Financial Health and Performance Analysis of UK Retail Supermarkets

This report provides a comprehensive financial analysis of Tesco, Sainsbury's, and Morrison's Plc, focusing on their financial health and performance. The analysis includes a detailed examination of profitability, efficiency, liquidity, and investment ratios, such as gross margin, operating profit, return on assets, inventory turnover, current ratio, and earnings per share. The report evaluates the companies' performance from 2010 to 2014, comparing their financial metrics and identifying trends. It also includes a memo to the managing director, outlining the firm's performance and recommendations for improvement. Furthermore, the report discusses the limitations of financial ratios and explores investment appraisal techniques, including net present value, taxation approaches, and project evaluation methods. The report concludes by considering other factors essential for making final investment decisions.

Accounting and Finance for Managers
Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION A....................................................................................................................................1
a. Analyzing financial health and performance of Tesco, Sainsbury and Morrison’s Plc
.....................................................................................................................................................1
b. Writing a memo to managing director regarding the performance of firm along with
the recommendations.............................................................................................................12
c. Outlining the limitations of financial ratios.......................................................................13
SECTION B..................................................................................................................................14

Using net present value technique to assess whether three year contract is profitable
or not for the organization......................................................................................................14
b. Explaining approach of taxation in appraisal..................................................................18
c. Discussing the techniques that can be used for the evaluation of project.................18
d. Stating the other factors that need to consider while taking final decision................19
CONCLUSION.............................................................................................................................19
REFERENCES............................................................................................................................21

Illustration Index
Illustration 1: Gross profit ratio.......................................................................................................2
Illustration 2: Operating profit ratio................................................................................................3
Illustration 3: Net profit ratio...........................................................................................................4
Illustration 4: Return on assets........................................................................................................5
Illustration 5: Return on equity........................................................................................................6
Illustration 6: Inventory turnover ratio............................................................................................7
Illustration 7: Asset turnover ratio...................................................................................................8
Illustration 8: Receivables turnover ratio........................................................................................9
Illustration 9: Current ratio............................................................................................................10
Illustration 10: Quick ratio.............................................................................................................11

INTRODUCTION
Accounting and finance management are vital for the organizational growth and
success (Accounting and finance management, 2017). In the business organization,
manager places high-level emphasis on maintaining accounting records and
information, this in turn helps preparing suitable statements. Therefore, by making
analysis of financial statements through the means of ratio analysis both internal and
external stakeholders can take suitable decision. This report is based on three major
retail or supermarket stores such as Tesco, Sainsbury’s and Morrison Plc. These retail
stores are listed on the recognized stock exchange of UK and known for delivering high
quality products. Tesco supermarket is the multinational grocery and general
merchandise retailer organization (TESCO Plc, 2017). Sainsbury is the second largest
chain of the supermarket, which consist of 16.9% shares of UK’s super market sector
and Morrison Plc (Sainsbury Plc, 2017). Retail super market is the public limited
company, which has 498 locations, and the revenue of this is £16,317 million. The
present report will light on the extent to which financial condition of company is sound
over others. It will develop understanding regarding the investment appraisal techniques
and its significance in the decision-making aspect.
SECTION A
a. Analyzing financial health and performance of Tesco, Sainsbury and Morrison’s Plc
Profitability analysis
1

Illustration 1: Gross profit ratio
 Gross margin ratio: It has been assessed from ratio analysis that GP margin of
Tesco decreased over the years and accounts for 6.31% respectively. From
2010 to 2014 GP ratio. Due to high degree of expenses cost of the products
going to increase so that the sale revenue is going to be decreases and
Morrison’s Plc. is fluctuated. In 2014, gross profit ratio of Morrison’s Plc was
6.07%. In comparison to this, Sainsbury’s GP margin was 5.79% in 2014. Due to
the existence of more competition business units failed to generate more sales
and profit. In addition to this, high level of direct expenses such as material and
labor is another major cause due to which business units failed to generate high
margin. Hence, by considering such aspects, it can be stated that GP margin of
all such business units were not good. Thus, for making improvement in the
gross profitability aspect Sainsbury is required to make focus on offering
innovative products or services to the customers. This in turn helps firm in coping
up with the competitive situation and thereby helps in attaining high profit. Along
with this, by applying the tool of budgetary control company can exert control on
direct expenses.
2

Illustration 2: Operating profit ratio
 Operating profit ratio: Outcome of ratio analysis shows that declining trend took
place in the operating margin of Tesco Plc. In 2012, operating margin was
account for 6.54%, whereas in 2014 such ratio implies for 4.14%. From 2010 to
2013, operating profit margin of Morrison’s is between the ranges of 5.24% to
5.89%. On the contrary to this, such ratio was negative .54%, which entails that
business unit sales has been failed to manage general administration expenses.
In comparison to Tesco and Morrison’s Plc, operating ratio of Sainsbury’s Plc
accounts for 4.21%. Hence, by considering such trend or performance level it
can be stated that operating margin of Tesco and Sainsbury’s Plc was good.
3

Illustration 3: Net profit ratio
Net profit ratio: The graph clearly shows that net margin of Tesco Plc increased
from 4.09% to 4.94% from 2010 to 2012. Hence, after such period, net
profitability aspect of firm after the fulfillment of obligations was 2.42% and 3.01%
in the year of 2013 and 2014. On the other side, NP margin of Morrison Plc
moved from positive to negative trends. In 2014, NP ratio of Morrison Plc was -
1.35%, which in turn presents that profitability of company was worst. On the
other side, net profit margin of Sainsbury’s Plc was within the range of 2 to 3%.
Sainsbury’s net profit was 2.99% at the end of 15 March 2014. Thus, overall
financial evaluation it can be stated that Tesco had generated higher margin by
making effectual control on expense level. Thus, other retail business units are
required to employ the system of budgeting which in turn helps in attaining higher
margin by making control over indirect and interest expense.
4

Management Effectiveness
Illustration 4: Return on assets
 Return on assets (ROA): The ROA of Tesco was 6.46%, 3.03% and 3.81%
from 2012 to 2014. As compared to Tesco, Morrison’s ROA reduced significantly
from 7.04% to -2.24%. It presents that Morrison failed to generate more funds or
returns through assets. In against to other rival firms returns generated by
Sainsbury’s Plc was within 4 to 6%. Such trend or competitor analysis shows that
Sainsbury’s Plc performance of was better in the year of 2014 compared to the
others.
5

Illustration 5: Return on equity Return on equity (ROE): The ROE of Tesco was 18.40% in 2012, which in turn
indicates that company had made effective use of equity to some extent. In
contrast to this, return on equity measure of the company was 12.22%, which
shows that performance level decreased significantly. Morrison’s ROE was
negative such as -4.80%, which demonstrates that strategic framework of
company was not highly sound. Ratio analysis results show that ROE of
Sainsbury’s Plc increased from 10.42% to 12.09% 2014. Comparative analysis
shows that Tesco and Sainsbury Plc had made their best efforts for generating
higher revenue through the means of shareholders fund. It can be depicted that
performance aspect of Tesco and Sainsbury is good over others.
6

Efficiency ratio analysis
Illustration 6: Inventory turnover ratio
 Inventory turnover ratio: Financial statement analysis presents that inventory
turnover ratio declined from 19.38 to 16.27 times. On the other side, such ratio of
Morrison’s Plc also shows declining trend in the performance level. Stock
turnover ratio of Morrison’s was 26.79, 25.24 & 23.54 respectively. On the
contrary, such ratio of concerned business organization accounts for 21.96 &
20.34 times. In addition to this, Sainsbury’s turnover ratio also shows decreasing
trend from 27.15 times to 22.65. The above mentioned trend shows that all these
three companies are facing difficulties in relation to generate more money
through sales due to the rise in competition and changes in the needs, wants as
well as expectation level of customers (Collier, 2015). Hence, outcome of ratio
analysis clearly presents that Sainsbury’s stock turnover ratio was good over
Tesco and Sainsbury’s Plc.
7

Illustration 7: Asset turnover ratio
 Asset turnover ratio: By applying the tools of ratio analysis, it has been
assessed that asset turnover ratio was 1.30 times in both 2011 & 2012. On the
other side, assets turnover ratio of Morrison’s Plc declined from 1.81 to 1.66
times. Along with this, declining trend or in the Sainsbury’s Plc performance level
pattern was seen. Hence, by considering the outcome of ratio it can be stated
that all such supermarkets failed to generate enough sales by making use of
assets. In comparison to all the firms, Tesco Plc had generated more sales from
both fixed and current assets.
8

Illustration 8: Receivables turnover ratio Receivable turnover ratio: Outcome of ratio analysis entails that Tesco
generated money from debtors within the less period in 2014 as compared to the
past years. Whereas, receivable turnover ratio of Morrison’s Plc was 87.31 in
2014. In contrast, debtor’s turnover ratio of Sainsbury’s Plc significantly declined
from 129.22 to 25.04 days. Out of the considered supermarkets, Tesco received
money from debtors within fewer time frames. However, working capital aspects
of Sainsbury’s and Morrison’s Plc was fluctuated negatively due to inappropriate
credit policy.
Liquidity ratios
9