Shareholder Value Analysis - Assignment Example

Table of Contents Introduction 2 Shareholder Value Analysis 2 Cash flow analysis 3 Operating Activities 3 Investing activities 4 Financing activities5 Influence of Corporate Governance on Financial Health 5 Conclusion 6 References 7 Sainsbury’s Plc. Introduction Sainsbury Plc. commonly referred to as J. Sainsbury Plc. that was founded in 1869 is the parent company of the Sainsbury’s Supermarket Plc. under which it engages in the grocery business and other relating activities in the UK. Sainsbury has three business segments that re retailing, financial services and property investments (J. Sainsburys Plc., 2013). The three business segments are operated through different store formats like supermarket and convenience stores, Sainsbury’s Bank joint ventures and The British Land Company Plc. joint venture and Land Securities Plc. joint venture. Sainsbury’s offers food and non-food items at its supermarkets and convenience stores along with that it also operate online grocery store and general merchandise operations. Sainsbury operates almost 1106 stores that includes 583 supermarkets and 523 convenience stores. Company also holds interest in freehold and long lease hold properties and also the properties that come under their joint venture agreements. In its financial services sectors it provides credit cards, insurance, loans and savings advices also relating to energy efficiency at customer homes. Sainsbury also provides selection of movies, music, books, games and other entertainment products (Yahoo, 2013). Sainsbury’s holds almost 18% share of the UK supermarket and is the second largest supermarket chain in the country. Shareholder Value Analysis Despite the fact that Sainsbury is the UK’s second largest supermarket chain it is the returns that the company offers that would attract the investors and the share towards the company not the quality of the services or the size of company itself. In order to understand how much value is given or created by the Sainsbury to its shareholders and investors it is important that analysis of it’s incomes, returns that it offers, its operations, liquidity position and the growth that it offers in the future is thoroughly made. Thus to get the full understanding cash flow analysis along with its income statement is made to have idea about its liquidity position. Cash flow analysis Both inflow and outflow of cash in the company is assured through three different activities that the company goes through operating, investing and financing. All three activities of Sainsbury are discussed as follow. Operating Activities Over the past three years Sainsbury’s Plc. have been reporting net income however as analysis of its profit margins are done it is seen that in the current period its profit margins re lagging behind to that of the industry average. It can be said that the company is sustainable however for that its operating activities have been analyzed. It shows that in it’s net income there is a huge portion of the non-cash items especially the depreciation that forms the major part of the cash flow providing operating activities and over the past three years considerable increase is seen (msn , 2013). The effect of the working capital has been quite nominal this shows that the company has efficient management of the working capital there has been very slight increase in the account receivables, inventories and account payable in the past three years. In the last financial year end cash and cash equivalents were 27% of the total current assets that declined from 36.3% in 2012. The operating cash flows show the positive and increasing trend in the outflow of the cash over the past three years however it has to be considered that operating activities do not highlight the expenses or the small term financial liabilities that are required to be met form the current assets. The liquid cash has decreased in the last financial year it seems that company has made payment of its long-term debt from current assets. The current ratio and quick ratio of the company present some alarming signs. Sainsbury had current ratio of 0.585, 0.648 and 0.614 in 2001, 2012 and 2013 respectively while the quick ratio was 0.308, 0.348 and 0.297 in 2011, 2012 and 2013 respectively. Liquidity position is declining the percentage of the liquid cash or assets is not enough to meet the short-term liabilities thus in the near future if the company follows through same situation of cash they would face severe liquidity issues. Despite the fact that company shows positive cash flows from operating activities the performance of its operations is not satisfactory. Investing activities These activities reveal that whether the company is trusted in the market or not, that can be said whether it has received investments from potential investors or the shareholders. It also evaluates what steps are taken by the company in order to grow in the future. In the case of Sainsbury’s Plc. it can be seen that over the past three years it has made considerable capital expenditures. It was also seen in its operating activities that depreciation has been quite high that shows that investment in non-current assets has been made over the past three years and company sees opportunities of their utilization (Yahoo, 2013). However there hasn’t been any sale of the property besides the property plant and equipment company has also invested in the intangibles thus signifying expansion of the business or even business segments. Not only for the past three but in last five years company has not shown positive cash out flow from investing activities this shows they are continuously developing and maintaining their non-current assets. It seems that the long-term debt whose part has paid in the last financial year is also being used to invest in the long-term assets of the company. Long-term debt increase the interest expense for the company however interest cover has been 6.06 times that is better than that of industry average that is almost 3.75 times. Financing activities These activities generate the finance for the company that could be used to support the investing activities and the operations. In the past three years it is just the financial year 2012 in which the company showed positive cash flow even that wasn’t that much high and over all free cash flows in the past five years have been negative. The major reason of positive cash outflow in 2012 was that company acquired long-term debt and repaid part of it in 2013 however the issuance of shares and common stock has been very nominal over the past 3-5 years. This can be related to the returns that the company offers; ROE (return on equity) of the company has been 11.8%, 10.62% and 10.7% in 2011, 2012 and 2013 respectively while currently the industry average is 24.7%. ROA is also not so high it can be seen stable or little bit on a declining trend over the past three years it has been 5.61%, 4.85% and 4.84% in 2011, 2012 and 2013 respectively again that is below the industry average of 6.91%. Company is getting short of finances that was evident from its liquidity ratios calculated that were also below the liquidity level of the industry. It can be seen from the performance analysis of all the activities of the Sainsbury’s Plc. that it does generate value for its shareholders. It is reflects in their financing activities that investors and shareholders do not find it attractive as the company in near might have liquidity issues. Influence of Corporate Governance on Financial Health Corporate governance is the key foundation for the firms to be more productive and have a long existing product life cycle. Business world around the world continuously goes through changes that is due to different factors like technology, globalization etc. thus new techniques and ideas transform structure and strategy that should be adopted in order to better govern the corporates (Loizos, 2001). Corporate governance is not a set of any rules that the firms are required to follow but a set of principles that allow the operations to run smoothly and efficiently it involve principles relating to corporate ethics, socialization, consumer satisfaction etc… In the case of Sainsbury’s it can be said that they are facing management issues as despite being the UK’s second largest supermarket chain they are not able to generate even considerable amount of finance and are not trusted and acknowledged in the market by the potential investors. Therefore the company today is almost facing liquidity issues therefore it would just not be the simple corporate governance or the set of some principles that would generate the finance and ensure growth for the company. Drastic measure are required from the management of the company that reflect strong business and competition strategies like promotional offers, discounts or new range of products or services etc. that would boost the revenues for the company and bring sustainability. Conclusion Sainsbury’s Plc. is a long established UK based company and currently the UK’s second largest supermarket chain. It is the analysis of the company’s activities that show that its performance is not satisfactory. Cash flow analysis of the company has been conducted integrating them with ratio analysis that showed some alarming situations especially relating to the generation of the finance. Company has been offering low returns than that of the industry average besides that it is also facing liquidity issues. Therefore It cannot only be the simple corporate governance that would revive the company and its performance; strong business strategy is required that would stabilize the company. References J. Sainsburys Plc. (2013). Annual Report. London: Sainsburys . Loizos, h. (2001). What is the impact of teh corporate governance on organizational performance. Conference Paper, 165-173. msn . (2013). Cash flow statement. Retrieved from msn money: http://investing.money.msn.com/investments/stock-cash-flow/?symbol=GB%3aSBRY Yahoo. (2013). Balance Sheet. Retrieved from Yahoo Finance: http://uk.finance.yahoo.com/q/bs?s=SBRY.L&annual Yahoo. (2013, March). Profile. Retrieved from Yahoo finance : http://finance.yahoo.com/q/pr?s=SBRY.L+Profile Read More