A Financial Comparison Of Sainsbury And Tesco
The main aim of preparing financial report is because it provides information about the firm’s performance in the market. This report will focus mainly on financial analysis which will. The main aim of doing this report is to make recommendations and conclusion based on financial analysis. The information gathered for this report is collected mainly through annual report and the site of the company and Accounting books (Accounting for management, 2010).
The Accounting Policies
Accounting policies reflect the basic business facts which are important to investor’s capability to make a decisions of investing in a firm. Some of the accounting policies are described below:
BASIS OF PREPARATION
The preparation of financial statement are done on basis of historic cost convention, which excludes financial instruments, investment properties and derivatives available for sale of financial assets which are measured in fair value. The related assumptions and estimates are based on historical experiences and various other factors.
The Group which has the authority to govern the financial and operating policies of a firm which are associated with shareholding of more than one half of the voting rights is known as Subsidiaries. Joint ventures are legally formed entities between two or more firms in which the company has interest. In joint ventures investments are carried in the Group balance sheet at the cost plus post-acquisition changes in the Group’s share of net assets, less any impairment in value (J Sainsbury, 2009).
The revenue is said to be recognised when the major rewards and risks of products and services have been given to buyer and which can be measured. Revenue is money earned through sales by retail outlets (Frank Wood, 2008).
FIXED ASSTES AND DEPRICIATION:
Land and buildings are known as fixed assets. They are settled at cost less accumulated depreciation. During construction properties are assumed at cost less recognised impairment losses. Costs are any attributable and borrowing costs which are financed in accordance with the Group’s accounting policy. Depreciation is calculated as per the write off cost of the assets to their remaining values, on a straight-line method on the basis such as freehold buildings and leasehold properties (J Sainsbury, 2009).
Inventories are normally calculated at lower cost, in warehouses it is valued on a basis on goods-in and goods-out basis, and at retail outlets they are valued at calculated average cost. All direct expenditure and other indirect costs which are incurred in bringing inventories to their location are considered as costs (J Sainsbury, 2009).
From operating expenses a large amount is outflow on employees costs, which increased from (£m)1,957 in 2008 to 2,003 in 2009. Profit on sale of properties is high (£m) 57 in 2009 as compared to 7 in 2008. Auditors remuneration also increased to 1.7 million pounds in 2009 from 1.5 in 2008 (J Sainsbury, 2009).
Property Plants and Equipments
The cost has increased to 12,351 in 2009 than 11,745 in 2008 (£M), which indirectly increases the accumulated depreciation and impairment. The net book value of land and buildings comprises of 2009 2008
Freehold land and building 4,777 4,502
Long leasehold 951 938
Short leasehold 520 505
It measures company’s earning power from ongoing operations which is equal to earnings before deducting the interest payments, and income taxes, which is also called earnings before interest and taxes or operating income (J Sainsbury, 2009).
It includes provisions for Group onerous leases, Group restructuring and disposal provision, Group long service awards, where overall group provisons have increased from £73 m to £76m in 2009. But the company’s total provision have decreased by £1m in 2009 to £28m from £29m in 2008 (Sainsbury 2009).The lease provision covers outstanding lease commitments of up to an average of 30 years the restructuring provisions are likely to be utilised in the financial year beginning 22 March 2009 (J Sainsbury, 2009).
Financial Performance and Analysis
Ratio analysis is used by individuals and by firms to conduct a quantitative analysis of information in company’s financial statement. Data is collected from accounting statements and converted into statistics. The statistics derived can be used to study a firm’s performance over a period of time. (Owen, 2003)
Ratios can be placed in four main headings:
These are useful for institutional and private investors as they give an indication of company’s investment potential (Holmes, Sugdon & Gee, 2008)
Dividend cover = N.P.A.T and preference dividend / Paid and proposed ordinary dividend
This ratio shows the distribution procedure of the company as it pays how many times the current dividend could have been paid out of current profits and by implicating how much profit has been retained to finance future growth of the company.
Earnings per share = N.P.A.T and preference dividend / No of ordinary shares in issue during the year
This ratio indicates the earning per share when issued. A potential investor will prefer to invest in a company whose earnings per share are increasing.
Profitability ratio makes one understand how much profit a business makes. It also compares with the previous periods and/or with other companies. There are four major profitability ratios:
Return on capital Employed = Profit x 100 / Capital
The best way accessing profitability is to calculate a ratio known Return on Capital Employed. ROCE is expressed in percentage. It indicates the return on capital which is invested in business.It is one of the most important ratios (Owen, 2003).
Gross Profit Ratios = Gross Profit x 100 / Total sales revenue
This ratio explains us how successful the firm has been at the business. It is the difference between COGS and net sales. It also measures the profit earned by the company in relation to the amount of sales that it has made
Operating profit Ratio = Gross Profit x 100 / Cost of Goods Sold
This ratio measures the amount of profit added to the cost of goods sold. The cost of goods sold plus profit equals the sales revenue. The mark-up can be reduced to encourage extra sales activity, but this can effect by reduction in gross profit.
Net Profit ratio = Net Profit Before taxation x 100 / Total sales revenue
This ratio indicates the ability of the firm to face economic conditions e.g. low demand. It is also possible to establish a current trend (Owen, 2003)
Cash Conversion Ratios:
These ratios are concerned with measure the efficiency with asset. The greater the rate of turnover the more efficient is the utilisation of asset other things being equal. So it is defined as test of the relationship between sales and various assets of firm (Owen, 2003).
Stock Turnover ratio = Cost of Goods Sold / Average Stock
It indicates that how much stock has been sold and quantity of stock remained in warehouse. It relates with the profit of company. It is expressed in numbers.
Trade debtor collection period ratio = Average trade debtors x 365 / Total credit sales
It shows the debts collection of the firm. It shows how quickly receivables or debtors are converted into cash. It is the liquidity of debtors of a firm.
Trade creditors collection period = Average trade creditors x 365 / Total credit sales
The credit period enjoyed by the firm to make payment to their creditors is known as creditor’s turnover ratio. It includes all bills payable and other sundry creditors.
Gearing ratios are of two types:
Interest Cover = P.B.T / Interest charges
It explains the outstanding debt the company could easily pay. The more ratio the more debt of the company. When company’s ratio comes below one it means that it cannot fulfil its interest expenses.
Gearing Ratio = Preference shares + LTL x 100 / Shareholders fund + LTL
It demonstrates the degree to which a company’s activities are funded by owner's funds against creditor's funds.
Liquidity ratios measure the degree to which assets can be quickly converted into cash. They try to access how much cash the firm has on hand in the short term mainly for next financial year (Cox & Fardon, 1998). There are two major liquidity ratios:
Current Asset Turnover ratio = Current Asset / Current Liabilities
It is also known as Working Capital ratio. It is used in finding the financial position of firm. It is obtained by dividing current assets by current liabilities.
Acid Test Turnover Ratio = Current Asset – Stock / Current Liabilities
It indicates the capacity of the firm to pay its amount when it becomes due. It describes the firm’s liquidity position than the current asset ratio. It is suggested that the ratio must be at least 1:1.
Sainsbury has monetary downturn in the market in 2008 & 2009 when compared to Tesco in various modes of financial aspects. Sainsbury gross profit has decreased in 2009 compared to 2008, but in case of operating profit it has increased in 2009 compared to 2008. The stock turnover days are low means they supply stock in high quantities. In comparison with Tesco, Sainsbury has low percentage of profits, but the stock days are less which means that the company has high stock turnover rate which is good for the company.
Financial statements provide an outline of a firm’s economic condition in both short and long term. All the significant financial information of a business venture presented in an ordered manner and in a form easy to understand is known as financial statements (Maire Loughran 2010).There are four basic financial statements such as:
Group income statement
Statement of retained earnings
Cash Flow Statement
4.1 Balance Sheet:
It is the statement which describes the financial position of a business for a financial year which describes the assets, liabilities, and owners' equity at a particular point in time. All accounts such as an asset, a liability or equity are categorised in the General ledger of the company’s accounting statement. These ratios are based on the profit and cash flow is very vital for accessing company’s finance stability (Atrill & McLaney, 2008)
4.2 Group income statement:
Group income statement is income less expenses. If company’s income is more than expense, then company have a net profit. And in case Expense more than income then the company have a net loss.The purpose of profit and loss statement is to identify if business has made profit or loss over financial year (Maire Loughran, 2010).
4.3 Cash Flow Statement:
Cash flow statement which is also known as fund flow statement in financial accounting. It keeps the track of transaction of cash in and cash out of business. The cash flow statement is an analytical tool that is used in determining the short-term viability of a company, mainly its ability to pay bills on time (Cox & Fardon, 1998)
The people and groups who are concerned in cash flow statements are:
Prospective lenders or creditors,
4.4 Statement of recognised income and expenditure
Retained Earnings = retained earnings at the beginning – paid dividend + Net income.
Generally Accepted Accounting Principles (GAAP) requires retained earnings whenever comparative balance sheet and income statement are present. Retained earnings comprises of retained earnings at the beginning, paid dividend and net income . (Atrill & McLaney, 2008)
The audit committee of Sainsbury include members such as Gary Hughes who with the help of John Mc Adam and Mary Harris and others consisted of the audit committee. The audit committee became the integral part of the corporate framework to fulfil the board of directors’ stewardship accountability to its outside constituencies. The work of audit committee is active since the accounting and auditing process are focus to modify (J Sainsbury 2009).
The audit committee is selected by board to (Louis Braiotta, 2010):
Directly responsible for reimbursement and supervision of the company’s independent auditor employed by the company for the purpose of preparing and issuing an audit report.
Assist the board in monitoring
The reliability of the financial reporting process, systems of internal controls and financial statements and reports of Company.
To assess the company’s internal audit functions
The compliances by the Company the legal and dictatorial needs.
The board of the Sainsbury have the responsibility for the control which is included in the company’s operations which also includes risk management. The audit committee has been provided with several of these responsibilities. The internal control has been designed in the way that it manages rather than to eliminate the risk of failure in achieving the objectives of the company (J Sainsbury 2009).
From the report it can be said that Sainsbury had a bad year as their gross profit decreased. The company has used its earning to improve its position by investing in restructuring and by paying the dividend to shareholders. But EPS shows that there was decline in shareholder’s value. The company’s cash flow is in danger as it excess spending is financed by excess gains.
Sainsbury has gone through difficulties in marketing, supply chain and financial management. To lead the market they have to supply good quality food at low price as its rivalry Tesco is doing to gain consumers. Though they have invested their funds in long term project it is advisable to them that they cut down prices to gain consumers attention. It is advisable to investors that Sainsbury will grow in future as they do have strong position in market even if it is far behind its competitor Tesco (Tesco, 2009)
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