The Company "Sainsbury's". A Financial Ratio Analysis


Academic Paper, 2017
18 Pages, Grade: 80%

Excerpt

Inhaltsverzeichnis

1. Introduction of the company

2. Financial ratio analysis

3. Profitability ratios
a) Gross margin ratio
b) Net margin ratio
c) Return on assets (ROA)
d) Return on capital employed (ROCE)
e) Return on equity (ROE)

4. Liquidity ratios
a) Current ratio
b) Quick ratio

5. Efficiency ratios
a) Inventory holding period
b) Receivables period
c) Payables period

6. Capital structure ratios
a) Gearing ratio
b) Interest cover
c) Dividend cover

7. Stock market performance ratios
a) Earnings per share (EPS)
b) Dividend payout ratio
c) Dividend yield
d) Price earnings (PE)

8. Limitations of the analysis

9. Conclusion

10. References

1. Introduction of the company

Sainsbury’s is the second largest supermarkets’ chain with the 16.9% share in the retail sector in the United Kingdom. The enterprise was established in 1869 by John James Sainsbury and in 1922 it became the largest UK’s grocery store. Furthermore, the company was an early adopter in the self-service in Britain. In 1995, the Sainsbury’s position dropped to the third place with the Tesco as a leader on the market and Asda in the second place. However, in 2014 Sainsbury’s regained its position and came in the second place (Sainsbury’s, 2017).

The holding firm (J Sainsbury plc) is consisted of three departments such as Sainsbury’s Bank, Sainsbury’s Argos and Sainsbury’s Supermarkets Ltd with the headquarter in Holborn Circus in London. The greatest number of company’s shares has Qatar Investment Authority (25.9%); Lord Sainsbury of Turville holds 4.99% of the stake; Judith Portrait (trustee of charitable trust) holds 3.92% of the shares and Sainsbury’s family has 15% of the stake. The company runs under three formats such as supermarket, convenient store- Sainsbury’s Local and online shopping service. The present CEO of the enterprise is Mike Cope. The Sainsbury’s presence is visible in London Stock Exchange and FTSE 100 Index (Annual Report, 2016).

2. Financial ratio analysis

The financial ratio analysis constitutes the most typical and broaden measurement to investigate the financial position of the company. The ratio examination is utilized to present the performance of the enterprise or compare its results with other firms over the time. Nevertheless, the ratio analysis is just a simple calculation of the firm’s financial state and does not embrace details for instance the business’ size. The ratio examination provides the creditors and investors with the directions and fields that must be enhanced in order to improve the financial condition. Furthermore, analysis of ratio enables to identify the weaknesses and strengths of the business. The ratios are categorized into five major groups such as liquidity, profitability, stock market performance, capital structure and working capital management. (Gitman, 2011).

3. Profitability ratios

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Source: Stockopedia (2017)

a) Gross margin ratio

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Gross margin ratio investigates how much gross profit to the revenues generates the enterprise for the specific period. From 2012 till 2014, there were no significant changes in ratio; however in 2015 there was a great fall by 4%, what indicates that the costs exceeded sales revenues. There was lack profit and the firm was struggling to cover additional expenses related to operating costs or tax. That’s negative ratio indicates inefficiency in management in that period. However, after a fall in 2015 there was high rise in 2016, what management and better control expenses or change the strategy. The recommendation for the gross margin ratio is better control of expenses by management in order to improve efficacy of the firm.

b) Net margin ratio

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Net margin ratio examines the ratio of net profit to sales revenues for an enterprise. From 2012 till 2014, the ratio was on similar level whose average was 2.7%; nonetheless in 2017, the Sainsbury’s ratio plummeted by 3.6%, what indicates that the control of expenses was ineffective (management’s inefficiency). The company was unable to successfully convert revenues into net income. However, in 2016 Sainsbury’s noted a rise by 1.3%, what gives good prognosis for the investors because the company is able to pay the dividends and loan for the creditors. In terms of recommendation, the management should control its operations more carefully, be more effective and careful to avoid similar failures in the future.

c) Return on assets (ROA)

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The return on assets (ROA) determines how profitable is the enterprise in relation to its assets. From 2012 till 2014, the firm converted funds from purchase of assets into net income effectively; however, in 2015 there was a significant fall by 5.9% what indicates that the company couldn’t manage successfully the assets to generate profits in that year. The ratio rose by 3.8%, what advocates an upward profit trend. The average 12.5% in profit is generated by £1 in assets.

d) Return on capital employed (ROCE)

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The return on capital employed ratio shows the efficiency of the enterprise in generating profit from the capital employed. In 2015, there was a significant fall by 9.5%, what can be result of competitive advantage’ loss. However, in 2016 the ratio has increased to 6.9%, what means that for every £1 invested in the business, the company makes 6.9 pence of net profit.

e) Return on equity (ROE)

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Return on equity ratio indicates how efficient the enterprise utilize shareholder’s funds to generate profits and expand the firm. There was a significant drop in ratio by 15% in 2015 and was -2.9, what can indicate ineffective use of investors’ funds. In 2016, there was increase by 10.6%. In 2016, the ratio was 7.7% what means that every pound of common shareholder’s equity earned about £7.7.

4. Liquidity ratios

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Source: The Telegraph (2017)

a) Current ratio

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The current ratio illustrates if the enterprise is in position to fulfil the short and long-term obligations. The diagram below shows that the current ratio dropped by 0.03 in 2013, however from 2014 it started to grow. Nonetheless, the ratio under 1 indicates that the firm’s current liabilities exceed the current assets, what is a negative indication and means that the firm is not in a good financial state and will not manage to pay its commitments if they come due at this stage (ACCA, 2012).

b) Quick ratio

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The quick ratio indicates whether the firm owns adequate number of short-term assets to cover immediate liabilities. The table presents that in 2013, the quick ratio fell by 0.06, however a year later it started to show growing trend. Nevertheless, the company’s ratio is less than 1 that indicates that the firm is unable to pay off its current liabilities, hence it’s a bad indicator for investors and partners. It shows that the firm is unable to convert quickly current assets into cash and pay off short term debts through selling liquid assets at short notice. Furthermore, quick ratio is lower than the current one, what demonstrates that the current assets are significantly contingent on inventory (ACCA, 2012).

[...]

Excerpt out of 18 pages

Details

Title
The Company "Sainsbury's". A Financial Ratio Analysis
College
University Of Wales Institute, Cardiff
Grade
80%
Author
Year
2017
Pages
18
Catalog Number
V512512
ISBN (eBook)
9783346100283
ISBN (Book)
9783346100290
Language
English
Tags
company, sainsbury, financial, ratio, analysis
Quote paper
MBA graduate Katarzyna Szydlowska (Author), 2017, The Company "Sainsbury's". A Financial Ratio Analysis, Munich, GRIN Verlag, https://www.grin.com/document/512512

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