Sainsburys Ratio Analysis

Sainsburys proportionality compendAccounting and Finance Assignment Sainsburys Ratio AnalysisNowa eld, it is important for organizations to fill in how to survive in the competitive market in which they argon involved, markets that assume managers who understand and argon aw be of the internal and impertinent factors that concerns to the gild. Therefore, it is vital to confound a go at it the existence of different techniques of measurement much(prenominal) as pecuniary in additionls, which domiciliate surpass an idea on how the partnerships pecuniary situation is going to preserve its deed in the marketplace.One of these tools arse be the used of pecuniary ratios, which gives to managers the information to set up st ordaingies in order to make decisions in the future. However, it is important to highlight that this ratios provide an overview of the strains financial condition, but an abbreviation in depth is needed to know the reasons why certain changes obli ge occurred (Maclaney and Atrill, 2002). Nevertheless, on that point are just near limitations in the used of financial ratios, for instance, the information is come out of date so it does not reflect the real situation of the alliance, and so it can fit to wrong decisions, also, the analysis made from the financial statements gives symptoms of such situations but not the causes of it (Berry and Jarvis, 1997).The purpose of this report is to analyze Sainsburys financial instruction execution using the analysis of ratios as a financial tool. This information volition be taken from the annual reports of 2003 and 2004. In addition, it will include external and relevant information of the federation which adds value to the analysis and thus to the financial action in the already mentioned period of period. This will also answer to compare Sainsburys with its competitor Tesco, in order to identify and evaluate the operation of both companies. Finally, this report will give conclusions and recommendations to those clotheors who want to make an robement funds in a secure fraternity.RATIO ANALYSISProfitability Ratios check to Maclaney and Atrill (2002, p. 197), Profitability ratios provide an insight to the degree of success in achieving this purpose. For instance, the lucrativeness ratios of Sainsbury plc areProfitabiliy Ratios20042003Return on detonating device Employed8.53%9.29%Return on Equity7.64%8.95%Gross Profit tolerance8.65%8.14%Net Profit Margin3.91%4.25% send back 1. Profitability Ratios (Base on data contained in Appendix A)Regarding on this table, Sainsburys pelfability ratios show a moderately deterioration in profit from 2003 to 2004 in a margin of 6%. This downward trend is collectable to several changes the company had such as, (1) the interchange of JS Development and Shaws supermarket, this has an impact on the companys current assets ( notes) and profit, in one hand it brings in cash for the sell but on the otherwise hand i t stops the daily cash input, consequently there were a decline in profit in 2.6% (2) the purchase of Swan Infrastructure belongingss Limited, which consist of a whole forward-looking IT dust and it is part of a Business Transformation Programme, therefore, there was a organize in 6% of the not bad(p) employed (fixed assets and net debt), and also a significantly fall in cash in 27%. Because of all these reasons, there was a drop in profit, but as it is a long-term putment it is estimated to be an income generation in the future.power and Effectiveness RatiosThese ratios are used to try and identify the strengths and weaknesses of a assembly line using a variety of different ratios (Giles et al., 1994, p. 371). The fol lowing table illustrates the might ratios used in Sainsburys case.Efficiency and Effectiveness20042003Fixed Asset employee turnover2 times2.17 timesDebtor Collection Period1.51 days2.48 daysCreditor Payment Period28.83 days28.78 daysStock Holding Period17.61 days18.67 daysTable 2. Efficiency and Effectiveness (Base on data contained in Appendix A)The fixed asset turnover has slenderly change magnitude overdue to the skill of Swan Infrastructure Holdings Limited, which caused a rise of 7.73% on Sainsburys fixed assets in comparison with the year 2003. Moreover, gross revenue reserve remained constant which deliver risen in 0.3%. The purchase of the IT systems will give opportunities to enhanced operational efficaciousness, a stronger platform, low costs and an increased in sales.In what a debtor collection period concerns, although this ratio shows a very little period to collect debts from customers, it is logic for this benevolent of lineage to be resembling that owing to the fact that being a supermarket, sales are in cash, only a 8% of the current assets are related to debtors, which had a fall in almost 40% analyze with 2003. On the other hand, the creditor payment period has stayed constant and it shows good rates. The motorcycle of both debtor collection period and creditor payment period presents that the company receive the money from their debtors before paying to their suppliers, which is good since they do not need to finance themselves but pay with the cash they get in from debtors.Regarding to the caudex holding period, even though it has fallen in 1 day, it still is high for a concern like supermarket in which the stock plays an important role because the rotation has to be in short periods of time to keep the food fresh. However, it is good to see that Sainsbury also have a stock of electro domestics, entertainment, house-wares, etc., that the rotation is meant to be in long periods of time.Liquidity RatiosAs Maclaney and Atrill (2002, p. 197) said, authoritative ratios may be calculated that examine the relationship amid liquid resources held and creditors due for payment in the near future. These ratios in Sainsburys company are as follow.Liquidity Ratios20042003Current Ratio0.83 10.871Acid Test (Quick Ratio)0.6710.701Table 3. Liquidity Ratios (Base on data contained in Appendix B)The current ratio has a about fall, due to the current liabilities emanation riotouser than the current assets. Looking at the current liabilities it can be seen that the company is using bank loans to finance the acquisition of the IT systems by the group, which increased in 63%. The current assets have also been affected by a decreased in 27% of cash account since a 10% of the purchase was made in cash. Similar situation happened with the acid test ratio with a comminuted fall in the rate.These ratios show a low rate, due to the fast stock rotation which produces cash sales. Although, it seems like the current assets do not cover the current liabilities, the liquid assets are used as fruitfully by the growing of the line of merchandise to make it more than effective, thus profitable.Capital gear RatiosThis is the relationship between the touchstone financed by the owners of the business and the amount contributed by outsiders (Maclaney and Atrill 2002, p. 197). For instance, Sainsburys capital gear ratios areCapital Gearing Ratios20042003Gearing Ratio28.54%25.97%Times Interest Covered5.91 times5.31 timesTable 4. Capital Gearing Ratios (Base on data contained in Appendix B)The gearing ratio has increased by 9% due to the long-term debts rising 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 also the company quicken to operations in the capital market and by operating subsidiaries to flock with the interest rate and current risk these finance involves. On the other hand, the times interest covered stayed constant and even though is a low rate, the company still can cover its interest with their profit.Investor RatiosCertain ratios are concerned with assessing the returns and performance of shares held in a particular business (McLaney et al., 2002, p. 197). In this case, the investor ratios for Sainsburys are the followingsInvestor Ratios20042003Earnings per Share0.200.23Price Earnings Ratio12.63 times9.54 timesDividend Yield66.89Dividend Cover1.321.52Table 5. Investor Ratios (Base on data contained in Appendix B)The earning per share has fall by 13% mainly caused by the higher(prenominal) profits on business disposals that the company went through defy year, so the return to shareholders was a lower rate per share. In contrast, the price earning per share growth by 24%, due to the increase in the market share price in 14%, this is a good advanced for Sainsburys since it reflects that the market confidence grew from 2003 to 2004. The dividend yield had a slightly decreased since the dividend per share only increased by 0.7% from net year. This was a decision from the company and it reflects the reduction in the earning per share already mentioned and the fall in the dividend cover by 13%.RECOMMENDATION TO author isation INVESTORSAccording to the information given by the ratios analysis in the concluding section, it can be said that even though the companys ratios showed a decreased rates from 2003 to 2004, the expectations of the business performance looks profitable. This is due to the Business Transformation Programme, which consists on the acquisition of IT systems and the sell of Shaws Supermarket and JS Development. The former will be a convinced(p) impact in the financial performance of the company in a long-term by increasing sales and reducing costs and the latter(prenominal) will be used to develop and make more effective the financial and management resources, hence it will enlarge Sainsburys core UK business and strengthen its market position.Therefore, from the ratios analysis, it can be stated that Sainsburys is not a good company to, at present time invest in, since the company has not showed a significant growth in profit during the last financial year. To conclude, if Sain sburys finances start to grow, there is no doubt that investors should consider this company to invest in as it plans a better performance in the long-term.In the next part, it will be given almost additional information about Sainsburys and also a comparison with Tesco.relevant INFORMATION ABOUT SAINSBURYSThe acquisition of IT system was an important contribution to lead Sainsburys strength its position in the high competitive marketplace. Whereas the group master(prenominal) executive of Sainsburys said The net reduction in costs will provide Sainsburys with additional resources to develop our customer proposition, by investing in spirit and innovation and improving further our competitive offer, as we displace towards trading our business harder from summer 2004 (http//www.j-sainsbury.co.uk/index.asp?PageID=19subsection= division=2004NewsID=384), there are some opinions that contrast with the statement already mentioned, which states that this acquisition of sophisticated tec hnology was too ambition and did the approach too quick, now Sainsburys is in a castigate position than it was before (Smiddy cited OBrian, 2004). In addition, after have used the new IT system, Sainsburys realized that the supply chain system have failed and it did not ladder as they have expected, it did not increased productivity and the costs were higher than they were years ago (http//www.computerweekly.com).SAINSBURYS vs. TESCOThe supermarket industry is very competitive nowadays, and even more when it comes to the customers satisfaction which is more and more demanding, so it is important for companies in this business to be focus in valued than in profitability, since the former leads them to the latter.Sainsburys and Tesco are two of the principles supermarket chains in UK. Both chains have akin(predicate) things to offer, such as own label goods have concern about consumers needs for example healthy and organic food launched loyalty card expand their products such as c lothing, electro domestics, etc. and others. On the other hand, they have some differences that make one stand out from the other. While Tesco have a good supply chains and a good strategy, which is having low prices and improving customer satisfaction by having the right products in shelf, Sainsburys is face some problems in what a supply chain relates to the implementation of the IT system (http//proquest.umi.com), which causes the lack of products in the shops and also the customers find it more expensive than its competitors, where they can have equal quality products with lower price (http//proquest.umi.com).There are other differences between Sainsburys and Tesco, but there is an important question which is where to invest?. It is important to draw attention to the fact that Sainsburys financial situation does not attract investors, due to the decrease in the profit and sales. In addition, the company has being going through its first loss in cxxxv years of history (www.accou ntancyage.com). This reduction was mainly caused by the 554 million acquisition of IT system, and by the drop in profits for the financial year. Thus, it can be said that Tesco might be a better choice to invest in, but this is open to discussion.CONCLUSIONTaking into consideration the ratio analysis applied to Sainsburys, it can be said that the company had some play between 2003 and 2004. Whereas, most of the profitability, efficiency and effectiveness, liquidity and investor ratios demonstrate decline, the gearing ratios demonstrate a rise due to the growth in the long-term debts and the capital employed.Understanding the ratio analysis and the relevant information gathered looks like Sainsburys has gone through some difficulties in their supply chain and their financial and marketing management. Although they have invested in a long-term project and are positive in a potential growth in the plan of attack years, to reach their aim they have to work hard and play in the same fi eld its competitors (Tesco and Asda) are doing, by having low prices and good quality food always available in their shelf for all kind of consumers.Sainsburys still have a strong position in the sell sector in the UK. For this reason it is good for investors to wait and see its performance for the next years, currently is not a good moment to invest in.REFERENCESBERRY, A. and JARVIS, R., 1997. Accounting in a Business Context. 3rd Edition. London world(prenominal) Thomson Business Press.GILES, R. and CAPEL, J., 1994. Finance and accounting. 3rd Edition. London MacMillan.HARDING, D., 2005. Supermarket sweep-up for Sainsburys. Accountancy Age. visible(prenominal) from http//www.accountancyage.com/ news show/1139885 Accessed 22/Apr/2005.MARKETING WEEK, 2004. Reinvention is the only option left for Sainsburys. Marketing Week, pg. 30. Available from http//proquest.umi.com/pqdweb?did=727035691sid=8Fmt=3clientId=15517RQT=309VName=PQD Accessed 20/Apr/2005.MARKETING WEEK, 2005. Sainsbury s promises must mean business. Marketing Week, pg.22. Available from http//proquest.umi.com/pqdweb?did=792773011sid=9Fmt=3clientId=15517RQT=309VName=PQD Accessed 20/Apr/2005.MCLANEY, E. and ATRILL, P., 2002. Accounting An Introduction. Second edition. London Prentice Hall.OBRIEN, L., 2004. Sainsburys blames profit warning on supply failures. Supply Management, 9 (22). Available from http//proquest.umi.com/pqdweb?did=749826531sid=8Fmt=4clientId=15517RQT=309VName=PQD Accessed 20/Apr/2005.SAINSBURYS WEBSITE, 2005. Annual motif and Financial Statements 2004. Available from http//www.j-sainsbury.co.uk/index.asp?pageid=20 Accessed 15/Apr/2005.SAINSBURYS WEBSITE, 2005. Sainsburys simplifies financing of IT contract with Accenture. Investor News. Available from http//www.j-sainsbury.co.uk/index.asp?PageID=19subsection=Year=2004NewsID=384 Accessed 20/Apr/2005.