Financial Analysis of Tesco and Sainsbury for the Year Ended 2013 - Example

Financial Analysis of Tesco and Sainsbury for the year ended Contents Contents 2 Introduction 3 Ratio Analysis 3 Profitability Ratio 3 ROCE 4 2.Gross Profit Ratio 4 3.Net Margin 4 Liquidity / Solvency Ratio 5 1.Current Ratio 5 2.Acid Test Ratio / Quick Ratio 5 3.Interest Cover 5 Financial Analysis 6 Users of Analysis 7 Discussion 8 Summary and Conclusion 8 Reference List 9 Introduction Tesco Plc was established in the year 1919 and is engaged in the business of multinational grocery chains. It is the second biggest retail chain after Wal-Mart. It has its cash and carry outlets. Departmental stores, hypermarkets and superstores all in the business of retailing. Tesco Plc has about 6351 stores globally with annual revenues amounting £64.826 billion in 2013. The British company has also been listed on the London Stock Exchange with an estimated market capitalisation of £24.4 billion (Tesco, 2014). J Sainsbury Plc is a competition supermarket chain much older in age that Tesco and is primarily based in UK under the group of Sainsburys Supermarkets Ltd. Established in 1869, the company today, has about 1106 stores all across UK reporting a group profit of £874 million, 2012. Sainsbury Plc is also engaged in hypermarkets, supermarkets and convenience stores in the British mainland. The company comes second largest in UK in terms of market capitalisation at 16.6% (Sainsbury, 2014). The main aim of this paper is to obtain, examine and interpret financial data pertaining to 2013 for two competing firms, Sainsbury Plc and Tesco Plc and the try to assess non financial objectives with a view so as to facilitate comparison and allow comprehensive analysis of the two firms. Ratio Analysis For the year-ending 2013, the following ratios have been calculated for Sainsbury Plc and Tesco plc. Profitability Ratio Profitability ratios help making comparisons that measure the overall success of a company. 1. ROCE Return on Capital Employed (ROCE) = (Profit Before interest and tax / Capital employed + Reserves) *100 This measure helps to calculate and gauge what part of earnings comes from long term funds (Black and Al-kilani, 2013). ROCE 2013 Sainsbury 9.26% Tesco 7.03% 2. Gross Profit Ratio Gross Profit Ratio =Gross Profit / Revenue Gross profits ratio estimates operational performance quality in business. GP Ratio 2013 Sainsbury 5.48% Tesco 6.31% 3. Net Margin Profit Margin Ratio = (Operating Income / Revenue) * 100 Net profit ratio measures profits of a company that occur on account of primary operational activities (Brealey and Myers, 2011). Net Margin 2013 Sainsbury 3.81% Tesco 3.38% Liquidity / Solvency Ratio 1. Current Ratio Current Ratio = Current Assets / Current Liabilities The current ratio measures the strength of a company’s short term liability management Ross, Westerfield and Jaffe, 2005). Current Ratio 2013 Sainsbury 0.61 Tesco 2.22 2. Acid Test Ratio / Quick Ratio Acid Test Ratio = (Current Assets - Inventories) / Current Liabilities Inventories are deemed to be least liquid amongst the current assets. The quick ratio determines a firm’s ability to pay of its short term creditors with its most liquid assets (Drury, 2008). Quick ratio 2013 Sainsbury 0.29 Tesco 0.49 3. Interest Cover Interest Cover: PBIT / Interest Payable This measure calculates how much of profits of a company are available to meet its interest payments. Interest Cover 2013 Sainsbury 6.24 Tesco 4.76 Financial Analysis Profitability Sainsbury has shown a higher return on capital employed than Tesco for the year ended 2013. The asset base of the company is also much less than that of Tesco. Despite a similar asset base and similar level of profits, it has been observed that Tesco’s profits fell short only because of its high current liabilities figure as compared to that of Sainsbury. Tesco has to maintain a better operational flow and reduce its current liabilities so as to improve its ROCE. The risk free rate for UK is 2.45 and when the ROCE for 2 firms is compared to the risk free rate, it is observed that both firms provide much higher returns that that guaranteed by the risk free rate and hence are good investments (TradingEconomics, 2013). In terms of Gross profit, Sainsbury has lesser gross profit margin than Tesco. This implies that a large part of revenues of Sainsbury goes to meet cost of goods sold. High cost of goods is deterrent to company profits and this needs to be reduced to improve company profitability. The net margin shows that despite high profitability, Tesco has a lower net margin than that of Sainsbury. This shows that Tesco comparatively has a higher interest obligation than Sainsbury. High leverage reduces firm profitability. Tesco has also faced losses in property which has had an impact on net profit figures. Liquidity and Solvency The analysis above represents that Tesco maintains a strong current ration position close to the ideal 2:1. This implies that the company has enough funds to finance its operating cash flow requirements and does not need to borrow to meet its short term funding requirements. The creditors have been paid in time. On the other hand, Sainsbury Plc does not have a strong current ration and this reflects that company’s short run assets fall short of meeting its short term fund requirements. The company has shortage of cash and might even need to borrow for meeting its creditor payments. This brings in addition cost burden in the short run and is not a good indicator of company’s operational management. Both Tesco and Sainsbury are operating at very low quick ratio margins by standards. However, the average quick ratio maintained in the personal and household goods industry is also running low at 0.25 as per the second quarter ended 2013 (CSIMarket, 2013). It is being observed that the general trend in the consumer goods industry is low cash because of sudden demand for cash in operations. The interest cover ratio for Sainsbury is 6 times while that for Tesco is close to 5 times. This shows that despite the short run cash crunch, the Sainsbury’s management has been able to generate enough profits to fund its interest payment and Tesco’s profitability has fallen far short in comparison. This derives that long term solvency of Sainsbury is much stronger than that of Tesco. However, Tesco has had sudden loss related to property and this has also impacted its profitability. Analysis of interest cover for a single year is therefo4re not a good tool for judging long term solvency of the firm. Users of Analysis The different users of financial data and its analysis are various stakeholders of the company like investors, competitors and employees. For investors, analysis of financial data between the two companies is important for determining where to invest and how much. If they have invested in the company, they also need to know the future of their investments. The competitors of the two companies and the shareholders themselves need to know the relative position of these financial statements to understand what is their position in the industry and determine what are they ways through which they can fight out the competition. For employees, such analysis of financial data holds extreme importance due to the fact that their jobs rely on the sound functioning of the company. Also growth potential of the employee is highly determined by the growth of the company. Future employees might see company strength before finalising over their employment options. Discussion Non-financial details like service aspects, political and environment conditions within the country of operations and social and ethical compliances by the company become extremely important to establish the sustainability of company growth. Reporting of corporate social responsibility is important from the point of view of getting social acceptance. Companies who engage and report of environmental compliances and responsible social behaviour are more accepted by the consumers that those which do not report any of it. This also contributes to long run profitability and sustainability of the company. Non financial analysis also takes into account all the competitive techniques that give a business the competitive edge and that cannot be measured financially. Such reporting gives value to company and also helps it mitigate risks with the help of forward looking aspects of the decision making process. Summary and Conclusion Both Sainsbury and Tesco have been making significant profits and running with sustainable competitive advantage. However, Tesco enjoys a greater market share than Sainsbury owing to its size. Sainsbury is a smaller company but profit figures are better than that of Tesco. Tesco made losses in property which has in turn impacted company profitability. Sainsbury lacks largely in its high cost of goods sold that takes away a major share of its profits. Tesco enjoys the benefit of large scale production but it has higher interest commitments that Sainsbury which in turn reflects in smaller share of profits available to the shareholders. To conclude, one can say that Sainsbury need to improve on its operational capability from the cost perspective while Tesco needs to maintain a lower inventory in order to increase profitability. Cash management of Tesco is very tight and it would be good if operational cash was kept for operational needs and financing of long term needs was reduced through retained earnings so as to reduce interest costs. Reference List Black, G. and Al-kilani, M., 2013. Accounting and Finance for Business. New Delhi: Pearson Education. Brealey, R. A. and Myers, S.C., 2011. Principles of Corporate Finance. New Delhi: McGraw-Hill. CSIMarket., 2013. Personal & Household Products Industry: Financial Strength Information & Trends. [online] Available at: [Accessed 16 January 2014]. Ross, S. A., Westerfield, R. W. and Jaffe, J. F., 2005. Corporate Finance. New Delhi: McGraw-Hill. Sainsbury., 2014. About Sainsbury. [online] Available at: < http://www.j-sainsbury.co.uk/> [Accessed 16 January 2014]. Tesco., 2014. About Tesco. [online] Available at: [Accessed 16 January 2014]. TradingEconomics., 2013. United Kingdom Government Bond 10Y. [online] Available at: [Accessed 16 January 2014]. Appendix Sainsbury Plc Ratios 2013 Return on Capital Employed   Profit Before interest and tax 887 Total Assets 12,695 Current Liabilities 3115 Total Assets - Current liabilities = Capital Employed 9,580 Profit Before interest and tax / Capital employed 0.0925 Current ratio   Current Assets 1,914 Current liabilities 3,115 Current Ratio 0.6144 Acid test Ratio   Current Assets 1,914 Inventories 987 Current Assets - Inventories 927 Current liabilities 3,115 Quick Ratio 0.2975 Gross Profit ratio   Gross Profit ratio 1,277 Revenue 23,303 Gross Profit/Revenue 0.0547 Profit Margin Ratio   Net profit 887 Revenue 23,303 Net profit/ Revenue 0.0380 Interest Cover   PBIT 887 Interest payable 142 PBIT / Interest Payable 6.2464 Tesco Plc Ratios 2013 Return on Capital Employed   Profit Before interest and tax 2,188 Total Assets 50,129 Current Liabilities 18985 Total Assets - Current liabilities = Capital Employed 31,144 Profit Before interest and tax / Capital employed 0.0702 Current ratio   Current Assets 13,096 Current liabilities 5,889 Current Ratio 2.2238 Acid test Ratio   Current Assets 13,096 Inventories 3,744 Current Assets - Inventories 9352 Current liabilities 18,985 Quick Ratio 0.4925 Gross Profit ratio   Gross Profit ratio 4,089 Revenue 64,826 Gross Profit/Revenue 0.0630 Profit Margin Ratio   Net profit 2,188 Revenue 64,826 Net profit/ Revenue 0.0337 Interest Cover   PBIT 2,188 Interest payable 459 PBIT / Interest Payable 4.7668 Read More