In this report, financial position and achievements of Tesco plc is compared and adverted with its close competitor J. Sainsbury plc for the three financial years 2008-2010 as listed on the London Stock Exchange. To find out which company is better for investment, we will carry out vertical and horizontal analysis.
Conclusion will be drawn in the end after analyzing the companies individually on the basis of analysis. We are stressing upon performance and profitability indicators which will help to find out which company is better for investment. We also have stressed upon the indicators of sound financial position such working capital management, liquidity and solvency.
J SAINSBURY plc
The following exhibits show the horizontal and vertical analysis of J. Sainsbury's financial position:
J Sainsbury
Vertical Analysis of Income Statement
Year
2010
2009
2008
Revenue
100.00%
100.00%
100.00%
Cost of sales
-94.58%
-94.52%
-94.38%
Gross Proï¬t
5.42%
5.48%
5.62%
Administrative expenses
-2%
-2.22%
-2.81%
Other income
0.14%
0.30%
0.17%
Operating Proï¬t
3.56%
3.56%
2.97%
Finance income
0.16%
0.27%
0.47%
Finance costs
-0.74%
-0.78%
-0.74%
Share of post-tax loss from joint ventures
0.69%
-0.59%
-0.01%
Proï¬t before taxation
3.67%
2.46%
2.69%
Income tax expense
-0.74%
-0.94%
-0.84%
Proï¬t for the ï¬nancial year
2.93%
1.53%
1.84%
Profitability and Performance:
It can be concluded from above analysis that company is operating in a saturated market. The cost of goods is consuming more than 90% of sales revenue resulting in generation of 5-7% of gross profit. The company is earning negligible profit of 1.8% - 3% on sales revenue in three years while other expenses are of no consequences.
As sales growth is equal to average rate of inflation, so we can observe from horizontal analysis of income statement shown below that the market is not growing and there is no real growth in sales. This also shows that profit figures of financial year 2008-2009 have decreased eventually.
J Sainsbury
Horizontal Analysis of Income Statement
2010-2009
2009-2008
Revenue
5.56%
6.02%
Cost of sales
5.63%
6.18%
Gross Proï¬t
4.44%
3.39%
Administrative expenses
-5%
-16.33%
Other income
-52.63%
90.00%
Operating Proï¬t
5.49%
26.98%
Finance income
-36.53%
-37.35%
Finance costs
0.00%
12.12%
Share of post-tax loss from joint ventures
24.32%
5450%
Proï¬t before taxation
57.29%
-2.71%
Analyzed as:
Underlying Proï¬t before tax
12.33%
11.27%
Proï¬t on sale of properties
-53.63%
714.29%
Investment property fair value movements
-0.80%
0.00%
Financing fair value movements
50.00%
150.00%
One-off items
0.00%
-100.00%
57.29%
-2.71%
Income tax expense
-16.38%
18.00%
Proï¬t for the ï¬nancial year
102.42%
-12.16%
Even though the sales seems to grow from 4% - 6.02% in the financial year 2008-2009 but has decreased from 6.02% - 5.56% in 2009-2010. The gross profit percentage has decreased from 5.62% to 5.48% during the year 2008-2009 and from 5.48% to 5.42% in the year 2009-2010. Contrary the operating profit has increased during 2008-2009 from 2.97% to 3.56% and has remained constant during the time period of 2009-2010. This shows that the profitability of the company has risen during the above mentioned financial year. In order to remain profitable the company needs to control its costs as company is already in a saturated market.
According to the operating profit trend, return on capital employed shows an increase in 2008-2009 and is constant in 2009-2010.
Financial Position
The financial position of a company is equally important as its functioning. We can observe the increase and decrease of different balances over the period of last three years from the trend analysis of balance sheet demonstrated below.
J Sainsbury plc
Balance Sheet Trend Analysis
2010-2009
2009-2008
Non-current assets
Property, plant and equipment
4.88%
5.35%
Intangible assets
-10.00%
-3.03%
Investments in subsidiaries
-
-
Investments in joint ventures
55.90%
94.59%
Available-for-sale financial assets
54.63%
-8.49%
Other receivables
-20.00%
-18.18%
Derivative financial instruments
-35.48%
31.00%
Deferred income tax asset
-
-
Retirement benefit asset
-495.00%
00.00%
6.63%
0.58%
Current assets
Inventories
1.88%
1.17%
Trade and other receivables
10.25%
-5.34%
Derivative financial instruments
-27.12%
1375.00%
Cash and cash equivalents
33.49%
-12.80%
14.45%
-2.48%
Non-current assets held for sale
166.67%
-81.25%
16.46%
-7.61%
Total assets
8.19%
-0.81%
Current liabilities
Trade and other payables
-0.88%
9.12%
Borrowings
-52.95%
-6.67%
Derivative financial instruments
-26.78%
833.33%
Taxes payable
-0.99%
5.76%
Provisions
-31.57%
90.00%
-4.31%
10.07%
Net current liabilities
-21.21%
42.80%
Non-current liabilities:
Other payables
15.21%
3.37%
Borrowings
8.62%
6.87%
Derivative financial instruments
-75.00%
-55.56%
Deferred income tax liability
51.57%
-70.40%
Provisions
15.78%
-9.52%
Retirement benefit obligations
36.24%
-309.00%
13.07%
8.31%
Net assets
13.48%
-11.33%
Equity
Called up share capital
6.18%
0.40%
Share premium account
13.64%
1.45%
Capital redemption reserve
-
-
Other reserves
26.70%
-138.66%
Retained earnings
19.62%
4.69%
Total equity
13.48%
-11.33%
Liquidity and Solvency:
In order to know the ability of a company to handle its short-term liabilities, current and quick ratios are calculated. A current ratio of minimum 1 is required for this purpose, but in the case of this company it is far beyond the edge in all of the years which are being reviewed.
For the purpose of obtaining finance, good solvency indicators such as debt ratio, interest earned should be kept by the company. But these are declining which is not good for the company.
Working Capital Management:
Company's execution in selling its inventory and then receiving the debts out are calculated by inventory turnover ratio and debt turnover ratio. These ratios help in knowing that how good a company is administrating its working capital.
The inventory turnover ratio of the company is good and steady which has remained 13.45 days, 14.07 days, and 14.76 days in 2010, 2009 and 2008 respectively. This ratio shows that the company has most favorable quantity of its inventory which are really fast moving.
The company is not executing the receivables efficiently as indicated by debt turnover ratio which has been constant in the range of 3-4. The company should improve the ratio by collecting its debts more often.
TESCO plc
Now we move towards the analysis of the other company, the Tesco plc. In the following exhibits are the vertical and horizontal analyses for Tesco plc. The financial position of the company is analyzed by the following observations.
Tesco plc
Vertical Analysis of Income Statement
53 weeks ended 28 February 2009
2010
£m
2009
£m
2008
£m
Continuing operations
Revenue (sales excluding VAT)
56,910
100.00%
54,327
100.00%
47,298
100.00%
Cost of Sales
(52,303)
-91.90%
(50,109)
-92.24%
(43,668)
-92.33%
Pensions adjustment - Finance Act 2006
-
0.00%
-
0.00%
-
0.00%
Impairment of the Gerard's Cross site
-
0.00%
-
0.00%
-
0.00%
Gross profit
4,607
8.09%
4,218
7.76%
3,630
7.67%
Administrative expenses
(1,527)
-2.68%
(1,248)
-2.30%
(1,027)
-2.17%
Profit arising on property-related items
377
0.66%
236
0.43%
188
0.40%
Operating profit
3,457
6.07%
3,206
5.90%
2,791
5.90%
Share of post-tax profits of joint ventures and associates
33
0.05%
110
0.20%
75
0.16%
Profit on sale of investments in associates
-
0.00%
-
0.00%
-
0.00%
Finance income
265
0.46%
116
0.21%
187
0.40%
Finance costs
(579)
-1.01%
(478)
-0.88%
(250)
-0.53%
Profit before tax
3,176
5.58%
2,954
5.44%
2,803
5.93%
Taxation
(840)
-1.47%
(788)
-1.45%
(673)
-1.42%
Profit for the year from continuing operations
2,336
4.10%
2,166
3.99%
1,881
2,130
Discontinued operation
Profit for the year from discontinued operation
-
0.00%
-
0.00%
-
0.00%
Profit for the year
2,336
4.10%
2,166
3.99%
2,130
4.50%
Performance and Profitability:
The financial situation of this company is almost same as of J. Sainsbury which is because both belong to the retail industry. Again, more than 90% of revenue is the cost of goods. The gross profit percentage is a little bit better than that of its competitor which is accounted around 7%. The operating profit of the company is more than J. Sainsbury which is approximately 5-6% and other expenses are minor. The trend analysis are exhibited below:
Tesco plc
Horizontal Analysis of Income Statement
2010-2009
2009-2008
Revenue (sales excluding VAT)
4.75%
14.86%
Cost of Sales
4.30%
14.75%
Pensions adjustment - Finance Act 2006
Impairment of the Gerrards Cross site
Gross profit
9.20%
16.20%
Administrative expenses
22.35%
21.52%
Profit arising on property-related items
59.75%
25.53%
Operating profit
7.82%
14.87%
Share of post-tax profits of joint ventures and associates
-70.0%
46.67%
Profit on sale of investments in associates
0.00%
0.00%
Finance income
128.44%
-37.97%
Finance costs
21.12%
91.20%
Profit before tax
7.51%
5.39%
Taxation
6.59%
17.09%
Profit for the year from continuing operations
7.84%
1.69%
Discontinued operation
-
-
Profit for the year from discontinued operation
-
-
Profit for the year
7.84%
1.69%
According to the above analysis, profit has increased by 1.7% in 2008-2009 and by an optimum sum of 7.84% in the year 2009-2010. The administrative expenses have increased in 2009 and 2010 because of the decline income by the properties.
Tesco Plc
Balance Sheet Trend Analysis
27 February 2010
2010-2009
£m
2009-2008
£m
Non-current assets
6.77%
34.45%
Current assets (including non-current assets held for sale)
-12.71%
113.95%
Current liabilities
-8.97%
71.44%
Net current liabilities
3.25%
3.86%
Total assets less current liabilities
7.29%
40.54%
Non-current liabilities
1.75%
88.31%
Net assets
13.75%
8.43%
Equity attributable to owners of the parent
13.59%
8.75%
Minority interests
49.12%
-34.48%
Total equity
13.75%
8.43%
Financial Position:
The liquidity situation of the company is not as much as observed in the current ratio which is critically low. These ratios require more attention even they are increasing from 2008 to 2010.
Debt ratio is the indicator of long-term financial stability, it shows a major growth of debt in balance sheet over the years which should be controlled to remain constant financially.
Working Capital Management:
In this company, the inventory is turning over more rapidly as compare to the other one debtor's turnover ratio has increased in accounts receivable. From above analysis, it is clear that the financial situation of Tesco Plc is better than J. Sainsbury.
Conclusion
We can observe from the analysis carried out above that the situation of the market is saturated and possibilities of earning super profit are minuscule. More than 90% of revenue is spend on the cost of goods sold by both the companies which result in the gross profit of 5-8%. In order to increase the profitability in this situation, the cost should be controlled.
But Tesco is better option for investment due to following reasons:
It is generating a little higher gross profit;
It has kept non-merchandizing costs at minimum;
It is paying higher dividends;
It is showing faster growth
Both companies have significantly high debt ratio and low current ratio as well as quick ratio which show that the financial position of none of these companies is impressive.
