Financial Analysis of Sainsbury Group PLC and Tesco Group PLC

This report presents a comprehensive financial analysis of two major Asian manufacturing food units, specifically focusing on Sainsbury Group PLC and Tesco Group PLC. The analysis encompasses the preparation, review, and evaluation of financial accounts and statements to facilitate sound economic decision-making. It includes a detailed examination of ratio analysis (profitability, liquidity, solvency, efficiency, and investment ratios), horizontal analysis, and vertical analysis for both companies. The report also critically assesses the significance of working capital management for both Tesco and Sainsbury, highlighting its impact on operational efficiency and financial stability. Furthermore, it provides a critical analysis of the annual cash flow statements of both companies over the past two years, with the findings intended to inform and support the decision-making processes within the organizations. The analysis covers the interpretation of various financial metrics, including revenues, gross profits, net income, and balance sheet components, providing a comparative overview of the financial health and performance of both companies.

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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Financial analysis....................................................................................................................1
2. Outlining significance of the working capital for both the organization................................1
3. Critical analysis of cash flow report of both the companies...................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
The financial analysis includes preparation, review and analysis of financial accounts and
statements for executing better economic decisions. Procedure of determining strength and
weaknesses in context of finance through establishing of different strategic relationship in
between balance sheet items, profit and loss account and other statements. The analysis in
finance is associated with simplify the financial data of a financial statement. This report will
cover details which will highlight about large Asian Manufacturing Food units. The report will
lay emphasis on two big corporates that is Sainsbury group plc and Tesco group. Vertical,
horizontal statement will be prepared for both the companies along with detailed ratio analysis of
the two will be undertaken. The report will also highlight about analysing the importance of
working capital for Tesco and Sainsbury plc to execute decision making. Along with this, the
report will critically analyse the annual cash flow statements for both the companies over the last
two years. The finding will also be assist in context of process of decision making.
1. Financial analysis
Ratio analysis- It is the quantitative methods that is been used by the firm for gaining
insight within the liquidity, efficiency, profitability and the operational performance by making
the comparison of the information that is contained in the financial statements (Ramiah, V. and
et.al., 2016). This tool is used for establishing the trend analysis within different company.
Horizontal analysis- It refers to the method that focuses on the assessing the financial
statement in order to compare the historical data, accounting periods, line items and the ratio
over the number of periods. It is also known as the base-year assessment.
Vertical analysis- It means the proportional analysis where each and every line item of
the financial report is been listed as the percentage of the another item. It is the tool that makes
the comparison easy of one entity with that of another (Li, D. and Wu, W., 2017). It is been used
in for assessing the picture relating to finding out that whether the performance of an
organization is improving or been deteriorating.
Ratio Analysis:

Interpretation:
Profitability ratio:
The profitability ratio depicts the level of profits earned by a company in an accounting
year and this reveal the increase or decrease in the income of business over a period of time
which is facilitated by the GP and NP ratio. The GP ratio for Sainsbury is seen to fluctuate
between 6-7 for past 4 years which means there is no increase by more than 1% in the profits of
company and also that company have maintained its position at current level of profits the net
For Tesco it can be seen that it have raised from 5% to almost near 6.5 % in same frame. This
means that the profitability of Tesco have increased in these 4 years rather Sainsbury have
managed to operate more or lee no the same level of profits with minor fluctuations.
Liquidity ratio:
The liquidity ratio defines the ability of a company to meet its immediate the cash expenses
which are required to be paid in the near future. The current ratio of Sainsbury for the 4 years it
seems to have to be at 0.5 with minor fluctuations but with no major changes in quick ratio. For

the Tesco it can be seen there is fall in the quick ratio which means there is fall in current asset or
an increase in both current asset and current liability where rise in CL is more than CA of the
business. For the current assets Sainsbury have managed to operate at same level which means
there is no fall in its past ratio but for Tesco a fall is seen in current ratio as well by almost 0.10.
Solvency ratio:
The solvency ratio defines the level of solvency depicting the debt financing in the
capital structure of a company as compare to the equity finance. For Sainsbury it can be seen
that the ratio have fallen down from .35 to 0.12 which means the debt financing of the
company have reduced and company is forwarding towards relying more on equity finance
rather than more on the debt financing. For Tesco the same scenarios is there where the debt
equity ratio have fallen down to 1.23 to 0.38 which means earlier the debt in the capital structure
were more than equity sources but now the company is also taking steps to increase equity
financing and decreasing debts in forms and loans and borrowings from banks and other
financial institutions.
Efficiency ratio:
The efficiency ratio defines the ability of the firm in utilizing the sources of the firms in
order to generate the profits for business. With higher utilisation the profits are higher. The
inventory turnover ratio of the Sainsbury have fallen down to 22 to 14 in past 4 years which
means company have reduced to keep the inventory more which states that there is a control
over the inventory carrying and holding cost for the company. For Tesco it can be seen that it
have increased from 19 to almost 24 which states the fact that the holding of inventory have
increased. The assets turn over ratio of Sainsbury have not much change while for Tesco it have
increased by 0.12 which means the Sainsbury is utilising its asset with lesser capacity while
Tesco have increased its efforts in utilization of tis asset for enhancing profits.
For fixed asset turnover ratio of the Sainsbury has increased while for Tesco it have
increased with same pace. This means both the organisation are trying to take optimal use of
their fixed asset in order to generate more of profits for business.
Investment ratio:

The investment ratio defines the ability of the company in giving return to their investors
who have invested money in their business through equity or debt financing which are given to
them in form of dividend and earning per share. For Sainsbury there is fall in the earing per
share and for Tesco the figures are fluctuating as with a positive EPS it become negative in
2017 but again it raised to .44 in 2018, which means the earing level for Tesco is quite
fluctuating while Sainsbury is operating at positive figures but EPS is decreasing. For Dividend
per share it can be stated that Sainsbury is operating at same level of dividend which are given to
shareholders while Tesco have not given any dividend to its shareholder till 2017 but in 2108 it
have given a dividend of just 0.03 it shareholder which means the profitable condition for Tesco
for tis investors is not so good.
Horizontal Analysis
Interpretation:
The revenues of Tesco have increased to 2.73% in 2017 and with a minor increase it
have researched to 2.81% in 2018. This means the profits of company are more or less operating
at same level. The gross profits have not changed much which is due to increase in the cost of

revenue with a hike in sale. There is fall in the net income of the company which means that the
expenses of the company are increasing with a faster pace as compared to the increase in the
revenues of organisation.
Balance sheet of Tesco :
Interpretation:
There is an increase in the total current asset of the company which states that there is
rise in the current and not current asset of the business. The rise in the total current asset is high
for starting years but gets lower in the latter years. This means the growth is controlled by the
company as per the time. The total current liability have increased with a faster pace and the non
current liability have increased and decreased too in time of 4 years. This give an over all falling
effect to the total liabilities of the company which means organisation have maintained a control
over the obligation of company.

Interpretation:
The balance sheet of the organisation depicts the fact that there is fall in the current asset
holding but an increase in the non current holding which have increased the figures of total asset
for organisation. The current liability of organisation have increased while increase in the
equity of the company as well. This means company is relying more of the equity rather then
long term debts and the current liquidity position of company can be stated to be good as there
is fall in the current asset and current liabilities have increased.

Interpretation:
The percentage change in the sales figures show a rise in the revenues of Sainsbury with
a lower pace but still is increase is there. The cost of production to generate that level of sales
have been at same level which directly effects the profitability of the company. This means that
the gross profits are increasing with increasing in sale revenues. Also the net profits are also
increasing for Sainsbury which means that with increasing the sales for the company the
expenses are also controlled to operate at incremental level and generate more profits.

Interpretation:
The figures in the income statement of the company reveals the fact that revenues of the
company have increased with a increase in the cost of production as well. This did not effected
the rising of gross profits of the company this means the cost of production have been controlled
by the organisation in order to generate high profits with increased sales and leered cost of
manufacturing. The net profits of the organisation have seen ups and down in past 4 years where
from the loss position it have arose to a profit making condition in same time frame of 4 years.

Balance sheet: Sainsbury's

Interpretation:
The total asset Tesco have increased and then decreased in 2018 while for Sainsbury it
can be stated that increased with a faster and Constance pace in past 4 years his depict the
growth of the organisation and stability in its financial position as well as performance of the
company. The current liabilities of the organisation have seen an increase and decrease as well
with rise in equity funding of the company. While there is increase in total liabilities of
Sainsbury as well but with a lower percentage and more percentage hike in its Equity sources of
funding. This means financial position of Tesco is not stable at the present time while Sainsbury
is operating at stable and constant level with changing its capital structure and increasing profits
for business.
2. Outlining significance of the working capital for both the organization
Working capital means managing the the current assets and the short term liabilities for
running the routine operations of the business (Ramiah and et.al., 2016). Working capital is been
considered as the life-blood of the business and is essential for maintaining the smooth
functioning of the business operations. For achieving the success with sufficient amount of the
cash, managing the working capital is of utmost importance for the organization. The major
components that depicts the significance of the working capital are as follows-

Enhancing goodwill- Adequate working capital helps Tesco and Sainsbury's in making
timely payment and in creating the goodwill (Masri and Abdulla, 2018). Reputation of
companies in the market get enhance if they maintain their working capital by paying their
current liabilities and the operating expenses on time.
Strengthen solvency- Proper working capital management enables both the enterprise in
operating their business without facing any of the financial problems in relation to meeting the
current liabilities. Buying of the material and making the payment of the wages, salary and the
overhead without any of the delay. Maintaining adequate level of the working capital assist the
business in attaining the good solvency position by facilitating the uninterrupted flow in the
process of production.
Obtaining the loan easily- A firm that is having the adequate level of working capital,
better credit rating and high solvency could arrange the loans from the banks and the financial
institution with ease and in favourable terms.
Continuous supply of the material- Quick payment of the credit purchases of the raw
material provides for the consistent supply of the material from the suppliers (Afrifa and
Tingbani, 2018). This in turn helps the organization in continuous production of their resources
so that demand of the customers can also be met on time.
Operational efficiency- Effective use of the working capital helps the business in in
maintaining the efficiency in its operations. The routine funds requirement could be met without
ithe lack of funds by the adequate working capital.
Facing crisis- with the proper working capital, company can met up with any of the crisis
in the emergencies like the economic downturn, depression or any other uncertain event.
Thus, working capital is referred as the important metric that helps Tesco and Sainsbury's
in maintaining the liquidity, solvency and the efficiency in the overall market across the globe. It
reflects the outcome of the several activities of the organization including the revenues, debt
management, inventory management and the payments to the suppliers. It is counted as the
strategy of the accounting which focuses on maintaining the balance in between the current
assets and the liabilities of the company (Li and Wu, 2017). Effective managing of working
capital helps the business in covering the financial obligation and also boosting up their earnings.

3. Critical analysis of cash flow report of both the companies
Cash flow statement- It refers to the statement that facilitates the information regarding
the aggregate data that includes all the cash inflows and outflows which the organization receives
through its operations and the investment sources that are external to the company (Bellouma, M.
and Belaid, F., 2016). It also accounts for the activities that involves the payment and the
investment for a particular period. It provides for the details in relation to the operating, investing
and the financing activities of the company.
Ratios for Cash flow analysis
Particulars Formula Sainsbury's Tesco
2018 2019 2018 2019
CFO 1365 618 2782 1966
Sales 28456 29007 57491 63911
Operating
cash flows
ratio (OCFR) CFO/ Sales 0.05 0.02 0.05 0.03
CFO 1365 618 2782 1966
Total assets 22001 23541 44862 49047
Asset
efficiency
ratio(AER)
CFO/Total
assets 0.06 0.03 0.06 0.04
CFO- dividend
paid 1130 381 2700 1609
CL (current
liabilities) 10302 11417 19238 20680
Current
liability
CFO/current
liabilities
0.110 0.033 0.140 0.078

coverage
ratio(CLCR)
Cash flow from
financing -244 -752 -3236 -1981
CFO 1365 618 2782 1966
External
financing
index ratio
(EFIR)
Cash flow
from
financing/Cas
h flow from
operations -0.18 -1.22 -1.16 -1.01
CFO- dividend
paid 1130 381 2700 1609
Long term debt 174 135 313 975
Long term
debt coverage
ratio
(LTDCR)
CFO/Long
term debt 6.49 2.82 8.63 1.65
Interpretation- From the above table it has been interpreted that the operating cash flow
ratio of Tesco and Sainsbury's is depicting a same position which means that the operating
activity of both the company is efficient and resulting a positive cash flow within the business.
Similarly, the assets efficiency ratio is also showing the same results which reflects that adequate
sales are been generated by making the use of their assets. Though the resultant ratios are low but
both are at same position. The short term liability coverage ratio states the amount of the cash
flows that the firm is been generating for paying off its current debts. As Tesco is attaining the
higher ratio, it means that it is having greater amount of the liquidity and indicates the better cash
flow position than Sainsbury's. External financing index ratio shows the ability of the firm in

financing its investments from the cash that is been generated by the business or it requires
external financing (Bellouma and Belaid, 2016). This ratios is resulted as negative of both the
entities which clearly depicts that the financial position of both companies is sound as negative
figures reflects that it does not require any external financing for making the investment. Long
term coverage ratio states the amount of non-current debts that the corporate is having against
their equities. Lower ratio reflects the better financial state of the company. In the year 2018, the
ratio was higher of Tesco than Sainsbury's which highlights that the former entity is having
higher debts over its equities. On the other hand, during the year 2019, Tesco has managed its
ratio by paying off their debts or not taken any external financing as its ratio generated is lower
than it competitors that is Sainsbury's.
CONCLUSION
By
summing up the above report it has been concluded that financial analysis is the most useful tool
that helps Tesco and Sainsbury's in determining the performance and the financial health of their
business so that corrective measures could be taken for making improvements within the
operations of the business. It enables the organization in knowing the liquidity, profitability and
its solvency position within the market in comparison with its competitors so that it could
achieve competitive edge. Financial analysis also helps the enterprise in attaining growing
success in the long run which in turn enhance the ability of the firm in meeting any uncertain
event or conditions if any occurs in the future. Ratio analysis facilitates comparison in between
the financial statements of two and more companies over the previous and the present years. It is
also considered as an effective technique that provides for the suitable decision making in respect
of activities of the business. This technique plays an important role for the users in measuring the
performance of the company over the years. Thus, overall the performance of
Sainsbury;'s is better than Tesco as its profitability and the liquidity position is
showing positive results while Tesco is resulting negative results which means net
loss. The efficiency and the investors valuation ratio is also higher of Sainsbury as
compared to Tesco. The leverage ratio of Sainsbury is better as it is resulting low

ratio which reflect a better position of the company in meeting its debts than the
Tesco.