Analysis Of Tesco And Sainsbury

Introduction

In today’s competitive business world, it is important for companies to improve their level of performance in order to sustain in market for longer time period with huge profitability. Companies have to focus on their financial performance and they must be compared with other companies in order to analyse their current position in market(Brigham and Ehrhardt, 2013). This report is written for comparing the financial performance of Tesco and Sainsbury. Their financial statements are compared in order to know about their financial performance. In addition to this, their level of disclosure is also evaluated in the end of this report.

Task 1: Financial Performance Analysis of Tesco and Sainsbury

 

Tesco

 

 

2011

2012

2013

2014

2015

Revenues

60455

64539

63406

63557

62284

Cost of sales

55330

59278

59252

59547

64396

Gross profit

5125

5261

4154

4010

-2112

Administrative expenses

1640

1652

1482

1657

2695

Loss/Profit arising on property-related items

432

376

290

278

-985

Operating Loss/Profit

3917

3985

2382

2631

-5792

Share of post-tax losses/profits of joint ventures and associates

57

91

72

60

-13

Finance income/cost

150

176

120

132

90

Loss/profit before tax

3641

3835

2057

2259

-6376

Taxation

864

879

529

-347

657

Loss/profit for the year

2777

2956

1528

1912

-5719

NPM

5%

5%

2%

3%

-9%

GPM

8%

8%

7%

6%

-3%

EPS

33.1

34.98

0.35

12.07

-70.82

 

 

Sainsbury

 

2011

2012

2013

2014

2015

Revenues

21102

22294

23303

25813

26328

Cost of sales

19942

21083

22026

2370

2407

Gross profit

1160

1211

1277

23443

23921

Administrative expenses

417

419

462

0

0

Loss/Profit arising on property-related items

108

82

67

0

0

Operating Loss/Profit

851

874

882

720

873

Share of post-tax losses/profits of joint ventures and associates

60

35

24

6

30

Finance income/cost

32

28

19

-170

-111

Loss/profit before tax

827

799

772

-72

898

Taxation

187

201

170

-94

-182

Loss/profit for the year

640

598

602

716

-166

NPM

3%

3%

3%

3%

-1%

GPM

5%

5%

5%

91%

91%

EPS

34

32

32

37.7

-8.7

 

1.1. Profitability Ratios

1.1.1. Gross Profit Margin

In order to test financial performance of a company gross profit margin of that company is analysed. It shows that how much money is retained by a company after deduction of cost of goods sold (Hoskin et al, 2014).

The above two graphs show the financial performance of Tesco as well as Sainsbury. It can be seen from graphs that there is a downturn graph of Tesco for gross profit margin whereas for Sainsbury, the graph is going in an upward direction. In case of Tesco, the gross profit margin has continuously reduced from 2011 to 2015; even in 2015 it has moved towards negative value. It shows that Tesco is bearing high costs and its revenues are less as compared to its costs. In contrast to this, Sainsbury is performing better than Tesco. The graph of gross profit margin is moving upward. The graph shows that in 2011 the gross profit margin was just 5% but with the passage of time, in 2014 and 2015 the company earned 91% gross profit margin. It means the financial performance of Sainsbury in 2014 and 2015 is excellent. It can be predicted from the above graph that in coming years Sainsbury will further improve its gross profit margin by earning high income with lesser cost. So, on the basis of gross profit margin it can be clearly seen that financial performance of Sainsbury is far better than Tesco.

1.1.2. Net profit margin

According to Brigham and Ehrhardt (2013), net profit margin tells that to what extent company gets success in translating its revenue in to profits.

According to the analysis of net profit margin of Tesco and Sainsbury for the year 2011 to 2015, it can be seen that their performance is almost equal. Both Tesco and Sainsbury are not that much successful in translating their revenues in to profit. The reason might be the presence of other types of cost or payment of high taxation. The net profit margin’ graph of Sainsbury shows that from 2011 to 2014 the company has earned almost same NPM, but in 2015 it has shifted towards negative net profit margin. In case of Tesco too, the company earned negative net profit margin in 2015. Both companies have to focus highly on formulation and implementation of those strategies through which their profitability can be increased.

1.1.3. Return on Equity

 

1.1.4. Return on Assets

1.2. Liquidity Ratios

1.2.1. Current Ratio

1.2.2. Quick Ratio

 

 

1.3. Efficiency Ratios

1.3.1. Asset Turnover

Task 2

Healyand Palepu(2012) stated that disclosure is one of the most significant factors through which attractiveness of investors for investing in a company is affected. It tells the extent to which a company is transparent in its reports. Disclosure depends on willingness and capability of management for correcting any distinctions informative for stakeholders. In the long run, the companies can get development and progress through disclosure of necessary information. The disclosure of financial information is considered to be very important for ensuring long term success of company.

2.1. Level of Disclosure in Tesco

From the analysis of financial statements of Tesco, it has been seen that maximum important information has been disclosed in their reports. From the profitability of Tesco, the requirement for better disclosure of allowances given to vendors is highlighted. With the help of better disclosures it has become easier for spotting errors, use of aggressive policies of accounting and misleading any information (Ball et al, 2012). Tesco has included the information related to the increase in attributable allowances and any decline in sales volume. The data mentioned in financial statements of Tesco are true in each aspect. In some years, when Tesco faced net loss, then it did not provide wrong information. There is uncertainty among the degree of vendor allowances in Europe, but in case of their widespread they can be approached or cross the operating profit. In financial reports of Tesco, the disclosure needed under DTR 7.2.6 is properly included.

From these disclosures it can be seen that company properly pays vendor allowances to retailers, for example at the time when certain volume of sales is achieved. With the help of this cost of goods for retailer is reduced, but due to their recognition in accounts there are chances of issues. Tesco has to face weak results due to early identification of promotional allowances. At the time of deterioration of performance, Tesco has to made large adjustments for pulling more income into the business and pushing out more costs until the sustainability among adjustments is achieved (Cheng et al, 2012). According to Tesco’ reports, it has been found that at some places Tesco overstated its profit. The reason behind this is because of increased identification of commercial income and late accrual of costs. This can be an error or an aggressive policy of accounting. The information following to FCA’s Disclosure and Transparency Rules is declared through a Regulatory Information Service. In annual reports of Tesco, certain needed disclosures have been presented, rather than in notes to financial statements. These disclosures are cross-referenced from financial statements and are recognized as audited. There are some disclosures of directors’ remuneration that have not been published in reports. The disclosures given in financial statements of Tesco are sufficient enough for giving reasonable declaration that there is no fake assessment done in financial statements.

Moreover, Tesco has taken benefit for exemption given in FRS 29 ‘Financial Instruments: Disclosures’ and it did not given disclosures of derivative financial instrument of organization. There is also an exemption to company with respect to FRS 8 ‘Related Party Disclosures’, regarding disclosure of relevant party transactions with completely owned entities in group of Tesco. There is no obligation of European retailers to disclose contribution given to vendors from their profits (Andrikopoulosand Kriklani, 2013).

2.2. Level of disclosure in Sainsbury

The management of Sainsbury gave a lot of importance to disclosure. The information provided in financial reports is enough to be used by shareholders for assessing performance, business model and strategy of company. The management of Sainsbury was called in a financial reporting council in December 2014, for providing investors with enough information related to accounting policies, important decisions and projections arising from their crucial arrangements of supplier. Moreover, additional information related to the kinds of supplier income is also provided in accounting reports of Sainsbury. In financial statements of Sainsbury, incentives, discounts and rebates to suppliers are identified within cost of sales. There are proper procedures recognized by company related to disclosure of any conflict and for considering and authorizing these conflicts.

In additional disclosures of company, users are provided with clear and related information through which they become capable of evaluating the effect of supplier income on performance and financial position of company (Lawrence, 2013). With the help of disclosures provided in financial statements of Sainsbury, even competitors are provided with information about company’s goals, budgeting and forecasting. Therefore, a complete detail about targets for 2014/2015 and 2015/2016 have not been given in reports. According to Frias?Aceituno et al (2014) the company should give expanded disclosure in order to make shareholders capable of understanding the basis of payments.

Task 3

From the analysis of reports of Tesco and Sainsbury, it has been found that almost all necessary information has been provided by both companies for the benefit of stakeholders. With the help of disclosures provided in financial statements, stakeholders can assess performance, strategies and future steps of companies. In case of Tesco reports, there are some disclosures that have been presented in annual reports but not in notes to financial statements. So, according to Dhaliwal et al (2014) for the ease of stakeholders, they should also be presented in notes to financial statements for better understanding of stakeholders.

One of the significant aspects of disclosure is environmental reporting. Both companies should focus considerably on communication of accurate and simplified detail about environmental interactions of company with its stakeholders. In order to build positive reputation of company, both organizations should disclose and keep information related to its CSR activities transparent to its stakeholders. In environmental reporting, details about environmental performance in related fields should be given like emissions of greenhouse gases, waste management and use of water. All relevant data must be expressed in terms of factual data and targets for improvements (Birt et al, 2013).

In addition to this, Nobes (2014) stated that all information disclosed in accounting reports must be written in a clear and concise way. All the data should be written in facts and figures. The language must be kept simple so that every individual can easily understand. More than all, the format and presentation of reports must be kept simple and attractive. From the analysis of reports of both companies, it has been found that there was some information that was too lengthy and irrelevant, so that kind of information must be avoided as it can create confusion.

Conclusion

This report is written for analysing financial performance of two big retailers operating in UK. The financial statements of Tesco and Sainsbury are analysed through different techniques. For the purpose of evaluating financial performance of both companies, some of profitability, liquidity and efficiency ratios were used. Moreover, in other parts of report the level of disclosure provided by each company in their accounting reports is analysed. From the analysis it has been shown that the financial performance of Tesco and Sainsbury is good but both companies have to focus on some aspects in order to make further improvements. From ratio analysis, it has been found that with some aspects one company is better than other and vice versa. Both companies have provided necessary information in their accounting reports for benefit of their stakeholders, but they should also make improvements in their level of disclosure. This can help them in building their reputation and image in industry.

References

Andrikopoulos, A. and Kriklani, N., 2013. Environmental disclosure and financial characteristics of the firm: the case of Denmark. Corporate Social Responsibility and Environmental Management20(1), pp.55-64.

Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting and Economics53(1), pp.136-166.

Birt, J., Rankin, M. and Song, C.L., 2013. Derivatives use and financial instrument disclosure in the extractives industry. Accounting & Finance,53(1), pp.55-83.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Cheng, M., Dhaliwal, D. and Zhang, Y., 2013. Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?. Journal of Accounting and Economics56(1), pp.1-18.

Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G., 2014. Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy33(4), pp.328-355.

Frias?Aceituno, J.V., Rodríguez?Ariza, L. and Garcia?Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting.Business Strategy and the Environment23(1), pp.56-72.

Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial accounting: a user perspective. Wiley Global Education.

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics56(1), pp.130-147.

Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.

 

 


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