Performance Analysis And Strategic Recommendations

Introduction

The report is based on financial assessment of Sainsbury, one of the biggest food retailing chain in the UK. The brand name of the company is developed upon the heritage of delivering the customers healthy, secure and fresh products. The company maintains quality with the prices of the products. Presently it serves about 18.5 million customers in a week and occupies market share of about 16%. It has about 537 supermarkets and 335 convenience stores and stocks about 30,000 products (The Telegraph, 2019). The report looks after its performance in terms of profitability, liquidity, efficiency and capital structure of the company and also provide recommendations on business and long run financing. especially for students who are seeking business dissertation help.

Profitability ratio

Gross profit ratio: Gross profit ratio allows to see how much gross profit is made over the revenue. Over the 52 weeks to 10th of March 2018 gross profit ratio performance at 6.61% (6.6 pence made for every £1 sold) comparing to 6.23% from last year. Sainsbury’s has improved in gross profit by increasing its sales and cost of sales by about 8%, improving with increase in gross profit by 15% (Sainsbury, 2018).

Net profit ratio: Net profit margin is another important profitability ratio which evaluates the degree of net income earned with each pound of sales generated by the company. From the analysis, it can be observed that the net profit margin ratio of Sainsbury was about 0.32% in the year 2017, which has increased to 2.59% in 2018 (Sainsbury, 2018). Performance of the net profit ratio has increased by 809%, showing great performance comparing to the previous year.

Current ratio: Current ratio evaluates organisational capability to pay the short run dues through using the current assets. There is increase in current ratio of Sainsbury from 0.74:1 in the year 2017 to 0.76:1 in 2018 (Sainsbury, 2018). This improvement can indicate that creditor had been paid on time and management of receivables got better to avoid bad debts. Increase is not too high, which would be problematic if company start being too liquid. That would cause assets being idle with no returns earned.

Acid test ratio: Acid test ratio is also termed as quick ratio which assesses the capability of an organisation to pay the current dues through using only quick assets. The acid test ratio of Sainsbury was about 0.53:1 in 2017, which has increased to 0.59:1 in 2018 (Sainsbury, 2018). The acid test ratio of the company has also shows improvement, which means that in 2018 the company has become better at extinguishing current liabilities through quick assets.

Non current assets ratio: Non current asset ratio is an efficiency ratio, which measures how effective the organisation is about the utilisation of its non current assets. The non current ratio of Sainsbury was 2.62:1 in 2017, which has increased to 2.87:1 in 2018 (Sainsbury, 2018). This indicates that the company is generating £2.87 sales for every pound invested in non current assets, reveals development in effective usage of the non current assets.

Rate of inventory: Rate of inventory permits to see how many days it requires for an inventory to be sold or replaced. This ratio assists the organisation to set price, promotions and move additional stock. In 2017 company’s rate of inventory rate was 26 days, and improvement in following year to 24 days (Sainsbury, 2018). This indicates that the company is able to convert its stock into cash quickly. Therefore, within short times, it can get fresh stock of products.

Debt/equity ratio: Debt/equity ratio is an important capital structure ratio which assesses organisation’s total debt in comparison with the total equity. It demonstrates proportion of organisational financing which arrives from the creditors and shareholders. The debt/equity ratio of Sainsbury is observed as 0.65% in the year 2017, which has become 0.66% in 2018, a slight increase in ratio (Morningstar, Inc., 2019). This value indicates that investors own about 66 pence of every pound of organisational assets while the creditors own about 33 pence of every pound of organisational assets, i.e. the company is mostly funded by the investors. It implies Sainsbury has a financially stable business.

Interest coverage ratio: Interest coverage is another capital structure ratio which evaluates the number of times interest is being paid by the company. The interest coverage ratio of Sainsbury was about 4.72 times in the year 2017, which has increased to about 3.7 times in the year 2018. This indicates that the company is paying interest of about 3.7 times in a year (Morningstar, Inc., 2019). The low amount of this ratio indicates that the amount of debt has reduced hence the number of times interest is being paid by the company has also reduced. Therefore, the capital structure of the company is lowly leveraged.

Dividend Payout ratio: Dividend payout is an investment ratio which reveals the proportion of earning of the organisation paying to the investors in the form of dividend, and the proportion of revenue it is reinvesting in the business for future growth. It is a vital ratio from investors’ viewpoint. From the financial report, it can be observed that the dividend payout ratio of Sainsbury was about 51.9% in the year 2017, which has increased to about 106.3% in the year 2018. This indicates that the company is giving more than enough dividend than earnings to the shareholders (London Stock Exchange plc, 2019). Although it is a good sign that the company is paying high amount of dividends, it also indicates that the future growth potential of the company has reduced.

Price/Earnings (P/E) ratio: P/E ratio is also termed as market prospect ratio, is an important investment ratio as investors use this ratio in order to determine the relative value of an organisational share by comparison the market price per share and earnings per share. In short, this ratio demonstrates the rate, market is enthusiastic to pay for a share of Sainsbury on the basis of its present earnings. The P/E ratio of Sainsbury was about 15.22 in the year 2017, which has increased to about 18.27 in the year 2018. Therefore, it can be stated that the investors are enthusiastic to pay about £18.27 for every pound of earning. In short, the share of the company is trading at a multiple of 18 (London Stock Exchange plc, 2019). Furthermore, increasing trend of this ratio indicates that the investors anticipate increased performance and growth in future.

Price to Book (P/B) ratio: P/B ratio is another investment ratio, which evaluates organisational market value to book value. The lower P/B ratio indicates that the share price of the organisation is undervalued. On the other hand, higher P/B ratio indicates that the stock price is overvalued. It also specifies whether an investor is paying too much or too little for a company share. From the analysis, it can be observed that the P/B ratio of the company was 0.89 in 2017, which has reduced to 0.80 in 2018 (Fusion Media Limited, 2019). This signifies that the market value of the company share is valued 0.80 times more than the book value. Since the value is less than 1, it can be regarded as an undervalued stock and that the investors are paying little amount for the share of the company.

Price Earnings to Growth (PEG) ratio: PEG ratio is an investment ratio which evaluates the value of share on the basis of the existing earnings and the possible future growth of the company. It helps to determine the share value by considering the increase in earnings and hence is regarded to provide a more comprehensive image of the company. On the basis of the company financial report, it can be observed that the PEG ratio of the organisation was about -0.57 in 2017, which has reduced to -0.76 in 2018. Since, the PEG ratio has decreased, it indicates that the organisation has not grown since 2017 and therefore the investors are paying less per unit of earnings growth (Fusion Media Limited, 2019).

Long term financing comprises long run debts and financial obligations which last for above one year, i.e. typically 5 to 10 years. There are various sources of long term finance and two of the most important among them for Sainsbury are:

Debentures: Sainsbury can issue debentures in order to raise long term finance. There are various benefits the company can obtain by issuing debenture, for example it can assist in trading on equity. Furthermore, debenture holders will have no ownership on the organisational operations as they have no voting power. The interest paid to the debenture holders are tax deductible hence, will provide better advantage on calculating profit. Furthermore, flexibility in capital structure is achievable in this method when debentures are exchanged. With the level of profitability and inventory turnover ratio of Sainsbury, it will be able to pay interest to the debenture holders (Bhat, 2008).

However, there is one key disadvantage for using this type of financing. Debenture requires heavy stamp duty, duty on transfer and commission among others which will make the cost of capital expensive.

Preference shares: Preference share is another mode for obtaining long term finance. The preference shareholders possess two vital rights which are the right to obtain dividend at fixed rate before distributing dividend on other shares and the right to obtain return on capital during winding up of the organisation, before returning the capital of the equity shareholders. This type of shares are raised through public issue of stocks and does not necessitate any security or ownership of the company assets. It has almost similar features of equity capital and some of the characteristics of the debt capital, such as similar to equity share, it has dividend and similar to debt capital, it requires to pay fixed amount of dividend in the form of interest. This capital is exchangeable and the shareholders do not possess the right to vote. The key advantages, Sainsbury can gain by issuing preference share is that the shareholders will not gain any control on the organisation. The organisational assets are not fortified in support of the preference shareholders. Furthermore, there is no risk of take over and the investors are certified regarding their dividend from this kind of investment. This option for fundraising has leveraging benefit, because it has fixed charges. Preference share is typically considered as a portion of net worth. Therefore, it enhances the solvency of the organisation (Khan & Jain, 2007).

However, there are various disadvantages for using this method for long term finance. For example, the dividend paid to the shareholders are not regarded as tax deductible expenditures. Therefore, it is considered as an expensive source of finance. Another key disadvantage is that in case the organisation unable to pay the dividend to the shareholders, they can obtain voting rights for certain amount of time (Khan & Jain, 2007). The other key disadvantage of this mode of financing is that they have preferential claim on the earnings of the organisation over the equity shareholders.

Conclusion and Recommendations

From the analysis of ratio, it can be observed that Sainsbury has strong profit margin. Its profitability ratios has increased from 2017 to 2018. Indicating that the company is able to maintain the operational expenditures as low as possible. Furthermore, on the basis of liquidity ratio, it can also be stated that the company has enough liquid assets to pay off the current liabilities. Then again, from the efficiency ratio it can be observed that the company’s asset turnover and inventory turnover has increased. This specifies that the company is quickly moving its inventory and it also supports the strong liquidity position. From the analysis of the capital structure ratio, it can be concluded that Sainsbury mostly use equity financing than debt financing which makes it less risky and favourable for the investors. However, on the basis of investment ratio, it can be stated that Sainsbury has not demonstrated sufficient growth and its growth rate has weakened in recent times. Hence, on the basis of the performance and financial position of the company, it can be recommended that the company should focus more on growth of business through using either one of the long term financing method described above. Furthermore, it require to constantly maintain its operational effectiveness in order to ensure sufficient profit and low day’s sales of inventory.

References

• Bhat, S., 2008. Financial Management: Principles and Practice. Excel Books India.
• Fusion Media Limited, 2019. J Sainsbury PLC (SBRY). [Online] available at:
• Khan, M. Y. & Jain, P. K., 2007. Financial Management. Tata McGraw-Hill Education.
• London Stock Exchange plc, 2019. Sainsbury (J) Plc Ord 28 4/7P. [Online] available at:
• Morningstar, Inc., 2019. Sainsbury (J) PLC SBRY. [Online] available at:
• Sainsbury, 2018. Annual Report and Financial Statements 2018. [Online] available at:
• The Telegraph, 2019. Fundamentals for Sainsbury (J). [Online] available at:

Looking for further insights on Optimal Tariff Theory and its Implications? Click here.