accounting ratio
Introduction to Accounting Coursework
Ratio Analysis of Tesco and Sainsbury
Introduction
This report details the results of a ratio analysis of two of the largest retailers in the UK: Sainsbury and Tesco based on their audited financial statements for the financial years ending 2011, 2012, and 2013. The two companies are compared with each other based on their profitability and liquidity ratios. This report then critically interprets the results of the ratio analysis calculations and then discusses the weaknesses of ratio analysis. Finally, this report concludes with some recommendations for how ratio analysis can be improved in the future.
Ratio Analysis
An Excel spreadsheet which accompanies this report has been created and contains the calculations which were used to derive the ratios from the annual reports of both Tesco and Sainsbury. The ratios are reproduced in Table 1 below. The methodology used to calculate each of these ratios is described further in Appendix 1 of this report. The income statement and balance sheets from which the numbers calculated in Table 1 are derived are reproduced in Appendix 2.
Sainsbury
2011
2012
2013
Tesco
2011
2012
2013
Profitability
Profitability
Gross profit margin
5.5%
5.4%
5.5%
Gross profit margin
8.5%
8.4%
6.3%
Operating profit margin
4.0%
3.9%
3.8%
Operating profit margin
6.5%
6.5%
3.4%
Net profit margin
3.0%
2.7%
2.6%
Net profit margin
4.6%
5.0%
2.1%
Return on assets
2.9%
2.5%
2.5%
Return on assets
3.0%
3.2%
1.4%
Return on equity
8.3%
7.3%
7.2%
Return on equity
12.1%
12.4%
5.3%
Liquidity
Liquidity
Current ratio
0.6
0.6
0.6
Current ratio
0.7
0.7
0.7
Quick ratio
0.3
0.3
0.3
Quick ratio
0.3
0.3
0.3
Cash ratio
0.2
0.2
0.2
Cash ratio
0.2
0.2
0.2
DIO
13.9
15.1
15.9
DIO
17.8
19.3
20.7
DSO
4.8
5.1
4.6
DSO
12.7
14.2
14.6
DPO
46.3
46.2
45.3
DPO
65.7
67.7
67.1
CCC
(27.7)
(25.9)
(24.7)
CCC
(35.2)
(34.2)
(31.8)
Table 1. Profitability and liquidity ratios for Sainsbury and Tesco
Ratio Analysis of Tesco and Sainsbury
Introduction
This report details the results of a ratio analysis of two of the largest retailers in the UK: Sainsbury and Tesco based on their audited financial statements for the financial years ending 2011, 2012, and 2013. The two companies are compared with each other based on their profitability and liquidity ratios. This report then critically interprets the results of the ratio analysis calculations and then discusses the weaknesses of ratio analysis. Finally, this report concludes with some recommendations for how ratio analysis can be improved in the future.
Ratio Analysis
An Excel spreadsheet which accompanies this report has been created and contains the calculations which were used to derive the ratios from the annual reports of both Tesco and Sainsbury. The ratios are reproduced in Table 1 below. The methodology used to calculate each of these ratios is described further in Appendix 1 of this report. The income statement and balance sheets from which the numbers calculated in Table 1 are derived are reproduced in Appendix 2.
Sainsbury
2011
2012
2013
Tesco
2011
2012
2013
Profitability
Profitability
Gross profit margin
5.5%
5.4%
5.5%
Gross profit margin
8.5%
8.4%
6.3%
Operating profit margin
4.0%
3.9%
3.8%
Operating profit margin
6.5%
6.5%
3.4%
Net profit margin
3.0%
2.7%
2.6%
Net profit margin
4.6%
5.0%
2.1%
Return on assets
2.9%
2.5%
2.5%
Return on assets
3.0%
3.2%
1.4%
Return on equity
8.3%
7.3%
7.2%
Return on equity
12.1%
12.4%
5.3%
Liquidity
Liquidity
Current ratio
0.6
0.6
0.6
Current ratio
0.7
0.7
0.7
Quick ratio
0.3
0.3
0.3
Quick ratio
0.3
0.3
0.3
Cash ratio
0.2
0.2
0.2
Cash ratio
0.2
0.2
0.2
DIO
13.9
15.1
15.9
DIO
17.8
19.3
20.7
DSO
4.8
5.1
4.6
DSO
12.7
14.2
14.6
DPO
46.3
46.2
45.3
DPO
65.7
67.7
67.1
CCC
(27.7)
(25.9)
(24.7)
CCC
(35.2)
(34.2)
(31.8)
Table 1. Profitability and liquidity ratios for Sainsbury and Tesco
Bibliography: Agnew, M. D., Thornes, J. E. (1995). The Weather Sensitivity of the UK Food Retail and Distribution Industry. Meteorological Applications, 2(2), pp. 137-147. Barua, A., Lin, S., Sbaraglia, A Basker, E. (2005). ‘Twas Four Weeks Before Christmas: Retail Sales and the Length of the Christmas Shopping season. Economics Letters, 89(3), pp. 317-322. Brigham, E. F., Ehrhardt, M. C. (2013). Financial Management Theory & Practice. 14th ed. Mason, OH: South-Western. J Sainsbury plc. (2011).Annual report 2010-2011. J Sainsbury plc. (2012). Annual report 2011-2012. J Sainsbury plc. (2013). Annual report 2012-2013. McEwen, R. A. (2013). Transparency in Financial Reporting: A Concise Comparison of IFRS and US GAAP. Petersfield, Hampshire: Harriman House Ltd. Tesco plc. (2011). Annual report 2010-2011. Tesco plc. (2012). Annual report 2011-2012. Tesco plc. (2013). Annual report 2012-2013.