Finance Management Assignment Sample

Introduction

In the report, the ratio analysis of Tesco and Sainsbury is done. The focus is on earnings and financial ratios, so price earnings ratio and dividend ratios are taken into account. Comments are made on them. Financial and non-financial factors behind these ratios’ performance are evaluated in detail, and accordingly, it is determined in which firm investment must be made. Finally, the conclusion section is prepared in the report.

Financial Analysis

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Table 1: Tesco ratio analysis

Price earnings ratio: The price earnings ratio reflects the valuation of the company and indicates whether the share of the company is overvalued or undervalued in the market (Restianti and Agustina, 2018). If the company’s PE ratio is more than the same as the industry, it can be said that company stocks are overvalued in the market.

EPS or earning per share: It is another essential ratio that reflects earnings that comes on each unit of equity, and more in the EPS means more earnings observed on each unit of equity.

Dividend payout ratio: The dividend payout ratio reflects the portion of earnings distributed among the shareholders as a dividend (Kadim, Sunardi and Husain,  2020). The dividend payout ratio may be more than 100% which reflects that firm is giving more dividends to shareholders to satisfy them.

Dividend coverage ratio: The dividend coverage ratio is the important ratio that reflects the number of times the dividend is covered by the net profit earned by the business firm (Hosaka, 2019).

Interpretation of ratios

From the chart given above, it can be observed that the PE ratio of Tesco is constantly increasing; in the year 2018, it was 372, which rose to 451 in the year 2019, and in the year 2020, it became 582, which reduced to 116 in the year 2021. This sudden decline in the PE ratio is a matter of investigation for the business firm.

EPS or earnings per share in the year 2018 was 0.56, which became 0.51 in 2019, and it declined to 0.38 in the year 2020. However, further, in the year 2021, it increased to 1.91. Hence, it can be said that a sharp increase happened in the firm earnings per share, and it can be said that it is good from the investor’s point of view.

The firm’s dividend payout ratio was 10.28 in the year 2018, and it increased to 17.80 in the year 2019, and further, it increased to 24.22 in the year 2020. However, in the year 2021, it declined to 5.71. It can be said that this is an alarming signal for the investors as the percentage decline suddenly.

The firm’s dividend coverage ratio in 2018 was 0.10, which declined to 0.06 in 2019, and further, it declined to 0.04 in 2020. However, its sudden increase to 0.18 in the year 2021. Thus, it can be said that some factors or company strategies have a very strong influence on the company dividend coverage ratio.

Financial and non-financial factors

Tesco stocks are overvalued in the market as in the last five years the retail sector of UK PE ratio remains 17 to 25 and from the chart given above it can be observed that each year Tesco PE ratio is higher than 100. This means that firm stocks are overvalued. The non-financial factor behind this is that people anticipate strong growth of the company in the retail sector, and due to this reason, investments are made in the company’s equity (Naseem et. al. 2019). Stable earning is another reason behind the high PE ratio. Due to all these reasons, ultimately, Tesco stocks get overvalued. Earnings per share of Tesco declined constantly, and in the year 2021, it increased. This happened because Tesco’s net profit either slightly increased or decreased, but in 2021, it increased sharply, due to which EPS increased. Tesco made many changes in its stores and technology base, which pushed its business profit and led to a sharp increase in the business profit.

 The dividend payout ratio of Tesco constantly increased year over year, but in 2021, it declined suddenly. This higher dividend payout ratio of more than 1 reflects that Tesco pays dividends to the shareholders using its internal resources. On the other hand, the higher the value of the dividend paid to the shareholders, the company will make more investment as they will assume that company fundamentals are strong (Hashim and et.al., 2021). These years firm did not earn a very high amount of business profit, but by just paying more dividends to shareholders, it is trying to maintain confidence among the investors. Hence, it can be said that on this front, a firm considering the trust factor give more dividend to the shareholders than it must give to them. The dividend coverage ratio of the firm is constantly declining, which reflects that the firm’s financial condition is not so good. Due to this reason, its net profit is not able to cover dividends even a single time (Singh and et.al., 2021). It can be said that Tesco has less control over its direct and indirect expenses, leading to low business profit and a low dividend coverage ratio. In the adverse market conditions, Tesco wants to maintain its good image so that more funds can be raised from the investors, and due to this, it is paying more dividends to the investors. More funds will be raised firm will be able to improve its business at a fast pace and speed up technology development, which will give it a competitive edge in the market (Kar, Bansal. and Mishra, 2021). This non-financial factor motivates the firm to pay a dividend to the investors by using its internal resources.

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Table 2: Sainsbury ratio analysis

Price earnings ratio: From the ratio of Sainsbury given above, it can be observed that it is both positive and negative, and values are highly positive and highly negative than the retail industry PE average. This reflects that firm stocks are highly overvalued in the market. At the current market price, if the investor is purchasing the stock of Sainsbury, it is paying more than a reasonable amount for the stock of Sainsbury (Taqatqa,  2021). Comparing both firms’ PE ratios, both firms’ stocks are overvalued in the market, and investment must not be made in these firms’ shares. In comparison, it can be said that Sainsbury stocks are more overvalued than same of Tesco. Hence, if investors want to choose from both firms’ stocks, they must go for the Tesco shares. If investors want to make rational investment decisions, they must wait for both firms’ share prices to decline to get better returns. A higher PE ratio reflects that firm is earning less. However, investors still maintain confidence in it and regularly invest in it, leading to a higher PE ratio in the business.

Figure 6: EPS comparison

(Source: Ms Excel, 2022)

EPS or earning per share: The EPS of Sainsbury is constantly fluctuating, and in the years 2018 and 2021, it is negative, but in the years 2019 and 2020, it is positive. From the chart, it can be observed that EPS is very low for Sainsbury. This ratio reflects that Sainsbury is not able to generate a good return for the investors. On this front, Tesco is doing well, its EPS has been positive across the years, and its earnings per share are higher than some of the Sainsbury (Benrqya and Jabbouri, 2021). It can be said that Tesco is much ahead of Sainsbury on all fronts. After the corona pandemic loss in 2021, Tesco observed fast growth in its profit, pushing its EPS to a higher level in the year 2021.

On the other hand, Sainsbury failed to come out of pressure, and in 2021 it further observed negative EPS. This comparison reflects that somewhat Tesco adopts a perfect strategy in its business which is less than sharp EPS. One of the reasons behind higher EPS is that Tesco improves its home delivery service and increases its capacity to serve people through in-home delivery service (Harris and et.al., 2021). This factor restores people’s confidence in Tesco, and they make more purchase from Tesco, which lead to higher EPS for the firm. On the other hand, in the case of Sainsbury, customers were having a lot of grievances due to which it lost its ground in the market. It can be said that Tesco performs better than Sainsbury on this front.

Dividend payout ratio: The dividend payout ratio of Sainsbury is negative in the year 2018 and 2021, but in the years 2019 and 2020, the value is positive. It can be observed that the ratio value increases at a fast pace in the year 2020, but in the year 2021, it becomes negative. In the case of Tesco, from 2018 to 2020, this ratio value increased constantly, and in the year 2021, a steep decline comes in ratio value. It can be said that the performance of Tesco is better than Sainsbury’s. Still, the latter follows a more systematic approach in the business than the former in dividend payment, as Sainsbury did not exploit its internal resources to keep investors satisfied (Höhler and Lansink, 2021). However, in 2020, Sainsbury will use its internal resource to pay a dividend to the shareholders. Overall, it can be said that Tesco is working on giving better returns to the investors. It successfully maintains the investors’ trust in its business, whereas the same does not happen in the Sainsbury case. However, in 2021, Tesco followed a more balanced approach, and it less used internal resources to pay a dividend to the shareholders. It can be said that Tesco is also performing better than Sainsbury on this front.

From the chart given above, it can be observed that in the case of the Sainsbury dividend coverage ratio is negative for the years 2018 and 2021. In the year 2019, suddenly dividend coverage ratio gets increases, and in the year 2020, it also increases at a very slow pace. This reflects that other than 2019 in no year firm was able to pay the entire dividend amount by using its net profit amount. It uses its internal resources to make a dividend payment to the shareholders in most years (Lokanan, 2021). On this front, there is not much difference between both firms’ statistics, and both almost give similar performance, and it can be said that in case of both firms net profit amount is not able to cover dividend amount. Both firms need to work on this front, and they must try to pay as much as a dividend out of profit, not from the other internal resources. Internal funds can be used for another purpose in the business.

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Based on the analysis, it is stated that investors must avoid making an investment in Tesco and Sainsbury. This is because both these firms’ stocks are overvalued in the market, which means that both firms’ shares are available at a very higher price in the market, which is more than the fair value of the equity (Guo and Wang, 2019). This means that if investors invest in both firms’ shares, they will pay the extra money, which is not right from an investment point of view. Other fundamentals also need to be evaluated in detail to make recommendations. It can be observed that there is a lack of stability in the Sainsbury business profit, and it keeps on constantly declining; in the year 2021 firm observed a heavy loss in the business. In the case of Tesco, there is almost stability in the profit and almost growth is seen in the company’s business profit. So, Tesco is in a better position than Sainsbury. However, in the case of Tesco, a heavy cost burden is observed, which leads to low business profit, which ultimately leads to fewer earnings per share in the business. Hence, investors are not getting much from Tesco as the mentioned firm is not able to manage or reduce expenses in the business (Evans and Mason, 2018). Tesco is selling its products at low prices, and the margin is less, due to which there are fewer company earnings for the investors. Profit is also low in the business of Tesco because the mentioned firm is making heavy investments in its business in the technology and improving store formats. All these lead to heavy capital expenditure and low profit in the business, which leads to less EPS for the investors, and this makes Tesco a less attractive choice for the investors. The problem with Tesco is that leaders need to focus on multiple areas, but they are paying attention only to technology adoption and improving store format. Leadership at Tesco is not much focusing on cost-cutting strategies so that costs can be reduced and more profit can be earned (Rosnizam et al., 2020). This lack of management foresightedness makes investment in Tesco a risky investment. It is advisable that investment in the mentioned firm must be avoided as it may fail to generate good returns for the investors. Moreover, Tesco uses internal funds to pay a dividend to the shareholders. It will have fewer funds to meet its business needs and, in the future time period, will take more debt in the business, which is not good from the investment point of view. More will be the debt in the business, higher will be the interest burden, and there will be less profit in the business, which will lead to less EPS and will also affect firm equity valuation. Hence, considering all these factors, it is recommended that investment must not be made in Tesco and Sainsbury (Tirawatnapong and Fernando, 2018). Both these firms are operating in a highly competitive environment where these firms are competing with each other based on low price strategy. Due to this reason, both firms will also earn less profit in the future time period in the business. Hence, for this reason, investment in Tesco and Sainsbury is not advisable. Currently, Tesco is working on improving its IT infrastructure, but it is not clear how it will start generating results for the business firms. Hence, it is not advisable to invest in Tesco and Sainsbury (Aiello, L.M., Quercia,  Schifanella and Del Prete,  2020). Sainsbury is also not performing well, and due to this, investment in the mentioned firm must be avoided as much as possible. Statistics also reflect that both firms are not able to pay a good amount of dividend to the investors and pay dividends to the investors. These firms are using internal resources, which is not good from the business point of view. If capital gain advantage is ignored, investors are not getting a good return on investment in these firms. Hence, it can be said that both firms need to work on themselves a lot, and they need to control expenses in the business so that profit can be increased (Ahmed. and Moosafintavida, 2020). More profit will be earned in the business firm will be able to pay more dividends to the investors without using internal funds. The internal fund will remain in the business, which the firm will use to meet its working capital needs in a proper manner. This will lead to less current liability in the business, which means that firms will not face any problems meeting their working capital needs. Hence, it can be said that both firms need to work on improving their business operations and strategy so that operations can be streamlined more (Tirawatnapong and Fernando, 2018). Thus, considering non-financial factors like firm intention to maintain trust among the shareholders and to ensure more investment from the investors in the future and heavy expenditure on technology up-gradation and store format improvement, Tesco is paying more dividends to the investors using internal sources, which is not the right approach. Moreover, PE is also high, and due to this, investment in Tesco is not advisable.

Conclusion

On the basis of the above discussion, it is concluded that Tesco shares are overvalued, and it is paying a good amount of dividends to the investors. Still, it uses internal resources to make a dividend payment to the investors. Factors like the desire to maintain trust among the investors and in the future to secure more funds from the investors and up-gradation of store format and adoption of technology are some factors due to which Tesco gives more dividends to the investors by using internal sources. Other than this, the PE ratio of both firms is also high, and due to this reason, investment in both firms is not advisable. Sainsbury is already earning less profit in its business. Hence, investment in both firms must be avoided due to all these reasons.

References

Ahmed, J.M. & Moosafintavida, S., (2020). Why nabors industries (NBR) Acquired Tesco Corporation (TESO) in an all-stock transaction: A case study. International Journal of Applied Science and Engineering, 8(2), pp.147-154. https://doi.org/10.30954/2322-0465.2.2020.7 

Aiello, L.M., Quercia, D., Schifanella, R. & Del Prete, L., (2020). Tesco Grocery 1.0, a large-scale dataset of grocery purchases in London. Scientific data, 7(1), pp.1-11. https://doi.org/10.1038/s41597-020-0397-7 

Benrqya, Y. & Jabbouri, I., (2021). Performance evaluation of European grocery retailers: a financial statement analysis. International Journal of Logistics Economics and Globalisation, 9(1), pp.24-39. https://doi.org/10.1504/ijleg.2021.10039482 

Evans, B. & Mason, R., (2018). The lean supply chain: managing the challenge at Tesco. Kogan Page Publishers. https://books.google.co.in/books?hl=en&lr=&id=drN7DwAAQBAJ&oi=fnd&pg=PP1&dq=Evans,+B.+%26+Mason,+R.,+(2018).+The+lean+supply+chain:+managing+the+challenge+at+Tesco.+Kogan+Page+Publishers.&ots=BzqJ6C_hNl&sig=bKFBCfVf3T7MqV9e5m2eAlegSUA&redir_esc=y#v=onepage&q=Evans%2C%20B.%20%26%20Mason%2C%20R.%2C%20(2018).%20The%20lean%20supply%20chain%3A%20managing%20the%20challenge%20at%20Tesco.%20Kogan%20Page%20Publishers.&f=false

Guo, L. & Wang, Z., (2019). Ratio analysis of J Sainsbury plc financial performance between 2015 and 2018 in comparison with Tesco and Morrisons. American Journal of Industrial and Business Management, 9(2), pp.325-341. https://doi.org/10.4236/ajibm.2019.92022 

Harris, P., McManus, P., Sainsbury, P., Viliani, F. & Riley, E., (2021). The institutional dynamics behind limited human health considerations in environmental assessments of coal mining projects in New South Wales, Australia. Environmental Impact Assessment Review, 86, p.106473. https://doi.org/10.1016/j.eiar.2020.106473 

Hashim, M., Nazam, M., Abrar, M., Hussain, Z., Nazim, M. & Shabbir, R., (2021). Unlocking the sustainable production indicators: a novel tesco based fuzzy AHP approach. Cogent Business & Management, 8(1), p.1870807. https://www.tandfonline.com/doi/full/10.1080/23311975.2020.1870807

Höhler, J. & Lansink, A.O., (2021). Measuring the impact of COVID‐19 on stock prices and profits in the food supply chain. Agribusiness, 37(1), pp.171-186. https://doi.org/10.1002/agr.21678 

Hosaka, T., (2019). Bankruptcy prediction using imaged financial ratios and convolutional neural networks. Expert systems with applications, 117, pp.287-299. https://doi.org/10.1016/j.eswa.2018.09.039 

Kadim, A., Sunardi, N. & Husain, T., (2020). The modeling firm’s value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870. https://doi.org/10.5267/j.ac.2020.5.008 

Kar, S.K., Bansal, R. & Mishra, S., (2021). Tesco: Entry and Expansion Strategy in India. Emerging Economies Cases Journal, 3(2), pp.65-76. https://doi.org/10.1177/25166042211038465 

Lokanan, M., (2021). Applying Four Quantitative Prediction Techniques to Detect Fraud in Financial Statements. Journal of Forensic and Investigative Accounting, 13(2). https://doi.org/10.15405/epsbs.2021.12.04.17 

Naseem, M.A., Lin, J., Rehman, R.U., Ahmad, M.I. & Ali, R., (2019). Moderating role of financial ratios in corporate social responsibility disclosure and firm value. PloS one, 14(4), p.e0215430. https://doi.org/10.15405/epsbs.2021.12.04.17 

Restianti, T. & Agustina, L., (2018). The effect of financial ratios on financial distress conditions in sub industrial sector company. Accounting Analysis Journal, 7(1), pp.25-33. https://doi.org/10.15294/aaj.v7i1.18996

Rosnizam, M.R.A.B., Kee, D.M.H., Akhir, M.E.H.B.M., Shahqira, M., Yusoff, M.A.H.B.M., Budiman, R.S. & Alajmi, A.M., (2020). Market opportunities and challenges: A case study of Tesco. Journal of the Community Development in Asia (JCDA), 3(2), pp.18-27. https://doi.org/10.32535/jcda.v3i2.807 

Singh, P., Ranjith, P.V., Fathihah, N., Kee, D.M.H., Nuralina, N., Nurdiyanah, N. & Nursyahirah, N., (2021). Service Quality Dimension and Customers’ Satisfaction: An Empirical Study of Tesco Hypermarket in Malaysia. International Journal of Applied Business and International Management (IJABIM), 6(3), pp.102-114. https://doi.org/10.32535/ijabim.v6i3.1333 

Taqatqa, A., (2021). 5 Tesco. 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, p.97. https://doi.org/10.1177/0258042×15578020 

Tirawatnapong, R. & Fernando, M., (2018). Factors influencing Bangkok people purchase intention towards Tesco Lotus house brand products. International Research E-Journal on Business and Economics, 4(2), pp.15-29. https://doi.org/10.26666/rmp.ijbm.2020.5.9 

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