Monday, May 27, 2019

Financial Ratios: TESCO and J. Sainsbury Essay

1. IntroductionThe purpose of this report is to conduct a comparative symmetry compendium of the financial statements of J. Sainsbury PLC and Tesco PLC for the year-ending 2013. The financial information that is provided from each troupes annual report and the comparison amidst them volition help possible users of this depth psychology to understand not only the differences between these two companies but also each familys weaknesses and strengths. Below, the profiles of the two companies will be refer sanguine as tumesce as eight accounting balances for each company will be presented in swan to have the appropriate financial information to analyse. Furthermore, the possible users of this analysis will be identified and all their differing information requirements will be menti angiotensin-converting enzymed. Finally, there will be provided a short discussion on the magnificence of supplementing financial analysis with non-financial conside dimensionns and a general conclus ion will be made which will contain a summary of the main findings of this report. 1.1 Tescos PLC profileTesco PLC (Public Limited Company) is a food retail company which operates in nine markets with 923 stores across the world. It employs more over 240,000 people which parcel out its products giving portal to 260 million people (Tesco PLC., 2014). Over the past five years, Tesco has expanded from the UKs supermarkets into new countries with new products and services including a major non-food line of business. more(prenominal) specifically, the company has started to sell electrical devices, internet shopping, toys, sports equipment, home entertainment, home shop, cook shop and furniture. Also it provides financial services in coope proportionalityn with Royal Bank 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 tether segments which are retailing (supermarkets and convenience), financial services (Sainsburys Bank), and Property investments (The British Land Company PLC and Land Securities PLC) (Reuters, 2014). The Company employs around 150,000 people and it operates over 1,000 stores getting 572 supermarkets and 440 convenience stores. The Company also acquires an online entertainment company, Global Media Vault Limited and HMV Group plcs holding in Anobii Limited, a social network and online retail merchant of e-books.2. financial-accounting information and symmetrysAccording 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 ac ross-the-board range of users for making economic decisions and assessing the organizational focussing (IFRS, 2014). Accounting ratios are related with this information and their purpose is to describe a quantitative notificationship between two values permitting the comparison of companys performance with the previous years, competitors and with the industry benchmarks. Below, profitability, liquidity, operative chapiter control and financial risk ratios will be presented and compared for the two companies providing the appropriate financial information.2.1 Profitability and efficiency ratiosThe main objective of a financial statement analysis is to value a firms equity securities which mean that the firm has to ensure its profitability for the future (Mackenzie et al., 2013). Profitability and efficiency ratios are used by financial information users in order to assess the firms operating performance. They provide information about how much profit the firm makes in relation wi th its sales and how efficiently the business is using its assets to generate r sluiceue.2.1.3 Return on capital industrious (ROCE) is a financial ratio that measures the percentage return on the total funds employed in the business and shows how effective management is in generating revenue and controlling damages. TESCO plc has slightly a bigger ROCE percentage than its comparable company J. Sainsbury which fact for somewhat people would be irrelevant but if it will be examined in depth it can be comprehended that TESCO company has a better management because it uses more efficiently its capital.2.1.3 asset swage ratioTESCO GROUPAsset 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 umpteen convictions the capital employed was turned over during the year to achieve the revenue which fact indicates th e efficiency of the companys deployment of its assets. The above tables show that even though the two companies surpass the rank of one hundred percent which elbow room that their capital employed was turned over at least one m 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 dollar signs were generated per dollar of assets 2.2 Liquidity and working capital control2.2.1 incumbent ratioTESCO GROUPCurrent ratiomCurrent assets13,096Current liabilities5,889Current Ratio x12.221J. SainsburyCurrent ratiomCurrent assets1,914Current liabilities3,115Current Ratio x10.611Current ratio is a liquidity ratio that measures the ability of the company to meet its short-term obligations (liabilities) such as debt and payables with its short-term assets such as cash, receivables and scrutinise. TESCOs current ratio is estimated to 2.221 an d it absolutely does not seem to have any liquidity worry in the business in contrast to J. Sainsbury company which current 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 e precise dollar of current liabilities. These results reveal a liquidity problem that J. Sainsbury has which means that the firm can not pay its short term obligations properly. However this does not necessarily mean that the company will be a offend in the near future if it will not pay its short-term liabilities for some small time gunpoint of time but it is definitely a swelled sign of not good financial health and it is required from the company to access more financing sources in order to overcome this problem.2.2.2 Quick ratioTESCO GROUPQuick ratiomCurrent assets13,096Inventories(3,744)Current liabilities5,889Current Ratio x11.581J. SainsburyQui ck ratiomCurrent assets1,914Inventories(987)Current liabilities3,115Current Ratio x10.291Quick ratio is an an new(prenominal)(a) liquidity ratio and it is very similar to current ratio but the difference from these two ratios is that quick ratio is more conservative because it shows the relationship between liquid assets (from which the origin is excluded) and current liabilities in contrast to the other ratio. The results are almost the same except the ratio numbers. TESCO has 1.58 dollars of liquid assets available per one dollar of current liabilities and J. Sainsbury has 0.29 of liquid assets for each dollar of current liabilities. The problem for J. Sainsbury remains the same as the company has a bad finance health because it cannot meet properly its short -term obligations.2.2.3 Inventory Turnover and holding ratioTESCO GROUPInventory Turnover ratiom embody of sales60,737Inventories3,744Inventory Turnover ratio16.22J. SainsburyInventory Turnover ratiom apostrophize of sales2 2,026Inventories987Inventory Turnover ratio22.31Inventory turnover ratio measures the times that an inventory was sold and replaced over a specific plosive of time. A low turnover ratio indicates low sales and simultaneously an excess in the inventory of the company which can lead to liquidity problems. On the other hand, a high turnover shows that the firm either has good sales or it implies ineffective buying of its products which mean that the company buys small quantities of product very frequently for a higher price than this that it would get if it would buying bigger quantities leading to a shortage or an inadequate inventory. TESCO during 2013, has turned over its inventory 16.22 times which is 6.09 lesser than J. 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 have an excess in the inventory which reveals the fact that the company was dropped out from its expectations in contrast to J. Sainsbury. More products in the inventory implies more cost for the firms so both of them and more specifically TESCO have to improve its ability to liquidateits stocks from the inventory.2.2.4 Inventory holding ratioTESCO GROUPInventory holding period ratiomInventories3,744Cost of sales60,737Inventory holding period ratio22.49 daysJ. SainsburyInventory holding period ratiomInventories987Cost of sales22,026Inventory holding period ratio16.35 daysSimilarly to the inventory turnover ratio, inventory holding period ratio shows the period 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 to Japanese industry statistical website (M &A BANK Co. LTD, 2014), the average inventory turnover for food retail companies such as TESCO and J. Sainsbury, is 34.44 days. The fact that TESCO has a bigger inventory turnover is illustrated in the inventory holding period for both companies. For each inventory turnover, TESCO was keeping its inventory for 22.49 days and J. Sainsbury for 16.35.These results lead to the same conclusions of inventory turnover statements that were mentioned above. 2.2.3 Receivables assembling periodTESCO GROUPReceivables collection period ratiomTrade receivables2,525Sales revenue64,826Receivables collection period ratio3.89 daysJ. SainsburyReceivables collection 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 that the company collects its dues from its clients quickly. If this indicator is too low, then it is understandable that the firm does not offer credit facilities to its clients resulting loss in business. On the other hand, when there is a high receivable collection period indicator it is obvious that the company have some difficulties collecting receivables from its clients. TESCO seems to take its receivables almost one day earlier (3.89 days) than J. Sainsbury (4.79 days) which fact mentions again the difference in the liquidity of these two companies. J. Sainsbury which has a liquidity problem has to collect more efficiently its receivables from customers to empower liquidityas much possible improving its financial position in the market.2.3 monetary Risk and debt to equity 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 liabilities (, 1999).TESCO GROUPDebt to equity ratiomNon-current liabilities14,483To tal equity16,661Debt 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 amount 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 facing the consequences of a such high ratio.3. Users of financial analysis and their information requirementsAccording to Gokul Sinha (Sinha, 2009), f inancial statements are the means of providing information to the confused users for their decision making but users are different and accordingly, their needs are also different. In the below table (Table 1.0) the seven categories of the users of financial analysis will be presented with all of their differing information requirements and potential decisions.4. The importance of supplementing financial analysis with non-financial statementsNon-financial considerations were always a great tool for companies which had the knowledge how to use them. Christopher Ittner and David Larcker (Christopher Ittner, 2000) have express that by supplementing financial analysis with non-financial statements, the organization creates a closer link to the long-term strategies of it. More specifically non-financial data make the companies to communicate different informational objectives withmanagers, providing them pauperization in order to plan long-term strategies in the future. Moreover they referred that some critics argue that intangible assets such as customer loyalty and intellectual capital are the drivers of success for many companies in different industries and they have to pay more attention on these two. Finally, both authors mentioned about the accompanied noise of non-financial data about which the managers must be aware in order to determine how much success they will get if they make their actions which will lead to a maximizing effect on the organizational performance.5. 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 financial analysis were referred and all of their differing requirements were described. Finally, there was a reference on the importance of supplementing financial analysis with non-financial statements as well as the capabilities of using non-financial considerations.BibliographyChristopher Ittner, D.L., 2000. Mastering Management series. Financial Times. Hussey, R., 1999. Oxford Dictionary of Accounting. Oxford Oxford University Press. IFRS, 2014. IFRS Foundation. Online London IFRS Foundation Available at http//www.ifrs.org Accessed 18 April 2014. Kirk, A., 2014. Chron. Online Available at http//www.chron.com Accessed 19 April 2014. M&A BANK Co. LTD, 2014. EDIUNET Industry Avg. Online Available at http//industry.ediunet.jp Accessed 19 April 2014. Mackenzie, B. et al., 2013. Wiley IFRS 2013 Interpretation and Application of International Financial Reporting Standards. New Jersey John Wiley & Sons. Maynard, J., 2013. Financial Accounting, Reporting, and Analysis. Oxford Oxford University Press. Reuters, 2014. http//uk.reuters.com. Online Available at http//uk.reuters.com Accessed 18 Ap ril 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

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.