task 1

FINANCIAL STATEMENT ANALYSIS SUBMITTED BY- MODINA MONIR SAFA

SUBMITTED TO- CHRISTINE HARROP-GRIFFITHS

SUBMISSION DATE 09-03-2011

TABLE OF CONTENTS

INTRODUCTION…………………… ………………………………………………… 3

TESCO PLC……………………………………………………………………………3 Company history……………………………………………………………………..3 Formation……………………………………………………………………………3 Products and services………………………………………………………………..4 J SAINSBURY…………………………………………………………………………4 Company history…………………………………………………………………….4 Formation…………………………………………………………………………. .4 Products and services…………………………………………………………….... 5

PROFITABILITY RATIOS: ........................................................................................................5

1. RETURN ON CAPITAL EMPLOYED .............................................................................. 5

2. RETURN ON EQUITY ..................................................................................................... 6

3. GROSS PROFIT MARGIN .............................................................................................. 7

4. MARK UP RATIO : ........................................................................................................ 8

5. NET PROFIT RATIO(NPBIT): ..................................................................................... 9

CONCLUSION OF PROFITABILITY…………………………………………… 10LIQUIDITY RATIOS: ..............................................................................................................10

1. CURRENT RATIO ..................................................................................................... 10

ACID TEST RATIO: .......................................................................................................... 11

CASH FLOW RATIOS: ...........................................................................................................12

1. CASH FLOW ADEQUACY (CASH COVER): ............................................................ 13

2. QUALITY OF PROFITS: ............................................................................................ 13

3. OPERATING CASH CYCLE: ..................................................................................... 14

CONCLUSION OF CASH FLOW…………………………………………………… 14EFFICIENCY RATIO: .............................................................................................................14

1. INVENTORY TURNOVER RATIO ............................................................................. 15

2. INVENTORY DAYS: .................................................................................................. 15

3. NON – CURRENT ASSETS TURNOVER: .................................................................. 16

4. ASSET TURNOVER ................................................................................................... 17

5. TRADE RECEIVABLE COLLECTION PERIOD (DEBTOR DAYS) ............................ 17

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6. TRADE PAYABLE PAYMENT PERIOD (CREDITOR DAYS) .................................... 18

INVESTMENT RATIO: ............................................................................................................19

1. DIVIDEND PER SHARE: ............................................................................................ 19

2. DIVIDEND YIELD: .................................................................................................... 19

3. EARNINGS PER SHARE ............................................................................................ 20

4. PRICE EARNING: ..................................................................................................... 20

INVESTMENT CONCLUSION…………………………………………………………...21

GEARING RATIOS: ................................................................................................................21

1. GEARING (D/E) ........................................................................................................ 21

2. GEARING (D/D+E) …………………………………………… 213.INTEREST COVER……………………………………………… 22

VERTICAL ANALYSIS……………………………………………………… .. 22

TREND ANALYSIS………………………………………………………………………… 25

PYRAMID OF RATIO ………………………………………………… …… 28

SEGMENTAL ANALYSIS ………………………………………………………… 32

FURTHER RESEARCH ………………………………………………………..36

LIMITATIONS OF RESEARCH………………………………………………… 36

APPENDIX ………………………………………………………………………… 36

REFERENCES ………………………………………………………… 41

BIBLIOGRAPHY ……………………………………… 41

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Introduction:I have selected group one from the company list. In group one the companies were Tesco plc and J Sainsbury plc. I studied them in details of their past three years’ financial statements. Task one involves a numerical analysis of Tesco Plc and J Sainsbury Plc. The performance of both companies for last three years is compared with each others. Financial ratio analysis, segmental analysis , trend and vertical analysis are used to compare their financial position and also strengths and weaknesses. These wil be helpful for investors providing better investment opportunity. The report represents it position in the industry through graphs.

TESCO PLC

Company History: Tesco plc is one of the largest retailers in the world, operating more than 2,300 supermarkets and convenience stores and employing 326,000 people. Tesco's core business is in Britain, where the company ranks as the largest private sector employer in the United Kingdom and the largest food retailer, operating nearly 1,900 stores.

Formation:

Tesco was founded by Jack Cohen in 1919 when he began to sell surplus groceries from a stall in East London. He then went on to open the first Tesco store in Edgware, North London and Tesco Stores Limited became a private limited company shortly after in 1932.

The growth of Tesco steadily rose through the decades and in 1979 annual sales reached £1 billion and then £2 billion in 1982. In 2005 the company announced annual profits of £2 billion.

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During the 90s Tesco launched many new initiatives that saw the company do even better. These included the Tesco Clubcard, 24 hour trading, the first Extra store in Essex and the first Tesco Express store. It launched new ranges such as its Organic range of food and Tesco Value products. It also entered new countries such as Hungary, Poland, Czech Republic, the Republic of Ireland and South Korea.PRODUCTS AND SERVICES:

Products and cervices include –Store types- extra superstores, express metro , Tesco.com

Store offerings-food retail , non food retail, petrol station, home living range.

Tesco personal finance-life insurance, pet insurance, home insurance, travel insurance, motor insurance, saving accounts , personal loans, security investments bonds .

J SAINSBURY:

COMPANY HISTORY

J Sainsbury plc, widely known in its home nation as Sainsbury's, is one of the largest operators of supermarkets in the United Kingdom. There are about 440 Sainsbury's stores in the United Kingdom, the largest of which stock more than 23,000 products; 40 percent of the items carry the Sainsbury's brand. The Sainsbury's chain was once the largest U.K. food retailer, but in the stiffly competitive 1990s Tesco PLC pulled into the lead while ASDA Group Limited, which was purchased by U.S. giant Wal-Mart Stores, Inc. late in the decade, began threatening to drop Sainsbury's to number three. J Sainsbury also owns nearly 170 supermarkets in the northeastern United States operating under the Shaw's and Star Markets names, while Sainsbury's Bank is a joint venture with the Bank of Scotland that runs in-store banks in the United Kingdom offering basic savings accounts, bonds, personal loans, mortgages, and other consumer-oriented financial products. In late 2000 the company was in the process of disposing of two other holdings: the Homebase chain of nearly 300 do-it-yourself (DIY) home centers located throughout the United Kingdom and an 80 percent stake in Sainsbury's Egypt, a chain of more than 100 supermarkets and neighborhood stores in and around Cairo. The founding Sainsbury family still maintains a 30percent stake in the company.

FORMATION

Sainsbury's was off to a romantic but practical start in 1869 when two young employees of neighboring London shops met, married, and started a small dairy store in their three-story Drury Lane home. Mary Ann Staples, 19, had grown up in her father's dairy

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business. John James Sainsbury, 25, had worked for a hardware merchant and grocer. Their shop was a success from the start, as both John and Mary Ann had the business knowledge and capacity for hard work that it took to win the loyalty of the local trade. Their passion for order, cleanliness, and high-quality merchandise made the shop an inviting place, in contrast to the prevalent clutter of many tiny family-owned shops and the insanitary conditions of the street vendors' stalls and carts.

Seven years later the Sainsburys opened a second shop in a newly developed section of town and moved into the upper portion of the building. Within a few years, they had opened several similar branches, planning to have a shop for each of their sons to manage when he grew up. By the time their six sons were adults, the branches far outnumbered them. Yet caution has always been characteristic of Sainsbury expansion; they regularly passed up opportunities to buy groups or chains of stores, preferring to develop each new store independently.

The passion for high quality led them to a turning point in 1882, when they opened a branch in Croydon.

PRODUCTS AND SERVICES:

J Sainsbury plc consists of Sainsbury's – a chain of 547 supermarkets and 343 convenience stores – and Sainsbury's Bank.

- Sainsbury’s supermarkets

-Sainsbury’s inline

-Sainsbury’s property

-Sainsbury’s bank

-Sainsbury’s pharmacy.

PROFITABILITY RATIOS:Management use profit as a performance measure, the analysis of profit is also of vital concern to share holders as they derive revenue, in the form of dividends. Profits are also important to creditors, as they are one source of funds for dept coverage.

(Source: Gibson, C.H. 1995)

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1. RETURN ON CAPITAL EMPLOYED (+ LONG TERM BORROWING)Introducing long term borrowing into the dominator allows us to asses how well management is using funds as well as long term debt to generate profit.

Return on Capital Employed 2010 2009 2008Tesco PLC 13.20% 12.96% 16.06%J Sainsbury PLC 11.58% 8.57% 7.57%

0.00%

5.00%

10.00%

15.00%

20.00%

ROCE

J Sainsbury plc

Tesco plc

J Sainsbury plc 11.58% 8.57% 7.52%

Tesco plc 13.20% 12.96% 16.06%

2010 2009 2008

J sainsbury plc’s ROCE has been increasing over the past three years. though tesco’s ROCE is also increasing it is greater than j Sainsbury . tesco is using their funds more efficiently than j Sainsbury.

2. RETURN ON EQUITYThis ratio measures the return to shareholders after subtracting from revenues not only operating expenses but also financing costs. Therefore, the return on equity expresses the results of firms operating, investing and financing decisions altogether.

(Stickney, C.P. &Brown, P. R 1999)

Return on Equity 2010 2009 2008Tesco PLC 15.91% 16.56% 17.94%

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J Sainsbury PLC 11.7% 6.60% 6.66%

ROE

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2008 2009 2010

J Sainsbury plc

Tesco plc

The ROE is decreasing of Tesco plc over the last three years , though this return is still adequate compared to that of Sainsbury’s. further research can be carried in task 2 to find reasons .

3. GROSS PROFIT MARGIN

The ratio helps: Manager budget gross profit levels into their predictions of profitability Cost control Auditors judge the accuracy of accounting system

(Gibson, C. H. 1995)Gross Profit Ratio 2010 2009 2008Tesco PLC 8.09% 7.76% 7.67%J Sainsbury PLC 5.41% 5.47% 5.62%

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0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Gross profit margin

J SainsburY plc

Tesco plc

J SainsburY plc 5.41% 5.47% 5.62%

Tesco plc 8.09% 7.76% 7.67%

2010 2009 2008

Tesco plc have seen an increase in their gross profit margin over the previous three years this also indicates a decrease in the risk for shareholders. Sainsbury’s figures are worryingly low and further research will be carried out to determine why they are much lower than tesco plc.

4. MARK UP RATIO

This measures the amount of profit added to the cost of goods sold. This varies greatly from industry to industry. Retail supermarkets will operate on a relatively low mark-up whereas businesses which specialize in large, infrequent sales will have a high mark-up.

Markup Ratio 2010 2009 2008Tesco PLC 8.80% 8.41% 8.31%Jsainsbury PLC 5.73% 5.79% 5.95%

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0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Mark up

J SainsburY PLC

Tesco plc

J SainsburYPLC

5.73% 5.79% 5.95%

Tesco plc 8.80% 8.41% 8.31%

2010 2009 2008

The mark up ratio of Tesco plc has been increasing over the last three years. But the case is different in j Sainsbury. It is having decrease in mark up ratio. It may due to the cost of sales was high.

5.NET PROFIT MARGIN (NPBIT)This ratio gives a measure of net income generated by revenue.

Net Profit Margin 2010 2009 2008Tesco PLC 6.13% 6.08% 6.05%Jsainsbury PLC 4.24% 2.97% 2.96%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Net profit margin

J SainsburY PLC

Tesco PLC

J SainsburYPLC

4.24% 2.97% 2.96%

Tesco PLC 6.13% 6.08% 6.05%

2010 2009 2008

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Both Tesco plc and j sainsbury’s net profit margin has consistently increased over the last three years, this may be due to there has been no significant change in cost of goods sold and an increase on operating profit.

Conclusion on profitability:Overall tesco plc is more profitable than sainsbury’s though siansbury’s NPBIT is increasing over the last three years. Issues that are highlighted for further research are-Siansbury’s low gross profit than tesco in 2010 and a sudden decrease in sainsbury’s return on capital employed in 2008.

LIQUIDITY RATIOS:Liquidity relates to the capacity of a business to pay its short- term depts. As they become due. Therefore, the focus is on the relationship between current assets and current liabilities. (O’Regan, P. 2007)

It provides information on a company’s ability to meet it’s short term , immediate obligations.

1. CURRENT RATIO

it indicates a company’s ability to satisfy its current liabilities with its current assets.

Current Ratio 2010 2009 2008Tesco PLC 0.73:1 0.76:1 0.60:1J Sainsbury PLC 0.66:1 0.54:1 0.64:1

10

0

0.2

0.4

0.6

0.8

Current ratio

J SainsburY PLC

Tesco PLC

J SainsburY PLC 0.73 0.76 0.6

Tesco PLC 0.66 0.54 0.64

2010 2009 2008

Traditionally the current ration is preferred to be 2:1, both companies are considerably lower than the norm. this may be considered that they don’t have enough capabilities to cover their liabilities.

2.ACID TEST RATIO:Sometimes it is appropriate to exclude inventory form the equation on the grounds that this will often take a considerable time to translate into cash.

(O’Regan, P. 2007)Acid test Ratio 2010 2009 2008Tesco PLC 0.56:1 0.61:1 0.37:1J Sainsbury PLC 0.41:1 0.30:1 0.39:1

0

0.2

0.4

0.6

0.8

Acid test ratio

J Sainsbury plc

Tesco PLC

J Sainsbury plc 0.41 0.3 0.39

Tesco PLC 0.56 0.61 0.37

2010 2009 2008

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Tesco’s figure decreased in 2010.but it’s significant increase in 2009 could be looked into further to find reasons for this. j Sainsbury’s ratio is in increase in 2010.

Liquidity conclusion: J Sainsbury is showing an increase in liquidity from the previous year .tesco plc’s liquidity gives us more concern as it is declining.

CASH FLOW RATIOS:Analysis of information included in the cash flow statement can often provide important additional insights into the liquidity position

(O’Regan, P. 2007)1. CASH FLOW ADEQUACY (CASH COVER):

Cash flow adequacy is a measure of the capacity of funds generated by trading to cover payment such as creditors, dividends and short- term dept without having to seek recourse to other sources of funds.

(O’Regan, P. 2007)

Cash Flow Adequacy(cash cover) 2010 2009 2008Tesco PLC 0.29:1 0.22:1 0.32:1J Sainsbury PLC 0.36:1 0.31:1 0.30:1

0

0.1

0.2

0.3

0.4

Cah flow adequacy(cash cover)

J Sainsbury plc

Tesco PLC


Tesco PLC 0.36 0.31 0.3

2010 2009 2008

Both company’s figures are low. This means they don’t have enough capability to cover current liabilities. Further research can be carried out to find reasons why their results are low.

2. QUALITY OF PROFITS:

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This ratio provides a measure of the businesses ability to generate cash from its trading activity

(O’Regan, P. 2007)Quality of profits 2010 2009 2008Tesco PLC 1.37:1 1.24:1 1.19:1J Sainsbury PLC 1.41:1 1.36:1 1.53:1

0

0.5

1

1.5

2

Quality of profit

tesco PLC

J Sainsbury plc

tesco PLC 1.37 1.24 1.19


2010 2009 2008

It is important that this ratios is closely monitored as it is a fundamental link between the basic activity of a business and the cash generated from it. the ratio shows that both companies have healthy results in 2010. it means both have better ability to generate cash from its trading activities.

3. OPERATING CASH CYCLE:

It is important to take payables days into account in this ratio as the businesses use credit themselves and by purchasing goods on credit; the cash life of the business is imported

(O’Regan, P. 2007)Operating Cash Cycle: 2010 2009 2008Tesco PLC - - -J Sainsbury PLC -19.57 25.26 -21.50

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-21.5

25.26

-19.57%

-40

-20

0

20

40

2008 2009 2010

OPERATING CASH CYCLE

J Sainsbury plc

Every business aim to reduce their cash operating cycle or indeed generate a negative figure; Sainsbury’s n have successfully achieved this .as in tesco annual report trade receivable is not given so it is not compared here.

Cash flow conclusions:Though both comapanies have greater ability to generate cash from its trading activities , Sainsbury have a little greater abilty to pay short term liabilities from their trading activities . th cash operating cycle shows that

EFFICIENCY RATIO:In order for a business to function efficiently there must be funds available to pay depts. This requires that working capital be managed properly. Efficiency ratios quantify the trading activity of the business in a way that recognizes that there is a direct relationship between activity and the availability of adequate cash resources on an ongoing basis.

(O’Regan, P. 2007)1. INVENTORY TURNOVER RATIO

This ratio yields a measure of the number of times the company has converted its inventory into sales, the higher the factor, the quicker the inventory is moving through.

(O’Regan, P. 2007)Inventory Turnover Ratio 2010 2009 2008

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Tesco PLC 19.16 18.62 17.97J Sainsbury PLC 26.89 6.12 24.72

0

10

20

30

Inventory turnover ratios

tesco plc

J Sainsbury plc

tesco plc 19.16 18.62 17.97

JSainsburyplc

26.89 6.12 24.72

2010 2009 2008

This ratio shows us both companies results are fairly stable. Sainsbury’s shows greater result due to the nature of their business being mainly more food based than Tesco plc. The significant drop of Sainsbury in 2009 should be further researched.

2. INVENTORY DAYS:

Companies will pursue a shorter period of time that inventory is held before being sold as this will reduce warehousing and security costs and additional amounts of cash tied up in inventory

(O’ Regan, P. 2007)Inventory Days 2010 2009 2008Tesco PLC 19.04 19.59 20.31J Sainsbury PLC 13.57 59.60 14.76

15

0

10

20

30

40

50

60

Inventory days

Sainsburg

Tesco

Sainsburg 13.57 59.6 14.76

Tesco 19.04 19.59 20.31

2010 2009 2008

TESCO PLC’S DAYS HAVE DECREASED OVER THE LAST THREE YEARS. BUT IN SAINSBURY’S THERE IS A SIGNIFICANT DROP IN 2010 AND THIS SHOULD BE RESEARCHED FURTHER IN TASK 2.

3.NON – CURRENT ASSETS TURNOVER:

Non-current Assets Turnover 2010 2009 2008Tesco PLC 1.66 1.67 1.98J Sainsbury PLC 2.21 2.24 2.12

0

0.5

1

1.5

2

2.5

Non current assets turnover

Sainsburg

Tesco

Sainsburg 2.21 2.24 2.12

Tesco 1.66 1.67 1.98

2010 2009 2008

Tesco plc has constant decrease in non current asset turn over. In 2010 j sainsbury’s turnover is also decreasing. Overall j Sainsbury is using its’ assets efficiently.

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4.ASSET TURNOVER

Management efficiency should be relation to overall asset management; this is normally measured by asset turnover ratio. (O’ Regan, P. 2007)

Assets Turnover 2010 2009 2008Tesco PLC 3.87 4.17 3.98J Sainsbury PLC 4.02 4.32 3.61

3.2

3.4

3.6

3.8

4

4.2

4.4

2008 2009 2010

ASSET TURNOVER

J Sainsbury plc

Tesco plc

The ratio shows that Tesco plc’s turnover has been decreasing . This may be due to utilization of too much capital to produce too little revenue. J Sainsbury has also decreased turnover but still greater than Tesco plc.

5. TRADE RECEIVABLE COLLECTION PERIOD (DEBTOR DAYS)

This time represents a cost to a business since it is effectively giving free credit to its customers out of its own resources.

(O’ Regan, P. 2007)

Trade Receivables Collection Period 2010 2009 2008Tesco PLC - - -J Sainsbury PLC 1.2 0.94 0.65

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0

0.2

0.4

0.6

0.8

1

1.2

Trade receivable collection period

J Sainsbury plc

Tesco PLC


Tesco PLC

2010 2009 2008

Tesco plc ‘s trade receivable in not given on the annual report. J Sainsbury has increase in trade receivable days.

6. Trade payable Payment Period (creditor Days)

Trade Payables payment period 2010 2009 2008Tesco PLC 35.47 34.86 32.89J Sainsbury PLC 34.44 35.28 36.92

30

31

32

33

34

35

36

37

Trade payable payments period

TESCO PLC

J Sainsbury plc

TESCO PLC 35.47 34.86 32.89

J Sainsbury plc 34.44 35.28 36.92

2010 2009 2008

Tesco plc’s payable days have been increasing since 2008 which is a positive move, but j Sainsbury’s payable days is decreasing.

Efficiency conclusion:

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After assessing each companies working capital it seems that Sainsbury shows inventory and asset turnover concern and Tesco plc shows payable concern. Issues that are highlighted for further research are-The reasons to look at the efficiency of tesco’s inventory and asset management.The reason for j Sainsbury’s payables’ constant decrease.

INVESTMENT RATIO:1. Dividend per share:

Dividend per share 2010 2009 2008Tesco PLC 13.05p 11.96p 10.09pJ Sainsbury PLC 14.2p 13.2p 12p

DPS

0

5

10

15

2010 2009 2008

J Sainsbury plc

tesco plc

Both companies indicate constant increase over the last three years , for making shareholders happy. Tesco plc has also increased but sainsbury’s are more appealing to potential investors.

2. DIVIDEND YIELD:IS THE RETURN TO SHAREHOLDERS MEASURED IN TERMS OF THE DIVIDENDS PAID DURING THE PERIOD.

Dividend yield 2010 2009 2008Tesco PLC 0.0309% 0.0354% 0.0247%J Sainsbury PLC 4.26% 4.21% 3.60%

Tesco plc have very low dividend yield while siansbury ‘s have constant rise in the figure.

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dividend yield

0.00%1.00%2.00%3.00%4.00%5.00%

2010 2009 2008

J Sainsbury plc

tesco plc

3. EARNINGS PER SHARE

IT IS THE AMOUNT OF INCOME EARNED DURING A PERIOD PER SHARE OF COMMON STOCK.

Earnings per share: 2010 2009 2008Tesco PLC 29.33p 27.14p 26.95pJ Sainsbury PLC 32.1p 16.6p 19.1p

EPS

0

10

20

30

40

2010 2009 2008

J Sainsbury plc

tesco plc

The growth rate of both companies is increasing , sainsbury’s significantly , indicating a positive performance from each company.

4. PRICE EARNING:

This ratio measures the relationship between the earnings of a company and the stock market price. It is an indication of the market’s view as to the future prospects of the company.

(O’ Regan , P. 2007)Price Earnings Ratio (P/E): 2010 2009 2008Tesco PLC 14.40 12.46 15.18J Sainsbury PLC 10.37 18.8 17.4

20

P/E

0

5

10

15

20

2010 2009 2008

J Sainsbury plc

tesco plc

Tesco plc has increased amount showing positive prospects future prospects for the company, again sainsbury’s figures are decreasing so, further research should be under taken to find reasons for this.

Investment conclusion:Over all , j Sainsbury shows a more steady positive performance than Tesco plc. Investors would find Sainsbury’s more appealing to provide equity in and receive a higher return.

GEARING RATIOS:There are a number of variations for the gearing calculation, two are them are below:

1. Gearing (D/E)

D/E 2010 2009 2008Tesco PLC 79.99% 96.01% 50.29%J Sainsbury PLC 47.46% 49.74% 41.23%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

D/E

J Sainsbury plc

Tesco plc

J Sainsbury plc 47.46% 49.74% 41.23%

Tesco plc 79.99% 96% 50.29%

2010 2009 2008

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Both j Sainsbury and Tesco plc’s figures have decreased which is a good sign, this means they are less risky to potential investors. In 2009 the figure has increased of Tesco but in 2010 it has decreased. the gearing figures of sainsbury are more less than TESCO plc.

2. Gearing (D/D+E)

D/D+E 2010 2009 2008Tesco PLC 44.44% 48.98% 33.46%J Sainsbury PLC 32.18% 33.22% 29.21%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

D/D+E

j Sainsbury plc

Tesco plc

j Sainsbury plc 32.18% 33.22% 29.69%

Tesco plc 44.44% 48.98% 33.46%

2010 2009 2008

Tesco and Sainsbury both have decreased amount of gearing but Sainsbury is less risky to invest . sainsbury’s gearing ratio remains stable and they are seen as a moderately geared firm.

3. INTEREST COVER

This ratio quantifies the capacity of the firm to meet interest payments due out of operating profits. (O’Regan, P. 2007)Interest Cover: 2010 2009 2008Tesco PLC 6.0 6.8 11.4J Sainsbury PLC 5.7 3.7 4

22

0

5

10

15

2010 2009 2008

interest cover

J Sainsbury plc

tesco plc

J Sainsbury has increased the number of times , they can cover their interest payments with their operating profit, this is a positive improvement and will give lenders confidence. But Tesco plc has decreased the number of times.

VERTICAL ANALYSIS:Tesco Plc and J Sainsbury PlcTesco Plc J Sainsbury Plc

2008 2009 2010 Years 2008 2009 2010

100% 100% 100% revenue 100% 100% 100%92.3 92.2 91.9 Cost of sales 94.3 94.5 94.57.67 7.76 8.09 Gross profit 5.6 5.4 5.42.17 2.32 2.68 Administrative and

operating expenses2.8 2.2 1.9

5.9 5.8 6.07 Operating profit 2.9 3.55 0.030.52 0.88 1.01 Finance cost 0.74 0.78 7.41

1.5% 3.9% 4.1% Profit for year 1.8% 1.5% 2.9%

TESCO PLC: Tesco plc have received a higher gross profit by decreasing their cost of sales. Administrative and operating expenses have increased slightly , hence the operating profit is higher than previous year. Finance cost has increased due to increase in their total borrowing. Overall profit

Tesco plc vertical analysis:

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0%50%

100%150%200%250%300%350%

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Cos

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Gro

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Adm

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trat

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and

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Ope

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Fin

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Pro

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2010

2009

2008

0.00%50.00%

100.00%150.00%200.00%250.00%300.00%

Non

-cu

rren

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Cur

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Ass

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Cur

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liabi

litie

s

Non

-cu

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Long

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mbo

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Tot

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2008

2009

2010

J SAINSBURY:It is evident that the cost of sales is the main problem for j Sainsbury’s’ profitability. J Sainsbury have managed to reduce their administrative and operating expenses. their finance cost increased in 2010 due to increase in their long term borrowings

Tesco Plc J Sainsbury Plc

2008 2009 2010 Years 2008 2009 2010

199.47% 248.6% 233.34% Non- current assets 170.0% 192.9% 181.2%50.4% 101.35% 77.59% Current Assets 32.6% 35.8% 36.1%87.1% 136.33% 109.08% Current liabilities 53.73% 66.7% 56.2%66.9% 116.71% 104.40% Non-current liabilities 51.2% 62.5% 62.3%50.2% 96.00% 79.99% Long term borrowings 41.2% 49.7% 47.46%100% 100% 100% Total equity 100% 100% 100%

TESCO PLCThe company’s non current assets are higher in 2009 indicating that the company have acquired new property , plant , and equipment this figure has increased .in 2010 current assets have decreased may be due to increase in tesco bank’s current customer loans and advances .(note-17)moreover cash and cash equivalent figure has decreased in the year

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2010. long term borrowing has decreased in 2010 may be due to company have cash to pay their payables.

J SAINSBURYthe company’s non current assets have decreased causing increase in current assets. Their long term borrowings have decreased in 2010.

J Sainsbury plc vertical analysis:

0%50%

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2010

TREND ANALYSIS:

TESCO PLCTesco plc 2008(£m) Change

(%)2009(£m) Change

(%)2010(£m) Change

(%)Revenue 47298 100 53898 13.9 56910 5.58Cost of 43668 100 49713 13.8 52303 5.2

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salesGross profit 3630 100 4185 15.2 4607 10.08NPBIT 2866 100 3279 14.4 3490 6.4

Non-current assets

23864 100 32085 34.4 34258 6.7

Current assets

5992 100 13081 118.3 11392 -12.9

Current liabilities

10345 100 17595 70.0 16015 -8.9

Non- current liabilities

7946 100 15063 89.56 15327 1.75

Capital Employed

29856 100 45166 51.2 45650 1.07

Shareholder’ Fund

11873 100 12906 8.7 14681 13.7

0%

200%

400%

600%

800%

1000%

1200%

1400%

revenue cost of sales gross profit NPBIT

2008

2009

2010

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-20%

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20%

40%

60%

80%

100%

120%

140%

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2008

2009

2010

J SAINSBURY PLC:J Sainsbury plc

2008(£m) Change (%)

2009(£m) Change (%)

2010(£m) Change (%)

Revenue 17837 100 18911 6.0 19964 5.5Cost of sales

16835 100 17875 6.1 18882 5.6

Gross profit 1002 100 1036 3.3 1082 4.4NPBIT 532 100 784 47.3 848 8.1

Non-current assets

8393 100 8442 0.58 9002 6.6

Current assets

1610 100 1570 -2.4 1797 14.4

Current liabilities

2652 100 2919 10.0 2793 -4.3

Non- current liabilities

2528 100 2738 8.3 3096 13.0

Capital Employed

10115 100 10033 -0.8 10855 8.1

Shareholder’ Funds

4935 100 4376 -11.3 4966 13.4

27

0%

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40%

60%

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revenue cost of sales gross profit NPBIT

2008

2009

2010

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100%

120%

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2008

2009

2010

PYRAMID OF RATIOS:Elliot and Elliot (2003) devised the concept of the ratio which links six key ratios

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TESCO PLC (2010)(Subject to rounding errors)

Operating Return on Equity23.77%

Financial Leverage Multiplier x Return on Capital Employed

3.13 7.58%

Asset Turnover x Net profit margin 1.22 6.21%



29

Financial Leverage Multiplier x Return on Capital Employed3.53 7.19%

Asset Turnover x Net profit margin 1.18 6.08%



Financial Leverage Multiplier x Return on Capital Employed

9.50% 2.53

Asset Turnover x Net profit margin

1.56 6.05%

Operating return on equity increased by 1.32% in 2009, but in 2010 it is dropped by 1.63% . financial leverage multiplier was higher 2009 but in 2010 it decreased by 0.4%. return on capital employed has increased in 2010 has increased due to increase in net profit margin (6.08 to 6.21)%.

30

J SAINSBURY PLC (2010)

(Subject to rounding errors)



Asset Turnover x Net profit 1.83 margin

4.24%

J SAINSBURY PLC (2009)(Subject to rounding errors)

Operating Return on Equity

31

17.91%


Asset Turnover x Net Profit 1.88 margin 4.14%

J SAINSBURY PLC (2008)(Subject to rounding errors)



Asset Turnover x Net Profit margin 1.76% 2.98%

Operating return on equity of Sainsbury has decreased slightly in 2010. Financial multiplier leverage has also decreased in 2010.return on capital employed remains same

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in 2009 &2010. asset turnover decreased in 2010 and profit of net margin increased by 0.1%.

SEGMENTAL ANALYSIS

IAS 14, Segment reporting , is intended to ensure that the segment information reported by an entity is disclosed on a consistent basis and it requires every entity to identify its reportable segments. (O’ Regan , P. 2007)

J Sainsbury PLC

J Sainsbury plc Revenue

2008 £m

%

2009 £m

%

2010 £m

%

Retailing 17837 100 18911 100 19964 100

Financial services - - - - - -

Property investment - - - - - -

Total 17837 100 18911 100 19964 100

This analysis shows that in the proportion of retailing there is a constant increase.

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J sainsbury PLC

OPERATING PROFIT

2008 £m

% 2009 £m

% 2010 £m

%

retailing 481 100.62762 577 123.8197 595 81.17326

Financial services -3 -0.627615 4 0.858369 7 0.95498

Property investment

1 0.20921 -115 -24.6781 131 17.87176

Total 478 100.20921 466 100 733 100

this analysis shows that in the proportion of profit there is a constant increase in retailing and In financial services. there is a significant drop in the proportion of property investment , but the figure has increased in 2010 at a greater rate than 2008.

J.SAINSBURY

SEGMENT ASSETS

2008 % 2009

% 2010

%

£m £m

£m

Retailing 9,968 98.54671 9,746 97.13944 10,406 95.86366Financial Services 89 0.879881 72 0.717632 102 0.939659Property Investment 58 0.573406 215 2.142928 347 3.196684

TOTAL 10,115 100 10,033 100 10,855 100

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The analysis shows an increase in retailing , property investmentand also financial services in2010.

J.SAINSBURY SEGMENT LIABILITIES2008 2009 2010

% % % £m

£m

£m

Retailing 5,180 100 5,657 100 5,889 100

Financial Services - - -

Property Investment -

- -

TOTAL 5,180 100 5,657 100 5,889 100

The analysis shows increasing retailing of j Sainsbury.

Tesco plc Segment asset 2008 2009 2010

% % % £m

£m

£m

Retailing 47298 100 54164 99.6% -

Financial Services - -163 -

Property Investment -

- -

TOTAL 47298 100 54327 .300 -

Tesco plc have increased in retailing but only for 2008 and 2009.

FURTHER RESEARCH:

35

The analysis of both companies ‘ financial statements has highlighted a number of issues that need to be further researched at the next stage.

PROFITABILITY:Over all , the differences in figures of the following should be researched further;-return on capital employed-gross profit margin-mark up ratio

LIQUIDITY:Both companies show a lower ration than the norm. so their liquidity position gives us more concern to further research.

CASH FLOW:Further research can be carried out to find out the reason why both companies’ cash flow adequacy are very low.

EFFICIENCY:-the significant drop of Sainsbury ‘s inventory turnover ratio.

INVESTMENT:-price earning figure of Sainsbury ‘s should be further researched.

Limitations of research:

Some unfamiliar terms Creative accounting practice

APPENDICES :

TESCO PLC

VERTICAL ANALYSIS

2010 = Result 2009 =Result 2008 =ResultINCOME STATEMENT

Revenue 56910/56910*100

100% 53898/53898*100

100% 47298/47298*100

100%

36

Cost of sales

52303/56910*100

91.95 49713/53898*100

92.23% 43668/47298*100

92.3%

Gross profit

4607/56910*100

8.09% 4185/53898*100

7.76% 3630/47298*100

7.67%

Administrative and operating expenses

1527/56910*100

2.68% 1252/53898*100

2.32% 1027/47298*100

2.17%

Operating profit

3457/56910*100

6.07% 3169/53898*100

5.87% 2791/47298*100

5.90%

Financial costs

579/56910*100

1.01% 478/53898*100

0.88% 250/47298*100

0.52%

Profit for the year

2336/56910*100

4.1% 2138/53898*100

3.9% 2130/47298*100

4.5%

Balance sheet

2010 =result 2009 =result 2008 =resultCurrent asset

11392/14681*100

77.59% 13081/12906*100

101.35% 5992/11873*100

50.4%

Non current asset

34258/14681*100

233.34% 32085/12906*100

248.60% 23864/11873*100

199.47%

Current liabilities

16015/14681*100

109.08% 17595/12906*100

136.33% 10345/11873*100

87.1%

Non current liabilities

15327/14681*100

104.40% 15063/12906*100

116.71% 7946/11873*100

66.9%

Long term borrowing

11744/14681*100

79.99% 12391/12906*100

96.00% 5972/11873*100

50.2%

Total equity

14681/14681*100

100% 12906/12906*100

100% 11873/11873*100

100%

J SAINSBURY

VERTICAL ANALYSIS

37

2010 = Result 2009 =Result 2008 =ResultINCOME STATEMENT

Revenue 19964/19964*100

100% 18911/18911*100

100% 17837/17837*100

100%

Cost of sales

18882/19964*100

94.5% 17875/18911*100

94.5% 16835/17837*100

94.3%

Gross profit

1082/19964*100

5.41% 1036/18911*100

5.4% 1002/17837*100

5.6%

Administrative and operating expenses

399/19964*100

1.99% 420/18911*100

2.2% 502/17837*100

2.8%

Operating profit

710/19964*100

3.55% 673/18911*100

3.5% 530/17837*100

2.95

Financial costs

148/19964*100

0.74%148/18911

*100 0.78%

132/17837*100

0.74%

Profit for the year

585/19964*100

2.9% 289/18911*100

1.5% 329/17837*100

1.8%

BALANCE SHEET2010 =result 2009 =result 2008 =result

Current asset

1797/4966*100 36.1% 1570/4376*100

35.8% 1610/4935*100

32.6%

Non current asset

9002/4966*100 181.2% 8442/4376*100

192.9% 8393/4935*100

170.0%

Current liabilities

2793/4966*100 56.2% 2919/4376*100

66.7% 2652/4935*100

53.73%

Non current liabilities

3096/4966*100 62.3% 2738/4376*100

62.5% 2528/4935*100

51.2%

Long term borrowings

2357/4966*100 47.46% 2177/4376*100

49.7% 2037/4935*100

41.2%

Total equity

4966/4966*100 100% 4376/4376*100

100% 4935/4935*100

100%

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CALCULATION OF PYRAMID RATIO , SEGMENTAL RATIO , RATIO ANALYSIS ARE ATTACHED IN EXCEL.

FORMULAS PROFITABILITY RATIOS

Return on Capital Employed

Net Profit before interest and tax x 100 Capital employed

Where capital employed is shareholders’ funds plus long-term loans.

Return on Shareholders' Capital

Net profit before tax x 100 equity

Gross Profit Ratio

Gross profit x 100Turnover

Net Profit Ratio

Net profit before tax x 100 Turnover

Mark-up Ratio

Gross profit x 100 Cost of sales

LIQUIDITY RATIOS

39

CURRENT RATIO:

Current AssetsCurrent liabilities

ACID TEST RATIO:

Current Assets less inventory (stock)Current liabilities

CASH FLOW RATIOS Cash Flow Adequacy (Cash Cover):

Net Cash Flow from Operating ActivitiesCreditors due within one year

Quality of profits:

Net Cash Flow from Operating Activities Operating Profit

Operating Cash Cycle:

Stock days + debtor days – creditor days

INVESTMENT RATIO Dividend per share:

Dividends Number of shares issued

Dividend yield:

Dividend per share x 100Market price per share

Earnings per share: (from note) Price Earnings Ratio (P/E):

Market price per shareEPS

GEARING RATIO Gearing =

40

Long Term Borrowings Equity

Long Term Borrowings Long Term Borrowing Equity

Interest Cover:

PBITInterest payable

PYRAMID OF RATIOS1) Operating Return on Equity:NPBIT / Shareholders’ Funds ˟ 100

2) Financial Leverage Multiplier:Capital Employed / Shareholders’ FundsN.B. Capital employed = total assets

3) Return on Capital Employed:NPBIT / Capital Employed˟100

4) Asset Turnover:Sales / Capital Employed

5) Net Profit Margin:NPBIT / Sales Reference:

http://www.fundinguniverse.com/company-histories/Tesco-plc-Company-History.html

http://www.checksure.biz/ftse_100_companies/tesco-plc.asp

http://www.referenceforbusiness.com/history2/88/J-Sainsbury-plc.htmlwww.j-sainsbury.co.uk/files/reports/ar2010_report.pdfwww.j-sainsbury.co.uk/files/reports/ar2009_report.pdfwww.j-sainsbury.co.uk/files/reports/ar2008_report.pdf

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http://www.checksure.biz/ftse_100_companies/tesco-plc.asp

http://www.fundinguniverse.com/company-histories/Tesco-plc-Company-History.html

ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/tesco-annualreport.pdfwww.investis.com/plc/storage/tesco_annual_09.pdfwww.tescoplc.com/plc/ir/ar/archive/ar2008/arfs_08/2008_TESCO_REPORT_COMPLETE.pdf

BIBLIOGRAPHY Elliott, B.& Elliott, J .(2003)Financial Accounting and Reoorting.7 th edn. Essex: Pearson Education Ltd.Gibson, C.H (1995) Financial Statement Analysis. 6th edn. Ohio: International Thomson Publishing.O, Regan, P. (2007) Financial Statement Analysis.2nd edn. West Sussex: john

Stickney, C.P & Brown,P.R (1999) Financial Reporting and Statement Analysis . 4th edn.

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Documents

task 1