TAWATCHAI NUANGSRIFINANCIAL CAPABILITIES

FINANCIAL ANALYSISTESCO PLC. VS J SAINSBURY PLC.

OUTLINERetailers in United Kingdom Company BackgroundFinancial Ratios Analysis

Profitability ratiosLiquidity ratioEfficiency ratiosSolvency ratio

ConclusionsReferences

Retailers in United KingdomTesco

Sainsbury

Asda

Morrisons

Kingfisher

Co-operative Group

John Lewis Partnership

Marks and Spencer

Alliance Boots

Home Retail Group

£64,419,000.00

£25,632,000.00

£23,670,000.00

£17,680,000.00

£11,125,000.00

£10,800,000.00

£10,718,000.00

£10,310,000.00

£6,697,000.00

£5,663,000.00

Top Ten UK Retailers by Sales in 2014

Sales (ex. VAT) (GBP m)

Ret

aile

rs

Figure 1: Top Ten retailers by Sales in 2014 (RetailEconomics, 2014).

Tesco

Sainsbury

Asda

Morrisons

Kingfisher

Co-operative Group

John Lewis Partnership

Marks and Spencer

Alliance Boots

Home Retail Group

0 2,000 4,000 6,000 8,000

7,305

1,106

525

667

1,124

2,800

345

1,311

2,487

736

Number of Store in 2014

Number of StoreFigure 2: Number of Store in 2014 (RetailEconomics, 2014).

3535 in UK

COMPANY BACKGROUNDTesco PLC

Found in 1919 by Jack Cohen in, Barnet, London.Headquarter in Hertfordshire, UK.Int’ retailer, retail banking and Insurance services.3,535 stores in UK, 6814 stores worldwide (including Franchises).310,000+ employees in UK, 480,000+ worldwide.Current share price 163.10p (04/12/15:16.21PM), (London Stock Exchange,2015).

J Sainsbury PLCFound in 1869 by James Sainsbury in Holborn, London.Headquarter in London, UK.Grocery and related retailing.1,200+ stores in UK.161,000+ employees.Current share price 226.20p (04/12/15: 16.30 PM), (London Stock Exchange,2015).

PROFITABILITY RATIOSGROSS PROFIT MARGIN

WHAT FINANCIAL RATIOS ARE IMPORTANT?•This ratio is significant indicator of the company’s financial health, because it looks at major inflows and outflows of money (Zions Business Resource Center, n/a).• Moreover, it should be a stable value and not much more fluctuation (Zions Business Resource Center, n/a).

2013 2014 2015-6

-3

0

3

6

9

6.3077 6.3093

-3.3909

5.4800 5.79155.0810

Figure 3: Gross Profit Margin (%) (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

%

ANALYSIS• J Sainsbury PLC, there was a stable in Gross Profit Margin all of the last three years.

•Tesco PLC fell by 10% in 2015 comparing with 2013 and 2014.

•G/P Margin’s Tesco PLC was higher than J Sainsbury PLC in first two years, however, the margin significantly plunged to -3.391% in 2015.

FORMULAGross Profit Margin(%) = Gross Profit/Sales*100%

•E.g. Gross Profit Margin(%) = (2012)/62284*100 = (3.391)%

•This is calculated for Tesco PLC in 2015.

PROFITABILITY RATIOSNET PROFIT MARGIN

WHAT FINANCIAL RATIOS ARE IMPORTANT?•This ratio is widely used as a measure of performance across similar industries (The Institute of Certified Public Accountants in Ireland, 2013).

•Furthermore, Rees (1995: 97) stated that “retailers often operate on low margins and high turnover”, so the analysts should also review at sales turnover. ANALYSIS

• J Sainsbury PLC slightly increased in Net Profit Margin in first two years and fell to -0.30% in 2015.

•Tesco PLC trend was nearly the same with J Sainsbury PLC in 2013-2014, However the trend plunged to -10.24% in 2015.

•Overall, N/P Margin of J Sainsbury PLC is better than Tesco PLC, however, both of them lose in net profit in 2015.

FORMULANet Profit Margin (%)= Profit before Charging Interest and

Tax (PBIT)/Sales * 100%• E.g. Net Profit Margin (%) = (6376)/62284 * 100 = (10.24)%

•This is calculated for Tesco PLC in 2015.

2013 2014 2015-14

-9

-5

0

5

9

3.0235 3.5543

-10.2370

3.3815 3.7496

-0.3028

Figure 4: Net Profit Margin (%) (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

%

PROFITABILITY RATIOSRETURN ON CAPITAL EMPLOYED

WHAT FINANCIAL RATIOS ARE IMPORTANT?•This ratio gives the annual percentage return that investors receive on their investment in stock market or the businesses (Midland, n/a).

•Similarly, Return on Capital Employed displays what return that the investors are making on their money in the businesses. (The Institute of Certified Public Accountants in Ireland, 2013).ANALYSIS

• J Sainsbury PLC, there was an slightly increase around 1% during 2013-2014, but the ratio plunged to -0.75 in 2015.

• Tesco PLC also slightly increased in first two years but plunged to -26.12% in 2015.

•Both of them, there were a low return, however, the overview, J Sainsbury PLC is apparently better than Tesco PLC in last year.

FORMULAReturn on Capital Employed (%)= PBIT/Total Capital Employed * 100%

•E.g. Return on Capital Employed (%) = (6376)/24404 * 100 = (26.13)%•From above we can see in 2015 for every £1 funders invest in Tesco PLC they would get an annual return of (26.13p).

•This is calculated for Tesco PLC in 2015.

2013 2014 2015-34

-23

-11

0

11

23

6.2933 7.8533

-26.1269

8.2255 9.1867

-0.7489

Figure 5: Return on Capital Employed (%) (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

%

LIQUIDITY RATIOCURRENT RATIO

WHAT FINANCIAL RATIOS ARE IMPORTANT?•This ratio gives business owners key information concerning their ability to pay short-term depts (Fritz, n/a).

•Walsh (2003) stated that the standard value for most types of businesses are an excess of 1.0 time.

•Midland (n/a) also pointed if it less than 1.0 time, the company could not pay their depts.ANALYSIS

• J Sainsbury PLC has slightly increased from 2013 - 2015.

•On the other hand, Tesco PLC, the trend has decreased all of the last three years.

•However, the ratio shows that both of them were less than 1. This means their current liabilities exceed their current assets.

FORMULACurrent Ratio = Current Assets / Current Liabilities

•Current Ratios\ = 11958 / (19819) = 0.60 : 1.•This is calculated for Tesco PLC in 2015.

2013 2014 20150.55

0.58

0.60

0.63

0.65

0.68

0.70

0.6898

0.61150.6036

0.6144

0.64580.6507

Figure 6: Current Ratio (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

EFFICIENCY RATIOSCREDITORS’ TURNOVER RATIO

WHAT FINANCIAL RATIOS ARE IMPORTANT?•This ratio monitors how long the company takes to pay their suppliers. if the suppliers have to wait to long, they might withdraw credits (midland, n/a).

ANALYSIS• J Sainsbury PLC significantly fell by 8.1 times in 2015, and average payment is around every 89 days.

• Tesco PLC was a stable level in first two years and rose to 12.69 in 2015 or average payment is around every 29 days.

• Hence, Tesco PLC can take to pay their creditors quicker than J Sainsbury PLC, as around 8 times.

FORMULACreditors’ Turnover Ratio = Cost of Sales/ Creditors

•E.g. Creditors’ Turnover Ratio = (64396) / (5076) = 12.69•Hence, creditors’ turnover of 12.69 is converted to around 29 days (365/12.69).

•This is calculated for Tesco PLC in 2015.

2013 2014 20150

3

7

10

13

16

10.0625 10.2121

12.686411.5440

12.2221

4.1151

Figure 7: Creditors’ turnover ratio (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

EFFICIENCY RATIOSSTOCK TURNOVER RATIO

WHAT FINANCIAL RATIOS ARE IMPORTANT?• Investopedia (n/a) said that the ratio displays how many times the stock is sold and replace during specific time.

• Investopedia (n/a) also pointed sales figure is frequently used but COGs may be used due to sales are recorded at market value while inventory are often recored at cost.

•Fritz (n/a) stated that “higher is better”.

ANALYSIS• J Sainsbury PLC had a stable line all of the last three years. The average of three years was around 22.47 in Stock Turnover Ratio.

•Tesco PLC rose to 21.78 in 2015, this is better than 2 years ago, around 5 times.

•Overall, based on ratio, J Sainsbury PLC can manage their stock better than Tesco PLC all of the last three yeas. However, they are quite similar in 2015.

FORMULAStock Turnover Ratio= Cost of Sales / Stock Level

•E.g. Stock Turnover ratio = (64396) / 2957 = 21.78•This is calculated for Tesco PLC in 2015.

2013 2014 20150

6

12

17

23

29

16.2225 16.6518

21.7775

22.3161 22.4498 22.6349

Figure 8: Stock Turnover Ratio (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

SOLVENCY RATIOGEARING

WHAT FINANCIAL RATIOS ARE IMPORTANT?• This ratio shows as “the ratio of dept” (Midland, n/a).

•Thus, the high value of ratio should be avoided (Rees,1995).

•However, if the cash flow is stable and profit is also stable, then the company can afford a higher gearing (Midland, n/a).

ANALYSIS• J Sainsbury PLC was a stable level in first two years but, slightly increased by 8% in 2015 . The average of all three years is around 73.32%

•Tesco PLC, there was a high gearing ratio and peak at 273.85% in 2015.

•Based on this ratio, Tesco PLC, there is high of depts, which is higher than J Sainsbury PLC apparently.

FORMULAGearing = Short Term Loans & Overdrafts + Long term

Liabilities / Shareholders’ Funds * 100•E.g. Gearing (%) = (19364)/ 7071 = 273.85 %•This is calculated for Tesco PLC in 2015.

2013 2014 20150

75

150

225

300

91.9305108.6103

273.8509

69.9808 71.7308 78.2632

Figure 9: Gearing (%) (Fame, 2015).

Tesco PLC J Sainsbury PLCYears

%

ConclusionsTesco PLC J Sainsbury

PLC Notes

Profitability ratio

Gross Profit Margin

J Sainsbury PLC, there is a stable value all of the last three years.

Net Profit Margin Both of them lost in net profit in

2015.

Return on Capital Employed

There are low return in both of these companies

in 2015.

Liquidity ratio Current ratio Both of them less than 1.

Efficiency ratio

Creditors’ Turnover ratio

Every 29 days/89 days.

Stock turnover ratio

J Sainsbury is better all of last

three years.

Solvency ratio

Gearing Both of them are more than 50%.

INVESTORS•BBC NEWS (2014) said Buffett sold his stake on 16 October 2014.

•The value of Buffett’s stake has fallen by $750m in 2014 (Kollewe, 2014).

•Buffett told CNBC: “I made a mistake on Tesco. That was a huge mistake by me.” (Kollewe, 2014).

•Neil Woodford who is UK fund manager, decided to sell his Tesco’s stake in 2012 after its first profit warning College, 2014 (Kollewe, 2014).

NEWS •During 2014, Tesco PLC was investigated by Financial Reporting Council due to Tesco PLC profit have been overstated (BBC News, 2014). •On the other hand, “the grocer faces heavy competition from discounters such as Aldi and Lidl while it is locked in a bitter price war with major rivals including Asda and Morrisons” (Butler, 2014).Based on Ratios, J Sainsbury PLC is currently suitable

for investment.

Table 1: Conclusion.

ReferencesBBC NEWS (2014) Tesco accounts face fresh inquiry. Available at: http://www.bbc.co.uk/news/business-30575040 [accessed 04 December 2015].

Butler, S. (2014) Tesco and PwC face fresh inquiry over £263m overstatement of profits. Available at:http://www.theguardian.com/business/2014/dec/22/tesco-pwc-inquiry-accountancy-watchdog-profit-overstatement [accessed 04 December 2015].

Certificated Public Accountants Ireland. (2013) Finance for Non accountants from CPA Ireland, 36. Available at: www.cpaireland.ie/docs/default-source/Simple-Facts-of-Accounting-Bulletins/sfa-36---finance-for-non-accountants-part-two.pdf?sfvrsn=2 [accessed 04 December 2015].

Fame (2015) Detailed information on UK and Irish companies. Available at: http://fame.bvdinfo.com/version-2015124/Search.QuickSearch.serv?_CID=1&context=1HCPBRSPHZFFQ4W [Accessed 01 December 2015].

Fritz, R. (n/a) What Financial Ratios Are Important to the Retail Industry? Available at:http://smallbusiness.chron.com/financial-ratios-important-retail-industry-23307.html [Accessed 05 December 2015].

Investopedia (n/a) Inventory Turnover. Available at: http://www.investopedia.com/terms/i/inventoryturnover.asp [Accessed 05 December 2015].

Kollewe, J. (2014) Warren Buffett: ‘Tesco was a huge mistake’. Available at:http://www.theguardian.com/business/2014/oct/02/warren-buffet-tesco-huge-mistake [accessed 04 December 2015].

London Stock Exchange (2015) Price & markets. Available at:http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/prices-search/stock-prices-search.html?initial=T&page=2 [accessed 04 December 2015].

ReferencesMIDLAND. (n/a) BUAINESS FACTSHEET: FINANCIAL RATIOS NO.9 Revised April.

Rees, B. (1995) FINANCIAL ANALYSIS. 2nd edn. London: Prentice Hall.

RetailEconomics (2015) Top 10 UK Retailers. Available at:http://www.retaileconomics.co.uk/top10-retailers.asp [accessed 02 December 2015].

J Sainsbury PLC (2015) 145 years of history. Available at: http://www.j-sainsbury.co.uk/about-us/145-years-of-history/ [accessed 03 December 2015].

TESCO PLC (2015) Key facts available. Available at:http://www.tescoplc.com/index.asp?pageid=71 [accessed 03 December 2015].

Walsh, C. (2003) Key management ratios: master the management metrics that drive and control your business. 3rd edn. Harlow: Prentice Hall.

Zions business resource center (n/a) BUSINESS BUILDER 7: HOW TO ANALYSE PROFITABILITY. Available at: https://cdn.fbsbx.com/hphotos-xfp1/v/t59.2708-21/11699214_915104758548844_916624055_n.pdf/biz_resources_book-7.pdf?oh=088240d5c88ac05d554f23523ea28571&oe=56689CEA&dl=1 [ Accessed 05 December 2015].

QUESTIONS