Assessing Sainsbury's Financial Health

Introduction

Financial performance analysis is a systematic process that is used to evaluate the financial strength and weakness of an organization with reference to different indicator financial performance (Laitinen, 2018). It includes an assessment of financial statements of the company along with market data of stock prices. This report presents financial performance analysis of Sainsbury Group Plc with reference to financial ratios, cash flow movement and stock price movement (Penman, 2015). Sainsbury Group Plc is a leading brand of retail industry in UK. It is known as second largest retail chain in UK retail market. Company has maintained its distinct position in the market through its reliable products and services.

Main Body

Analysis of Financial Ratios

A financial ratio determines the relationship between two different financial variables to assess an appropriate outcome through which fiscal performance of an organisation can be measured in an appropriate manner (Misund, 2017). Therefore, a variety of financial ratios are considered to examine the overall business efficiency:

Profitability Ratio

Gross profit ratio: It determines the relationship between gross profit and total sales of the company. As per the appendix 1, Sainsbury Plc has recorded upward trends in gross earnings. It remains stable between the periods of 2017 to 2019 without any huge fluctuations. The gross profit of firm is respectively 6.23%, 6.61% and 6.92% for the period of 2017, 2018 and 2019.

Net profit margin: This indicates the net earnings of an organisation after deducting all its expenditures. Appendix 1 is showing downward trends in net profit margin of Sainsbury Plc because net profit percentage of company is reached to 0.75% in 2019 as compared to 1.44% of 2017. The main reason behind reduction in net profit is that retail firm is facing some issues to control its operating expenditure that leads negative on net earnings of business entity (Sainsbury’s Group Annual Report and Financial Statement 2018, 2018). In this process, increase in market competition has increased operating expenditure of company.

Return on capital employed (ROCE): This ratio determines the percentage of operating profit with reference to total capital employed in business operations (Arkan, 2016). With reference to Appendix 1, Sainsbury Plc has faced a reduction in return on capital employed in all three years. The ROCE ratio of the company for the period of 2017, 2018 and 2019 is respectively 5.73%, 4.43% and 2.57%. The main reason behind downward trends is reduction operating earnings of business entity. In addition to that increase in value of capital employed can also lead adverse impact on company’s earnings.

Return on equity (ROE): This ratio is mainly considered by shareholders because it shows the percentage of the net earnings over the total value of shareholder’s capital. In this regards, Appendix 1 presents that ROE of Sainsbury is reduced to 2.59% in 2019 due to a reduction in net earnings and increment in owner’s capital. Similarly, the ROE of retail company for the period of 2017 and 2018 is respectively 5.49% and 4.17% (Sainsbury’s Group Annual Report and Financial Statement 2019, 2019).

Assets turnover ratio: It establishes the relationship between net sales of the company and total assets. In the present case of Sainsbury Plc, company is losing its sales generation capabilities even after increase in the value total assets. As per the Appendix 1, the assets turnover ratio of company for the period of 2017, 2018 and 2019 is respectively 1.32, 1.29 and 1.23 times so as it can be stated that organisation is not generating appropriate amount of revenue with reference to its total assets because huge business rivalry among retail companies.

Liquidity Ratio

Current ratio: It is a great tool to determine the proportion of current assets as per the total current liabilities. Appendix 1 is showing that Sainsbury Plc has not attained the ideal current ratio of 2:1 in all three years that is 0.66 of 2019, 0.76 of 2018 and 0.74 of 2017. This information indicates that management of retail organisation is facing liquidity related issues because it is not having appropriate amount of current assets as per the current liabilities of business entity.

Quick ratio: This ratio determines the availability of cash and cash-equitant current assets of a business entity with reference to its total current liabilities (Myšková and Hájek, 2017). As per Appendix 1, the quick ratio of Sainsbury Plc is reduced to 0.50 in 2019 as compared to 0.59 of 2018 and 0.53 of 2017. This data indicates unavailability of liquidity assets because organisation has not attained the ideal current ratio of 1:1 in all three years.

Management or Efficiency Ratio

Inventory turnover ratio: This ratio determines the relationship between the cost of goods sold and average inventory. It is a great measure to evaluate business efficiency with reference to the flow of inventory. In this regards, Appendix 1 has determined that inventory turnover ratio of 2017, 2018 and 2019 is respectively 14.44, 14.83 and 17.93 times. It shows downward trends in operational efficiency of Sainsbury Plc.

Account receivable turnover days: It determines time duration in which an organisation can manage its recovery from debtors. In the case of Sainsbury Plc, account receivable days for the period of 2017, 2018 and 2019 are respectively 8, 10 and 8 days (Appendix 1) (Sainsbury’s Group Annual Report and Financial Statement 2019, 2019). This information shows that the retail firm has received early payments from debtors in 2019 as compared to 2018.

Account payable turnover days: This ratio determines the average time duration which is provided by creditors for making the payment of all dues (Schmidgall and DeFranco, 2016). In the present case, Appendix 1 indicates upward trends in account payable turnover days that are increased to 60 days in 2019 as compared to 59 days of 2018 and 56 days of 2017. It shows improvement in the efficiency of Sainsbury Plc.

Solvency Ratio

Debt-to-equity ratio: It is a great measure to assess the solvency position of business entity with reference to total debt and total equity of the company. In this regards, Appendix 1 shows that the debt-equity ratio of Sainsbury Plc is 0.11, 0.22 and 0.30 for the period of 2019, 2018 and 2017. This ratio indicates that Sainsbury Plc is reducing its debt financing and increasing shareholder’s equity because downward trend identified in debt-equity ratio in all three years.

Debt-to capital employed ratio: This ratio determines the relationship between debt capital and total capital employed (Debt and Equity). As a reduction in debt funds in total capital of Sainsbury Plc, the business entity has recorded negative trends in this ratio that is respectively 0.10, 0.18 and 0.23 for the period of 2019, 2018 and 2017 (Appendix 1).

Interest coverage ratio: It shows the relationship between operating income and interest related expenditure of the business entity. As a reason for debt financing, Sainsbury Plc has reduced its interest related expenditure. Appendix 1 shows reduction in interest coverage ratio that is reached to 3.15 times in 2019 in comparison of 3.70 times of 2018 and 4.72 times of 2017.

Investment Ratio

Earnings per Share (EPS): This measure determines per share earnings with reference to net earnings and the total number of share of company. Higher EPS plays critical role to attract investors. As a reason of reduction in net profit, Sainsbury Plc has recorded negative trends in earning per share that is reached to £0.09/share in 2019 in comparison of £0.13/share in 2018 and £0.17/share in 2017 (Appendix 1).

Price to Earnings Ratio: It determines the relationship between the market price of shares and earnings per share to assess the market value of the company. With reference to Appendix 1, the P/E ratio of Sainsbury is reached to 25.14 in 2019 in comparison of 18.87 of 2018 and 16.33 of 2017. It has recorded significant upward trends due to reduction in share prices (Sainsbury’s Group Annual Report and Financial Statement 2018, 2018).

Dividend coverage ratio: This ratio presents an organisational capability to pay the dividend (Uwonda and Okello, 2015). It determines the frequency of dividend payment to shareholder that a firm can manage with reference to net profit. In the context of Sainsbury, business entity has faced downward trends because the dividend coverage ratio of company is decreased to 0.81 times in 2019 as compared to 1.25 times of 2018 and 1.62 times of 2017 (Appendix 1). The kind of situation has emerged because Sainsbury Plc has recorded reduction in net earnings as compared to previous years.

Dividend yield ratio: It determines the value of per share dividend with reference to the dividend paid by company and numbers of outstanding shares (Williams and Dobelman, 2017). In the context of Sainsbury Plc, organisation has managed stability in the dividend yield figures for last three years. Appendix 1 determines that dividend yield ratio of retail firm for the period of 2017, 2018 and 2019 is respectively £0.11/share, £0.10/share and £0.10/share. This information determines that Sainsbury Plc has maintained appropriate balance between dividend payment and total number of shareholding.

Assessment of Cash Flow Movement

Cash flow statement is a great tool to evaluate the inflow and outflow of cash from different transactions and managerial operations (Edwards and et.al., 2018). Appendix 2 presents the cash flow statement of Sainsbury Plc for the period of 2019, 2018 and 2017. In 2017, company has recorded the cash flow from operating activities is £1,153m that has mainly employed in purchase of new property and repayment of borrowings and the closing cash flow is £1077m (Sainsbury’s Group Annual Report and Financial Statement 2019, 2019). The comparison of cash inflow from operating activities shows that Sainsbury Plc has recorded the highest net cash inflow from operating activities in 2018 that is £11365m. Further assessment of cash flow statement has derived that investment-related business operations have acted as key drivers of cash outflow in 2018 that is reached to £470m as compared to £750m of 2017 (Sainsbury’s Group Annual Report and Financial Statement 2018, 2018). In similar way, the cash outflow from financing activities is also reduced to £244m in 2018 due to reduction in value of borrowings repayment. Appendix 2 has determined that Sainsbury Plc has found significant reduction in the positive cash flow from operating activities because off the payment of old liabilities and it is reached to £618m in 2019. Furthermore, company has recorded negative cash flow from investing and financing activities. The value of cash outflow from financing activities is highest in 2019 as compared to previous years which is reached to £752m because retail firm has repaid its borrowings of £593m. However, Sainsbury Plc has maintained positive closing cash balance of £1120m as reason of open cash balance of £1728m. Therefore, it can be stated that company has maintained appropriate balance cash inflow and cash outflow that results positive cash balance at the end of all three years ().

Share Price Movements

Sainsbury Plc has faced significant up-downs in the market price of shares in the last three years. Appendix 3 presents share price movement of Sainsbury Plc from 1st April 2016 and 2 April 2019. It shows that share price of company has floated below and above to 250 GBp in the financial year of 2017 in which the highest and lowest share price of company is respectively 292.20 GBp and 214.60 GBp. The comparison of lowest price of share in all three years has found the 214.60 GBp as lowest share price. However, organisation has maintained upward trends in stock price during the period of 2016-2017 (Share information J Sainsbury, 2019). Furthermore, retail firm has attained the highest level of 281.70 GBp in 2018 and maintained downward trends in whole year so as the value of lowest share price is reached to 229.20 GBp in the financial year of 2017-2018. Apart from that the period of 2018-2019 has reflected significant boost-up in the market so as share price of Sainsbury Plc has attained the all-time highest mark of 341.50 GBp. Therefore, the share price of company is floated above the 300 GBp till December 2018 then organisation has recorded some downward trends so as stock price is reached to 223.60 GBp in March 2019 that can be termed lowest stock price for the period of 2018-2019. Sainsbury Plc has maintained a better performance in 2018-2019.

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Conclusion

As per the above assessment, this report has concluded that ratio analysis is great to examine the financial results of an organisation with reference to its previous year performance. Therefore, this investigation has found that Sainsbury Plc has faced negative trends in its profitability because reduction in net earnings of firm. However, efficiency and solvency ratios show improvement in business performance as a result of increase in trade payables turnover days and reduction in debt-equity ratio due to reduction in value of debt. Further assessment of cash flow statement has derived that Sainsbury has maintained an appropriate balance between cash inflow and outflow because organisation has recorded positive cash balance at the end of each year. Apart from that a systematic analysis of share price movement has concluded that Sainsbury Plc has provided better returns to investors in 2019 due to significant increase in stock prices.

Reference

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