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…………………………………………… 10
LIQUIDITY 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…………………………………………………… 14
EFFICIENCY 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

1
 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) ……………………………………………
21
3.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

2
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.

3
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

4
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)

5
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 2008

Tesco PLC 13.20% 12.96% 16.06%
J Sainsbury PLC 11.58% 8.57% 7.57%

ROCE

20.00%

15.00%

10.00%
J Sainsbury plc
5.00% Tesco plc

0.00%
2010 2009 2008
J Sainsbury plc 11.58% 8.57% 7.52%
Tesco plc 13.20% 12.96% 16.06%

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 EQUITY
This 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 2008

Tesco PLC 15.91% 16.56% 17.94%

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J Sainsbury PLC 11.7% 6.60% 6.66%

ROE

20.00%
18.00%
16.00%
14.00%
12.00%
J Sainsbury plc
10.00%
Tesco plc
8.00%
6.00%
4.00%
2.00%
0.00%
2008 2009 2010

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 2008
Tesco PLC 8.09% 7.76% 7.67%
J Sainsbury PLC 5.41% 5.47% 5.62%

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 Gross profit margin

10.00%

8.00%

6.00%

4.00% J SainsburY plc

Tesco plc
2.00%

0.00%
2010 2009 2008

J SainsburY plc 5.41% 5.47% 5.62%

Tesco plc 8.09% 7.76% 7.67%

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 2008

Tesco PLC 8.80% 8.41% 8.31%
Jsainsbury PLC 5.73% 5.79% 5.95%

8
 Mark up

10.00%
8.00%
6.00%
4.00%
J SainsburY PLC
2.00%
Tesco plc
0.00%
2010 2009 2008
J SainsburY 5.73% 5.79% 5.95%
PLC
Tesco plc 8.80% 8.41% 8.31%

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 2008

Tesco PLC 6.13% 6.08% 6.05%
Jsainsbury PLC 4.24% 2.97% 2.96%

Net profit margin

7.00%

6.00%

5.00%

4.00%

3.00%
J SainsburY PLC
2.00% Tesco PLC
1.00%

0.00%
2010 2009 2008

J SainsburY 4.24% 2.97% 2.96%

PLC
Tesco PLC 6.13% 6.08% 6.05%

9
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 2008

Tesco PLC 0.73:1 0.76:1 0.60:1
J Sainsbury PLC 0.66:1 0.54:1 0.64:1

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 Current ratio

0.8

0.6

0.4
J SainsburY PLC
0.2 Tesco PLC

0
2010 2009 2008
J SainsburY PLC 0.73 0.76 0.6
Tesco PLC 0.66 0.54 0.64

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 2008
Tesco PLC 0.56:1 0.61:1 0.37:1
J Sainsbury PLC 0.41:1 0.30:1 0.39:1

Acid test ratio

0.8

0.6

0.4
J Sainsbury plc
0.2
Tesco PLC
0
2010 2009 2008

J Sainsbury plc 0.41 0.3 0.39

Tesco PLC 0.56 0.61 0.37

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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 2008

Tesco PLC 0.29:1 0.22:1 0.32:1
J Sainsbury PLC 0.36:1 0.31:1 0.30:1

Cah flow adequacy(cash cover)

0.4

0.3

0.2
J Sainsbury plc
0.1 Tesco PLC

0
2010 2009 2008

J Sainsbury plc 0.29 0.22 0.32

Tesco PLC 0.36 0.31 0.3

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:

12
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 2008
Tesco PLC 1.37:1 1.24:1 1.19:1
J Sainsbury PLC 1.41:1 1.36:1 1.53:1

Quality of profit

1.5

1
tesco PLC
0.5
J Sainsbury plc
0
2010 2009 2008

tesco PLC 1.37 1.24 1.19

J Sainsbury plc 1.41 1.36 1.53

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 2008
Tesco PLC - - -
J Sainsbury PLC -19.57 25.26 -21.50

13
 OPERATING CASH CYCLE

40 25.26
20
0 -19.57%
J Sainsbury plc
-20 -21.5

-40
2008 2009 2010

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

14
Tesco PLC 19.16 18.62 17.97
J Sainsbury PLC 26.89 6.12 24.72

Inventory turnover ratios

30

20

10
tesco plc
0
2010 2009 2008 J Sainsbury plc

tesco plc 19.16 18.62 17.97

J 26.89 6.12 24.72
Sainsbury
plc

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 2008
Tesco PLC 19.04 19.59 20.31
J Sainsbury PLC 13.57 59.60 14.76

15
 Inventory days

60

50

40

30
Sainsburg
20
Tesco
10

0
2010 2009 2008

Sainsburg 13.57 59.6 14.76

Tesco 19.04 19.59 20.31

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 2008
Tesco PLC 1.66 1.67 1.98
J Sainsbury PLC 2.21 2.24 2.12

Non current assets turnover

2.5

1.5

1 Sainsburg
Tesco
0.5

0
2010 2009 2008

Sainsburg 2.21 2.24 2.12

Tesco 1.66 1.67 1.98

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 2008

Tesco PLC 3.87 4.17 3.98
J Sainsbury PLC 4.02 4.32 3.61

ASSET TURNOVER

4.4

4.2

3.8 J Sainsbury plc

Tesco plc
3.6

3.4

3.2
2008 2009 2010

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 2008

Tesco PLC - - -
J Sainsbury PLC 1.2 0.94 0.65

17
 Trade receivable collection period

1.2
1
0.8
0.6
0.4 J Sainsbury plc
Tesco PLC
0.2
0
2010 2009 2008

J Sainsbury plc 0.65 0.94 1.2

Tesco PLC

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 2008
Tesco PLC 35.47 34.86 32.89
J Sainsbury PLC 34.44 35.28 36.92

Trade payable payments period

37
36
35
34
33
TESCO PLC
32 J Sainsbury plc
31
30
2010 2009 2008

TESCO PLC 35.47 34.86 32.89

J Sainsbury plc 34.44 35.28 36.92

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:

18
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 2008
Tesco PLC 13.05p 11.96p 10.09p
J Sainsbury PLC 14.2p 13.2p 12p

DPS

15

10 J Sainsbury plc
5 tesco plc

0
2010 2009 2008

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 2008

Tesco 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.

19
 dividend yield

5.00%
4.00%
3.00% J Sainsbury plc
2.00% tesco plc
1.00%
0.00%
2010 2009 2008

3. EARNINGS PER SHARE

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

STOCK .

Earnings per share: 2010 2009 2008

Tesco PLC 29.33p 27.14p 26.95p
J Sainsbury PLC 32.1p 16.6p 19.1p

EPS

40
30
J Sainsbury plc
20
tesco plc
10
0
2010 2009 2008

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 2008
Tesco PLC 14.40 12.46 15.18
J Sainsbury PLC 10.37 18.8 17.4

20
 P/E

20
15
J Sainsbury plc
10
tesco plc
5
0
2010 2009 2008

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 2008

Tesco PLC 79.99% 96.01% 50.29%
J Sainsbury PLC 47.46% 49.74% 41.23%

D/E

100.00%

80.00%

60.00%

40.00% J Sainsbury plc

20.00% Tesco plc

0.00%
2010 2009 2008

J Sainsbury plc 47.46% 49.74% 41.23%

Tesco plc 79.99% 96% 50.29%

21
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 2008

Tesco PLC 44.44% 48.98% 33.46%
J Sainsbury PLC 32.18% 33.22% 29.21%

D/D+E

50.00%

40.00%

30.00%

20.00% j Sainsbury plc

10.00% Tesco plc

0.00%
2010 2009 2008
j Sainsbury plc 32.18% 33.22% 29.69%
Tesco plc 44.44% 48.98% 33.46%

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 2008
Tesco PLC 6.0 6.8 11.4
J Sainsbury PLC 5.7 3.7 4

22
 interest cover

15

10
J Sainsbury plc
5 tesco plc

0
2010 2009 2008

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 Plc
Tesco 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 94.5
7.67 7.76 8.09 Gross profit 5.6 5.4 5.4
2.17 2.32 2.68 Administrative and 2.8 2.2 1.9
operating expenses
5.9 5.8 6.07 Operating profit 2.9 3.55 0.03
0.52 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

23
Tesco plc vertical analysis:

350%
300% 2010
250%
200% 2009
150%
100% 2008
50%
0%

Profit for year

Administrative
revenue

Gross profit
Cost of sales

Operating

Finance cost
and operating

profit

300.00%
250.00%
200.00% 2008
150.00% 2009
100.00% 2010
50.00%
0.00%
Current

borrowings
current

current
Assets

liabilities

equity
Total
Long term
Current
Non-

Non-

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%

24
100% 100% 100% Total equity 100% 100% 100%

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

J SAINSBURY
the 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:

350%
300% 2010
250%
200% 2009
150%
100% 2008
50%
0%
Profit for year
Administrative
revenue

Gross profit
Cost of sales

Operating

Finance cost
and operating

profit

250.00%
200.00%
2008
150.00%
2009
100.00%
2010
50.00%
0.00%
Current

borrowings
current

current
Assets

liabilities

equity
Total
Long term
Current
Non-

Non-

25
TREND ANALYSIS :
TESCO PLC
Tesco plc 2008(£m) Change 2009(£m) Change 2010(£m) Change
(%) (%) (%)
Revenue 47298 100 53898 13.9 56910 5.58
Cost of 43668 100 49713 13.8 52303 5.2
sales
Gross profit 3630 100 4185 15.2 4607 10.08
NPBIT 2866 100 3279 14.4 3490 6.4

Non-current 23864 100 32085 34.4 34258 6.7

assets
Current 5992 100 13081 118.3 11392 -12.9
assets
Current 10345 100 17595 70.0 16015 -8.9
liabilities
Non- current 7946 100 15063 89.56 15327 1.75
liabilities

Capital 29856 100 45166 51.2 45650 1.07

Employed
Shareholder’ 11873 100 12906 8.7 14681 13.7
Fund

1400%
1200%
1000%
800% 2008
600% 2009
400% 2010
200%
0%
revenue cost of sales gross profit NPBIT

26
 140%
120%
100%
80% 2008
60% 2009
40% 2010
20%
0%
-20%

d
s
s

ed
ts
ts

un
ie
ltie
se
se

oy
lit

rf
bi
as
as

bi

pl

de
lia

lia

m
nt
nt

ol
le
nt
rre

nt
rre

eh
rre

ta
rre
cu
cu

ar
pi
cu

cu

sh
ca
n

n
No

No

J SAINSBURY PLC:
J Sainsbury 2008(£m) Change 2009(£m) Change 2010(£m) Change
plc (%) (%) (%)
Revenue 17837 100 18911 6.0 19964 5.5
Cost of 16835 100 17875 6.1 18882 5.6
sales
Gross profit 1002 100 1036 3.3 1082 4.4
NPBIT 532 100 784 47.3 848 8.1

Non-current 8393 100 8442 0.58 9002 6.6

assets
Current 1610 100 1570 -2.4 1797 14.4
assets
Current 2652 100 2919 10.0 2793 -4.3
liabilities
Non- current 2528 100 2738 8.3 3096 13.0
liabilities
Capital 10115 100 10033 -0.8 10855 8.1
Employed
Shareholder’ 4935 100 4376 -11.3 4966 13.4
Funds

27
 100%

80%

60% 2008
2009
40%
2010
20%

0%
revenue cost of sales gross profit NPBIT

120%
100%
80%
2008
60%
2009
40%
2010
20%
0%
-20%
d
s

ed
ts
ts

un
ie
ltie
se
se

oy
lit

rf
bi
as
as

bi

pl

de
lia

lia

m
nt
nt

ol
le
nt

nt
rre
rre

eh
rre

ta
rre
cu
cu

ar
pi
cu

cu

sh
ca
n

n
No

No

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

28
TESCO PLC (2010)
(Subject to rounding errors)
Operating Return on Equity
23.77%

Financial Leverage Multiplier x Return on Capital Employed

3.13 7.58%

Asset Turnover x Net profit margin

1.22 6.21%

TESCO PLC (2009)

(Subject to rounding errors)

Operating Return on Equity

25.40%

29
 Financial Leverage Multiplier x Return on Capital Employed
3.53 7.19%

Asset Turnover x Net profit margin

1.18 6.08%

TESCO PLC (2008)

(Subject to rounding errors)

Operating Return on Equity

24.08%

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)

Operating Return on Equity

17.07%

Financial Leverage Multiplier x Return on Capital Employed

2.18 7.80%

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%

Financial Leverage Multiplier x Return on Capital Employed

2.29 7.80%

Asset Turnover x Net Profit

1.88 margin
4.14%

J SAINSBURY PLC (2008)

(Subject to rounding errors)

Operating Return on Equity

10.78%

Financial Leverage Multiplier x Return on Capital Employed

2.04 0.05%

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

32
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 % 2009 % 2010 %

£m £m £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.

33
 J sainsbury OPERATING PROFIT
PLC

2008 % 2009 % 2010 %

£m £m £m

retailing 481 100.62762 577 123.8197 595 81.17326

Financial services -3 -0.627615 4 0.858369 7 0.95498

Property 1 0.20921 -115 -24.6781 131 17.87176

investment

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.

SEGMEN
T
J.SAINSBURY ASSETS

2008 % 2009 % 2010 %

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

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

34
The analysis shows an increase in retailing , property investmentand also financial
services in2010.

J.SAINSBURY SEGMENT LIABILITIES

2008 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 =Result

INCOME STATEMENT
Revenue 56910/56910 100% 53898/53898 100% 47298/47298 100%
*100 *100 *100

36
Cost of 52303/56910 91.95 49713/53898 92.23% 43668/47298 92.3%
sales *100 *100 *100
Gross 4607/56910 8.09% 4185/53898 7.76% 3630/47298 7.67%
profit *100 *100 *100
Administra 1527/56910 2.68% 1252/53898 2.32% 1027/47298 2.17%
tive and *100 *100 *100
operating
expenses
Operating 3457/56910 6.07% 3169/53898 5.87% 2791/47298 5.90%
profit *100 *100 *100
Financial 579/56910 1.01% 478/53898 0.88% 250/47298 0.52%
costs *100 *100 *100
Profit for 2336/56910 4.1% 2138/53898 3.9% 2130/47298 4.5%
the year *100 *100 *100
Balance sheet

2010 =result 2009 =result 2008 =result

Current 11392/14681 77.59% 13081/12906 101.35% 5992/11873 50.4%
asset *100 *100 *100
Non 34258/14681 233.34% 32085/12906 248.60% 23864/11873 199.47%
current *100 *100 *100
asset
Current 16015/14681 109.08% 17595/12906 136.33% 10345/11873 87.1%
liabilities *100 *100 *100
Non 15327/14681 104.40% 15063/12906 116.71% 7946/11873 66.9%
current *100 *100 *100
liabilities
Long term 11744/14681 79.99% 12391/12906 96.00% 5972/11873 50.2%
borrowing *100 *100 *100
Total 14681/14681 100% 12906/12906 100% 11873/11873 100%
equity *100 *100 *100

J SAINSBURY

VERTICAL ANALYSIS

37
 2010 = Result 2009 =Result 2008 =Result
INCOME STATEMENT
Revenue 19964/19964 100% 18911/18911 100% 17837/17837 100%
*100 *100 *100
Cost of 18882/19964 94.5% 17875/18911 94.5% 16835/17837 94.3%
sales *100 *100 *100
Gross 1082/19964 5.41% 1036/18911 5.4% 1002/17837 5.6%
profit *100 *100 *100
Administra 399/19964 1.99% 420/18911 2.2% 502/17837 2.8%
tive and *100 *100 *100
operating
expenses
Operating 710/19964 3.55% 673/18911 3.5% 530/17837 2.95
profit *100 *100 *100
Financial 148/19964 0.74% 132/17837 0.74%
costs *100 148/18911 *100
*100 0.78%

Profit for 585/19964 2.9% 289/18911 1.5% 329/17837 1.8%

the year *100 *100 *100

BALANCE SHEET
2010 =result 2009 =result 2008 =result
Current 1797/4966*100 36.1% 1570/4376 35.8% 1610/4935 32.6%
asset *100 *100
Non 9002/4966*100 181.2% 8442/4376 192.9% 8393/4935 170.0%
current *100 *100
asset
Current 2793/4966*100 56.2% 2919/4376 66.7% 2652/4935 53.73%
liabilities *100 *100
Non 3096/4966*100 62.3% 2738/4376 62.5% 2528/4935 51.2%
current *100 *100
liabilities
Long term 2357/4966*100 47.46% 2177/4376 49.7% 2037/4935 41.2%
borrowings *100 *100
Total 4966/4966*100 100% 4376/4376 100% 4935/4935 100%
equity *100 *100

38
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 100

Turnover

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 Assets
Current liabilities

ACID TEST RATIO:

Current Assets less inventory (stock)

Current liabilities

CASH FLOW RATIOS

Cash Flow Adequacy (Cash Cover):

Net Cash Flow from Operating Activities

Creditors 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 100

Market price per share

Earnings per share: (from note)

Price Earnings Ratio (P/E):

Market price per share

EPS

GEARING RATIO
Gearing =

40
Long Term Borrowings
Equity

Long Term Borrowings

Long Term Borrowing Equity

Interest Cover:

PBIT
Interest payable

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

2) Financial Leverage Multiplier:

Capital Employed / Shareholders’ Funds
N.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.html
www.j-sainsbury.co.uk/files/reports/ar2010_report.pdf
www.j-sainsbury.co.uk/files/reports/ar2009_report.pdf
www.j-sainsbury.co.uk/files/reports/ar2008_report.pdf

41
ar2010.tescoplc.com/~/media/Files/T/Tesco-Annual-Report-
2009/Attachments/pdf/tesco-annualreport.pdf
www.investis.com/plc/storage/tesco_annual_09.pdf
www.tescoplc.com/plc/ir/ar/archive/ar2008/arfs_08/2008_TESCO_REP
ORT_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.

42