Business and Financial Performance: An Analysis of Tesco and Sainsbury

This report presents a comparative analysis of the business and financial performance of Tesco and Sainsbury, two leading retail organizations in the UK. It employs a quantitative approach and positivism philosophy, utilizing secondary data from annual reports spanning five years (2011-2015). The study aims to compare the financial health of both companies, provide insights for potential investors, and offer valuable information to stakeholders regarding return on equity and dividends. Ratio analysis is used to assess financial performance, revealing Sainsbury's superior efficiency compared to Tesco. The report delves into the significance of financial performance for stakeholders, explains ratio analysis and its classifications, and addresses research questions concerning shareholder investment efficiency, monetary risk exposure, and resource utilization, ultimately offering recommendations for improved financial performance.

''An analysis and evaluation of the business and financial performance of
Tesco as compared to Sainsbury ''

Acknowledgement
I would like to thank my supervisor who has helped in throughout competing this
dissertation. The continuous support from my guide and his/ her efforts helped me in learning,
overwhelming immense knowledge and motivated me. I would also like to thank my family and
friends for their support and faint in me.

ABSTRACT
The measurement of financial performance of business gives a deeper insight into the use
of financial resources by business. The UK retail industry is highly growing and attractive
sector, therefore, investors are willing to invest in retailing organization. The study aims to make
a comparative analysis into the business as well as financial performance of Tesco and
Sainsbury, both are leading retail organization in the UK. A quantitative approach is selected for
the investigation to which a positivism philosophy is adopted. The data for the present study
have been collected from secondary sources including books, journals, articles, research papers
and online stuffs. To assess the financial performance of Tesco and Sainsbury, annual reports
prepared by the both the companies for last 5 years are used to gather financial information.
Ratio analysis is used to carry out the accurate financial analysis in which Sainsbury is found
more efficient as compared to Tesco in terms of financial performance.

Table of Contents
Acknowledgement...........................................................................................................................2
ABSTRACT....................................................................................................................................3
CHAPTER 1- INTRODUCTION....................................................................................................6
1.1 Background............................................................................................................................6
1.2 Rationale of investigation......................................................................................................6
1.3 Aims and objectives...............................................................................................................7
1.4 Significance of the proposed research study.........................................................................7
CHAPTER 2: LITERATURE REVIEW.........................................................................................8
2.1 Introduction............................................................................................................................8
2.2 Significance of the business and financial performance to the stakeholders.........................8
2.3 Ratio Analysis and significance.............................................................................................9
2.4 Classification of the ratios...................................................................................................10
2.5 Limitations of the ratio analysis..........................................................................................10
CHAPTER 3-RESEARCH METHODOLOGY............................................................................12
3.1 Research philosophy............................................................................................................12
3.2 Research approach...............................................................................................................12
3.3 Research design...................................................................................................................12
3.4 Data collection.....................................................................................................................13
3.5 Data Analysis.......................................................................................................................13
3.6 Ethical and accessibility issues............................................................................................13
CHAPTER 4- DATA ANALYSIS................................................................................................15
CHAPTER 5 CONCLUSION AND RECOMMENDATION......................................................24
REFERENCES..............................................................................................................................26
Appendix 1.....................................................................................................................................28
Appendix 1.....................................................................................................................................29

CHAPTER 1- INTRODUCTION
1.1 Background
Financial performance is denoted as a subjective measure of how an organizations is
using or can use assets to generate revenues as well as profitability (Rao, 2011.). The
measurement of financial performance of business gives a deeper insight into the use of financial
resources by business. The stakeholders (both internal and external) seek for assessing the
financial performance of companies so as to make financial decisions such as investments,
expansion. Including this, management of companies keen to know financial health and
performance of the firm to find out smooth business. Ratio analysis is a tool used to easily
understand the financial performance of a corporate entity, further m it helps in measuring the
return which investors will get through investing money in the business operations of respective
organization. In the present competitive scenario, financial performance analysis is used to find
out how competitive the form and in the market and how they can improve their performance to
remain successful. The retail industry of the United Kingdom has become competitive in terms
of sales performance and profit generation, however, it becomes important to compare the
financial performance to assess the effectiveness of retail in firms in generating revenues and
profits (UK Retail Stats and Facts, 2016). The dissertation herewith aims at comparing the
financial performance of two leading retail organization of the UK named as Tesco and
Sainsbury. Through this investigation, a deeper insight to the existing financial position of both
the firms have been quoted.
1.2 Rationale of investigation
The UK retail industry is highly growing and attractive sector, therefore, investors are
willing to invest in retailing organization. Tesco and Sainsbury Plc. both have gained a
significant market image however, a huge competition is witnessed in terms of improved
business practices and financial performance (UK Retail Stats and Facts, 2016). From the
investor’s point of view, financial strong company is a sources from where better returns can be
raised. Sainsbury Plc. is a the major competitor of Tesco , however, the questions is that which
firm is financially strong , hence, the study will attempts to make an analysis and evaluation
into business and financial performance of Tesco and Sainsbury. The rationale behind present
investigation is to analysis the financial information of both the companies so that various

decision makers can be assist with effective insights in financial health to facilitate effective
decision making.
1.3 Aims and objectives
Aim
The study aims to make a comparative analysis into the business as well as financial
performance of Tesco and Sainsbury.
Objective
 To make comparison of the financial health of Tesco with its competitor, Sainsbury
 To provide information to the potential investors about the financial performance of
Tesco and Sainsbury
 To offer valuable information to several stakeholders about return on equity, dividend,
etc.
 To help investors and shareholder in making suitable decision on investments and
provide assistance to them in making effective decisions.
Research questions
Q.1 How efficient Tesco and Sainsbury are in using shareholders’ investment?
Q.2 To which extent, Tesco and Sainsbury stakeholders are open to monetary risk?
Q.3 Which Company is utilizing its financial resources to their optimum level?
Q.4 Will Tesco and Sainsbury are able to attain success in the upcoming years or in future?
1.4 Significance of the proposed research study
The herewith investigation is significant for retailing industry, academicians, researchers
as well as the management of both Tesco and Sainsbury. The academicians are going to get
insights into the use of ratio analysis and its interpretations. The investigation is going to analysis
the financial position of Tesco and Sainsbury in last 5 year (2011-2015) which have hardly done
in previous studies. The information pertaining to financial performance of retail sectors will
allow researchers to identify the significance of ratio analysis and financial performance
companies in retail industry. In addition to that, investors and shareholder are going to be
assisted with effective decision on investments and the findings of this study will provide

assistance to them in making effective decisions. The comparison of the financial performance of
Tesco with its competitor, Sainsbury is going to be carried out in this investigation which will
provide information to the potential investors about the financial performance of Tesco and
Sainsbury so they can make decisions. The management of Tesco and Sainsbury are going to be
recommended with the ways to improve financial performance.

CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
Literature review is the most crucial section of the investigation which carries a review
into academic theories and aspects related to the topic of study (Robson and McCartan, 2016).
The section is important to assess the findings and previous studies which can support the
present investigation. Review of literature includes summary of findings of previous authors
who have conducted range of investigations into the study topic. The section herewith deals with
the secondary information in relation to financial performance analysis which has been carried
by various authors in their studies. To complete the present investigation various themes such as
the significance of the financial performance to the stakeholders, definition and meaning of ratio
analysis along with its significance. Furthermore, this section represent classification of the
ratios, its importance and limitations of the ratio analysis.
2.2 Significance of the business and financial performance to the stakeholders
According to Vogel (2014) financial performance is referred to the degree to which
financial objectives are being or have been attained within an organization. In a border sense,
financial performance is a way to measure how an organization is managing its financial
resources to manage the risk of business. The measurement of financial performance is a major
criteria to assess financial risk management. To the view point of Ahrendsen and Katchova
(2012) financial performance is measured to find the results of a firm's policies and operations in
monetary terms. The measurement of overall financial health of an organization which is given
within a specified period of time is referred as the financial performance. This is further evident
as the most effectual measure which carried a deeper insights into the optimum utilization of
financial resources within a company (Financial Performance - Understanding its Concepts and
Importance, 2016). The performance of company which is judged in a financial terms indicates
profitability as well as liquidity of the same and carries out the ways in which it can be improved
(Fridson and Alvarez, 2011).

According to Fridson, and Alvarezn (2011) the major significance of assessing financial
performance is that finance manager can make suitable business as well as investment decisions.
Furthermore, Rao (2011) stated that the accurate financial performance analysis allows company
to meet the information need of various stakeholders such as management, employees, financial
institution, government and shareholders etc
As per the investigation carried out by Delen, Kuzey and Uyar (2013) organizations aims
at assessing the financial performance of business for the purpose to know the growth in terms of
sales and profitability aspect. Hence, financials performance is carried out to the growth of
business. On the critical note, Brigham and Ehrhardt, (2013) revealed the fact that by making
comparisons of current performance with the previous, business cannot accurately judge
financial performance because, market conditions like as inflation or deflation have influence on
firms growth and performance.
According to Healy and Palepu (2012) shareholders and investors are interested in
knowing the financial performance of companies so as to make profitable investment decisions.
To a contrary note Hill, Perry and Andes (2011) argued that shareholders can decide on suitable
investment decision only through comparing current performance with the rivals because on a
competitive business arena shareholders have number of options in which they can easily make
investment. Furthermore, Rao (2011) explained that suppliers and financial institutions are also
interested in knowing financial performance of individuals so that they can decide to lend money
to the business such as trade supplier and banks. Here, people, include who provide funds to the
company in the basis of its creditworthiness. The significance of knowing financial performance
of such entities’ is to know that to what extent business entity is able to repay the amount of loan
in given time frame. The financial institutes are highly concerned about the time in which they
will get their money. The banks and financial institutes need such information so as to decide
creditworthiness of business. Hence, financial performance offers an assistance to the
stakeholders for designing the most profitable decisions about future finances situation and
growth.

2.3 Ratio Analysis and significance
To the view point of Chang (2011) ratio analysis is an effective method to obtain a quick
indication of a firm's financial performance. The author further revealed it as a quantitative
analysis of the information provided in financial statements so as to know financial health of a
company. To conduct an effective ratio analysis the information included in financial statements
such as balance sheet, income statement and the cash flow statement is used. Using such
analysis, the relation can be expressed in percentage or quotient terms. It can be said that ratios
are simple to calculate and easy to understand. Brigham and Ehrhardt (2013) explained that ratio
analysis is used to evaluate the business position of a firm by the means of profitability, liquidity,
solvency and efficiency. The significance of ratios analysis is in finding out the ways to improve
the business performance by comparing it with inter firms or intra firms, in means comparing
performance with internal performance and competitor’s performance. Furthermore it is useful
in presenting the numerical data available into financial statements in a simpler and easier forms.
Ratio analysis is considered a useful tool to show the numerical relationships based on the
statements.
2.4 Classification of the ratios
Ratio analysis is an effective tool which carries the financial analysis into different forms
so as to know the financial health of a company is a different aspect (Healy and Palepu, 2012).
The ratios have been classified into various segments which are as follows:
Profitability Ratios: The profitability ratio analysis is a kind of ratios analysis which is
carried out to know how business is earning profits through effective use of financial resources.
Delen, Kuzey and Uyar, (2013) found profitability ratios to be used to know a constant
improvement in sales and profitability of business and is significantly carries out to measure the
efficiency of the company related to utilization of resources in earning profits.
Liquidity ratios – This is an effective kind of ratio analysis which is used to carry out the
efficiency of firm in paying short term financial obligations. The business acts the adequacy of
the current and liquid assets. However Rao (2011) revealed that liquidity ratio is frequently used
to know short term solvency position of business. This ratio is majorly used by creditors such as
banks, suppliers to decide whether firms have adequate liquid cash to meet their obligations.
Efficiency/ Activity ratios – Efficiency ratio, which is also called as activity ratio used for
generating revenues through transforming the production into sales. As per Kuada (2012) ratio

defines how frequently the assets and inventories are being converted into the sales and how
efficient a firm in using its assets.
Solvency ratios – The solvency ratio is a measurement of potentials of a corporate entity
to survive for a long period of time. This is a very important ratio for stakeholders and creditors
to decide on their investments in companies. Using this ratio, it becomes easy to examine the
capital structure of company.
2.5 Limitations of the ratio analysis
The major limitation of ratios analysis is that being a quantitative analysis tool, it ignores
qualitative analysis of business performance. To the view point of Chang (2011) the limitation of
ratio analysis is that appropriate standards of analysis cannot be determined due to ratio analysis.
The major conclusions derived from this analysis tool sometimes does not meet the standards of
companies. However, in the present investigation the companies are dealing in the same industry
hence, this limitation does not hamper present research objectives. Delen, Kuzey and Uyar,
(2013) explained that comparison becomes difficult in case when two companies are
significantly different in size, scale and nature, because, the judgment becomes very difficult for
the information users. Many of the times, ratios give false results, if they are calculated from
incorrect accounting data. In Tesco and Salisbury’s financial information there must be some
issuers relating to accounting data which might hampers the effectiveness of ratio analysis. In
respect to the present investigation, it can be an issue of carrying ratio analysis. In view of the
accounting issues that Tesco has had in the relatively recent past further hamper the ratio
analysis and their findings (Annual Report and Financial Statements Tesco. 2016). Furthermore
Rao (2011) explained that ratio analysis is based on past data, therefore, it does not provide
complete information for future forecasting. Due to historical figures, it becomes difficult to
evaluate current and accurate performance, hence no indication about the existing and future
problems is a limitation of ratio analysis. The ratios sometimes argued to be not appropriates
because, they do not provide appropriate answers to the financial issues. However, it can be said
that issues of judgment always arises along with identifying the importance which should be
given to the numbers. Nonetheless, ratios can be misleading, if these are calculated using false or
window-dressed accounting information.

CHAPTER 3-RESEARCH METHODOLOGY
Research methodology is the most crucial section of the investigation which includes
tools and tactics used for accomplishing the research objectives (Robson and McCartan, 2016).
Here, the section includes research philosophy, research approach, research design along with
data collection and analysis tactics. The use of each and every method is backed with suitable
justification.
3.1 Research philosophy
Interpretative and positivism are two main research philosophies used in the research
world that governs a specify way to collect data and conduct analysis to solve a research
problem. Positivism philosophy supports quantitative approach under which objectives are
achieved using an in-depth analysis (Bryman and Bell, 2015). On the other hand, interpretivism
philosophy is suitable to qualitative approach. Here, for the present investigation financial
performance of Tesco and Sainsbury, is going to be assessed which indicates a quantitative
approach, hence positivism philosophy is justifiable (Creswell, 2013). The rationale behind
opting positivism philosophy is the specific nature of study that molds that researcher mind
towards analyzing each financial value and carrying out valid findings.
3.2 Research approach
Research approach is significantly used to find out the way in which the investigation
will be carried out, it may be general to specific, or specific to general. Two major research
approaches are inductive and deductive (Flick, 2011). For the present investigation, deductive
approach is used so as to assess the financial performance of Tesco and Sainsbury, to make
comparisons. Reason behind using such approach is the specific nature of study in which Tesco
and Sainsbury are chosen. Along with this, data are quantitative in nature which needs to be
specifically analyzed hence, the use of deductive approach is backed with a suitable justification
(Zikmund and et.al., 2012).
3.3 Research design
Research design in general phenomena is called as a blue print of study, which is used to
conduct an investigation into a right direction. Descriptive and exploratory are major research
designs that cab be employed in study (Collis and Hussey, 2013). In respect to the present