Financial Ratios Analysis of Sainsbury Company - Report Example

Financial Analysis Introduction Financial analysis is an essential financial function since it helps an investor in measuring theability of an organization in maximizing his wealth by investing his capital. Consequently, a financial analysis for Sainsbury Company has been conducted using it 2013 financial results to understand it financial performance and position. In undertaking the financial analysis, financial ratios have been employed to measure the liquidity, profitability, efficiency and solvency positions of the organization. In addition, the analysis has been conducted through comparative analysis approach with one of the firm’s competitor in the market namely Wm Morrison Supermarkets. This has the potential of helping to understand how the firm performs compared with its peers in the industry. Financial Ratios Analysis The liquidity ratios computed in the appendix attached reflect the ability of the firm in servicing it current financial obligations using it current financial assets (Peterson & Fabozzi, 2012). Consequently, the ability of the firm in meeting its current financial obligations has been measured using current ration and quick ratio. The current ratio imply that Sainsbury posses £0.61 for every one pound it owes to short-term creditors. Similarly, the quick ratio reflects that the organization possess £0.29 of immediate current assets for every one pound it owes to current creditors. Thus, the organization is financially constrained in meeting current financial obligations using it current assets it has lower current assets and immediate to compensate for the current financial obligations when they fall due (Bagad, 2010). This has the potential of denying the organization the opportunity to access short-term financial credit since the suppliers will fear the organization may default servicing it financial obligations when they fall due. On the other hand, Wm Morrison Supermarket current ratio reflect the organization possess £0.57 of current assets for every one pound it owes current credit providers. Similarly, the quick ratio reflect that the organization possess £0.24 of immediate assets for every one pound it owes to short-term credit providers (Gibson, 2012). Consequently, the firm faces difficulty is servicing current financial obligations using current assets and immediate assets. This has potential of hindering the organization from accessing current financial support in the market due to high potential of defaulting financial obligations when they fall due (Gibson, 2012). Consequently, the liquidity of the two firms is constrained due to poor current ratios and quick ratios. However, the comparative analysis reveals that Sainsbury has a better liquidity strength compared to Wm Morrison Supermarkets. This is due to a higher current ration and quick ratio compared to that of Wm Morrison Supermarket. Thus, Sainsbury Company is in a better position to access short-term financial support to run it operations smoothly compared to Wm Morrison Supermarkets (Fridson & Alvarez, 2011). The profitability of the two firms under analysis has been conducted through net income margin ratio and return on equity (ROE) ratio. Net income margin ratio measures the ability of an organization to generate income from the sales revenue it generates while return on equity measures the ability of an organization in generating return to the common shareholders (Khan & Jain, 2010). The net income margin ratio reflects that the Sainsbury is able to retain 2.63% of the total sales revenue generated for the shareholders. In contrast, the net income margin ratio reflects that Wm Morrison Supermarkets retains 3.5% of the sales revenue it generates for the shareholders. Consequently, Wm Morrison Supermarkets is more profitable compared to Sainsbury due to the higher sales revenue it retains from its operations to be distributed to the shareholders. Similarly, the return on equity reflects that equity shareholders of Sainsbury should expect a return of 10.71% from their capital investment. In contrast, the ROE ratio reflects that shareholders of Wm Morrison Supermarkets should expect a return of 12.18% of their capital investment. Consequently, WM Morrison Supermarket has a better potential of maximizing the wealth of the investors compared to Sainsbury organization due its higher expected return to equity shareholders. This implies that rational investors should consider investing their capital in Wm Morrison Supermarkets compared to Sainsbury venture due to its higher potential of expanding their income (Brigham & Houston, 2009). Efficiency ratios have also, been used in comparing the financial performance of the two firms. Efficiency ratio measures the efficiency of the management in utilizing the resources of the organization to enhance financial position of the organization (Bagad, 2010). Consequently, the inventory turnover measures the efficiency of the firm in restocking inventories that are sold. The inventory turnover ratio reflects that Sainsbury restocks it inventories 23.61 times while Wm Morrison Supermarket restocks 23.2 times. This implies that the management of Sainsbury organization is more efficient compared to Morrison Supermarkets in making restocks. In addition, the days’ sales turnover ratio reflects that Sainsbury sells it inventories within 15.46 days while Morrison Supermarkets takes 15.73 days (Fridson & Alvarez, 2011). Consequently, the management of Sainsbury is more efficient in managing inventory movement that is essential in generating revenue compared to Morrison Supermarkets. Similarly, the receivable turnover ratio reflects that Sainsbury management clears it receivable accounts by 613.24 times annually while Morrison Supermarkets takes 62.25 times. Furthermore, the average collection period ratio reflects that Sainsbury takes 0.6 days to collect its account receivables while Morrison Supermarkets takes 6 days (Fridson & Alvarez, 2011). This implies that Sainsbury management is more efficient is collecting it receivables timely compared to Morrison Supermarkets that is essential in enhancing the liquidity of the organization. Consequently, the management of Sainsbury is more efficient compared to Morrison Supermarkets in managing it resources to enhance the financial position of the organization. The solvency position of the organizations has been measured using the gearing ratios of debt ratio and equity ratio. Debt ratio and equity ratio measures the capital structure of an organization in financing acquisition of assets. In addition, the times earned interest ratio has been employed to measure the ability of the organization in servicing it interest expenses using earnings before interest and tax (Peterson & Fabozzi, 2012). The gearing ratio reflects that Sainsbury is financed by debt in acquiring by 54.83% while equity financing is 45.17%. In contrast, debt financing for Morrison Supermarkets is 50.32% while equity financing is 49.68%. This implies that Sainsbury is more indebted compared to Morrison Supermarkets due to it high debt ratio. Thus, the gearing ratio for Morrison Supermarkets is favorable in allowing the organization to access financial credit in the market compared to Sainsbury due to it lower debts (Bagad, 2010). Similarly, the times interest earned ratio reflects that Sainsbury can cover the interest expense by 6.55 times using earnings before interest and tax while Morrison Supermarkets has the capacity of 12.72 times. Consequently, Morrison has favorable financial position of accessing financial credit in the market compared to Sainsbury due to it high interest earned ratio (Khan & Jain, 2010). This has the potential of allowing Morrison Supermarkets to acquire financial credit at a lower interest rate due to its low default risk compared to Sainsbury Company. Consequently, Morrison Supermarkets has a better solvency position compared to Sainsbury Company (Peterson & Fabozzi, 2012). Conclusion The comparative financial analysis undertaken above reflects the financial position and performance in year 2013. Owing to the findings of the financial analysis using financial ratios, Morrison supermarket has better financial performance and position compared to Sainsbury Company. This is reflected by the profitability and gearing ratios that reflect Morrison Supermarkets performance and position is better compared to Sainsbury. Even though Sainsbury has a better liquidity and management efficient position compared to Morrison Firm, the ability of the firm in maximizing the wealth of the investors is highly influenced by profit generation and ability to access capital to finance future investment development. Consequently, Morrison Supermarket is relatively is a better financial position compared to Sainsbury Company. Reference Bagad, V. (2010). Managerial Economics And Financial Analysis. New York: Technical Publications. Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: South-Western Cengage Learning. Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioners guide. Hoboken, N.J: Wiley. Gibson, C. H. (2012). Financial Reporting and Analysis. Boston: South-Western Pub. Khan, M. Y., & Jain, P. K. (2010). Financial management. New Delhi: McGraw-Hill. Peterson, D. P., & Fabozzi, F. J. (2012). Analysis of financial statements. Hoboken, New Jersey: John Wiley & Sons. Appendix Financial ratios Sainsbury Wm Morrison Supermarkets Liquidity ratios Current ratio = current assets/current liabilities 1,901/3,115 = 0.61 1,342/2,334 = 0.57 Quick ratio = current assets-inventory/current liabilities (1,901-987)/3,115 = 0.29 (1,342-781)/2,334 = 0.24 Profitability ratios Net income margin ratio = net income/ sales revenue 614/23,303*100 = 2.63% 637/18,116*100 = 3.51% Return on equity (ROE) = net income/ shareholders’ equity 614/5,734*100 = 10.71% 637/5,230*100 = 12.18% Efficiency Ratios Inventory turnover = net sales/ inventory 23,303/987 = 23.61 18,116/781 = 23.2 Days’ sales turnover = 365/inventory turnover 365/23.61 = 15.46 days 365/23.2 = 15.73 Receivable turnover = net sales/ accounts receivable 23,303/38 = 613.24 times 18,116/291 = 62.25 Average collection period = 365/receivable turnover 365/613 = 0.6 days 365/62.25 = 6 days Gearing Ratios Debt ratio = total liabilities/ total assets 6961/12,695*100 = 54.83% 5297/10527*100 = 50.32% Equity ratio = total equity/ total assets 5,734/12,695*100 = 45.17% 5,230/10527*100 = 49.68% Times interest earned = EBIT/ interest expense (788+ 142)/ 142 = 6.55 times (879+ 75)/ 75 = 12.72 times Read More