Financial Analysis of Tesco and Sainsbury's: Ratio and Trend Analysis

This report provides a comprehensive financial analysis of Tesco and Sainsbury's, two multinational supermarket chains. It begins with an introduction outlining the significance of financial analysis in evaluating business performance, focusing on profitability, liquidity, and solvency. The analysis includes the calculation and interpretation of various financial ratios such as gross profit ratio, net profit ratio, current ratio, quick ratio, debt-to-equity ratio, inventory turnover ratio, total assets turnover ratio, fixed assets turnover ratio, EPS, and dividends per share for the period of 2016-2019. Furthermore, the report incorporates horizontal and vertical analyses of the income statements and balance sheets of both companies to identify trends and make comparative assessments. The study also emphasizes the importance of working capital and provides a critical assessment of the cash flow statements of both companies. The report concludes by summarizing the key findings and offering insights into the financial health and performance of Tesco and Sainsbury's.

Financial Analysis Management &
Enterprise - FAME

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Financial analysis ...................................................................................................................1
NP ratio ...........................................................................................................................................1
2. Outlining significance of assessing working capital of the companies.................................10
3. Critical assessment of cash flow report of the two companies ............................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial analysis refers to the practice of evaluating the businesses, budgets, projects
and the activities relating to finance for determining the suitability and the performance of an
enterprise. It is been used for making the assessment regarding the stability, solvency,
profitability and liquidity of an entity (Topa and Herrador-Alcaide, 2016). This analysis is made
by emphasizing on the balance sheet, cash statements and the income statement. The present
study is based on Tesco and Sainsbury's, both are the multinational firm, dealing in the
supermarket, grocery and the merchandise items. Furthermore, it also includes the ratio,
horizontal and the vertical analysis of the financial report of both the organizations. Moreover , it
also includes the importance of the working capital for enterprise with the analysis of the cash
flow statement of both the companies.
1. Financial analysis
Profitability ratios
Gross Profit ratio
Year / organizations Sainsbury's Tesco
2016 6.19% 5.24%
2017 6.23% 5.19%
2018 6.61% 5.83%
2019 6.92% 6.48%
Interpretation- From the above table it has been interpreted that over the four years the
gross profit ratio of Sainsbury's is greater than Tesco which clearly means that it It has efficiently
managed its cost incurred in relation selling of the goods. Also the ratio of Sainsbury's is
showing an increasing trend over the years which depicts that it is earning higher profits as the
year passes. However, the ratio of Tesco is depicting an increasing or decreasing trend in
different years which means that it has to take measures for increasing its profit margins on the
sales.
NP ratio
Year / organizations Sainsbury's Tesco
2016 2% .25%
1

2017 1.44% -0.07%
2018 1.09% 2.10%
2019 .75% 2.07%
Interpretation- The above analysis is reflecting that in the initial years the net profit ratio
of Sainsbury's was higher than Tesco but in the later years that is 2018 and 2019, Tesco has
gained higher profits than its rivalry. This clearly indicates that in In 2016 &2017, Tesco was
incurring larger expense on relation to its finance cost and taxes against its revenues but by
meeting the sales target and gaining increased profit margins resulted the company is attaining
higher profits than Sainsbury's.
Liquidity ratios
CR ratio
Year / organizations Sainsbury's Tesco
2016 .66 .75
2017 .74 .79
2018 .76 .71
2019 .66 .61
Interpretation- By making the assessment of the above table it has been analysed that
current ratio of Tesco in the year 2016 and 17 is greater than Sainsbury's whereas during the year
2018 & 19 the situation get opposite or reversed. This means that Sainsbury's has opt for
appropriate measures in order to maintain its cash liquidity against its competitor. However, the
liquidity position of Tesco gets affected as it has not made efficient use of its current assets
against its short-term liabilities.
QR ratio
Year / organizations Sainsbury's Tesco
2016 .52 .61
2017 .53 .68
2018 .59 .60
2019 .50 .49
2

Interpretation- The quick funding capacity of the Tesco is better than Sainsbury's which
means that it can meet its current obligation with the use of the immediate cash. However, in the
year 2019, Sainsbury's has made its ratio closer or better from the Tesco by maintaining effective
use of its working capital.
Solvency ratios
Debt-to- equity ratio
Year / organizations Sainsbury's Tesco
2016 .35 1.23
2017 .31 1.45
2018 .20 0.67
2019 .12 .38
Interpretation- The above table is reflecting that the solvency position of the Sainsbury's
is much better than Tesco because the debt equity ratio of Sainsbury's is lower than Tesco. It has
been stated that lower the ratio, better it is. Higher ratio indicates that debts are more against
equity which is not a good sign for the enterprise.
Efficiency ratios
Inventory turnover ratio
Year / organizations Sainsbury's Tesco
2016 22.44 19.15
2017 17.93 22.41
2018 14.83 23.73
2019 14.44 24.49
Interpretation- From the above analysis it has been interpreted that inventory turnover
ratio of Tesco in the last three years is more than Sainsbury's which means that inefficient use of
its resources but in the year 2016, the ratio of Sainsbury's was higher than Tesco which in turn
depicts that it has made corrective measures in order to improve its ratio and management of its
stock against sales.
Total assets turnover ratio
Year / organizations Sainsbury's Tesco
2016 1.40 1.24
3

2017 1.43 1.25
2018 1.36 1.27
2019 1.27 1.36
Interpretation- The above ratio states the ability of the company in using its assets for the
purpose of the increasing the sales. Therefore, as the asset turnover ratio of the Sainsbury's is
higher than its competitor that is Tesco which clearly depicts that it is making efficient use of its
assets in order to generate larger sales over its rivalry.
Fixed assets turnover ratio
Year / organizations Sainsbury's Tesco
2016 1.91 1.78
2017 2.02 1.88
2018 2.07 1.87
2019 1.93 1.89
Interpretation- Fixed asset turnover ratio measures the ability of the enterprise in using
its fixed assets for gaining higher sales. As the ratio of Sainsbury's is greater than Tesco, it has
been interpreted that the former company is earning more with the use of its fixed assets while
the latter company is not making effective and efficient use of its fixed assets in terms of
increasing its sales.
Investor's ratios
EPS
Year / companies Sainsbury's Tesco
2016 .23 0.05
2017 .17 (0.01)
2018 .13 .44
2019 .08 .41
Interpretation- In the year 2016&17 the earning per share of Tesco was low and negative
because its has attained net loss against it rivalry that is Sainsbury's. On the other hand, during
2018 & 19, the ratio of Tesco is greater than Sainsbury's which means that it has earned larger
profitability.
Dividends per share
4

Year / companies Sainsbury's Tesco
2016 .12 -
2017 .12 -
2018 .1 .03
2019 .1 .11
Interpretation- The above table states the dividend per share of both the companies. In
the year 2016&17, the ratio of Tesco is nil which means that it was not having the profits for
distributing it to the shareholders but Sainsbury's has distributed the profits to its shareholders.
However, in the year 2018&19, Tesco earned larger profits and also contributed the dividend to
the members who are having holding in the company.
Horizontal analysis of Sainsbury's and Tesco
Income statement: Sainsbury's
Particulars 2016
%
change
in 2017 2017
%
change
in 2018 2018
%
change
in 2019
201
9
Sales
23,50
6 11.6% 26,224 8.5% 28,456 1.9%
29,
007
Revenue cost
22,05
0 11.5% 24,590 8.1% 26,574 1.6%
27,
000
GP 1,456 12.2% 1,634 15.2% 1,882 6.6%
2,0
07
Total ope. 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% 312
Interest Expense 142 -8.5% 130 3.8% 135 -38.5% 83
Other income 26 -61.5% 10
Other expenses 17 -47.1% 9
Earnings before interest
and tax 548 -8.2% 503 -18.7% 409 -41.6% 239
Income tax provision 77 63.6% 126 -20.6% 100 -80.0% 20
Net profit 471 -20.0% 377 -18.0% 309 -29.1% 219
Income statement: Tesco
Particulars 2016
%
change
in 2017 2017
% change
in 2018 2018
%
change
in 2019 2019
5

Sales 54,433 2.73% 55,917 2.81% 57,491 11.17% 63,911
Revenue cost 51,579 2.78% 53,015 2.12% 54,141 10.39% 59,767
GP 2,854 1.68% 2,902 15.44% 3,350 23.70% 4,144
Total ope. 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
Earnings before interest
and tax 162 -
10.49% 145 795.17% 1,298 28.97% 1,674
Income tax provisions
-54
-
261.11
%
87
251.72%
306
15.69%
354
Net profits
138
-
128.99
%
-40
2915%
1,206
9.62%
1,322
Balance sheet: Sainsbury
Particulars 2016 2017
%
chang
e in
2017 2018
% change
in 2018 2019
%
chang
e in
2019
Assets
Total CA 4,444 6,322 42.3% 7,866 24.42% 7,589 -3.52%
Total Long
term 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
shareholders
equity
Total CL 6,724 8,573 27.5% 10,302 20.2% 11,417
10.82
%
Total Long
term liability 3,884 4,292 10.5% 4,288 -0.09% 3,668
-
14.46
6

%
Total
liabilities 10,608 12,865 21.3% 14,590 13.41% 15,085 3.39%
Total
shareholders
equity
6,365 6,872
8.0%
7,411
7.84% 8,456
14.10
%
Total
liabilities and
shareholders
equity
16,973 19,737
16.3%
22,001
11.47%
23,541
7.00%
Balance sheet: Tesco
Vertical analysis
Income statement: Sainsbury
Particulars 2016
%
chang
e 2017
%
chang
e 2018
%
chang
e 2019
%
cha
nge
Sales
23,50
6
26,22
4
28,45
6
29,00
7
Revenue cost
22,05
0 93.8%
24,59
0 93.8%
26,57
4 93.4%
27,00
0
93.1
%
GP 1,456 6.2% 1,634 6.2% 1,882 6.6% 2,007 6.9
%
Total ope. 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
%
Earnings before interest
and tax 548 2.3% 503 1.9% 409 1.4% 239 0.8
%
Income tax provision 77 0.3% 126 0.5% 100 0.4% 20 0.1
%
Net profits 471 2.0% 377 1.4% 309 1.1% 219
0.8
%
Income statement: Tesco
7

Particulars 2016
%
chang
e 2017
%
change 2018
%
chang
e 2019
%
chan
ge
Sales
54,43
3
100.00
%
55,91
7 100.00%
57,49
1
100.00
%
63,91
1
100.0
0%
Revenue cost
51,57
9
94.76
%
53,01
5 94.81%
54,14
1
94.17
%
59,76
7
93.52
%
GP 2,854 5.24% 2,902 5.19% 3,350 5.83% 4,144 6.48
%
Total ope. 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
%
Earnings before
interest and tax 162 0.30% 145 0.26% 1,298 2.26% 1,674 2.62
%
Income tax provision -54 -
0.10% 87 0.16% 306 0.53% 354 0.55
%
Net profits 138 0.25% -40 -0.07% 1,206 2.10% 1,322 2.07
%
Balance sheet: Sainsbury
Particulars 2016
%
chan
ge 2017
%
chan
ge 2018
%
chan
ge 2019
%
chang
e
Assets
Total CA 4,444 26.2
% 6,322 32.0
% 7,866 35.8
% 7,589 32.2%
Total Long
term assets 12,529 73.8
%
13,41
5
68.0
% 14,135 64.2
%
15,95
2 67.8%
Total assets 16,973 100.0
%
19,73
7
100.0
% 22,001 100.0
%
23,54
1
100.0
%
Liabilities
and
shareholders
8

liabilities
Total CL 6,724 39.6
% 8,573 43.4
% 10,302 46.8
%
11,41
7 48.5%
Total Long-
term liability 3,884 22.9
% 4,292 21.7
% 4,288 19.5
% 3,668 15.6%
Total
liabilities 10,608 62.5
%
12,86
5
65.2
% 14,590 66.3
%
15,08
5 64.1%
Total
shareholders
equity
6,365 37.5
%
6,872 34.8
%
7,411 33.7
% 8,456 35.9%
Total
liabilities
and
shareholders
equity
16,973
100.0
%
19,73
7 100.0
%
22,001
100.0
%
23,54
1 100.0
%
Balance sheet: Tesco
Particulars
% of
2016 2017
% of
2017 2018
% of
2018 2019
% of
2019
Assets
Total CA 33.8% 15,417 33.6% 13,726 30.6%
12,66
8 25.8%
Total Long-term
assets 66.2% 30,436 66.4% 31,136 69.4%
36,37
9 74.2%
Total assets 100.0% 45,853 100.0% 44,862 100.0%
49,04
7
100.0
%
Liabilities and
shareholders equity
Total CL 44.9% 19,405 42.3% 19,238 42.9%
20,68
0 42.2%
Total long-term
liability 35.5% 20,010 43.6% 15,144 33.8%
13,50
9 27.5%
Total liabilities 80.4% 39,415 86.0% 34,382 76.6%
34,18
9 69.7%
Total shareholders
equity 19.6% 6,438 14.0% 10,480 23.4%
14,85
8 30.3%
Total liabilities and
shareholders equity 100.0% 45,853 100.0% 44,862 100.0%
49,04
7
100.0
%
9

2. Outlining significance of assessing working capital of the companies
Working capital refers to the capital that is required by the organizations in order to
maintain its routine operations. It is been computed by subtracting the current liabilities from the
current assets (Kigume, Maluka and Kamuzora, 2018). It is essential for Tesco as well as for
Sainsbury's to seeks for efficient management of the working capital for enhancing their
financial performance and in achieving operational success within the business. A hallmark
relating to the better management of the business is reflected by an ability in utilizing the
working capital in order to maintain the balance in between the growth, liquidity and the
profitability. By evaluating the working capital ratio, both the enterprise can assess that it has the
sufficient cash for covering their current debts or the expenses. Analysing the working capital is
necessary for gaining the success in the long run (Schalock, Verdugo and van Loon, 2018).
Some of the major reasons that depicts the significance of the working capital area as follows-
Expanding investment portfolio- Funds that are released from the sound management of
the working capital is been counted as the cheapest finance source which could be used in
expanding the existing projects or making the investment in the new profitable sectors (Baik and
et.al., 2016).
Increased profitability- The main purpose over the managing the working capital for the
corporates is to maximize the profits by saving the financial cost and increasing the revenues.
Ensuring the adequate availability of resources- Managing the stock is a crucial element
of the working capital for ensuring that sufficient resources are been maintained (Moazzez and
De Virgilio, 2016). Making optimum use of the resources helps in proper management of the
working capital.
Improves operational efficiency- Assessing the working capital helps Tesco and
Sainsbury's in improving their overall operations by adopting system of WC management. This
system enables the organization in maintaining the finances in a manner that no obstacle is been
faced by the entity in the future and could be able run its operations smoothly with stability even
at the time of economic downturn.
Resource allocation- Working capital assist both the entities in the allocating their
resources in their resources in an appropriate way (Afrifa and Padachi, 2016). As the ratios are
10