Main Body Word Count:2989

Table of Contents

1 Section 1 ............................................................................................................................. 6

1.1 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) ............................................................................................................................... 10

1.2 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 ................................................................................................................................................ 14

1.3 Liquidity Ratios ........................................................................................................................14

1.3.1 Current Ratio .................................................................................................................................................................. 14 1.3.2 Quick Asset Ratio .......................................................................................................................................................... 16

1.4 Financial Gearing Ratios........................................................................................................17

1.4.1 Gearing ratio ................................................................................................................................................................... 17 1.4.2 Interest Cover................................................................................................................................................................. 18

1.5 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 .................................................................................................................................................. 21

1.6 Conclusion .................................................................................................................................22

2 Section 2 .......................................................................................................................... 23

2.1 Annual Report and Informational Needs from Users ...................................................23

2.2 Accounting conventions ........................................................................................................24

2.3 Applicability ..............................................................................................................................25

2.4 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 Figures

Figure 1: Comparative analysis - Tesco plc & J Sainsbury plc ........................................................................ 6

Figure 2: Tesco PLC - Negative impact of Long-Term Borrowings in ROCE .................................................. 6

Figure 3: J Sainsbury plc - Positive Impact of PBIT upon ROCE .................................................................... 7

Figure 4: Comparative Return On Shareholders' Funds ................................................................................. 7

Figure 5: J Sainsbury plc - Positive Impact of Net Profit after taxes on ROSF ................................................ 8

Figure 6: Comparative analysis - Equity and Long-Term Borrowings ............................................................. 8

Figure 7: Comparative Net Profit Ratio ........................................................................................................... 9

Figure 8: Tesco plc - NPP & Operating Expenses .......................................................................................... 9

Figure 9: J Sainsbury plc - NPP & Operating Expenses ................................................................................. 9

Figure 10: Comparative analysis of Gross Profit Ratio.................................................................................. 10

Figure 11: Tesco PLC - GPP and proportion of selling cost .......................................................................... 10

Figure 12: J Sainsbury plc - GPP & Changing % of costs ............................................................................. 11

Figure 13: Inventory (stock) holding period - (days) ...................................................................................... 12

Figure 14: Receivables (debtor) payment period (days) ............................................................................... 13

Figure 15: Comparative analysis of accounts payable turnover .................................................................... 13

Figure 16: Comparative analysis of Working Capital..................................................................................... 14

Figure 17: Comparative analysis of current ratio ........................................................................................... 15

Figure 18: Tesco PLC - Impact of Current Assets & Loans upon Current ratio ............................................. 15

Figure 19: J Sainsbury's plc - Impact of Current Assets & and Loans upon Current ratio ............................. 15

Figure 20: Comparative analysis of Quick Ratio ........................................................................................... 16

Figure 21: Comparative Gearing Ratios ........................................................................................................ 17

Figure 22: Tesco plc - Long-term borrowing and gearings ............................................................................ 17

Figure 23: Comparative Interest Cover ......................................................................................................... 18

Figure 24: Comparative Analysis of Earnings Per Share .............................................................................. 19

Figure 25: Comparative analysis of P/E ........................................................................................................ 20

Figure 26: Comparative Analysis Dividend Yield Ratio ................................................................................. 20

Figure 27: Comparative Analysis of Dividend Payout Ratio .......................................................................... 21

Figure 28: Comparative Analysis of Dividend Cover Ratio ............................................................................ 21

Figure 29: Main users of financial information ............................................................................................... 23

4

Table of Abbreviations

5

EXECUTIVE SUMMARY

The 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 a

company. The same ratios are studied through the financial reports of two of the largest retailers in

UK. The primary company used for the report in Tesco plc and J Sainsbury plc its closest rival’s

performance is used to get a comparison. The report looks at both the companies over a period of

five years to analyse the trends and the fluctuations. The analysis of ratios is divided into four

parts:

Definition of the indicator

Comparative view of results between the two companies

Analysis of differences identified in point two

Conclusion

The performance of both the companies are analysed through the analysis of their ratios of

profitability, liquidity, efficiency, gearing and investment. While Tesco looks like performing well

despite of the recession, when the same is compared with its fiercest rival, J Sainsbury plc, the

picture seems quite different.

The report in the second half goes on to analyse the users of the annual financial reports, the most

common accounting conventions and the advantages and disadvantages of the annual financial

documents.

6

1 Section 1

1.1 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

7

In contrast, J Sainsbury plc's 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 ROCE

1.1.2 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%).

8

Figure 5: J Sainsbury plc - Positive Impact of Net Profit after taxes on ROSF

It can also be noticed that the management of equity differs between the companies. Tesco PLC's

utilises more the long-term borrowings than equity to generate profits. As a result, the finance

costs increase and the net profit decreases. On the other hand, J Sainsbury plc uses more equity

than borrowings..

Figure 6: Comparative analysis - Equity and Long-Term Borrowings

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. It

indicates the remaining profit after production and operation costs. (Accounting Tools , n.d.).

Tesco PLC displayed a higher and stable NPP whereas J Sainsbury plc's results were lower and

unstable.

Figure 7: Comparative Net Profit Ratio

It can be noticed that policies related to operating expenses have changed with Tesco PLC increased

the operating expenses and J Sainsbury plc reduced them.

In 2007 Tesco PLC reached its highest NPP

result for two reasons, the operating

expenses were low and exceptional incomes

such as Pensions adjustment - Finance Act

2006 (£258m) were recorded.

Nevertheless, in 2009 the NPP failed

drastically due to a significant increase of

operating expenses (+37%) mainly

administrative expenditures.

By contrast, J Sainsbury plc reduced the

operation expenses from 2007 to 2011 by 63%.

Due to this reduction of costs, the NPP

reached its highest level by 2011 with

4.47%.

Figure 8: Tesco plc - NPP & Operating

Expenses

Figure 9: J Sainsbury plc - NPP & Operating

Expenses

10

1.1.4 Gross Profit Percentage (GPP)

The GPP reflects the margin of profit that companies are able to earn on their trading and

manufacturing activity after deducting the cost of sales. The higher the percentage the better it is for

the company as it provides more financial resources to pay costs associated with growing the

business (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 Ratio

Tesco PLC's GPP increased from 2009 to 2011 by 7%. It is explained by the decrease of selling

costs. This was propelled by the modernisation of IT systems that allowed the reduction of selling

costs (e.g. the improvement of Tesco direct website to sell online more non-food products and reduce

costs - less stores resulting in fewer employees)

Figure 11: Tesco PLC - GPP and proportion of selling cost

11

J Sainsbury plc's GPP decreased by 18% between 2007 and 2008 due to an increase of cost of

sales by 2.11%.

Figure 12: J Sainsbury plc - GPP & Changing % of costs

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 Sainsbury's 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.

13

Figure 14: Receivables (debtor) payment period (days)

Based on figure 14, J Sainsbury's 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.

14

As for J Sainsbury's 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 company's 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

15

debts if they come due at that point (Investopedia, n.d.). Nevertheless, given that retailers have

the possibility to convert products into cash quickly; it would not represent a signification risk to

payables.

Figure 17: Comparative analysis of current ratio

In 2009, Tesco plc increased by 27% its

current ratio. It could be mainly due to an

increase of its current assets (+118%)

coming from loans that Tesco PLC has to

banks (£2,100) and customers (£1918) and

an increase of current liabilities by 71%.

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 18: Tesco PLC - Impact of Current Assets &

Loans upon Current ratio

Figure 19: J Sainsbury's plc - Impact of Current

Assets & and Loans upon Current ratio

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).

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 company's 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

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).

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 company's management (Ciancanelli et

al., 2009: 37)

1.5.1 Earnings Per Share (EPS)

EPS is the most frequent ratio used to determine the share's 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 investor's 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.

20

Figure 25: Comparative analysis of P/E

1.5.3 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

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 Ratio

1.5.5 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

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.

23

2 Section 2

2.1 Annual Report and Informational Needs from Users

The annual report (AR) is the company's most important strategic communication document,

setting forth the firm's 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)

24

2.2 Accounting conventions

The accounting conventions that are commonly used by the users listed above are:

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.

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.

27

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profit-ratio [05 Mar 2012].

Alexander, M. and Young, D. (1996) 'Outsourcing: Where's 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 isn't 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 Sainsbury's plc (2008) Annual report and financial statements 2008, London.

J Sainsbury's 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.

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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

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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].

29

Appendix 1. Brief Presentation of the Companies

The financial ratios have been calculated for the principal company Tesco plc and then compared

with 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 Sainsbury's plc,

2011). It is the third-largest food retailer in the United

Kingdom and the largest public equity pure play in

the U.K. food retail sector (Morningstar, n.d.). The main

activities of the group are grocery and related retailing. (J Sainsbury's plc, 2011).

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

31

Appendix 3. Working Ratios for 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

TESCO plc

32

Appendix 4. Working Ratios for J Sainsbury 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

J SAINSBURY's plc

33

Appendix 5. Tesco - Long-Term Borrowing 2009

34

Appendix 6. Tesco plc Financial Statements 2007 - 2008 Statements

35

36

2009 - 2010 Statements

37

38

2011 Statements

39

40

Appendix 7. J Sainsbury plc Financial Statements

2007-2008 Statements

41

42

2009-2010 Statements

43

44

2011 Statements

45

46

Appendix 8. Data used to calculate Investment ratios

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