Financial Statement presents the financial performance of an organisation over a period of time. It helps the investors and analysts to get to know how the company operates ?, What is their financial position (assets and liabilities)? , What could be the future of the company (by reading the Director's report)?. It is prepared according to the Generally Accepted Accounting Principles (GAAP) of the country in which the organisation operates.
A financial statement usually contains four sections - Balance Sheet, Income Statement, Owner's Equity Statement and Cash Flow Statement.
Balance Sheet is a statement of Assets and Liabilities (financial position) as on a particular date.
Income Statement presents the revenues generated and the expenses incurred over a period of time.
Statement of Owner's Equity captures the movements in the Equity (Fresh Issue and Buy Back) and retained earnings.
Cash Flow statement contains the Operating, Investing and Financing cash flows over a
period of time.
1. ABOUT TESCO
Tesco PLC is a global grocery and retailer which is headquartered in Cheshunt, United Kingdom. It is the grocery market leader in the United Kingdom with a market share of around 30%. Tesco has opened stores in 14 countries across Europe, Asia, North America, Thailand and Malaysia. Tesco has officially announced its intention to enter Indian market as well.
Tesco was founded by Jack Cohen in 1919. The brand name is derived from the first two letters of his own surname and the initials of T.E.Stockwell from whom he has bought tea shipment. After naming the brand, the first store was officially opened in 1929 in Burnt Oak, Edgware, North London. Today, the number stores in UK are 2482 with its 287,669 employees. Tesco has been started focusing on the food and drinks retailer in UK. With time, it has diversified globally and entered into sectors such as electronics, clothing, home, health, financial services (includes banking) , telecom industry and so on.
Tesco's core purpose is to create value for customers to earn their lifetime loyalty. They strongly believe "if the customers like what we offer, they are likely to come back again and shop with us".
Tesco's strategy is well defined and established for its extensive growth. Their strong focus on the strategy has enabled them to fortify their UK businesses and help them to expand their operations in the new markets. Tesco's successes was laid down by its diversification strategy which served as a foundation for its long-term growth. As a result of its diversification strategy it has become profitable and competitive in the new areas of businesses. They has also become the market leader in many of their businesses outside the UK.
The objectives of the strategy are:
To be a successful international retailer.
To grow the core UK business.
To be as strong in non-food as in food.
To develop retailing services - such as Tesco Personal Finance, Telecoms and Tesco.com.
To put community at the heart of what we do.
Tesco has delivered a strong performance amidst strong economic slowdowns both in domestic and internationally. Their business has made a consistent growth by delivering its services for today's customers and also focusing on its future growth. These growth and performance results clearly indicate that their strategy is working very well.
2. ABOUT SAINSBURY'S
J Sainsbury's is the third largest supermarket retailer in the United Kingdom with its head office located in Holborn Circus, City Of London. Sainsbury's has the market share of around 16.1% in the supermarket sector in United Kingdom. John James Sainsbury and his wife Mary Ann founded Sainsbury's in the year 1869. It started as a fresh foods retailer and later became a retailer of packaged grocery items. Sainsbury's tagline stated "Quality perfect, prices lower".
Sainsbury's was very innovative in its business strategy which includes offering its own brand label in their products. The stores' infrastructure was excellent. Emerging as UK's largest grocery group in 1922, Sainsbury's has been incorporated as a private company, "J. Sainsbury Limited".
It has had an enormous growth, became the largest retailer in the UK in 1922 and had its heyday in 1980s. After TESCO overtook Sainsbury's in 2003 and establishment of ASDA, Sainsbury's has been downgraded to third place. Till 20th century, Sainsbury's has been the market leader in the supermarket industry, but after that, TESCO has emerged as the UK's largest supermarket. Sainsbury's also made some successful new ventures, for instance, Sainsbury's bank which is established in partnership with the Bank Of Scotland. By the time TESCO was emerging and introducing new stores, Sainsbury's also repeated the same. It opened Sainsbury's Central in response to TESCO Metro.
The official announcement of Sainsbury's downfall in profit was made in 1996. Certain management changes were made which includes appointment of two new Chief Executives.
In March 2004, Justin King was appointed as CEO. King wanted to get the customer review in order to know what went wrong for the company's poor performance at that time. As a result, he ordered a direct mail customer feedback campaign to around 1 million customers asking them what they need and what went wrong. The problem with the Sainsbury's is the failure of ensuring full stockings on their shelves. Following this, he planned to revive the company's growth by initiating the recovery plan "Making Sainsbury's Great Again" to fix the stock availability problem and to increase the quality of service.
The company has now reported growth in sales for the 19 consecutive quarters as a result of King's Recovery Programme. The latest price cuts and fresh and healthy food offerings helped Sainsbury's to attain this achievement. It is now the world's largest Fair-trade goods by value retailer.
Currently it has 537 supermarkets and 335 other convenience stores (collectively called as hypermarkets). It strongly emphasizes on the higher quality offerings as compared to its arch rivals - TESCO and ASDA.
Their goal is as follows. "At Sainsbury's we will deliver an ever improving quality shopping experience for our customers with great products at fair prices. We will exceed customer expectations for healthy, safe, fresh and tasty food, making their lives easier every day".
3. FINANCIAL RATIO ANALYSIS
Financial ratio analysis guides us in understanding more about the business and accounts. Using ratio analysis, we can get the information on how good the business is operating, how profitable it was in the given period, was the shareholders satisfied on their returns. It also helps to check whether the business of a company is operating well than the other competitors or not and tells us how far the company has improved on its performance when compared to its previous year's performance.
There are many ratios to analyse the financial statements. Some of them are as follows.
Profitability Ratio
Liquidity Ratio
Long-term Solvency Ratio
Investors Ratio
Efficiency Ratio
Now let us analyse the Financial statements of TESCO PLC and SAINSBURYS to find which company is good in terms of each ratios. This analysis also includes analysis of the TESCO's previous year performance with that of SAINSBURY's to get the wider picture of its performance.
3.1. PROFITABILITY RATIO
3.1.1 Gross Profit Margin
Gross profit is the profit we get on every £1 of sales. For e.g., If the gross profit is 20%, it means for every £1 of sales, profit is 20pence. It is the profit we get before excluding the selling costs, administration costs, operating costs and so on. So it is advisable to keep the gross profit figure higher to get more net profit.
Gross Profit Margin =
Profit x 100 %
sales
PROFITABILITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Revenue (Sales)
56910
53898
19964
18911
Gross Profit
4607
4185
1082
1036
Gross Profit Margin (in %)
8.1
7.77
5.42
5.48
Tesco's gross profit margin has seen an increase from 2009 to 2010. This is because of the strategy the company has adopted and the commitment towards it. Tesco has well adapted to the demands of the local market in all its businesses. It has a strong management which focuses on delivering great value for the customers at lower costs. The Tesco Clubcard system may be the reason for its increased sales over the years. Tesco finds out the shopping pattern of the customers, monitors these data and then provides the customers with the most bought products. With the introduction of Double points in the Clubcard, more customers are encouraged to sign up for the Clubcard with which customers spend more than before. Tesco Bank is laying the foundation for Tesco's future growth as it has made a good progress in attracting the customers. Tesco's other services including Tesco Telecom has seen a growth in profit with more than 2 million customers for Tesco mobile.
Sainsburys saw a moderate increase in its profit with just £46million in 2010. But the sales has seen an increase in 2010. Since the launch of 'Making Sainsburys Great Again', Sainsburys has seen a cumulative growth in sales over the past 5 years. It has been a foundation for the success of Sainsburys. It has concentrated on delivering quality, fresh and healthy products which has earned more customers towards Sainsburys. The 'Switch and Save' enables customers to save at least 20% when they choose Sainsbury's label products which are equivalent to the products of leading brands. Sainsburys also concentrated on earning customer loyalty by offering them the Vouchers (Coupon at till technology).
3.1.2 Gross Mark-up
Gross Mark-up can be interpreted in many ways. In most cases it is meant as the difference between the selling price and the cost of the product. It also means how much margin a company quotes for selling a product. In easier terms, If mark-up is 10%, then for every £1 of cost, 10pence is added to make it as selling price £1.10
Gross Mark-up Margin =
Gross Profit x 100%
Cost of sales
PROFITABILITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Gross Profit
4607
4185
1082
1036
Cost of sales
52303
49713
18882
17875
Gross Mark-up in %
8.80829
8.418321
5.730325
5.795804
From the figures above, it is clear that Tesco's mark-up is higher than Sainsburys. Tesco has increased its selling prices in 2010 than in 2009. But Sainsburys' mark-up has seen a fall from 2009 to 2010. Sainsburys is selling at a low price than Tesco. Tesco initially has attracted the customers by offering low prices on goods and services. After it has gained the market share of around 30% in the sector, it felt that it is time to put back the prices to normal. But the customers still have a opinion that Tesco offers low price. This is the major advantage of Tesco to have high mark-up. Sainsburys has reduced its prices and this could be the reason that it has generated more sales over the years.
3.1.3 Operating Profit
Operating profit is the profit that is retained after deducting all the operating expenses. This also tells us how much is spent on operating the company. It is calculated as follows.
Operating profit Margin =
Operating profit x 100%
Sales
PROFITABILITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Revenue (Sales)
56910
53898
19964
18911
Operating profit
3457
3169
710
673
Operating profit margin in %
6.074504
5.879624
3.556402
3.558775
Sainsburys is operating in a better way consistently for the past 2 years as its operating costs are relatively lower than Tesco which is the reason it has made higher net profit. Tesco is operating under higher cost structure which is reducing its net profit inspite of having a higher gross profit margin. Tesco's operating expenses are increasing year by year which is impacted on its net profit. Tesco's increasing operating costs are due to the change of ownership as they are preparing for the expansion. As Tesco has signed a wholesale broadband agreement with Cable & Wireless to offer higher bandwidth speeds at low price, the operating expenses is expected to increase in the coming year.
3.1.4 Net Profit Margin
Net profit is the profit that is retained after all the expenses like operating, administration expenses. It is the amount of net profit earned for every £1 of sales. This is the profit that is left at end for which tax is paid. Sometimes in financial statements, net profit is calculated before interest and taxation and net profit after taxation.
Net Profit Margin
(Before Interest and Tax) =
Profit before tax x 100
Sales
PROFITABILITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Revenue (Sales)
56910
53898
19964
18911
Net profit (Before tax)
3176
2917
733
466
Net profit margin in % (Before Tax)
5.58
5.41
3.67
2.46
Profit for the year in % (PAT)
4.11
3.97
2.93
1.53
Tesco has made a huge profit than Sainsburys. But TESCO's finance cost (Interest paid) is higher than the previous year which means it has saved more tax payable on its profit. Sainsburys' finance costs are 2 times higher in 2010 than its previous year's cost. It has made more tax savings on its net profit than TESCO which is generally good. This indicates Sainsbury's is good in terms of managing its capital (Working capital management). Tesco's 2010 profit is 1.5 times greater than Sainsburys. Tesco has paid more tax on profits and Sainsbury's has made more tax savings.
The administration costs for TESCO is again high in 2010 than its previous year. Since TESCO is dealing with huge stocks and operating in around 2482 stores across UK, it has to face high administration expenses. It also has to compensate its 287,669 employees which ultimately led to its high administration costs. Sainsbury's has made savings on its admin costs as it is just concentrating on attracting the customers with its present 827 hypermarkets in UK. Sainsbury's is not planning to open any new stores to face the administration costs. But nowadays customers approach the stores which are not too far from their areas. TESCO has understood this and opened many stores which is their main competitive advantage over its rivals. If Sainsbury's has to respond to their customer's expectations, it has to open many stores like TESCO did. In that case, Sainsburys may need to recruit more people to provide good service quality which in turn leads to higher compensation costs to its employees.
3.1.5 Return On Capital Employed (ROCE)
Return on capital employed indicates how much profit is earned from the investments made in the business by the shareholders. The interpretation is "If the ROCE is 20%, then for every £1 invested yields 20pence of return."
Return On Capital Employed =
Profit before interest and tax
Sales
Total Capital =
Borrowings + Total Equity
PROFITABILITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Net profit (Before tax)
3176
2917
733
466
Total capital
16210
16377
5039
4530
ROCE
19.59 %
17.81 %
14.55 %
10.29 %
Tesco's return is comparatively higher than Sainsburys. TESCO's rate of return has increased by 2% in 2010 which is generally good from the investor's perspective. But Sainsbury's ROCE has increased dramatically by 4.3% which is a very good news for its investors.
TESCO has issued more shares in 2010 and reduced half of its borrowings. But the profit gained is not proportionate to the additional shares issued. Tesco's ROCE is higher in 2010 despite having marginal increase in its profit. The retained profit for the company is low as it has to pay dividend to its increased number of shareholders. Sainsburys also reduced half of its borrowings but has issued only considerable additional shares and has made 2x profit than its previous year. So it has paid dividends to its additional shareholders which are marginal and retained more of its profit for the company. It clearly shows that Sainsburys' investors are highly satisfied with its performance.
3.1.6 Finance costs
Financial costs is the interest payable to the banks. These are short term and long term liabilities that a company should face if it has borrowed from banks.
DESCRIPTION
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Finance cost
579
478
148
148
Borrowings (Current)
1529
3471
73
154
Total Equity
14681
12906
4966
4376
Finance cost %
1.017396
0.88686
0.741334
0.782613
Finance cost of Tesco is more than Sainsburys in 2010. But the total borrowings of TESCO has become lower in 2010 than the previous year which is generally good. Sainsbury's finance cost is low because it has reduced its borrowings by half. But Sainsbury's long term borrowings are high (refer the balance sheet)and so faces the risk of high interest costs in the forthcoming years despite reducing its interest costs by 0.04% in 2010. Since Sainsbury's profit is huge, it can face the interest costs as it runs on low equity. TESCO may face the interest risks (arises mainly due to long term borrowings) if it continues to increase its number of shareholders whose dividends increases proportionally with the profit thereby reducing the chances on minimising its long term borrowings.
3.2 LIQUIDITY RATIO
Liquidity ratios is important for any business. It tells us whether we have the exact amount of money to meet our liabilities or not. It shows the cash flow in a company. We have two ratios to find out the liquidity of a company.
Current Ratio
Quick / Acid Test Ratio
3.2.1 Current Ratio
Current ratio is often referred as Working Capital Ratio. It is the ratio between the current assets to the current liabilities.
Current Ratio = Current Assets : Current Liabilities
LIQUIDITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Total Current Assets
11765
13479
1853
1591
Total Current Liabilities
16015
17595
2793
2919
CURRENT RATIO (approx)
3 :4
3 :4
2 : 3
0.55 : 1
Sainsburys has bought more assets in 2010 and reduced its net debts by £126 million. It has managed its working capital effectively in 2010 as it is now in a better position to settle its liabilities than in the previous year wherein capital management is not good. This shows that Sainsburys prospects are good in terms of effective capital management which is achieved by reducing the liabilities and maximising their assets.
Tesco has more assets than Sainsburys. But in general both are poor because they are not in a position to meet their current liabilities. Tesco has made its expansion in UK by selling its short term investments. It has used its cash to finance its expansion. It has lost almost £2 billion of its working capital for the sake of its growth despite having more assets in 2009 as compared to its 2008 assets. This has made TESCO in weak working capital position as its liabilities are more than its assets by comparison despite growth in businesses. Tesco has planned to open new premises for its Banking and Insurance operations in Newcastle and Glasgow. This would account in their current assets which should make its position better in mid 2010.
Sainsburys is also planning to open 38 new supermarkets which would definitely accelerate their growth. Sainsbury is strong in asset backing as the estimated current market value of its freehold property estate was £9.8 billion which is an increase of £2.3 billion since last year.
3.2.2 Quick / Acid Test Ratio
The Acid test ratio is also known as Quick or Liquid ratio. This is same as the current ratio wherein stocks are included as assets. But in Quick ratio stocks are not included in the assets. The idea behind this is sometimes stocks are considered as a problem because it has to be sold in order to settle the debts. In supermarket industries, some stocks may sell quickly and some may not.
Quick / Acid Test Ratio = Current assets - stocks : Current Liabilities
LIQUIDITY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Total Current Assets
11765
13479
1853
1591
Total Current Liabilities
16015
17595
2793
2919
Inventories (stocks)
2729
2669
702
195
Quick / Acid test ratio
0.56 : 1
0.61 : 1
0.41 : 1
0.48 : 1
Sainsburys has more liquid assets while Tesco has more stocks. Working capital cost for TESCO is high due to high inventories. TESCO is dealing with huge amount of stocks whereas Sainsburys' stocks are comparatively less. Sainsburys is still concentrating on filling its shelves with stocks and has made huge improvement after its downfall reported officially in the year 1996. When compared to 2009, Sainsburys has improved a lot on filling the shelves in 2010 (increased its stock holdings) and have not emphasized on its liquidity position which is very poor. TESCO's liquidity position has become strong in 2009 as compared to 2008 but it is now in a weaker liquidity position. This is generally not a good thing. But Note that the value of assets that Sainsburys and Tesco hold has increased vertically which makes it feasible to manage in case of any emergency.
3.3 GEARING RATIO
Gearing ratio is the ratio between the total debt capital to the total capital employed. Shareholders are very interested to see the gearing ratio of a company as it gives the relationship between long-term liabilities and the total capital employed. If the company is highly geared, then it indicates that the company operates more on debt capital than equity which is generally considered risky for the investors.
Gearing Ratio = Debt Capital : Total Capital Employed
LONG TERM SOLVENCY RATIO
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Long Term Liabilities
(Non-Current Liabilities)
15327
15063
3096
2738
Total capital employed
(Total Equity)
14681
12906
4966
4376
Gearing Ratio
1.04 : 1
1.16 : 1
0.62 : 1
0.63 : 1
Tesco has minimised its debt capital by 0.8% in 2010 even though it is still in a poor position. It has high debt and new investors will not be happy on seeing these results. TESCO faces the risk of high interest problems and control problems by having high level of long term liabilities. It has minimised its debts by firm control of capital expenditure and better inventory management.
Sainsburys has got better capital structure. This could be one of the reasons for its low tax structure. It also indicates that Sainsburys prefers equity funding to debt funding. New investors will surely be happy as Sainsburys debts were minimised considerably and its other ratios were fine too.
However Sainsburys debts tend to increase to around £1.9 billion due to increased capital expenditure as it has planned to increase its space in 2 years to March 2011.
3.4 INVESTOR RATIOS
3.4.1 Earnings per Share (EPS)
This is the fundamental ratio for an investor. This expresses profit earned per share issued. This ratio is important that there is an International Accounting Standard 33 (IAS 33) specifically requiring companies to report their EPS figures in their financial statements.
Earnings per Share =
Earnings
No.of.Shares issued
INVESTOR RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Weighted Avg no of shares
7933
7859
1821.7
1738.5
Profit
2327
2133
585
289
EPS ( in pence)
29.33
27.14
32.1
16.6
TESCO's EPS has increased by 2 pence as compared to its last year. The number of shares issued has increased by 74 million whereas profit has increased only marginally. So the profit available to the shareholders is relatively less.
Sainsbury's EPS has almost doubled over the 2 years and the number of shares issued has increased by 83.2 million. Also the profit has also doubled during this financial year. Hence profit available to the shareholders is significantly too high (from £289 million to £585 million). The main reason for the EPS of Sainsburys show 93.4% increase is primarily due to the surplus on joint venture (JV) property valuations. The shareholders would be very happy on Sainsburys' performance since it is operating , controlling and managing the capital in a very efficient way. This also clearly indicates high growth prospects of Sainsbury's in the future which would mark a rise in its market share.
3.4.2 Price - Earnings Ratio (PE Ratio)
PE Ratio =
Current Market Share Price
EPSThe Price-Earnings ratio is calculated to project the future prosperity of a company. It acts as an important ratio for an investor which tells him how the future business is going to be - whether good or bad. Investor expects this ratio to be high as EPS is past accounted whereas PE ratio is calculated using the current market share price.
INVESTOR RATIOS
TESCO
SAINSBURYS
In Pence
In Pence
In Pence
In Pence
Year 2010
Year 2009
Year 2010
Year 2009
EPS
29.33
27.14
32.1
16.6
Market price per share
(as on 10/11/2011)
429.65
429.65
391.5
391.5
P/E Ratio
14.64882
15.83088
12.19626
23.58434
The PE ratio of Tesco has decreased marginally while Sainsburys has seen a drastic downfall. This is certainly not a good thing for the investors. But the PE ratio is uncertain as they are just estimates of the future. Though it is considered important for the future cash flows, it is also advisable to look at the historical PEs also as they are known with high degree of certainty. From the above figures, Sainsburys have a dramatic decrease in its PE ratio which would make the investors think twice before investing.
3.4.3 Dividend Per Share (DPS)
Dividend per share is the amount of dividend paid to the shareholders from the profit.
DPS =
Dividend declared
No. Of. Equity Shareholders
INVESTOR RATIOS
TESCO
SAINSBURYS
£ million
£ million
£ million
£ million
Year 2010
Year 2009
Year 2010
Year 2009
Proposed Dividends Declared
731
662
189
167
Weighted Avg No Of Shares (millions)
7933
7859
1821.7
1738.5
Dividend Per Share (in pence)
9.16
8.39
10.2
9.6
Since Tesco is still in a poor position in terms of its liabilities, it is paying acceptable dividends on its profit. Sainsburys is paying less dividends even though it is in a better position. It has retained almost 3/4 of its profit for its future growth. But the shareholders will not be satisfied with this action as Sainsburys may lose its shareholders which may have an impact on its working capital.
3.5 EFFICIENCY RATIOS
3.5.1 Inventory Turn Over Ratio
This ratio tells us how well the inventories are controlled. It expresses the length of time the inventories stays in stocks. The formula for this ratio is
Inventory Days =
Average Inventory x 365 days
Cost of Sales
EFFICIENCY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Cost of Goods sold
(Cost of Inv as expense)
42504
40779
15192
14490
Average Inventory
(Assuming opening & closing stocks are equal)
2729
2669
702
689
Inventory days
23.43
23.89
16.86
17.35
Tesco's inventory turnover days is 23 days which is not too bad for a supermarket retailer. Since cost of sales is also increasing with the number of days the stocks are held, Tesco may have to face stock liquidation problems in case of an emergency. It could have reduced its turnover days to maximise its profit as it directly impacts on the cost of sales.
Sainsbury's has improved marginally in liquidating its stocks which is really a must for a supermarket. This means that it can use the money that is held up with the stocks on other activities as it has minimised its investment on stocks. This is generally a good thing. This ratio also tells us that Sainsburys' stocks are liquidated quickly than that of Tesco.
3.5.2 Debtor Days / Receivable Days
This ratio shows the length of time the debtors take to settle their debts. It is as important as stock control. Generally businesses need to sell their services or products on credits. If they do not provide such an option, they might lose their customers as the competitors attract them by offering such facilities. So it is essential to maintain the debtors as optimally as possible.
Debtors Days =
Trade Debtors x 365 days
Credit Sales
EFFICIENCY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Credit sales
(Assume all sales are credit sales)
56910
53898
19964
18911
Avg receivables
(Trade Receivables)
652
659
114
107
Debtors days
4.18
4.46
2.08
2.06
TESCO is providing 4 days to its debtors to repay them whereas Sainsbury's provide only 2 days. This is generally good from the company's perspective but not so good from the customer's perspective. Sainsbury's may face the customer switching risk if it continues to provide only 2 days repayment period. Here Tesco is controlling its debtors efficiently even though Sainsbury's offers only 2 days. In spite of allowing 2 days credit to its debtors, Sainsbury's has given more credit to its customers whereas Tesco has reduced its credit offerings marginally.
3.5.3 Creditors Days
Creditors are those who provide credit facilities to the company. The longer the credit days is better. Mostly the creditors for a supermarket are suppliers (Inbound Logistics).
Creditors Days =
Trade Creditors x 365 days
Credit Sales
EFFICIENCY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Avg payables
(Trade receivables)
5084
4748
1782
1728
Purchases
(Assuming opening & closing stock are equal)
42504
40779
15192
14490
Creditors days
43.7
42.5
42.8
43.5
Tesco is taking more time to pay its creditors than its previous year. This is because Tesco is handling huge volume of stocks and this may be the reason the creditors may have given extra credit days to Tesco. If Tesco demands more credit days from its suppliers by domination, it would have to face the suppliers risk whereby they may prefer other companies. If the supply has been cut, then the entire business will go down, just in case. Whereas Sainsburys has been given 1 day less to pay their creditors. But the creditors days are stable for both Tesco and Sainsburys and the difference can be considered negligible.
3.5.4 Asset Turn-Over Ratio
This ratio shows the amount of sales generated for every £1 invested in the total assets. It measures the efficiency of the assets employed in generation of sales.
Asset turnover ratio =
Revenue x 100
Total Assets
EFFICIENCY RATIOS
TESCO
SAINSBURYS
£ millions
£ millions
£ millions
£ millions
Year 2010
Year 2009
Year 2010
Year 2009
Turn Over (Sales)
56910
53898
19964
18911
Total Assets
46023
45564
10855
10033
Asset turnover ratio (in %)
1.24
1.18
1.84
1.89
Both TESCO and Sainsbury's have invested more on their assets as compared to 2009. Sainsbury's ratio has slightly fallen down as it has made more investments in its assets which are yet to generate the sales. Sainsburys have recently acquired 33 stores from Somerfield and Co-op which in turn is yet to generate sales. This ratio may also see a rise due to the planned expansion of Sainsburys' space which is expected in March 2011. This expansion is expected to contribute around 2.5% to the total sales growth.
Tesco's ratio has increased by 0.05% in spite of investments in its assets. This is because it has generated more sales as it clearly indicates that TESCO is further expanding its territory for its future developments. But Tesco is now concentrating on retailing services such as Tesco Bank, Tesco Telecom and other non-food services as well as Core UK businesses.
4. LIMITATIONS OF FINANCIAL STATEMENTS
Financial statements are based on the past data and is accounted for the past. It is useful in predicting the future which cannot be accurate.
Financial statements are only quantitative and not qualitative.
Certain quality factors are left out in the financial statements like reputation, customer loyalty as they cannot be quantified.
Only financial factors are considered and future is projected with financial statements. The other factors such as economic, political and social factors which are also responsible for the business are omitted.
The instability of money (Inflation) is the most vital limitation of the financial statements.
While projecting the future of the business, certain assumptions are made to analyse and compare the business with the suitable and close competitor.
