Sainsbury and Tesco: Financial Performance

Introduction

COVID-19 has greatly affected profit generation by the grocery markets in the UK. Hence, the UK grocery market has faced challenges since the pandemic’s onset (Pantano et al., 2020, p. 211). Sainsbury PLC is included in the UK and listed on the London Stock Exchange (Jones, 2017, p. 8). Its merged financial statements are made at the end of the year to represent the group accounts with subordinate figures. Sainsbury’s major activities include retail of non-foods and groceries. The operations involved in Sainsbury are segmented into three categories, i.e., retailing (with the help of online stores, Convenience stores, and supermarkets), Estate investments, and Financial Services. However, Sainsbury’s major earnings are raised from the retailing operations.

Tesco is a public limited company and is a British merchandise retailer that Jack Cohen established in 1919. It operates in 12 countries across the world. Tesco PLC is the biggest retailer in the United Kingdom, and it has more than 360,000 workers (About us: Tesco plc, 2021, paragraph 1). Some of the countries in which Tesco operates include China, Czech Republic. Ireland, Hungary, Poland, and Malaysia. Globally, Tesco is the third-largest retailer in terms of market capitalization and revenues. After its establishment, Tesco operated for years selling groceries in the United Kingdom (Taqatqa, 2021, p. 97). However, today, Tesco has intensified its operations into other areas such as financial services, internet services, books, clothing, software, furniture, and electronics. Tesco’s online availability has also enabled it to make significant sales via its websites.

The Modern Nature and State of The Grocery Industry of the UK

The United Kingdom supermarkets have been open throughout the COVID-19 period. Sainsbury and Tesco invested massively in their online home delivery platforms to counter the rising demand in e-commerce (Supermarkets in the UK – Market Research Report, 2021, paragraph 1). The UK’s National Statistics Office reported significant growth of 79.3% in food store online retail sales in 2020 (Supermarkets in the UK – Market Research Report, 2021, paragraph 1). Weakening of Government restrictions resulted in higher completion from other companies. However, the online proportion of sales reduced to 30% in April 2021 from 34.7% in March 2021 (Supermarkets in the UK – Market Research Report, 2021, paragraph 3). The reduction in sales was probably because of the revival of mortar and non-essential brick stores.

Trend Analysis

Trend analysis refers to analyzing a company’s trend by relating its financial accounts to analyze its market trend or future analysis depending on its past presentation. It is a company’s trial to create the best decisions depending on its analysis outcomes (Liang, 2021, p. 6). Trend analysis helps companies comprehend how their businesses perform to predict where their current business practices and operations will take them. A trend analysis done well gives a company idea concerning how things might change to move the firm in the correct direction.

Table 1: Tesco and Sunbury 2020-2021 Trend.

Tesco Tesco Sunbury Sunbury
2021 2020 2021 2020
Noncurrent assets
Goodwill 5393 6078
Property and equipment 17211 19234 8587 8949
Assets Rights 5951 6874 4747 4826
Investment properties 19 26
joint ventures investments 178 307 5 9
Financial assets 11 866 754 972
Investment securities 752
Trade 170 166 50 43
Loans 3309 4171
Derivative instruments 1425 1083 8 6
Deferred tax 552 449
34971 39254 18089 20351
Current assets
Financial assets 3 202 90 82
Investment securities 175
Inventories 2069 2433 1625 1732
Trade 1263 1396 725 811
Loans 3093 4280
Derivative instruments 37 63 5 12
Current tax 41 21
Short-term savings 1011 1076
Cash 2510 4137 1477 994
10202 13608
Assets held 605 285
10807 13893 25162 27937
Current liabilities
Trade (8399) (8922) (4488) (4275)
Borrowings (1080) (2219) (258) (48)
Lease liabilities (575) (598) (524) (510)
Derivative instruments (81) (61) (93) (53)
Customer deposits (5321) (6327) (6086) (6890)
Current liabilities (79) (324)
Provisions (186) (155) (209) (108)
(15721) (18656) (11717) (12047)
Disposal groups (276)
Net liabilities (5190) (4763)
Noncurrent liabilities
Trade (109) (170) (20) (11)
Borrowings (6188) (6005) (748) (1248)
Lease liabilities (7827) (8968) (5310) (5264)
Derivative instruments (926) (887) (44) (36)
Customer deposits (1017) (1830)
Post-employment benefit (1222) (3085)
Deferred tax (48) (40) (255) (265)
Provisions (119) (137) (261) (89)
(17456) (21122) (6841)
(18558)
(8117)
(20164)
Net assets 12325 13369 6604 7773
Equity
Share capital 490 490 637 634
Share premium 5165 5165 1173 1159
All reserves 3183 3658 167 168
Retained earnings 3505 4078 3131 4068
Equity 12343 13391 6356 7277
Non-controlling interests (18) (22)
Total equity 12325 13369 6604 7773

According to the analysis above, the noncurrent assets of Tesco decreased from 39254 in 2020 to 34971 in 2021. Sunbury’s noncurrent assets decreased from 20351 in 2020 to 180189 in 2021 (J Sainsbury PLC – AnnualReports.com, 2021, paragraph 3). Undoubtedly the decrease was due to amortization, depletion, and depreciation that reduced the total amount of noncurrent assets on the balance sheet. Noncurrent assets have more risks than current ones because they have high chances of declining value throughout their extended period. Tesco’s current assets decreased from 13893 in 2020 to 10807 in 2021. Sunbury’s noncurrent assets also decreased from 27937 in 2020 to 25962, possibly due to a surge in alternative assets, a reduction in a legal responsibility or equity interpretation, or an upsurge in an expenditure.

Tesco’s current liabilities decreased from 18656 in 2020 to 15721 in 2021. Sunbury’s current liabilities also decreased from 12047 in 2020 to 11717 in 2021. The usage of the subsidy may have perhaps caused the decrease and so signifies a cash discharge: reductions in accounts billed suggest that a business has compensated its debts (Tesco PLC (LSE: TSCO) Annual Report 2021 Analysis – Stock Metric, 2021, paragraph 2). Tesco’s noncurrent liabilities decreased from 21122 in 2020 to 17456 in 2021. Sunday’s noncurrent liabilities also decreased from 20164 in 2020 to 18558 in 2021. Tesco’s net assets decreased from 13369 in 2020 to 12325 in 2021. Sunbury experienced a decrease in net assets from 7773 in 2020 to 6604, possibly because of the daily actions of a business.

Current possessions are liquid and are switched for other properties regularly. There are periods when a reduction in a quality account can designate a monetary or working problem in a corporation. Both Tesco and Sunbury experienced a decrease in their total equity whereby Tesco has total equity of 13369 in 2020 and 12325 in 2021. In addition, Sunbury had total equity of 7773 in 2020 and 6604 in 2021, probably because they paid dividends to stockholders. The payments unswervingly reduce the business’s retained salaries in the shareholders’ equity unit of the balance sheet, instigating a droplet in the entire equity.

Profitability

Profitability denotes an organization’s measure of profitability comparative to its expenditure. Most efficient organizations realize more profits as percentages of their expenses than less efficient organizations, spending more money to generate similar profits (Linares-Mustarós, Coenders, and Vives-Mestres, 2018, p. 7). Whether an organization records its previous year’s profitability or projects profitability for subsequent years, profitability is crucial since it enables businesses to estimate their success. Hence, profitability helps businesses to have holistic views of the performance of their businesses.

Profitability = Gross Profit – (Operating Costs, Including Selling and Administrative Expenses)

Table 2: Sainsbury plc. profitability.

2020 2021
Gross Profit $36,862 $38,004
Operating Costs $36,035 $37.925
Profitability $827 $79

Based on the analysis above, Sainsbury plc. Profitability in 2020 was $827 in 2020 and $79 in 2021, a decrease in profitability probably due to high costs of operations, insufficient revenues, insufficient revenues and high operations costs.

Table 2: Tesco plc. profitability.

2020 2021
Gross Profit $5.854 $5.468B
Operating Costs $79.558 $72.772
Profitability (73.704) (67.304)

Profitability = Gross Profit – (Operating Costs, Including Selling and Administrative Expenses)

In the above Tesco plc. profitability table, Tesco plc. profitability was (73.704) in 2020 and (67.304) in 2021, which is slightly improved compared to 2021 when the businesses had generated more losses.

Liquidity

Liquidity is how a business can convert its security to cash in markets at prices reflecting the current value of a business. Liquidity is also the process of converting an asset into cash without losing any money. The easier an asset turns to cash, the more liquid the asset is. Therefore, liquidity is crucial since it enables companies to learn how to pay their short-term debts and liabilities.

Liquidity= current assets / current liabilities

Table 3: Sainsbury plc. liquidity.

2020 2021
Current Assets 27937 25162
Current Liability 12047 11717
Liquidity 2.3190 2.1475

The above table shows that Sainsbury’s liquidity ratio decreased from 2.3190 in 2020 to 2.1475 in 2021, indicating that the company failed to adhere to its obligations. However, the company’s liquidity ratios still exceed 1, indicating that the company’s short-term assets are sufficient to attain the company’s debt obligations.

Table 4: Tesco plc. liquidity.

2020 2021
Current Assets 13893 10807
Current Liability 4763 5190
Liquidity 2.9169 2.0823

The table above shows that Tesco’s liquidity ratio reduced from 2.9169 in 2020 to 2.0823 in 2021, suggesting that the corporation unsuccessfully followed its duties. Though, the business’s liquidity proportions still surpass 1, representing that the short-term properties of the firm are adequate to reach the debt requirements of the corporation.

Efficiency

In Finance, efficiency is the performing of tasks in a pocket-friendly and timely manner, usually through standardized and simplified procedures that influence technology and elimination/consolidation of non-core activities by outsourcing or shared experience. The more the operational efficiency, the more the investment or firm becomes because the organization can generate more revenue or returns for a lower cost than the alternative. Operational efficiency occurs in financial markets when fees and transaction costs are reduced.

Efficiency= Revenues / Total Assets

Table 5: Sainsbury plc. efficiency.

2020 2021
Revenues $36,862 $38,004
Total Assets $35,519 $32,919
Efficiency 1.0378 1.1545

Table 6: Tesco plc. efficiency.

2020 2021
Revenues $66,852 $59,328
Total Assets $58,091 $55,917
Efficiency 1.1508 1.0610

Gearing

Gearing refers to the association between the ratio of a firm’s Debt to Equity. Gearing shows the degree to which shareholders sponsor an organization’s operations.

Gearing= total debt / the total shareholders’ equity

Table 7: Sainsbury plc. gearing.

2020 2021
Total Debt $1,587 $979
Total shareholder’s equity $ 7525 $6604
Gearing 0.2109 0.1482

Table 8: Tesco plc. gearing.

2020 2021
Total Debt $7773 $6604
Total shareholder’s equity $13369 $12325
Gearing 0.5814 0.5358

Investment Potential

Investment potential refers to the specific value of assets based on particular parameters. Investment potential is a person’s measurement of the property value of the assets. Probable investors frequently embrace an investment value metric when they invest in real or property estate.

Investment potential= Net Profit / expenses

Table 9: Sainsbury plc. investment potential.

2020 2021
Net Profit $193 $-366
Expenses $36,035 $37,925
Investment Potential 0.54% -0.97%

Table 10: Tesco plc. investment potential.

2020 2021
Expenses $79,558 $72,772
Investment Potential 1.56% 0.11%

Conclusion and Recommendations

Sainsbury’s liquidity ratio decreased from 2.3190 in 2020 to 2.1475 in 2021, indicating that the company failed to adhere to its obligations. However, the company’s liquidity ratios still exceed 1, indicating that the company’s short-term assets are sufficient to attain the company’s debt obligations (Tesco PLC (LSE: TSCO) Annual Report 2021 Analysis – Stock Metric, 2021, paragraph 3).

According to Tesco plc. profitability table, Tesco plc. profitability was (73.704) in 2020 and (67.304) in 2021, which is slightly improved compared to 2021 when the businesses had generated more losses. Tesco’s liquidity ratio reduced from 2.9169 in 2020 to 2.0823 in 2021, suggesting that the corporation unsuccessfully followed its duties. Though, the business’s liquidity proportions still surpass 1, representing that the short-term properties of the firm are adequate to reach the debt requirements of the corporation (Tesco PLC (LSE: TSCO) Annual Report 2021 Analysis – Stock Metric, 2021, paragraph 2). Sainsbury plc increased its efficiency ratios to 1.1545 in 2021 from the 1.0378 ratios the company incurred in 2020, a clear indication the company can practice its possessions and monitor its liabilities effectively.

Tesco decreased its efficiency ratios to 1.0610 in 2021 from the 1.1508 ratios the company incurred in 2020, clearly indicating the company cannot practice its possessions and monitor its liabilities effectively. I recommend Sainsbury plc. to investors since it has a high ROI and liquidity ratio compared to Tesco plc. Indicating that the company has enough assets to maintain its debt obligations (Tesco PLC (LSE: TSCO) Annual Report 2021 Analysis – Stock Metric, 2021, paragraph 3).

The company’s high profitability indicates that the company has a high return on investments. The accomplishment of any commercial is contingent on its aptitude to earn profits repeatedly; revenue contemporaries a corporation’s revenues detriment of expenses. Earning an income is significant to a corporate because effectiveness influences whether a corporation can safely acquire bankrolling from a series, attract depositors to account its processes and raise its business.

Limitations of the Analysis

Various activities influence the calculation of financial ratios hence making comparisons to be complex. Using approximations to allocate costs in each year makes the ratios similar to the estimates in terms of accuracy. The cost principles used when preparing financial statements do not create room for adjusting price deflation, inflation, or changes. Businesses have the option of accounting techniques that influence ratios and complicate companies against sing various techniques. Companies may need to possess varying years that may make comparisons complex; the organization is cyclical.

In this research, various limitations restricted the researcher from conducting the evaluation accurately. For instance, the elements included in the financial statements of the two companies are not arranged in chronological order, a situation that made comparing the tables difficult. Another limitation is that the financial statements provided in the two companies’ annual reports have omitted some important data that made calculating the profitability, liquidity ratio, and efficiency ratios difficult. The researcher had to use the internet to obtain part of the data that was not available in the financial statements. Time also is another factor that limits the researcher from obtaining adequate information.

Reference List

Annualreports. (2021). ‘J Sainsbury PLC – AnnualReports.com.’ Web.

Ibisworld. (2021). ‘Supermarkets in the UK – market research report.’ Web.

Jones, M. (2017) The expanded auditor’s report: a case study from the United Kingdom. Web.

Liang, S. (2021) ‘Trend analysis of the journal of finance based on the web of science database’, Journal of Physics: Conference Series, 1852(4), p. 042010. Web.

Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M. (2021) Financial performance and distress profiles. From classification according to financial ratios to compositional classification. Web.

Pantano, E., Pizzi, G., Scarpi, D. and Dennis, C. (2020) ‘Competing during a pandemic? Retailers’ ups and downs during the COVID-19 outbreak‘. Journal of Business Research, 116, pp.209-213. Web.

Stockmetric. (2021) Tesco PLC (LSE: TSCO) annual report 2021 analysis – stock metric. Web.

Taqatqa, A. (2021) ‘Tesco’, in Siegfried, P. (ed.) Business management case studies: Pran-RFL, Netflix, Mc Donalds, Google, Tesco, Apple, COCA-COLA, PSA Group, Mercedes, Tesla, Toyota, Beximco, KFC, LBC Lao Brewery Company. Norderstedt: Books on Demand, p. 97.

Tescoplc. (2021) ‘About us: Tesco plc.’ Web.

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