Comparative Financial Analysis - Tesco and Sainsbury - Case Study Example

Comparative Financial Analysis- Tesco and Sainsbury Contents Comparative Financial Analysis- Tesco and Sainsbury 1 Analysis of financial performance of Tesco and Sainsbury 3 Introduction 3 Overview of Tesco 3 Overview of Sainsbury Plc 3 Ratio Analysis 4 Liquidity Ratios 4 The current ratio 4 Quick Ratio 5 The net profit margin 6 Return on Assets (ROA) 7 8 Return on Equity (ROE) 8 Appropriate action on the loan request 9 Long term and short-term sources of finance 10 Short term source; Bank loan 10 Long term source; Ordinary shares 10 A.Bond Valuation 11 Tesco limited 11 Sainsbury limited 11 The three main international bond-rating agencies 11 Moody's Investors Service 11 Standard and poor’s 12 Fitch rating 12 Why might companies try to maintain a given target rating on their outstanding debt? 13 Bibliography 15 Analysis of financial performance of Tesco and Sainsbury Introduction The appraisal of the financial statement of a firm is significant for the assessment of the whole performance of the company and eventually appraisal of the ideal venture verdict. There are diverse financial tool that is accessible for determining the appropriate ratio analysis of a firm. Our report will focus on evaluating the two years financial performance of Sainsbury and Tesco Company using the liquidity ratio and profitability ratios. Overview of Tesco Tesco amongst the leading food retailers in UK with more than 2800 retail outlet in the UK. Tesco was founded in the year 1919 by Jack Cohern and has its head office in East London. The company has definitive product ranging from groceries, financial services, and Telkom and clients goods (Anton, 2006). The net income of the company as at $54.433 billion. The company’s net income is now $1.046 billion as a t 2016. The company distributes its reported net profit to shareholders in form of dividends. Overview of Sainsbury Plc The company is the third leading supermarket chain in UK. The firm has market share of 18.5% in the UK retail stores. J Sainsbury was established din the year 1860 and has more than 345 retail stores. The company is grown its business to entail shares in Lloyds Banking group as well as investment in real estate’s by tow joint venture with British Land Company and land Securities Company (Colonel, 2012). In 2016, the company reported a revenue of $23.506 billion which was a bit lower unlike for the previous year’s which was $ 23.775 billion the company compared the importance of distributing dividend and as a result, it provides dividend both interim and financial in January/December as interim dividend and Annual dividend in July. Ratio Analysis Liquidity Ratios These ratios demonstrate the capacity of the firm to meet its short-term commitment with the existing short-term assets as depicted by the current and quick ratio. The current ratio The current ratio depicts the capacity of the firm to meet its short-term debt with the existing liquid or current asset. The ratio is arrived at dividing the current asset by current liability.   2013-02 2014-02 2015-02 2016-02 Tesco PLC ADR 0.690 0.730 0.600 0.750 Sainsbury (J) PLC 0.610 0.640 0.640 0.660 From the graph above, it is evident that the current ratio for Tesco Plc is more than those of Sainsbury Plc. It was observed that none of the firm attained the current ratio of one for the last four financial periods. This is risky depiction for the business. Particularly it is advised that a firm must have a current ratio of greater than one. Even though none of the firm was in a position of training this level, Tesco depicts great potency in its financial performance by having ideal current ratio (Connolly, 2006). Both firms depict the signs of risky liquidity situation since, the firms do not meet the short debt with the existing current assets thus the creditors may find it complex to supply their product to the company. In the end, the client loss trust in the business performance and their shall exist delays in supply. Quick Ratio   2013-02 2014-02 2015-02 2016-02 Tesco PLC ADR 0.44 0.43 0.42 0.59 Sainsbury (J) PLC 0.28 0.49 0.48 0.5 Same to current ratio, the quick ratio depicts the capacity of the firm to meet its short term dent by using the liquid cash devoid of cash, the outcome from the working, doesn’t less effective quick ratio. Tesco depicts an ideal edge over its competitor Sainsbury. Sainsbury limited depict a reduction in quick ratio which is bad signal for the firm since, it implies that the liquid cash at the disposal of the firm is scarce which may be because of the low level of debtors collection (Ehrhardt, 2016). As a result, the firm must determine the ideal approach of collecting the debtors like providing the trade discounts and having an improved debtors and creditors management. The net profit margin From the graph below, it is evident that Sainsbury is having an effective performance in term of the profitability unlike those of Tesco. Particularly, this growth in profit margin is because of the effective control of cost and good plan of promotion of the comapnyy’s product to capitalize on the sales (Harold Bierman, 2003). Tesco has been recording low volume of sales income unlike sainsbury with numerous retail outlet in UK that boost the sales income for the company. Furthermore, Tesco low sales income might be because of the poor approach to marketing leading to least sales income generated. Sainsbury has efficient approach to debtors and creditors control boosting the risk control more especially with the diversification of its business, which enhances its capacity to venture and grow the market outlets.   2013-02 2014-02 2015-02 2016-02 Tesco PLC ADR 0.19 1.53 -9.22 0.25 Sainsbury (J) PLC 2.63 2.99 -0.7 2 Return on Assets (ROA) The profitability of Sainsbury is growing unlike those of Tesco. Sainsbury growth in profitability is because of the capacity of the firm to attract good an effective investors with the aim of sustaining the string financial plan for the earning in the prospect to be in the positive tendency. As return on Asset is growing, the tendency foe the last four financial period depicts a decline in the year 2015 (Jack, 1995). Even though the firm’s revenue is growing, there is likelihood that the firm might not be realising their debtors on time and mast sales may be purchased on credit. The graph below depicts a sign of the tendency in the flow in return on assets. Tesco had its highest pick in 214 while Sainsbury was in 2013. Nevertheless Sainsbury demonstrates high record in 2016 which because of timely debtors collection by the firm and efficient plans employed by the management in promotion of its inventories.   2013-02 2014-02 2015-02 2016-02 Tesco PLC ADR 0.25 1.94 -12.17 0.31 Sainsbury (J) PLC 4.91 4.9 -1 2.81 Return on Equity (ROE) From the graph below of return in equity for Sainsbury and Tesco limited, it is evident that the Sainsbury depict a high returns on equity unlike Tesco (Madura, 2007). This is because of company holding diversified portfolio of investment in other segments like financial sector and real estate. Furthermore, the higher the return on equity may be because of the long history of efficient control of stakeholder’s equity/ eventually, efficient venture verdict by Sainsbury doubled by the huge proceeds from venture leading to a growth in the level of return with the business.   2013-02 2014-02 2015-02 2016-02 Tesco PLC ADR 0.72 6.21 -52.7 1.76 Sainsbury (J) PLC 10.81 12.2 -2.88 7.91 Appropriate action on the loan request Ratio Definition Tesco Plc Industry Avg. Debt Debt/Total Assets 73 0.5 Debt-Equity Long-Term Debt/equity 1.51 1.1 Times Interest Earned EBIT\/Interest 3 7.3 Since Tesco Plc has a high degree of indeabtness and low capacity to service its debt unlike the average company in the industry, the loan will hence not approved. Long term and short-term sources of finance Short term source; Bank loan From the statement of financial position for Tesco, it is evident that the short-term debt (Bank loan) is growing each financial year from $1.094 billion in the year 2013 to $2.815 billion in the ending 2016. The company is depicted to be using the bank loan each year to finance it business operations because of the asset lifetime. Loan may be obtained for short term, medium or long-term. If the repayment situation is not complied with, then the lender will take action to recover the amount (Moyer, 2015). Bank loan is identified as some amount by financial institution that is an advanced repayable subsequent to agreed period. Thos advances is deem to another distinct loan account and the borrowing firm should pay the interest on principal amount of loan devoid of consideration of the real amount of loan that was given. Long term source; Ordinary shares The financial structure of Tesco has both debt and equity capital that funds its business operations and project for the company. With rewards to equity capital, in 2016, there has been a share issue at 0.05 per share summing to $9 million ordinary shares, whilst no preference shares were issued (Narayanan, 2004). Tighter the share issues, share capital had final face value of $402 million as well as net equity grew to $17,801 million. Other than this, no shareholders existed with ownership that surpass the security in which might provide special right concerning the control of the business operation for Tesco. Ordinary share capital is the leading source of finance for ht business. The benefit for the company is that, for Limited Corporation, in case of liquidity or solvency, there shall exist no liability other than the company's assets. Nevertheless, we should consider that shareholders would have power to verdict through voting rights. Also, there is risk of using equity capital since shareholders will normally command a high profits margin for their venture and the more the business realize more net profit, the more is paid as dividend. A. Bond Valuation Face value is $100 Time to maturity is 5 years Coupon rate is 8% P.a Bond valuation is worked out as follows Present Value of Interest Payments = c × F × 1 − (1 + r)-t/r+Fr/ (1 + r) t Tesco limited Price of the bond=8 %*( 1.1) ^5/0.1} + ($100/1.1^5= $ 63.38 Sainsbury limited Bond valuation with will be out as follows Price of Bond = {4% × $100 × {1− (1 + 5%) ^10/5} +$100/ (1 + 5%) ^10= $64.09 From the above bond valuation , it is evident that the two bonds alternative are not identical In term of bond price and hence, they should be the bond will not be sell at identical price since, the bond valuation for Tesco is $63.398 and for Sainsbury is $64.09. The three main international bond-rating agencies Moody's Investors Service  In Moody's Investors Service's rating system securities is allotted rating ranging from Aaa to C, with Aaa being the best standard and C being low standard. The service many at times is referred to as Moody’s. It is the bond credit rating business of Moody Company representing the firm’s customer line of business and its past name (Sharma, 2008). Moody’s ventures services providers global financial study on bonds issued by commercial and government entity. The company ranks the creditworthiness of borrow with the sue of standardized rating scale that evaluates the anticipated investor loss in the event of non-payment. Moody’s investor’s service rate debt security in many market dividend linked to public and corporate bond. Managed investment like money market funds, fixed income security and hedge funds as well as banks and asset in structured finance. Standard and poor’s Standard & Poor's Financial Services LLC (S&P) is a financial service based in America. It is segment of the S&P Global, which publishes the financial study and assessment on stock bonds and the commodity. S&P is famous for its stock market indices like the US-based S&P 500, and S&P 200 for Australia (Theobald, 2010). As a credit rating agency, the company issues the credit ration for the debt of public and private firms and other public borrowers like the government. It is one amount the many credit rating agency that been assigned a nationality recognized statistic rating firms by the us security and exchange commons. Fitch rating The company was launched din the year 2008 and it offers a n assortment of fixed income product and professional development service for financial expert. The company furthermore distributes Fitch rating proprietary credit rating, research, financial data, as well as analytical tools (Madura, 2007). Fitch Rating’s long terms rating is allotted on Alphabetical order from AAA to D. the company is licensed by S&P. the company as well as the intermediate +/- modifier for every class diversely between AA and CCC. Why might companies try to maintain a given target rating on their outstanding debt? When a company uses the credit, the company borrows the cash that pledges to repay within an agreement time. Credit score is a statistical approach to establish the chances of a firm repaying the amount borrowed. Credit rating is a significant tool for companies to gain right of entry to loan and debt (Madura, 2007). A good credit rating permits companies to simply borrow cash from banks or public debt market. At the client level, financial institution normally base their terms of loan as a function of the company’s credit rating, in this regards, many company will ensure that they maintain a certain target level on outstanding debt. The better the terms of loan normally are. If the company’s credit rating is poor, financial institution might even decline to offer the loan to the banks. At the corporate level, it is normally in the best interest of the firm to look for credit rating agency top rate their debt. Investors normally; times base part of their verdict to buy the bond or stock, on credit rating of the firms’ debt. Leading credit rating agencies like Moody’s and standard and poor’s, execute this rating services for a fee. Normally, investors will look at the credit rating provide by these Agencies and rating provided by local rating agencies prior to concluding to venture. The credit rating bureaus that issue the credit scores have diverse appraisals system, each on the basis of diverse factors. Some might consider just the informatim provided in the company’s credit report (Harold Bierman, 2003). The main factors employed to work out the company’s credit score is the payment history. current debt, time period of credit history, kind of the credit mix as well as the frequency of the application for new credit. Since the scoring system is on the basis of the diverse criterion, which is weighted diversely, the three main credit bureaus in the United States are Equifax, TransUnion, and Experian might issue diverse credit scores for the company, even though the score is on the basis of similar credit report information. As per financial theory, growth I the credit risk implies that the risk premium should be added to the price of the cash borrowed (Sarnat, 2007). Normally, if the company is having a poor credit score, lenders will not shun from giving loan unless it is completely awful. Rather, the lenders will give firms the cash needed at a high rate unlike the one paid by a firm wit better credit score. The different interest will have different effect on the monthly repayments for difference firms. In disregards, the company must be ware of its credit score and the amount of debt outstanding more specifically, poor credit rating or when the company is indebted, it will harm the credit score devoid of even being aware of. Bibliography Anton, D. (2006) Business Finance: The Fundamentals of Financial Management, New York: Cengage Learning. Colonel, J. (2012) Guide to Personal Financial Planning for the Armed Forces, 7th edition, London: Stackpole Books. Connolly, M. (2006) International Business Finance, London: John Wiley $ Son's. Ehrhardt, M. (2016) Corporate Finance: A Focused Approach - Page 575, New York: Springer. Harold Bierman (2003) Financial Management for Decision Making, Sydney: Pearson Education. Jack, K. (1995) Personal Finance: Personal Financial Planner, 4th edition, New York: Irwin. Madura, J. 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