Financial Analysis Of J Sainsbury PLC And Morrison PLC - Essay Example

Financial Analysis of J Sainsbury PLC and Morrison PLC for Investment Financial Analysis of J Sainsbury PLC and Morrison PLC for Investment Introduction J Sainsbury is worth to be invested in because of its growth and development over the years. It operates in retail industry which is expanding rapidly globally specifically in United Kingdom. Global retail industry is expanding; in US alone, growth of 4.1% is expected in 2014 in retail sector (Faster growth seen for US retail industry, 2014). UK government has extended its support further to the retail industry, there is high probability that the industry will grow by and large (UK retail industry: international action plan, 2014). Findings Two companies that were chosen initially for investment were Morrisons and J Sainsbury. Both the companies have been making profits and paying dividends for over last 10 years. Different trends and ratio analysis have been used to compare the two options which are detailed as follows: Liquidity ratios Sainsbury Morissons Short term liquidity 0.49 0.57 Working Capital -1214.00 -992.00 Accounts receivables turnover rate 78.73 59.30 Inventory turnover rate 22.88 21.96 Although short term liquidity of Sainsbury is lesser than Morrisons, it could be justified by the fact that the company has more working capital available as compared to Morrisons. This proves the liquidity health of the Sainsbury as against Morrisons. The receivable’s turnover rate of the Sainsbury is more than the competitor which is because of the fact that the company is focusing on expanding the customer base. Once the customer relationship is developed, it would be easier for Sainsbury to lock the customers and attract them to purchase more. It is evident from the inventory turnover rate that both the companies fetch the sales from inventory in a reasonable period of time. This shows that Sainsbury is working as per planning; its sales are increasing but they are not over-stocking as it will disturb their short term liquidity ratio. Measures of long term credit risk Sainsbury Morrisons Debt ratio 0.55 0.50 Interest coverage ratio 6.25 12.65 The debt ratio of both the companies is similar which indicates that this ratio is maintained across the industry. The ratio reveals positive results as 50% of the assets are financed by equity financing. This reduces the role of external creditors affecting the decisions of Sainsbury. Despite the fact that interest coverage of Morrison’s is much better than Sainsbury, it does not affect the decision to invest in Sainsbury. Despite the lower interest coverage of Sainsbury, its interest expenses is still 6 times lesser than its operating profit which shows that there is no potential threat of credit risk or bankruptcy for the company. Moreover Sainsbury may resort to loan financing for growth as it is capable to pay the interest out of its operating profits. Measures of Profitability Sainsbury Morrisons Gross Profit rate 0.05 0.07 Operating expense ratio 0.02 0.02 Return on assets 0.07 0.09 The measures of profitability for both the companies are identical and do not make Sainsbury appealing for investment. The return on assets of Morrisons and Gross profit rate are higher than Sainsbury which is due to increase in assets of Sainsbury in previous near years. The investment in assets will take some time to generate profits. Actually the earnings per share of Sainsbury make it attractive for investment. Earnings per share for Sainsbury is £ 32 as against £ 26.65 of Morrisons, this huge difference between the earnings per share keeps Sainsbury at priority for investment in comparison to Morrisons. Furthermore, the dividends of Sainsbury are also more than those paid by Morrisons. Dividends history in 2013 for both the companies is as follows: Dividend type Sainsbury Morrisons Interim 4.8p 3.49p Final 11.9p 8.31p Total dividend 16.7p 11.8p Since Sainsbury pay more dividends per share, it is worth to invest in it as earnings per share and dividend per share are both high. There are signals that UK retail industry will start improving in 2014, this improvement will increase the dividends further. There can be an argument that the share price of Morrisons is less than Sainsbury and if amount of £ 10,000 is invested in Morissons, it will pay more dividends. Hypothetical assessment of this option is considered below: Description Sainsbury Morrisons Market price of share as at 14 May, 2014 £ 327 (SBRY SAINSBURY (J) PLC ORD 28 4/7P, 2014) £ 196 (MRW MORRISON (WM) SUPERMARKETS PLC ORD 10P, 2014) Total shares that may be purchased 31 51 Actual interim Dividends per share in 2014 5 3.84 Total dividends 195.84 Above calculation apparently shows that Morrisons is better option than Sainsbury but this is not true because the share price of Morrisons is continuously falling which will oust the gains from dividends. Contrary to this, increase in share price of Sainsbury will result in more capital gain which will compensate the dividend income lost due to non-investment in Morrisons. Following graphs show that from May, 2014 onwards, the share price of Sainsbury has started increasing and share price of Morrisons is still falling. Graph 1.01: Price trend of Morrisons (Morrisons Historical prices, 2014) Graph 1.02: Price trend of Sainsbury (Sainsbury Historical prices, 2014) Equity ratio Sainsbury Morrisons Price - earnings ratio 10.02 7.34 The price earnings ratio of Sainsbury indicates the positive anticipation of the investors with respect to Sainsbury. These expectations are because of the improvement in UK economy and the response of Sainsbury to such macro-economic indicators. Morrisons and other retail chains have decided to indulge in price cutting war. Morrisons is specifically involved in this war so that it can recover from the deep decline in sales that it suffered from in 2013-14. But Sainsbury has announced to back out from this war as it finds itself in much better condition. Such an aggressive and carefree attitude of Sainsbury has re-gained the confidence of the investors (Morrisons sales slump as Sainsbury’s dismisses checkout war, 2014). Conclusion Improving economic conditions, handsome dividends and increasing share prices of Sainsbury make it a considerable option for investment. As the consumers will start increasing their consumer expenditures again; especially in food items, Sainsbury will start paying more return on investments. List of References UK retail industry: international action plan. 2014. [Online] Available at: . Faster growth seen for US retail industry. 2014. [Online] Available at: . Morrisons Historical prices. 2014. [Online] Available at: https://uk.finance.yahoo.com/q/hp?s=MRW.L&b=12&a=04&c=2012&e=14&d=04&f=2014&g=d . Morrisons sales slump as Sainsbury’s dismisses checkout war. 2014. [Online] Available at: . MRW MORRISON (WM) SUPERMARKETS PLC ORD 10P. 2014. [Online] Available at: . Sainsbury Historical prices. 2014. [Online] Available at: . SBRY SAINSBURY (J) PLC ORD 28 4/7P. 2014. [Online] Available at: . Appendix Sainsbury Income statement 2013 Revenue 23,303 Cost of sales (22,026) Gross profit 1,277 Administrative expenses (457) Other income 67 Operating profit 887 Finance income 19 Finance costs (142) Share of post-tax profit from joint ventures 24 Profit before taxation 788 Analysed as: Underlying profit before tax 756 Profit on disposal of properties 66 Investment property fair value movements (10) Financing fair value movements (10) IAS 19 pension financing (charge)/credit (5) One-off items (9) 788 Income tax expense (174) Profit for the financial year 614 Attributable to: Owners of the parent 614 Non-controlling interests – – - 614 Earnings per share Basic 32.6 Diluted 32.1 Underlying basic 30.7 Underlying diluted 30.2 Sainsbury Balance Sheet Non-current assets Property, plant and equipment 9,804 Intangible assets 171 Investments in subsidiaries - Investments in joint ventures 532 Available-for-sale financial assets 189 Other receivables 38 Derivative financial instruments 47 Deferred income tax asset - 10,781 Current assets Inventories 987 Trade and other receivables 306 Derivative financial instruments 91 Cash and cash equivalents 517 1,901 Non-current assets held for sale 13 Total assets 12,695 Current liabilities Trade and other payables (2,726) Borrowings (165) Derivative financial instruments (65) Taxes payable (148) Provisions (11) (3,115) Net current liabilities Non-current liabilities Other payables (173) Borrowings (2,617) Derivative financial instruments (4) Deferred income tax liability (247) Provisions (39) Retirement benefit obligations (766) (3,846) Net assets 5,734 Equity Called up share capital 541 Share premium account 1,075 Capital redemption reserve 680 Other reserves (623) Retained earnings 4,060 Equity attributable to owners of the parent 5,733 Non-controlling interests 1 Total equity 5,734 Morissons Income statement 2013 Turnover 18,116 Cost of sales -16,910 Gross profit 1,206 Other operating income 80 Administrative expenses -336 Losses arising on property transactions -1 Operating profit 949 Finance costs -75 Finance income 5 Profit before taxation 879 Taxation -232 Profit for the period attributable to the owners of the Company 647 Other comprehensive expense Actuarial loss arising in the pension scheme -6 Cash flow hedging movement -2 Tax in relation to components of other comprehensive expense -2 Other comprehensive expense for the period, net of tax -10 Total comprehensive income for the period attributable to the owners of the Company 637 Earnings per share (pence) – basic 26.65 – diluted 26.57 Morissons Balance Sheet 2013 Assets Non-current assets Goodwill and intangible assets 415 Property, plant and equipment 8616 Investment property 123 Investments 31 Other financial assets 0 9185 Current assets Stocks 781 Debtors 291 Other financial assets 5 Cash and cash equivalents 265 1342 Liabilities Current liabilities Creditors -2130 Other financial liabilities -55 Current tax liabilities -149 -2334 Non-current liabilities Other financial liabilities -2396 Deferred tax liabilities -471 Net pension liabilities -20 Provisions -76 -2963 5230 Net assets Shareholders’ equity 235 Called-up share capital 107 Share premium 37 Capital redemption reserve 2578 Merger reserve 2273 Retained earnings and hedging reserve 5230 Read More