2. OUTLINE
Retailers in United Kingdom
Company Background
Financial Ratios Analysis
Profitability ratios
Liquidity ratio
Efficiency ratios
Solvency ratio
Conclusions
References
3. Retailers in United Kingdom
£64.42
£25.63
£23.67
£17.68
£11.13
£10.80
£10.72
£10.31
£6.70
£5.66
£0.00 £17.50 £35.00 £52.50 £70.00
Tesco
Sainsbury
Asda
Morrisons
Kingfisher
Co-operative Group
John Lewis Partnership
Marks and Spencer
Alliance Boots
Home Retail Group
Sales (ex. VAT) (GBP m)
Millions
Retailers
Top Ten UK Retailers by Sales in 2014
Figure 1: Top Ten retailers by Sales in 2014 (RetailEconomics, 2014).
7,305
1,106
525
667
1,124
2,800
345
1,311
2,487
736
0 2,000 4,000 6,000 8,000
Tesco
Sainsbury
Asda
Morrisons
Kingfisher
Co-operative Group
John Lewis Partnership
Marks and Spencer
Alliance Boots
Home Retail Group
Number of Store
Number of Store in 2014
Figure 2: Number of Store in 2014 (RetailEconomics, 2014).
3535 in UK
4. COMPANY BACKGROUND
Tesco PLC
Found in 1919 by Jack Cohen in,
Barnet, London.
Headquarter in Hertfordshire, UK.
Int’ retailer, retail banking and
Insurance services.
3,535 stores in UK, 6814 stores
worldwide (including Franchises).
310,000+ employees in UK,
480,000+ worldwide.
Current share price 163.10p
(04/12/15:16.21PM), (London
Stock Exchange,2015).
J Sainsbury PLC
Found in 1869 by James Sainsbury
in Holborn, London.
Headquarter in London, UK.
Grocery and related retailing.
1,200+ stores in UK.
161,000+ employees.
Current share price 226.20p
(04/12/15: 16.30 PM), (London
Stock Exchange,2015).
5. PROFITABILITY RATIOS
GROSS PROFIT MARGIN
WHAT FINANCIAL
RATIOS ARE
IMPORTANT?
•This ratio is significant indicator of the
company’s financial health, because it
looks at major inflows and outflows of
money (Zions Business Resource
Center, n/a).
• Moreover, it should be a stable value
and not much more fluctuation (Zions
Business Resource Center, n/a).
6.3077 6.3093
-3.3909
5.4800 5.7915
5.0810
-6
-3
0
3
6
9
2013 2014 2015
%
Years
Figure 3: Gross Profit Margin (%) (Fame, 2015).
Tesco PLC J Sainsbury PLC
ANALYSIS
•J Sainsbury PLC, there was a stable in
Gross Profit Margin all of the last three
years.
•Tesco PLC fell by 10% in 2015
comparing with 2013 and 2014.
•G/P Margin’s Tesco PLC was higher
than J Sainsbury PLC in first two
years, however, the margin
significantly plunged to -3.391% in
2015.
FORMULA
Gross Profit Margin(%) = Gross Profit/Sales*100%
•E.g. Gross Profit Margin(%) = (2012)/62284*100 = (3.391)%
•This is calculated for Tesco PLC in 2015.
6. PROFITABILITY RATIOS
NET PROFIT MARGIN
WHAT FINANCIAL RATIOS
ARE IMPORTANT?
•This ratio is widely used as a measure
of performance across similar
industries (The Institute of Certified
Public Accountants in Ireland, 2013).
•Furthermore, Rees (1995: 97) stated
that “retailers often operate on low
margins and high turnover”, so the
analysts should also review at sales
turnover.
ANALYSIS
•J Sainsbury PLC slightly increased in
Net Profit Margin in first two years and
fell to -0.30% in 2015.
•Tesco PLC trend was nearly the same
with J Sainsbury PLC in 2013-2014,
However the trend plunged to -10.24%
in 2015.
•Overall, N/P Margin of J Sainsbury PLC
is better than Tesco PLC, however, both
of them lose in net profit in 2015.
FORMULA
Net Profit Margin (%)= Profit before Charging Interest and Tax
(PBIT)/Sales * 100%
• E.g. Net Profit Margin (%) = (6376)/62284 * 100 = (10.24)%
•This is calculated for Tesco PLC in 2015.
3.0235
3.5543
-10.2370
3.3815 3.7496
-0.3028
-14
-9
-5
0
5
2013 2014 2015
%
Years
Figure 4: Net Profit Margin (%) (Fame, 2015).
Tesco PLC J Sainsbury PLC
7. PROFITABILITY RATIOS
RETURN ON CAPITAL EMPLOYED
WHAT FINANCIAL RATIOS
ARE IMPORTANT?
•This ratio gives the annual percentage
return that investors receive on their
investment in stock market or the
businesses (Midland, n/a).
•Similarly, Return on Capital Employed
displays what return that the investors
are making on their money in the
businesses. (The Institute of Certified
Public Accountants in Ireland, 2013).
ANALYSIS
•J Sainsbury PLC, there was an slightly
increase around 1% during 2013-2014,
but the ratio plunged to -0.75 in 2015.
• Tesco PLC also slightly increased in
first two years but plunged to -26.12%
in 2015.
•Both of them, there were a low return,
however, the overview, J Sainsbury
PLC is apparently better than Tesco
PLC in last year.
FORMULA
Return on Capital Employed (%)= PBIT/Total Capital Employed * 100%
•E.g. Return on Capital Employed (%) = (6376)/24404 * 100 = (26.13)%
•From above we can see in 2015 for every £1 funders invest in
Tesco PLC they would get an annual return of (26.13p).
•This is calculated for Tesco PLC in 2015.
6.2933
7.8533
-26.1269
8.2255 9.1867
-0.7489
-34
-23
-11
0
11
2013 2014 2015
%
Years
Figure 5: Return on Capital Employed (%) (Fame, 2015).
Tesco PLC J Sainsbury PLC
8. LIQUIDITY RATIO
CURRENT RATIO
WHAT FINANCIAL RATIOS
ARE IMPORTANT?
•This ratio gives business owners key
information concerning their ability to
pay short-term depts (Fritz, n/a).
•Walsh (2003) stated that the standard
value for most types of businesses are
an excess of 1.0 time.
•Midland (n/a) also pointed if it less than
1.0 time, the company could not pay
their depts.
ANALYSIS
•J Sainsbury PLC has slightly
increased from 2013 - 2015.
•On the other hand, Tesco PLC, the
trend has decreased all of the last
three years.
•However, the ratio shows that both
of them were less than 1. This
means their current liabilities
exceed their current assets.
FORMULA
Current Ratio = Current Assets / Current Liabilities
•Current Ratios = 11958 / (19819) = 0.60 : 1.
•This is calculated for Tesco PLC in 2015.
0.6898
0.6115
0.6036
0.6144
0.6458
0.6507
0.55
0.58
0.60
0.63
0.65
0.68
0.70
2013 2014 2015
Years
Figure 6: Current Ratio (Fame, 2015).
Tesco PLC J Sainsbury PLC
9. EFFICIENCY RATIOS
CREDITORS’ TURNOVER RATIO
WHAT FINANCIAL
RATIOS ARE
IMPORTANT?
•This ratio monitors how long the
company takes to pay their
suppliers. if the suppliers have to
wait to long, they might withdraw
credits (midland, n/a).
ANALYSIS
•J Sainsbury PLC significantly fell by
8.1 times in 2015, and average
payment is around every 89 days.
• Tesco PLC was a stable level in first
two years and rose to 12.69 in 2015 or
average payment is around every 29
days.
• Hence, Tesco PLC can take to pay
their creditors quicker than J Sainsbury
PLC, as around 8 times.
FORMULA
Creditors’ Turnover Ratio = Cost of Sales/ Creditors
•E.g. Creditors’ Turnover Ratio = (64396) / (5076) = 12.69
•Hence, creditors’ turnover of 12.69 is converted to around 29
days (365/12.69).
•This is calculated for Tesco PLC in 2015.
10.0625 10.2121
12.6864
11.5440
12.2221
4.1151
0
3
7
10
13
16
2013 2014 2015
Years
Figure 7: Creditors’ turnover ratio (Fame, 2015).
Tesco PLC J Sainsbury PLC
10. EFFICIENCY RATIOS
STOCK TURNOVER RATIO
WHAT FINANCIAL RATIOS
ARE IMPORTANT?
•Investopedia (n/a) said that the ratio
displays how many times the stock is
sold and replace during specific time.
•Investopedia (n/a) also pointed sales
figure is frequently used but COGs may
be used due to sales are recorded at
market value while inventory are often
recored at cost.
•Fritz (n/a) stated that “higher is better”.
ANALYSIS
•J Sainsbury PLC had a stable line all of
the last three years. The average of
three years was around 22.47 in Stock
Turnover Ratio.
•Tesco PLC rose to 21.78 in 2015, this is
better than 2 years ago, around 5 times.
•Overall, based on ratio, J Sainsbury PLC
can manage their stock better than
Tesco PLC all of the last three yeas.
However, they are quite similar in 2015.
FORMULA
Stock Turnover Ratio= Cost of Sales / Stock Level
•E.g. Stock Turnover ratio = (64396) / 2957 = 21.78
•This is calculated for Tesco PLC in 2015.
16.2225 16.6518
21.7775
22.3161 22.4498 22.6349
0
6
12
17
23
29
2013 2014 2015
Years
Figure 8: Stock Turnover Ratio (Fame, 2015).
Tesco PLC J Sainsbury PLC
11. SOLVENCY RATIO
GEARING
WHAT FINANCIAL
RATIOS ARE
IMPORTANT?
• This ratio shows as “the ratio of
dept” (Midland, n/a).
•Thus, the high value of ratio should
be avoided (Rees,1995).
•However, if the cash flow is stable
and profit is also stable, then the
company can afford a higher
gearing (Midland, n/a).
ANALYSIS
•J Sainsbury PLC was a stable level in
first two years but, slightly increased
by 8% in 2015 . The average of all
three years is around 73.32%
•Tesco PLC, there was a high gearing
ratio and peak at 273.85% in 2015.
•Based on this ratio, Tesco PLC, there
is high of depts, which is higher than
J Sainsbury PLC apparently.
FORMULA
Gearing = Short Term Loans & Overdrafts + Long term
Liabilities / Shareholders’ Funds * 100
•E.g. Gearing (%) = (19364)/ 7071 = 273.85 %
•This is calculated for Tesco PLC in 2015.
91.9305
108.6103
273.8509
69.9808 71.7308 78.2632
0
75
150
225
300
2013 2014 2015
%
Years
Figure 9: Gearing (%) (Fame, 2015).
Tesco PLC J Sainsbury PLC
12. Conclusions
Tesco PLC
J Sainsbury
PLC
Notes
Profitability
ratio
Gross Profit
Margin
J Sainsbury PLC,
there is a stable
value all of the
last three years.
Net Profit Margin Both of them lost
in net profit in
2015.
Return on
Capital
Employed
There are low
return in both of
these companies
in 2015.
Liquidity ratio Current ratio Both of them less
than 1.
Efficiency
ratio
Creditors’
Turnover ratio
Every 29 days/89
days.
Stock turnover
ratio
J Sainsbury is
better all of last
three years.
Solvency
ratio
Gearing Both of them are
more than 50%.
INVESTORS
•BBC NEWS (2014) said Buffett sold his
stake on 16 October 2014.
•The value of Buffett’s stake has fallen by
$750m in 2014 (Kollewe, 2014).
•Buffett told CNBC: “I made a mistake on
Tesco. That was a huge mistake by me.”
(Kollewe, 2014).
•Neil Woodford who is UK fund manager,
decided to sell his Tesco’s stake in 2012
after its first profit warning College, 2014
(Kollewe, 2014).
NEWS
•During 2014, Tesco PLC was
investigated by Financial Reporting
Council due to Tesco PLC profit have
been overstated (BBC News, 2014).
•On the other hand, “the grocer faces
heavy competition from discounters
such as Aldi and Lidl while it is locked
in a bitter price war with major rivals
including Asda and Morrisons” (Butler,
2014).
Based on Ratios, J Sainsbury PLC is currently suitable for
investment.
Table 1: Conclusion.
13. References
BBC NEWS (2014) Tesco accounts face fresh inquiry. Available at:
http://www.bbc.co.uk/news/business-30575040 [accessed 04 December 2015].
Butler, S. (2014) Tesco and PwC face fresh inquiry over £263m overstatement of profits. Available at:
http://www.theguardian.com/business/2014/dec/22/tesco-pwc-inquiry-accountancy-watchdog-profit-overstatement
[accessed 04 December 2015].
Certificated Public Accountants Ireland. (2013) Finance for Non accountants from CPA Ireland, 36. Available at:
www.cpaireland.ie/docs/default-source/Simple-Facts-of-Accounting-Bulletins/sfa-36---finance-for-non-accountants-
part-two.pdf?sfvrsn=2 [accessed 04 December 2015].
Fame (2015) Detailed information on UK and Irish companies. Available at:
http://fame.bvdinfo.com/version-2015124/Search.QuickSearch.serv?_CID=1&context=1HCPBRSPHZFFQ4W
[Accessed 01 December 2015].
Fritz, R. (n/a) What Financial Ratios Are Important to the Retail Industry? Available at:
http://smallbusiness.chron.com/financial-ratios-important-retail-industry-23307.html [Accessed 05 December 2015].
Investopedia (n/a) Inventory Turnover. Available at:
http://www.investopedia.com/terms/i/inventoryturnover.asp [Accessed 05 December 2015].
Kollewe, J. (2014) Warren Buffett: ‘Tesco was a huge mistake’. Available at:
http://www.theguardian.com/business/2014/oct/02/warren-buffet-tesco-huge-mistake [accessed 04 December
2015].
London Stock Exchange (2015) Price & markets. Available at:
http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/prices-search/stock-prices-
search.html?initial=T&page=2 [accessed 04 December 2015].
14. References
MIDLAND. (n/a) BUAINESS FACTSHEET: FINANCIAL RATIOS NO.9 Revised April.
Rees, B. (1995) FINANCIAL ANALYSIS. 2nd edn. London: Prentice Hall.
RetailEconomics (2015) Top 10 UK Retailers. Available at:
http://www.retaileconomics.co.uk/top10-retailers.asp [accessed 02 December 2015].
J Sainsbury PLC (2015) 145 years of history. Available at:
http://www.j-sainsbury.co.uk/about-us/145-years-of-history/ [accessed 03 December 2015].
TESCO PLC (2015) Key facts available. Available at:
http://www.tescoplc.com/index.asp?pageid=71 [accessed 03 December 2015].
Walsh, C. (2003) Key management ratios: master the management metrics that drive and control your business.
3rd edn. Harlow: Prentice Hall.
Zions business resource center (n/a) BUSINESS BUILDER 7: HOW TO ANALYSE PROFITABILITY. Available at:
https://cdn.fbsbx.com/hphotos-xfp1/v/t59.2708-
21/11699214_915104758548844_916624055_n.pdf/biz_resources_book-
7.pdf?oh=088240d5c88ac05d554f23523ea28571&oe=56689CEA&dl=1 [ Accessed 05 December 2015].
