Gross Working Capital of Sainsbury
Sainsbury is mainly considered a general merchandise company, which is situated in London and has been operating in the country since 1869. In addition, the company has mainly increased its overall number of stores to 6,553 (Sainsburys.co.uk, 2017). Sainsbury has mainly been considered the second market leader in the UK, where it held’s maximum of the market share in retail and merchandise business. Currently, the financial environment of Sainsbury and other merchandise industry are relatively positive, as it is generating higher revenue from the investment. This increased financial environment has mainly allowed the organisation to increase the overall income, which has raised its financial stability over the fiscal period. However, the current financial condition of the company has mainly stabilised over the period of fiscal years, where its revenue has increased adequately for supporting its net profits margin.
|
Gross working capital |
Year 2016 |
|
Inventories |
968,000,000 |
|
Trade and other receivables |
508,000,000 |
|
Amounts due from Sainsbury’s Bank customers |
1,695,000,000 |
|
Available-for-sale financial assets |
48,000,000 |
|
Derivative financial instruments |
51,000,000 |
|
Cash and bank balances |
1,143,000,000 |
|
Gross working capital |
4,413,000,000 |
Table 1: Depicting The Gross Working Capital of Sainsbury for 2016
(Source: Sainsburys.co.uk, 2017)
|
Net Working Capital |
Year 2016 |
|
Current assets |
4,413,000,000 |
|
Current liabilities |
6,720,000,000 |
|
Net working capital |
(2,307,000,000) |
Table 2: Depicting the net working capital of Sainsbury for 2016
(Source: Sainsburys.co.uk, 2017)
The above table 1 and 2, mainly depicts the relevant networking capital and gross working capital of Sainsbury for the year 2016. The working capital is negative, which depicts the loss accumulation of adequate current assets, which is been conducted by the company. However, the rising liabilities have reduced its ability to smoothly function and make an adequate return on the investment. Mathuva (2015) mentioned that investors by evaluating the overall working capital condition of an organisation are able to detect its financial condition and capital blockage, which might hamper its future growth.
|
Working capital |
Amount |
Time |
Amount |
|
Current assets |
|||
|
Inventories |
968,000,000 |
0.25 |
242,000,000.00 |
|
Trade and other receivables |
508,000,000 |
0.33 |
169,333,333.33 |
|
Amounts due from Sainsbury’s Bank customers |
1,695,000,000 |
0.08 |
141,250,000.00 |
|
Available-for-sale financial assets |
48,000,000 |
0.08 |
4,000,000.00 |
|
Derivative financial instruments |
51,000,000 |
0.08 |
4,250,000.00 |
|
Cash and bank balances |
1,143,000,000 |
0.08 |
95,250,000.00 |
|
Total Current Assets |
656,083,333.33 |
||
|
Current Liabilities |
|||
|
Trade and other payables |
3,077,000,000 |
0.25 |
769,250,000.00 |
|
Amounts due to Sainsbury’s Bank customers and banks |
3,173,000,000 |
0.08 |
264,416,666.67 |
|
Borrowings |
223,000,000 |
0.08 |
18,583,333.33 |
|
Derivative financial instruments |
43,000,000 |
0.08 |
3,583,333.33 |
|
Taxes payable |
158,000,000 |
0.08 |
13,166,666.67 |
|
Provisions |
46,000,000 |
0.08 |
3,833,333.33 |
|
1,072,833,333.33 |
|||
|
Working capital |
(416,750,000.00) |
Profitability Ratio:
Figure 1: Depicting the profitability ratio of Sainsbury from 2012 to 2016
(Source: As created by the author)
From the evaluation of figure 1, profitability ratio of Sainsbury could be identified, which depicts its current financial position. In addition, the overall Gross profit margin of the company has mainly increased in the five-year term, where it incremented from 5.43% to 6.19%. However, the overall revenue of the company declined in 2016 as compared to 2015. This only indicates the adequate measures, which is taken by the organisation to minimise its cost of capital. Bodie (2013) argued that profitability ratio does not allow investors to adequately identify the financial position, as it focuses only on the profits that are obtained by the organisation. On the other hand, Atoom, Malkawi & Al Share (2017) mentioned that profitability ratios mainly allow investors to identify the trend in revenue, gross profit, and net profit obtained by an organisation, which is essential in making investment decisions.
Net Working Capital of Sainsbury
Furthermore, net profit margin of the company has declined from 2.68% in 2012 to 2% in 2016, which is only conducted due to the high administrative cost incurred during the fiscal years. However, from 2015 to 2016 the company’s overall profitability mainly increased by 2.7%, as in 2015 the company incurred or net profit margin of minus -0.70%. This only indicates that with adequate measures Sainsbury has attained financial stability, which has reduced the overall losses incurred in the previous fiscal year (Delen, Kuzey & Uyar, 2013).
Liquidity Ratio:
Figure 2: Depicting the Liquidity ratio of Sainsbury from 2012 to 2016
(Source: As created by the author)
With the help of figure 2, the financial stability and liquidity of Sainsbury could be identified, which has relevantly increased from 2012 to 2016. The overall current ratio of the company may be increased from 0.65 in 2012 to 0.66 in 2016, which only states the improving financial stability of the organisation. Sainsbury has mainly focused on reducing the current liabilities, by increasing its overall current assets, which could be identified from the figures incurred in 2013 to 2015. The company’s overall current ratio did not increase from 0.64, whereas in 2016 it reached 0.66. In this context, Buchman, Harris, & Liu (2016) mentioned that using the liquidity ratio mainly allows investors to identify the overall ability of the organisation to support its short-term liabilities by selling all its current assets. However, seeing the current ratio of Sainsbury, the company will not be able to pay its short-term loans, as it does not accumulate the adequate current assets against the current liability (Stockinger & Leitner-Hanetseder, 2014).
Sainsbury’s quick ratio has drastically inclined in the 5-year tenure, which is the indication that the companies have reduced is overall inventory accumulation and focused management’s decision on increasing its financial stability. However, recruiter issue is not adequate for Sainsbury, as it does not omit all the current liabilities of the organisation. This only indicates that the company needs more assets, which could support its short-term liabilities in long run (Schonbohm, 2013).
Solvency/Gearing Analysis:
Figure 3: Depicting the Solvency/Gearing analysis of Sainsbury from 2012 to 2016
(Source: As created by the author)
According to figure 3, overall solvency and bearing analysis of Sainsbury could be conducted, which depicts the financial position of the company. Debt to equity ratio and interest cover ratio is mainly used in this section, which helps in deriving the solvency condition of the organisation. The debt to equity ratio has mainly improved from 63.51% in 2012 to 61.02% in 2016, which only depicts the adequate solvency condition of Sainsbury. However, the debt of the company increased to 73.57% in 2015, which drastically increased its financing cost and hampered net profitability. Lakshmi, Martin & Venkatesan (2016) stated that debt equity ratio mainly allowed investors to go out into the solvency condition of an organisation, as increasing debt would also raise the financing cost and reduce its overall financial condition.
Working Capital of Sainsbury
However, the overall interest cover ratio or scenes very are mainly declined from 6.33 in 2012 to 4.23 in 2016, which indicate the reduced capacity of the organisation to attain more loans to support its activities. This reduced interest cover ratio only portrays the increasing loan accumulation that is been conducted by Sainsbury and past fiscal years (Erdogan, 2014). Nevertheless, the company’s earnings before interest and tax have also declined due to the reduction in revenue generation capacity during 2015 and 2016.
|
Investment |
$ 1,000,000 |
||||
|
Year |
6 years |
||||
|
Cost of capital |
11% |
||||
|
Year |
Cash inflow |
Cumulative Inflow |
Discounting rate |
Discounted cash flow |
Cumulative Inflow |
|
0 |
$ (1,000,000) |
$ (1,000,000) |
1.00 |
$ (1,000,000.00) |
$ (1,000,000) |
|
1 |
$ 200,000 |
$ (800,000) |
0.90 |
$ 180,180.18 |
$ (819,820) |
|
2 |
$ 300,000 |
$ (500,000) |
0.81 |
$ 243,486.73 |
$ (576,333) |
|
3 |
$ 400,000 |
$ (100,000) |
0.73 |
$ 292,476.55 |
$ (283,857) |
|
4 |
$ 450,000 |
$ 350,000 |
0.66 |
$ 296,428.94 |
$ 12,572 |
|
5 |
$ 500,000 |
$ 850,000 |
0.59 |
$ 296,725.66 |
$ 309,298 |
|
6 |
$ 400,000 |
$ 1,250,000 |
0.53 |
$ 213,856.33 |
$ 523,154 |
|
Payback period |
3.22 years |
||||
|
Discounted Payback Period |
3.96 years |
||||
|
Accounting rate of return |
37.50% |
||||
|
Net present value |
$ 523,154.40 |
||||
|
Internal rate of return |
25.37% |
||||
|
Profitability Index |
1.52 |
Conclusion:
After the overall evaluation of the financial position of Sainsbury, its financial stability if identified. The evaluation of ratios mainly helped in identifying the financial stability of Sainsbury from 2012 to 2016. The company’s profitability ratio has mainly Incline adequately, while the net profit margin has declined in comparison to 2012. This is due to the rising administrative expenses which are incurred by Sainsbury for smoothly conducting its operations. Both the current ratio and quick ratio is gradually improved from 2012 to 2016, while it is still not at support its current liabilities, which in turn reduces its ability to smoothly conduct its operations. The solvency/ gearing analysis mainly indicate the financial stability of the organisation. Nevertheless, the overall interest cover ratio of Sainsbury has declined rapidly due to the high financial cost and net profitability by the company. Whereas the debt-equity ratio has adequately improved, this has enabled the company to reduce its debt in comparison to its equity. Therefore, it could be understood that financial stability of Sainsbury has gradually increased, which might allow investors to get a high return on investment.
Reference and Bibliography:
Atoom, R., Malkawi, E., & Al Share, B. (2017). Utilizing Australian Shareholders’ Association (ASA): Fifteen Top Financial Ratios to Evaluate Jordanian Banks’ Performance. Journal of Applied Finance and Banking, 7(1), 119.
Bodie, Z. (2013). Investments. McGraw-Hill.
Buchman, T. A., Harris, P., & Liu, M. (2016). GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Erdogan, A. I. (2014). Applying factor analysis on the financial ratios of Turkey’s top 500 industrial enterprises.
Lakshmi, T. M., Martin, A., & Venkatesan, V. P. (2016). A genetic bankrupt ratio analysis tool using a genetic algorithm to identify influencing financial ratios. IEEE Transactions on Evolutionary Computation, 20(1), 38-51.
Mathuva, D. (2015). The Influence of working capital management components on corporate profitability.
Nezlobin, A., Rajan, M. V., & Reichelstein, S. (2014). Capital Investments and Financial Ratios (No. 3052).
Pech, C. O. T., Noguera, M., & White, S. (2015). Financial ratios used by equity analysts in Mexico and stock returns. Contaduría y Administración, 60(3), 578-592.
Sainsburys.co.uk.(2017). About.sainsburys.co.uk. Retrieved 12 July 2017, from https://www.about.sainsburys.co.uk/investors/results-reports-and-presentations/archive/2012
Schönbohm, A. (2013). Performance measurement and management with financial ratios: the BASF SE case (No. 72). Working Papers of the Institute of Management Berlin at the Berlin School of Economics and Law (HWR Berlin).
Stockinger, M., & Leitner-Hanetseder, S. (2014, January). What Impact does the Application of IFRS 11 have on (European) Companies? An Empirical Study of the Impacts on Selected Financial Statement Figures and Key Financial Ratios. In Global Conference on Business & Finance Proceedings(Vol. 9, No. 1, p. 208). Institute for Business & Finance Research.
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