FINANCIAL RATIO ANALYSIS

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Financial Ratio analysis
Introduction
This report has been prepared to show the comparison of the financial performance of Tesco Plc. and Sainsbury Plc., over a five year period. The ratios that have been chosen to show the financial analysis of both the company are as profitability, efficiency and liquidity over a five year period. Both the companies are operating in UK and deals in grocery products under the head of supermarkets. According to the financial report of both the companies it has been found that Tesco holds more than 29% of the market share and holds the top place in the grocery market whereas Sainsbury hold 17% of the market share holding the third place in the industry. Besides grocery business both the companies deals in other kinds of business starting from clothing to financial services. According to the reports published by Morning Star (2018), Tesco has earned a revenue of $57,491 billion whereas Sainsbury’s total revenue stands at $28, 456 billion in the year 2018.

Performance analysis of the chosen companies
The report in consideration with the financial ratios determine the financial performance of both the companies for a five a year period starting from the year 2014 to 2018. This will include the annual reports of the companies supported by the analysis to show the financial positions of the companies.

Liquidity Ratio
Liquidity ratio is a means to determine whether the company has the ability to pay off its debt. A company having a higher value of assets than its liabilities is the preferred benchmark. Having a higher value of current assets than its current liabilities shows that the company has the ability to pay off its debts at a short notice if required to do so (Vogel 2014). Liquidity ratio is also known as the current ratio of the company by which the shareholders determine the company’s ability to pay off the short term liabilities of the company. The company pays such debts out of cash, inventory and receivables. This is also known as company’s current assets that the company can turn or liquidate into liquid cash or money within a short period as compared to the amount of liabilities outstanding in the books of the company (Adewuyi 2016).

  Tesco Plc. Liquidity Ratio

The results above shows that Tesco’s current liabilities are more than its current assets and therefore does not comply with the bench mark as set above. As per the benchmark the current assets of the company should be higher or more than its current liabilities so that the company can pay off its debts within a short notice. The figure above shows that the company’s liabilities are more than its assets and therefore the liquidity ratio is negative in case of Tesco Plc (Financials.morningstar.com. 2018).

Sainsbury’s Liquidity Ratio


The above figure shows the data of the current assets and liabilities of Sainsbury Plc. As per the set benchmark regarding the liquidity ratio it has been said that the current assets should have a higher value than its current liabilities. But the data shows that the company’s current liabilities are more than its current assets which does not comply with the bench mark as set before. Therefore, the company’s liquidity ratio is negative (Financials.morningstar.com. 2018).

Comparative analysis
Going through the figures representing current assets and liabilities of both the companies it has been found that the liquidity ratio for both the companies are negative. The figure shows the data of current assets and current liabilities for the year 2018 of both the companies. From the given data it can be analyzed that the value current assets of Tesco and Sainsbury is $30.6 billion and $35.75 billion respectively, whereas the current liabilities are $42.86 and 46.83 respectively. Hence, as per the given data both the companies have higher value of current liabilities than its currents assets. Therefore, liquidity ratio for both the companies are negative (Financials.morningstar.com. 2018).

Profitability Ratio
The profitability ratio analysis help a company to analyze its profitability. Profits of a company is used for capital expenditure, re-investment purpose as well as pay dividends to its shareholders. Therefore, a company needs to analyze its profitability so that it can compare with the profitability ratio of other firms in the industry (Greco, Figueira and Ehrgott 2016).

To determine the profitability ratio of a firm Earnings per Share must be considered. Earnings per Share is used to measure the earnings from each unit of share. This helps the shareholder to calculate and determine the earnings available from each unit of share purchased by them and when this is compared to actual dividend received by the shareholders will give them the payout ratio of the firm (Boyas and Teeter 2017). This is very important for the shareholders of the company as profits are used either for investment in capital expenditure or for the purpose of paying off its dividends. Therefore, if the dividends are low then either the shareholders or the investors may expect that profits of the company has been used to meet its capital expenditure which is a good sign for the shareholders as it will increase the future value of the company and lead to capital gains (Barman and Sengupta 2017).

The other ratios that is to be used to analyze the profitability ratio of a company is the Gross Profit Margin and the Net Profit Margin of the firm. Gross Profit Margin is the revenue earned by firm deducting from the amount of goods sold (Miller-Nobles, Mattison and Matsumura 2016). The Gross Profit Margin of a company shows its production efficiency. If a company has a gross profit margin more than that of its competitors then it is considered to be efficient. On the other hand Net Profit Margin denotes the net income deducting all the costs (Valickova, Havranek and Horvath 2015).

     
Tesco’s Profitability Ratio
The above figure shows that the position of Tesco not at all good. Though Tesco’s Earnings per share has increased in this recent year but looking to data of the previous years does not reflect a good attitude of the company. The Gross Profit Margin of the company is good and seems to be consistent for the last three years as shown in the figure. The company has an average of 3.84% of gross profit margin which is a good sign for the company. Whereas the net profit margin of the company is negative with an average of -1.08% of net profit which is not at all good for the company as the investors will not take risk to invest in the company which has a negative profit margin (Financials.morningstar.com. 2018).

Sainsbury Profitability Ratio
The figure above shows that the Earning per Share (EPS) of the company is average. The company’s earnings per share has a consistency as shown in the data above. The Gross Profit margin of the company is too consistent which shows a good amount of profits earned by the companies in the recent year as well as in the previous years. The company has an average of 5.98% of Gross Profit Margin over the five years. This will have a positive impact on the shareholders as it would reflect the production efficiency of the company. The given figure also shows that the Net Profit Margin of the company where it shows that the net profit margin has dropped in the recent year as compared to the previous years. The average net profit margin earned by the company over the last five years are 1.31% (Financials.morningstar.com. 2018).

Comparative Analysis
Going through the graphical representation of both the company’s Earning per Share it seems that Sainsbury has a better position as compared to Tesco. Tesco does not have a consistency over its earning per share whereas Sainsbury’s earning per share is positive as compared to Tesco’s. The average of Gross Profit Margin is higher in case of Sainsbury than Tesco. Shareholders of Sainsbury Plc. will have a positive reaction on the production efficiency of the company than that of Tesco. Tesco has a average gross profit margin of 3.84% whereas Sainsbury has an average of 5.98%. The Net Profit Margin of Tesco is very poor as compared to Sainsbury. The average of last five years data shows that the net profit margin of Tesco is negative with -1.08% whereas Sainsbury has 1.31%. Comparing overall figures of both the companies it can be said that Sainsbury is doing well than that of Tesco (Financials.morningstar.com. 2018).

Efficiency ratio
Efficiency ratio analysis helps in determining the efficiency of the company in using its liabilities or assets in the generation of revenue for the company’s business. Such ratio can be determined by comparing the Inventory Turnover ratio with other companies present in the industry (Brigham et al. 2016).


Tesco’s Efficiency Ratio
As per the graphical representation made above in the figure, it shows that Tesco’s performance in inventory turnover has decreased which means that Tesco is taking much more time to reduce or clear its stocks. Tesco takes an average of 20.2 days’ time to clear its stocks which is much more as compared to its competitors in the market (Financials.morningstar.com. 2018).

Sainsbury’s Efficiency Ratio
As the given data in the figure above, it shows that Sainsbury’s performance has improved over the last four years. In the last four years the company’s turnover ratio was very low as compared to its competitors but in the recent year it has done well and has come to an average of 20 days (Financials.morningstar.com. 2018).

Comparative Analysis
Comparing the graphical representation of both the companies it seems that Tesco’s performance has dropped from its previous years. In the previous year’s Tesco was able to clear its stock in less time than the recent year. While on the other hand Sainsbury’s bury performance has improved than its previous years. Though both the companies having an average of 20 days in Inventory turnover ratio, however, considering the previous data it shall be considered that Sainsbury’s performance in inventory turnover has increased whereas Tesco’s performance level has dropped from its previous (Financials.morningstar.com. 2018).

Conclusion
On the basis of comparative analysis made above it shows that Sainsbury will be a favorable choice for the investors. The financial ratio analysis has been derived from the annual report published by the company and has proved to be a valuable tool for the investors. Therefore, from the comparative analysis of the financial performance of both the companies over a period of five years, it is clear that Sainsbury has accelerated its growth while Tesco’s performance is not good. However, by analyzing the financial performance of the company’s the investors can just assume but cannot confirm the future performance of the companies. Sainsbury is leading the growth in the grocery market while Tesco’s is proving to be more efficient than its competitors. Tesco is considered to be the leader in the grocery market. However, the performance of Tesco is relatively poor in terms of the efficiency and profit margins it has earned over period of five years as compared to Sainsbury.

Therefore in conclusion, it can be summarized that through the analysis of the ratios of both Tesco Plc. and Sainsbury Plc. from the year 2014 to 2018, it can be said that Tesco’s performance is not at all satisfactory. The grocery business of Tesco is growing very slowly as compared to its competitor Sainsbury. However, analyzing through numbers of the previous years it can be said that Tesco has a strong potential to grow in this sector. Therefore, Tesco should improve its performance in the future operations.

Reference:

Adewuyi, A.W., 2016. Ratio Analysis of Tesco Plc Financial Performance between 2010 and 2014 in Comparison to Both Sainsbury and Morrisons. Open Journal of Accounting5(03), p.45.

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Barman, A.N. and Sengupta, P.P., 2017. Determinants of Profitability in Indian Telecom Industry Using Financial Ratio Analysis. International Journal of Research in Management & Social Science, p.25.

Valickova, P., Havranek, T. and Horvath, R., 2015. Financial development and economic growth: A meta‐analysis. Journal of Economic Surveys29(3), pp.506-526.

Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

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Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., 2016. Horngren’s Financial & Managerial Accounting: The Managerial Chapters. Pearson.

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Financials.morningstar.com. (2018). Growth, Profitability, and Financial Ratios for Tesco PLC ADR (TSCDY) from Morningstar.com. [online] Available at: http://financials.morningstar.com/ratios/r.html?t=TSCDY&region=usa&culture=en-US [Accessed 19 Dec. 2018].

Financials.morningstar.com. (2018). Growth, Profitability, and Financial Ratios for Sainsbury (J) PLC (SBRY) from Morningstar.com. [online] Available at: http://financials.morningstar.com/ratios/r.html?t=SBRY&region=gbr&culture=en-US [Accessed 19 Dec. 2018].