Financial analysis of five UK retail companies

Financial Statement Analysis

In this particular essay, I undertake the financial analysis of five companies, all of which are set in the retail industry. Three of the companies, Tesco Plc, Sainsbury's and Wm Morrison Supermarkets plc are some of the largest food retailers in the United Kingdom. Ocado which is the fourth company is the largest online food retailer in the whole world and lastly Crawshaw Group PLC is also in the business of operating a chain of retail food stores. Every company will be discussed individually and it will encompass information regarding the history of the company, the products and the services, the consumers and also other information.

Tesco Plc is a company that is based in Britain and is the largest food retailer in the United Kingdom. It is one of the biggest retailers in the globe as it is the third in position in the retail industry below Carrefour which is based in France and Wal-Mart which is based in the United States. At the outset, Tesco begun its business operations with grocery retailing but at the present moment has massively expanded and also retails health and beauty products, electrical goods, household goods, stationary and also intermittent products that are sold seasonally such as garden furniture during summer periods. Tesco has its business operations in over fourteen nations with over three thousand retail store outlets. The company has its largest geographical market base in the United Kingdom as more than two thirds of its retail stores are located in the U.K. Tesco operates by means of different forms of its stores which encompass hypermarkets, supermarkets, Metro, and also Express. It has to be said that Tesco has grown immensely to become one of the largest independent retailers of oil in the United Kingdom. More so, the company has also started offering financial services as well to the consumers as it made a joint venture agreement with the Royal Bank of Scotland which in turn has grown to become a successful venture for the operations of the company. The main purpose of the company as pointed out on the company website is to create value for consumers and to earn their lifelong loyalty (Tesco PLC Website).

Sainsbury plc, which was established in the year 1896 is one of the main competitors of Tesco and is also deemed to be one of the leading retailers of food in the United Kingdom being ranked third. It is a publicly traded company that is registered in the FTSE 100 and also the London Stock Exchange. Aside from being a major player in the food retailing sector, the company has also played a part in the property sector and also the financial sector. However, on the basis of the amount of turnover generated by the company, it has to be agreed that the retail food chain is the major operation of business. At the present moment, Sainsbury plc consists of over five hundred supermarkets and just about three hundred practicality necessities. The company is also the partial owner of Sainsbury's Bank with the other owner being Lloyds Banking Compilation. In addition, the company also has possession of twofold ventures with Ground Securities Collection PLC and also the British Soil Corporation Plc. Being the third largest retailing company for food in the United Kingdom, Sainsbury currently boasts of having about seventeen percent of the total market share. Having been the main leading food retail company in the United Kingdom for several years, the company experienced a decline during the 90s period and is at the present day making an attempt to reclaim its position and status in the United Kingdom market as well as expand its market share internationally. It is actually during that when Tesco claimed the number one position and Asda became second in the food retailing industry (Sainsburry, 2015).

Morrison Supermarkets is another company that operates as a food retailer in the United Kingdom. However, the company deals with online selling of groceries and selling of groceries in-store. The company has over five hundred stores and also undertakes home retail delivery services for the consumers that purchase the products online. The Company has its business operations in 7 regional distribution centers which usually service its main supermarkets, and two convenience distribution centers (Bloomberg, 2015). Ocado is the biggest online supermarket in the whole world and not just in the United Kingdom. It is an independent business operation but is registered on the London Stock Exchange (Ocado Group Website, 2015). Crawshaw Company Information together with its branches undertake business operations of a business chain of retail food stores that are purely focused on delivering all kinds of meat in the United Kingdom. The company offers fresh, raw and cooked meats and also hot meals. These encompass beef, lamb, chicken and also pork meat. The company only has two centers for distribution which service all of its 20 retail locations in the different expanses of the United Kingdom (Bloomberg, 2015).

Ratio Analysis

Return on Net Operating Assets

Return on net operating assets (RNOA) is a financial ratio that not only measures the profitability of a company but also its financial health. This ratio, in particular, places emphasis on measuring the profitability of the assets that are only used to generate revenue for the company. RNOA is calculated through dividing Net Operating Profit After Taxes (NOPAT) by the Average Net Operating Assets (NOA) subsequent to the separation of the operating activities from the financing activities in the statement of comprehensive income and the statement of financial position and recognize their distinct efficiency.

Return on Net Operating Assets

2014

2013

2012

2011

Tesco

6.00%

1.53%

11.96%

12.22%

Sainsbury

10.96%

9.02%

9.13%

9.81%

Ocado

5.78%

-2.22%

0.49%

2.00%

Crawshaw

8.34%

0.79%

0.19%

4.69%

Morrison

-2.18%

9.92%

11.02%

10.93%

In the year 2012 and 2011, the return on net operating assets for Tesco which is the main company was the highest compared to the other companies being analyzed. However, in the year 2013 the RNOA of Tesco declined in a considerable manner to 1.53%. The rate did rise up to 6.00% in the subsequent year 2014. In the analysis of the other companies, Sainsbury which is the main competitor of Tesco can be seen to be the most consistent in terms of the returns generated with the RNOA ranging between 9% and 11%. Morrison has also been consistent over the years but in 2014, the return of the company dropped in an alarming rate from 9.92% to -2.18% and making negative returns which are losses to the underlying assets. Ocado and Crawshaw have shown considerable growth as the return on net operating assets between 2013 and 2014 rose from -2.22% to 5.78% and from 0.79% to 8.34% respectively.

Operating Profit Margin

The operating profit is also referred to as the Earnings Before Interest and Tax (EBIT) as would be perceived in the income statement. In addition, the operating profit margin is also referred to as the profit margin which is obtained by dividing the earnings generated by the company before the deduction of interest as well as taxation by the net sales of the company which can also be attained from the statement of comprehensive income which considers EBIT to be included in the sales revenue. This particular ratio is employed in measuring and analyzing the efficiency level of a company's operating activities by relating all of the costs of the average business activity. In addition, the operating profit margin demonstrates the revenue and the costs of the company that are incorporated and defines the operating income as a proportion of the net revenue. This therefore implies that the higher or the more superior the operating profit margin, the more profitable the company is and the better it is for the users of the financial statements.

Operating Profit Margin

2014

2013

2012

2011

Tesco

2.21%

0.60%

4.69%

4.84%

Sainsbury

3.44%

3.00%

3.05%

3.21%

Ocado

1.74%

-0.72%

0.16%

0.47%

Crawshaw

3.95%

0.43%

0.11%

2.57%

Morrison

-0.92%

3.90%

4.09%

4.01%

The operating profit margin of Tesco though slightly decreased was the highest compared to the other companies in the years 2011 and 2012 with 4.84% and 4.69% respectively. This basically implies that for every dollar that was invested in Tesco, the company made a return of 4.84 cents in 2011 and 4.69 cents in 2012. However, in the subsequent year 2013, the profit margin of Tesco dropped considerably to 0.60%. However, the company's profit margin did improve as it rose to 2.21%. On the other hand, Sainsbury which is the main competitor of Tesco maintained a steady operating profit margin throughout the four-year period. In general, it shows that the two companies are making profit and between the four years never made any losses. However, it can be said that Sainsbury has generated more profit compared to Tesco in the past four years. This cannot be said for Ocado and Morrison which made losses in the year 2013 and 2014 respectively. Ocado's profit margin declined considerably between 2011 and 2013 from 0.47% to -0.72% implying that for every dollar invested in the company, it made a loss of 0.28 cents. Ocado can be seen to be the least profitable company out of the five firms that are being analyzed. Morrison also to some extent had maintained a steady profit margin up until the year 2014 when it made a return of -0.92% in profit meaning that for every dollar invested in the company, the firm made a return of 0.08 cents in losses. Lastly, Crawshaw had an unsteady profit margin as it decreased then went on to increase again.

Net Borrowing Cost (NBC)

The net borrowing cost is a financial ratio that is quite significant and weighty when making a financial analysis of any firm. To begin with, the net borrowing cost can be described as the expenses incurred in borrowing that are directly related to the procurement, manufacture or production of a qualifying asset. This kind of asset is one that essentially takes a considerable amount of time to be ready for its proposed usage or sale and all the aforementioned expenses are included in the cost of the asset. The other costs of borrowing are recognized as an expense. This basically implies that the cost incurred in borrowing so that the construction or selling of an asset can take place is vital and significant. The net borrowing costs of Tesco and its main competitors Sainsbury and Morrison will be compared and contrasted. The net borrowing costs of Ocado and Crawshaw will also be compared between the years 2011 and 2014. This will be undertaken so as to perceive the fluctuations and how the net borrowing costs for all the five companies vary and differ year by year. It is imperative to take note that a decrease in the net borrowing cost is healthy for a company in financial terms because this is a liability and in general it will decrease the debt level of the company. Majority of the companies incur net borrowing costs. However, this particular amount is reliant on the size of the company as well as other factors. A decrease in borrowing costs implies that there has been a drop in the amount borrowed by the firm so as to purchase, construct or produce an asset for the purposes of selling it or using it.

Net Borrowing Cost

2014

2013

2012

2011

Tesco

-5.63%

-4.02%

-3.74%

-3.94%

Sainsbury

-6.57%

-5.27%

-5.71%

-5.69%

Ocado

-12.24%

-12.84%

-9.44%

10.77%

Crawshaw

2.02%

-17.68%

-5.31%

-4.12%

Morrison

-3.08%

-3.30%

-2.79%

-3.36%

The net borrowing costs for Tesco increased by almost twice its rate from -3.49% in 2011 to 3.74% in the year 2012. This was not proper for the company as it implies that its debt level increased considerably. However, since then, the ratio has gone on to decrease in a consistent and significant manner from 3.74% in 2012 to -4.02% in 2013 and even much further to -5.63% in 2014. The same can be said of Sainsbury whose ratios at all 4 years have been higher when compared to Tesco as its main competitor. Morrison, similar to both Sainsbury and also Tesco also had the same pattern in its net borrowing costs but in this case was consistently lower compared to Tesco in all the other four years. Ocado's net borrowing costs have been considerably and exceedingly high compared to those of its competitors. This can be assumed that the company has borrowed plenty of funds to acquire, construct or manufacture assets for its products and services. However, this has greatly increased the debt levels of the company.

Operating Liability Leverage

The operating liability leverage can be described as the ratio which measures the extent or magnitude to which a company or any other entity incurs with regards to the fixed and variable costs combined. This implies when taking into consideration, both the fixed costs as well as the variable costs have to be analyzed. It is important to note that a company is said to be highly leveraged in that it makes very minimal revenues with every sale generating a high gross margin. The opposite also goes hand in that a company whose business operations make several sales and every sale bringing about a small margin then it is less leveraged. The increase in the number of sales, every new sale adds less and less to the fixed expenses and more towards the profit. It is also important to note that a company that has a high amount of fixed costs and lower amount of variable costs is said to have employed more operating leverage. On the other hand, lower fixed expenses and higher variable expenses point towards less operating leverage. The higher the level of operating leverage the larger the probable danger from projecting risk. This implies that if a comparatively minimal mistake is done while projecting sales, it can be expanded into massive mistakes or errors in the projections of cash flows. The contrary takes place for company business operations that are less leveraged (Kesavan, 2009).

The breakeven point which is the counterbalance level of whether a profit or a loss will be made is basically calculated by making use of the operating liability leverage. Breakeven points that are high are related or linked to the companies that have high operating liability leverage. The firms can generate more money or funds from increased amount of revenues if they have high operating liability leverage in comparison to other firms. This is for the reason that costs do not have to be proportionally or consistently increased for a firm to undertake certain sales. More often than not, businesses that have a high operating liability leverage ratio have a tendency of making many more profits from proper management or other aspects that increase the sales level in a considerable manner. On the other hand, the same companies that have a high operating leverage ratio have a tendency to or are likely to be exposed to revenue deteriorations that could be instigated or initiated for example by making bad or poor decisions. Considering the fact that this particular ratio places emphasis on the fixed costs and variable costs, it is imperative to bear in mind that some firms necessitate a fixed costs that is usually higher when compared to that of other companies. This shows that it is meaningful and useful to compare the operating liability leverage of firms that are in the same industry when making their financial analysis.

Operating Liability Leverage

2014

2013

2012

2011

Tesco

99.99%

86.94%

80.34%

77.69%

Sainsbury

79.24%

52.42%

50.47%

50.88%

Ocado

45.77%

42.08%

34.85%

41.24%

Crawshaw

28.01%

26.33%

27.26%

27.01%

Morrison

39.51%

39.35%

41.38%

43.56%

The operating liability leverage for Tesco consistently increased from the year 2011 to 2014 from 77.94% to 99.99% respectively. This implies that Tesco has a tendency of making many more profits from proper management or other aspects that increase the sales level in a considerable manner. On the other hand, Sainsbury's operating liability leverage decreased between 2011 and 2012 but went on to consistently increase until the year 2014. The same case can be said of Ocado and Morrison which revealed the same pattern. On the other hand, the operating liability leverage ratios for Crawshaw increase between 2011 and 2012 and thereafter went on to decrease in 2012 and then increase once again in the year 2014. This implies that of all these companies, it is Tesco that incurs minimal costs in the several sales that it makes.

Asset Turnover (ATO)

Asset turnover in general encompasses the gross sales as well as revenue that are generated by the assets of the firm. The asset turnover ratio measures the ability of a firm to generate revenue by making a comparison between the net revenue generated by the company with the average total assets. In other words, it measures just how much a company is able to utilize its assets in the retailing of its products or services. Taking this into consideration, a firm is deemed to be more efficient if it can make a higher and more superior turnover with the least possible number or amount of assets. The total asset turnover ratio computes the net sales as a fraction of the assets in order to reveal how many revenues are generated for every dollar of the assets of the company.

Asset Turnover

2014

2013

2012

2011

Tesco

Sainsbury

Ocado

Crawshaw

Morrison

The asset turnover ratio for Tesco consistently increased from the year 2011 to 2014 from 252.5% to 272.0% respectively. This implies that Tesco has a tendency of making many more profits from the assets of the company by utilizing and making the most out of them. On the other hand, Sainsbury's asset turnover ratio decreased between 2011 and 2012 but went on to consistently increase until the year 2014. The same case can be said of Ocado and Morrison which revealed the same pattern. On the other hand, the asset turnover ratio ratios for Crawshaw increase between 2011 and 2012 and thereafter went on to decrease in 2012 and then increase once again in the year 2014. This implies that of all these companies, it is Tesco that makes the most out of its assets to generate revenues and does so in a consistent manner.

Return on Common Equity

The return on common equity can be described as the amount of profit return or the net income that a company generates from every dollar that emanates from its equity. However, this ration only takes into account the ordinary or common shareholders. This is usually of great value and benefit to the users of financial statements and in particular the investors to perceive what kind of profit the voting shareholders are obtaining when the other preferred and other kinds of shared are not included (Wilkinson, 2013). It reveals just how the company makes use of the funds that are invested by the common shareholders in the company. A high rate implies that the company knows how to generate profit and maximizing the funds of the shareholders. In addition, it also indicates growth and makes more and more probable investors to invest in the company (Accounting for Management, 2014).

Return on Common Equity

2014

2013

2012

2011

Tesco

6.21%

0.72%

16.36%

17.06%

Sainsbury

12.20%

10.81%

10.82%

12.32%

Ocado

3.47%

-6.13%

-1.27%

-0.29%

Crawshaw

7.85%

1.79%

0.10%

4.33%

Morrison

-4.80%

12.18%

12.76%

12.19%

The return on common equity for Tesco decreased from 17.06% in 2011 to 16.36% in 2012 and then much further in an exceeding way to 0.72% in the year 2013. However the ROCE did rise up to 6.21% in the year 2014. The same case can be said of Sainsbury which is the main competitor as the ROCE decreased from 12.32% in 2011 to 10.82% in 2013 to 10.81% in 2013 but then went on to increase to 3.47% in the year 2014. The ROCE of Ocado continued to decrease in a gradual manner until the year 2014 when it increased. With its ROCE being in a negative number it can be implied that this is the lease profitable companies in terms of generating returns for its common shareholders.

Conclusion

Financial are a strong basis that can be employed by users of financial statements and in particular investors to make the comparison of the financial performance of a company with another company. This unvarying group of financial rations will help the stakeholders and more so the investors to make better decisions in terms of investments for the reason that they are ratios, which have a uniform basis all across the industry in which the company is set. The ratios could also be employed by the company itself and also by other users of financial statements for probability in the future to project the liquidity level of the company and also the market share of the company.

In this particular paper, Tesco has been employed in selecting the list of firms and attain the necessary and beneficial information to support the ratio analysis that is presented. With the ratios in hand, it was possible to make an analysis and compare in the four years between 2011 and 2014. Tesco which is the main company was compared and contrasted to its competitors which are Sainsbury, Morrisons, Ocado and Crawshaw. This made it possible to find out which of these companies performed financially well. In turn, the ratios showed that though in the initial years Tesco has a better performance, it was Sainsbury that had a more steady and consistent financial performance over the years. It has to be agreed that Sainsbury was better in general and financially set. On the other hand, it is Ocado that appears to have the poorest financial performance compared to all of the other companies. Morrison also had a consistent financial performance over the years but in 2014 its performance declined and dropped significantly in a worrying manner for the forthcoming periods.

Tesco did perform efficiently in some of the years but still had ratios that showed that it performed lower than Sainsbury. Simply Sainsbury performed better than Tesco throughout the years. The industry averages were better than the ratios of Tesco most of the time showing that its performance is not as efficient as Sainsbury in most of the years. The industry in which these companies are set which is the food retail industry is one that is increasingly extended and continues to grow all over the world as the level of demand continues to increase and also the rivalry and number of competitors is growing intense. Tesco which is the largest company in the food retail industry in the United Kingdom does have a consistent performance though the past two years it declined. It is Sainsbury which is still on the road to reclaim its spot as the leading company as it has consistent and steady financial performances over the years.