Assessment of the Company's Performance - Report Example

ASSESSMENT OF COMPANY’S PERFORMANCE: If the analysis of the ratios is done, it can be seen that the company’s overall ratios of profitability which include the net profit margin (3) and gross profit margin (4) have declined as compared to the previous years. 1. Net Profit Margin: The company’s performance for the year 2008 has reported a steady growth in its revenue (sales) as compared to its performance in the year 2007. According to the income statement, the company’s revenue has increased by 5.8%. The net profit margin indicates the profit available for the distribution of the dividends. The company’s net profit margin for the year 2008 is 2.69%. But in the years 2006 and 2007 the net profit margin has increased steadily from 0.65% to 2.78%. By analyzing the income statement it can be induced that the sales from 2006 to 2007 have not increased that much but still the company has managed a massive increase in its profits. The reason behind such figures can be attributed to the fact that Sainsbury has found a cheap source of resources or are selling their products at a higher price. However, the reverse of this has happened in 2008. Although Sainsbury has managed to increase its sales or revenues but have failed to increase its profits which has led to a decline in the profit margin. This can be due to the fact that the company is engaging in more costly production and production methods. 2. Gross Profit Margin: By analyzing the net profit margin, it was concluded that the sales of the company were causing a downfall in the profits. But if the gross profit margin is analyzed it can be seen that the increase in the profits for the years 2006 and 2007 was due to decrease in the company’s cost of production and not due to increase in sales. Although the sales were not very high in the years 2006 and 2007, the company had somehow managed to decrease their costs in order to increase its net profit. There is a small decline from 2007 to 2008 though, showing that Sainsbury, although made an increase in sales revenue, actually had a decrease in gross profit. This shows the cost of obtaining their products is increasing therefore they will have to increase either their prices or the amount of sales they make. 3. ROSF: The figures for the ROSF (Return on Shareholder’s Funds) show two things. First, it can be seen from the massive increase (of 5.99%) from 2006 to 2007, that Sainsbury had resurgence in sales and stock prices. This fact can be attributed to their new marketing & stock control policies. However, the figures for 2007 & 2008 dont draw such an obvious conclusion – but it can be see that although net profit remained effectively the same, the shareholders funds increased dramatically – due to a large increase in the sales/price of stock. 4. ROCE: ROCE (Return on Capital Equity) indicates the rate of return on the amount invested by the shareholders in the company’s capital equity. The figures for the ROCE follow a similar trend to the ROSF figures. By analyzing the values it can be concluded that not only there is a large increase in the profits of Sainsbury from 2006 to 2007 but they paid off a massive amount of liabilities. This shows that they made even more profit that year than actually specified. The 2007 and 2008 figures show that Sainsbury was consistent in keeping this profit margin & the resurgence was not a one year deal. 5. Current Ratio: The current ratio indicates that the financial ability of how the firm meets its current obligations following due immediately. According to this, the company’s current ratio should be 2:1 which is very good, but it is not so. For the three years under review, this ratio has been below 100% which shows that the company is unable to meets its liability requirements with the given amount of its assets. 6. Quick Ratio or Acid Test: The ideal ratio for any company is 1:1 or 100%. If the acid test analysis of the company is seen, the ratio for the three years is below 100% that is at 35.66% as calculated above, which might not be a good sign for the company. The company cannot cover its liabilities immediately if the need arises. 7. Stockholding Period: The stockholding period of the company is on average 14 days for the three years (2006, 2007 & 2008). This shows that the company can sell its products within 14 days. For a supermarket, this period should be less as some of the inventories that can include foods are sold in either 2 or 3 days. For this reason, the company’s current ratio and acid test show a lower value than the required of many other companies. COMPARISON WITH INDUSTRY: The profitability ratios of the company are performing much better than the industry average ratios for the year 2008. The industry net profit margin ratio was calculated to be 0.15% before the taxes whereas the company’s ratio was 2.69% which shows that the company is ahead of the industry in producing more profits than the whole supermarket industry. The gross profit margin of J. Sainsbury was calculated to be 5.62% whereas the whole supermarket industry recorded a gross profit margin of only 0.38%. The company is proving itself that it can reduce its cost much better than the industry can on the whole. The reason the industry might be falling behind the company’s ratio can be attributed to a lot of different factors such as other companies might be incurring low sales or high costs of production. The quick ratio for the company for the year 2008 is recorded to be 0.36 whereas in contrast, the industry’s average quick ratio is 2.19 which is well above the company’s ratio. The industry ratio is very exceptional and the company should benchmark this ratio and try to reach its level. This also shows that the industry is able to meet its current obligation requirements more readily and immediately than the company. The current ratio of the company is also below the benchmark level of the industry which is also at 2.19 showing the industry does not hold any inventory and is also able to meet its requirements. This can also be seen by the inventory turnover ratio. The industry’s inventory turnover is zero whereas the industry’s turnover 14.76. The lower the turnover rates the better for the company. Another ratio that can tell the company’s position is not going good as compared to the industry is the receivable turnover ratio. This ratio is very high for the company being 4.22 days as compared to the industry’s ratio of zero. The company is unable to receive the cash easily on its credit sales which makes it difficult for the company to invest cash into the business immediately. The company must try reducing its receivables turnover as it can help the company to inject cash into its operations more readily. COMPARISON WITH TESCO: The gross profit margin of Tesco (a competitor of J. Sainsbury in the industry) was recorded to be 22.87 according to the recent update of Reuters finance. This is very high in comparison to J. Sainsbury. The net profit margin of Tesco is 8.26 in contrast to J. Sainsbury’s 2.69%. This is also very high showing that the company is making huge profits and gross profits and is able to keep its cost of production to the minimum. The quick ratio and current ratio of Tesco is 1.67 and 2.94 respectively. This shows that the company has a good position in covering its liabilities with its current assets. In comparison these two ratios for J. Sainsbury are not at all satisfactory. VALUE DRIVERS: The average store size of the company is of 34,000 sq ft. With this, the company is well positioned to trade strongly It is clear that Sainsburys can trade well up to 55,000 sq ft. The profit and sales values from 2006 to 2007 show that, in order to increase their profits by the amount they did, Sainsbury must have bought a lot more sales space. This can be seen as there is no increase in sales made per square foot of sales space – so there had to be additional purchases made. There is not much difference in the sales per square foot from 2007 to 2008, although it seems Sainsbury cut down on its sales space as there is an improvement on profit per square foot. Read More