1. Introduction
The purpose of this report is to conduct a comparative ratio analysis of the financial statements of J. Sainsbury PLC and Tesco PLC for the year-ending 2013. The financial information that is provided from each company’s annual report and the comparison between them will help possible users of this analysis to understand not only the differences between these two companies but also each company’s weaknesses and strengths. Below, the profiles of the two companies will be referred as well as eight accounting ratios for each company will be presented in order to have the appropriate financial information to analyse. Furthermore, the possible users of this analysis will be identified and all their differing information requirements will be mentioned. Finally, there will be provided a short discussion on the importance of supplementing financial analysis with non-financial considerations and a general conclusion will be made which will contain a summary of the main findings of this report. 1
.1 Tesco’s PLC profile
Tesco PLC (Public Limited Company) is a food retail company which operates in nine markets with 923 stores across the world. It employs more over 240,000 people which sell its products giving access to 260 million people (Tesco PLC., 2014).
Over the past five years, Tesco has expanded from the UK’s supermarkets into new countries with new products and services including a major non-food business. More specifically, the company has started to sell electrical devices, internet shopping, toys, sports equipment, home entertainment, home shop, cook shop and furniture. Also it provides financial services in cooperation with Royal Bank of Scotland serving 3.4 million customers which reveals the company’s intentions to expand in new markets.
The Term Paper on Financial Statement Statements Masb Information
1. Introduction Accounting is often said as the language of business (Lavoie, 1987). As a business language, one of the main functions of an accounting system is to provide information, through periodic reports known as financial statements, regarding the financial position, the results of operations and cash flows of a business entity to assist users of such reports in making decisions. The ...
1.2 J. Sainsbury’s Profile
Sainsbury PLC is engaged in grocery and related retailing. The company’s activities are organised into three segments which are retailing (supermarkets and convenience), financial services (Sainsbury’s Bank), and Property investments (The British Land Company PLC and Land Securities PLC) (Reuters, 2014).
The Company employs around 150,000 people and it operates over 1,000 stores acquiring 572 supermarkets and 440 convenience stores. The Company also acquires an online entertainment company, Global Media Vault Limited and HMV Group plc’s holding in Anobii Limited, a social network and online retailer of e-books.
2. Financial-accounting information and ratios
According to Roger Hussey (Hussey, 1999), the financial accounting information is primarily concerned with communicating a ‘true and fair view’ of the financial performance and financial position of an entity to external parties in accordance with established principles, legal requirements and accounting standards. The general purpose of financial statements is to provide information that is useful to a wide range of users for making economic decisions and assessing the organizational management (IFRS, 2014).
Accounting ratios are related with this information and their purpose is to describe a quantitative relationship between two values permitting the comparison of company’s performance with the previous years, competitors and with the industry benchmarks. Below, profitability, liquidity, working capital control and financial risk ratios will be presented and compared for the two companies providing the appropriate financial information.
2.1 Profitability and efficiency ratios
The main objective of a financial statement analysis is to value a firm’s equity securities which mean that the firm has to ensure its profitability for the future (Mackenzie et al., 2013).
Profitability and efficiency ratios are used by financial information users in order to assess the firm’s operating performance. They provide information about how much profit the firm makes in relation with its sales and how efficiently the business is using its assets to generate revenue.
The Business plan on Ratio and Financial Statement Analysis
This paper analyzes tools used in financial analysis such as ratios. Financial ratio analysis is a judicious way for different stakeholders to use for different goals. This paper demonstrates that financial ratio analysis is an important instrument to estimate resources and their used. It also demonstrates that despite the fact that financial ratio analysis is an excellent tool, it does have ...
2.1.3 Return on capital employed (ROCE) is a financial ratio that measures the percentage return on the total funds employed in the business and shows how effective management is in generating revenue and controlling costs. TESCO plc has slightly a bigger ROCE percentage than its comparable company J. Sainsbury which fact for some people would be irrelevant but if it will be examined in depth it can be comprehended that TESCO company has a better management because it uses more efficiently its capital.
2.1.3 Asset turnover ratio
TESCO GROUP
Asset turnover ratio
£m
Sales revenue
64,826
Capital employed
22,550
Asset turnover (%)
287,47 %
J. Sainsbury
Asset turnover ratio
£m
Sales revenue
23,303
Capital employed
9,580
Asset turnover (%)
243,24%
Asset (or capital) turnover ratio measures how many times the capital employed was turned over during the year to achieve the revenue which fact indicates the efficiency of the company’s deployment of its assets. The above tables show that even though the two companies surpass the rank of one hundred percent which means that their capital employed was turned over at least one time during 2013, TESCO exceeds J. Sainsbury for 44, 23 %. This fact demonstrate that TESCO deploys almost a half time more efficiently its assets than J. Sainsbury and in accounting terms it is explained as 2.87 dollars were generated per dollar of assets 2.2 Liquidity and working capital control
2.2.1 Current ratio
TESCO GROUP
Current ratio
£m
Current assets
13,096
Current liabilities
The Essay on Acid test ratio vs current ratio
The Current ratio and the Acid-test ratio, both fall under the category of financial ratios. These two ratios examine the capability of an organization to pay those creditors, whose debts are below the stipulated period of twelve months. Such short-term debts usually consist of 30 or 60 days credit period. Indeed under the two ratios the Current Liabilities are considered as the debt to be ...
5,889
current ratio x:1
2.22:1
J. Sainsbury
Current ratio
£m
Current assets
1,914
Current liabilities
3,115
Current Ratio x:1
0.61:1
Current ratio is a liquidity ratio that measures the ability of the company to meet its short-term obligations (liabilities) such as debt and payables with its short-term assets such as cash, receivables and inventory. TESCO’s current ratio is estimated to 2.22:1 and it absolutely does not seem to have any liquidity problem in the business in contrast to J. Sainsbury company which current ratio is estimated to 0.61:1. More specifically, these numbers show that TESCO had 2.22 dollars of current assets for each dollar of current liabilities and J. Sainsbury had 0.61 dollars of current assets for every dollar of current liabilities. These results reveal a liquidity problem that J. Sainsbury has which means that the firm can not pay its short term obligations properly. However this does not necessarily mean that the company will be a bankrupt in the near future if it will not pay its short-term liabilities for some small period of time but it is definitely a bad sign of not good financial health and it is required from the company to access more financing sources in order to overcome this problem.
2.2.2 Quick ratio
TESCO GROUP
Quick ratio
£m
Current assets
13,096
Inventories
(3,744)
Current liabilities
5,889
Current Ratio x:1
1.58:1
J. Sainsbury
Quick ratio
£m
Current assets
1,914
Inventories
(987)
Current liabilities
3,115
Current Ratio x:1
0.29:1
Quick ratio is an another liquidity ratio and it is very similar to current ratio but the difference from these two ratios is that quick ratio is more conservative because it shows the relationship between liquid assets (from which the inventory is excluded) and current liabilities in contrast to the other ratio. The results are almost the same except the ratio numbers. TESCO has 1.58 dollars of liquid assets available per one dollar of current liabilities and J. Sainsbury has 0.29 of liquid assets for each dollar of current liabilities. The problem for J. Sainsbury remains the same as the company has a bad finance health because it cannot meet properly its short -term obligations.
The Essay on Current Ratio
1) Current Ratio The ratio is mainly used to give an idea of the company’s ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. 2) Quick Ratio An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ...
2.2.3 Inventory Turnover and holding ratio
TESCO GROUP
Inventory Turnover ratio
£m
Cost of sales
60,737
Inventories
3,744
Inventory Turnover ratio
16.22
J. Sainsbury
Inventory Turnover ratio
£m
Cost of sales
22,026
Inventories
987
Inventory Turnover ratio
22.31
Inventory turnover ratio measures the times that an inventory was sold and replaced over a specific period of time. A low turnover ratio indicates low sales and simultaneously an excess in the inventory of the company which can lead to liquidity problems. On the other hand, a high turnover shows that the firm either has good sales or it implies ineffective buying of its products which mean that the company buys small quantities of product very frequently for a higher price than this that it would get if it would buying bigger quantities leading to a shortage or an inadequate inventory. TESCO during 2013, has turned over its inventory 16.22 times which is 6.09 lesser than J. Sainsbury’s turnover which is estimated to 22.31 times for the same year. This means that in comparison with J. Sainsbury even though that TESCO is a bigger company, in relation with both companies’ capabilities TESCO seemed to have an excess in the inventory which reveals the fact that the company was dropped out from its expectations in contrast to J. Sainsbury. More products in the inventory implies more cost for the firms so both of them and more specifically TESCO have to improve its ability to liquidate its stocks from the inventory.
2.2.4 Inventory holding ratio
TESCO GROUP
Inventory holding period ratio
£m
Inventories
3,744
Cost of sales
60,737
Inventory holding period ratio
22.49 days
J. Sainsbury
Inventory holding period ratio
£m
Inventories
987
Cost of sales
22,026
Inventory holding period ratio
16.35 days
Similarly to the inventory turnover ratio, inventory holding period ratio shows the period of time (days) that stocks were kept in the company’s inventory. A low inventory holding period indicates that stocks that were kept in the inventory were for a small period of time. Accordingly happens when the inventory holding period is high which means that stocks in there are kept for a long period of time. According to Japanese industry statistical website (M&A BANK Co. LTD, 2014), the average inventory turnover for food retail companies such as TESCO and J. Sainsbury, is 34.44 days. The fact that TESCO has a bigger inventory turnover is illustrated in the inventory holding period for both companies. For each inventory turnover, TESCO was keeping its inventory for 22.49 days and J. Sainsbury for 16.35. These results lead to the same conclusions of inventory turnover statements that were mentioned above. 2.2.3 Receivables collection period
The Business plan on Financial Analysis 2
It is always important to have both company background information, and the aid of other analyses such as ratios to help form a complete picture. Income Statement Revenue Sections: From the income statement one of the most visible changes is both strength and a weakness. The jump in Net Sales from FY6 to FY7 (up 33%) is very substantial indicating a growth year for the company and a very positive ...
TESCO GROUP
Receivables collection period ratio
£m
Trade receivables
2,525
Sales revenue
64,826
Receivables collection period ratio
3.89 days
J. Sainsbury
Receivables collection period ratio
£m
Trade receivables
306
Sales
23,303
Receivables collection period ratio
4.79 days
The receivable collection period ratio measures the period of time (days) that the company awaits to collect receivables from its clients. A low receivable collection period indicator shows that the company collects its dues from its clients quickly. If this indicator is too low, then it is understandable that the firm does not offer credit facilities to its clients resulting loss in business. On the other hand, when there is a high receivable collection period indicator it is obvious that the company have some difficulties collecting receivables from its clients. TESCO seems to take its receivables almost one day earlier (3.89 days) than J. Sainsbury (4.79 days) which fact mentions again the difference in the liquidity of these two companies. J. Sainsbury which has a liquidity problem has to collect more efficiently its receivables from customers to empower liquidity as much possible improving its financial position in the market.
The Business plan on Importance Of Financial Ratios
Introduction The main purpose of this report is to analyse importance of different types of financial performances and to compare financial ratios of Chancellors Hotel and Conference Centre with another business in the same industry and industry averages. It is owned by The University of Manchester and it is located in Fallowfield, Manchester, United Kingdom, which is close both to Manchester City ...
2.3 Financial Risk and debt to equity ratio
Financial risk shows the possibility of failure in an investment that an investor would have if he would have invest in a company with debt that would not have meet its financial liabilities (Литовских, 1999).
TESCO GROUP
Debt to equity ratio
£m
Non-current liabilities
14,483
Total equity
16,661
Debt to equity ratio
86.92 %
J. Sainsbury
Receivables collection period ratio
£m
Non-current liabilities
3,846
Total equity
5,734
Debt to equity ratio
67,07 %
Debt to equity ratio measures the percentage that corresponds to debt and equity of a company. A high debt to equity ratio means that the company has developed with a big amount of debt which can lead to big interest and would have an impact on shareholder’s earnings or even it would lead to a bankruptcy in an extreme case. In the above table, TESCO shows a debt to equity ratio estimated to 86.92 % and J. Sainsbury 67.07 % which is lower for 19.85 % in relation with the first company. It is obvious that TESCO in the previous year was aggressively financing its growth than J. Sainsbury which means that the company has many liabilities and it is already on the red line to start facing the consequences of a such high ratio.
3. Users of financial analysis and their information requirements
According to Gokul Sinha (Sinha, 2009), “financial statements are the means of providing information to the various users for their decision making but users are different and accordingly, their needs are also different.” In the below table (Table 1.0) the seven categories of the users of financial analysis will be presented with all of their differing information requirements and potential decisions.
4. The importance of supplementing financial analysis with non-financial statements
Non-financial considerations were always a great tool for companies which had the knowledge how to use them. Christopher Ittner and David Larcker (Christopher Ittner, 2000) have stated that by supplementing financial analysis with non-financial statements, the organization creates a closer link to the long-term strategies of it. More specifically non-financial data make the companies to communicate different informational objectives with
managers, providing them motivation in order to plan long-term strategies in the future. Moreover they referred that some critics argue that intangible assets such as customer loyalty and intellectual capital are the drivers of success for many companies in different industries and they have to pay more attention on these two. Finally, both authors mentioned about the accompanied noise of non-financial data about which the managers must be aware in order to determine how much success they will get if they make their actions which will lead to a maximizing effect on the organizational performance.
5. Conclusion
In conclusion, the profiles and activities of TESCO plc and J. Sainsbury were detailed as well the mean of the financial-accounting information was explained. Furthermore, there were presented two ratios from each of profitability, liquidity, working capital control categories and one ratio that describes the financial risk for both of companies. Afterwards the users of the financial analysis were referred and all of their differing requirements were described. Finally, there was a reference on the importance of supplementing financial analysis with non-financial statements as well as the capabilities of using non-financial considerations.
Bibliography
Christopher Ittner, D.L., 2000. Mastering Management series. Financial Times. Hussey, R., 1999. Oxford Dictionary of Accounting. Oxford: Oxford University Press. IFRS, 2014. IFRS Foundation. [Online] London: IFRS Foundation Available at: http://www.ifrs.org [Accessed 18 April 2014]. Kirk, A., 2014. Chron. [Online] Available at: http://www.chron.com [Accessed 19 April 2014]. M&A BANK Co. LTD, 2014. EDIUNET Industry Avg. [Online] Available at: http://industry.ediunet.jp [Accessed 19 April 2014]. Mackenzie, B. et al., 2013. Wiley IFRS 2013: Interpretation and Application of International Financial Reporting Standards. New Jersey: John Wiley & Sons. Maynard, J., 2013. Financial Accounting, Reporting, and Analysis. Oxford: Oxford University Press. Reuters, 2014. http://uk.reuters.com. [Online] Available at: http://uk.reuters.com [Accessed 18 April 2014]. Sinha, G., 2009. Financial Statement Analysis. New Delhi: PHI Learning Private. Tesco PLC., 2014. Global Sources. [Online] Available at: http://www.globalsources.com
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