Financial Analysis and Management Enterprises Report - Ratio Analysis

This report provides a comprehensive financial analysis of Sainsbury's and TESCO, focusing on their performance through ratio analysis, working capital, and cash flow analysis. It begins with an introduction to financial analysis, explaining its importance in measuring business operations. The main body delves into vertical and horizontal ratio analysis, examining profitability (gross profit and net profit), liquidity (current and quick), and solvency (debt-equity and interest coverage) ratios for both companies from 2015 to 2018. The report interprets these ratios, comparing the companies' performances and identifying trends. It also includes an analysis of working capital and cash flow. The conclusion summarizes the findings, highlighting key insights into the financial health and operational efficiency of Sainsbury's and TESCO. References and appendices are included to support the analysis.

Financial Analysis and
Management Enterprises

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Vertical and horizontal ratio analysis of financial statements of given two companies:............3
Working capital analysis:..........................................................................................................11
Cash flow analysis: ..................................................................................................................12
CONCLUSION .....................................................................................................................13
REFERENCES..............................................................................................................................14
APPENDICES ......................................................................................................................15
.......................................................................................................................................................15

INTRODUCTION
Financial analysis helps the company in measuring its business operations by conducting
the technical analysis of its financial statements such as ratio analysis, cash flow analysis etc. It
may be defined as method of reviewing and analysing the organisation's accounting report in
order to determined its future performance based on past financial performances (Borodin, A.
and et.al., 2015). Working capital analysis is necessary to determine the proper requirements of
working capital in the company in near future for its day to day business activity. For better
understanding of financial analysis, two companies named Sainsbury's and TESCO are chosen
which are engaged in supplying groceries items. This report explains the meaning and
calculation of financial ratios and interpretation of these ratios. Cash flow analysis and working
capital analysis of above mentioned company is also explained in this report.
MAIN BODY
Vertical and horizontal ratio analysis of financial statements of given two companies:
Ratio analysis may be defined as a procedure to compare the line items of financial
statements of a business organisation. This analysis is mainly useful when these financial ratios
are compared with other other company's financial ratios. Calculations of various financial ratios
of Sainsbury's and TESCO companies areas follows:
Income statements of Sainsbury's:
Particulars 2018 2017 2016 2015
Revenue 28456 26224 23506 23775
Cost of sales (26574) (24590) (22050) (22567)
Gross profit 1882 1634 1456 1208
Administrative expenses
Other Income
(1415)
51
(1207)
215
(850)
101
(1132)
5
Operating Profit 518 642 707 81
Finance income
finance cost
Share of post tax profit
19
(140)
12
34
(136)
(37)
19
(167)
(11)
19
(180)
8

Profit before tax 409 503 548 (72)
Income tax expense (100) (126) (77) (94)
Profit for the F.Y. 309 377 471 (166)
Income statements of TESCO:
Particulars 2018 2017 2016 2015
Revenue 57491 55917 54433 62284
Cost of sales (54141) (53015) 51579 64396
Gross profit 3350 2902 2854 (2112)
Administrative expenses
Other Income (expense)
(1786)
2
(1734)
(14)
(1874)
(9)
(2695)
(25)
Operating Profit 1566 1154 971 (4832)
Finance income
finance cost
Share of post tax profit
165
(431)
(2)
(506)
(517)
14
(320)
(498)
9
(1070)
(499)
25
Profit before tax 1298 145 162 (6376)
Income tax expense (306) (87) 54 657
Profit for the F.Y. 992 58 216 (5719)
Profitability Ratios:
These ratios are calculated by the company to evaluate the profitability of the
organisation in response to its business operations. Calculations of given two companies are as
follow:
 Gross profit ratio: This ratio is calculated by the company to find the capability of the
organisation to sales its products in response to cost of goods sold.
Particulars 2018 2017 2016 2015
Sainsbury's:
Gross profit 1882 1634 1456 1208

Sales
Gross Profit Ratio
28456
6.61
26224
6.23
23506
6.19
23775
5.08
TESCO:
Gross profit
Sales
Gross Profit ratio
3350
57491
5.83
2902
55917
5.19
2854
54433
5.24
(2112)
62284
-3.39
gross profit ratio = gross profit / Sales *100
Vertical Interpretation:
After seen the above calculation related to Sainsbury's company, it is clearly evident that
its gross profit ratio is high as compared to its previous years. This mean that company is able to
control its cost of production and increase its profit margin.
After seen the above calculations related to TESCO, it is clearly evident that company is
doing its business operations in effective manner due to this its current G.P. Ratio (5.83) in year
2018 is high as compared to last years.
Horizontal Interpretation:
from the above calculations related to gross profit ratio, it is clearly evident that
Sainsbury's company's gross profit ratio (6.61) in year 2018 is higher as compared to TESCO
(5.83). this is good sing for Sainsbury's but TESCO shall required to take suitable action for
increasing its ratio. Although there is no such big difference between G.P. Ratio of these two
companies.
2018 2017 2016 2015
-4
-2
0
2
4
6
8
6.61 6.23 6.19
5.08
5.83 5.19 5.24
-3.39
Sainsbury's:
TESCO:

 Net profit ratio: This ratio is calculated for evaluating the company's capacity to earn
profit in response of its operating expenses. Calculations of net profit ratios of two
companies are as follows:
Particulars 2018 2017 2016 2015
Sainsbury's:
Net profit
Sales
Net Profit Ratio
409
28456
1.44
503
26224
1.92
548
23506
2.33
(72)
23775
(0.3)
TESCO:
Net profit
Sales
Net Profit ratio
1298
57491
2.26
145
55917
0.26
162
54433
0.30
(6376)
62284
-10.24
Vertical interpretation:
After seen the above difference related to the Sainsbury's company it is clearly evident
that company's net profit ratio is not sufficient in the given four years because it is very low.
Companies shall require to take suitable actions for improving its net profit ratio.
From the above report related to TESCO, it is clearly evident that it is better for the
company to take some improvement in its business operations to have more net profit. Although,
it is also stated that company's has negative net profit ratio in year 2015 and in year 2018 it has
positive ratio which is (2.26 %), it earns company has done some improvement in its operations.
2018 2017 2016 2015
-12
-10
-8
-6
-4
-2
0
2
4
1.44 1.92 2.33
-0.3
2.26
0.26 0.3 -10.24
Sainsbury's:
TESCO:

Horizontal interpretation:
After analysis the above calculations related to net profit ratio, it is clearly stated that
Sainsbury's has high ratio as compared to TESCO in year 2018 but it is not consistent as
compared to Sainsbury's. It means that TESCO shall require to attain good net profit ratio in
consistent manner. But by focusing only year 2018, it can be said that TESCO has high net ratio
so its performance is good in current year.
Liquidity Ratios:
These are the ratios which are calculated by the company to find the liquidity position of
company, calculations of these ratios are as follows:
 Current ratio: This ratio is calculated to find the capacity of company to pay its short term
liabilities through its current assets (Grace, M. and et.al., 2015).
Particulars 2018 2017 2016 2015
Sainsbury's:
Current Assets
Current Liabilities
Current Ratio
7866
10302
0.76
6322
8586
0.74
4444
6724
0.66
4505
6923
0.65
TESCO:
Current Assets
Current Liabilities
Current Ratio
13726
19238
0.71
15417
19405
0.79
14828
19714
0.75
11958
19810
0.60
Current ratio = Current assets / Current liabilities

Vertical interpretation:
From the above calculation related to Sainsbury's company it is concluded that its current
ratios in all given years is very low which is as low as less than one. It means company's
liquidity position is not string as it has no current assets to pay its current liabilities.
From the above report related to TESCO, it is suggested to the company it have to
improve business operations so that it liquidity position can be improved.
Horizontal interpretation:
From the above calculations related to current ratio it is clearly evident that both the
companies have not performed well in utilising its current assets as both the companies have
almost same current ratio in the given four year. Both the companies need to improve its
business operations to utilise its current assets in better way.
 Quick Ratio: This ratio is calculated by the management accountant to know the
company's capacity to pay it current liabilities by the help of its quick assets.
Particulars 2018 2017 2016 2015
Sainsbury's:
Quick Assets
Current Liabilities
Quick Ratio
6056
10302
0.59
4547
8586
0.53
3476
6724
0.52
3508
6923
0.51
TESCO:
Quick Assets 11463 13116 12079 8649
2018 2017 2016 2015
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.76 0.74
0.66 0.65
0.71
0.79 0.75
0.6
Sainsbury's:
TESCO:

Current Liabilities
Quick Ratio
19238
0.60
19405
0.68
19714
0.61
19810
0.44
Quick ratio = Quick assets / Current liabilities
Note: Quick asset is calculated by deducting inventory and prepaid expenses from the current
asset.
Vertical interpretation:
From the above calculations related to Sainsbury's company it is concluded that it quick
assets ratio is very low in all the four years. It means that company is not able to pay its current
liabilities through its quick assets.
After considering the above calculations related to TESCO, it is clearly evident that its
quick ratio in the given four years is very low. Hence it need to improve its business operations
to improve its quick ratio.
Horizontal analysis:
After considering the above calculation related quick ratio it is clearly evident that quick
ratios of both companies are almost same so these both companies required to assess the
weaknesses in its business process. To improve such ratios.
Solvency ratios:
2018 2017 2016 2015
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.59
0.53 0.52 0.51
0.6
0.68
0.61
0.44
Sainsbury's:
TESCO:

These ratios are calculated to know the the company's business risk as well as financial
risk and to know whether company is sufficient to pay its finance cost (Khan, Hussain and
Mehmood, 2016). Calculations of various solvency ratios are as follows:
 Debt equity ratio: It is calculated to know the proportion of debt in terms of equity that
help the company in determining whether issue of debt is in limit or in excess (Kothari,
Mizik and Roychowdhury, 2015).
Particulars 2018 2017 2016 2015
Sainsbury's:
Debt
Equity
Debt equity Ratio
1602
6915
0.23
2039
6376
0.32
2190
5869
0.37
2506
5539
0.45
TESCO:
Debt
Equity
Debt equity Ratio
7032
10480
0.67
9330
6438
1.45
10623
8626
1.23
10520
7071
1.49
Debt equity ratio = Total debt / Shareholders fund
Vertical analysis:
2018 2017 2016 2015
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0.23 0.32 0.37 0.45
0.67
1.45
1.23
1.49
Sainsbury's:
TESCO:

After observing the above calculations related to Sainsbury's, it is clearly evident that it
has low finance risk as compared to its business risk because it has low debt portion as compared
to its equity and therefore, it has no need to take appropriate action.
From the above calculation related TESCO, it is clearly concluded that it has low debt
portion as compared to its equity. This mean that it has low or negligible finance risk as
compared to its business risk.
Horizontal analysis:
From the above calculations related to debt equity ratio, it is clearly evident that in year
2018 the companies has almost same ratio in year 2018 and it is very low. This mean that in
current year, both the companies have low finance risk. It is also stated that TESCO company
has more debt in previous years that indicates that its finance risk is very high as compare to
other company. At last, it may be said that both the companies have require to nothing in current
year.
 Interest coverage ratio: This ratio helps the company in evaluating the profits capability
in paying the company's interest cost (Kuznetsov, 2015).
Particulars 2018 2017 2016 2015
Sainsbury's:
EBIT
Interest Expenses
Interest coverage ratio
518
140
3.7
642
136
4.72
707
167
4.23
81
180
0.45
TESCO:
EBIT
Interest Expenses
Interest coverage ratio
1566
431
3.63
1154
517
2.23
971
498
1.95
(4832)
499
9.68

Interest coverage ratio = EBIT / Interest expenses
Vertical analysis:
From the above report related to first mentioned company, it is clearly evident that its
interest coverage ratio in first three year is good, due to this, such company has enough money to
pay its interest cost. This is because it has 3.7 times more EBIT as compared to its interest
expense.
After considering the above calculations related to TESCO, it is clearly evident that it has
sufficient earning before interest and tax to pay its interest expenses. It is also stated that it has
consistent in its interest ratio in last three year but in year 2015 it has more EBIT and afterwards,
it decreases, company need to take a look regarding this issue.
Horizontal analysis:
From the above calculations related to interest coverage it is clearly evident that both the
company have almost same ratio in year 2018 which means that both companies performs well
to earn sufficient amount of profits to pay its interest expense. But it is also interpreted that
TESCO company has low EBIT as compared to year 2015 and Sainsbury's company has
increased its EBIT since year 2015. Therefore, TESCO has to reconsider its business operations
to increase its EBIT by eliminating non value added activities.
Turnover Ratios:
07/07/1905 08/07/1905 09/07/1905 10/07/1905
0
2
4
6
8
10
12
3.7
4.72
4.23
0.45
3.63
2.231.95
9.68
Sainsbury's:
TESCO:

These ratios are calculated to know the capability of company's business activities which
is evaluated by taking sales revenues as base (Maskell, Baggaley and Grasso, 2017).
 Fixed assets turnover ratio: It is calculated by management accountant to know
company's fixed assets performances in terms of its sales revenue (Palepu and
Healy, 2013).
Particulars 2018 2017 2016
Sainsbury's:
Net sales
Average fixed assets
Fixed assets turnover ratio
28456
13805.5
2.06
26224
13002.5
2.02
23506
12280.5
1.91
TESCO:
Net sales
Average fixed assets
Fixed assets turnover ratio
57491
30374
1.89
55917
29378
1.90
54433
30384.5
1.79
Fixed Assets Turnover Ratio Formula = Net Sales / Average Fixed Assets
Vertical interpretation:
08/07/1905 09/07/1905 10/07/1905
1.65
1.7
1.75
1.8
1.85
1.9
1.95
2
2.05
2.1 2.06
2.02
1.91 1.891.9
1.79
Sainsbury's:
TESCO:

From the above calculations related to Sainsbury's, It is evident that company has
performed well in its business operations, due to this, its net sales has more than its average fixed
assets.
From the above calculations, it is clearly evident that TESCO has utilised its fixed assets
in effective manner, due to this, it has more sales revenue.
Horizontal interpretation:
From the above calculations related to fixed assets turnover ratio, it is stated that both the
companies has performed well but Sainsbury's has little bit good ratio in comparison with
TESCO.
 Inventory turnover ratio: It is calculated to know the efficiency of its inventory utilisation
in production process by taking cost of goods sold as base (Ward, 2012).
Particulars 2018 2017 2016
Sainsbury's:
Cost of goods sold
Average inventories
Fixed assets turnover ratio
26574
1792.5
14.83
24590
1371.5
17.93
22050
982.5
22.44
TESCO:
Net sales
Average fixed assets
Fixed assets turnover ratio
54141
2282
23.73
53015
2365.5
22.41
51579
2693.5
19.15
Inventory Turnover Ratio Formula = Cost of Goods Sold/Average Inventories
08/07/1905 09/07/1905 10/07/1905
0
5
10
15
20
25
14.83
17.93
22.44 23.73
22.41
19.15
Sainsbury's:
TESCO:

Vertical interpretation:
In this ratio, Sainsbury's has also performed well. This mean that company has high sales
in terms of its inventory
From the above report, it is clearly evident that TESCO has doing its business operations
well, due to this, company has high profits in the given four year in terms of its average
inventory.
Horizontal interpretation:
Sainsbury's company has 14.83 in year 2018 and TESCO has 23.73 in current year. This
mean that TESCO has high turnover in terms of inventory as compared to other company.
Sainsbury's shall require to improve its business operations to have better ratio.
Working capital analysis:
Working capital analysis means evaluating the funds of company to determine its
capacity to pay its short term liabilities. Companies usually consider this analysis to find its
future working capital requirements and take decisions accordingly. This analysis is necessary to
assess the requirement of it working capital in near future. Working capital analysis is used to
measure the liquidity position in short run for paying its current liabilities (Williams and
Dobelman, 2017). This provides the details to company about whether it required additional long
term funding for its business activities.
Particulars 2018 2017 2016 2015
Sainsbury's:
Current assets
Current liabilities
Working capital
7866
10302
(2436)
6322
8586
(2264)
4444
6724
(2280)
4505
6923
(2418)
TESCO:
Current assets
Current liabilities
Working capital
13726
19238
(5512)
15417
19405
(3988)
14828
19714
(4886)
11958
19810
(7852)
Interpretation:
After considering the above calculations it is clearly evident that both the companies has
negative capital in all the given four years which meads that both the companies has not enough

money (funds) to pay its current liabilities and to finance its day today business operations.
Although, TESCO company's working capital is very less as compared to other company.
Therefore, both the companies need to take suitable steps to do its working capital positive and
TESCO need to focus more in this regard.
Cash flow analysis:
A cash flow analysis may be defined as method by which an organisation evaluate its
business requirements related to cash in near future and also measure its business operations
efficiency in current years in utilising the cash for various processes. cash flow statement has
necessary to find that in which areas and business activities cash is spent by the company to
evaluate the performances of different business areas. In preparing this statement, company is
required to find cash amount which it spends in operating , investing and financing related
activities. It provides the information about the company's health which is require by various
stakeholders (Arnold, 2012).
By analysis the cash flow statement of Sainsbury's company, it may be said that it
investing and finance activity is negative cash inflow which is (900) and (314) respectively and
from operating activity, it has a positive cash inflow which is 911. this shows that company has
performed well in doing it operating business operations but it is not good in its finance and
investment related activities (Willcocks, 2013).
By analysis the cash flow statement of TESCO company, it has clearly stated that
company has negative cash flows from financing activity which is (3236) and it has positive
cash flows from operating and investing activities which are 2782 and 666 respectively in year
2018. Therefore, it can be said that company has performed well in doing its core business
activities but it has to need improvement in its financing related activities to do the cash flows
positive from such activity.
By observing both the companies related to its cash flows statements, it is clearly evident
that company TESCO has performed well in doing its cash flow related activities. Therefore,
Sainsbury's company need to take positive steps to do its cash flows positive. Although, there is
also need to take suitable steps to TESCO also in some extent but more emphasis it placed on
other company.

CONCLUSION
From the above report it is concluded that financial ratios plays vital role in comparing
and measuring the financial performances of an organisation and it shall be done with vertical
and horizontal analysis. It is further concluded that working capital analysis has to consider by
the company to evaluate its present performances and to evaluate its working capital
requirements for its future period. Cash flow analysis shall be required to assess the requirements
of its cash in near future.
REFERENCES
Books and Journal:

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Arnold, G., 2012. Corporate financial management. Pearson Education.
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APPENDICES