Boots Plc and Sainsbury Plc - Essay Example

PART A: INTRODUCTION This report exhibits a comparison between two companies i.e., Boots Plc and Sainsbury Plc from the retail industry in terms of their financial performance and position for the year ended 2005. This analysis has been done with the help of various financial ratios that are known to be specifically helpful for different stakeholders and users of the company's financial information i.e., company's management, investors and lenders. All the data for ratio calculation has been obtained from the companies' annual reports and financial statement for the year 2004-2005. At the end of the report, the financial and non-financial factors that are critical to the future performance of both the companies are presented. Both the companies, Boots and Sainsbury are well-known names in retail industry. United Kingdom is the centre of the companies' major business operations and although both the companies run their business outside the country also, but most of the companies' sales are from the UK segment. The Boots Plc Group's major activities include retailing of chemists' merchandise, the provision of opticians' and other healthcare services, the development, manufacture and marketing of healthcare and consumer products. The group's major business segments include Boots The Chemists, Boots Opticians, Boots Healthcare International and Boots Retail International (Boots Plc Annual Reports, accessed 23/11/2005) Boots the Chemist operates over 1,400 stores, where in nearly every store there is a pharmacist to offer guidance and help on healthcare matters. J Sainsbury Plc is a leading UK food retailer with interests in financial services. It consists of Sainsbury's Supermarkets, Sainsbury's Local, Bells Stores, Jacksons Stores and JB Beaumont, Sainsbury's to You and Sainsbury's Bank. It employs 153,000 people A large Sainsbury's Supermarket offers around 30,000 products, 50% of these are Sainsbury's own brand including fresh produce. In addition to a wide range of quality food and grocery products, many stores offer delicatessen, meat and fish counters, pharmacies, coffee shops, restaurants and petrol stations (Company Overview, accessed 24/11/2005) The comparison and analysis of these two companies' financial performance and position has been broken down into sections so as to be useful for various users of the company's financial statements. It will be of assistance to the companies' management in assessing their performance over the recent year and making plans to overcome any future risks and failures. The companies' investors would find this comparison beneficial in order to decide on which company to choose for investment and which company offers better investment potential. The lenders would benefit from this report in terms of being aware of the companies' solvency and liquidity position. PART B: FINANCIAL ANALYSIS Analysis From Management's Viewpoint A company's management is concerned with the financial results of its performance over the year that shows the management's capability and efficiency to generate sales and profit for the business effectively. The following ratios would be helpful in analysing both the companies from the management's viewpoint: Return on Capital Employed Boots Plc Sainsbury Plc 18.83% 1.64% The Return on Capital Employed ratio shows how much a company earns on the investment made in the assets. Boots Plc's return on capital employed ratio reveals a much profitable snapshot of the company's performance whereas Sainsbury Plc's financial results exhibit a much weaker position of the company in utilising its assets towards profit generation as compared to Boots Plc. Gross Profit Ratio Boots Plc Sainsbury Plc 46.13% 4.12% The Gross Profit ratio analyses the company's profit margin before accounting for various operating costs. Therefore, it represents the profit margin after accounting for cost of sales. Here, Boots Plc's financial results show that company is getting more profit on its sales after accounting for cost of sales. The company is managing the production and distribution activities more effectively than that of Sainsbury. There's a great difference in both the companies' gross profit margin on sales. Net Profit Ratio Boots Plc Sainsbury Plc 8.22% 0.65% The net profit ratio analyses a company's profitability after taking into account all the operating costs. The application of this ratio on the companies exposes that Boots is generating more profit out of its sales and business activities as compared to Sainsbury. The difference between gross and net profit shows the extent of operating costs incurred by the company. This aspect of net profit ratio exhibits that Boots Plc is incurring more operating costs than Sainsbury, which has had its impact on the company's net profit ratio. Stock Turnover Boots Plc Sainsbury Plc 14.9 or 15 days 14.58 or 15 days The Stock Turnover ratio shows the efficiency of a company's management to generate sales out of its available stock. Both the companies' stock turnover ratio reveals that it takes these companies' management 15 days to finish their entire stock and convert it into sales. Therefore, this ratio does not indicate any difference between the capabilities of these companies' management to generate sales out of its stock. Total Asset Turnover Boots Plc Sainsbury Plc 1.58 or 2 times 1.42 or 1 times The total asset turnover ratio measures how efficiently or productively the firm is using its total assets, (fixed assets plus current assets), to generate sales. Boots Plc's total asset turnover ratio indicates that the company's sales are 2 times bigger than its assets whereas Sainsbury's total turnover is 1 time bigger than that of its assets. This time again, Boots Plc's management is much efficiently performing to generate sales for the business. Analysis From Lenders' (Short-term) Viewpoint A company's short-term lenders want to be assured that the company is capable enough to meet its short-term debts and liabilities. This is only possible when the company has enough liquid assets to meet its current liabilities. The following ratios are useful in analysing the company's short-term liquidity position: Current Ratio Boots Plc Sainsbury Plc 1.46:1 0.92:1 The current ratio exposes the availability of liquid assets within a company to pay off its short-term liabilities. Boots Plc's current ratio is much better than that of Sainsbury, which reveals a strong position of the company in terms of availability of liquid assets. It shows that the company has more liquid assets to meet its liabilities conveniently than Sainsbury. Acid Test Ratio Boots Plc Sainsbury Plc 0.80:1 0.79:1 The Acid Test ratio indicates a company's the short-term solvency after keeping aside its stock from the current assets. For Boots and Sainsbury, this ratio does not reveal a much different position i.e., there is not much difference in the companies' quick ratio. This shows that most of the Boots Plc's liquid assets comprise the stock, which in case of retail business is highly convertible into cash. Sainsbury Plc's quick ratio shows that the company has not kept much investment into stocks. Analysis From Lenders' (Long-term) Viewpoint The lenders of a company are interested in its financial position in term of solvency. The following ratios measure the Boots Plc and Sainsbury Plc's solvency position from lenders point of view: Debt Ratio Boots Plc Sainsbury Plc 20.94% 18.02% The Debt Ratio measures the relationship between a company's total debt and total assets. It shows how much of a company's assets are financed by external debts and borrowings. If we compare both the companies' debt ratios, it will be seen that about 21% of Boots Plc's assets are financed by external debts. Although its not a suspicious figure, but it is still to some extent more than that of the Sainsbury's 18.02%. Debt to Equity Boots Plc Sainsbury Plc 44.92% 47.87% The Debt to Equity ratio indicates the relationship between a company's total debts and its total equity funds. It shows how much of a company's total equity is financed by external funds. The comparison of these companies' ratios does not expose much difference between their capital structures. Both the companies' capital structure is a mixture of external debts and equity shareholders funds. Analysis From Investors' Viewpoint A company's investors are interested in the company's profitability. If the company is profitable, it will pass on the profit to its investors. Investors are the people who put their money into the company's shares. The following ratios evaluate the companies' position from the investors' aspects: Dividend Per Share Boots Plc Sainsbury Plc 21p 7.80p The dividends paid by a company are of interest to the investors who invest money in the company to get profit in company's earnings by means of dividends. Boots Plc offer a good investment potential it is paying a higher dividend to its investors than the Sainsbury. There is much difference between both the companies' dividends paid. This also indicates the great difference between both the companies' profitability and earning prospects. Earnings Per Share Boots Plc Sainsbury Plc 40.9p 3.5p The Earnings Per Share data is of importance to the investors who are interested in the gains obtained by the market price of company's shares. Boots Plc's Earnings Per Share ratio illustrates a good record of company's position over the year. It has offered 40.9p earnings per share to its investors. This figure is of great attraction to the investors as compared to the 3.5p Earning per Share given by Sainsbury Plc. PART C: FACTORS AFFECTING FUTURE PERFORMANCE ANALYSIS FOR BOOTS PLC After the thorough analysis of the company's financial performance, the following factors are found to be critical for the future performance of the company: Exit from Business Segments In the year 2005, the Boots Group Plc announced exit from the Dentistry, Chiropody, Laser Eye Correction and Laser Hair Removal businesses. The group also plans to sell its major business segment Boots Healthcare International to return a significant proportion of proceeds to its shareholders. These decisions can have an impact on the company's future performance. Proposed Merger with Alliance UniChem Plc Boots Group Plc and Alliance UniChem Plc have decided to merge in order to compete more effectively with the supermarket giants. Both of these companies are very well known in UK. According to the company information, the merger will be completed in 2006. This merger will be beneficial for Boots Plc to further enhance its financial performance through joint efforts (Proposed Merger, accessed 30.10.2005) ANALYSIS FOR SAINSBURY PLC As indicated by the above analysis, Sainsbury Plc hasn't had a good year in terms of the financial performance and results obtained thereof. After a keen observation of the company's financial statements and ratio analysis, the following factors seem to be crucial in affecting the company's future performance: Low Profit Margins The company's financial data as obtained from the annual reports and analysed with the help of financial ratios shows that the company has had a seriously declining profit margin. It has managed to keep a gross profit margin of only about 4% and a net profit margin of 0.65% on sales, which can have a serious impact on the company' performance in near future as decreased profits could result in lack of retained profits and resources for the company. High Costs Sainsbury's total cost of sales is about 96% of the total turnover, which is the major cause of the company's low profit margins. If this becomes a trend in the company's financial future, it can really continue to affect its sales and financial results. Low Dividend and Earnings Per Share The Earnings per share and dividends paid by the company are not at a satisfactory level. This indicates a weaker position of the company in terms of earnings. It can leave a bad impression for the company among the investors that can lead them to withdraw their funds in future from the company in search for a better investment and therefore affecting the company's performance. CONCLUSION The above comparison and analysis demonstrates that the Boots Plc's performance for the financial year ended 2005 has been more satisfactory than Sainsbury Plc. The company's results records show the effective and efficient performance of the company's management, better position of the company in terms of liquidity and solvency (i.e., for short and long-term lenders) and attractive earnings per share and dividend announced. Thus, the company's current financial position is favourable for all its major stakeholders. APPENDIX Click on the icon below to see the appendix for ratio calculation: Annual report 2005, Sainsbury Plc, accessed October 23, 2005 from the World Wide Web: http://www.jsainsburys.co.uk/ar05/files/report05.pdf Boots Plc Annual Reports, accessed November 23, 2005 from the World Wide Web: http://www.boots-ir.com/ Company Overview, accessed November 24, 2005 from the World Wide Web: http://www.jsainsburys.co.uk/index.asppageid=187 Proposed Merger, accessed November 30, 2005 from the World Wide Web: http://www.boots-ir.com/boots/announcements/announcement/2005-10-03/ Bernstein Leopold A. (5th ed. 1993), Financial Statement Analysis: Theory, Application and Interpretation, Richard D. Irwin Inc., USA Read More