Interpret Financial Statements: Calculate and Interpret Financial Ratios - Assignment Example

The current ratio of Sainsbury first increased and then decreased although it has increased at a compounded annual growth rate of 2.14% over the last three years. This means that the company has been able to increase its current assets for servicing its short-term liabilities. The quick ratio of Sainsbury has been found as (Current Assets-Inventory)/ Current Liabilities. The same trend is visible for the quick ratio of Sainsbury but the volume of inventory increased on an overall basis in the last three years.

The gross profit margin is calculated as (Gross Profit)/ Sales. The gross profits earned by Sainsbury in comparison to sales have decreased on a compounded annual rate basis over the last three years. The net profit margin has been calculated as Net Profit/ Sales. The net profits of Sainsbury have decreased in comparison to sales and revenues in the last three years at a compounded annual rate of 6.79%. The return on capital employed is = (Earnings before interest and tax)/ Capital employed.

The return achieved by Sainsbury from the investment of the capital funds has decreased at a compounded annual rate of 7.5% in the last three years. The return on equity is = Net Profits/ Equity. The return achieved by Sainsbury from the investment of equity capital of the company has decreased at a compounded annual rate of 4.73%. The debt-equity ratio is = Debt/ Equity. Sainsbury has increased its debt volume in comparison to the equity at a compounded annual growth rate of 4.44% to tap the investment opportunities in the last three years.

The earnings per share of Sainsbury have been computed as  Total earnings/ Total number of shares. The earnings of the shareholders of Sainsbury have decreased at a compounded annual rate of 2.62% in the last three years (Sainsbury Plc, 2014, p.1). Graphical comparison: Sainsbury and Morrisons The revenues earned by Sainsbury have been more than Morrisons over the last three years. The current ratio of Sainsbury has always been greater than Morrisons in the last three years as represented below in the graphical form.

The quick ratio of Sainsbury is more than Morrisons continuously which shows that the inventory concerning total current assets is more for Sainsbury as compared to Morrisons. Morrisons have, however, been able to earn higher gross profits and net profits in comparison to respective sales revenues over the last three years. This has been represented below in the next two graphs. The return on the capital employed by Morrisons which includes the average debt liabilities and equity has been more than Sainsbury's in the last three years.

The return on the equity capital of Sainsbury was slightly more than Morrisons in 2011. However, Morrisons has recovered to achieve a higher return on equity in the last two years. Sainsbury has maintained a continuously higher debt in proportion to equity in the last three years that have allowed them to tap investment opportunities and achieve higher earnings for the shareholders. This has been represented in the next two graphs given below. The rationale for the selection of Morrisons Morrisons has been selected for comparison with the business trends and financial performance of Sainsbury.

The rationale behind choosing the Morrisons is that both players operate in the same supermarket industry and have a worldwide business. Both companies belong to the FTSE market and are among the Fortune 500 companies. The comparison between the two big supermarket players helps provide insight into the trends of the supermarket industry. The changing position in the ranking of the big supermarket players could also be understood from this comparison. Recommendation Based on the above analysis, it could be recommended to accept Sainsbury as an audit client.

This is because the annual reports published by Sainsbury over the years have shown consistency in their business and financial performance. The risks due to liquidity problems, profitability, survival, and existence of the company seem to be minimal. This provides a positive signal in accepting Sainsbury as an audit client. There are, however, limitations in this analysis as it does not take into account the business risks due to interest rates exchange rates, and market fluctuations in the future. The acceptability of Sainsbury has been decided based on the assumptions that the growth trend of the company and the market would continue in the future.