Analysis of the Balance Sheet from British Airways and Sainsbury's

Analysis, description and discussion of pecking order theory and trade off theory

Term Paper, 2008

16 Pages, Grade: 1,3


Table of contents

Part A:
British Airways

Part B:

Part C

Part D



Part A:

British Airways

Because of the happenings after the 11.09.2001, with the terror attack on the world trade centre, the airline industry dropped in a recession. Therefore the 2007 balance sheet from BA shows for total assets only 88% of the value of 2003, this is a loss of ₤1.5 billion. Especially the planes were disinvested by ₤1.7 billion and also land & buildings reduced by ₤300 million. Otherwise the current assets increased by ₤700 million, mainly the fund position with ₤500 million. Contemporaneously the company pays long term debt, to reduce the risk and the interest payments, back. The decline correlates with ₤2.4 billion, the highlight is the decrease of ₤2.8 billion at the hire and leasing position. In 2003 BA financed their planes equally by leasing ₤2.4 billion and hire purchase ₤2.4 billion. Over the 5 year period they cut the hire purchase to one-third of the volume and it is only ₤776 million worth. Moreover they reduced the leasing to the half quantity of ₤1.27 billion. Thus, now the relation changes to two-thirds. This is useful because they pay smaller amounts over the plane’s life cycle and reduce the refinance and also the maintenance and service costs. Furthermore through the switch from UK GAAP to IFRS in 2005-2006 BA must expel the pension liabilities to the amount of ₤1.1 billion. In addition the current liabilities increased by ₤700 million particular important are accruals and other current liabilities each one with ₤500 million. The shareholder funds financing on average only 19.4% of the assets in 2007. As a result of these facts the gearing ratio, as in Figure 2 shown, reduces dramatically from over 410% to 270%. The problem with such a high gearing level is that debt is normally secured by assets. If the company fail to pay the interest the creditors will sell the planes to get their money, and therefore BA will be out of the business. As Figure 3 shows 80% of the assets are on average financed by debt. But normally over 50% of the assets are financed over long term and 20%-30% are financed by current liabilities. Fernandes and Capobianco (2001) mentioned that the airlines should keep the asset to liability ratio in a range from 40%-77%. Even if the gearing level is still high the index of BA is close to this optimum scope and therefore not an alarm signal. Additionally the golden rule is important in the airline sector. Because of the very cyclical business and the long term investment in planes it is essential for survival to finance fixed assets over the long run and current assets in the short term, this can be seen in Figure 4. Both proportions oscillate around one. After this turnaround BA is fit for the future and can raise the turnover by more then 10% in the last 5 years and reach, through a higher efficiency, the profit margin of 10%, which is now only 7% as C. Buyck (2005) mentioned. 495 words


Sainsbury’s assets were reduced in the period of 2003 to 2007 from ₤12 billion to only ₤9.5 billion. Thereby the fixed assets were stable at around ₤7.7 billion, excluded the year 2006. Here major changes had taken place. Investment in the quantity of ₤1.6 billion rose. This money was spent on the acquisition of shops from Morrison’s in the volume of ₤900 million and investments in the retail chain (Sainsbury, 2006).But the current assets were cut to the half volume. These resulted from a change in the payment options or in accounts receivable management. Hence, the Bank deposit doubled to ₤1.1 billion and the Debtors were reduced by over ₤1.6 billion. Consequently the current liabilities declined, especially the other current liabilities. Through the stable value of fixed assets the long term liabilities have a continued worth of ₤2.5 billion. But in 2006 major changes in the long financing took place. Through the switch from UK GAAP to IFRS the pension liabilities must been expelled in the amount of ₤658 million and also other long term liabilities with the value of ₤1 billion. Furthermore Sainsbury changed a key part of the long period financing. They paid ₤1.7 billion of unsecured bonds back and issued ₤2 billion of secured debt. This debt is secured by over 100 supermarkets and allows about ₤12 million lower interest payments. This flexible financing arrangement is repayable over 12 and 25 years (anon, 2006). Contrary to BA the equity part in financing the business is more important 41.5 % in 2003 is very high, in the average 40% of the assets are financed by share holder capital. Therefore Figure 2 shows in 4 of 5 years a sector specific gearing ratio around 60-65%. The only exception is 2006 concerning the explanation above. Moreover a higher gearing would show problems in the, 2006 reorganised, supply chain (Sainsbury, 2006a). Thus, customers pay immediately at the cash desk and the grace period for the supplier is around 30 days, this leads to an increase in the inventory turnover ratio increased about 8 times. Figure 3 confirm this evidence, that short term funding is important for Sainsbury. Until 2005 40% of the goods there financed by a length of less than 1 year, but this ratio changed in 2006 and 2007. At the moment both financing forms are equally essential. That is why Sainsbury try to follow the rule to finance current assets over the short period and fixed assets over the long run. Figure 4 shows a relation around 1. Thereby extended financing methods cover a part of current assets to reduce business risk.

Sainsbury (2007) expect to open 75 new shops by 2010 to hold the place as the UK’s biggest retailer and enlarge the power over the supplier.

460 words

Part B:


Interest cover = PBIT / Interest Paid = 584 mil / 107 mil = 5,458 times

Number of Shares: 495.000.000 / 28.75p = 1721.739 mil

MV Equity = Number of Shares * Market price = 1.721739 * 549.5 pence = 9469.96 mil

D/E-ratio = MV Debt / MV Equity = 1720 mil / 9469.96 mil * 100% = 18.16%

British Airways:

Interest cover = PBIT / Interest Paid = 798 mil / 187 mil = 4,267 times

Number of Shares: 288mil / 25p = 1152 mil

MV Equity = Number of Shares * Market price = 1152 mil * 829 pence = 9550.08 mil

D/E-ratio = MV Debt / MV Equity = 4150 mil / 9550.08 mil * 100% = 43.455%

First of all the book value of debt to equity is a quick way to see how highly geared a company is. If the ratio is under 40% the company is low geared, above means a high level of gearing. The book value ratio is interesting for money lenders to show how high the financial risk of the company is. Therefore the company should pay a higher or lower premium. So the relation is also interesting for the internal view of the company. Therefore the management see how they could finance future projects for instance, issue new debt or when the ratio is to high they can issue new equity. Normally the debt is secured by assets and if the firm can not pay the interest the company will lose their assets. On the contrary the relation is perhaps obsolete, because it show’s the financing situation from the last year which can differ from ‘now’.


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Analysis of the Balance Sheet from British Airways and Sainsbury's
Analysis, description and discussion of pecking order theory and trade off theory
University of Glamorgan
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ISBN (Book)
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Analysis, Balance, Sheet, Sainsbury, British Airways
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Roberto Niesing (Author), 2008, Analysis of the Balance Sheet from British Airways and Sainsbury's, Munich, GRIN Verlag,


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