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Financial And Management Accounting

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Financial and Management Accounting

Financial and Management Accounting


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  • 1. Main Body Word Count:2989
  • 2. Table of Contents 1 Section 1 ............................................................................................................................. 61.1 Performance Ratios .................................................................................................................. 6 1.1.1 Return on Capital Employed (ROCE) ..................................................................................................................... 6 1.1.2 Return On Shareholders Funds (ROSF)............................................................................................................... 7 1.1.3 Net Profit Percentage (NPP) ...................................................................................................................................... 9 1.1.4 Gross Profit Percentage (GPP) ............................................................................................................................... 101.2 Efficiency Ratios .......................................................................................................................12 1.2.1 Inventory Turnover in days .................................................................................................................................... 12 1.2.2 Accounts receivables turnover .............................................................................................................................. 12 1.2.3 Accounts payable turnover...................................................................................................................................... 13 1.2.4 Working Capital Cycle ................................................................................................................................................ 141.3 Liquidity Ratios ........................................................................................................................14 1.3.1 Current Ratio .................................................................................................................................................................. 14 1.3.2 Quick Asset Ratio .......................................................................................................................................................... 161.4 Financial Gearing Ratios........................................................................................................17 1.4.1 Gearing ratio ................................................................................................................................................................... 17 1.4.2 Interest Cover................................................................................................................................................................. 181.5 Investment ratios ....................................................................................................................19 1.5.1 Earnings Per Share (EPS) ......................................................................................................................................... 19 1.5.2 Price Earnings Ratio (P/E)....................................................................................................................................... 19 1.5.3 Dividend Yield ratio .................................................................................................................................................... 20 1.5.4 Dividend Payout Ratio ............................................................................................................................................... 21 1.5.5 Dividend Cover Ratio .................................................................................................................................................. 211.6 Conclusion .................................................................................................................................22 2 Section 2 .......................................................................................................................... 232.1 Annual Report and Informational Needs from Users ...................................................232.2 Accounting conventions ........................................................................................................242.3 Applicability ..............................................................................................................................252.4 Conclusion .................................................................................................................................26 3 Bibliography .................................................................................................................. 27 Appendix 1. Brief Presentation of the Companies ...................................................... 29 Appendix 2. Formulas ......................................................................................................... 30 Appendix 3. Working Ratios for Tesco plc .................................................................... 31 Appendix 4. Working Ratios for J Sainsbury plc .......................................................... 32 Appendix 5. Tesco - Long-Term Borrowing 2009 ....................................................... 33 Appendix 6. Tesco plc Financial Statements ................................................................ 34 Appendix 7. J Sainsbury plc Financial Statements...................................................... 40 Appendix 8. Data used to calculate Investment ratios .............................................. 46
  • 3. Table of FiguresFigure 1: Comparative analysis - Tesco plc & J Sainsbury plc ........................................................................ 6Figure 2: Tesco PLC - Negative impact of Long-Term Borrowings in ROCE .................................................. 6Figure 3: J Sainsbury plc - Positive Impact of PBIT upon ROCE .................................................................... 7Figure 4: Comparative Return On Shareholders Funds ................................................................................. 7Figure 5: J Sainsbury plc - Positive Impact of Net Profit after taxes on ROSF ................................................ 8Figure 6: Comparative analysis - Equity and Long-Term Borrowings ............................................................. 8Figure 7: Comparative Net Profit Ratio ........................................................................................................... 9Figure 8: Tesco plc - NPP & Operating Expenses .......................................................................................... 9Figure 9: J Sainsbury plc - NPP & Operating Expenses ................................................................................. 9Figure 10: Comparative analysis of Gross Profit Ratio.................................................................................. 10Figure 11: Tesco PLC - GPP and proportion of selling cost .......................................................................... 10Figure 12: J Sainsbury plc - GPP & Changing % of costs ............................................................................. 11Figure 13: Inventory (stock) holding period - (days) ...................................................................................... 12Figure 14: Receivables (debtor) payment period (days) ............................................................................... 13Figure 15: Comparative analysis of accounts payable turnover .................................................................... 13Figure 16: Comparative analysis of Working Capital..................................................................................... 14Figure 17: Comparative analysis of current ratio ........................................................................................... 15Figure 18: Tesco PLC - Impact of Current Assets & Loans upon Current ratio ............................................. 15Figure 19: J Sainsburys plc - Impact of Current Assets & and Loans upon Current ratio ............................. 15Figure 20: Comparative analysis of Quick Ratio ........................................................................................... 16Figure 21: Comparative Gearing Ratios ........................................................................................................ 17Figure 22: Tesco plc - Long-term borrowing and gearings ............................................................................ 17Figure 23: Comparative Interest Cover ......................................................................................................... 18Figure 24: Comparative Analysis of Earnings Per Share .............................................................................. 19Figure 25: Comparative analysis of P/E ........................................................................................................ 20Figure 26: Comparative Analysis Dividend Yield Ratio ................................................................................. 20Figure 27: Comparative Analysis of Dividend Payout Ratio .......................................................................... 21Figure 28: Comparative Analysis of Dividend Cover Ratio............................................................................ 21Figure 29: Main users of financial information ............................................................................................... 23 3
  • 4. Table of Abbreviations 4
  • 5. EXECUTIVE SUMMARYThe following report is on Financial Accounting and is divided into two sub sects.The first part analysis the various ratios used to determine the financial performance of acompany. The same ratios are studied through the financial reports of two of the largest retailers inUK. The primary company used for the report in Tesco plc and J Sainsbury plc its closest rival’sperformance is used to get a comparison. The report looks at both the companies over a period offive years to analyse the trends and the fluctuations. The analysis of ratios is divided into fourparts:  Definition of the indicator  Comparative view of results between the two companies  Analysis of differences identified in point two  ConclusionThe performance of both the companies are analysed through the analysis of their ratios ofprofitability, liquidity, efficiency, gearing and investment. While Tesco looks like performing welldespite of the recession, when the same is compared with its fiercest rival, J Sainsbury plc, thepicture seems quite different.The report in the second half goes on to analyse the users of the annual financial reports, the mostcommon accounting conventions and the advantages and disadvantages of the annual financialdocuments. 5
  • 6. 1 Section 11.1 Performance Ratios The following analysis does a study of the ratios commonly used in gauging the performance and to provide a clear picture of the level of efficiency that the management of the company has in wealth creation for the share holders. 1.1.1 Return on Capital Employed (ROCE) The ROCE establishes the correlation between the profits (PBIT) and the capital employed via the equity and/or the long-term borrowings. It indicates the percentage of return on the capital employed. It is also used as a tool to set up future profitability targets. Tesco plc displays higher ROCE results over the five years compared with J Sainsbury plc. Figure 1: Comparative analysis - Tesco plc & J Sainsbury plc However, significant changes were identified: Tesco PLC experienced a decrease of its ROCE in 2009 (-21%) and this is mainly due to a steep increase in the long-term borrowings (+107%). Refer to Appendix 5. Tesco PLC decided to obtain 6 new loans totalling around 4 Billion £ with an average interest of 5.55% Figure 2: Tesco PLC - Negative impact of Long-Term Borrowings in ROCE 6
  • 7. In contrast, J Sainsbury plcs ROCE increased by 28% in 2010. This change is linked to the increase of profits before taxes (+43%) that is mainly contributed by of profits of £138m from joint ventures. Figure 3: J Sainsbury plc - Positive Impact of PBIT upon ROCE1.1.2 Return On Shareholders Funds (ROSF) The RSOF indicates the level of effectiveness that the company has to generates profits with the money invested by shareholders. Tesco PLC and J Sainsbury plc experienced opposite ROSF results between 2007 and 2010. Whilst Tesco PLC decreased slightly (~3% in average) over the years, J Sainsbury plc increased (~17% in average). Figure 4: Comparative Return On Shareholders Funds J Sainsbury plc displayed a significant improvement in 2010 (+78%), which was due to a rise of net profit after taxes (+102%) during the same year. This rise in the net profits has been boosted by the profits from joint ventures (+180%). 7
  • 8. Figure 5: J Sainsbury plc - Positive Impact of Net Profit after taxes on ROSFIt can also be noticed that the management of equity differs between the companies. Tesco PLCsutilises more the long-term borrowings than equity to generate profits. As a result, the financecosts increase and the net profit decreases. On the other hand, J Sainsbury plc uses more equitythan borrowings.. Figure 6: Comparative analysis - Equity and Long-Term Borrowings 8
  • 9. 1.1.3 Net Profit Percentage (NPP)The net profit percentage is considered as one of the best measures of overall results of companies. Itindicates the remaining profit after production and operation costs. (Accounting Tools , n.d.).Tesco PLC displayed a higher and stable NPP whereas J Sainsbury plcs results were lower andunstable. Figure 7: Comparative Net Profit RatioIt can be noticed that policies related to operating expenses have changed with Tesco PLC increasedthe operating expenses and J Sainsbury plc reduced them.In 2007 Tesco PLC reached its highest NPPresult for two reasons, the operatingexpenses were low and exceptional incomessuch as Pensions adjustment - Finance Act2006 (£258m) were recorded.Nevertheless, in 2009 the NPP faileddrastically due to a significant increase ofoperating expenses (+37%) mainlyadministrative expenditures. Figure 8: Tesco plc - NPP & Operating ExpensesBy contrast, J Sainsbury plc reduced theoperation expenses from 2007 to 2011 by 63%.Due to this reduction of costs, the NPPreached its highest level by 2011 with4.47%. Figure 9: J Sainsbury plc - NPP & Operating Expenses 9
  • 10. 1.1.4 Gross Profit Percentage (GPP)The GPP reflects the margin of profit that companies are able to earn on their trading andmanufacturing activity after deducting the cost of sales. The higher the percentage the better it is forthe company as it provides more financial resources to pay costs associated with growing thebusiness (e.g. R&D). (Newcorn, n.d.)Tesco PLC displays a higher trade effectiveness compared with J Sainsbury plc. Figure 10: Comparative analysis of Gross Profit RatioTesco PLCs GPP increased from 2009 to 2011 by 7%. It is explained by the decrease of sellingcosts. This was propelled by the modernisation of IT systems that allowed the reduction of sellingcosts (e.g. the improvement of Tesco direct website to sell online more non-food products and reducecosts - less stores resulting in fewer employees) Figure 11: Tesco PLC - GPP and proportion of selling cost 10
  • 11. J Sainsbury plcs GPP decreased by 18% between 2007 and 2008 due to an increase of cost ofsales by 2.11%. Figure 12: J Sainsbury plc - GPP & Changing % of costs 11
  • 12. 1.2 Efficiency Ratios These ratios provide a clear picture of how well the two companies use their assets and liabilities internally (Investopedia, n.d.) 1.2.1 Inventory Turnover in days This ratio calculates the number of days taken by the company to sell a piece of stock (Ciancanelli et al., 2009: 20). The optimal inventory turnover is the shortest one because the shorter is the stock turnover period, the quicker the good is converted into cash. Based on figure 13, it can be stated that J Sainsburys plc gets the cash back quicker (14 days on average) than Tesco PLC (19 days on average). As the chart below shows a substantially higher inventory period for Tesco PLC and this can be explained from the fact that Tesco PLC also has operations in other countries (e.g. Japan) which results in a higher inventory turnover cycle, whereas J Sainsbury plc has market exclusively in UK. A possible recommendation to Tesco PLC is to keep improving the internet channel to reduce geographical distances and better manage stocks. Figure 13: Inventory (stock) holding period - (days) 1.2.2 Accounts receivables turnover This ratio indicates how long, on average, credit consumers take to pay the amounts that they owe to the company (Atrill and McLaney, 2011: 201). It has a direct impact on the cash flow of the company. It is the efficiency of the company to collect debts at the shortest time possible. 12
  • 13. Figure 14: Receivables (debtor) payment period (days) Based on figure 14, J Sainsburys plc’s management of credit from debtors is more effective than Tesco PLC. In some cases, the company collects three times faster than Tesco PLC. It could be suggested that Tesco PLC should improve its credit control policies to ensure better work capital.1.2.3 Accounts payable turnover This ratio allows quantifying the rate at which a company pays off its suppliers. Figure 15: Comparative analysis of accounts payable turnover Figure 15 illustrates the different trends of accounts payable turnover for both companies over the last 5 years. Tesco PLC has increased this period by 13% from 2007 to 2011.Two aspects shall be underlined as the main reason:  The company has the opportunity to use the cash allocated in the short-term liabilities and make more money through better rotation of the same.  As the company is well established in the retailer market, suppliers trust it and are ready to wait longer. However, there is also a risk of undermining commercial relationships with suppliers. 13
  • 14. As for J Sainsburys plc, the number of accounts payable has been reduced by 4%. It could be perceived as an effective management of short-term debts and a source of motivation to do business with the company. 1.2.4 Working Capital Cycle The working capital allows measuring both, the companys liquid assets and its short-term financial health. The working capital can be positive or negative; it will depend on the sector of the company and the level of inventory, receivable and payable that the company is carrying. For retailers companies such as Tesco PLC and J Sainsbury plc, the inventory turns on a cash basis very fast. Given that, their need to have an important working capital available is very low. (Kennon, n.d.) Figure 16: Comparative analysis of Working Capital As shown in figure 16, both companies display a negative working capital. It means that their current liabilities (Account payables) are higher than their turnover receivable. This result does not represent a risk for the company because the time to get the money from the customer after buying a piece of stock is lesser than the time available to pay to creditors.1.3 Liquidity Ratios The liquidity ratios indicate the availability of the company to meet short-terms financial obligations (Atrill and McLaney, 2011: 207). The higher the value of the ratio, the bigger is the margin of safety that the company has to pay current debts. (Investopedia, n.d.) 1.3.1 Current Ratio This ratio specifies if the company is able to pay back its debts and payables with its current assets such as inventory, trade and other receivables. Based on figure 17, on average, both companies have the same current ratio average. However, their value is lesser than one which indicates that the companies would be unable to pay back its 14
  • 15. debts if they come due at that point (Investopedia, n.d.). Nevertheless, given that retailers havethe possibility to convert products into cash quickly; it would not represent a signification risk topayables. Figure 17: Comparative analysis of current ratioIn 2009, Tesco plc increased by 27% itscurrent ratio. It could be mainly due to anincrease of its current assets (+118%)coming from loans that Tesco PLC has tobanks (£2,100) and customers (£1918) andan increase of current liabilities by 71%. Figure 18: Tesco PLC - Impact of Current Assets & Loans upon Current ratio In the contrary, J Sainsbury plc decreased its current ratio during the same year. It could be due to an increase of current liabilities (+12%) and a reduction of the current assets (-8%). The later was due to a -90% decrease of the loans to banks and other financial assets. Figure 19: J Sainsburys plc - Impact of Current Assets & and Loans upon Current ratio 15
  • 16. 1.3.2 Quick Asset Ratio This ratio is similar to the current ratio except that it does not include the inventories in the calculation. Figure 20: Comparative analysis of Quick Ratio In 2009 Tesco plc recorded a large surge in its current assets, due to loans and advances to other banks (£1541 m) and increase on cash and cash equivalent (£3,509 m). 16
  • 17. 1.4 Financial Gearing Ratios These ratios indicate the extent to which a company is under debt and the burden of the financial obligation thereof. The ratios are analysed in relation to the investment of shareholders through equity and the outside financing used in the company operations. Moreover, gearing ratios are an effective indicator of the level of risk associated with the business. The higher a companys degree of leverage, the more the company is considered risky. (Investopedia, n.d.) 1.4.1 Gearing ratio The ratio measures the long-term borrowings the firm uses to finance the business in relation to the total capital structure (all borrowings + total equity + preferred equity). Figure 21: Comparative Gearing Ratios J Sainsbury plc experienced a lower level of gearing ratio than Tesco PLC. While this might project a risky scenario for Tesco, it is also important to understand that low interest on long term debt also encourages a company to seek funds through this mode. Besides, in 2009 Tesco plc reached the highest gearing ratio level over the five years. This behaviour is due to an important rise of long-term borrowings (+107%). Due to that, the firm reached 48.98% gearing ratio (47% higher than the previous year). An additional consequence of the increase of long-term borrowings is that the ROCE has decreased. Figure 22: Tesco plc - Long-term borrowing and gearings 17
  • 18. 1.4.2 Interest Cover It is a ratio utilised to calculate how safe a company is on its financial cost obligation payments. The lower the ratio, the more the company is under risk in their payment on long term debt. Figure 23: Comparative Interest Cover For Tesco PLC, Interest Cover Ratio decreased drastically from 2008 to 2009 (-42%). It was due to an increase of interest expenses (+91%) during the same period (Tesco plc, 2009: 70). 18
  • 19. 1.5 Investment ratios These ratios are considered separately from those that are used to interpret financial statements. In fact, qualities of the company are not directly linked with companys management (Ciancanelli et al., 2009: 37) 1.5.1 Earnings Per Share (EPS) EPS is the most frequent ratio used to determine the shares price. It relates the earnings generated by the business, and available to shareholders, during a period, to the number of shares in issue. (Atrill and McLaney, 2011: 218). The EPS ratio shows the strength of a company to make money in relation to the shares. The chart below shows a spurt in the J Sainsbury plc EPS as against Tesco PLC mainly due to a faster growth of net profits. Figure 24: Comparative Analysis of Earnings Per Share 1.5.2 Price Earnings Ratio (P/E) The P/E ratio is a measure of investors expectations as future earnings (Ciancanelli et al., 2009). It takes into account the market price of an ordinary share with the earnings per ordinary share. There are proponents and opponents of a higher P/E ratio. Tesco PLC ratio which has remained stable can also be defined as the returns on a lower investment, whereas a higher ratio of J Sainsbury plc suggests better future prospects. 19
  • 20. Figure 25: Comparative analysis of P/E1.5.3 Dividend Yield ratio The ratio gives a scenario in context to the dividend and the market price of the shares. This can fluctuate as per the fluctuation of the market price. The growth of Tesco PLC in 2009 is mainly driven due to the share price being the lowest in the mentioned period. This ratio allows shareholders to assess the cash return on their investment in the business. Figure 26: Comparative Analysis Dividend Yield Ratio 20
  • 21. 1.5.4 Dividend Payout Ratio The ratio gives a synopsis of the ratio of cash payout to the total available earnings for the shareholders. The effect on J Sainsbury plc’s payout ratio is highlighted in the figure below. Figure 27: Comparative Analysis of Dividend Payout Ratio1.5.5 Dividend Cover Ratio The ratio gives a picture of the comfort with which a company is able to dole out dividends. As the figure below points out, Tesco PLC has historically had a much higher cover ratio. J Sainsbury plc meanwhile showed a ratio of around one in the year 2009. This was due to the really high dividend payout ratio as discussed in Figure 27. Figure 28: Comparative Analysis of Dividend Cover Ratio 21
  • 22. 1.6 Conclusion While historically Tesco has been performing better and delivering better results in financial terms, the last two years has seen a reversal of fortunes through better P/E ratio and higher EPS for J Sainsbury plc. While both the companies have been showing a healthy trend even during the worst period of recession, J Sainsbury plc seems to have recovered faster and projecting better figures post recession. 22
  • 23. 2 Section 22.1 Annual Report and Informational Needs from Users The annual report (AR) is the companys most important strategic communication document, setting forth the firms vision, values and operating philosophy, as well as its communication strategy (Goldstein, 2001). The different interested parties are illustrated and described below: Figure 29: Main users of financial information Adapted from: (Atrill and McLaney, 2011: 5) 23
  • 24. 2.2 Accounting conventions The accounting conventions that are commonly used by the users listed above are: 24
  • 25. 2.3 Applicability The relevance of any financial data is subjective to the need of the user. In the current age of creative accounting the information provided also might not be in the required form by the user. Advantages Being the primary source of information about a company’s performance and health, the annual reports are a valued document for any investor. For an ordinary common investor and analyst, these reports still constitute the main source of information about the health of their investment. The reports are also used by other users mentioned earlier for their objectives. These reports are also used to derive the ratios which give the required information to a user for all types of decisions. Disadvantages Historic cost convention is based on a figure in the past which don’t have any relevance in the current times. Properties and land should be periodically revalue for the statement to show the real picture. The prudence convention can lead to a misinformation of financial placement of the organization which can result in resulting in users making poor decisions. Money measurement concept quantifies all factors in terms of money including goodwill and brands value which can make the statements very subjective. Realisation and the accruals concepts show revenues and expenses in the books prior to receiving or deducting them thus paving way for a potential over or understatement of figures. The financial accounting by nature does not represent the current financial state of a firm because it only analysis historical data (Anonymous, n.d.). As a result, managers cannot completely base their decisions on the AR. External factors such as the inflation, political or economical issues are not included in the annual report. As a result, decisions made by users can not only be based on the financial information. Accounting conventions do not measure key resources of the business such as the level of workforce or leadership. As a result, the information provided does not allow users to estimate the potential value of the firm. Potential income or expenses are not considered in the financial statement since the financial information is recorded based on the accrual basis accounting. 25
  • 26. 2.4 Conclusion The annual reports are a very important part of the financial markets as well as reporting method for a company. This is really depended on by majority of the investors for their evaluation of a company and their investments. But it is also important to ensure that all aspects of the reports are looked at and judgements are not passed after analysing a single years performance. While studying the ratios also it is equally important to analyse all, profitability, liquidity, financial, efficiency and investment before arriving at a conclusion about a portfolio. 26
  • 27. 3 Bibliography  Accounting for Management Net Profit Ratio, [Online], Available: http://www.accountingformanagement.com/net_profit_ratio.htm [03 Mar 2012].  Accounting Tools Net Profit Ratio, [Online], Available: http://www.accountingtools.com/net- profit-ratio [05 Mar 2012].  Alexander, M. and Young, D. (1996) Outsourcing: Wheres the value, Long Range Planning, vol. 29, no. 5, pp. 728-30.  Anonymous Lessons 1: Introduction to acconting, [Online], Available: http://www.b- u.ac.in/sde_book/bbm_account.pdf [Mar Mar 2012].  Atrill, P. and McLaney, E. (2011) Analysing and interpreting financial statements, in Atrill, P. and McLaney, E. Accouting and Finance for Non-Specialists, 7th edition, Harlow: Prentice Hall - Financial Times.  Ciancanelli, P., Dunn, J., Koch, B. and Stewart, M. (2009) Analysis of financial statement information, in Ciancanelli, P., Dunn, J., Koch, B. and Stewart, M. Financial and Management Accounting, Glasgow: University of Strathclyde - Business School.  Deming, W.E. (1986) Out of Crisis, Cambridge, MA: MIT Press.  Goldstein, S. (2001) The annual report isnt what it used to be, Communication World, vol. 18, no. 2, Feb/Mar , pp. 11-13.  Investopedia (I) Investopedia, [Online], Available: http://www.investopedia.com/terms/e/efficiencyratio.asp#axzz1oIgxqx4I [06 Mar 2012].  J Sainsburys plc (2008) Annual report and financial statements 2008, London.  J Sainsburys plc (2011) Annual Report and Financial Statements 2011.  Kennon, J. Negative Working Capital, [Online], Available: http://beginnersinvest.about.com/od/analyzingabalancesheet/a/negative-working- capital.htm [05 Mar 2012].  Morningstar Moriningstar - J Sainsbury PLC SBRY, [Online], Available: http://tools.morningstar.co.uk/ukp/stockreport/default.aspx?Site=uk&id=0P000090N6&Lang uageId=en-GB&SecurityToken=0P000090N6]3]0]E0WWE$$ALL [05 Mar 2012].  Morningstar Morningstar - Tesco PLCTSCO, [Online], Available: http://tools.morningstar.fr/fr/stockreport/default.aspx?Site=fr&id=0P00007OYV&LanguageI d=fr-FR&SecurityToken=0P00007OYV]3]0]E0WWE$$ALL [all Feb-Mar 2012].  Newcorn, C. How to Define Gross Profit Percentage, [Online], Available: http://www.ehow.com/how_4420887_define-gross-profit-percentage.html [05 Mar 2012].  News Business (2012) Tesco disappointed by its UK Christmas trading, BBC, Jan.  Tesco plc (2007) Tesco Annual Report and Financial Statements 2007, Cheshunt.  Tesco plc (2008) Tesco Annual Report and Financial Statements 2008, Cheshunt: plc, Tesco.  Tesco plc (2009) Tesco Annual Report and Financial Statements 2009, Cheshunt. 27
  • 28.  Tesco plc (2010) Tesco Annual Report and Financial Statements 2010, Cheshunt. Tesco plc ( 2011) Tesco Annual Report and Financial Statements 2011, Cheshunt. The Telegraph (2012) Tesco sales improve as discounts draw in shoppers, 3 Mar, [Online], Available: http://uk.finance.yahoo.com/news/tesco-sales-improve-discounts-draw- 213049010.html [3 Mar 2012]. Walker, I. (2012) Dow Jones Newswires, 28 Feb, [Online], Available: http://tools.morningstar.co.uk/ukp/stockreport/default.aspx?tab=3&vw=story&SecurityToke n=0P00007OYV]3]0]E0WWE$$ALL&Id=0P00007OYV&ClientFund=0&CurrencyId=GBP&s tory=191858336886234 [04 Mar 2012]. Wearden, G. (2010) Tesco rings up record profits, The Guardian, Apr, Available: http://www.guardian.co.uk/business/2010/apr/20/tesco-rings-up-record-profits-again [03 Mar 2010]. 28
  • 29. Appendix 1. Brief Presentation of the CompaniesThe financial ratios have been calculated for the principal company Tesco plc and then comparedwith J Sainsbury plc. Tesco plc is a public limited company incorporated and domiciled in the United Kingdom (Tesco plc, 2011: 103) and one of the most successful British companies of recent years (Wearden, 2010). Its principal activity is retailing and associated activities. Moreover, it provides banking and insurance services through its subsidiaries.J Sainsbury plc is a public limited company incorporated in the United Kingdom (J Sainsburys plc,2011). It is the third-largest food retailer in the UnitedKingdom and the largest public equity pure play inthe U.K. food retail sector (Morningstar, n.d.). The mainactivities of the group are grocery and related retailing. (J Sainsburys plc, 2011). 29
  • 30. Appendix 2. Formulas RATIO FORMULA PROFITABILITY Return On Capital Employed Return on Shareholders Funds x 100 Net Profit Percentage x 100 Gross Profit Percentage LIQUIDITY RATIO Current Ratio Quick Ratio (Acid Test) EFFICIENCY RATIOS Inventory (stock) holding period (days) Receivables (debtor) payment period (days) Payables (creditor) payment period (days) FINANCIAL STRUCTURE Leverage (gearing) Interest cost INVESTMENT RATIOS Earnings per share P/E ratio Dividend yield Dividend ratio payout Dividend cover ratio 30
  • 31. Appendix 3. Working Ratios for Tesco plc TESCO plc 2007 2008 2009 2010 2011 LIQUIDITY RATIOS Current ratio .5:1 .6:1 .7:1 .7:1 .6:1 Current Assets 4168 5992 13081 11392 11438 Current Liabilities -8152 -10263 -17595 -16015 -17731 Quick Asset Ratio (Acid Test Ratio) .3:1 .3:1 .6:1 .5:1 .5:1 Current Assets less Inventory less prepaid expenses 2237 3562 10412 8663 8276 Current Liabilites -8152 -10263 -17595 -16015 -17731 EFFICIENCY RATIOS Inventory (stock) holding period -(days) 18 days 20 days 20 days 19 days 21 days Inventory (stock) 1 931 2 430 2 669 2 729 3 162 Cost of Sales -39 401 -43 668 -49 713 -52 303 -55 871 Inventory turnover (times) 20.4 times 18.0 times 18.6 times 19.2 times 17.7 times Cost of Sales -39401 -43668 -49713 -52303 -55871 Inventory (stock) 1931 2430 2669 2729 3162 Receivables(Debtor) Payment Period(-days) 9 days 10 days 12 days 12 days 14 days Trade Receivables (debtors) 1 079 1 311 1 820 1 888 2 314 Revenue (sales) 42 641 47 298 53 898 56 910 60 931 Payables (Creditor) payment period(-days) 56 days 61 days 64 days 66 days 68 days Trade Payables (Creditors) -6 046 -7 277 -8 665 -9 442 -10 484 Cost of Sales -39 401 -43 668 -49 713 -52 303 -55 871 Working capital cycle -29 days -30 days -32 days -35 days -34 days FINANCIAL STRUCTURE Laverage (gearing) 28% 33% 49% 44% 37% Long term borrowing (debt) - 4 146 - 5 972 - 12 391 - 11 744 - 9 689 Long term borrowing plus equity 14 717 17 874 25 297 26 425 26 312 Interest cover 13.3 times 12.2 times 7.1 times 6.5 times 8.3 times Profit before interest and tax 2 869 3 053 3 395 3 755 4 018 Interest expenses -216 -250 -478 -579 -483 INVESTMENT RATIOS Earnings per share 23.69 26.57 26.67 29.14 33.31 P/E ratio 6.18 p 6.01 p 4.53 p 4.81 p 5.23 p Dividend yield 4.68 4.75 6.82 6.50 5.83 Dividend ratio payout 28.54 28.40 30.96 31.29 30.40 Dividend cover ratio 3.50 3.52 3.23 3.20 3.29 31
  • 32. Appendix 4. Working Ratios for J Sainsbury plc J SAINSBURYs plc 2007 2008 2009 2010 2011 LIQUIDITY RATIOS Current ratio .7:1 .7:1 .5:1 .7:1 .6:1 Current Assets 1940 1722 1591 1853 1721 Current Liabilities -2721 -2605 -2919 -2793 -2942 Quick Asset Ratio (Acid Test Ratio) .5:1 .4:1 .3:1 .4:1 .3:1 Current Assets less Inventory less prepaid expenses 1325 929 881 1095 896 Current Liabilites -2721 -2605 -2919 -2793 -2942 EFFICIENCY RATIOS Inventory (stock) holding period -(days) 13 days 15 days 14 days 14 days 15 days Inventory (stock) 590 681 689 702 812 Cost of Sales -15 979 -16 835 -17 875 -18 882 -19 942 Inventory turnover (times) 27.1 times 24.7 times 25.9 times 26.9 times 24.6 times Cost of Sales -15979 -16835 -17875 -18882 -19942 Inventory (stock) 590 681 689 702 812 Receivables(Debtor) Payment Period(-days) 4 days 4 days 4 days 4 days 6 days Trade Receivables (debtors) 197 206 195 215 343 Revenue (sales) 17 151 17 837 18 911 19 964 21 102 Payables (Creditor) payment period(-days) 52 days 49 days 51 days 48 days 48 days Trade Payables (Creditors) -2 267 -2 280 -2 488 -2 466 -2 597 Cost of Sales -15 979 -16 835 -17 875 -18 882 -19 942 Working capital cycle -34 days -30 days -33 days -30 days -27 days FINANCIAL STRUCTURE Laverage (gearing) 32% 30% 33% 32% 30% Long term borrowing (debt) - 2 090 - 2 084 - 2 177 - 2 357 - 2 339 Long term borrowing plus equity 6 439 7 019 6 553 7 323 7 763 Interest cover 5.5 times 4.6 times 4.1 times 6.0 times 8.1 times Profit before interest and tax 584 611 614 881 943 Interest expenses -107 -132 -148 -148 -116 INVESTMENT RATIOS Earnings per share 18.68 18.83 16.49 31.44 34.21 P/E ratio 28.65 p 17.43 p 18.86 p 11.35 p 10.60 p Dividend yield 1.77 3.60 4.22 4.26 4.30 Dividend ratio payout 52.19 63.72 80.07 45.16 44.14 Dividend cover ratio 1.92 1.57 1.25 2.21 2.27 32
  • 33. Appendix 5. Tesco - Long-Term Borrowing 2009 33
  • 34. Appendix 6. Tesco plc Financial Statements 2007 - 2008 Statements 34
  • 35. 35
  • 36. 2009 - 2010 Statements 36
  • 37. 37
  • 38. 2011 Statements 38
  • 39. 39
  • 40. Appendix 7. J Sainsbury plc Financial Statements 2007-2008 Statements 40
  • 41. 41
  • 42. 2009-2010 Statements 42
  • 43. 43
  • 44. 2011 Statements 44
  • 45. 45
  • 46. Appendix 8. Data used to calculate Investment ratios < END OF THE DOCUMENT > 46