Corporate Management and Finance - Essay Example

?Corporate Management & Finance- Assessment Element 2 Table of Contents Overview 4 Financial Position 4 Key Financial Indicator: 4 Financial Ratio: 5Financial Statement Analysis 7 Liquidity Analysis 8 Solvency Analysis 9 Sainsbury’s 15 Business Objectives 15 Forecasts and Strategic Plan: 15 Strengths 15 Weakness 16 Opportunities 16 Threats 16 TESCO 17 Business Objectives 17 Forecast and Strategic Plan 17 Strengths 18 Weakness 18 Opportunities 18 Threats 18 Morrison’s 19 Business Objectives 19 Strengths 19 Weakness 19 Opportunities 19 Threats 19 Investment Recommendations: 19 References 21 Overview This report is intended to provide potential investors with a financial analysis and insight of the corporate management strategies on three supermarket chains of UK, namely, Sainsbury, Morrison and Tesco. For the assessment of the financial viability of the retail chains, their five year annual reports would be analysed and the findings of the study would indicate the most viable investment. Financial Position Key Financial Indicator: This part of the report includes some key financial performance indicators for the three-retail giant of UK. This three company shares almost 72% of UK retail market share. Looking at the size of the company it is very important for management to identify the key financial performance indicator for their organisation. Sales Growth This is one of the major performance indicator for most of the companies particularly companies within retail sector. These companies are serving consumers by providing their basic and luxury items. Sales growth indicates company’s current position in the market as compare to its peer group. Since UK retail market is almost an oligopoly market it can be easily evaluate the performance and efficiency of the management of these three companies. Operating Profit Operating profit is another appropriate performance measurement indicator. Since these companies are largely utilising their fixed asset and labor, it is very important for this companies to maintain their operating cost efficiently. High labour cost or operating expenses can lead to a humongous loss to any firm and its shareholders. Financial Ratio: Any investors or potential investors generally analyse the financial ratios of a company before making an investment on it as they properly indicate the current position of the company. At the same time, these financial ratios are important from manager’s point of view also to assess their performance. While creditors also look at those ratios before giving any loan to the company. Precisely speaking everybody analyse the ratios before involving with any organisation. Ratios like ROE, EPS, and Dividend Payout are the most relevant from investor’s point of view as they are specifically indicate return generate by a company using invested capital. Whereas leverage ratios, efficiency ratio, operating or net profit depending on business (in retail industry operating) are of more interest to managers. While creditors i.e. lenders are more interested to see the efficiency and cash conversion ratios of a particular firm. Accordingly the below explained ratios are very important for retail industry. Operating Profit Margin: This indicates the operating profit as a percentage of sales. OPM signifies firm’s capability of generating profit from its operating activities. Generally, higher operating profit creates some tremendous investment opportunities for both investors and lenders. Total Asset Turnover: The ratio is an appropriate indicator of the fact that how efficiently and effectively company is utilising their assets to generate revenue. This ratio is very important for a retail company as they posse’s lots of fixed assets. The higher asset turnover signifies higher asset utilisation. This ratio is a good indicator of management efficiency. Higher asset turnover implies efficient management team. Current Ratio: This ratio is very important from retail industry point of view as it indicates the liquidity position of the company. Higher current ratio is better for the company as it implies that the company will be able to sustain at immediate liquidity crash. Very high current ratio indicates either management’s inefficiency in using cash or very less bargaining power. Return on Equity: This ratio is very much important from investor’s point of view. Every investor wants their desired returns from the investment they made on the company. This ratio provides an absolute idea about what is the past return trend of the company. This is important as based on the return it generated most of the investors invest on a particular company. Higher ROE implies that the company is generating net high profit. Dividend Yield Ratio: Another important ratio from investor’s point of view is dividend payout ratio. An investor is always wants a certain part of the profit generate by the organisation. Organisation pays dividend, which is a part of company’s net profit to the shareholder. This ratio indicates that dividend paid by the company as compare to the current market value of the company. Higher dividend yield attracts more number of investors. Debt to Equity Ratio: This ratio is the indicator of how company is financing its project. Precisely, how company is raising capital and at what proportion. Ideally, any company should finance their project with 70% debt and 30% equity. Higher debt to equity ratio can lead to a bankruptcy whereas low debt to equity ratio dilutes profit percentage. Financial Statement Analysis The analysis of the financial statements of an organization helps one to examine its financial performance and well-being. The financial statements of a company can be assessed with the help of ratio analysis, so as to evaluate the company’s position in terms of liquidity, profitability, and solvency among others. This section of the paper would focus on the analysis of last five years’ financial statements of Sainsbury, Tesco and Morrison. The financial statement analysis would comprise of liquidity analysis, profitability analysis, long-term debt and solvency analysis in addition to the analysis of the operating as well as the investing activities of three UK based retail companies. Liquidity Analysis The liquidity position of a company can be assessed with the help of its current ratio, quick ratio and cash ratio. These ratios determine the organization’s capability to fulfil their short-term liabilities. The current ratio can be computed as the ratio of the current assets to the current liabilities of the company, while the quick ratio is calculated as the quick assets divided by the current liabilities. In this context, the quick asset of an organization comprises of its cash, receivables and short term marketable investments. On the other hand, cash ratio is calculated by dividing the sum of cash and short term marketable investments by the current liabilities (Brigham & Ehrhardt, 2010). The liquidity ratios of Tesco for the past five years have been computed as follows:     TESCO       Year 2011 2010 2009 2008 2007 Current Ratio 0.67 0.73 0.77 0.61 0.51             Quick Ratio 0.49 0.56 0.61 0.38 0.38             Cash Ratio 0.11 0.18 0.20 0.17 0.13 The liquidity ratios of Sainsbury for the past five years have been computed as follows:     Sainsbury       Year 2011 2010 2009 2008 2007 Current Ratio 0.58 0.66 0.54 0.65 0.70             Quick Ratio 0.31 0.41 0.30 0.39 0.49             Cash Ratio 0.18 0.31 0.21 0.27 0.41 The liquidity ratios of Morrison for the past five years have been computed as follows:     Morrison       Year 2011 2010 2009 2008 2007 Current Ratio 0.55 0.51 0.53 0.49 0.40             Quick Ratio 0.24 0.24 0.28 0.25 0.21             Cash Ratio 0.11 0.11 0.16 0.10 0.12 (Bloomberg Businessweek, 2012; Morrisons, 2008; Tesco, 2007; J Sainsbury Plc, 2007). The liquidity ratios of Tesco have decreased in the year 2011 as against that of 2010, however, it had increased in the prior years. A similar trend can be observed for Sainsbury as well. On the other hand, the liquidity ratios of Morrison have risen over the period. However, Tesco’s latest liquidity ratios are significantly higher than that of both Sainsbury and Morrison. This indicates that Tesco holds a higher percentage of current assets and cash as compared to its current liabilities. In other words, it can be said that Sainsbury and Morrison are comparatively less competent than Tesco in the context of meeting its near-term obligations. Solvency Analysis The solvency position of an organization can be measured by means of its long-term debt ratios, such as the debt to equity, debt to capital, and the interest coverage ratios. These ratios assess the ability of the firm to meet its long-term commitments. The debt to equity ratio of a firm is computed by dividing its total debt by its total shareholders’ equity, while its debt to capital ratio is derived by dividing its total debt by the sum of its shareholders’ equity and its total debt. The interest coverage of a company is calculated as the ratio of its earnings before interest and tax (EBIT) and its interest payables (Brigham & Ehrhardt, 2010). The solvency ratios of Tesco are as follows: Year 2011 2010 2009 2008 2007 Debt to Equity 0.61 0.83 1.18 0.61 0.54 Debt to Capital 0.38 0.45 0.54 0.38 0.35 Interest Coverage Ratio 7.33 5.91 7.27 10.60 10.63 The solvency ratios of Sainsbury are as follows: Year 2011 2010 2009 2008 2007 Debt to Equity 0.42 0.46 0.50 0.43 0.57 Debt to Capital 0.30 0.32 0.33 0.30 0.36 Interest Coverage Ratio 7.34 6.13 4.94 4.56 4.33 The solvency ratios of Morrison are as follows: Year 2011 2010 2009 2008 2007 Debt to Equity 0.19 0.25 0.23 0.19 0.26 Debt to Capital 0.16 0.20 0.19 0.16 0.21 Interest Coverage Ratio 26.03 17.96 15.59 14.93 14.59 (Bloomberg Businessweek, 2012; Morrisons, 2008; Tesco, 2007; J Sainsbury Plc, 2007). The debt ratios of the companies depict that their solvency position have deteriorated in the past years. The comparative analysis of the three retail companies reveals that the Tesco is in a more comfortable position in terms of long-term solvency. However, Morrison’s ability to pay its interest on debt is significantly higher than the other two companies. Profitability Analysis The analysis of a firm’s capacity to produce cost-effective sales by means of its resources can be determined with the help of the profitability ratios. These ratios consist of the operating profit margin, the net profit margin in addition to the returns on equity and assets of the company. The operating profit margin of a firm is the ratio of its operating income to revenue, while net profit margin is the ratio of net income to revenue. On the other hand, return on equity (ROE) is the value of net income as a percentage of total shareholders’ equity while the return on asset is the value of net income as a percentage of total assets (Brigham & Ehrhardt, 2010). The profitability ratios of Tesco from 2007 to 2011 have been computed as follows: Year 2011 2010 2009 2008 2007 Operating profit margin 5.59% 5.51% 5.39% 5.60% 6.21% Net profit margin 4.36% 4.09% 3.96% 4.49% 4.45% ROE 15.97% 15.85% 16.53% 17.85% 18.08% ROA 5.62% 5.06% 4.68% 7.04% 7.78% The profitability ratios of Sainsbury from 2007 to 2011 have been computed as follows: Year 2011 2010 2009 2008 2007 Operating profit margin 4.03% 3.44% 3.69% 3.27% 3.03% Net profit margin 3.03% 2.93% 1.53% 1.84% 1.89% ROE 11.80% 11.78% 6.60% 6.67% 7.45% ROA 5.61% 5.39% 2.88% 3.25% 3.38% The profitability ratios of Morrison from 2007 to 2011 have been computed as follows: Year 2011 2010 2009 2008 2007 Operating profit margin 5.53% 5.24% 4.72% 4.72% 3.39% Net profit margin 3.84% 3.88% 3.17% 4.27% 1.99% ROE 11.66% 12.08% 10.18% 12.65% 6.32% ROA 6.91% 6.83% 5.59% 7.26% 3.37% (Bloomberg Businessweek, 2012; Morrisons, 2008; Tesco, 2007; J Sainsbury Plc, 2007). The profit margins as well as the returns generated from its assets and equity have consistently improved for all the three companies. Furthermore, Tesco had generated significantly higher returns on equity and net profit margin than the other two. This implies that Tesco has been able to utilize its assets and equity optimally to generate superior returns throughout the years. Operating Activity Analysis In order to assess the company’s competence in its day-to-day activities, for instance inventory management and receivable collection, ratios like the inventory turnover, payable turnover, working capital turnover, and cash conversion turnover among others are used. The relevant ratios for Tesco from 2007 to 2011 have been computed as follows: Year 2011 2010 2009 2008 2007 Inventory Turnover 19.27 20.85 20.19 19.46 39.52 Receivables Turnover 12.57 14.34 11.07 46.42 39.52 Payables turnover 10.54 11.19 10.98 12.02 7.05 Working capital Turnover -10.39 -13.39 -13.09 -11.93 -10.70 The relevant ratios for Sainsbury from 2007 to 2011 have been computed as follows: Year 2011 2010 2009 2008 2007 Inventory Turnover 25.99 28.44 27.45 26.19 29.07 Receivables Turnover 87.56 116.07 138.04 155.10 87.06 Payables turnover 11.49 11.20 10.94 10.47 7.57 Working capital Turnover -17.28 -21.24 -14.02 -19.18 -21.28 The relevant ratios for Morrison from 2007 to 2011 have been computed as follows: Year 2011 2010 2009 2008 2007 Inventory Turnover 25.83 26.71 29.41 29.34 33.86 Receivables Turnover 76.65 98.78 80.71 65.17 82.53 Payables turnover 11.77 11.41 10.07 7.72 8.30 Working capital Turnover -17.38 -14.54 -15.16 -13.69 -11.28 (Bloomberg Businessweek, 2012; Morrisons, 2008; Tesco, 2007; J Sainsbury Plc, 2007). Investment Activity Analysis The long-term investment position of a company can be determined with ratios like the net fixed asset turnover, total asset turnover and the equity turnover. The computation of the turnover ratios for Tesco has been shown below: Year 2011 2010 2009 2008 2007 Net Fixed Asset Turnover 2.50 2.35 2.33 2.39 2.51 Total asset turnover 1.29 1.24 1.18 1.57 1.75 Equity Turnover 3.67 3.88 4.18 3.97 4.06 The computation of the turnover ratios for Sainsbury has been shown below: Year 2011 2010 2009 2008 2007 Net Fixed Asset Turnover 2.40 2.43 2.42 2.40 2.39 Total asset turnover 1.85 1.84 1.88 1.76 1.79 Equity Turnover 3.89 4.02 4.32 3.61 3.94 The computation of the turnover ratios for Morrison has been shown below: Year 2011 2010 2009 2008 2007 Net Fixed Asset Turnover 2.18 2.07 2.21 2.09 2.04 Total asset turnover 1.80 1.76 1.77 1.70 1.69 Equity Turnover 3.04 3.11 3.21 2.96 3.17 (Bloomberg Businessweek, 2012; Morrisons, 2008; Tesco, 2007; J Sainsbury Plc, 2007). These ratios determine how well a company had been able to utilize its assets and equity. It can be inferred from the turnover ratios of three companies that all the three had managed its assets and equity equally well and their performance in this context have remained almost steady over the years. Sainsbury’s Business Objectives Founded in the year 1869, Sainsbury’s was the brain child and business venture of one London based John James Sainsbury and Mary Ann Sainsbury. As of today, it has grown in size on an exponential manner and had become one of the biggest retailers doing business in the U.K. At today’s date, it has a total of 934 stores, which includes 557 supermarket and a host of convenience stores counting 377 in number. It is also the co-owner of Sainsbury’s Bank along with Lloyd’s Banking Group (Sainsbury plc, 2012). Besides that, it has also owns property joint ventures with The British Land Company PLC and Land Securities Group PLC. What started off as a small retail store on London’s Drury Lane around the year 1969, Sainsbury’s has developed a huge history behind him over the years. Sainsbury’s follows a simple passion of offering great food at fair prices to its consumers and this has been treated as one of the reasons for their success. By the year 2020, they have a target of sourcing all necessary raw materials and commodities in a sustainable manner. Forecasts and Strategic Plan: Sainsbury is focused to provide healthy, safe, fresh and tasty food at fair prices. The chain continues to operate on five areas, which makes the chain differentiate itself from the retailers. The chain’s current focus plan is on: Growing space and creating property value Providing great food to the consumers Compelling general merchandising and clothing Developing new business channels Providing complimentary channels and services. Strengths Sainsbury’s has won numerous awards in the industry for its superior product quality over the past few years. Some of the awards comprises of fresh produce retailer of the year, honest food award and even wine retailer of the year . So it has clearly maintained industry standards and gained recognition in the industry The chain has made considerable amount of effort in order to modernize the brand by integrating technology at the point of sales (POS). Has tie ups with Nectar, a loyalty programme with an active user base of over 11 million. The chain has got high points on a regular basis in the industry’s most respected basket survey. Weakness Their strategy is very puzzling at times. At times, they are targeting to appeal to mass markets which may result in tempting to go on an acquisition spree and then landing up with failed takeovers. Yet to recover the leading position of being the most preferred retailer in the UK region from the rival leading retailers. Opportunities Sainsbury’s ranking as an UK based online grocery provider is strengthened with higher sales on a year on year basis. With the increase in internet usage among the consumers, this segment can provide more sales to the retail chain. The addition of floor space in all new and existing stores for introducing the chain’s new health, beauty and household line of products will benefit the chain in the upcoming days and may provide greater share of revenue. Threats Sainsbury’s is less committed to reinvest the capital generated in the business. This can spell danger for the chain as Tesco who is a stronger competitor in this segment is more focused on committing a large amount of capital for maintaining their long term growth oriented strategy. Have high reservations in establishing the brand of Sainsbury’s overseas and in foreign locations, which provides them with a disadvantage of being unknown in foreign markets. ASDA, which is backed by America based Wal Mart’s huge resources is growing pretty fast over the years and pose a serious competition in the market. TESCO Business Objectives Tesco was founded in the year 1919 in the East End of London by Jack Cohen. Since that time, the company has come a long way and as of today, it has operations on a global scale with footprints in 14 markets across Asia, North America and Europe. Tesco also provides financial services, which was founded in the year 1997. Tesco main aim is to create values for customers and earning loyalty of a lifetime. Forecast and Strategic Plan The chain follows a seven segmented strategy which aims to widen the business scope and deliver sustainable results in the long term. The seven segmented plan is highlighted below: To grow in the UK market Focus on being a good performer as an international retailers in stores and online as well Developing strength similar to the food segment in every business segment the chain is into. Focus on growing retail services in all markets To be responsible to the society for their services Focus on creating highly valued brands Building teams with the main objective to create value. Strengths One of the major retailers in the UK, which by posting high sales growth is able to strengthen their market position and dominance. With its strong financial reserves, the chain is highly dedicated to maintain a growth in the market and is strongly reinvesting capital in the business Has been accredited as an international organization and has strong presence in the online territory through its own website, Tesco.com Tesco loyalty club program has active memberships of over 10 million customers Weakness Tesco’s liquidity is highly overstretched in comparison with its competitors, which means the top management needs to use the available finances in a better manners than the current scenario. There are some tremendous deficiencies in Tesco’s online shopping module. Selected outlets are available for accepting, picking up and dispatching goods ordered online. As a matter of fact, it is very much evident that there is no or very little guarantee for availability of product. Opportunities Tesco’s ambitious acquisition moves for other small time retailers. Focusing on developing markets in Southeast countries like China and India, which in today’s date has become the hotcake in the global arena for international companies to go for market development. Threats Focus on too many areas can actually lead to downgrade in organization’s performance. Focusing too much on southeast markets like China and India can take the focus off the UK market. Morrison’s Business Objectives The chain was first established in the year 1899 by an egg and butter merchant named William Morrison in Bradford Market. The company has grown to become the fourth largest retail food chain with a store count of over 400. The company’s goal is to become the most preferred retailer for customers who prefer other retail chains to shop at. Strengths Fourth largest food retailer in UK (Morrison’s, 2012). Have good ideas for store formatting Weakness Smaller in size as compared to rivals Have low ability to sustain tough retail market conditions Opportunities Merger of Safeway with the chain will provide visibility to the brand Safeway’s merger will help them to go for competitive marketing Threats Switching of customers to other retail chains. Investment Recommendations: Last 4 years financial analysis indicates that all the chains are maintaining good profitability margins. At present, Tesco is dominating the sector with the maximum net profit margin. So as a recommendation, Tesco should be the better choice, focusing on the fact that it may provide better returns in future. Judging in terms of Return on Equity (ROE), which determines the net income generated in respect of amounts invested in the business by shareholders, it can be said that both Tesco and Sainsbury are good options to invest, if we look at the data from the last 5 years. Though on a further note, it can also be said that the tendency of investment should be more on Tesco as it has a comparatively higher return on equity as compared to Sainsbury. References Brigham, E. F., & Ehrhardt, M. C., 2010. Financial Management Theory and Practice. USA: Cengage Learning. Morrisons, 2008. Annual Report and financial statements 2008. Available at [Accessed 12 Apr. 2012] Tesco, 2007. Annual Report and financial statements 2007. Available at [Accessed 12 Apr. 2012] J Sainsbury Plc, 2007. Annual Report and financial statements 2007. Available at [Accessed 12 Apr. 2012] Bloomberg Businessweek, 2012. Tesco Plc. Available at [Accessed 12 Apr. 2012] Bloomberg Businessweek, 2012. Sainsbury (J) Plc. Available at [Accessed 12 Apr. 2012] Bloomberg Businessweek, 2012. Wm Morrison Supermarkets. Available at [Accessed 12 Apr. 2012] J Sainsbury Plc, 2012. About Us. Available at [Accessed 12 Apr. 2012] Morrisons, 2012. About Us. Available at [Accessed 12 Apr. 2012]. Read More