Financial Analysis of Sainsburys

Financial Analysis of SainsburysThe bailiwick is divided into iv posts. Firstly, exploitation proportions as a tool pass on help in analyzing and evaluating the monetary working capital punishment of the Sainsbury obtained from the 2008 and 2009 annual report. To show the pattern of Sainsburys monetary performance for the stratum 2007 to 2008 a trend compendium will be prepargond. Also, developments in the supermarket fabrication will be analyzed and evaluated for the division 2008 and 2009.Moreover, a What If outline of the probable financial performance of Sainsburys, had the down acidify non occurred.Lastly, conclusion of the report will be discussed how Sainsburys handled the downturn situation to take the effect on its financial performance and disclose if the come with was prep ard.INTRODUCTIONThe Food sell Industry is a enormous and fast growing industry in UK .It is a complex and is a diverse market dominated by various corpo step giants such as Tesco, AS DA, J Sainsburys. Price and prime(prenominal) of goods ar the devil key elements which the companies keep in mind to sum up their gross revenue and defend their position in this agonistic market. In the year 2009, nutriment sell recorded sales figures of GBP 297,478.9 one one thousand million million million, a great with providing employment to 11.6% of the hands in UK (Euro monitor, 2010). It is forecasted, by the year 2014 the sales would cross GBP 350,000 million (Euro monitor, 2010).This duty assignment wayes on the third largest solid food retailer store in UK, i.e. J Sainsbury.Sainsbury is a super market which will ope prizes its bank line sector in retail sector from the year1869.Sainsbury is started by James and Mary Ann Sainsburys. Sainsbury to daytime operates a original of 827 stores comprising 537 supermarkets and 335 convenience stores(J Sainsbury 2010) .With their presence in various other markets such as financial services and Property management, groc ery retailing remains their inwardness business. In an industry which employs over 3,335,000 tidy sum and with sales figure of GBP 137,590 million (Euro Monitor), Sainsbury enjoys a market sh are of 16% and serving 19 million clients weekly with a product offering of 30,000 ( J Sainsbury, 2010).QUESTION 1- An analysis and evaluation of the info open in the organizations annual reports. 30%SAINSBURYS symmetryS compendiumAccording to Maclaney and Atrill (2002), symmetrys provide an overview of thebusinesss financial condition. Similarly, Wood (2002) stated, Ratio analysisis a first step in assessing an entity. The effects of the downturn experiencedby Sainsbury are demonstrated by the fol menialing ratios below. A three yeartrend analysis will focus on Sainsburys performance two years prior to thedownturn and the two years during the downturn.PROFITABILITY RATIOSMaclaney and Atrill (2002, p. 197) stated, favorableness ratios provide an insightto the degree of success in achiev ing the purpose of the business.RATIOS2008 %2009 %2010 % earthy Profit Margin5.625.48Net Profit Margin1.841.522.9ROCE( lead on seat of government Employed)7.109.4610.21GROSS PROFIT MARGINThis ratio tells us nearly how businesses fancy its production cost or manage its margins which are made from purchasing and selling of products. perfect(a) margin is mainly quite s board (in percentage).Gross loot= Gross Profit / Revenue x coke (expressed as a percentage) acquit PROFIT MARGINNet dough tells us about the profitableness afterwards all cost are included. It shows what percentage of turnover is reiterate by net profit.Net Profit margin= Profit in the first place please and tax/ sales or turnover X hundredNet Profit Margin summationd from 2.97% to 3.56% from 2008 to 2009 which is a 16% plus and by 0.53% over 2006 to 2009. The net profit margin shows how well Sainsburys defend its overheads. These amplifys continue despite the economic slakedown showing their financia l power. Because strategic plans were properly planned and executed and sales volume increased without change magnitude costs.RETURN ON CAPITAL EMPLOYEDROCE is roughlytimes referred to as the primary feather ratio it tells us what returns management has made on the resources made available to them ahead making any distribution of those returns.ROCE=Net profit before tax, beguile and dividends (EBIT) / total summations (or total assets little reliable liabilitiesAn investor might examine the return on capital employed with the possible return if the specie was invested elsewhere. ROCE from 2009-2010 increased from 9.46% to 10.21% mainly because of profit achieved from disposal which is used to finance general operations. From 2008 to 2009, ROCE devolved by 2.36% because of oil related costs and increased business rates. Therefore, Sainsburys have to plan out some measures to demoralise much(prenominal) profit from the business to coax investors.LIQUIDITY RATIOS ANALY SISAccording to Robinson et. al (2009, p.795) fluidness ratios are Financial ratiosmeasuring the companys ability to meet short- destination obligations.RATIOS2008 %2009 %2010 % brisk Ratio0.390.310.41 up-to-date Ratio0.650.550.66QUICK RATIOAlso shows the akin in a toweringer place, but excludes inventorying, which may be difficult to turn into case is some circumstances.Quick Ratio= watercourse assets little stock / Current liabilitiesIf the truehearted ratio of the business is little than 11, it signifies that the current assets are less and will non cover its current liabilities. It usher out be seen from the above table that the entire rapid ratio are less than 11. Again, retailers have their laborious cash flow. They back end operate comfortably with blistering test ratios of less than 1. Nevertheless, Sainsbury has a remarkable debtor retribution blockage and reanimateed debts quickly even during the downturn.CURRENT RATIOIt shows whether the business can e xpect debts delinquent within one year from assets that is expected to turn into cash within one year.Current Asset= Current assets/ Current liabilitiesFrom the above table it means that Sainsbury has fitted assets to match their current liabilities. The current ration in 2009 dropped marginally below the companys average. The dry land for current assets to decrease is by mostly investment funds thoroughly in long bound ventures or because current liabilities are growing at a express rate than current assets. Sainsbury used their liquid assets to finance their business through with(predicate) marketing and promotions to make it profitable, hence profitable during the downturn.ACTIVITY RATIOS ANALYSISRobinson et. al (2009, p.789) stated, Activity ratios are ratios that measurehow efficiently a company performs casual tasks, such as the collectionof receivables and management of inventory.RATIOS200820092010set Asset swageInventory turnover ratioFIXED ASSET TURNOVER RATIOFixed a ssets turnover indicates the sales being generated by the mend asset base of a company, like ROCE, it is sensitive to the acquisition, age and valuation of fixed assets.Fixed asset turnover = Sales or Turnover / Fixed assetsINVENTORY TURNOVER RATIOThis ratio shows how long it takes for a company to turn its stocks into sales. The shorter the stock days ratio, the subvert the cost to the company of property stock, the value of this ratio is very dependent on the look at for the stock and so will vary significantly depending on the nature of a companys business.Inventory turnover ratio = Stock or inventory / cost of sales X 365INVESTMENT RATIOS ANANLYSISRATIOS200820092010Return on Equity6.545.239.51 remuneration Per share17.4 p21.2 p23.9 pRETURN ON EQUITYReturn on equity shows how much profit a company reached in comparison to the total amount of shareholder equity found on the balance sheet. For example profit after taxation and taxationReturn on equity= Earnings after tax and pr eference dividends / Shareholders currencyFrom the above table it seems in the 2009-2010 Sainsburys ROE ratio is very gamey 9.51 as canvass to last year 2008-2009 it was 5.23. This means Sainsburys has earned a good profit and shareholders are automatic to invest cash in the company and can get better dividend.EARNINGS PER SHAREEarnings per share measures overall profit generated from each share in human race over a particular period.Earnings per share= Earnings after tax and preference dividends / Number of issued ordinary shares.According to the financial parameter of Sainsburys the company has issued more shares in all three years 2008 to 2010, that the reason Sainsburys Earnings per share has increased in 2009-2010. The number of shares has increased with the increase in profit.GEARING RATIORATIO200820092010Gearing ratio44.6253.2748.93 stake cover4.753.646.56GEARINGIt shows the debts weight in the capital employed. For example long term lease agreements involve fixed pay ments and may be added to both(prenominal) non-current debt and capital employed.Gearing= Long-term debt / jacket crown employed X 100From the above table it seem in that respect is increase in gear ratio from 2008-2009 which means they have many debts to pay. It is difficult to invest money in this year. But, in that location is decrease in gearing ratio from 2009-2010 which is 4.34 less from last year. So it means it is less baseless to invest money this year as Sainsbury do not have many debts to pay. engage COVERThis ratios tells us how business can cover the interest paymentInterest Cover= Profit before interest and tax / interest chargesIn the year 2008-2009 the ratio is very reduced which states that Sainsburys do not have sufficient profit to pay interest to its debtor. However, in 2009-2010 the ratio improved which means that Sainsburys earned huge profit and can pay interest to its debtors.LIMITATION OF RATIO ANALYSISRatios are very distinguished part in the busines s. However, there are certain limitations to be alive(predicate) ofRatios are only reliable as the data that has been entered. Ratios analysis is calculated from past data and will not help in predicting upcoming. recitation of quantitative data- qualitative factors such as skills of the management, rate of change in market and industrial record are also need to b considered.Figures in balance sheet only relate to that day- changes every day and the one chosen on the day may not be typical and thus ratios calculated from that data are not needs correct.(http//intranet.bpc.ac.uk/courses/Main/GCE/SfcP/BS/ALevel/limitra.htm)COMPETITORS RATIO ANALYSISTESCO COMPANY PROFILETesco was started by Jack Cohen in 1919. Tesco is biggest food retailer in the world, having 2482 stores in UK and crowing employment to more than 472000 passel (287669 in UK) who serve millions of customer roughly the world. Tesco has a largest market in UK, where it operates under signs of Extra, Superstore, M etro and Express. Tesco offers more than 40000 products to customers including clothing and other non-food lines. Tesco enjoy a market share of 31% in UK and operates its business in 13 countries across Europe, Asia, and the United States. Tesco main focus is to provide excellent service to all customers (Tesco, 2010). In the 2010, food retailing recorded sales figures of 42.3 billion (Tesco, 2010)RATIO COMPARISON BETWEEN SAINSBURYS AND TESCORATIOSSAISNBURYS (2010)TESCO (2010)Current Ratio1.562.93Quick Ratio0.410.56Interest Cover6.15.7ROCE(Return On Capital Employed)10.2113.06Operating Margin3.565.17Dividend Cover2.122.14Gross Gearing48.9390.94Return on Equity9.5112.04As per the research and study about the different financial ratios of the two food retailing company in United Kingdom. If we examine the current asset of Sainsburys is 1.56 and Tesco is 2.93 which is 1.37 less from Tesco. Sainsbury need to improve its current ratio by change magnitude its current assets relative to its current liabilities. Sainsburys can recover its current assets by declareling its companys credit and can recover its current liabilities by reducing short-term creditors.If we compare the quick ratio of Sainsburys is 0.41 which is less than 0.14 as we compare it with Tesco quick ratio 0.56. The decline in Sainsburys quick ratio may have resulted from investing in long term activities. Tesco has enough funds to pay off his liabilities.Both Sainsbury and Tesco have strong balance sheet, interest cover for Sainsbury is 6.1 and on the other hand Tesco its 5.7 which is reasonably low from Sainsbury. However, Sainsbury appears to be little better. This collateral allows them to borrow at demean rate and generate cash via sale and lease back schemes if they are in a pinch. Tesco coverage ratio has fallen from 10.6 to 5.7 now because of training debt in a low interest environment.Return on capital employed (ROCE) of Sainsburys is 10.21 and on the other hand Tesco it is 13.06 which is 2.85 high from Sainsburys. There can be couple of reasons for Tesco of its high ROCE net profit is change magnitude without an increase in capital employed or sale revenue is increasing without an increase in cost. Sainsbury have to think about some measures to attract more investors.Operating margin of Sainsburys is 3.56 which is less than 1.61 from Tesco 5.17 operating margin.From the above table we see gearing ratio of Sainsbury is 48.93 and on the other hand Tesco it is 90.94, about 42.01 less from Tesco which means from an investor point of view it is risky to invest in the Sainsburys company.From the above table we see Return on equity of Sainsburys is 9.51 and on the other hand Tesco it is 12.04 which is 2.53 high from Sainsburys. It showed that Tesco has earned high profit and shareholders willing to invest more money in the company and can get better dividend paid.QUESTION 2- An analysis and evaluation of the development in the financial markets during the last two year s with reference to their effects on your chosen organization. 20%RECESSION is a normal part of a business phase, though, one-time crunch events can cause the onset of a recession. In the planetary recession of 2008-2009, many large financial institutions bought their attention to the risky investing strategies. As a resultRecession is a normal (albeit unpleasant) part of the business cycle however, one-time crisis events can often trigger the onset of a recession. The global recession of 2008-2009 brought a great amount of attention to the risky investment strategies used by many largefinancialinstitutions, along with the actually global nature of the financial sytem. As a result of such a wide-spread global recession, the economies of virtually all the worlds real and developing nations suffered native set-backs and numerous government policies were implemented to help prevent a standardized future financial crisis.A recession generally lasts from six to18 months, andinterest ratesusually fall in during these months to stimulate the pitch by offering cheap rates at which to borrow money.(http//www.investopedia.com/ harm/r/recession.asp)AnswerSainsburys works in a extremely competitive market. The UK food retailing industry is mainly ruled by quatern big players- Tesco, Asda, Sainsbury and Morrisons. Together they all control approximately 75% of the UKs market. food market leaders are adopting low cost strategy which is benefited to consumers and increasing demanding. luxuriously disceptation in market makes market leaders to become highly innovative to grow market share by focusing on value, price, advertising and customer satisfaction.DiagramDEVELOPMENT IN THE UKS SUPER securities industry INDUSTRYThe supermarket in the UK are no longer controlling themselves to just supplying food products to consumers. In 2008, financial downturn made supermarket industry to spread their risks at a time when food puffiness climbed, to diverse into areas such as finance, mobile and broadband markets. This diversification provides opportunities to slowdown sales in food product, as they achieve sales in other areas. In 2008, the supermarket industry recorded 123 billion in consumer spending a huge distinction when compared to 119.8 billion in 2007. This show clearly to remain competitive their strategies and financial strength were successful during the downturn period..PESTAL ANALYSISPOLITICAL FACTORSTaxation Policy- rate of corporation tax was decreased by government from 30% to 28%. This means supermarkets profit will be greater by saving substantial amount of money.Government interference- government put his rights of price darn among major supermarkets which poses a threat as they may have to control prices.ECONOMIC FACTORSIncrease in employment- in UK employment figures rise to 164,000 in 2008.Inflation- because of fall in prices of crude oil, inflation rate decreased.Rate of interest- interest were decreased by 2% in 2008, consume r spending were increased.Disposable income- palpable available income can be squeezed as ONS discovered that with earnings ingathering on a downward trend due to the failing stab market families. This can affect the supermarkets sales.SOCIAL FACTORLifestyle changes- masses are becoming more health conscious and purchasing intelligent foods. During the downturn, people started preparing home cooked meals rather eating out which is expensive due to food inflation.TECHNOLOGY FACTORSIncrease in Technology- new technology was follow to make the service convenient and customer satisfaction which lead to a competitive advantage and increase sales.ENVIRONMENTAL FACTORSGreen issues- by using less plastic, recycling wastes and adopting environmental friendly procedures, supermarkets are investing in green issues. Profit are used for this issue but increases sales as more customer demand for environmental friendly products. juristic FACTORSRestriction on foreign trade- customer demand for substitutes as goods are becoming more expensive due to imports taxes and tariffs..EFFECTS OF FINANCIAL MARKET ON SAINSBURYEXCHANGE RATEWeakened sterling caused decrease in the UK exchange rate during 2008-2009. From April 2008 to December 2008, continued decline reaching at 1.0219 GBP which made merchandiseed goods cheaper but imported goods were more expensive causing unfavourable effect on businesses. Sainsburys most food products are imported, with British drum still on Back foot (Coventry 2010), buying products from others countries will be more expensive. This will result in high purchasing costs ultimately customers have to suffer this.(http//www.economywatch.com/exchange-rate/uk-pound-sterling.html)In 2008, Sainsbury experienced a slow addition when compared to past results. Due to the downturn Sainsbury adapted some measures to increase its profitability in 2009. Some of the changes they made are discussed below.Increase in food inflation, rise in employment and dec rease in disposable are the effects of the downturn that made Sainsbury to adapt some changes for a better performance.Household budget were under burden from the effect of the downturn. Sainsbury had to reduce the cost of basic products which customer faced as the biggest squeeze of income in 50 years. To improve layout, increase space, future hedge with suppliers and reduce superfluous cost, marketing strategy need to be stimulateed to focus more on cost as well as adjust value chain. As customers were demanding low cost products, Sainsbury adjusted according to demand.Interest rate and consumer price index annual inflation rate decreased and standard of living changes are also the effects of downturn. Due to decreased interest and CPI inflation rate it benefited Sainsbury as more customers were able to take advantage of lower borrowing. Sainsbury took advantage of this by reducing prices and strengthened marketing of their cheaper own distinguish products. People living of st andard changes as the economy dipped, more people decided to make home cooked meals just to reduce the cost tie to eating out. Penny pinched consumer were dependant on Sainsbury to provide low cost vegetables and meats.Competitive rivalry and customer reliability caused Sainsbury to focus more on price, value and advertising while strengthened excellent customer service. Sainsbury annual report (2009) specified that a clear strategy was developed to focus on five areasGreat product at sporting pricesAdditional marketing channels to reach more customersIncrease growth of non-foods itemsIncrease space and property managementQUESTION 3- What if analysis of the possible financial performance that might have existed had the downturn not occurred. 30%Sainsburys always been challenging to adopt any changes in the market. The condition of the Sainsburys was not bad during the recession period but there were some changes that Sainsbury need to adopt so as to remain competitive.Lets make ou t what will be the condition of Sainsburys what if there was no financial downturn.Exchange rate would not have decreased which made import goods cheap and export goods expensive. Buying products from other countries would be cheap and because of the high prices of products customer will not be suffered. Decrease in food inflation would not have affected family budget plan which were in downturn period. primary products were being available at low cost and customers dont have to shift their standard of living as they no more will be dependent on the home cooked products.Sainsburys made a lot of profit during the recession period, if there was no recession Sainsbury would have earned more profit. As the Sainsburys policies are so strong during its recession time they were earning huge profits. So Sainsbury should not change its policy so as to earn more profit because customer are willing to pay high prices for the quality products.As of financial crises Sainsburys manpower were dec reased and less people were willing to more work than what was expected on less salaries. If there were no recession then things would have been different, employees would be getting sufficient salary and would have been willing to give best performance. Recruitment hazard would be more to recruit new employees in the organisation.Due to the competition in the market it leads Sainsbury to focus more on prices and value strengthen excellent services. Sainsburys made some measures to remain competitive. If there were no financial downturn then customers would not have to pay high prices for the products.If there were no downturn then Sainsburys dont have to improve its layout, increase space, future hedge with suppliers and reduce unnecessary cost. Marketing strategy need not to be shifted to focus more on cost instead of bighearted better services or high quality products to customers.CONCLUSIONIf we compare the financial performance of Sainsburys from the year 2008 to 2010, we can say it is rising as a company. Sainsburys is earning huge profit every year. There are increasing the share in the market and market is interested in investing the money. There are many improvements that need to be considered if we compare the data from the year 2008 to 2010.Though, if we compare the financial performances of the Sainsburys and Tesco it can be said that Sainsburys are still far behind Tesco. The ratio figures of Tesco states that Sainsburys still need to do strong planning so as reach near Tesco. In the competitive market, investors have a choice of investment.