J Sainsbury Plc - Report Example

Table of Contents BACKGROUND 2 FEATURES AND STRATEGY 2 PERFORMANCE ANALYSIS 2 Profitability 3 Liquidity and Working Capital 3 Gearing Ratio4 Investment Ratio 4 Share Premium 4 COMPARISON WITH INDUSTRY 5 PAST AND FURURE PERFORMANCE 5 APPENDIX 7 REFERENCES 9 J Sainsbury Plc A food retailer company is analysed with respect to their performance during the recent financial years and their future profit viability is evaluated BACKGROUND J Sainsbury is one of the leading food retailer established in the United Kingdom and is a public listed company. It operates a total of 890 stores which are divided into supermarkets and convenience stores which number 547 and 343 respectively. (J-Sainsbury) The company also claims to have a market share or around 16%. FEATURES AND STRATEGY The major business of the company is the provision of food at fair prices through the retail channel. It operates with numerous supermarkets and retail stores all over and also carries out business through online channel with delivery of the food to the doorstep. The strategy of the company is to provide safe and healthy food to its customer at a fair and reasonable price while maintaining a good market share and leadership in the retail and convenience business. The company is also the joint owner of the Sainsbury Bank and is also a part of two joint ventures. PERFORMANCE ANALYSIS The performance of the company is analyzed with respect of the key ratios that determine the health of the company and future profitability. Profitability: The profitability of the company was quite satisfactory during the period as they were able to earn a gross and net profit of 5.42% and 2.93% respectively. The company improved their sales 6.7% which also enhanced their profits as their operating margin was 3.36% compared to last year which was 3.26%. (J-Sainsbury) The return on capital employed was 10.92% which is quite satisfactory as compared to the last five year performance. The company has taken a reasonable hike from 2006 as the Return on capital employed then was only 6.1% while last year it was 10%. The employment of capital is quite efficient. On the other hand, the assets were also utilized efficiently as the company generated 2.2 times revenue with their fixed assets while the Net Return on Assets stood at 5.4% Liquidity and Working Capital: Sainsbury has not been able to manage the liquidity as efficiently as they have managed their profitability. The current ratio of the company was low as they had only 0.66 times cover over their current liabilities with current assets. The quick asset ratio was also lingering behind as it was 0.41 times of their current liabilities. This shows that the company may experience some liquidity issues in the the year to come if they are unable to pay off their current liabilities with the available liquidity. The company has shown a reasonable debtor collection period of 4 days which is quite essential for a company like this as they have to generate cash quickly to overcome the need of pulling back stock in the stores Gearing ratio: The solvency ratio of the company was 17.84% which is lower than the relied ratio of 20% that indicates the companies difficulties when servicing debts in the future. The gearing ratio was 48% as the long term borrowing of the company was £2,357 compared to equity of £4,966. This is a favourable ratio for the company which indicates that the company is financed more with equity than it is with debt, therefore making is easier for the company to meet its current requirements and saving more interest expense. Investment Ratios: The company had reasonable investment ratio as the Basic earning per share stood at £0.321 or 32.1 pence for this year while the company declared a dividend of 10.2 pence for this year showing that the dividend cover was 3.14 times the earnings per share. From the investor’s point of view, this is quite reasonable as the dividend yield is also enhanced for a company whose share price moves around £20 and can be an attractive investment option. Share premium: The share premium represents the additional amount that has been taken from the issue of share capital over its nominal or par value. The reason for which the value is same for this year as well as previous year is that the company has not issued any shares in both the years. The company can increase the amount of share premium by issuing more shares and charging a premium on each share. COMPARISON WITH INDUSTRY Compared to the industry, the company has shown good results as it controls over 16% of the market share in the retail food business. The return of the capital employed was marginally better than than of the industry as the company maintained a ratio of 10.21 compared to industry’s 9.60. The net gearing was also superior that industry trends with 32.08% of the company and the industry’s 53.49%. One sector that needed improvement is that of the operating profit as the industry trends showed an operating margin of 4.61% and the company lingered at 2.9%. The needs to maintain the operating margin as it has diminished from pervious year when it ws 3.14% PAST AND FUTURE PERFORMANCE The company has a great prospect of growth as the company is increasing the sales with each passing year and thus the market share is also enhancing where the company has taken over 16% of the market share with increase in sales of 25% The company has adequate resources to fund the future developments as indicated by the operating cash flow which was £1,209 Million. The company is on a campaign of ‘Making Sainsbury great again’ which is promising as the company is reporting growth for every quarter since the past 19 quarters. The company now has 19 million transactions weekly which are up by a million since last year. Therefore, the future looks bright and promising for Sainsbury as it look to promote their business. APPENDIX Profitability: Return on Sales = Net Income = £585 = 2.93% Net Sales £19,964 Gross Profit Ratio = Gross Profit = £1,082 = 5.42% Net Sales £19,964 Return on Assets = Net Income = £585 = 5.4% Total Assets £10,855 Return on Capital Employed = EBIT = £881 = 10.92% Total Assets – Current Liabilities £10,855 - £2,793 Fixed Asset turnover = Net Sales = £19,964 = 2.22 times Total Non Current Assets £9,002 Liquidity: Current Ratio = Current Assets = £1,853 = 0.66 times Current Liabilities £2,793 Acid Test Ratio = Cash + Investments + Receivables = £1,151 = 0.41 times Current Liabilities £2,793 Debtor Collection = Debtor’s x 365= £215 x 365 = 4 days Turnover £19,964 Solvency: Solvency Ratio = Profit after tax + Depreciation = £1,051 = 17.84% Total Liabilities £5,889 Debt to Equity = Total Liabilities = £2,357 = 48% Shareholder’s Equity £4,966 Investment: Earnings per share = Net Income = £585 = £0.321 Average Outstanding shares 1,822 Dividend cover = Earnings per share = £0.321 = 3.14 times Dividend to shareholder £0.102 Works Cited J-Sainsbury. . 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