Wednesday, April 3, 2019
Financial Ratio Analysis of Sainsburys
Financial Ratio Analysis of SainsburysA sustainable corpoproportionn needs effective planning and fiscal management. Ratio abbreviation is a useful tool to get the pecuniary results and the societys development cardinaldency. It target be divided into four parts. They are lootability, liquidity, efficiency and gearing. This report discusses the compendium of two companies, one is Sainsbury, and the other is Tesco. It is necessary to compare these companies from the data and entropy in 2011 and 2012, so that howevert ons the use of an appropriate range of ratios.Sainsbury is engaged in grocery and related selling. It is separated three segments Retailing (Super commercializes and Convenience) Financial serve (Sainsburys Bank enunciate venture), and Property investitures (The British Land Company PLC joint venture and Land Securities PLC joint venture). In 2012, this ships social club has operated over thousand stores comprising 572 supermarkets and 440 convenience s tores (Sainsbury company information, 2013). In the topical competitive food retail market Sainsbury has focused on its elapse strength providing shoppers with an casual alternative to the larger out-of-town supermarkets whilst deeming a commitment to fresh quality foods (Sainsbury, 2012).Tesco has the biggest supermarket compass in the UK. It has over 280, 000 employees working with them (Tesco, 2012). It git maintain their market package and remuneration in the UK, they in addition use social network to maintain the relationship with the customer. It is the biggest and most networkable supermarket chain in Britain it has 30 per penny of grocery market. Tesco has over 2200 stores in the whole United Kingdom (Tesco, 2012). It is a superb development of Tesco, it is from a sharper store to be a superstores. Sales of non-food is one of the key parts of their strategy, it contributes to the growth picture in the UK. Tesco is launching a low price strategy they offer the d ispirit price for the similar product compare to others contenders.By equivalence Sainsbury and Tesco, it is easy to use fiscal ratio summary to pinpoint the strengths and weaknesses. This report provides an compendium based on ratio calculation and then compares these companies data to attend grasp the veritable performance of the companies and thus showing a pecuniary snapshot of the companies localize.Financial AnalysisThe following part will analysis the two companies performance in the criteria of boodleability, efficiency, liquidity and gearing ratios. Ratios are all-important(prenominal) when companies need to compare the monetary health of various argumentes in regularise to understand the performance and position in the industry. Although some companies are comparatively larger than the others such(prenominal) as comparing Tesco with Sainsburys, different case of operations can be eliminated using the ratios for the same market (Atrill McLaney, 2008).Profit abilityThe target of profitability ratio is to esteem the degree of success towards business objectives in terms of profit (Atrill McLaney, 2008). It express the generated profit such as expenses, wear upon cost and gross sales revenue in relation to a companys business resource. Gross profit brink measures differences between cost of sales and sales revenue, in other words a measure of profitability in purchasing and selling before any other expenses are interpreted into account. The data shows that gross profit margin had a sylphlike strike from 5.50% (2011) to 5.43% (2012), although both gross profit and Revenue increased, it could mean that sales prices were turn down or an increased on purchasing. Operating profit margin is the equivalence of both outputs of businesses operate profit and sales revenue. It is used to measure the profit from trading operations before interest collectable expenses are calculated. The operating profit margin has excessively minifyd from 4.03% (2011) to 3.92% (2012) indicating a change in 2 %. ROCE describes the relationship between operating profit and non-current liability. It has decreased from 10.06% (2011) to 9.50% (2012) by 6%. The results indicate that Sainsburys profitability has decreased by a small amount.LiquidityLiquidity ratios represent the ability of business to meet its short financial liabilities in one category condemnation (Atrill McLaney, 2008). The purpose of using current ratio is to compare the assets of the company that will be glum into cash with current liabilities. Different businesses have different rate of ratios, supermarket such as Sainsburys and Tesco usually have relatively lower ratio than 11 since the companies are to sell FMCG and all sales are converted into cash immediately. The calculation shows that current ratio of Sainsburys increased by 12.07% from 0.58 (2011) to 0.65 (2012). This suggests that the company is more efficient at converting its assets into cash in comparisons with current liabilities. acerbic ratio is similar to current ratio but is calculated excluding inventories wherefore the changes from both ratio changes should reasonably be similar. Therefore the result in any case shows an increase of 12.9% from 0.31 (2011) to 0.35 (2012), it suggests that the business of Sainsburys became more liquid throughout 2011. energyEfficiency ratio is use for assessing the extent to how well assets are being managed (Atrill McLaney, 2008). Inventories turnover period represents the average period of inventories are being held. Since maintaining inventories require high cost, therefore it is advisable for businesses to have shorter inventories turnover period. The data suggests that Sainsburys inventory turnover period increased by about 1 day from 15 (2011) to 16 (2012), meaning it took longer for the company to sell its goods. The data may also suggest that an increased number of inventories come across longer to sell. Moreover, comp etitor Tesco had inventory three generation more than Sainsburys and it took them even longer to clear their goods.GearingGearing ratio is a measurement of contribution of long-run lenders to the companys long-term capital structure (Atrill McLaney, 2008). The high gearing ratio the higher risk for businesses because a small increase in operation profit tends to increase greater amount of returns to shareholders, but small decline also result in greater decline. The gearing ratio of Sainsburys increased by 8.31% from 35.86 (2011) to 38.84 (2012). It indicates a higher risk than the previous year. Interest cover ratio measures the quantity of available operating profit to cover interest payable (Atrill McLaney, 2008). Calculation shows a decrease on interest cover of -1 time from 7.34 (2011) to 6.33 (2012). It indicates greater risk for lenders where interest payments might non be met. However, Tesco has a higher rate of interest cover the reason may be due to their higher ope rating profit with less interest payable comparing with Sainsburys.Comparative Financial AnalysisIn the context of financial report, it is essential to compare ratios internally and externally. In terms of internal, the objective is to pink whether Sainsburys performance has an improvement or deterioration and it is usually being metrical over time such as one, five or ten years. Such comparison helps the company to detect drifts for example the ways of how Sainsburys should witness the flow of its stock or the amount of dividends which affect its stakeholders action. Comparing financial performance with other competitors within the same industry is also essential, because having same levels of performance is one of the major ways to survive in the market (Atrill McLaney, 2008).Analysing from both annual report of Sainsburys and Tesco, the profitability section indicates that Sainsburys had a decrease on both gross profit and operating profit margin while Tesco had an increase performance on profitability for gross profit margin by 4.05% ((8.48 8.15) / 8.15) and operating profit margin by 5.02% ((6.48 6.17) / 6.17). In other words it means Tesco is more capable at generating profit in 2011 / 2012, the reason is probably due to Tesco is a larger company than Sainsburys in terms of the number of stores at about 6 times more than Sainsburys and higher market share at 26.9% while Sainsburys had 14% during 2011 (Mintel, 2012).The previous annual report of 2010 / 2011 shows that the online checkout system helped increase Sainsburys sales by 20% (130,000 weekly hostels) which was the strength of the company (Sainsburys, 2011a). However the sales decreased in 2012 which was also partially caused by online shopping. The financial distress was due to sales cannibalisation and charging delivery at low rate. The reason to that is because the trend towards online grocery shopping where more and more customers are shopping online (Guardian, 2013). other weakness of Sainsburys causing it to lose shares to its competitor Tesco was because of lack in investment internationally, particularly in China (The Independent, 2012). Currently Tesco already has over blow stores in China. Sainsburys did not fully understand the trends and operating environment comparing to its home competitors.In addition, Current Ratios are also needed to get along comparisons between two companies because the current ratios provide us with the first slight of the financial strength of a company, but the current ratio analysis of different companies can be mis ahead(p) in some baptismal font so that investors must be careful while evaluating a company on the bases of its current ratio (Atrill McLaney, 2008). The Liquidity section demonstrates that Sainsburys had a meek increase on current ratio by 12.07% ((0.65-0.58) / 0.58) while the current ratio of Tesco had remained intact. In spite of this, it can be seen from comparison that Tesco is the master in the curren t ratio contest as it has more current ratios that is 0.67 in 2012 compared to Sainsbury where the result is 0.65. Consequently, Tesco has more money to afford the liabilities and deal with its bills smash than Sainsbury. The reason of this is probably due to the number of operating profit for Tesco at about 4 times more than Sainsburys in 2012, which was 3,985m and 874m respectively.In order to make an exact measure of financial leverage, demonstrate the degree to which a firms activities are funded by owners funds versus creditors funds, the gearing ratios are needed to be compared also (Atrill McLaney, 2008). According to the annual report of Sainsburys and Tesco, it can be shown that in this section, Sainsbury is doing better because its lower proportion of debts. The calculations demonstrate that the liability of Tesco shows more than approximately 73% of its debt is from borrowings while the loans of Sainsbury is lower than about 73% comparing with Sainsbury.LimitationRatios provide an efficient and straight forward rule to analyse the performance and position of businesses, however there are limitations companies should take into account.Firstly, all numbers are taken and are used from the financial statements therefore the results of all ratios can only be based on the quality of the information. It indicates that intangible non-current assets such as the value of brand label and goodwill cannot be included into the balance sheet. Moreover, no businesses are akin therefore companies should be aware of differences in accounting policies, financial year ends between businesses and financing methods when carrying out ratio analysis especially during benchmarks.Secondly, ostentatiousness can affect the values of ratio analysis. Since balance sheet is make for the previous financial year, therefore the values of assets held could change in a period of time which results little relation to current values. Inflation can also affect the measurement of pr ofit, it may show that the current prices does not reflect to previous expense, in that case profit may be overstated leading to inaccuracy.Thirdly, companies should only use ratios as an insight but not fully rely on it. The reason is due to the event ratio cannot measure information such as differences in scale between businesses and capital employer, profit / sales used for measuring changes of company size over time. As ratio can only measure relative position and performance of a business.Conclusion RecommendationsThis report reveals the financial analysis techniques used to evaluate the financial performance of Sainsburys, and the evaluation of the companys position and performance. The result shows that Sainsburys overall performance in 2012 was similar to 2011 but with barbarian decrease which may affect shareholders / investors decision on whether or not to continue investing on the company.It is advisable for Sainsburys to increase dividends in order to admit its inves tors at a satisfy level. As the company is also the initiative to the Click Collect service, it should focus investment on amend its quality and differentiation from the competitors.In terms of pricing issue leading to decrease on profitability, there are two choices for Sainsburys. First is to keep the pricing at the same level because its market share has been increasing, or secondly to increase price to gain profit where the decision is depending on Sainsburys objectives.
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