Interpretation of the Financial Statements of J Sainsbury Plc - Example

Interpretation of the financial ments of J Sainsbury plc Table of Contents Introduction 3 Main Sources of Revenue 3 Cash inflows and outflows 4 Vertical analysis of financial statement 5 Horizontal analysis of financial statement 6 Financial statement analysis and interpretation of the ratios of J. Sainsbury plc 7 The following table highlights the ratios of J Sainsbury: 7 Analysis for the investors including investor ratio 8 Critical evaluation of the financial performance of J Sainsbury plc. 8 Limitations of the analysis 9 Conclusion 9 Reference list 10 Appendix 11 Introduction The largest chain of supermarkets in the United Kingdom is Sainsbury’s with a share of 16.9% in supermarket sector (J Sainsbury plc, 2015a). Sainsbury’s Supermarkets Ltd, Sainsbury’s Bank and Sainsbury’s Convenience Stores Ltd are the three divisions or the holding companies of the parent company J Sainsbury plc. In the year 1869 it was founded by Mary Ann Sainsbury and her husband John James Sainsbury in London (J Sainsbury plc, 2015c). The vision of the company is to be the most trustworthy retailer where individuals love to work and shop. The goal of the company is to offer superior quality of goods and services at reasonable prices, making the lives of customers’ easier serving them round the clock. The strategy of the company is to know their customers better than anyone else and serve them with best products and services (J Sainsbury plc, 2015b). There are 1,200 supermarkets and convenience stores of J Sainsbury along with an online common merchandise and grocery business (J Sainsbury plc, 2015a). Sainsbury’s Bank offers a number of insurance products and a range of quality banking services. The ordinary share of J Sainsbury’s are listed on the London Stock Exchange in the form of American Depositary Receipts. The shares are traded Over-The-Counter in US securities market. Each ADR is represented by 4 underlying J Sainsbury plc ordinary shares. Major shareholders of the company are Qatar Holding LLC and Lord Sainsbury of Turville (J Sainsbury plc, 2015e).Top of Form Main Sources of Revenue Its business is segregeted into three major segments: Retailing, financial services and Property investments (J Sainsbury plc, 2015f). The main sources of revenue consists of sales through retail outlets and Sainsbury’s bank comprising of fees, commissions and interest receivable excluding value added tax (J Sainsbury plc, 2015f). Sources of revenue for the year ended 15 March 2014 Retailing (£m) Financial services (£m) Group (£m) Segment revenue: Retail sales to final customers Financial services to final customers 23,921 - - 25 23,921 25 Underlying revenue 23,921 25 23,946 Fair value (acquisition adjustment) - 3 3 Revenue 23,921 28 23,949 Cash inflows and outflows For the year ended 15 March 2014, the cash flow statement of J Sainsbury plc indicates that the net cash generated from operating activities and investing activities were £939m, £426m respectively and net cash used in financing activities was £290m (J Sainsbury plc, 2015f). It is inferred from the cash flow statement of J Sainsbury plc that in 2014, there has been a decrease in the cash generated from operating activities which was £981m in the year 2013 where there has been a net increase in cash flow generated from investing and financing activities (J Sainsbury plc, 2015f).Bottom of Form Vertical analysis of financial statement In vertical analysis of an income statement the individual components are presented as a percentage of sales (Rich, et al., 2012). Vertical analysis of the income statement of J Sainsbury plc for the year ended 15 March 2014: 2014 2013 Amount (£m) Percent Amount (£m) Percent Revenue 23949 100 23303 100 Cost of goods sold 22562 94.21 22026 94.52 Gross profit 1387 5.79 1277 5.48 Administrative expenses 444 1.85 462 1.98 Other income 66 0.28 67 0.29 Operating profit 1009 4.21 882 3.78 Finance income 20 0.08 19 0.08 Finance costs 159 0.66 153 0.66 Share of post-tax profit from joint ventures and associates 28 0.12 24 0.10 Profit before taxation 898 3.75 772 3.31 Income tax expense 182 0.76 170 0.73 Profit for the financial year 716 2.99 602 2.58  From the vertical analysis of income statement of J Sainsbury, it is inferred that the profitability position of the company has improved with comparison to sales generated in 2014 than in 2013 (J Sainsbury plc, 2015f). Horizontal analysis of financial statement A trend analysis of the financial statement where a comparison is made between the components of the income statement over two or more years is known as horizontal analysis (Nikolai, Bazley and Jefferson, 2009).  Comparative Income Statement for the year ended 15 March 2014 and 2013 (horizontal analysis) Increase or decrease 2014 (£) 2013 (£) Amt. (£) Percent (%) Revenue 23949 23303 646 2.77 Cost of goods sold 22562 22026 536 2.43 Gross profit 1387 1277 110 8.61 Administrative expenses 444 462 -18 -3.90 Other income 66 67 -1 -1.49 Operating profit 1009 882 127 14.40 Finance income 20 19 1 5.26 Finance costs 159 153 6 3.92 Share of post-tax profit from joint ventures and associates 28 24 4 16.67 Profit before taxation 898 772 126 16.32 Income tax expense 182 170 12 7.06 Profit for the financial year 716 602 114 18.94  The horizontal analysis of income statement of J Sainsbury shows that the profitability position of the company has improved in 2014 compared to 2013 as the company has been able to reduce its administrative expenses (J Sainsbury plc, 2015f). Financial statement analysis and interpretation of the ratios of J. Sainsbury plc The following table highlights the ratios of J Sainsbury: Financial Statement analysis for the year ended 15 March 2014 and 2013 2014 (£m) 2013 (£m) Liquidity ratios Current ratio 0.64 0.61 Quick ratio 0.50 0.29 Cash ratio 0.24 0.17 Investor ratios EPS (diluted) 36.9 31.5 DPS 16.9 16.4 Profitability ratios Gross profit ratio 5.79 5.48 Net profit ratio 2.99 2.58 Operating profit ratio 4.21 3.78 Administrative expense ratio 1.85 1.98 Return on Shareholders fund 11.93 10.31 Return on long-term investment 32.66 31.12  The following results are obtained from the interpretation of the above mentioned ratios: Liquidity ratios As a conventional rule, a current ratio of 2:1 or more is considered satisfactory (Downes and Goodman, 2003). From the above comparison of current ratio for the years 2014 and 2013 of J Sainsbury which are 0.64 and 0.61 respectively, it is inferred that the company is having lesser amount of current assets in relation to current liabilities and its ability to meet the current obligations is faint. A quick ratio of 1:1 is considered to represent a satisfactory current financial condition (Sheeba, 2011). In this case, J Sainsbury is having a quick ratio of 0.50 and 0.29 for the years 2014 and 2013 respectively. The cash ratio of the company reflects that the company has improved its cash position in the year 2014 (J Sainsbury plc, 2015f). Profitability ratios From the profitability ratios, it is inferred that the company has improved in its profitability position increasing the return on shareholders’ fund and long-term investments. All the profitability ratios portray an increase in their values in 2014 when compared to 2013. The group sales increased by 2.77% as the company maintained of 16.8% market share in spite of strong presence of the other competitors in the retail sector (J Sainsbury plc, 2015f). Analysis for the investors including investor ratio The shares of J Sainsbury appear attractive for the investors as the company’s underlying profit before tax was up by 5.3 percent to £798 million and basic EPS rose 6.5% to 32.8 pence (J Sainsbury plc, 2015d). Return on capital employed increased by 19 basis points, year on year to 11.3 percent. For the year 2014, the board recommended a final dividend of 12.3 pence per share and 17.3 pence full year dividend, an increase of 3.6 per cent over the preceding year. The group posted a net increase in the sales position by 2.77% in 2014 (J Sainsbury plc, 2015f). Critical evaluation of the financial performance of J Sainsbury plc. Though the company is having a sound profitability position, the liquidity position is not satisfactory as the company is having higher amount of current liabilities than current assets. In 2014, the current liabilities of J Sainsbury are £6765m, whereas, current assets are £4362m portraying a negative working capital (J Sainsbury plc, 2015f). In order to gain a sound liquidity position, the company needs to reduce the current liabilities outstanding in its balance sheet in the form of trade creditors and amounts outstanding to Sainsbury bank customers. Limitations of the analysis The analysis indicates the financial performance of the company which is quantitative information about its financial affairs but it fails to provide qualitative information such as management labour relations, management skills and customer satisfaction which are equally essential for decision making. Conclusion Analysis of financial statement of J Sainsbury indicates that the company is having a sound financial position in terms of profitability, but the liquidity position is not satisfactory. As the economy recovers, the company is expected to grow its market share improving its liquidity position. Reference list Downes, J. and Goodman, J., 2003. Finance and investment handbook. New York: Barron’s Educational Series, Inc. J Sainsbury plc, 2015a. About Us. [online] Available at: [Accessed 20 June 2015]. J Sainsbury plc, 2015b. Business Strategy And Objectives. [online] Available at: [Accessed 20 June 2015]. J Sainsbury plc, 2015c. Business Structure. [online] Available at: [Accessed 20 June 2015]. J Sainsbury plc, 2015d. Financial Performance. [online] Available at: [Accessed 20 June 2015]. J Sainsbury plc, 2015e. Major Shareholders. [online] Available at: < http://www.j-sainsbury.co.uk/investor-centre/share-price/major-shareholders/> [Accessed 20 June 2015]. J Sainsbury plc, 2015f. Annual Report. [online] Available at: [Accessed 20 June 2015]. Nikolai, L., Bazley, J. and Jefferson, J., 2009. Intermediate accounting. Mason: South-Western Cengage Learning. Rich, J., Jones, J., Mowen, M. and Hansen, D., 2012. Cornerstones of financial accounting. Mason: South-Western Cengage Learning Sheeba, K., 2011. Financial management. Navi Mumbai: Dorling Kindersley (India) Pvt. Ltd. Appendix Read More