Financial Analysis Report: Sainsbury's and Tesco's Performance

This report presents a comprehensive financial analysis of two major retail firms, Sainsbury's and Tesco. It begins with an introduction to financial analysis, emphasizing the use of tools and techniques to interpret financial statements. The main body of the report delves into detailed ratio analysis, c...Read More

Financial Analysis
Management & Enterprises

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY ................................................................................................................................1
1. Vertical and horizontal ratio analysis of financial statements for the both company:.............1
2. Working capital analysis:.......................................................................................................20
3. Cash flow analysis:................................................................................................................21
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................24

INTRODUCTION
The financial analysis can be defined as a combination of tools and techniques that are
used to analysis and interpret the financial statements and business reports. Management of the
business firm conducts the detailed analysis regarding the financial statements by evaluating the
certain technical analysis like cash flow management, Ratio analysis to know the business
position in the market. It is defined as process of assessing and analysing a firms’ financial report
in terms of ascertained the standard data that helps to recognise the business performance. Ratio
analysis helps to management in determinant the business position of an entity. So that they can
take the strategic decision as per market performance in the particular industry. Working capital
management is a fundamental concept to find out basic needs of the fund in the particular
business in short term period to operate the operational function of the business. Cash flow
analysis provides the information regarding the firm operational cycle period of cash inflow and
out flow.
To understand the financial aspect two retail sector firm Sainsbury's and TESCO are
selected that are involved in retail sales of product at supermarket or departmental stores. This
report justifies the definition and computation of financial ratios and interpretation of the
financial ratios. In this report, Cash flow and working capital analysis of these firm are also
discussed in detail.
MAIN BODY
1.Vertical and horizontal ratio analysis of financial statements for the both company:
Ratio analysis is particular method that states that financial position of the business at
certain level and it is a comparative analysis of two or more year of the business reports (Palepu
and Healy, 2013). It may include the profitability, liquidity, solvency and efficiency position of
the firm. This analysis includes the comparative study of the financial statement, profitability and
solvency ratio with another company. For this comparative study, Ratio analysis of the both firm
are as under:
Profitability Ratios:
1

These are the ratio that are computed by the firm to assess the profitability of the business
in consequence to its basic business activities that are performed in the business circle. These are
financial metrics that are used to measure firm's ability to gain the earning or income from sales
revenue, operating cost, assets etc. These are the standard ratio that used to measure the
profitability condition of the corporation. Computation of profitability ratio of the both
companies are discussed as follows:
Gross profit ratio: It is computed by the business to find out the business profit from the
sales revenue generated by the firm (Ward, 2012). Gross profit ratio shows the relationship
between gross profit and net sales revenue. It is most preferred tools of the firm in order to
measure the performance of the entity.
Year / companies Sainsbury Tesco
2015-16 6.19% 5.24%
2016-17 6.23% 5.19%
2017-18 6.61% 5.83%
2018-19 6.92% 6.48%
2

Here,
Gross profit Ratio = Gross profit / Net sales revenue *100
Interpretation:
After the detailed analysis of this computation of gross profit margin of the Sainsbury's
firm, it states that gross profit margin is increasing year by year. But in the previous year it
increased most among the year. It directly means that company is in stable position to earning
the profit (Banerjee, 2012).
In order to discussion of the profit margin of TESCO firm, it is clearly shows that
company is in-stable in the market. But it is earning the profits in different manner like in the
year of 2015-16, firm bears loss but in the next year company earns a profit and ratio increases to
6.48 % in 2018-19.
 As per the above computation of the gross profit, it is identified that gross profit of the
Sainsbury's is comparatively higher than that of TESCO's in all the year starting from the
2015-16
 Profit of the Sainsbury's and TESCO are continuously increasing from the year of 2015-
16 so that's a good sign for the both company.
Net profit ratio: It is a ratio that is calculated profit after tax to net sales revenue. It shows the
relationship between net profit and revenue generated by the firm (Williams and Dobelman,
2017). Net profit ratio is measured the ability of the company to earn profit out of its sales by
deducting the indirect expenses. Determination of the net profit ratio of both companies are as
under:
Year / companies Sainsbury Tesco
2015-16 2% 0.25%
2016-17 1.44% -0.07%
2017-18 1.09% 2.10%
2018-19 0.75% 2.07%
3

Here,
Net profit ratio = Net profit / Net sales volume *100
Interpretation:
After analysing the net profit ratio, it is interpreted that profit of the Sainsbury are low
and inconsistent from the year starting of 2015-16. (Rigamonti, Ferreira, Grosso and Marques,
2015). As per the above data affiliated to TESCO, it is obviously very low or adverse situation to
deal with. Management of the company needs to take proper actions for improving its profit
ratio. It is stated that firm has negative ratio in year 2015-16 or bearing the loss but after that it is
favourable situation to handle the business operations.
 By evaluating the data related to the net profit ratio, due the high cost of product the
profit of Sainsbury's is decreases from the year of 2015-16. but TESCO's NP ratio is
increases year by year.
 In 2018-19, TESCO has maintained almost same the NP ratio as per considering the last
year ratio. It is required to focus on the increasing sales revenue and reduce the operating
cost to both the company in order to higher the ratio.
Liquidity Ratios:
This ratio shows how quickly a firm can convert its current assets into cash and cash
equivalent in order to pay their short term liability. Liquidity ratio are computed by a firm to
ascertain liquidity position. Computation of its ratios are as under:
4

 Current ratio: It is liquidity ratio that measures the firm's capability to pay the short term
liabilities during the financial year (Arnold, 2012). It compares a company's short term
assets and current liabilities.
Year / companies Sainsbury Tesco
2015-16 0.66 0.75
2016-17 0.74 0.79
2017-18 0.76 0.71
2018-19 0.66 0.61
Here,
Current ratio = Current assets / Current liabilities
Interpretation:
As per above calculation, Sainsbury’s current ratio are not favourable as it is less than
one. Where the ideal ratio is 2:1. So it is required maintain the ratio above one or two to enhance
in the liquidity position. This ratio shows firm has not sufficient cash or cash equivalent to pay
the short term obligation.
 After the concluding the current ratio of TESCO, highest current ratio is in the year of
2016-17. where Sainsbury's highest current ratio is in 2017-18. It is recommended to the
firm to control the basic business operation so the liquidity position can be improved.
5

 Both company may have almost same current ratio during the all year. Sainsbury's
current ratio is same in the year 2015-16 and 2018-19. So it is required to enhance the
business operation and effectiveness in appropriate manner to improve the business
efficiency.
Quick Ratio: It is also known as acid test ratio. It measures the ability of the firm regarding the
quick assets or the asset which are near to cash with the current liabilities (Willcocks, 2013).
This ratio is determined by the management to know firm's abilities to pay it short term
obligation with the help of cash equivalent.
Year / companies Sainsbury Tesco
2015-16 0.52 0.61
2016-17 0.53 0.68
2017-18 0.59 0.6
2018-19 0.5 0.49
Quick ratio = Quick assets- (Stock+ Prepaid expenditure) / Current liabilities
Interpretation:
As per the detailed analysis of the Sainsbury's firm it is states that it quick ratio in all the
year is very low or it is below one which describes the adverse situation. The ideal situation of
the quick ratio is 1:1. It directly means that firm is not able to pay the short term liabilities with
required cash (Burtonshaw-Gunn, 2017).
6

As per the deep evaluation of the ratio of TESCO, it is clearly shows the quick assets
ratio is below par situation. Thus, it needs to be alter the business model and plan in order to
controlling the business operations.
 In the year of 2017-18, there is huge gap in quick ratio of both company. Sainsbury's is
maintained the ratio of 0.5 that is not at par situation. Where TESCO has the ratio of 0.49
only. So both the companies are required to implement new business tactics to
developing or enhancing the organisational efficiency.
 Quick ratio of Sainsbury's is almost same in the year of 2015-16 and 2016-17. but after
that it increases.
Solvency ratios:
Solvency ratio is financial metrics that used to measure the firm's efficiency to meet the
long term obligation in the business organisation. This ratio shows weather the available
resources in the business are sufficient to pay the long term debts. Computations of various
solvency ratios are as below:
 Debt equity ratio: This ratio is used to measure a firm's financial position in the market
by evaluating the financial leverage of the company (Chandra, 2017). It is helpful to yield
the report regarding the information of the firm 's owners’ capital and its long run
liabilities. It is calculated by diving a firm total long run debt by its internal equity such
as share capital + surplus and retained earnings).
Year / companies Sainsbury Tesco
2015-16 0.35 1.23
2016-17 0.31 1.45
2017-18 0.2 0.67
2018-19 0.12 0.38
7

Here,
Debt equity ratio = long term debt / owners fund
Interpretation
After analysing all the computation related to this ratio, it is observed that Sainsbury has
very low financial risk as its ratio below one so company has low long term debts as comparative
to its owners’ equity. Ideal debt equity ratio is said to be 2:1. In the year 2015-16, company has
the debt equity ratio is 0.35 that is not ideal or it is below par.
Considering the above ratio, it is determined that TESCO is reducing the outsider fund
and increasing the equity share capital year by year. It directly means that company do not wants
financial risk in the business.
 After determining the debt equity ratio, it is states that TESCO company is having more
long term debts as compare to Sainsbury's in all the years.
 In the year of 2015-16 Sainsbury has the almost same ratio as TESCO in the year of
2018-19. It means that Sainsbury has less financial risk in the business and paying less
interest on the long term debts as compare to TESCO's.
Turnover Ratios:
These ratios represent that efficiency of assets of a company in relation with total
revenue. It shows the firm's ability of the financial aspect that is measured by sales revenue taken
as base.
8

 Total assets turnover ratio: It measured the efficiency of the assets in the business to
comparing with the sales generated by the firm (Post and Byron, 2015).
Total assets turnover ratio
Year / companies Sainsbury Tesco
2015-16 1.4 1.24
2016-17 1.43 1.25
2017-18 1.36 1.27
2018-19 1.27 1.36
Here,
Assets Turnover Ratio = Net volume / Total Assets
Interpretation:
From the above figure related to Sainsbury's, it is determined that firm has performed
good in the all the financial year as its sales are more compared to assets. In the year of 2016-17
Sainsbury's have the total asset ratio 1.43.
As per the above computation, it is assessed that TESCO has used its assets impressively,
so its sales volume is higher.
 By observing all the data related to this ratio, it is identified that Sainsbury is most
consistent player in the market as compared to TESCO's but at the same times both are
performed well.
9

 Fix asset turnover ratio: It measured utilisation of the fix assets during the financial year
(Zafra-Gómez, Rodriguez Bolivarand Munoz,2013). This ratio is calculated to experience
the efficiency of the fix asset utilization to its sales level. Computations of the ratio for
both the companies are as under:
Fixed assets turnover ratio
Year / companies Sainsbury Tesco
2015-16 1.91 1.78
2016-17 2.02 1.88
2017-18 2.07 1.87
2018-19 1.93 1.89
Here,
fix asset Turnover Ratio = Fix assets / total sales
Interpretation
After analysis the above, Sainsbury's is performing well in the business in terms of
circulating the fix asset during the financial year. But in the year of 2018-19 it decreases again.
After observing the computations of the ratio, it is determined that TESCO has increasing
trends in the ratio of all years. And the ratios are decreasing in the following years.
10

 Similarities in the fix assets turnover ratio of both company, it is in increasing trends in
all financial year. But in comparison between 2015-16 and 2017-18 years it may have
huge changes in the ratios.
From the above consideration, the ratio analysis of Sainsbury is better than that of
TESCO's. Ratio analysis of the Sainsbury’s are getting better result so it is recommended to
Asian food manufacture to choose the Sainsbury’s firm in order to export the goods.
HORIZONTAL ANALYSIS
This analysis includes the trends that are evaluated by the researcher of the business
management. Horizontal analysis is done using both income statement and balance sheet. This
method display variables of financial statements are varied over time as in this process, one year
is chosen as a base year.
Horizontal analysis of both the companies related to Income statement and Balance sheet
of Tesco and Sainsbury’s is compared as follows:
11

12

13

14

Interpretation
As per the horizontal analysis of both the institutions, it is determined that profit for both
the organisations are less than base year that is chosen 2015-16. It has almost similarities in the
revenue of TESCO's in the year of 2017 and 2018. but comparison of the both companies are
mentioned below:
 As it is a food retailer at large in the market, it is crucial to know gross sales of these
institution so that they can analysis the firm are competent to sell the goods or not. As per
the above analysis it has been interpreted that Tesco has an optimistic change in the
volume and that is from 20.73% to 2.81% and 11.17%. but Sainsbury’s indicate
pessimistic changes in the volume which is 11.6% to 8.5% to 1.9%.
15

Comparison of the Tesco is facing affirmative changes in the business but on the other hand case
of Sainsbury’s have negative.
As per the above analysis of income statement and balance sheet, it is found that revenue
of TESCO is increasing year by year. And profit also increases during the year. Asian foods
manufacture should select the TESCO company to export the goods.
VERTICAL ANALYSIS
Vertical analysis is a tools for measuring the business performance of the years. It is
considered one variable of the financial report as a base and determined other variables motions
in relation to base variable. Vertical analysis of the both company is determined as follows:
16

17

18

Balance sheet: Tesco
Interpretation:
As per the above analysis that are determined by the business management by
considering the income statement and balance sheet, it has been seen that both firm has similar
condition in order to increasing trends in the expenses due to the cut throat competition in the
market as required to more invest in business activities. On the other hand there is an important
variation that is seen in the profit of Sainsbury’s are fix increasing trends but not sales volume.
Where the sales volume of Tesco is accelerating in these years.
19

It is concluded as Tesco is more effectively handling the sales along with its expenditure. It
is result to earn profit in upcoming future by investing money in the marketing and promotional
activities. So TESCO firm should be selected for exporting the goods.
2. Working capital analysis:
Working capital is the flow of the fund that used in the business to operate the daily
activities of a firm (Dunham-Taylor and Pinczuk, 2014). It is calculated to know the required
fund in the business that is actually determined as current assets minus current liabilities.
Management of the firm are computed the working capital to find out the uses of the fund that
are available in the business.
Here, working capital analysis for four years (2015-18) of Sainsbury and Tesco company is
analysed below:
Interpretation:
After observing all the details related to working capital analysis, it is determined that
both the firm has negative working capital in all the financial years. As both the company does
not have enough money to pay their short term liabilities. Sainsbury has less negative fund than
that of TESCO’s. So that is required to take proper action against the daily business operations.
Importance of analysing working capital:
 The working capital analysis is used in assessing the return on investment in the
company. So parting cycle period of the Sainsbury's is turning out fast as compare to
20

TESCO's. As the liquidity position of the Sainsbury's is better than TESCO's in all the
financial year.
After considering all detail analysis that are deciding the requirement of working capital to pay
the short term operational liabilities of the both firm, Asian food manufacture should choose the
Sainsbury's firm to exporting the goods. As its operation cycle period is better than TESCO's so
it may provide the money within given credit period of time.
3. Cash flow analysis:
It is a financial tool that used by firm to cash flow from the business transactions. It
indicates how alteration in the business transactions and income affect to the cash and cash
equivalent in the business (Banerjee, 2012). It may lead the three operating activities in the entity
such as operating, investing and financing activities. Cash flow statement of the both companies
are as under:
21

For Tesco: in million
Year Cash flow
2018 Operating activities: 2782
Investing activities: 666
Financing activities: (3236)
2019 Operating activities: 1966
Investing activities: (1143)
Financing activities: (1981)
For Sainsburry: in million
Year Cash flow
2018 Operating activities: 1365
Investing activities: (470)
Financing activities: (244)
2019 Operating activities: 618
Investing activities: (474)
Financing activities: (752)
After observing cash position of Sainsbury's company of both the year, it is evaluated that
company is performing well during the financial year. As its revenue from the operating
activities are really high than that of other activities but company is investing all the fund in the
long run investment and in the capital. Whereas TESCO has also huge revenue from operating
activities but they are investing fund in the financing activities. So it has negative cash flow from
overall business operation. It is required to maintain some cash for emergency so they need to
take a mark on it.
Cash flow system of the both firm is negative. But Sainsbury's is generating more operating
revenue as compare to TESCO's so Sainsbury's should choose by the Asian food manufacture to
exporting the products as per the analysis of Cash flow statement.
22

CONCLUSION
As per this report, it is concluded that financial ratio analysis of the above company
ascertained that business activities and financial performance needs to be improved in the current
or may be in next financial year. Because it is below par performance over the years related to
firm's financial statements. It is also required to assess the working capital requirement needs in
the business to operating the business activities in efficient manner. It is further determined the
cash flow statement to identifying the fundamental needs of the cash in the business so they can
manage the operating cash by investing the excess funds at large scale of manufacture. It is
recommended to large Asian food manufacturer to select the TESCO firm to export their goods
as this company resulted to be more effective and has high brand equity due to which there is
high probability that Asian large food manufacturer can trust TESCO as they will get succeed to
sell their products.
23

REFERENCES
Books and Journal:
Maskell, B. H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Palepu, K. G. and Healy, P. M., 2013. Business analysis and valuation: Using financial
statements, text and cases.
Ward, K., 2012. Strategic management accounting. Routledge.
Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
Arnold, G., 2012. Corporate financial management. Pearson Education.
Willcocks, L., 2013. Information management: the evaluation of information systems
investments. Springer.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
Ghazali, A. W., Shafie, N. A. and Sanusi, Z. M., 2015. Earnings management: An analysis of
opportunistic behaviour, monitoring mechanism and financial distress. Procedia
Economics and Finance. 28. pp.190-201.
Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A meta-
analysis. Academy of Management Journal. 58(5). pp.1546-1571.
Zafra-Gómez, J. L., Rodriguez Bolivar, M. P. and Munoz, L. A., 2013. Contrasting new public
management (NPM) versus post-NPM through financial performance: A cross-sectional
analysis of Spanish local governments. Administration & Society. 45(6). pp.710-747.
Dunham-Taylor, J. and Pinczuk, J. Z., 2014. Financial management for nurse managers. Jones
& Bartlett Publishers.
Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..
Rigamonti, L., Ferreira, S., Grosso, M. and Marques, R.C., 2015. Economic-financial analysis of
the Italian packaging waste management system from a local authority's
perspective. Journal of Cleaner Production. 87. pp.533-541.
Burtonshaw-Gunn, S. A., 2017. Risk and financial management in construction. Routledge.
Ogiela, L., 2015. Intelligent techniques for secure financial management in cloud computing.
Electronic commerce research and applications. 14(6). pp.456-464.
24

25