Financial Analysis: Tesco and Sainsbury Supermarket Comparison

This report undertakes a comprehensive financial statement analysis of two prominent UK retail giants, Tesco and Sainsbury. The analysis employs various methodologies, including ratio analysis, to assess profitability, liquidity, and share price performance over a period of time. Key financial aspects such as ROCE, current ratios, and cash flow are examined to provide insights into the financial health and operational efficiency of both companies. Furthermore, the report incorporates a Z-score model to evaluate the financial distress risk of Tesco. The study also provides valuable interpretations and comparisons, drawing conclusions and offering recommendations based on the financial data and market positions of Tesco and Sainsbury. The report aims to offer a thorough understanding of the financial dynamics within the UK retail market, making it a useful resource for students of finance.

FINANCIAL STATEMENT
ANALYSIS

Table of Contents
INTRODUCTION...........................................................................................................................3
Tesco and Sainsbury financial statements analysis.........................................................................4
Methodology applied...................................................................................................................4
Profitability analysis....................................................................................................................4
Liquidity analysis.........................................................................................................................6
Share price analysis.....................................................................................................................7
Cash flow analysis.......................................................................................................................7
Z score model on Tesco...............................................................................................................8
Conclusion ......................................................................................................................................9
Recommendations .........................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial statement analysis terms as the process of analyzing company's financial
position with through evaluating profit and loss account and balance sheet of the firm. It
indicates entity's strengths and position in competitive markets also useful for effective decision
making and further strategic planning activities (Ebrahimi and Talebnia, 2016). Analysis of
financial statement permits measuring cash, profitability and assets and liabilities of the
organization. It is beneficial to compare industry's position on the basis of present and past
statements involves income statement, balance sheet and profit and loss account.
This report would be focused on the analysis of financial statements of two well known
retail companies of UK named: Tesco and Sainsbury supermarket. Both companies are famous to
achieve maximum profit with customer satisfaction that's why these two industries selected for
analyzing of t their financial statements. Tesco as well Sainsbury have strong financially position
and provides goods and services to its customers in effective and efficient manner. The report
will show liquidity ratio, income statements, customer feedback and also unique facilities'
advantages (Karaibrahimoglu and Tunç, 2014). Tesco is third largest retail company produces
grocery products to customers by means of physical as well as online medium. Sainsbury also
produces its goods and services in qualitative way to its customer in online and way.
Both Tesco and Sainsbury's advertises their products and pulls customers t increase in
demand quantity. They follow marketing concept to accomplish the task to fulfill customers'
needs and demands and then supply products (Brochet, Jagolinzer and Riedl, 2013). Financial
position in UK market can analyses through this report in wide range with various forms. This
concept approaches to other small and retail businesses of UK in grocery and other food items.
In reference to analyze financial position several ratios will be showed in comparing and similar
way. Both are global and wide spread market for UK competitive supermarkets.
Tesco is international grocery and one of the fifth largest retailer in the world, who
provides facilities to its customers. Its products are well qualified and brand. It targets for long
term profit and producing more and more products (Cantoni, 2012). The vision of Tesco views
as guidance of the direction in grocery and different products. It makes strategic and strong
planning framework to gain extra quality of products. This growing business remains full of
opportunities to grab ideas and opinions to encourage its employees and customers. It is helpful

to maintain harmony in relationship between organization and its employees. Tesco is high level
brand company to reach the target of better performance.
Sainsbury remains as second largest supermarket chain in UK market produces facilities
of grocery products. Its financial position is very strong same as get succeed to fulfill customer
needs and desires (Brochet, Jagolinzer and Riedl, 2013). It aims to expand its business on long
term basis plans. Same as Tesco, it views its growth through focus honest feedback of customers
according to its goods and services. Products are also popular as Sainsbury products and
advertises in unique way and always grab opportunity to sustain and maintain its position in UK
grocery market at high level.
Thus, this report is able to analysis financial statements of UK largest grocery markets.
This report will also be able to show all kinds of qualities and maximization of products in
systematic manner.
TESCO AND SAINSBURY FINANCIAL STATEMENTS ANALYSIS
Methodology applied
Financial statement's analysis is one of the process of reviewing and analysing the
financial statements of the company in order to make better economic decisions. The financial
statements include income statements, balance sheets and the cash flow statements which is
regarded as the standard statements prepared by an entity. The financial statements are analysed
in order to ascertain several factors such as assessing the trend and proportion analysis of all the
components of the financial statements.
There are various methods of analysing the financial statement's such as vertical and
horizontal analysis of this company. The current analysis of the financial statement is based on
applying the technique of ratio analysis. The technique of ratio analysis is used by an entity as
this defines the ability of an enterprise by categorising bin different variety such as profitability,
liquidity and financial performance in making the best suitable decisions in an entity.
Horizontal analysis
It is used as historical method of comparing the financial performance of the business
over series of different reporting periods. This analysis will aggregate the information in the
existing financial statements by defining percentage changes from the previous years. It is

helpful as this shows the performance of an entity from previous years in order to make good
business decisions.
Vertical analysis
This form of analysis is regarded as the proportion analysis of the financial statement in
which each variable of the financial statement are presented in percentage form. It shows the
efficiency of singular item in the relative proportion of account balances.
Ratio analysis
This approach is used in evaluating the business performance of bot the supermarkets in
order to assess it existing efficiency in order to judge its future profitability. The selection of
these ratios is due to assess this particular decision in order to make good business decisions.
Cash flow analysis
The current analysis is done in order to determine the cash availability in an entity by
defining cash inflow and outflow in the current business. The initial cash and the closing balance
of cash are analysed by knowing the level of cash outflow in comparison with the cash inflow in
the business.
Beta calculations
Covariance(ri, m)/Variance of market
Correlation(ra, rm)*S.D(i)/S.D(m)
=0.8696 and 0.5984
M Score( Appendix 2)
TESCO=-0.371
Sainsbury=-2.582(Appendix 3)
M score is that method which utilise the mathematical model in order to assess the
existing business efficiency by using different financial aspects. This tool is used to applied in
the business of Tesco and Sainsbury in order to determine the company is manipulator or not.
The current score of M score shows that the company is not a manipulator in the overall market.
The results of both the entities are in negative which shows that Tesco has higher pressure of
external pressure as compared to the Sainsbury.
It has been observed from the above score of both the companies which are showing
negative figures but the ratio of Sainsbury is less negative as compared to the TESCO.

In order to analyse and interpret financial statements of both retailers the ratio analysis will be
the main technique used (Karaibrahimoglu and Tunç, 2014). However, the comparative review
of the financial results and market position of two supermarkets will also be examined.
Profitability analysis
TESCO Sainsbury
-10
-8
-6
-4
-2
0
2
4
0.18
2.6
1.5
3
-9.25 -0.7
Profitability
2013
2014
2015
Interpretations
The profitability of an enterprise is regarded as one of the integral aspects of an organisation
through which an entity can beat all the existing competitors (Ebrahimi and Talebnia, 2016).
The profit of an enterprise is that factor that can be used by an enterprise in order to achieve all
kinds of goals and the objectives. The current profitability trend has been based on the two
organisation such as TESCO and Sainsbury as these two important organisation has higher
market share in the external market. The income statements prepared by an enterprise which can
be used by an entity in order to reduce their obligations by paying off all expenses from the
profitability. This profitability figure can be used in order to retract large number of users of the
business such as customers, lenders, shareholders who make valuable investment in an enterprise
in order to strengthen an organisation (Quan, 2013). It has been observed from the above that the
profitability of the TESCO is showing good position in the 2015 and all other years are not good
as this defines the lack of efforts made by an entity in order to increase their profitability by

challenging their capabilities. The profitability position of the organisation of the Sainsbury
which is one of the competitor of TESCI has been assessed while applying the same criteria of
profitability weapon. It has been found that the performance of this organisation inn the year
2013 and 2014 is almost same which shows the deficiency of an entity in order to grab higher
market opportunities based on their profitability figure (Maaloul and Zéghal, 2015). The above
comparison is based on the complete profit figure of an enterprise that is using the figure of net
profit. This figure is regarded as one of the important figure which will clarify all doubt of the
business as it is considered the taxation factor deducted from this figure. From the above
profitability analysis it has been found that the TESCO has sound business efficiency.
ROCE of Tesco and Sainsbury
Table 1: ROCE of Tesco
Particulars 2013 2014 2015
Operating profit 2188 2631 -5792
Capital employed(W.N.1) 31144 28765 24404
ROCE 7.03% 9.15% -23.73%
Table 2: Capital employed of Tesco
Capital employed(W.N.1)
Total equity 16661 14722 7071
Non-current liabilities 14483 14043 17333
Capital employed 31144 28765 24404
Table 3: ROCE of Sainsbury
Particulars 2013 2014 2015
Operating profit 887 1009 -81

Capital employed(W.N.1) 9580 9775 9614
ROCE 9.26% 10.32% -0.84%
Table 4: Capital employed of Sainsbury
Capital employed(W.N.1)
Total equity 5734 6005 5539
Non-current liabilities 3846 3770 4075
Capital employed 9580 9775 9614
Tesco Sainsbury
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
7.03% 9.26%9.15% 10.32%
-23.73% -0.84%
ROCE
2013
2014
2015
Interpretations
It has been observed from the above analysis that the return on capital employed of Tesco
initially increased and then decline its existing performance by showing negative results. The
return of the Sainsbury is increases initially and declines suddenly but less negative than Tesco.

Liquidity analysis
The liquidity is basic requirements of the business which helps an entity in order to pay off its
current liabilities by using existing business efficiency in the form of current assets held with an
enterprise.
TESCO Sainsbury
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.7
0.62
0.77
0.64
0.6 0.65
Liquidity ratio
2013
2014
2015
Interpretations
The liquidity ratios are regarded as one of the important element which will help an entity
in order to increases the liquidity of an enterprise (Quan, 2013). The liquidity is essential as it
will help an entity in order to pay off all its expenses which is regarded as essential as business is
full of responsibilities which needs to be fulfilled. The higher ratio of liquidity will enhance the
capabilities of an organisation. This liquidity tool can be used against the competitors as this
factor can be used as one of the important factor in restricting all kinds of expenses. The liquidity
ratios includes current ratios and the quick ratios which will be helpful for an enterprise in
achieving all kinds of goal and the objectives designed by the entity owner in a particular year.
The current ratio is that ratio which will assess the relationship between the current assets and the
current liabilities held by an entity (Zeff, 2016). The current assets should be higher than the
current liabilities held by an entity in order to meet all kinds of current liabilities as it is regarded
as the burden on an enterprise. The current comparison is based on the current ratio of an

enterprise that assess the internal business efficiency of an organisation. The results of the
current ratio has shown that the figures obtained from this analysis in all three years such as
2013,2014 and 2015 are higher which shows the ability of an organisation (Vogel, 2014). On the
contrary the Sainsbury has stable position which is not a good sign for an entity as it affect an
enterprise's internal business efficiency which will affect an entity.
Share price analysis
This is regarded as one of the integral part of an enterprise as the current company has listed in
the recognised stock exchanges of the U (Zeff, 2016). The share price analysis helps all kinds of
the business users in order to get advantage of taking external market benefit as it can prove
negative for an entity in affecting the internal business performance. The average price of the
stock are determined by an enterprise which will help the investors in order top invest in an
enterprise according tie the upwards changes takes places in an enterprise.
TESCO&Sainsbury
The beta of this entity is 0.8696 and 0.5984 the results obtained from this analysis it has been
found that the beta is the symbol of higher risk faced by an enterprise due to the business
operations currently operated by an organisation. The lower values of the beta is good sign for an
entity as it shows the ability of an organisation in order to enhance their current capabilities
which will be nurtured with the passage of time. This value of beta needs to assess the current
capabilities of an enterprise (Ebrahimi and Talebnia, 2016). From the above share price analysis
which is revealing the real truth about the current abilities of an entity. It has been found that
Sainsbury would be selected as the investing company as it has generated lower value of Beta as
compared to their biggest competitor is TESCO.
Cash flow analysis
According to the cash flow of Tesco it has been found that Cap Ex as a % of Sales of
Tesco was 4.71 during 2013 which was decreased in the next year to 4.53. However, in financial
year 2015 it was 4.07 (Wheeler and Cereola, 2015). Moreover, free cash flow of business is
varying in each year as it was -0.24 which increased in the next year to .48. It can be critically
evaluated that current performance of corporation is not good as free cash flow of sales is -3.22.
Apart from this, free cash flow of net income was .32 in 2015 which was .31 during 2014. On the
other hand, in case of Sainsbury Cap Ex as a % of Sales is 4.69 during 2013 which was increased

to 3.88 and 4.33 during 2014 and 2015 respectively (Vogel, 2014). This shows that presently
Sainsbury is performing good however, free cash flow of net income for the same is better in
2015; 0.71. In addition to this, free cash flow of sales was -.50 and reflect the same performance
of both business. Therefore, cash flow of Sainsbury is comparatively good which in turn
management can create competitive edge in the marketplace. However, performance of Tesco is
comparatively poor as its free cash flow of and net income is lower.11
Z score model
Altman's Z score model is used to evaluate the company's financial crisis as this score model is
linear combination of 4 or 5 common business ratios. This method has applied the statistical
method of discriminant analysis. The z score formula is given below:
Z=1.2X1+ 1.4X2+3.3X3+0.6X4+1.0X5
X1= Working capital/total assets
X2= Retained earning/Total assets
X3= EBIT/Total assets
X4= Market value of equity/Book value of total liabilities
X5= Sales/Total assets
The score of this model has different time limits which shows the different position of an entity
which are given as below:
 Z score less than 1.8 which shows distress zones
 Z score is greater than 2.99 which showcases safe zones
 Z score lies between 1.81 and 2.99 then it is a Grey zones.
Z score of TESCO
Z= 1.2*X1+1.4*X2+3.3*X3+0.6*X4+1.0*X5
=1.2*-0.11+1.4*0.70+3.3*-0.07+0.6*0.44+1.0*0.12
=-0.132+0.98+0.231+0.264+0.12
=1.463
The value of TESCO shows that it lies in the distress zone.(Refer to appendices 1)
The current score of Tesco shows that this entity will be covered in the distress zone
which is showing the inability of this organization and all the risks faced by this particular
organization. The bankruptcy situation will be faced by this firm in the next two years. The

Tesco needs to be alert by ensuring its existing financial resources in order to avoid these
situations.
Z score of Sainsbury's
Z= 1.2*X1+1.4*X2+3.3*X3+0.6*X4+1.0*X5
=1.2*-0.14+1.4*0.21+3.3*-0.04+0.6*0.22+1.0*1.44
=-0.168+0.294+-.132+0.132+1.44
=1.566
The current status of this entity lies below the set limit of 1.81 that is the position of this firm is
in the distress zone.(Refer to appendices 2)
The ratio of Sainsbury is higher than compared with the Tesco which is clear indication
of showing financial risks and occurrence of bankruptcy situations. The current situation will be
improved by investing more in the bonds in order to generate higher returns.
With the help of Z score model, Cited firm can easily find accurate forecaster for their
financial performances (Vogel, 2014). In respect to this, their WC/TA ratio is measure of the
liquid assets of the organization. It considered total capitalization of the firm. In this term,
working capital defined as difference between current and assets and liabilities which consisting
operating losses in relation to total assets.
Pestle analysis
Tesco is a multinational food retailing company which provide various types of food item
to their customers. In this context, following pestle analysis can be considered on their operations
which are as follows:
 Political factors- Political factors consist global policies and stability which create
impact on the Tesco operations (Healy and Palepu, 2012). In this regard, government
demonstrate tax rates, and legislation which need to take by cited firm. Hence, they are
creates employment opportunities within the company and make diversification in
business products and services.
 Economic factors- Demand of the products create major impact on the company
operations. In respect to this, inflation and interest rates introduced by the government
which create impact on company finance.

 Social factors-Due to changes in trends and customers preferences Tesco highly affected
by this aspect. Thus, they increase their goods and services which demanded by the
customers.
 Technological factors- Advance technology make opportunities for the business for
expanding business in different areas. It will help to make high profits within the business
operations.
Sainsbury
Sainsbury has effective financial system because they perform various activities which
enhance organization profits (Damodaran, 2016). Therefore, it considered following analysis of
pestle factors;
 Political factors- UK demonstrate high tax rates so that it create direct impact on the
Sainsbury operations. This is because, government determine various rules and
regulations for operate functions of the company.
 Economic factors- High inflation rate and unemployment create high impact on the
company operations (Quan, 2013). Thus, Sainsbury need to decrease price for products
and services which they provide to the customers.
 Social factors- Changes in customers preferences considered high impact on the
organization operations. In respect to this, cook and save considered by the organization
which promote to company grow.
 Technological factors- online delivery of food products considered major impact on the
cited firm. This is because, it helps to enhance profits of the business through making
high sales within the firm.
CONCLUSION
From the above report, it has been concluded that by evaluating the financial statements
business unit itself and their stakeholders can take decision about investment. Besides this, it can
be revealed from the ratio analysis that profitability aspect of Sainsbury was sound in the year of
2013, 2014 and 2015 over the rival firm. Besides this, it can be inferred that liquidity aspect of
Sainbury was sound as compared to the previous years. Further, it can be stated that cash flow
position of Sainsbury was comparatively better in 2015. Hence, Tesco is required to take
corrective measure or action for making improvement in its financial performance.

RECOMMENDATIONS
 It is recommended to Tesco and Sainsbury that they need to focus on developing strategic
and policy framework for attaining the positive and higher profit margin (Cantoni, 2012).
In this regard, retail companies need to focus on raising the quality of products which are
offered them. The rationale behind this now customers prefer to purchase the product
which has high quality. In this, business organizations need to focus on employing quality
management techniques rather than offering high discounts to the customers.
 Besides this, it is advised to Tesco and Sainsbury that they need to undertake promotional
strategies and campaign which in turn helps them in influencing the large number of
customers (Maaloul and Zéghal, 2015). Through this, business organizations would
become able to enhance the profit margin to the large extent.
 Along with this, for making improvement in the financial performance Tesco requires
employing zero base budgeting. This in turn helps it in making suitable monetary
framework which in turn ensures optimum use of the resources. In this way, by
considering business unit can make control over the unnecessary expenses.
 Financial statement analysis presents that Tesco needs to make focus on controlling the
cash expenses and other assets (Cantoni, 2012). It will enable business enterprise to
enhance their liquidity position to the significant level. Hence, by adopting such measure
company can improve its capability in relation to meeting the financial obligations and
thereby attracts the large number of investors.
 Further, it is advised to Tesco to reduce their dependency on debt instruments. Moreover,
according to ideal ratio debt-equity measure must be .5:1, Hence, firm needs to follow
such ratio while determining the financial structure.
 Tesco also needs to encourage the personnel to make their best efforts while performing
the business activities and functions. In this way, by making effectual use of the resources
Tesco and Sainsbury both can improve the sales and profit margin.

REFERENCES
Maaloul, A. and Zéghal, D., 2015. Financial statement informativeness and intellectual capital
disclosure: An empirical analysis. Journal of Financial Reporting and Accounting. 13(1).
pp. 66-90.
Brochet, F., Jagolinzer, A.D. and Riedl, E. J., 2013. Mandatory IFRS adoption and financial
statement comparability. Contemporary Accounting Research. 30(4). pp. 1373-1400.
Karaibrahimoglu, Y. Z. and Tunç, G., 2014. Financial Statement Analysis under IFRS.
Handbook of Research on Strategic Business Infrastructure Development and
Contemporary Issues in Finance. 4(5). pp. 204-238.
Cantoni, E., 2012. Financial statement analysis and insolvency forecast models: a proposal for
local firms. Economia Aziendale. 3(4). pp. 1-17.
Quan, Z., 2013. On the Limitations and Improvement Measures of Financial Statement Analysis.
Trade Unions' Tribune. Journal of Shandong Institute of Trade Unions' Administration
Cadres. 4(2). pp. 16-36.
Ebrahimi, M. and Talebnia, G., 2016. Investigating the Impact of Knowledge Management
Components on Financial Statement Fraud in Companies Accepted in Tehran Stock
Exchange. Journal of Current Research in Science. 5(1). pp. 678-720.
Wheeler, S. and Cereola, S. J., 2015. Auditor scrutiny of unaudited client disclosure outlets:
Recognized vs. disclosed financial statement items also appearing in the MD&A..
Advances in Accounting. 31(1). pp. 91-95.
Zeff, S. A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. Routledge.
Healy, P. M. and Palepu, K. G., 2012. Business Analysis Valuation: Using Financial Statements.
Cengage Learning.
Vogel, H. L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.

Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance. John Wiley & Sons.

APPENDICES
1. Z score of TESCO
X1= Working capital /Total assets
=(Total current assets-Total current liabilities)/Total assets
=21182.85-28162.85/62720
=-0.11
X2= Retained earning/total assets
= 4664.28/62720
=0.70
X3= EBIT/Total assets
=-480/62720
=-0.07
X4= Market value of equity/Book value of total liabilities
=Market cap/Total assets
=22189/50379
=0.44
X5= Revenue/ total assets
=7761.42/62720
=0.12
Z score of Sainsbury's
X1= Working capital /Total assets
=(Total current assets-Total current liabilities)/Total assets
=(7245.84-11237.54)/27475
=-0.14
X2= Retained earning/total assets
=5913/27475
=0.21
X3= EBIT/Total assets
=-1277.4/27475

=-0.04
X4= Market value of equity/Book value of total liabilities
=6232.46/27475
=0.22
X5= Revenue/ total assets
=39782/27475
=1.44
2. TESCO
M= -6.065 + 0.823*DSRI + 0.906*GMI + 0.593*AQI + 0.717*SGI + 0.107*DEPI
=-6.065 + 0.823*10.11 + 0.906*−0.73 + 0.593*2.34+ 0.717*0.89+ 0.107*0.90
=-3.71
DSRI= (Receivables/Revenue)/(Receivables t-1/Revenue t-1)
=708/7761/(817/87308)
=0.091/0.009
=10.11
GMI= (Gross margin t-1/Revenue t-1)/Gross margin t-1/Revenue t-1)
=(-3378/87308)/(4077/77761)
=−0.038/0.052
=−0.73
AQI= (1-current assets-t +PPE-t)/Total assets-t)/(1-(current assets t-1+PPE t-1)/Total assets t-1
=(1-(2182+22571)/62720)/(1(18340+31349)67812)
=0.61/0.26
=2.34
SGI= Sales-t/Sales t-1
=77761/87308
=0.89
DEPI= (Depreciation t-1/(Depreciation t-1+PPE t-1))/(Depreciation t-1/(Depreciation t+PPE t))
=(2380/(2380+31349))/(1905/(1905+25571))
=0.070/0.077
=0.90

3. M SCORE OF SAINSBURY
M=-4.84+0.92*DSRI+0.528* GMI+0.404*AQI+0.892*SGI+0.115*DEPI
=-4.84+0.92*1+0.528*0.44+0.404*1.85+0.892*1.13+0.115*0.946
=-4.84+0.92+0.23+0.74+1+0.108
=-2.582
DSRI= (Receivables/Revenue)/(Receivables t-1/Revenue t-1)
=(207/39782)/(193/35147)
=0.005/005
=1
GMI= (Gross margin t-1/Revenue t-1)/Gross margin t-1/Revenue t-1)
= (1927/35147)/(2303/38978)
=0.0263/0.0590
=0.44
AQI= (1-current assets-t +PPE-t)/Total assets-t)/(1-(current assets t-1+PPE t-1)/Total assets t-1
= (1-(7245+16411)27475/(1-(2867+14787)/19148
=0.13/0.07
=1.85
SGI= Sales-t/Sales t-1
=39782/35147
=1.13
DEPI= (Depreciation t-1/(Depreciation t-1+PPE t-1))/(Depreciation t-1/(Depreciation t+PPE t))
=(779/(779+14787)/(915)/(915+16411))
=0.050/0.0528
=0.946