Financial Analysis Memorandum

Date : 23 October 2023

From : Julian Kiu Kwong Hong (Junior Analyst)
To : Management, (Penco)
Subject : Financial Analysis Between Tesco PLC and J Sainbury PLC

This memo is to highlight the investment potential of analise through financial ratio
aspect of Tesco PLC and J Sainbury PLC. Financial ratio refer to ratio analysis which
provide a quantitative method of ganing insight into a company’s profitability,
liquidity, operational efficiency and investment returns by studying and research its
financial statements such as balance sheet and income statement. Therefore, 5 ratio
research which will be conducted is , profitability ratio, efficiency ratio, liquidity
ratio, financial gearing and investment return that will be carrying out to study and
determine the highest potential to investment in.

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1.a) Profitability Ratio
According to Maskun, A. (2012), profitability ratios area a class of financial
metrics that provide the better perspective of a business in gross profit, operating
costs, revenue, balance sheet and shareholders’ equity in a annual period time to
time. Profitability ratio that include in this research are gross profit margin,
operating profit margin, net profit margin and return on capital employed (ROCE).

The table above show profitability ratio between Tesco PLC and J Sainbury PLC.

Gross profit margin is a metric analysts that help and study to asses a
company’s financial health by calculating the amount of money that left over from
product sales after subtracting the cost of goods sold (COGS). The table above show
that in term of gross profit in between Tesco PLC and J Sainbury PLC has shown that

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is increasing in gross profit, they are improving their profitability compare to years
2021 that 2022 increase in 1% ( Tesco PLC) and 2% (J Sainbury PLC).

Operating profit margin is the formula way that show how a company
generates their earnings that can be used to pay the company's investors and the
ability to pay off company's taxes. Tesco PLC and J Sainbury PLC has shown an
improve in operating profit margin which provided better value of company for
future development. Tesco PLC increase in 1% from 2021 to 2022 and J Sainbury PLC
increase in 3.5% from 2021 to 2022.

For net profit margin in profitability ratio, that indicates the ability to convert
their actual profit from gross profit that provide better perspectives of their
efficiency without affecting more to the cost of operation. Tesco PLC has shown a
drop in net profit margin 9% from 2021 to 2022, however J Sainbury PLC has done
better which 1.4% increase from 2021 to 2022.

Return on capital employed (ROCE) is a well knowed measure to a company's

performance in profitability. ROCE is a financial ratio that indicates how well a
company generating profits from all its capital in terms of company assets that were
used. Tesco PLC has perform better compare to 2021 which generate 2% increase,
however J Sainbury PLC has drop in 4% which compare to 2021.

1.b) Efficiency Ratio

According to Norvaisiene, R. (2012), efficiency ratio analysis is a method of
metric that calculate and determine how well a company uses it assets and libiality
internally. Efficiency ratio that been apply to this research are sales revenue to
capital employed, sales revenue per employee, return on assets (ROA) and return on
equity for research and study.

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The table above show efficiency ratio in between Tesco PLC and J Sainbury PLC.

Sales Revenue To Capital Employed is defined as similar to ROCE but is a tools

that measeure management’s efficiency in generating revenue and sales from the
total assets at its disposal. Tesco PLC has show increase in 0.04 higher than J
Sainbury PLC which shown a drop in 0.04 compare from 2021 to 2022.

Sales Revenue per Employee is defined as how much money each employee
generates for the company. It is calculated as a company’s total revenue divided by
its current number of employees. Tesco PLC has a done a better than J Sainbury
from 2021 to 2022 which increased from 0.15(2021) to 0.17(2022) for Tesco PLC and
0.25 (2021) to 0.20 (2022) for J Sainbury PLC.

Reurn on assets (ROA) is a measurement of how efficient a company’s

management in generating profit from their total assets refelcted on their balance

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sheet in an operation. Tesco PLC has increased about 2% compare from 2021 to
2022 and J Saibury PLC has show an increase from (0.8)% 2021 to 2% 2022.

Return on Equity is defined as the measure of the rate of return that the
owners or shareholders of common stock of a company receive on their
shareholdings. It signifies how well the company is generating returns on the
invesments received from shareholders. Tesco PLC and J Sainbury PLC are shown an
increase from 2021 to 2022 about 6% for Tesco PLC and 8.3% for J Sainbury PLC.

1.c) Liquidity ratio

According to Aleksandre Petriashvili (2018), liquidity ratio is the drive that
were conducted for determine whether a company’s performance of their current
assets to cap their current liabilities.

The table above show liquidity ratio of Tesco PLC and J Sainbury PLC.

Current Ratio is the ratio that reflects a company capability from the auditing
conducted on balance sheet of its annual report to cover all the payables which
includes short term debts and short term liabilities within a year. Tesco PLC has gain
0.07 of current ratio in 2022 compare to 2021 and J Sainbury PLC show in gain 0.08
in 2022 compare to 2021.

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 Acid Test Ratio is the measure that reflect the similar thesis of current ratio
but it compares its current assets to its current liabilities instead the whole
company’s ability to show a clearer image of how efficient to settle off their debts
with ease. Tesco PLC increase in 0.06 in 2022 compare to 2021 and J Sainbury PLC
also increase in 0.04 in 2022 compare to 2021.

1.d) Financial Gearing

According to O’Hare, J. (2017) , financial gearing ratio is the common used by
a firm to conduct a financial analysis on current debt and its equity. The purpose of
this financial gearing is to understand a firm prevent its over rely on its liability and
equity on a healthy operation.

The table above show financial gearing of Tesco PLC and J Sainbury PLC.

Gearing Ratio are financial ratio that related to owner’s equity or capital and
compare to company debt or fund which borrowed under the company. Tesco PLC
drop about 6% compare to 2021 , however J Sain bury PLC show an increase about
36% compare to 2021.

Interest Coverage Ratio is a ratio that compare debt and profitability ratio that use to
determine a company can pay interest on its outstanding debt. Tesco PLC and J

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Sainbury PLC increase from 2022 to 2021 which increase in 1.68 time for Tesco PLC
and 3.16 time for J Sainbury PLC.
Debt Equity Ratio is a financial ratio indicating the relative proportion of
shareholder’s equity and debt used to dinance a company’s assets which combine
long term and short term debt and compare to company current equity and long
term equity itself. Tesco PLC and J Sainbury PLC show a drop from 2021 to 2022
which drop by 0.31 for Tesco PLC and 0.16 for J Sainbury PLC.

1.e) Investment Returns

According to Phillips, J.J. (2011), investment returns can be define as return
on investment (ROI) is a mathematical formula that investors can use to evalute
investments and by judge how well a particular investment has performed compared
to other. ROI can be found by and determine by using dividend payout ratio,
dividend yield, price earnings ratio and earning per share which is the most common
to be conducted on the research.

The table above show ROI of Tesco PLC and J Sainbury PLC.
Dividend Payout Ratio is a measure that provides better perspective on a
company earnings planned annually after putting asides all other payables and
company fund reserve are be able to return the dividents to shareholders. Tesco Plc

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were performed better in year 2022 comparing to the past year 2021 that their
payout ratio were increased by 11.69%. Sainsbury’s payout ratio were decreased
significantly by 52.27% which shows that last year dissapoint their shareholder
clearly.

Dividend Yield is an indicator that a company’s yearly dividend expressed as a

percentage of the current stock price which in order affected dividend gain of the
year to all their shareholders. Both Tesco and Sainsbury’s were performed last year
that both their actual divident yield were increased by 1% (Tesco) and 2%
(Sainsbury’s) .

Price Earnings Ratio is used for valuing company’s worth through the factor
of company’s share price that how they were proposed to their potential
shareholders. Therefore shareholder would be have a better insight by reading the
annual report and analize the company are overvalued or undervalued compared
annually from year to year. Tesco were doing great comparing to past year that
increase from 112.04x to 288.61x but Sainsbury’s dropped 9.75x compared to year
2021.

Earnings Per Share (EPS) is used to measure and determine a company value
and earns from each of its share of stock and is used by investors to assess, study
and research a company’s profitability. Sainsbury’s were performing well on EPS
since year 2021 were just -0.34% to 1.15% but EPS of Tesco were decreased since
the net profit of Tesco doesn’t be able to give more earnings for their shareholder by
1.85 to 0.57.

Conclusion
Base on the financial ratio that used to be conduct and study between Tesco PLC and
J Sainbury PLC, both firm has show a great potential to invest in term of financial that

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both of them be able to conduct their business past few years and business
development were planned appropriate to develop in the future.

Thank You

Julian Kiu Kwong Hong,

Junior Analyst,

Reference List

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Aleksandre Petriashvili (2018) Cash Flow Ratios and Liquidity Ratios Analysis of
Selected Listed Companies in Sri Lanka," Springer Proceedings in Business and
Economics, in: David Procházka (ed.), The Impact of Globalization on International
Finance and Accounting, pages 205-216, Springer.

Maskun, A. (2012) 'The effect of current ratio, return on equity, return on asset,
earning per share to the price of stock of go-public food and beverages Company in
Indonesian Stock Exchange', International Journal of Academic Research Part B, 4(6),
pp. 134-138..

Norvaisiene, R. (2012) 'The Impact of Capital Structure on the Performance Efficiency

of Baltic Listed Companies', Inzinerine Ekonomika-Engineering Economics, 23(5), pp.
505-516.

O’Hare, J. (2017) Analysing financial statements for non-specialists. London, United

Kingdom: Routledge.

Phillips, J.J. (2011) Return on investment in training and Performance Improvement

Programs. Abingdon, Oxon, United Kingdom: Routledge, pp 11-14.

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