Accounting论文模板 – Tesco Plc and Sainsbury Plc Financial Analysis

1.0  Introduction

This report evaluates the financial performance of Tesco plc in terms of profitability, liquidity and investors relations. The analysis is based on ratios calculated in the appendix. Comparisons with Tesco’s competitor Sainsbury are done to determine how its performance ranks relative to its competition. The second part of the report deals with discussing corporate social reporting, its importance. A comparison of the two companies’ CSR is done.  In conclusion, the results highlight that Tesco’s financial performance is weak while its CSR reporting is wanting.

Results from the Tesco’s annual report (2015) reveal that its revenues were down 2.04% to £62.28 million. Its net income declined significantly by -400% with the firm making a net loss of -£5.72 billion.

2.0  Profitability

According to Jordan, Westerfield & Jordan (2001), profitability ratios give an indication of a firm’s efficiency in utilization of assets, and management of its operations to generate profits. Tesco’s profitability in 2015 did not match its 2014 performance while it was also weak relative to its competitors.

Tesco’s operating profit margin declined with the company making an operating loss of -9.30% in 2015 in comparison with an operating profit of 4.14%. Principally, a challenging business environment which resulted in a -2% revenue decline to £62.28 billion and a 62.64% increase in administrative costs to £2.70 billion in 2015 to cover redundancy costs were the key reasons for the decline in operating profit margin. In contrast, Tesco’s competitor Sainsbury’s operating profit margin declined to 0.34% in 2015 in comparison with 4.21% in 2014 also indicating a negative profitability trend. A highly competitive business environment with retailers resorting to discounting to increase sales hampered Sainsbury’s sales. The sluggish nature of the Sainsbury’s revenue with grew marginally by 0.73% to £23.78 billion in 2015 and 154.95% increase in administrative sales to £113 billion resulted in the firm’s weak operating earnings.

Tesco’s net profit margin also declined with the firm making a net loss margin of -9.25% in 2015 compared with a net profit of 1.53% in 2014. Sainsbury also made a net loss of -0.70% in 2015 in comparison with a net profit margin of 2.99% in 2014. A difficult business environment and increase in administrative costs effects on both firms were the main reasons for the decline in profitability. This further reveals Tesco’s weak profitability relative to both Sainsbury and the previous year’s performance.

Tesco’s return on equity (ROE) decreased to -81.54% in 2015 from 6.59% in 2014. This means that Tesco generated losses of 81.54 cents in 2015 compared with a net profit of 6.59 cents in 2014 from each £1 of sale made. This is an indication of weakness in the firm’s capacity to utilize of equity leading to unfavorable returns to its shareholders.

Overall, both Tesco and Sainsbury’s profitability are weak in comparison to the industry and previous year’s performance. However, Tesco’s profitability appears weaker compared with Sainsbury.

3.0  Liquidity

Atrill & McLaney indicate that liquidity “examines whether a firm has a sufficient liquid resources that it can use to meet maturing short term obligations“(p.169).

The current ratio shows the proportion of current assets relative to current liabilities with the current assets used to meet its current obligations.

Tesco’s current ratio decreased to 0.60 in 2015 in comparison with 0.68 in 2014. This shows a decrease in liquidity. However the decrease in the current ratio was due to a -17.31% decline in inventory to £2.96 billion. This decline in inventory therefore suggests swift movement of inventory as indicated by the firm’s inventory turnover period decreasing to 16.70 days in 2015 compared with 21.92 days in 2014. In contrast, the current ratio of Sainsbury remained steady at 0.64 in both years. This indicates that Sainsbury’s liquidity is greater in comparison with Tesco. However, Tesco seems to aggressively making use of its currents assets to try turnaround the firm’s fortunes.

Tesco’s quick ratio also declined to 0.45 in 2015 in comparison with 0.51 in 2014 suggesting a more aggressive use of its current assets to remain competitive in the market. Sainsbury’s quick ratio also remained relatively unchanged at 0.49 in 2015 in comparison with 0.50 in 2014 indicating stability in its liquidity. This also shows Tesco’s liquidity is relatively lower in comparison with Tesco.

4.0  Investors ratios

“The investor ratios highlight the market performance of firm in relation to the price of its shares, earnings and dividends” (Wood & Sangster 2005, p.410)

Tesco’s earnings per share (EPS), fell to -70.82p in 2015 in comparison with 12.07p in 2014. This indicates that company generated losses of -70.82 cents for each share in 2015 to indicate weak performance. In comparison, the EPS for Sainsbury also decreased to -8.7p in 2015 compared with 37.7p in 2014.

The price earnings (P/E) for Tesco in 2015 was -3.41 compared with -28.45 for Sainsbury. The negative P/Es indicates that both firms suffered losses. However, Tesco’s P/E is smaller to indicate that its financial performance suffered more resulting in the weak market performance in comparison with Sainsbury.

The dividend yield declined to 0.48% in 2015 compared with 5.2% in 2014 indicating weak returns from its dividends. In contrast, Sainsbury’s returns from dividends relative to its stock remained strong and steady by increasing marginally to 5.33% in 2015 compared with 5.17% in 2014. This is an indication that Sainsbury’s market performance was better compared with Tesco despite both firms not performing favorably as a result being under intense pressure in the industry.

Tesco’s weak EPS, P/E and dividend yield shows that its performance in the market has been weak compared with Sainsbury even though the latter’s results are no better.

5.0  Corporate social reporting

Van Horne & Wachowicz (2008) defines “Corporate social reporting (CSR) as a business outlook that acknowledges a firm’s responsibilities to its stakeholders and the natural environment” (p.5). Despite the primary objective of a business to ensure its shareholders receive favorable returns, it also has a responsibility to ensure the interests of other stakeholders are fulfilled. Therefore CSR indicates the extent to which a firm goes beyond its interests. This includes ensuring the protection of its customers by being fair and providing quality products, fair remuneration of its workers. Others include “maintaining fair hiring practices and safe working conditions, supporting education, and becoming involved in such environmental issues as clean air and water” (Van Horne & Wachowicz 2008, p.5). Hence CSR is concerned with indicating the steps a firm has taken in ensuring that the concerns of all its stakeholders have been considered.

Corporate social reporting has grown in importance including boosting investment in a company. This is because a firm with strong CSR is seen as having a holistic view of the business environment.

The Economist Intelligence Unit (2005) pinpoints the importance that CSR plays and this include: “it helps enhance the ethical behaviour of a company’s staff, improve corporate governance and transparency of its corporate dealings and improve its profitability” (p.1)

CSR also boosts the brand of a company since a firm that is engaged in various activities in the society as well having strong relations with its stakeholders will viewed favourably.

CSR also helps build and enhance a firm’s image to the public. A firm that is seen to have committed itself to a number of philanthropic engagements in the society is perceived as caring to the society. Consumers will feel obliged to also support its activities through purchasing of its products (The Economist Intelligence Unit 2005).

It also increases the productivity of its workforce since a firm that is seen in good light in the public will have its employees wanting to identify with it by working hard.

Tesco’s CSR’s reporting is “currently under review with the firm having installed a new committee with its core areas being customers and the local communities being the focal points” (Tesco plc annual report 2015, p.40). However, the firm has a number of successes of the past year including  “removing confectionery from checkouts in all UK stores and  launching a new Code of Business Conduct, followed by a company-wide training programme” ”(Tesco plc annual report 2015, p.40)

In contrast, Sainsbury’s CSR’s more robust in its analysis through benchmarking of the various achievements made during the year. This includes “Only UK company to be ranked as a Sustainability Leader in the ‘Food and Staples Retailing’ category of the Dow Jones Sustainability Index (‘DJSI’)” (Sainsbury annual report 2015, p.50). The firm also ranked highly in relation to the environment protect and curbing of carbon emissions,

Despite the companies’ CSR reporting, only Sainsbury tries to reveal the impact it has had on the operations of the respective firms. However, Tesco’s reporting of CSR in relation to the influence it has had on its operations and the environment is minimal. In Sainsbury’s case, the firm reveals the steps it has taken in reducing greenhouse emissions, with the aim being achieving a 30% reduction in the next four years in comparison with 65% in 2005. The achievements that the company has made has boosted Sainsbury’s image global since these accreditations have been done by credible institutions.

6.0  Recommendations and conclusion   

The areas which are of concern to Tesco include weak profitability, high competition and unfavorable working capital.  The main recommendations to deal with the highlighted issues will include increase asset efficiency, implementation of new credit and working policies to enhance its receivables and therefore boost its working capital. Finally, it can use price discounts and use of credit policy to attract customers.

In conclusion, Tesco’s profitability and market performance are unfavorable with a net profit loss of -9.26% and EPS of -70.82p.  Its profitability is weak relative to competitor given by a ROSF of -81.54% is lower compared with -3% for Sainsbury whose performance is also low. Its liquidity is however moderate given that its quick ratio of 0.45 is close to 0.49 for Sainsbury.

7.0  References

Atrill, P, McLaney, E (2006). Accounting and Finance for Non-specialists.

    Essex: Pearson Higher education.

The Economist Intelligence Unit. (2005). “The importance of corporate responsibility”.

     The economist. [Online]. Available from

     http://graphics.eiu.com/files/ad_pdfs/eiuoracle_corporateresponsibility_wp.pdf

     [Accessed: 29 March 2016].

Reuters finance. (2015). Tesco plc: Financials. [Online].available from

     http://www.reuters.com/finance/stocks/financialHighlights?symbol=SBRY.L

    [Accessed: March 28, 2016]

Ross, S, A, Westerfield, R, W, Jordan, B, D. (2001). Essentials of corporate finance.

     Boston: McGraw-Hill Irwin

Sainsbury Plc. annual report. (2015). J Sainsbury annual report and financial

 Statements 2015. [Online].available from http://www.j-sainsbury.co.uk/media/2475802/sainsburys_ar_2015.pdf    [Accessed: March 28, 2016]

Sainsbury Plc. annual report. (2014). J Sainsbury annual report and financial

 Statements 2014. [Online].available from http://www.j-J Sainsbury .co.uk/media/2064053/J Sainsbury _s_annual_report_and_accounts_13-14.pdf

    [Accessed: March 28, 2016]

Tesco plc annual report (2015) .Annual Report and Financial Statements 2015.

[Online].available from http://www.tescoplc.com/files/pdf/reports/ar15/download_annual_report.pdf

    [Accessed: March 28, 2016]

Tesco plc annual report (2014) .Annual Report and Financial Statements

2014[Online].available from http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf

    [Accessed: March 28, 2016]

Tesco plc annual report (2013) .Tesco PLC Annual Report and Financial Statements

2013 for year ended 23 February 2013. [Online].available from http://files.the-group.net/library/tesco/annualreport2013/pdfs/tesco_annual_report_2013.pdf

    [Accessed: March 28, 2016]

Wood, F, Sangster, A. (2005).Business accounting 2. New York: Pearson education ltd.

Yahoo finance. Sainsbury Plc: Historical prices. [Online]. Available from

https://uk.finance.yahoo.com/q/hp?s=SBRY.L&b=1&a=01&c=2014&e=28&d=02&f=2016&g=m  [Accessed: March 28, 2016]

Yahoo finance. Tesco Plc: Historical prices. [Online]. Available from

https://uk.finance.yahoo.com/q/hp?s=TSCO.L&b=1&a=01&c=2014&e=28&d=02&f=2016&g=m [Accessed: March 28, 2016]

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