Financial Ratios: TESCO and J. Sainsbury Essay

1. IntroductionThe purpose of this report is to conduct a comparative symmetry abridgment of the pecuniary statements of J. Sainsbury PLC and Tesco PLC for the year-ending 2013. The monetary entropy that is provided from individually high societys annual report and the comparison between them volition help assertable users of this analysis to understand not only the divergencys between these deuce companies but also each conjunctions weaknesses and strengths. Below, the profiles of the two companies willing be referred as well as eight history proportionalitys for each lodge will be presented in order to con stanch the appropriate monetary 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 immensity of supplementing fiscal analysis with non-fiscal conside symmetryns and a general conclusion will be make which will contain a summary of the main findings of this report. 1.1 Tescos PLC profileTesco PLC (Public Limited corpo balancen) is a food retail come with which operates in nine markets with 923 stores across the world. It employs more over 240,000 people which sell its products gift access to 260 million people (Tesco PLC., 2014). Over the past five years, Tesco has grow from the UKs supermarkets into bare-ass countries with new products and services including a major non-food business. to a greater extent specifically, the guild has started to sell electrical devices, internet shopping, toys, sports equipment, home entertainment, home shop, skirt shop and furniture. Also it provides financial services in coope balancen with Royal aver of Scotland serving 3.4million customers which reveals the companys intentions to expand in new markets.1.2 J. Sainsburys ProfileSainsbury PLC is engaged in grocery and related retailing. The companys activities are organised into thre e segments which are retailing (supermarkets and convenience), financial services (Sainsburys Bank), and Property coronations (The British contribute 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, world(a) Media Vault Limited and HMV Group plcs holding in Anobii Limited, a social network and online retailer of e-books.2. Financial- chronicle information and ratios accord 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 devi sing economic decisions and assessing the organizational management (IFRS, 2014). invoice ratios are related with this information and their purpose is to describe a numeric relationship between two values permitting the comparison of companys performance with the previous years, competitors and with the industry benchmarks. Below, make headwayability, liquid, working enceinte inhibit and financial risk ratios will be presented and compared for the two companies providing the appropriate financial information.2.1 positiveness and efficacy ratiosThe main objective of a financial statement analysis is to value a potents justice securities which regard as that the firm has to ensure its profitability for the future (Mackenzie et al., 2013). Profitability and efficiency ratios are utilize by financial information users in order to assess the firms operating performance. They provide information almost how much profit the firm makes in relation with its sales and how efficie ntly the business is using its assets to generate tax.2.1.3 Return on capital apply (ROCE) is a financial ratio that measures the percentage return on the total funds active in the business and shows how effective management is in generating r levelue and tyrannical costs. TESCO plc has slightly a bigger ROCE percentage than its comparable company J. Sainsbury which position for any(prenominal) people would be irrelevant but if it will be examined in depth it buttocks be comprehended that TESCO company has a better management because it uses more efficiently its capital.2.1.3 Asset long horse volume ratioTESCO root wordAsset turnover ratiomSales revenue64,826Capital employed22,550Asset turnover (%)287,47 %J. SainsburyAsset turnover ratiomSales revenue23,303Capital employed9,580Asset turnover (%)243,24%Asset (or capital) turnover ratio measures how many ms the capital employed was turned over during the year to achieve the revenue which fact indicates the efficiency of th e companys 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 quantify 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 control2.2.1 modern ratioTESCO assemblage true ratiom genuine assets13,096Current liabilities5,889Current symmetry x12.221J. SainsburyCurrent ratiomCurrent assets1,914Current liabilities3,115Current Ratio x10.611Current ratio is a liquidity ratio that measures the ability of the company to consider its short-term obligations (liabilities) much(prenominal) as debt and payables with its short-term assets such as cash, receivables and enumeration. TESCOs authentic ratio is estimated to 2.2 21 and it absolutely does not seem to pretend any liquidity problem in the business in line to J. Sainsbury company which oc authentic ratio is estimated to 0.611. 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 ein truth 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 unavoidably mean that the company will be a bankrupt in the near future if it will not pay its short-term liabilities for some small extent of time but it is definitely a spoiled 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 affectionate ratioTESCO GROUPQuick ratiomCurrent assets13,096Inventories(3,744)Current liabilities5,889Current Ratio x11.581 J. SainsburyQuick ratiomCurrent assets1,914Inventories(987)Current liabilities3,115Current Ratio x10.291Quick ratio is an another liquidity ratio and it is very similar to current ratio but the difference from these two ratios is that firm ratio is more conservative because it shows the relationship between liquid assets (from which the chronicle is excluded) and current liabilities in contrast to the other ratio. The results are almost the akin(p) 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 put up properly its short -term obligations.2.2.3 scroll Turnover and holding ratioTESCO GROUPInventory Turnover ratiom address of sales60,737Inventories3,744Inventory Turnover ratio16.22J. SainsburyInventory Turnover ratiomCost of sales2 2,026Inventories987Inventory Turnover ratio22.31Inventory turnover ratio measures the times that an inventory was sold and replaced over a specific plosive speech sound of time. A low turnover ratio indicates low sales and at the same time 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 every 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 scathe than this that it would collar 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. Sainsburys 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 work an excess i n 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 shaveits stocks from the inventory.2.2.4 Inventory holding ratioTESCO GROUPInventory holding occlusion ratiomInventories3,744Cost of sales60,737Inventory holding flow rate ratio22.49 ageJ. SainsburyInventory holding diaphragm ratiomInventories987Cost of sales22,026Inventory holding closure ratio16.35 daysSimilarly to the inventory turnover ratio, inventory holding percentage point ratio shows the tip of time (days) that stocks were kept in the companys 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 t o Japanese industry statistical website (M&A margin 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 property 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 order of battle periodTESCO GROUPReceivables allurement period ratiom get by receivables2,525Sales revenue64,826Receivables arrangement period ratio3.89 daysJ. SainsburyReceivables assimilateion period ratiomTrade receivables306Sales23,303Receivables collection period ratio4.79 daysThe 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 th at the company collects its dues from its clients quickly. If this indicator is too low, then it is comprehensible 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 put one across 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 liquidityas much possible improving its financial position in the market.2.3 Financial Risk and debt to virtue ratioFinancial 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 liabilitie s (, 1999).TESCO GROUPDebt to rightfulness ratiomNon-current liabilities14,483Total paleness16,661Debt to equity ratio86.92 %J. SainsburyReceivables collection period ratiomNon-current liabilities3,846Total equity5,734Debt to equity ratio67,07 %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 union of debt which can lead to big interest and would have an impact on shareholders 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 inthe 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 face the consequences of a such high ratio.3. Users of financial a nalysis and their information requirementsAccording to Gokul Sinha (Sinha, 2009), financial statements are the means of providing information to the various users for their decision making but users are polar and accordingly, their needs are also several(predicate). 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 statementsNon-financial considerations were incessantly a great tool for companies which had the knowledge how to use them. Christopher Ittner and David Larcker (Christopher Ittner, 2000) have verbalize that by supplementing financial analysis with non-financial statements, the organization creates a closer connective to the long-term strategies of it. More specifically non-financial data make the companies to communicate different informational objectives withmanag ers, providing them motivation in order to plan long-term strategies in the future. tho they referred that some critics argue that intangible assets such as customer homage 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 alive(predicate) 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. ConclusionIn 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 f inancial 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.BibliographyChristopher Ittner, D.L., 2000. get the hang Management series. Financial Times. Hussey, R., 1999. Oxford Dictionary of Accounting. Oxford Oxford University Press. IFRS, 2014. IFRS Foundation. Online London IFRS Foundation ready(prenominal) 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 supranational Financial Reporting Standards. New Jersey John Wiley & Sons. Maynard, J., 2013. Financial Accounting, Reporting, and Analysis. Oxfo rd 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.comAccessed 18 April 2014