Financial Performance Analysis of Sainsbury and Tesco Companies

This report provides a comprehensive analysis of financial performance, encompassing both vertical and horizontal analysis of income statements and balance sheets for Sainsbury and Tesco. It delves into key financial ratios, including profitability (gross profit margin, net profit margin), liquidity (current ratio, quick ratio), efficiency (asset turnover ratio, inventory turnover ratio), and gearing ratios, offering a comparative assessment of the two companies. The report also includes investment appraisal techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and payback period to evaluate potential investment decisions. Furthermore, it addresses the importance of Corporate Social Responsibility (CSR) reporting and its drivers. The analysis covers various aspects of financial management, making it a valuable resource for understanding corporate financial health and strategic decision-making.

Managing financial
performance

TABLE OF CONTENTS
Critical personal reflection.....................................................................................................3
Question 1..............................................................................................................................3
Question 2..............................................................................................................................7
Question 3..............................................................................................................................9
REFERENCES.........................................................................................................................10
APPENDIX..............................................................................................................................11
Question 1............................................................................................................................11

Critical personal reflection
Earlier I was not able to clear this assessment and now I am prepared to reappear for
the assessment. I was not able to clear it before as it was not prepared with respect to the
subject and the concept. I though it to be really very tough and just by seeing the numerical I
got scared even though it was very easy. This fear of mine made me to think negative about
the subject because of which I was not able to focus on the subject that caused the problem
for me. Slowly and slowly I completely neglected this subject, thinking I won’t be able to do
it. I lost interest which affected my thinking process and caused a problem for me. All these
negative thoughts worked against me which is the reason I was not able to pass the
assessment first time and I really felt bad about it and even felt depressed. Then I got help
and assistance from the friends to overcome this problem. Then I took the advice and help
from my friends so that I can prepare myself to appear for the retest. At this point I was clear
in mind that I have to do something and pass this assessment any how this time. I have
gathered all the notes that will be useful for my study from my friends and faculty. My
neglecting behaviour causes failure which I always regret and I have learned from my
mistake.
This time I have really worked hard and had tried to understand each and every
concept along with its real life corporate application. I have referred to different books which
has helped me in better understanding the concepts. I even took help and guidance from the
faculty which has helped me in building more confidence and encouraged me to pursue
further and also provided me direction so that I can achieve my goals easily. I have even
made a study schedule with all the topic which are required to be covered so that I didn’t skip
any important topic and follow the schedule to complete my study on time which has
provided me ample time revision and more practice. This time I feel I am well prepared and
will be able to clear the assessment. I have undergone thorough revision and numerical
practice which has helped me in getting more confidence, better understanding and clearing
the concepts with more clarity. Thus, based on the time, efforts and dedication that I have put
on preparing on for this assessment makes me feel secure that this time I will pass the
assessment. I am no longer in fear of the subject and long numerical questions. I have cleared
my mind and thoughts and started a fresh and I think I will be able to do it. This make me feel
sure that the thing which I was not able to do last time, this time I will do it and will succeed.
Question 1
Vertical analysis
Income statement: The percentage change in the cost of goods sold with respect to sales has
increase over the period 5 year in Sainsbury from 94.07% in 2016 to 102.28% in 2020 as
compared to the Tesco which has declined from 94.79% in 2016 to 92.57% (Rengel and
Palacios, 2020). But the gross income of Sainsbury has increased in comparison to Tesco
which is good sign but the net income has declined of Sainsbury as compared to Tesco which
has increased.
Balance sheet: It can be seen that the current assets of Sainsbury is 26.13% of total assets
which has increased to 27.15% in 2020 in contrast to 33.12% in Tesco which ahs declined to
24.62% in 2020. The current liability of Sainsbury constitutes 43.12% in 2020 an increase
from 2016 and in Tesco, it has declined from 40.69% in 2016 to 34.28% in 2020.
Horizontal analysis

Income statement: In Sainsbury, the sales has shown an increasing trend over the past 5 year
taking 2016 as the base year. Also, the gross incomes have increased from 8.32% in 2017 to
55.16% in 2020. But the net income as shown downward trend as it has decreased to -71.49%
in 2020 from -21.79% in 2017. On the other hand, in Tesco, revenue has shown an increasing
trend but the gross income has shown a downward trend as it falls to -41.60% in 2020. The
net income is in upward trend as the percentage change has increased from -72.83% to
252.08% in 2020.
Balance sheet: In Sainsbury, there is a positive change in the current asset and the total assets
along with the current and total liabilities (Vaca-Tapia and et.al, 2018). Increase in assets is
good but increase in liability is a concern. In Tesco, there is decline in the change in current
and total assets but the current liabilities have declined from 7.66% in 2017 to 0.34% in 2020
which is good for it but the overall liabilities have increased.
Profitability: It is the financial metrics which is used in evaluating and measuring the ability
of the business to generate income in relation to sales, operating cost, assets and so forth
(Goldmann, 2017).
Gross profit ratio
This ratio depicts the relationship between gross profit and net sales of the company.
It helps in evaluating the operational performance of the business. The gross profit margin of
Sainsbury is better than Tesco as it increased from 5.93% to 7.46% in 2020 as compared to
Tesco which has declined from 8.92% to 4.34% in 2020.
2016 2017 2018 2019 2020
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
5.93% 5.76%
6.56% 6.62%
7.46%
8.92%
8.06%
5.92%
4.76% 4.34%
Gross profit margin
Sainsbury Tesco
Net profit ratio
It expresses the relationship of net profit and net sales. The net profit margin of Tesco
has increased from 0.49% in 2016 to 1.44% in 2020. In Sainsbury, it has declined to 0.44% in
2020 from 1.95% in 2016.

2016 2017 2018 2019 2020
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
1.95%
1.37%
1.02%
0.69%
0.44%0.49%
0.13%
1.73%
1.99%
1.44%
Net profit margin
Sainsbury Tesco
Liquidity: These are the ratios which are used to measure the ability of the business to pay
off its short-term obligations (Chiaramonte and Casu, 2017).
Current ratio
This ratio is used in measuring the liquidity position of the company. It helps in
analysing whether the company is having enough cash to meet its short-term liabilities. It is
the most popular ratio for measuring the liquidity of the business. The current ratio of
Sainsbury and Tesco is below 1 which is a point concern.
2016 2017 2018 2019 2020
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
0.66
0.74 0.76
0.66 0.63
0.81 0.78
0.71
0.60
0.72
Current ratio
Sainsbury Tesco
Quick ratio
It measures the liquidity but in a more conservative manner as it does not consider
inventory and prepaid expenses. The quick ratio of Sainsbury and Tesco is also quite similar
and fluctuating and is also very less thus company requires to manage its current assets
effectively.

2016 2017 2018 2019 2020
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.52 0.53 0.59
0.50 0.49
0.68 0.66
0.59
0.47
0.58
Quick ratio
Sainsbury Tesco
Efficiency: This ratio is used to measure the efficiency of the company in utilizing the assets
of the company in generating maximum sales (Arkan, 2016).
Asset turnover ratio
It measures the ability of the company with respect to generating sales by optimum
utilizing its assets. The ratio of Sainsbury is below that of Tesco which mean sit is not
effective in utilizing its assets.
2016 2017 2018 2019 2020
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60 1.38 1.31 1.29 1.23
1.04
1.23 1.22 1.28
1.12
1.24
Asset turnover ratio
Sainsbury Tesco
Inventory turnover ratio
It refers to how many times the inventory of the company has been sold off in an
accounting year. This ratio of Tesco is 24.64 times increasing trend, in contrast to it,
Sainsbury has shown decline to 15.49 times in 2020.

2016 2017 2018 2019 2020
0.00
5.00
10.00
15.00
20.00
25.00
30.00
22.83
13.93 14.69 14.04 15.49
21.04 22.98 23.89 22.70 24.64
Inventory turnover ratio
Sainsbury Tesco
Gearing ratio: This ratio measures the financial leverage of the company in its capital
structure (Jinadu and et.al, 2017). This ratio of Tesco has declined over the period but it has
increased in case of Sainsbury.
2016 2017 2018 2019 2020
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
1.92 2.14 2.19 1.97
2.84
4.09
6.13
3.28 3.23 2.94
Gearing ratio
Sainsbury Tesco
Conclusion and recommendation
The financial position of Sainsbury is not good. It needs to manage in its current
assets, current liabilities effectively which will improve its liquidity ratios and also the
gearing ratio. It should put limitation on the production of the product to improve its ratio.
Sainsbury is required to work on improving its inventory turnover ratio by implementing
strategies to either increase its sales or decrease the stock of its products which help in
effectively managing its resources. The asset turnover ratio of the company is also very less
thus, it should identify the factors which is stopping it from optimum utilization of its
resources. All these strategies if followed will help in improving the performance of the
organization.
Question 2
Part (a)

X Y Z Total
Sales 432 288 216 936
Material -144 -96 -96 -336
Contributio
n
288 192 120 600
Fixed cost -216 -216 -216 -648
Profit/Loss 72 -24 -96 -48
i. Contribution of X is £288, Y is £192 and Z is £120.
ii. Yes, the company should stop making product Y as it is incurring losses (Tabitha
and Oluyinka, 2016) which is hampering its overall profitability.
iii. Production of product Z should be stopped as it is also making losses which is not
favourable to the company (Bush and et.al, 2018).
iv. Contribution is the excess sales which is contributed towards fixed expenses,
when fixed expenses and contribution is equal it is called break-even point which
is important for the firm. This level helps in determining the price of the product
and the level after which business starts incurring profits.
v. The total profit will improve which will be £72m from product X. Earlier, the total
loss was of £48m but if the Production of product X and product Y is stopped, it
will lead to reduction in loss by £120m which is beneficial for the company.
Part (b)
i. NPV = £6191.83
ii.
Cash inflow Amount
Sales 34320
Less: cost of
product X
8004
Cost of product Y 5660
Staff costs 1416
light & heat 2011
Other overheads 7708
Cash inflow 9521
iii.
Year Cash
flows
Nominal
cash flow
Discounting
factor
@12%
Present
value of
cash inflow
0 16676 1 1 16676.00
1 9521 9711.42 0.892857143 8500.89
2 9521 9905.6484 0.797193878 7590.08
3 9521 10103.7613
7
0.711780248 6776.86
NPV 6191.84

iv.
v. PBP = 1.75 years, DPBP = 2.09 years
PBP = 16676/9521 = 1.75 years
Discounted payback
period
Year Cash
flows
Discounting
factor
@12%
DCF Cumulative
0 -16656 1 -16656 -16676
1 9521 0.892857143 8501 -8175
2 9521 0.797193878 7590 -585
3 9521 0.711780248 6777 6192
Discounte
d payback
period
2.09 years
vi. IRR = 33%
Year Cash
flows
0 -16656
1 9521
2 9521
3 9521
IRR 33%
vii. Yes, investment should be done.
viii. Limitations:
NPV method is based on discounting rate which can be wrong leading to wrong
decision. Payback period does not consider time value of money. IRR ignores the
external factors like inflation.
Question 3
The main driver of CSR reporting is the increasing awareness among the people and
stakeholders to exerts pressure on companies to take initiative and in order to indicate their
work a report is prepared which is used by stakeholders for analysing whether the company is
meeting it social responsibility or not (Ramón-Llorens and et.al, 2019). The motivators are
the customers along with other benefits attached to it. The good CSR report will enhance the
reputation of the company which will lead to increase in revenue and profitability. But
sometimes companies incur expenses on CSR activities but get nothing in return (Wang, Cao
and Ye, 2018). CSR reporting on the other hand, may depict that company is doing show off
of its deed as it the responsibility of the company because it is using the resources of the
society. Sometimes there are things that the promises to do for the society turn never does it.
Therefore, it becomes essential for the corporates to ensure that the work gets recognised by
its stakeholders and the public so that everyone gets to know the CSR and sustainable
practices and activities employed by the organization,

Thus, the above drivers and the motivators makes it clear that the CSR report is very
essential to get the understanding about the steps taken by the organization for the purpose of
Social responsibility and sustainability towards the environment and its surroundings.

REFERENCES
Books and Journals
Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case
study in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia. 79(1). pp.13-26.
Bush, J. L. and et.al, 2018. Total and marginal cost analysis for a high school based bystander
intervention. Journal of school violence. 17(2). pp.152-163.
Chiaramonte, L. and Casu, B., 2017. Capital and liquidity ratios and financial distress.
Evidence from the European banking industry. The British Accounting Review. 49(2).
pp.138-161.
Goldmann, K., 2017. Financial liquidity and profitability management in practice of polish
business. In Financial Environment and Business Development (pp. 103-112). Springer,
Cham.
Jinadu, O. and et.al, 2017. Effects of International Financial Reporting Standards (IFRS) on
Financial Statements Comparability of Companies. Journal of Humanities
Insights. 1(01). pp.12-16.
Ramón-Llorens, M. C. and et.al, 2019. The role of human and social board capital in driving
CSR reporting. Long Range Planning. 52(6). p.101846.
Rengel, B. and Palacios, A., 2020. Computational analysis of vertical and horizontal jet
fires. Journal of Loss Prevention in the Process Industries. p.104096.
Tabitha, N. and Oluyinka, I. O., 2016. Cost Accounting Techniques Adopted By
Manufacturing And Service Industry Within The Last Decade. International Journal
Of Advances In Management And Economics. 5(1). pp.48-61.
Vaca-Tapia, A. C. and et.al, 2018, January. Knowledge Based of an Expert System Using the
Horizontal Analysis for Financial Statements of National, Private TV Companies in
Ecuador. In International Conference on Information Theoretic Security (pp. 1044-
1054). Springer, Cham.
Wang, X., Cao, F. and Ye, K., 2018. Mandatory corporate social responsibility (CSR)
reporting and financial reporting quality: Evidence from a quasi-natural
experiment. Journal of Business Ethics. 152(1). pp.253-274.

APPENDIX
Question 1.
Income statement of Sainsbury
Fiscal year is March-February. All values GBP Millions. 2016 2017 2018 2019
Sales/Revenue 23,495 26,231 28,459 29,007
Cost of Goods Sold (COGS) incl. D&A 22,101 24,721 26,593 27,088
COGS excluding D&A 21,517 24,073 25,863 26,351
Depreciation & Amortization Expense 584 648 730 737
Gross Income 1,394 1,510 1,866 1,919
SG&A Expense 712 1,164 1,319 1,602
Research & Development - - - -
Other SG&A 712 1,164 1,319 1,602
Other Operating Expense - - - -
EBIT 682 346 547 317
Unusual Expense 87 -38 121 137
Non Operating Income/Expense 113 252 66 136
Non-Operating Interest Income 19 18 14 3
Interest Expense 120 114 109 84
Pretax Income 559 540 397 235
Income Tax 77 126 100 20
Other After Tax Income (Expense) -12 -18 -18 -18
Consolidated Net Income 459 359 291 201
Net Income 459 359 291 201
Balance Sheet of Sainsbury
Assets
Fiscal year is March-February. All values GBP Millions. 2016 2017 2
Cash & Short Term Investments 1,242 1,277 1
Total Accounts Receivable 2,096 3,260 4
Inventories 968 1,775 1
Finished Goods 967 1,774 1
Progress Payments & Other 1 1
Other Current Assets 149 10
Total Current Assets 4,455 6,322 7
Net Property, Plant & Equipment 9,764 10,006 9
Property, Plant & Equipment - Gross 15,259 15,529 15
Buildings 9,773 10,150 10
Construction in Progress 342 299