%
change
in 2019 2019
Revenue 54,433 2.73% 55,917 2.81% 57,491 11.17% 63,911
Cost of revenue 51,579 2.78% 53,015 2.12% 54,141 10.39% 59,767
Gross profit 2,854 1.68% 2,902 15.44% 3,350 23.70% 4,144
Total operating expenses 1,874 -7.47% 1,734 3.00% 1,786 15.73% 2,067
Operating income 980 19.18% 1,168 33.90% 1,564 32.80% 2,077
Interest Expense 498 3.82% 517 -16.63% 431 -31.79% 294
Other income 165
-
100.00%
Other expenses 320 58.13% 506 -100.00% 0 #DIV/0! 109
Income before income t... 162 -10.49% 145 795.17% 1,298 28.97% 1,674
Provision for income t... -54 -
261.11% 87 251.72% 306 15.69% 354
Net income 138 -
128.99% -40 2915% 1,206 9.62% 1,322
Interpretation
The above horizontal income statement if the Tesco plc shows that company's
performance of earning income is improving with the time. The statement shows that manager's
and directors of the company have formulated their strategies for the fianchncial position of the
company. Although, as company's financial position is improving with lower growth rate, its
managers can improve their plans so that they can improve the financial growth rate of the
company.
Balance sheet: Sainsbury
Particulars 2016 2017
%
change
in 2017 2018
% change
in 2018 2019
%
change
in 2019
Assets
Total current
assets 4,444 6,322 42.3% 7,866 24.42% 7,589 -3.52%
Total non-
current assets. 12,529 13,415 7.1% 14,135 5.37% 15,952 12.85%
Total assets 16,973 19,737 16.3% 22,001 11.47% 23,541 7.00%

Liabilities and
stockholders
equity
Total current
liabilities 6,724 8,573 27.5% 10,302 20.2% 11,417 10.82%
Total non-
current
liabilities
3,884 4,292
10.5%
4,288
-0.09% 3,668
-
14.46%
Total liabilities 10,608 12,865 21.3% 14,590 13.41% 15,085 3.39%
Total
stockholders'
equity
6,365 6,872
8.0%
7,411
7.84% 8,456 14.10%
Total liabilities
and
stakeholders
equity
16,973 19,737
16.3%
22,001
11.47%
23,541
7.00%
Interpretation
The horizontal balance sheet of Sainbury shows that company's financial performance is
reducing over the year. Further, with the analysis of statement of financial position, it can be
said that company's financial position is reducing with the higher rate.
Balance sheet: Tesco
2016 2017
%
change
in 2017 2018
%
change
in 2018 2019
%
chang
e in
2019
Assets
Total current assets 14,828 15,417 4.0% 13,726 -11.0% 12,668 -7.7%
Total non-current asse... 29,076 30,436 4.7% 31,136 2.3% 36,379 16.8%
Total assets 43,904 45,853 4.4% 44,862 -2.2% 49,047 9.3%
#DIV/0! #DIV/0!
#DIV/
0!
Liabilities and stockh... #DIV/0! #DIV/0!
#DIV/
0!
#DIV/0! #DIV/0! #DIV/

0!
Total current liabilit... 19,714 19,405 -1.6% 19,238 -0.9% 20,680 7.5%
Total non-current liab... 15,564 20,010 28.6% 15,144 -24.3% 13,509
-
10.8%
Total liabilities 35,278 39,415 11.7% 34,382 -12.8% 34,189 -0.6%
Total stockholders' equity
8,626 6,438
-25.4%
10,480
62.8% 14,858 41.8%
Total liabilities and
stakeholders equity 43,904 45,853 4.4%
44,862
-2.2% 49,047 9.3%
Interpretation
The above horizontal statement of the company shows that company's financial position
reduced in the year 2018 as compare ti 2017. Although, through effective strategies of managers
and directions of its directors, comapany became able to re-boom its financial position and starts
generating products from the business.
Vertical analysis
Vertical analysis refers to an analysis of different financial activities of the company on
the basis of revenue earned by the company. Vertical financial statements shows the revenue
generation capacity of the company along with its efficiency of performing several business
activities.
Income statement: Sainsbury
Particulars 2016
%
change 2017
%
chang
e 2018
%
change 2019
%
cha
nge
Revenue 23,506 26,224 28,456 29,007
. Cost of revenue 22,050 93.8% 24,590 93.8% 26,574 93.4% 27,000 93.
1%
Gross profit 1,456 6.2% 1,634 6.2% 1,882 6.6% 2,007 6.9
%
Total operating
expenses 749 3.2% 992 3.8% 1,364 4.8% 1,695 5.8
%
Operating income 707 3.0% 642 2.4% 518 1.8% 312 1.1
%
Interest Expense 142 0.6% 130 0.5% 135 0.5% 83 0.3

%
Other income 0.0% 0.0% 26 0.1% 10 0.0
%
Other expenses 17 0.1% 9 0.0% 0.0%
0.0
%
Income before income
t... 548 2.3% 503 1.9% 409 1.4% 239 0.8
%
Provision for income t... 77 0.3% 126 0.5% 100 0.4% 20 0.1
%
Net income 471 2.0% 377 1.4% 309 1.1% 219
0.8
%
Income statement: Tesco
Particulars 2016
%
change 2017 % change 2018
%
change 2019
%
chan
e
Revenue 54,433 100.00
% 55,917 100.00% 57,491 100.00% 63,911 100.0
%
Cost of revenue 51,579 94.76% 53,015 94.81% 54,141 94.17% 59,767 93.5
%
Gross profit 2,854 5.24% 2,902 5.19% 3,350 5.83% 4,144 6.48%
Total operating expenses 1,874 3.44% 1,734 3.10% 1,786 3.11% 2,067 3.23%
Operating income 980 1.80% 1,168 2.09% 1,564 2.72% 2,077 3.25%
Interest Expense 498 0.91% 517 0.92% 431 0.75% 294 0.46%
Other income 0.00% 0.00% 165 0.29% 0.00%
Other expenses 320 0.59% 506 0.90% 0 0.00% 109 0.17%
Income before income t... 162 0.30% 145 0.26% 1,298 2.26% 1,674 2.62%
Provision for income t... -54 -0.10% 87 0.16% 306 0.53% 354 0.55%
Net income 138 0.25% -40 -0.07% 1,206 2.10% 1,322 2.07%
Interpretation
vertical income statement of the Sainsubury shows that company is capable to maintain
its financial performance and efficiency over the year. On the other hand, vertical income
statement of Tesco showed that company's financial efficiency is fluctuating over the year. There
is no specific trend in the change in financial performance of company
Balance sheet: Sainsbury
Particulars 2016
%
change 2 % change 2018
%
change 2019
%
change

Assets
Total current
assets 4,444 26.2% 6 32.0% 7,866 35.8% 7,589 32.2%
Total non-
current assets 12,529 73.8% 1 68.0% 14,135 64.2% 15,952 67.8%
Total assets 16,973 100.0% 1 100.0% 22,001 100.0% 23,541 100.0%
Liabilities and
stockholder’s
liabilities
Total current
liabilities 6,724 39.6% 8 43.4% 10,302 46.8% 11,417 48.5%
Total non-
current
liabilities
3,884
22.9%
4
21.7%
4,288
19.5% 3,668 15.6%
Total liabilities 10,608 62.5% 1 65.2% 14,590 66.3% 15,085 64.1%
Total
stockholders'
equity
6,365
37.5%
6
34.8%
7,411
33.7% 8,456 35.9%
Total liabilities
and
stakeholders
equity
16,973
100.0%
1
100.0%
22,001
100.0%
23,541
100.0%
Balance sheet: Tesco
Particulars % of 2016 2017
%
of
20
17 2018
% of
2018
201
9
% of
2019
Assets
Total current assets 33.8%
15,417
33
.6
%
13,726
30.6%
12,6
68 25.8%
Total non-current
assets 66.2%
30,436
66
.4
%
31,136
69.4%
36,3
79 74.2%
Total assets 100.0% 45,853 10 44,862 100.0 49,0 100.0%

0.
0
% % 47
Liabilities and
stockholders’ equity
Total current
liabilities 44.9%
19,405
42
.3
%
19,238
42.9%
20,6
80 42.2%
Total non-current
liabilities 35.5%
20,010
43
.6
%
15,144
33.8%
13,5
09 27.5%
Total liabilities 80.4%
39,415
86
.0
%
34,382
76.6%
34,1
89 69.7%
Total stockholders'
equity 19.6%
6,438
14
.0
%
10,480
23.4%
14,8
58 30.3%
Total liabilities and
stakeholders equity 100.0% 45,853
10
0.
0
%
44,862 100.0
%
49,0
47 100.0%
Interpretation
The analysis of vertical balance sheet of both Sainburty and Tesco shows that overall
financial position of the Sainsubury is improving over the year. On the other hand, the financial
position of Tesco is declining with the passage of time.
Importance of working capital analysis of companies prior to decision making
Working capital:
Working capital is one of the most important element to be taken into account at the time
of making any decision for the company. The working capital ratios can be termed as a mirror
image of financial health of the company. The working capital of the business can be determined
by reducing amount of current assets from its current liabilities. Analysis of the working capital
is important for an investor before taking any decision for the company. As it shows the
capabilty of business in maintaining curerent assets over current liabilities.
The analysis of working capital of Sainsubury shows that company's is efficiently
maintaining more value of current assets over current liabilities. It shows that company is able to

repay all its short term debts with the shortterm assets held by it. On the other hand, by analysing
the working capital condition of Tesco, it can be seen that company's performance in maintaining
working capital is reducing over the year. Further, it can be seen that amount of current assets is
reducing over the year. At the same time current liabilities of the company is increasing over the
year.
In this regard, it can be seen that in case Asian food manufacturer wants to transact with
these company's it would be more beneficiary to trade with Sainsbury. Due to reduction in the
working capital, company's capability of reopening its debts may reduce. That may result in
increase in the risk and uncertainties with the company
Evaluation of cash flow statements
Tesco plc
The cash flow statement of sainsbury shows that the company's liquidity position is
reducing over the year. Further, by analysing the change in the cash flow position from 2018 to
2019, it can be said that there is a drastic reduction in the amount of cash and cash equivalent
held by the compamy. By analysing the cash flow statement deeply, it can be said that the major
cause of company's liquidity position is inefficiencies of the company in generating cash from
the investing activities. Although, its efficiency of generating cash from operatibng activities is
also reducing over the time.
Sainsbury
The amount of cash flow is reducing with the time. It is being caused due to
inefficiencies of the company in generating cash and cash equivalent from its financial activities.
Further, the company's efficiency of generating investing activties is also reducing but with the
nominal rate. In addition, by analysing the cash from operating activities, it can be said that its
efficiency of the earning cash and cash equivalent from the operational activity has also been
reduced with higher rate.

CONCLUSION
From the above analysis it can be said that financial performance of the company can be
analysed by analysing its financial reports and performance. Further, for the purpose of having in
depth analysis of company's financial position, financial ratios can be evaluated. Further, there
are some statements such as horizontal financial statements, vertical financial statements., etc.
that helps the stakeholders in having more accurate analysis of change in the financial
performance of company. In addition, cash flow statements and working capital analysis are two
major elements that can help the stakeholders in analysing the repaying capabilities of a business
organisation.

REFERENCES
Books and Journals
Muda, I. and et.al., 2018, March. Factors of quality of financial report of local government in
Indonesia. In IOP Conference Series: Earth and Environmental Science (Vol. 126, No. 1,
p. 012067). IOP Publishing.
Wilson, B. and Marrer, K., 2019. Exploring Student Responses Regarding Most Difficult
Coursework Prior to Financial and Managerial Accounting. Journal of Higher Education
Theory and Practice, 19(1).
Lee, E. and et.al., 2018. Unintended Consequences of Economic Interventionism on Accounting
Conservatism: A Natural Experiment. Available at SSRN 3264746.

APPENDIX
Ratio analysis of Sainsbury
Particulars
F
or
m
ul
a
Profitability ratio analysis
2016 2017
Gross Profit 1456 1634
Net profit 471 377
Sales revenue 23506 26224
GP ratio
G
ro
ss
pr
of
it
/
sa
le
s
*
10
0 6.19% 6.23%
NP ratio
N
et
pr
of
it
/
sa
le
s
*
10
0 2.00% 1.44%
Liquidity ratio analysis
2016 2017
Current assets 4444 6322
Current liabilities 6724 8573

Inventory 968 1775
Prepaid expenses
Quick assets 3476 4547
Current ratio
C
ur
re
nt
as
se
ts
/
cu
rr
en
t
li
a
bi
lit
ie
s 0.66 0.74
Quick ratio
C
ur
re
nt
as
se
ts
-
(s
to
ck
+
pr
ep
ai
d
ex
pe
ns
es
) 0.52 0.53
Solvency ratio analysis

Long-term debt 2234 2114
Shareholder's equity 6365 6872
Debt-equity ratio
L
o
n
g-
te
r
m
de
bt
/
sh
ar
eh
ol
de
rs
’
eq
ui
ty 0.35 0.31
Efficiency ratio analysis
2016 2017
Cost of goods sold 22050 24590
Average Inventory 983 1372
Turnover or sales revenue 23506 26224
Average total assets 16755 18355
Average fixed assets 12280.5 12972
Stock turnover ratio (In times) 22.44 17.93
Total assets turnover ratio 1.40 1.43
Fixed assets turnover ratio 1.91 2.02
Investment ratios
2016 2017
Earnings per share
(
N 0.23 0.17

et
in
co
m
e
-
pr
ef
er
re
d
di
vi
de
nd
) /
N
u
m
be
r
of
sh
ar
es
ou
tst
an
di
ng
Dividends per share A
nn
ua
l
di
vi
de
nd
s /
N
u
m
be
r
of
sh
0.12 0.12

ar
es
Ratio analysis of Tesco
Particulars Formula
Profitability ratio analysis
2016 2018
Gross Profit 2854 3350
Net profit 138 1206
Sales revenue 54433
5749
1
GP ratio Gross profit / sales * 100 5.24%
5.83
%
NP ratio Net profit / sales * 100 0.25%
2.10
%
Liquidity ratio analysis
2016 2018
Current assets 14828
1372
6
Current liabilities 19714
1923
8
Inventory 2430 2263
Prepaid expenses 319
Quick assets 12079
1146
3
Current ratio Current assets / current liabilities 0.75 0.71
Quick ratio Current assets - (stock + prepaid expenses) 0.61 0.60
Solvency ratio analysis
Long-term debt 10623 7032
Shareholder's equity 8626
1048
0
Debt-equity ratio Long-term debt / shareholders’ equity 1.23 0.67
Efficiency ratio analysis
2016 2018
Cost of goods sold 51579 5414

1
Average Inventory 2694 2282
Turnover or sales revenue 54433
5749
1
Average total assets 44059
4535
8
Average fixed assets 30666
3078
6
Stock turnover ratio (In times) 19.15
23.7
3
Total assets turnover ratio 1.24 1.27
Fixed assets turnover ratio 1.78 1.87
Investment ratios
2016 2018
Earnings per share
(Net income - preferred dividend) / Number of
shares outstanding 0.05 0.44
Dividends per share Annual dividends / Number of shares - 0.03
Balance sheet of Tesco Plc

Balance sheet of Sainsbury

Cash flow statements of Sainsbury

Cash flow statement of Tesco Plc