Accountings - Sainsburys Ratio Analysis Essay

Accounting and Finance Assignment – Sainsbury ‘s Ratio Analysis

Nowadays, it is of import for organisations to cognize how to last in the competitory market in which they are involved, markets that require directors who understand and are cognizant of the internal and external factors that concerns to the company. Therefore, it is critical to cognize the being of different techniques of measuring such as fiscal tools, which can give an thought on how the company ‘s fiscal state of affairs is traveling to impact its public presentation in the market place.

One of these tools can be the used of fiscal ratios, which gives to directors the information to put up schemes in order to do determinations in the hereafter. However, it is of import to foreground that this ratios provide an overview of the concern ‘s fiscal status, but an analysis in deepness is needed to cognize the grounds why certain alterations have occurred ( Maclaney and Atrill, 2002 ) . However, there are some restrictions in the used of fiscal ratios, for case, the information is out of day of the month so it does non reflect the existent state of affairs of the company, hence it can take to incorrect determinations, besides, the analysis made from the fiscal statements gives symptoms of such state of affairss but non the causes of it ( Berry and Jarvis, 1997 ) .

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The intent of this study is to analyse Sainsbury ‘s fiscal public presentation utilizing the analysis of ratios as a fiscal tool. This information will be taken from the one-year studies of 2003 and 2004. In add-on, it will include external and relevant information of the company which adds value to the analysis and therefore to the fiscal public presentation in the already mentioned period of clip. This will besides assist to compare Sainsbury ‘s with its rival Tesco, in order to place and measure the public presentation of both companies. Finally, this study will give decisions and recommendations to those investors who want to do an investing in a secure company.

RATIO ANALYSIS

Profitability Ratios

Harmonizing to Maclaney and Atrill ( 2002, p. 197 ) ,Profitability ratios provide an penetration to the grade of success in accomplishing this intent. For case, the profitableness ratios of Sainsbury plc are:

Profitabiliy Ratios

2004

2003

Tax return on Capital Employed

8.53 %

9.29 %

Tax return on Equity

7.64 %

8.95 %

Gross Profit Margin

8.65 %

8.14 %

Net Net income Margin

3.91 %

4.25 %

Table 1. Profitableness Ratios ( Base on informations contained in Appendix A )

Sing on this tabular array, Sainsbury ‘s profitableness ratios show a moderately impairment in net income from 2003 to 2004 in a border of 6 % . This downward tendency is due to several alterations the company had such as, ( 1 ) the sell of JS Development and Shaw ‘s supermarket, this has an impact on the company ‘s current assets ( hard currency ) and net income, in one manus it brings in hard currency for the sell but on the other manus it stops the day-to-day hard currency input, accordingly there were a diminution in net income in 2.6 % ; ( 2 ) the purchase of Swan Infrastructure Holdings Limited, which consist of a whole modern IT system and it is portion of a Business Transformation Programme, hence, there was a rise in 6 % of the capital employed ( fixed assets and net debt ) , and besides a significantly autumn in hard currency in 27 % . Because of all these grounds, there was a bead in net income, but as it is a long-run investing it is estimated to be an income coevals in the hereafter.

Efficiency and Effectiveness Ratios

These ratios are used to seek and place the strengths and failings of a concern utilizing a assortment of different ratios( Giles et al. , 1994, p. 371 ) . The following tabular array illustrates the efficiency ratios used in Sainsbury ‘s instance.

Efficiency and Effectiveness

2004

2003

Fixed Asset Turnover

2 times

2.17 times

Debtor Collection Period

1.51 yearss

2.48 yearss

Creditor Payment Period

28.83 yearss

28.78 yearss

Stock Holding Period

17.61 yearss

18.67 yearss

Table 2. Efficiency and Effectiveness ( Base on informations contained in Appendix A )

The fixed plus turnover has somewhat decreased due to the acquisition of Swan Infrastructure Holdings Limited, which caused a rise of 7.73 % on Sainsbury ‘s fixed assets in comparing with the twelvemonth 2003. Furthermore, gross revenues have remained changeless which have risen in 0.3 % . The purchase of the IT systems will give chances to heighten operational effectivity, a stronger platform, low costs and an increased in gross revenues.

In what a debitor aggregation period concerns, although this ratio shows a really small period to roll up debts from clients, it is logic for this sort of concern to be like that owing to the fact that being a supermarket, gross revenues are in hard currency, merely a 8 % of the current assets are related to debitors, which had a autumn in about 40 % comparing with 2003. On the other manus, the creditor payment period has stayed changeless and it shows good rates. The rhythm of both debitor aggregation period and creditor payment period demonstrates that the company receive the money from their debitors before paying to their providers, which is good since they do non necessitate to finance themselves but pay with the hard currency they get in from debitors.

Sing to the stock keeping period, even though it has fallen in 1 twenty-four hours, it still is high for a concern like supermarket in which the stock plays an of import function because the rotary motion has to be in short periods of clip to maintain the nutrient fresh. However, it is good to see that Sainsbury besides have a stock of electro house servants, amusement, house-wares, etc. , that the rotary motion is meant to be in long periods of clip.

Liquidity Ratios

As Maclaney and Atrill ( 2002, p. 197 ) said,Certain ratios may be calculated that examine the relationship between liquid resources held and creditors due for payment in the close hereafter. These ratios in Sainsbury ‘s company are as follow.

Liquidity Ratios

2004

2003

Current Ratio

0.83:1

0.87:1

Acid Test ( Quick Ratio )

0.67:1

0.70:1

Table 3. Liquidity Ratios ( Base on informations contained in Appendix B )

The current ratio has a somewhat autumn, due to the current liabilities lifting faster than the current assets. Looking at the current liabilities it can be seen that the company is utilizing bank loans to finance the acquisition of the IT systems by the group, which increased in 63 % . The current assets have besides been affected by a decreased in 27 % of hard currency history since a 10 % of the purchase was made in hard currency. Similar state of affairs happened with the acerb trial ratio with a little autumn in the rate.

These ratios show a low rate, due to the fast stock rotary motion which produces hard currency gross revenues. Although, it seems like the current assets do non cover the current liabilities, the liquid assets are used as fruitfully by the growth of the concern to do it more effectual, therefore profitable.

Capital Gearing Ratios

This is the relationship between the sum financed by the proprietors of the concern and the sum contributed by foreigners (Maclaney and Atrill 2002, p. 197 ) . For case, Sainsbury ‘s capital geartrain ratios are:

Capital Gearing Ratios

2004

2003

Gearing Ratio

28.54 %

25.97 %

Timess Interest Covered

5.91 times

5.31 times

Table 4. Capital Gearing Ratios ( Base on informations contained in Appendix B )

The geartrain ratio has increased by 9 % due to the long-run debts lifting faster than the capital employed during the period from 2003 to 2004. The long term debts went up by 14 % , which is because the purchase of IT fixed assets and besides the company resort to operations in the capital market and by runing subordinates to cover with the involvement rate and current hazard these finance involves. On the other manus, the times involvement covered stayed changeless and even though is a low rate, the company still can cover its involvement with their net income.

Investor Ratios

Certain ratios are concerned with measuring the returns and public presentation of portions held in a peculiar concern( McLaney et al. , 2002, p. 197 ) . In this instance, the investor ratios for Sainsbury ‘s are the followerss:

Investor Ratios

2004

2003

Net incomes per Share

0.20

0.23

Price Net incomes Ratio

12.63 times

9.54 times

Dividend Output

6

6.89

Dividend Cover

1.32

1.52

Table 5. Investor Ratios ( Base on informations contained in Appendix B )

The earning per portion has fall by 13 % chiefly caused by the higher net incomes on concern disposals that the company went through last twelvemonth, so the return to stockholders was a lower rate per portion. In contrast, the monetary value gaining per portion growing by 24 % , due to the addition in the market portion monetary value in 14 % , this is a good new for Sainsbury ‘s since it reflects that the market assurance grew from 2003 to 2004. The dividend output had a somewhat decreased since the dividend per portion merely increased by 0.7 % from last twelvemonth. This was a determination from the company and it reflects the decrease in the earning per portion already mentioned and the autumn in the dividend screen by 13 % .

Recommendation TO POTENTIAL INVESTORS

Harmonizing to the information given by the ratios analysis in the last subdivision, it can be said that even though the company ‘s ratios showed a reduced rates from 2003 to 2004, the outlooks of the concern public presentation looks profitable. This is due to the Business Transformation Programme, which consists on the acquisition of IT systems and the sell of Shaw ‘s Supermarket and JS Development. The former will be a positive impact in the fiscal public presentation of the company in a long-run by increasing gross revenues and cut downing costs ; and the latter will be used to develop and do more effectual the fiscal and direction resources, hence it will enlarge Sainsbury ‘s nucleus UK concern and beef up its market place.

Therefore, from the ratios analysis, it can be stated that Sainsbury ‘s is non a good company to, at present clip invest in, since the company has non showed a important growing in net income during the last fiscal twelvemonth. To reason, if Sainsbury ‘s fundss start to turn, there is no uncertainty that investors should see this company to put in as it plans a better public presentation in the long-run.

In the following portion, it will be given some extra information about Sainsbury ‘s and besides a comparing with Tesco.

Relevant INFORMATION ABOUT SAINSBURY ‘S

The acquisition of IT system was an of import part to take Sainsbury ‘s strength its place in the high competitory market place. Whereas the group main executive of Sainsbury ‘s said:The net decrease in costs will supply Sainsbury ‘s with extra resources to develop our client proposition, by puting in quality and invention and bettering farther our competitory offer, as we move towards merchandising our concern harder from summer 2004( hypertext transfer protocol: //www.j-sainsbury.co.uk/index.asp? PageID=19 & A ; subsection= & A ; Year=2004 & A ; NewsID=384 ) , there are some sentiments that contrast with the statement already mentioned, which states that this acquisition of sophisticated engineering was excessively ambition and did the attack excessively speedy, now Sainsbury ‘s is in a worst place than it was before ( Smiddy cited O’Brian, 2004 ) . In add-on, after have used the new IT system, Sainsbury ‘s realized that the supply concatenation system have failed and it did non work as they have expected, it did non increased productiveness and the costs were higher than they were old ages ago ( hypertext transfer protocol: //www.computerweekly.com ) .

SAINSBURY ‘S vs. TESCO

The supermarket industry is really competitory presents, and even more when it comes to the clients satisfaction which is more and more demanding, so it is of import for companies in this concern to be focus in valued than in profitableness, since the former leads them to the latter.

Sainsbury ‘s and Tesco are two of the rules supermarket ironss in UK. Both ironss have similar things to offer, such as ain label goods ; have concern about consumers demands for illustration healthy and organic nutrient ; launched trueness cards ; spread out their merchandises such as vesture, electro house servants, etc. and others. On the other manus, they have some differences that make one base out from the other. While Tesco have a good supply ironss and a good scheme, which is holding low monetary values and bettering client satisfaction by holding the right merchandises in shelf, Sainsbury ‘s is confronting some jobs in what a supply concatenation relates to the execution of the IT system ( hypertext transfer protocol: //proquest.umi.com ) , which causes the deficiency of merchandises in the stores and besides the clients find it more expensive than its rivals, where they can hold equal quality merchandises with lower monetary value ( hypertext transfer protocol: //proquest.umi.com ) .

There are other differences between Sainsbury ‘s and Tesco, but there is an of import inquiry which is where to put? . It is of import to pull attending to the fact that Sainsbury ‘s fiscal state of affairs does non pull investors, due to the lessening in the net income and gross revenues. In add-on, the company has being traveling through its first loss in 135 old ages of history ( www.accountancyage.com ) . This decrease was chiefly caused by the 554 million acquisition of IT system, and by the bead in net incomes for the fiscal twelvemonth. Thus, it can be said that Tesco might be a better pick to put in, but this is unfastened to treatment.

Decision

Taking into consideration the ratio analysis applied to Sainsbury ‘s, it can be said that the company had some fluctuation between 2003 and 2004. Whereas, most of the profitableness, efficiency and effectivity, liquidness and investor ratios demonstrate diminution, the pitching ratios demonstrate a rise due to the growing in the long-run debts and the capital employed.

Understanding the ratio analysis and the relevant information gathered expressions like Sainsbury ‘s has gone through some troubles in their supply concatenation and their fiscal and selling direction. Although they have invested in a long-run undertaking and are positive in a possible growing in the coming old ages, to make their purpose they have to work hard and play in the same field its rivals ( Tesco and Asda ) are making, by holding low monetary values and good quality nutrient ever available in their shelf for all sort of consumers.

Sainsbury ‘s still have a strong place in the retail sector in the UK. For this ground it is good for investors to wait and see its public presentation for the following old ages, presently is non a good minute to put in.

Mentions

BERRY, A. and JARVIS, R. , 1997.Accounting in a Business Context.3rdEdition. London: International Thomson Business Press.

GILES, R. and CAPEL, J. , 1994.Finance and accounting. 3rdEdition. London: MacMillan.

Harding, D. , 2005.Supermarket sweep-up for Sainsbury ‘s.Accountancy Age. Available from: [ hypertext transfer protocol: //www.accountancyage.com/news/1139885 ] Accessed 22/Apr/2005.

Selling WEEK, 2004.Reinvention is the lone option left for Sainsbury ‘s.Marketing Week, pg. 30. Available from: [ hypertext transfer protocol: //proquest.umi.com/pqdweb? did=727035691 & A ; sid=8 & A ; Fmt=3 & A ; clientId=15517 & A ; RQT=309 & A ; VName=PQD ] Accessed 20/Apr/2005.

Selling WEEK, 2005.Sainsbury ‘s promises must intend concern.Marketing Week, pg.22. Available from: [ hypertext transfer protocol: //proquest.umi.com/pqdweb? did=792773011 & A ; sid=9 & A ; Fmt=3 & A ; clientId=15517 & A ; RQT=309 & A ; VName=PQD ] Accessed 20/Apr/2005.

MCLANEY, E. and ATRILL, P. , 2002.Accounting An Introduction.Second edition. London: Prentice Hall.

O’BRIEN, L. , 2004.Sainsbury ‘s incriminations profit warning on supply failures.Supply Management, 9 ( 22 ) . Available from: [ hypertext transfer protocol: //proquest.umi.com/pqdweb? did=749826531 & A ; sid=8 & A ; Fmt=4 & A ; clientId=15517 & A ; RQT=309 & A ; VName=PQD ] Accessed 20/Apr/2005.

SAINSBURY ‘S WEBSITE, 2005.Annual Report and Financial Statements 2004.Available from: [ hypertext transfer protocol: //www.j-sainsbury.co.uk/index.asp? pageid=20 ] Accessed 15/Apr/2005.

SAINSBURY ‘S WEBSITE, 2005.Sainsbury ‘s simplifies funding of IT contract with Accenture.Investor News. Available from: [ hypertext transfer protocol: //www.j-sainsbury.co.uk/index.asp? PageID=19 & A ; subsection= & A ; Year=2004 & A ; NewsID=384 ] Accessed 20/Apr/2005.

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