J Sainsbury, Marks & Spencer and Tesco Inc's Five-Year Ratio Analysis - Statistics Project Example

1.1 Introduction The focus of this section is on conducting a five-year ratio analysis for three big UK-based supermarkets; J Sainsbury, Marks & Spencer as well as Tesco Inc. The ratios to be analysed in this section include; liquidity, profitability, efficiency and investment ratios for the period between 2012 and 2016 to ascertain their immediate financial performances. It is worth to note that the financial statements for all of these companies will be directly sourced from Hargreaves Lansdown Database. 1.2 Ratio Analysis A. Liquidity Ratios Taking a closer look at the Table-1 within the appendix section, the following can be noted; Tesco’s current ratio improves within the five-year period from 0.64 to 0.74 in 2012 and 2015 respectively; M&S ratio however; decreases within the period from 0.73 to 0.69; and Sainsbury’s immediate ratio increases slightly within the similar period from 0.65 to 0.66 (Graph 1). It is important to note that current ratios are used to measure the short-term capacity of firms to meet their immediate obligations (Babalola & Abiola, 2013). As can be seen from this information, Tesco is fairly positioned in regards to how it can meet its short-term commitments as and whenever they fall due. The acid test ratio for Tesco increases within the period from 0.46 to 0.62 in 2012 and 2016; M&S’s ratio however decreases within the same period from 0.39 to 0.31 while that of Sainsbury increases from 0.35 to 0.51(Graph 2). Acid test ratio measures the capacity of a firm to meet its short term obligations without necessarily depending on its underlying inventory levels (Babalola & Abiola, 2013). This means that for all the three firms, Tesco is fairly positioned to meet its short-term obligations without utilising its overall stocks. Graph-1 Graph 2 B. Profitability Ratios Tesco’s capital employed decreases within the five-year operational period from 31,091 to 23,954 in 2012 and 2016 respectively. However, for the other two companies this ratio increases from 5,267.9 to 6,371.6 for M&S; and 9,204 to 10,222 for Sainsbury as shown in Table 2. The ratio is used to determine the amount of capitals that has been used for acquisition of profits. Graph 3 below indicates that Tesco’s is fairly positioned in relation to the level of capital it has employed to acquire profits over time. Tesco’s ROCE ratio decreases within the period from 0.11 to 0.04 in the period between 0.11 and 0.04; a similar pattern is replicated with M&S whose ratio decreases from 0.14 to 0.09; and Sainsbury decreases from 0.09 to.0.07 respectively within the period. ROCE is a ratio that determines how a company can easily generate profits from underlying capital employed (Delen, Kuzey, & Uyar, 2013). Graph 4 below indicates that ROCE is dwindling over the period for the sector meaning that despite capital employed being improved, the level of profits generated keep on dwindling. Tesco’s profit margin decreases within the period from 0.04 to 0.00 in 2012 and 2016 respectively. A similar pattern is replicated with M&S whose ratio decreases from 0.05 to 0.04 and Sainsbury whose ratio decreases slightly from 0.03 to 0.02 within the same period as shown in Graph 5 below indicates that M&S has been consistent in regards to translation of sales revenues into profits. Graph 3 Graph 4 Graph 5 C. Efficiency Ratios Tesco’s trade debtor collection period reduces from 15 to 10 days within the five-year period starting 2012 and 2016. However, for M&S, the ratio increases from 9 to 11 days while that of Sainsbury also improves from 4 to 7 days (Table 3). The ratio is used to determine the efficiency of management to foster fast collection of credit sales revenues (Babalola & Abiola, 2013). As shown in Graph 6, Tesco’s ratios decreases over the period indicating that the management has put stringent policies in place to ensure that credit sales revenues are collected in place. Tesco’s inventory turnover decreases within the five-year period from 0.06 to 0.05. M&S ratio increases within the period from 0.07 to 0.08 while for Sainsbury; the ratio remains steady at 0.04 for the five operational years as shown in Graph 7. Inventory turnover is a ratio that measures that capacity of a firm to translate the underlying inventories into sales revenues. Higher ratios are always preferred (Delen, Kuzey, & Uyar, 2013). As can be seen from Graph 7, M&S has been able to maintain higher inventory ratios meaning that the supermarket’s management has employed sufficient policies to ensure that more stocks are translated into revenues more times. Graph 6 Graph 7 D. Investment Ratios Tesco’s earning per share decreases significantly within the five-year period from 39.23 to 2.76 in 2012 and 2016 respectively. A similar pattern is replicated by M&S whose ratio decreases from 32.2 to 24.8; and Sainsbury whose ratio also decreases from 35.2 to 22.5 Earnings per share is a ratio that measures a firm’s profitability in relation to the profits allocated to each share held (Babalola & Abiola, 2013). Table 4 indicates that M&S strives to maintain a higher ratio despite the drop in profits within the retailing sector as a whole. The capital gearing ratio is used to measure the level of borrowed funds in relation to equity funds from shareholders. A lower ratio is always preferred since it means that a company uses equity as opposed to borrowed funds to finance operations (Babalola & Abiola, 2013). Tesco’s ratio increases within the five year period from 0.27 to 0.35; M&S’s ratio remains steady at 0.34 while that of Sainsbury decreases within the period from 0.28 to 0.22. It can thus be noted that Sainsbury has made efforts to utilise less borrowed funds to conduct operations. 1.3. Assumptions and Limitations In conducting this analysis, it assumed that all of these three supermarkets operate within the same sector; retailing sector despite the fact that they may experience differences in their operational activities. It is also assumed that they all have equal opportunities in attracting and retaining their immediate customer-base within the five-year under analysis (Babalola & Abiola, 2013). The major limitation of ratio analysis rests with the fact that past information is analyse while in real sense only current and future information is deemed crucial and relevant (Babalola & Abiola, 2013). 1.4 Conclusion To sum up, it can be seen that ratio analysis is a technique that is quite efficient in establishing the financial performance of companies. In this case, ratios computed indicate that M&S is likely to be more profitable and efficient in the manner for which it utilises its existing resources to generate earnings and use equity funds to finance projects. Appendix Table-1  Tesco FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Balance Sheet Items Inventories 3,598 3,744 3,576 2,957 2,430 Total Current Assets 12,353 12,465 13,085 11,819 14,592 Total Current Liabilities 19,180 18,703 20,206 19,805 19,714 Current Ratio 0.64 0.67 0.65 0.60 0.74 Acid Test Ratio 0.46 0.47 0.47 0.45 0.62 M&S FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Balance Sheet Items Inventories 681.9 767.3 845.5 797.8 799.9 Total Current Assets 1,460.10 1,267.90 1,368.50 1,455.00 1,461.40 Total Current Liabilities 2,005.40 2,238.30 2,349.30 2,111.60 2,104.80 Current Ratio 0.73 0.57 0.58 0.69 0.69 Acid Test Ratio 0.39 0.22 0.22 0.31 0.31 Sainsbury FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Balance Sheet Items Inventories 938 987 1,005.00 997 968.0 Total Current Assets 2,032.00 1,901.00 4,362.00 4,421.00 4,413.00 Total Current Liabilities 3,136.00 3,115.00 6,765.00 6,923.00 6,720.00 Current Ratio 0.65 0.61 0.64 0.64 0.66 Acid Test Ratio 0.35 0.29 0.50 0.49 0.51 Table-2 Tesco FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Income Statement Items Turnover (Sales) 63,916.00 63,406.00 63,557.00 62,284.00 54,433.00 Net Profit (loss) 2,814.00 24 970 -5,766.00 129 Profit Before Tax and Interest 4,182.00 2,382.00 2,631.00 -5,792.00 1,046.00 Balance Sheet Items Total Long-Term Assets 37,918.00 37,033.00 34,592.00 32,256.00 29,076.00 Total Current Assets 12353 12465 13085 11819 14,592.0 Total Current Liabilities 19180 18703 20206 19805 19,714.0 Capital Employed 31,091.00 30,795.00 27,471.00 24,270.00 23,954.00 ROCE 0.11 0.06 0.08 -0.18 0.04 Profit Margin 0.04 0.00 0.02 -0.09 0.00 M&S FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Income Statement Items Turnover (Sales) 9,934.30 10,026.80 10,309.70 10,311.40 10,555.40 Net Profit (loss) 489.6 444.8 506 481.7 404.4 Profit Before Tax and Interest 746.5 753 694.5 701.3 584.1 Balance Sheet Items Total Long-Term Assets 5,813.20 6,342.80 6,534.50 6,741.10 7,015.00 Total Current Assets 1460.1 1267.9 1368.5 1455 1,461.4 Total Current Liabilities 2005.4 2238.3 2349.3 2111.6 2,104.8 Capital Employed 5,267.90 5,372.40 5,553.70 6,084.50 6,371.60 ROCE 0.14 0.14 0.13 0.12 0.09 Profit Margin 0.05 0.04 0.05 0.05 0.04 Sainsbury FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Income Statement Items Turnover (Sales) 22,294.00 23,303.00 23,949.00 23,775.00 23,506.00 Net Profit (loss) 598 602 716 -166 471 Profit Before Tax and Interest 874 882 1,009.00 81 707 Balance Sheet Items Total Long-Term Assets 10,308.00 10,781.00 12,171.00 12,032.00 12,529.00 Total Current Assets 2032 1901 4362 4421 4,413.0 Total Current Liabilities 3136 3115 6765 6923 6,720.0 Capital Employed 9,204.00 9,567.00 9,768.00 9,530.00 10,222.00 ROCE 0.09 0.09 0.10 0.01 0.07 Profit Margin 0.03 0.03 0.03 -0.01 0.02 Table 3 Tesco FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Income Statement Items Turnover (Sales) 63916 63406 63557 62284 54,433.0 Cost of Sales 59,734.0 61,024.0 60,926.0 68,076.0 53,387.0 Balance Sheet Items Accounts Receivable (Trade Debtors) 2,657.00 2,525.00 2,190.00 2,121.00 1,607.00 Inventories 3598 3744 3576 2957 2,430.0 Trade Debtor Collection Period 15.17312 14.5353 12.5769 12.4296 10.775724 Stock/Inventory Turnover 0.06 0.06 0.06 0.04 0.05 M&S FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Income Statement Items Turnover (Sales) 9,934.30 10,026.80 10,309.70 10,311.40 10,555.40 Cost of Sales 9,187.8 9,273.8 9,615.2 9,610.1 9,971.3 Balance Sheet Items Accounts Receivable (Trade Debtors) 253 245 309.5 321.8 321.1 Inventories 681.9 767.3 845.5 797.8 799.9 Trade Debtor Collection Period 9.295572 8.918598 10.9574 11.39098 11.103464 Stock/Inventory Turnover 0.07 0.08 0.09 0.08 0.08 Sainsbury FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Income Statement Items Turnover (Sales) 22,294.00 23303 23949 23775 23,506.0 Cost of Sales 21,420.0 22,421.0 22,940.0 23,694.0 22,799.0 Balance Sheet Items Accounts Receivable (Trade Debtors) 286 306 433 471 508 Inventories 938 987 1005 997 968.0 Trade Debtor Collection Period 4.682426 4.792945 6.599232 7.230915 7.8881988 Stock/Inventory Turnover 0.04 0.04 0.04 0.04 0.04 Table 4 Tesco FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Net Profit (loss) 2814 24 970 -5766 129.0 Dividends per Share 14.76 14.76 14.76 0.0 0.0 Shares Outstanding (Number of Ordinary Shares ) 402 403 405 406 407.0 Earnings Per Share 39.23 19.06 23.72 -70.24 2.76 Total Long-Term Liabilities (long term loans) 13,731.00 14,483.00 14,043.00 17,333.00 15,574.00 Total Liabilities & Equity (shareholders' fund + long term loans) 50781 50,129 50,164 44,214 43,904 Capital Gearing Ratio 0.270396 0.288915 0.279942 0.392025 0.354728 M&S FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Net Profit (loss) 489.6 444.8 506 481.7 404.4 Dividends per Share 17.0 17.0 17.0 18.0 23.3 Shares Outstanding (Number of Ordinary Shares ) 401.4 403.5 408.1 412 405.8 Earnings Per Share 32.2 28.2 32.2 29.5 24.8 Total Long-Term Liabilities (long term loans) 2,489.10 2,852.90 2,847.00 2,885.70 2,928.20 Total Liabilities & Equity (shareholders' fund + long term loans) 7,272.80 7610.7 7902.3 8196.7 8476.4 Capital Gearing Ratio 0.342248 0.374854 0.360275 0.352056 0.345453 Sainsbury FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Net Profit (loss) 598 602 716 -166 471.0 Dividends per Share 16.1 16.7 17.3 13.2 12.1 Shares Outstanding (Number of Ordinary Shares ) 538 541 545 548 550 Earnings Per Share 31.5 31.5 36.9 -8.7 22.5 Total Long-Term Liabilities (long term loans) 3,575.00 3,742.00 3,770.00 4,075.00 3,884.00 Total Liabilities & Equity (shareholders' fund + long term loans) 12,340 12,695 16,540 16,537 16973 Capital Gearing Ratio 0.289708 0.294762 0.227932 0.246417 0.228834 References List Babalola, Y.A. & Abiola, F.R., 2013. Financial Ratio Analysis of Firms: A Tool for Decision Making. International Journal of Management Sciences, vol.1, no.4, pp.132-137. Delen, D., Kuzey, C. & Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, vol.40. no.10, pp.3970-3983. Hargreaves Lansdown. 2016. Tesco Plc. Five-year Annual Reports. Retrieved from http://www.hl.co.uk/shares/shares-search-results/t/tesco-plc-ordinary-5p/financial-statements-and-reports Hargreaves Lansdown. 2016. Sainsbury J Five-year Annual Reports. Retrieved from http://www.hl.co.uk/shares/shares-search-results/s/sainsbury-j-plc-ordinary-28,47p/financial-statements-and-reports Hargreaves Lansdown. 2016. Marks & Spencer Five-year Annual Reports. Retrieved from http://www.hl.co.uk/shares/shares-search-results/s/sainsbury-j-plc-ordinary-28,47p/financial-statements-and-reports Read More