Financial Ratio Analysis Of Sainsbury For 2014: Liquidity, Profitability, Leverage And Efficiency

Sainsbury

Question:

Describe about the Interpretation of Financial Report of Sainsbury Company?

Sainsbury is a UK based supermarket (J-sainsbury.co.uk, 2015). It has over 1200 stores worldwide. The organizations source their product and sell them in the UK based supermarket, convenience stores and online (Sainsburys.co.uk, 2015). The food business of Sainsbury is complemented by the general merchandise and clothes offered by the firm (Sainsburys.co.uk, 2015). Sainsbury offer banking and financial services via the wholly owned subsidiary of Sainsbury known as Sainsbury bank (Sainbury's Live Well For Less, 2015). They also have a number of joint ventures which also includes property development. The financial performance of Sainsbury will be analyzed for the year 2014(Tesco plc, 2015). The financial performance of Sainsbury will be compared with Tesco for the year 2014(Tesco.com, 2015). This will help to analyze the financial performance of the company against the industrial benchmarks. The financial ratios will be analyzed for the period of 2014 to ascertain the liquidity, profitability position of the company, leverage position and efficiency of the organization. The ratio analysis will serve as a tool for Sainsbury to make future decisions based on its current financial position. The investors will be able to judge the company on the basis of its performance.

Effective planning and financial management is essential for continuing the business in a sustainable manner. Financial ratio analysis is essential as it is a management tool that will improve the understanding of the financial results. The ratios can be used as a tool to understand the trend of the company over time. The ratio also acts as key indicators of the performance of the organization. The manager can identify the strengths and weaknesses of the organization. This will help the organization to formulate strategies on the basis of its potential strengths and weakness. The investors use ratios to measure the financial results against the industry benchmarks. It helps them to make judgements concerning the effectiveness of the management and the impact of it on the mission of the organization (Basu, 2015). Apart from the reasons discussed for choosing ratios as a tool for financial analysis, ratio analysis has the following uses –

Ratios are critical quantitative tools. They are used as indicators for indentifying the positive and negative financial trends. The trend analyses help the organization to make the future financial plans. The organization can make the short term plans to make their investment decisions. The ratio analysis serves as a tool for comparing the financial state of the company with the business in other industries.

The operating expense and turnover ratios are critical for the helping the organization analyze the efficiency of the business by utilizing the assets and managing the liabilities in an efficient manner. The operating ratios can be used to compare the operating expenses like the inventory, rent and advertising to the revenue that has been generated via sales (Peterson Drake and Fabozzi, 2006).

The liquidity ratios help the company to determine whether the company can invest in capital assets or it can make long term investments. These investments are necessary for the growth of the business. The current ratio and the working capital ratio are useful for assessing the liquidity position of the company so that it overcomes the short term debt expenses. This will assist the organization in making key decisions (Besley et al., 2000). The company can make business plan on the basis of the ratios (Lohrey, 2015).

Tesco

The financial ratios can express the relationship between the items in the financial statement. The financial ratios will help the management to identify the strengths and weakness. This will help the organization to measure the future performance of the organization. They are compared with the industry average.

Current ratio and quick ratio represent the most common liquidity ratios. The ratio determined by comparing the current assets with the current liabilities. It shows the ability of the organization to pay the short term bills. The minimum ratio is considered as 1. If the ratio is less than one then the company has more liabilities than assets. The higher ratio acts as a safety cushion for the organization. It enhances the flexibility of the organization as it is not possible to convert some of the items in the inventory and receivable balance. The liquidity position of the company can be improved by lowering down the debt margin and converting the short term debt into long term debt. The receivables can be collected faster to improve the liquidity position of the company.

 The financial stability of the company can be determined by the solvency ratios. They measure the company’s debt with respect to the assets and the equity. A highly debted firm does not have the ability to manage the cash flow if there is rise in the rate of interest or if there is deterioration of profitability of the business (Finkler and Ward, 1999).

The profitability ratio determines the ability of the company to convert the dollars gained from sales into profits and cash flow. The common profitability ratios are the net profit margin, gross profit margin and operating profit margin. The profitability ratios include the return to assets ratio, return on investment ratio. It shows the effectiveness of the organization to generate return from the investments (Desai et al., n.d.).

The efficiency ratios are the inventory turnover ratio and the receivable turnover ratio. The inventory turnover ratio is the ratio of the cost of goods sold to inventory. The higher inventory turnover ratio indicates that the company has the ability to convert the inventory into sales. The receivable turnover ratio is the ratio the credit sales to the accounts receivable. It tracks the outstanding credit sales. The higher accounts receivable turnover ratio indicates that the company is able to collect the outstanding credit balance in a successful manner (Grier, 2015).

		Sainsbury	Tesco
Profitability Ratios
Return on capital employed	Net Operating Income/ ( Total Assets - Current liabilities)	7.18%	33.97%
Return on Equity	Net Income / Equity	11.92%	6.59%
Net Profit Percentage	Net Income / Net Sales	2.99%	1.53%
Gross Profit Percentage	Gross Profit / Net Sales	5.79%	6.31%
Operating Profit Percentage	Operating Income / Net Sales	4.21%	4.14%
Liquidity Ratios
Current ratio	Current Asset/ Current Liabilities	1.823456	2.245581
Quick Ratio	Quick Assets / Current Liabilities	1.404007	1.631886
Efficiency ratios
Inventory Turnover Ratio	Cost of Goods Sold / Inventory	22.44975	16.65185
Stock Holding Period ( Days)	365/ Inventory Turnover	16.25853	21.91949
Debtor's Payment Period ( Days)	Net credit sales / Average Debtors	55.30947	29.02146
		6.599232	12.5769
Financial structure
Interest coverage ratio	EBIT / Interest Expense	5.647799	4.005319
Price/ Earnings ratio	Current Share Price / Earnings Per share	7.161804	10.22105

Profitability ratios

The profitability position of Sainsbury has been determined by the profitability ratios which are the return on capital employed, return on equity, net profit percentage, gross profit percentage and operating profit percentage.

The return on capital employed for Sainsbury is 7.18% for the year 2014. On the other hand the ratio is 33.97% for Tesco. It is seen that Tesco is deriving more return from investment. The return on equity for Sainsbury is 11.92% whereas the return on equity for Tesco is 6.59%. The return on owner’s capital is more for Sainsbury. The net profit margin for Sainsbury is 2.99% and it is 1.53% for Tesco. The profit margin for Sainsbury is higher. But it is seen that the gross profit margin for Tesco is higher than that of Sainsbury. The operating profit margin for both the companies is same (Colombo et al., 2005).

Profitability Ratios

The liquidity ratios are the current ratio and the quick ratio. The current ratio for Sainsbury is 1.82:1 and for Tesco it is 2.25: 1 The ideal current ratio is considered to be 2:1. It is seen that the current ratio of both the companies fall within the range. The quick ratios of both the companies are within the range of 1:1. Thus it can be said that the liquidity position of both the companies fall within the range and the company is able to pay its liabilities well with the short term assets (Nissim and Penman, 2001).

The efficiency ratios show the ability of the company to manage its inventory and debtors. The ratios used to determine the efficiency are the inventory turnover ratio and the debtor’s turnover ratio. The inventory turnover for Sainsbury is 16 days and that of Tesco is 21 days. Thus it can be said that Sainsbury is more efficient than Tesco in managing its inventory. The debtor’s payment period for Sainsbury is 6 days and for Tesco, it is 12 days. Thus it can be said that Sainsbury is managing its debtors more efficiently than Tesco. The higher the debtors ratio it is not a good sign for the organization (Cull, Demirgu Kunt and Mordug, 2007).

These ratios show the ability of the company to cover up the interest and the earning of the shareholders on the investment in the shares of Tesco and Sainsbury.

The interest coverage ratio shows the ability of the company to repay its interest expense from the profitability. The lower the ratio, it is better for the organization. It is seen that the interest coverage for Sainsbury is less than Tesco (Palepu, Healy and Peek, 2010).

The earnings of the shareholders of Tesco is more than the earning of the shareholders of Sainsbury. The share price of Sainsbury is higher than Tesco. But the return of the share holders is less (Sainsbury plc - Annual Report and Financial Statements 2014, 2014) ; (Tesco PLC Annual Report and Financial Statements 2014, 2014).

Conclusion and Recommendations for Sainsbury

The ratio analysis shows that the financial position of Sainsbury is stable. The company has been doing good business in UK and rest of the world. However it receives tough competition from other supermarkets in UK. They are Tesco and Aldi. The financial performance of Sainsbury in comparison to Tesco shows the profitability position of Sainsbury is higher than that of Tesco. But the return of the investors of Tesco is more than Sainsbury.

Sainsbury can maximize the return of the shareholders. This will earn the confidence of the investors. Sainsbury can venture into new products. They can emphasize more on the clothes section apart from the food section. The financial performance of the company showed positive improvements. The profit before tax was up by 5.3% and the earning per share was up by 6.5% in the year 2014. They also paid dividend to the share holders.

1. The different companies in different industries and they operate in different environmental conditions and depends on the regulatory mechanism by the Government. Thus the comparison of two companies belonging to two different industries can be misleading (Garrison, Brewer and Noreen, 2015).

2. The accounting standards follow different accounting policies which affects the ratio analysis.

3. The ratio analysis shows the relationship between the past performance and uses past information but the investors are more concerned of the current and future information (KIRKOS, SPATHIS and MANOLOPOULOS, 2007).    

References

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