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Every successful company is aiming at profitability ,efficiency debts free, avoid going on Bankcrupt,liquidate.such companies should be concerned with knowing the financial status of it company by carrying out a financial analysis. By so doing the company is at the point of saving the company from experiencing and down fall.
According to Neadles and Power (2004:667) "Describes ratio analysis as techniques of financial performance evaluation that identifies meaningful relationships between the components of the financial statements".
It is realistic that the use of financial ratio is a guide to evaluating, comparing and for decision making on the state of financial condition of a company. Therefore, it will be ideal to show the users of finalcial statement.
1.2 USERS AND REASON FOR FINANCIAL RATIO
The users of financial ratio as outlined by Jeans (1986) are:
"Management: Might need it for the purpose of controlling over assets, to ascertain the efficiency of management policies and might helps to enable effective decision or to enhance effective management decision.
Shareholders': To enable them know the viability of an organisation. To enable them know the appropriate investment decision such as buying and selling of shares.
Investment Analysis: it facilitates re-investment.
Lender(Banks): to enable them decide whether to grant more facility or not. To determine the going concern status of the firm whether the loan should be treated as bad or loss or doubtful(prudent guideline)
Employers: To enable them bargain for improving working conditions and enable to ascertain job security.
Tax Authorities: To determine the amount of Tax payable by the company.
Auditor: For the general audit purpose and to enable them, form their opinion on the company's state of affairs".
REASON FOR RATIO COMPARISON
According to Atrill (2005), "ratio will not say very much about the performances of a business it is only when it is compared with some 'benchmark' that is when information can be interpreted and evaluated" it should be compared with some standard consisting of:
Paste financial statements.
Using the projector preformed statement.
Wood & Frank (2002:566) state that, "there are vast interested parties in the need of analysing financial statements yet they will be interested in different things"â€¦.
It's possible to put together sequence of ratio that will provide all they needed to investigate.
Mc Laney Atrill (2005:207) highlights the most important widely used ratio for decision-making purpose as:
Financial Gearing Ratio
Mclaney & Atrill (2005:206-236) described that, the commonly used ratios, are usually grouped under the following categories:
"PROFITABILITY RATIO: The following ratio evaluate the profitability of the two companies:
Return on shareholders' funds(RSF): - this compares the amount of profit available to the owner.
= Net profit after taxation and preference dividend (if any) x 100
Ordinary share capital plus reserves
Return on capital employed (ROCE): This is fundamental measure of business performance which expresses the relationship between the net profit and the average long term capital invested.
= Net profit before interest and taxation x 100
Share capital + Reserves + Long term loans
Net Profit margin: This relates the net profit for the period, to the sales revenues during that period.
= Net Profit before interest and taxation x 100
Gross profit margin: - This relates the gross profit of the business to the sales revenue generated for the same period.
= Gross Profit x 100
= operating profit x 100
EFFICIENCY RATIO: Examine in which various resources of the business are managed.
Average stock turnover period: - This measures the average period for which stock are being held.
= Average stock held x 365
Cost of sales
Average settlement period for debtors: - a business will usually be concerned with how long it takes for customers to pay the amount owing.
= Trade Receivable x 365
Credit sales revenue
Sales revenue to capital employed: This examines how effectively the assets of the business are being used to generate sales revenue.
= sales revenue
Share capital + Reserves + Non-current liabilities
( C ) LIQUIDITY RATIO: These are concerned with the ability of the business to meet its short-term financial obligations.
Current ratio: compare the 'liquid' assets of the business with current liabilities.
= current assets
Acid test ratio: is very similar to the current ratio, but represents a more stringent test of liquidity.
= current assets (excluding stock)
Operating cash flows to maturing obligations: - This compares the cash generated from operations to the current liabilities of the business: = cash generated from operations
( D ) GEARING RATIO: occurs when a business is financed, at least in part, by borrowing, instead by finance provided by the owners.
Gearing ratio: - measures the contribution of long-term lenders to long term capital structure of a business.
= Long term (non-current)liabilities x 100
Share capital + Reserves + long-term (non-current) liabilities
Interest cover ratio: - measures the amount of profit available to cover interest payable.
= Profit before interest and taxation
( E) Investment Ratio: This help investor's to assess the returns on investment using,
Dividend payout ratio:-this measures the proportion of earnings that a business pays out to shareholders in the form of dividends:
= Dividends announced for the years x 100
Earning for the year available for dividends
ii. Earnings per share: in Black(2003:166) FRS14 & CIMA(1990) SSAP3 'disclosure policies '. "This ratio relates the earnings generated by the business and available to shareholder, during a period of the number of shares in issues".
= Earnings available to ordinary shareholder
Number of ordinary share in issue
Operating cash flow per share: This provides a better guide to the ability of a business to pay dividends and to undertake planned expenditure then the earnings per share.
= cash generated from operations less preference dividend(if any)
Number of Ordinary Share in issue"
IMPORTANT OF RATIOS ABOVE
Davies & Boczko(2005) identifies the economic importanat of ratio
To predict the company's failure
To provide equity valuation models to value business
To establish loan and credits rating
2.0 INTERPRETATION OF MARK & SPENCER, AND SAINSBURY
According to ACCA (2006: 438) "a report should be reported addressed as follows."
REPORT 13th December,2010.
TO: Grigourious Theodosopoulos
FROM: Benjamin Awosanmi (Manager)
SUBJECT: Analysis of performance of Mark & Spencer and
The reading of this report should be done in line with the exhibit attached in the appendix which proves the relevant ratio calculated on the two companies.
"In discussing performance" IASC noted that profit is used to measure performance or as the basis for other measure"â€¦ (Scharoeder et al, 1998 : 171).
The return on capital employed of Sainsbury increased between the years and is higher than M&S which decreases over the same financial years.
It simply means that M&S is more profitable and efficiency as a result of its management being able to properly utilise the available resources at their disposable. It is possible for a company to be efficient and not profitable. From 12.9% previous year to 13.13% while M&S is decreasing both in efficiency and profitability by 10.16% to 6.24%. Therefore, Sainsbury is worth investing in.
The profit margin of M&S, 2008. shows that for every
1£ of sales revenue there is an 12.52p (12.52%) was remain to be
profit. This have further 7.79p for same 1£, in 2009. While in
Sainsbury is fallen with a margin from 2.69% to 2.47% in respective
Therefore, Sainsbury tends to operate on low prices and the low profit margins to stimulates sales and thereby increase amount of profit generated. M&S have high profit Margins but have much level of sales Volume. Factor such as climate, type of consumer e.g. for Sainsbury, that is the reason for the good ROCE and ROSF.
Operating profit margin of M&S has decrease to 9.61%.thus, it means that the operating profit margins of M&S may suggest that, the business has a product range that is becoming difficult to sell Within 2009. Also, might be environment of the two companies.
The return on share holder funds of Sainsbury has increased to 21.1%. This is a good return while M&S falls to 5.51%. It means in 2009 they are not doing well, there is need to investigate why things are that way that year.
Sainsbury inventories have increased from 14- 15 days, this could
be inventory for future sales.
The debtors to Sainsbury were able to pay back their debt quickly.
From the years, within 3.8-4.2days.This might lead to reduction in
the debts to their customers. Probably resulting to discounts
allowed to customers who pay quickly, while debtors to M&S took
11.5 to 12.4days before their debtors could pay. Therefore, Sainsbury
will be glad to retain such customer and still, give sales on credit.
Sainsbury have improved more on its sales revenue being generated
for each £1 capital employed (£ 2.2) than in 2008 (£1.95). Provided it
over trading is not a problem. This shows that j Sainsbury have been
able to use its asset effectively to generates revenue, compare to M &S
at (£1.75) for every £1 in 2008, to (£1.83) in 2009.
Therefore, a high turnover ratio is preferred to lower a company
because this suggests that there is proper usage of its assets to generate revenue.
The higher the ratio, the more liquid any business is to be considered because this is the survival of the business. There is decline in the ratio of M&S from 0.59 in 2008 & 0.6 in 2009, when compare with that of Sainsbury there is much difference showing that Sainsbury have higher current ratio than M&S. It may be that funds are tied up in cash; other liquid assets may not be used productively as expected.
Though Sainsbury have a fall of liquidity from 1:1 in 2008 to 0.67 in 2009 but a little increase when compare with that of M&S with 0.35 to 0.37 in respective years. There is rapid incline in their ratio. This may be that Mark and M&S is experiencing liquidity ratio, not operating on the same assets, inventory, and liability.
There is an alarming ability for Sainsbury, from 1.07 to 0.91 in 2008/2009 but when comparing M&S which is having similar ability of 0.62 to 0.6 in 2008/2009. Comparing the two companies there is more ability for Sainsbury in meeting its obligation from its operating cash flows. This shows that liquidity is an important tort for a business.
Sainsbury, is experiencing a tremendous increase in the level of gearing 0f 66.6% but a substantial increase when compare with M & S with 25.91% to 23.65%, not being very high over the year.
Profits is less than the level of interest when compare within 2008/2009 of MandS, and Sainsbury but in the levels it shows that they are on the same high profit to pay their interest.
The Cash Generated operations of M&S (1.73) in 2009 is high over the year compare to its Earning per share of 0.64 in 2008. Comparing Sainsbury this can be agreed that cash operations provide a better ability for the business
The dividend payout when compare to each other Sainsbury is high with (75.43%) in 2009, and M&S is 69.97% in 2009.
Signed: Benjanmin A. Awosanmi
2.1 EVALAUTION OF THE LIMITATION OF THE RATIOS
According Alexander & Britton (2001:702) "changes in environment, different accounting policiesâ€¦â€¦ are responsible for ratio limitations."
The Companies information should be used on historical information not for the future. It is of little use in assessing future plans of the companies. The short term fluctuations in assets and liabilities is not identified by ratio at point in time by using the year end Providing good liquid to previous year.
Inflation can make the whole of our ratio to become invalided because it affects value of pounds. Non- quantifiable information like competence of management and staff and changes in operating environment cannot be provided.
Considering the limitations discuss above it is dificult to reach any definite conclusions as to the performance and position of the two subsidery companies
Therefore, we recommend that the companies should improve in their net profit and gross margin by operating on low price to stimulate sales because it appears no much growth.
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