FINANCIAL ANALYSIS OF SAINSBURY AND TESCO PLC

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As a trainee management consultant the work is divided into three tasks. Task one includes accounting policies which are needed to analyze and the items which needs to be considered are basis of preparation, revenue recognition, fixed assets and depreciation policies which helps us to know what is actually happening in these areas.

The task two evaluates the financial performance of J Sainsbury plc using the different statements in the annual report. In other words it is a comprehensive financial analysis for both companies Sainsbury and Tesco of both the years, and they are analyzed by investor, profitability, liquidity and working capital and gearing ratios.

The task three is concerned with the primary financial statements balance sheet, cash flow, income statement and statement of recognised income and expenditure; these all statements give a brief idea of how the company performs in every aspect in terms of finance. Also the Audit committee and the Internal control which acts a guide to the company in every aspect to take the firm in proper control.

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Going through all the analysis some recommendations and conclusions can be noted down to bring forward the company in every aspect.

Sr No.

TABLE OF CONTENTS

Page no.

1.

Introduction

2.

Accounting Policies

3.

Evaluation of Financial Performance and Analysis

3.1

Profitability ratios

3.2

Solvency ratios

3.3

Cash Conversion ratios

3.4

Gearing ratios

4.

Financial statements

4.1

Group Income statement

4.2

Balance Sheet

4.3

Cash Flow statement

4.4

Statement of recognised income and expenditure

5.

Audit committee

6.

Internal control

7.

Conclusion and Recommendations

8.

References

9.

Appendices

Introduction:

A UK based company J Sainsbury plc a firm which is into grocery, retailing and financial services business. The research is mainly to do the financial assessment of Sainsbury and the performance in compared to its industry competitors. Looking at the last 2 years report the company is now recovering from its passed performances. In recent years there has been many changes in the management and the board which has adopted many different approaches like expanding on retail, renovating, re-engineering of supply chain, brand repositioning, quality improvement, coat reduction and also in IT devision, which gave a lot of sales and profit to the company.

If we look in the past Sainsbury has less flow of cash flow and also in net profit. If we compare them with its competitor Tesco, it shows that Tesco is the market leader, and has a high profit margin (DataMonitor, 2010)

2. Accounting Policies:

Accounting policies are reliable and give the facts of the business which are crucial to make investment decisions for the business. If the company's profits are understated or overstated, the decisions taken by the investors appear to be false and financial resources get misallocated (Frank Wood, 2008).

Basis of preparation:

The financial statements are based on historical cost. The financial statements is in conventionality with IFRSs requires the use of assumptions, estimates and judgements that manipulate the amounts of assets and liabilities on the date of the financial statements and the reporting period amounts of revenues and expenses (J Sainbury 2009).

Subsidiaries:

Subsidiaries are all the entities over which the Group have rights to manage the operating and financial policies, which are related with shareholders voting rights. The Group income statement has all the subsidiaries from the date of acquisition. (J Sainbury 2009).

Joint ventures:

These entities are formed by their own interest wherein the group has an interest. The Group's share of results of its joint ventures are included in the income statement and makes use of the equity method of accounting. The Group's eradicate the profits and the losses interest in the joint venture. Joint ventures passes the investment in the Group balance sheet at the cost plus post-acquisition changes in the Group's net assets, less any difference in the value. (J Sainbury 2009).

Revenue Recognition:

Revenue can be described as the risks and rewards of the services and the products which have been sent to buyers which are efficiently measured.

Revenue is the sales of the retail outlets which do not include Value Added Tax. (J Sainbury 2009).

Fixed Assets and Depreciation:

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The fixed assets like land and building are made on cost less accumulated depreciation and also include impairment losses. The cost involves borrowing and costs directly attributable which are prepared in accordance with the policy of the group.

To write off the cost of the assets depreciation is calculated to their residual values, on a straight-line method on the leasehold properties and freehold buildings - 50 years, or the lease term if the lease term is shorter and fixtures, equipment and vehicles - 3 to 15 years.

(J Sainbury 2009).

Inventories:

The value of inventories are lower of cost and net realisable value, first in , first out basis is used in the warehouse and in retail it is calculated by average cost prices. The cost consist of all direct expenses and other suitable attributable costs which are used to bring the inventories to their present location (J Sainbury 2009).

Operating Profits:

A huge sum of expenditure is put on Employees costs, which raised from (£m)1,957 in 2008 to 2,003 in 2009. Profits are high on sales (£m) 57 in 2009 as compared to 7 in 2008. Auditors remuneration has been greater than before to 1.7 million pounds in 2009 from 1.5 in 2008.

Property Plants and Equipments

The cost of plant and machinery 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 building is as follows: 2009 2008

Short leasehold 520 505

Long leasehold 951 938

Freehold land and building 4,777 4,502

The calculation of earnings per share can be done by the 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 Sainbury 2009).

Provision:

Provisions for Group proves to be tedious , the groups figures have increased from £73 m to £76m in 2009, but the sainsburys total provision has decreased by £28m to £29m in 2008.

The disposal provisions relate to indemnities rising from the disposal of subsidiaries, where the timing of utilisation is uncertain (J Sainbury 2009).

3. Evaluation of Financial performance of Sainsbury Plc

Ratio is a quantitative relation between two amounts showing the number of times one value contains within the other. Data may be extracted from accounting statements and converted into statistics. These statistics can then be used to examine an entity's performance over a given period of time. Ratios may also be used to compare the current year's performance with that of previous years, or with similar entities. Such comparisons may be done on a percentage basis or by using simple factors.

Ratios can be placed in four main headings:

Profitability

Solvency

Cash Conversion

Gearing

3.1 Profitability ratios:

Profitability ratio tells you how much profit a business makes and compares with the previous periods or with other entities (Holmes, Sugdon & Gee, 2008)

Return on capital employed:

It should be higher than the borrowings of the company, the values show that Sainsbury has less ROCE than Tesco, we also need to consider the borrowings in relation to capital

Gross profit:

Gross Profit helps in analyzing the profit, given values shows that Tesco is more in profitability than Sainsbury.

Operating profit:

Operating Profit is concerned with the firms values says that Tesco is higher operating profit than Sainsbury. The Operating profit of Tesco has been the same for past 2 consecutive years.

Asset turnover:

Efficiency can be seen i.e. the proper utilisation of company's assets. Values show that the Sainsbury is higher in asset turnover than Tesco with a marginal difference.

3.2 Solvency ratio

Solvency ratios measure the extent to which assets can be quickly turned into cash. In other words they try to access how much cash the entity has available in the short term mainly for next twelve months

Current ratio:

Current ratio is concerned with the company's ability to pay in short term period. The value says there is a slight difference between Sainsbury and Tesco but Tesco is heading in 2009 year than 2008.

Quick ratio:

Quick ratio is concerned with the company's credibility to pay in short term period, by means of its liquid assets. The use of liquidity assets is higher of Tesco than Sainsbury

3.3 Cash conversion ratios:

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These ratios are concerned with measuring the efficiency with asset management. The efficiency with which the assets are used would be reflected with speed and rapidity with which assets are converted into sales (Holmes, Sugdon & Gee, 2008)

Stock turnover period:

Generally used in numbers but not in percentage, more the turnover of stock the more efficient the company, Tesco is high in turn over stock than Sainsbury.

Debtor's collection days:

Average collection period is related to this formula, it related to conversion of debtors to cash Sainsbury and Tesco have similar debtors collection period in 2009-08

Creditors payment days:

The credit purchase and the average amount outstanding in the particular year, the company can reduce its current assets by depending on credits. Sainsbury is higher in its creditors payment days than Tesco.

3.4 Gearing ratios:

Gearing ratio:

It looks after the financial performance of the owners fund and the creditors fund. Tesco controls its finance efficiently than Sainsbury.

Interest cover:

Interest cover is concerned with how the company pay its interest on pending debts. Tesco is more in interest cover compared to Sainsbury and it can pay its interest without difficulty.

3.4 Investment ratios:

These are useful for institutional and private investors as they give an indication of company's investment potential (Holmes, Sugdon & Gee, 2008)

Earnings per share:

Earnings per share show the profitability position. Tesco is high in earning per share than Sainsbury which also gives Tesco has greater profitability than Sainsbury.

Dividend cover

Dividend cover is the number of times the dividend paid from its profits.. For example Sainsbury dividend cover is 1.73 which says that the company's profit attributable to shareholders was 1.73 times the amount of dividend paid out and, Tesco is more in its profit attributable than Sainsbury.

4. Financial Statement:

Sainsbury Plc

Every business's primary objective is to achieve maximum profit but there are many other objectives that a company need to achieve. (Atrill & McLaney, 2008)

Profit objective

Product quality

Research and development

Market share in the industry

Social policy

Ecological issues

Financial accounting can be segregated in two different parts financial transactions with the detailed analysis of financial statements, and management accounting is concerned with the type of costing information and reporting management.

In this report we are concentrating on financial statements, which helps company in (Cox & Fardon, 1998)

It give records in detail format,

It is very useful for shareholders of the company,

It acts as a good help to creditors and the bank,

It gives clear idea about the internal revenue of the company,

Registrar of the company,

Outsiders make the rules they set the standard accounting practice,

It gives a detailed ,true and fair view of the business

Financial statements are produced annually.

Financial Statements are of four types:

Group Income Statement

Balance Sheet

Cash Flow Statement

Statement Of Recognised Income And Expense

This report will give us the logical function of these financial statements and the prototype of financial statements individually.

Group Income Statement:

The profit and loss account financial statement basically shows the profitability of the business and also the number of expenses taking place in the company. In other words the profits which company has received in a particular period of time and the payments which are made.

It shows the:

Sales of the company

COGS Cost of goods sold in the business

It also includes the overheads of the business

The equation of Profit And Loss Account is very easy it includes revenue and expenses.

Revenue-Expenses= Profit and Loss

If the revenue of the company is higher than expenses then the company is gaining adequate profit by it sales and if the expenses are more that profit then the company is dealing with losses. If this situation exists the company has to do some changes with the sales or the productivity to manage up with its profits. (Atrill & McLaney, 2008)

Balance Sheet.

Balance sheet is a second form of financial statement which gives detail of assets, liabilities and the capital of the company: (Atrill & McLaney, 2008)

Assets includes Land & Building, Machinery, Vehicles, Stock, Debtors, Cash in hand and Cash at Bank

Liabilities has creditors (amount owed by the business to it suppliers),loans and bank overdraft

Capital owns by company on the specific date.

The equation of Balance Sheet is very simple which includes assets, liabilities and capital:

Capital = Assets-Liabilities

4.3 Cash Flow Statement:

Cash flow statement includes information from the profit and loss account and balance sheet both and all together it measures the flow of the money which is going out and coming in.

The Profit and Loss Accounts Statement, Balance sheet and Cash Flow Statement three financial statements cannot operate individually because each of them say something on the particular aspect in financial state of the business.

The main reason for preparing these financial statements is to inform the company about the company situation and its growth, measure the performance and fill the gaps if there are any, accumulate and optimum usage of finance for the future business, complete the official issues and think about liability for tax. (Atrill & McLaney, 2008)

4. 4 Statement of Recognised Income and Expense

Generally Accepted Accounting Principles (GAAP) requires retained earnings whenever comparative balance sheet and income statement are present. Retained earnings consist of beginning retained earnings, dividend paid and net income which gives retained earnings. (Atrill & McLaney, 2008)

Ending retained earnings= beginning retained earnings - dividend paid + net income.

5. Audit Committee:

Gary Hughes, John Mc Adam and Mary Harris are members of the audit. This committee is very important to form as it looks after the accountability. ( Braiotta, 2010).

Purpose:

The Board of directors elect the members of the audit committee ( Braiotta, 2010)

Assist the board in monitoring

The financial reporting process, internal controls and financial statements and reports of Company are covered by the committee.

The Audit committee also measure the company's internal audit functions

It also looks after the company's legal and dictatorial needs

It also looks after the reimbursement and supervision of the company's independent auditor employed by the company to full the company's needs with proper audit report (Sainsbury,2009)

6. Internal Control:

The board of directors are responsible in control of the operations which includes risk management. The audit committee has been allotted several responsibilities. The internal control has been designed for the company as it manages the operations of the firm to eliminate the risk of failure in achieving the objectives of the company (Sainsbury 2009)

7. Conclusion:

Sainsbury Plc is on the no.3 position in the Grocery industry which is leaded by Tesco and Asda on the number one and two position respectively,

Sainsbury is improving in every aspect in terms retail expansion, renovating, re-engineering of supply chain, creating a brand image , improvement in quality, reduction in cost and also in IT which gave a lot of sales and profit to the company.

It is having a great position in the market in its field

The profits achieved by Sainsbury are all in positive As an investors point of view Sainsbury is a trusted organisation wherein investors can introduce themselves as it shows a positive profit.

7. Recommendations:

The company should focus on reducing its administrative expenses and operating expenses as it will have a positive impact on the profits which they earn.

Better returns can be achieved when the company follows the standards.

Even the audit committee and the internal control should be well managed as these two teams act as risk management team for the company.