Performance Evaluation Of Sainsbury’s Analysis Essay Example

to Martin et al. (2005), the current ratio evaluates a company's liquidity by comparing its liquid assets to its short-term debts. Similarly, the quick ratio is calculated in the same way but excludes inventory value from current assets. Maintaining control over inventory is crucial for sustaining profitability in conglomerates within the retail sector. The current and quick ratios for 2009, 2008, and 2007 are as follows: 0.54, 0.61, 0.70 and 0.30, 0.34, 0.51 respectively.

These figures show that the company has enough current assets to cover each pound of short-term liability, but the liquidity has decreased in the recent year. The working capital for 2009, 2008, and 2007 has been negative, indicating that the company's current liabilities exceed its current assets. The annual report of 2009 mentions that new short-term financing was arranged through two revolving credit facilities. The first facility is due in May 2011 with an amount of 163m, and the second facility is due in February 2012.

The company's objective is to preserve working capital through cash trade and improving stock days. Sainsbury's observed stock turnovers (days) of 14.07, 14.76, and 13.48 in the years 2009, 2008, and 2007 respectively. The company has consistently witnessed a rise in revenue over the past five years, prompting them to prioritize enhancing profit margin and other profitability measures.

Sainsbury's revenue increased from ?1.72 billion in 2007 to ?1.89 billion—a rise of 9.9%—in 2009. However, gross profit declined by 11.6% while operating profit saw a remarkable increase of 29.42% during this period due to the disproportionate growth between revenue and cost of sales.

The gross margin is the revenue left over after subtracting the direct cost of sales. Sainsbury's had

gross margins of 5.8, 5.62, and 6.83 in 2009, 2008, and 2007 respectively.

Operating profit is what remains after deducting indirect costs or overheads, and operating margin indicates the proportion of operating profit to total revenue. In 2009, the operating profit was slightly higher than the previous year at 3.56%.

The net profit is what remains after deducting expenses, and the net profit margin represents the proportion of net profit to total revenue.

The net profit margin for Sainsbury's in 2009, 2008, and 2007 was 1.3%, 1.84%, and 1.89% respectively. These figures were influenced by market conditions and competition from low-priced competitors.

Additionally, the graph showcases the company's Return on Capital Employed (ROCE) percentages for those years: 9.46% in 2009, 7.10% in 2008, and 7.59% in 2007.

It is worth noting that there was a significant increase in return on capital employed during the year of 2009.

By comparing these numbers with the market leader, TESCO, we can get a better understanding of Sainsbury's profitability. TESCO, a competitor in the same market as Sainsbury's, had impressive performance in 2009, 2008, and 2007. During that period, TESCO's revenue saw a substantial growth of 29.4%, going from ?42,641m to ?54,327m.

TESCO's Return on Capital Employed (ROCE) was 11.44%, 14.02%, and 15.90% in the mentioned years, while the gross margin and operating margins were 7.76%, 7.67%; 8.12%, and 5.9%, 5.9%; 6.2% for the above-mentioned years respectively. This section offers valuable information about TESCO's financial performance, which may be of interest to investors considering Sainsbury's plc.

These tools assess the level of risk associated with the money we invest. The debt ratio compares a company's total liability, both current and non-current, with its total asset. This indicates

the company's ability to repay its debts based on its available assets (Arnold 2005). Conversely, the gearing ratio indicates how a company finances its operations, either through its own funds or by borrowing externally. A high gearing ratio suggests that the company relies heavily on borrowed funds, raising concerns about its ability to fund its projects in case of any unforeseen circumstances.

The long-term risk measurement tool shows that Sainsbury's had a debt ratio of 56.38%, 51.21%, and 54.58% from 2007 to 2009. This means that the company has debts which make up the mentioned percentage of their total asset.

In addition, the company's gearing ratio for the years 2009, 2008, and 2007 are 38.49%, 33.87%, and 36.56% respectively. These percentages indicate that the company's long-term liabilities represent the mentioned percentage of their total amount of equity.

The company increased its number of acquired stores in the latest financial year to gain more market shares through yearly acquisitions. It is important for the company to maintain a well-balanced debt-to-equity ratio because high gearing can discourage potential investors due to associated risks. In 2009, TESCO had a debt ratio of 72.41% and a gearing ratio of 53.61%, indicating significant leverage. However, long-term capital is crucial for expansion and acquiring new businesses in this industry. Moreover, TESCO has demonstrated its ability to meet its debt obligations promptly thanks to substantial daily cash flow.

The finance strategy for the Group is outlined in the 2009 annual report, where the Chief Finance Officer states that they handle financing requirements by pre-funding cash flow needs and dealing with maturing debt obligations. They also maintain various funding sources, including fixed, floating, and inflation-linked borrowings. Furthermore,

debt repayments are spread out over different maturity periods. The efficiency of a company's management can be assessed based on the return on assets or return on equity they generate. In 2009, Sainsbury's recorded a return on assets of 2.87%, while in 2008 it was 3.34% and in 2007 it stood at 2.9%.

Sainsbury's calculates its returns on equity by dividing the income after tax by the total amount of assets. In 2009, 2008, and 2007, Sainsbury's had returns on equity of 6.6%, 6.67%, and 7.47% respectively.

In terms of dividends, Sainsbury's pays them twice a year to its shareholders. The dividend amounts paid in 2009, 2008, and 2007 were 218m, 178m, and 140m respectively.

In 2009, there were 436 million outstanding shares. The dividend per share was 13.2p and the earning per share was 22.1p. The payout ratio, calculated by dividing the dividend per share by EPS, was 59.73%. This ratio remained consistently high from 2007 to 2009, with a payout ratio of 63.33% in 2007 and 61.22% in 2008.

Sainsbury’s plc has a long-term policy for dividend cover, aiming to maintain it between 1.5 to 1.75. In line with this policy, the company's dividend cover was 1.7, 1.63, and 1.51 in 2009, 2008, and 2007 respectively.

The company's 'Employee Share Ownership Plan' trust holds 9.65 million shares with a face value of 283/7 pence.

Sainsbury's has a policy called the DRIP - Dividend reinvestment policy which allows shareholders to reinvest their dividends through purchasing new shares from the market via a special arrangement. In 2009, a total of 32,562 shareholders participated in this policy. Additionally, there are various factors that can influence the company's decision regarding acquiring or restructuring

its financial strategies. Sainsbury's prioritizes maintaining the smooth operation of its business and strives for long-term sustainability by conducting regular risk assessment and management.

The company identifies the following risks as highly significant: act of terrorism risk, business strategy risk, economic and market risk, environmental and sustainability risk, financial strategy and treasury risk, fraud, IT system and infrastructure risk. In a challenging market and economic environment, companies must continuously adjust their strategies based on demand and appropriate actions. Given the abundance of market information available, it is difficult to attain a substantial profit margin in this fiercely competitive market. To achieve a 50% increase in revenue over the next three years, Sainsbury's should explore opportunities in foreign markets. TESCO, the leading competitor in the market has already expanded globally and currently operates across various countries.