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Financial Statement Analysis Of Sainsburys Finance Essay

The Sainsbury’s brand is providing to customers with healthy, safe and fresh food. Quality, low prices and a responsible approach to business is the key of the company. J Sainsbury plc was founded in 1869 and today operates a total of 872 stores comprising 537 supermarkets and 335 convenience stores. Sainsbury’s stores have a particular importance on fresh food and the innovation for improve products in relation with needs of the customers. http://t1.gstatic.com/images?q=tbn:ANd9GcSumydjfSkMXV1fNzsIriwUb6b1yqLcsM4xGX7W62u46-pexu875L339fk

Moreover, the company has established for this year corporate objectives which appear in the Annual Report and Financial Statements 2010 of Sainsbury’s:

“Great food at fair prices

Accelerating the growth of complementary non-food ranges and services

Reaching more customers through additional channels

Growing supermarket space

Active property management”

PROFITABILITY RATIOS

2009

2010

2011

ROCE: profit before interest & tax / capital employed x 100

673/4376=15.37%

710/4966=14.29%

851/5424=15.68%

Gross profit / Turnover x 100

1036/18911=5.47%

1082/19964=5.41%

1160/19964=5.81%

Analyzing profitability ratios is important because it assesses the company's ability to generate positive results in a given period. The return on capital employed (ROCE) is a ratio that is used to measure the return a company generates from the capital it employs. This ratio is advisable that it is high. ROCE ratio is useful if compared with other years and this ratio has a slightly drop in 2010, It is advisable that there a trend of ROCE rising.

For improve this ratio the company could do two things: improve the operating profit without an increase in capital employed or maintain operating profit but reduce the value of capital employed.

Gross profit reveal how much a company earns taking into consideration the costs that it has needed for producing theirs products or services so the higher the percentage, the better the company is controlling costs. It is good that the percentage is rising along the years.

LIQUIDITY RATIOS

2009

2010

2011

Current ratio: Current Assets / Current liabilities

1570/2919=0.53

1797/2793=0.64

1708/2942=0.58

Acid test ratio: Current Assets less stock/ current liabilities

1570-689/2919=0.30

1797-702/2793=0.39

1708-812/2942=0.30

The current ratio indicates a company's ability to meet short-term debt. This ratio is useful in determining if the company should to make short-term loans or not. It is advisable that is within 1 and 2. Sainsbury’s has the value less than 1 and this may mean that the company may have difficulty meeting current obligations. Sainsbury’s had an increase in 2010 but the ratio falls again in 2011.

The acid test ratio should be higher than 1. In this case, the ratio always kept below 1 so this means that this company is not stable and may have difficulty paying off their short terms debts. For this situation improve, is advisable that the company sell some of their assets.

EFFICIENCY RATIOS

2009

2010

2011

Stock turnover ratio: Cost of Sales / Stock

17875/689=25.94

18882/702=26.89

19942/812=24.55

Trade debtors days: Trade debtor/ Credit sales x365

195/18911=3.76

215/19964=3.93

343/19964=6.27

Trade Creditor: Trade Creditors/ Credit purchases x 365

2488/17875=50.80

2466/18882=47.66

2597/19942=47.53

Stock turnover ratio is a measure of the number of times inventory is sold or used in a given time period, in this case, it’s in a years. This value it is good because a greater sales efficiency and a lower risk of loss of money for products in stock that it is not sell. In the supermarket sector this ratio is higher than other sectors because the rotation of products is highest.

Trade debtors days ratio determines how quickly a company collects the debts from their customers during an year. It is important for indicates if the company is having difficulties collecting sales made on credit. This ratio is lower because in the supermarket sector the most of payments is made on credit.

Trade creditor calculates the total time it takes a business to pay back its creditors. This ratio is advisable that it is high because is more interest for the company is able to earn by placing the monies made in the bank. Moreover, the trade debtors days ratio is less than trade creditor ratio, it is a good situation for the company because it can finance oneself.

INVESTMENT RATIOS

2009

2010

2011

Earnings per share:

Net profit for the year / number of ordinary shares in issuex100

289000000/1738500000=16.6

585000000/1821700000=32

640000000/1921000000=33

Price/Earnings ratio:

Market price per share / EPS

3.13/0.166 = 18.85

3.331/0.32 = 10.41

3.51/0.33 = 10.64

Earnings per share (EPS) is the part of the company’s distributable profit which is allocated to each equity share. EPS is a very good indicator of the profitability of the company because it shows how much money the company is making for their shareholders. The earnings per share ratio has been growing year by year. Also, there is a large increase in 2010 due to the growth in the net profit for year.

Price/ Earnings ratio(PE) shows the number of years of earnings which would be required to pay back the purchase price of the share. In this case the ratio in this range may be considered fair value because the share is not undervalued or overvalued.

GEARING RATIOS

2009

2010

2011

Gearing Ratio: Long term liabilities / Share capital + reserves + long term loans x100

2738/4376+2177= 41.78%

3096/4966+2357= 42.27%

3033/5424+2339= 39.07%

Interest Cover: NPBIT / Interest payable

673/128 = 5.25

710/111 = 6.4

851/126 = 6.75

Gearing ratio demonstrating the degree to which the company’s activities are funded by owner's funds versus creditor's funds. The value of this ratio is correct because is not high or low but the ratio has been falling every years and this can produced a low gearing.

Interest cover ratio determines how easily the company can pay interest on outstanding debt. In this ratio is advisable that is higher than 2 so the value is good because it indicates the company is generating sufficient revenues to satisfy interest expenses. In this case is higher than 2 and it is good.

Tesco

Tesco was founded in 1919 by Jack Cohen. Nowadays the company has grown and they now operate in 14 countries worldwide, employ over 500,000 people and serve tens of millions of customers every week. Tesco have always been dedicated to providing and quality food and a good shopping experience. Today the company continue to focus on performing theirs new objectives, which appear in theirs official website, some of them are: to grow the UK core, to be an outstanding international retailer in store and online, to be strong in everything they sell and to be a creator of highly valued brands.http://www.portalfruticola.com/wp-content/uploads/2011/08/tesco2.jpg

PROFITABILITY RATIOS

2009

2010

2011

ROCE: profit before interest & tax / capital employed x 100

3169/12906=24.5%

3457/14681=23.5%

3811/16623=23%

Gross profit / Turnover x 100

4185/53898=7.76%

4607/56910=8.1%

5060/60931=8.3%

The table shows a reduction of the ROCE ratio, this is not a good way for the company because this is not getting high returns that this business is achieving from the capital employed.

The resulting of the gross profit ratio indicates that there is an increase each year. This is good for the company because it is efficiently using their resources.

LIQUIDITY RATIOS

2009

2010

2011

Current ratio: Current Assets / Current liabilities

13479/17595=0.76

11765/16015=0.73

11438/17731=0.64

Acid test ratio: Current Assets less stock/ current liabilities

13081-2669/17595=0.59

11765-2729/16015=0.56

11438-3162/17731=0.46

The higher the ratio, the more liquid the company is. In this case, the value of ratio is nearly of 1 so this situation is better than Sainsbury’s situation but in the last year there is a decrease that it is bad for the liquid of Tesco.

Acid test ratio should be 1 or higher than 1 although it remains below 1, it is better than Sainsbury’s ratio. Further the company should revise their accounts receivable and current liabilities because there is a decrease during the years 2009, 2010, 2011 and in this year continues falling down. (Acid test ratio of 2012: 0.45)

EFFICIENCY RATIOS

2009

2010

2011

Stock turnover ratio: Cost of Sales / Stock

49713/2669=18.62

52303/2729=19.16

55871/3162=17.66

Trade debtors days: Trade debtor/ Credit sales x365

1820/53898=12.32

1888/56910=12.10

2314/60931=13.86

Trade Creditor: Trade Creditors/ Credit purchases x 365

8665/49713=63.61

9442/52303=65.89

10484/55871=68.49

This stock turnover ratio is smaller than Sainsbury’s ratio so it is advisable for the supermarket sector because reduce the possibility of having expired products and increase responsiveness to changes in customer requirements or if a product is not sold as expected.

The difference between Tesco and Sainsbury in this ratio is higher because Tesco offers different kind of services besides the supermarket and this can change the result. In spite of this, the value of ratio is good because is low.

The value of trade creditor ratio is good because is higher than trade debtors days so the company receive the payments before this has to pay the debts to suppliers.

INVESTMENT RATIOS

2009

2010

2011

Earnings per share:

Net profit for the year / number of ordinary shares in issuex100

42138/7895344018=27

42336/7985044057=29

42671/8046468092=33

Price/Earnings ratio:

Market price per share / EPS

3.582/0.27 = 13.27

4.2955/0.29 = 14.67

3.981/0.33 = 12.06

Earnings per share (EPS) is the part of the company’s distributable profit which is allocated to each equity share. The earnings per share ratio has been growing year by year and this is good sign for the company and shareholders.

Price/ Earnings ratio(PE) shows the number of years of earnings which would be required to pay back the purchase price of the share. In this case the ratio in this range may be considered fair value because the share is not undervalued or overvalued.

GEARING RATIOS

2009

2010

2011

Gearing Ratio: Long term liabilities / Share capital + reserves + long term loans x100

12391/12906+12391=48.98%

11744/14681+11744=44.44%

9689/16623+9689=36.82%

Interest Cover: NPBIT / Interest payable

3169/562 = 5.64 Times

3457/690 = 5.01 Times

3811/614 = 6.2 Times

Gearing ratio demonstrating the degree to which the company’s activities are funded by owner's funds versus creditor's funds. The value of this ratio is correct because is not high or low but the ratio has been falling every years and this can produced a low gearing.

Interest cover ratio determines how easily the company can pay interest on outstanding debt. In this ratio is advisable that is higher than 2 so the value is good because it indicates the company is generating sufficient revenues to satisfy interest expenses.

COMPARING TESCO AND SAINSBURY’S

After analyzing Tesco and Sainsbury’s, can compare the two companies because they belong to the same sector and this will give us more information about the result set of ratios.

In the profitability ratios group shows the difference the size company although both results are good depending of theirs big of the company. The graph shows the difference over 9% between Tesco and Sainsbury’s. Moreover the graph shows that the two companies remain stable year by year.

Also, it can be interesting to compare the investment ratio because despite being a smaller business Sainsbury’s has the value of shares same than Tesco in 2011. This is because the net profit for the year is higher than Tesco. Also, the graph shows the increase of the two companies year by year and the highly growth in 2010 of EPS Sainsbury’s. Two companies have good figures in this aspect but Sainsbury’s have less shareholders, in 2010 it overcame Tesco and the interest cover ratio is lower because Sainsbury’s share is good way.

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