About Sainsbury Plc
Sainsbury Plc is the second greatest supermarket chain in the UK with around a 16.0% share of the supermarket sector, and it was established in 1869 by John James Sainsbury. Thus, the company operates or functions through two segments contains: retail, is involved in food retailing, clothing, general merchandise, and financial services. Hence, the retail segment runs convenience and supermarkets. Whereas the segment of financial services includes the Sainsbury’s Bank operations, and on the other hand, its brand contains Argos, Nectar, Habitat, Tu, and Sainsbury Bank.
In addition, the company also offers a variety of locally-tailored services and products across food, seasonal, general, beauty, and clothing merchandise. It also proposes groceries under different categories, such as veg and fruit, fish and meat, beauty and health, pet, home, household, baby, drinks, chilled, bakery, food cupboard, and frozen. Moreover, it has around 1409 warehouses which contain 598 supermarkets & over 811 convenience warehouses. By the end of FY 2021, the company generated net revenue of around £29.048 billion and a net profit of around £ (280) million. It is registered on the LSE (London Stock Exchange) & is a constituent or voter of the FTSE 100 Index. The top-most competitors of Sainsbury Plc are Tesco, Morrisons, Aldi UK, and Associated British Foods.
The following SWOT Analysis of Sainsbury Plc are discussed and presented below:
- Sainsbury’s strategies adopted or accepted are innovative and may directly be fought against its competitors.
- Sainsbury maintains healthy relations with their clients on social media websites, and they always ask for frequent responses from them (Grimm and Blazovich 2016). Thus, they have lots of brand acquisitions.
- The Covid-19 pandemic has resulted in economic uncertainty & also caused a shortage in supplies. Sainsbury had to inflate the prices because of the cost increments, and as an outcome, the sales price was reduced to a huge extent (Ishibashi et al. 2016).
- The company has been suffering from huge financial net loss over the past two years, which ultimately causes a reduction in the annual net revenue and net income compared to the financial year 2020.
- The company had successfully ascertained a large network in the United Kingdom. It observes an amazing chance for the group to develop an additional net profit & new income streams & also expand into new product alternatives (Jackson 2021).
- An automated technology must be introduced as the company has to provide the client’s 24*7. Hence, this process will ultimately increase sales by creating the procedure simpler and more effective.
- The company has been grasped in various controversies like dairy price-fixing, ethical, and environmental issues. Thus, continuing such controversies would no longer take the group to be weak in the market.
- The legal rules and standards have generated a primary setback for the company’s modification in the regulatory frameworks & signifying regulations to an organization might have been a disadvantage for Sainsbury.
Profitability Ratios is a financial ratio that are utilized to measure the businesses’ ability or capability to create the earnings comparative to its net revenue, balance sheet assets, shareholder’s equity, and operating costs over time, utilizing data from a particular point in time. This metric is utilized and investors and analysts to evaluate and measure of the firm to create net income (TEXTS 2018). Sainsbury profitability ratio is determined by analysing the three major types of profitability ratios for the financial years 2021, 2020, and 2019.
On the basis of calculation that has been provided in the spreadsheet and appendix, it can be observed that the net profit margin of Sainsbury pertaining to 2021, 2020, and 2019 is calculated at -0.96%, 0.52%, and 0.75%. Thus, it can be observed that the company suffered from net loss in the current year, implying that the group was inefficient in generating net profit from its available net revenue (Firdaus and Endri 2020). Hence, the money that has been created from selling their services and products is not sufficient to meet the cost of selling or making those services and assets. From 2019, the company’s net profit margin was deteriorating and the primary reason may be because of the Covid-19 pandemic that has adversely affected the Sainsbury net sales and net profit.
Based on the calculation, the Sainsbury ROA for 2021, 2020, and 2019 is calculated at -1.11%, 0.54%, and 0.93%. Thus, it can be observed that the company does not able to utilize or acquire its assets considerably enough to create a profitable return in the current years as compared to previous years. However, the shareholders are losing value rather than gaining. This may be a bad sign for the managers and investors who will try to ignore a negative return as forcefully as possible (Williams and Dobelman 2017).
Products and Services
The Sainsbury ROE for the financial years 2021, 2020, and 2019 is calculated at -4.24%, 1.96%, and 2.59%. It can be seen that ROE is in negative which, hence it is obvious that the metric will be in negative because the company suffered from net loss in the current year. The group is suffering from the financial distress and it has not created any net profits from its available shareholders equity. On the other hand, there is no such increment in the company’s shareholders value as well. The primary reason behind this is that the company has more amount of liabilities than the equity and assets.
Liquidity ratio is another type of financial metric which is utilized to determine the company’s capability to cover its short-term debts (Dance and Imade 2019). The Sainsbury liquidity position is decided by analysing or reviewing the three different types of liquidity ratios for the financial years 2021, 2020, and 2019.
On the basis of financial calculation, the current ratio of Sainsbury was less than one from the past three years, implying that the company does not have sufficient liquid assets or cash to cover all of its short-term obligations. Hence, the current ratio pertaining to 2021, 2020, and 2019 is calculated at 0.60 times, 0.63 times, and 0.66 times. This might occur as the value of current assets does not exceeds the value of current liabilities. In addition, the company may face liquidity problems, although the firm cannot secure another form of financing (Zainudin and Hashim 2016).
On analysing quick ratio, it has been observed that the quick ratio was also less than one over the past three years, suggesting that the company does not have any liquid assets in order to clear its current debts and must be treated with care. Thus, the quick ratio for 2021, 2020, and 2019 is calculated at 0.46 times, 0.49 times, and 0.50 times. There is a marginal reduction in the metric, implying that the company’s current assets are heavily vary on the inventories (Benrqya and Jabbouri 2021). Lastly, the group has lower amount of liquid assets in comparison to current liabilities.
The cash ratio of Sainsbury for the financial year 2021, 2020, and 2019 stands at 0.13 times, 0.08 times, and 0.10 times. It can be noticed that there is slight increment in the metric but it is still less than one as there are more amount of current liabilities in comparison to cash & cash equivalents. Thus, it means that there is insufficient cash exists in order to pay off all the short-term debt. The company may improve its metric by controlling the costs of overhead expenses, and sell unnecessary assets.
Efficiency Ratios measures or evaluates the company’s ability or capability to utilize its assets in order to produce net income. This metric implies how efficiently the group is managing or handling its routine affairs. The Sainsbury operational efficiency position is determined or decided by analysing the three major types of efficiency ratios for FY 2021, 2020, and 2019. Hence, the following analysis and interpretation are mentioned and presented below:
Financial Performance
Based on the financial ratio calculation, the company’s inventory turnover ratio pertaining to 2021, 2020, and 2019 is calculated at 16.79 times, 15.58 times, and 14.00 times. Hence, it can be observed that there is a marginal increment in the metric, implying insufficient inventory and strong sales. Higher the metric, better the number is because it frequently implies a fervent net sale. In other words, the group is selling goods rapidly, and there is a significant demand for their products and services. This might happen because of the lower input costs and higher sales.
On analysing the receivable turnover ratio of Sainsbury, it can be observed that there is a considerable increment in 2021 to 40.07 times, as compared to previous year 2020 (35.75 times) and 2019 (43.88 times). Thus, it indicates that the company is more efficiently processing credit. However, the company is quite conservative with respect to extending credit to the customers and is aggressive or efficient with its prices of collection in the current year in comparison to 2020. Whereas, Sainsbury’s clients are of superior quality or it might run and operates on the cash basis.
The asset turnover ratio of the company increases marginally to 1.15 times in 2021 from 1.04 times (2020) and `.23 times (2019). Thus, it indicates that the company has generated more net revenue from its available total assets. In the current year, the company has tried to perform efficiently and it can also improve its metric by increasing net revenue, selling assets, computerizing order and inventory systems (Otekunrin et al. 2018). Moreover, Sainsbury has utilized its total assets efficiently in terms of generating net income. It is quite important for companies to manage their total assets & other resources to maintain their best operational infrastructure.
Solvency ratio refers to a metric which is utilized in measuring or assessing the enterprise’s capability to cover all the long-term debt implications and is utilized frequently by the potential business lenders (Kourtis, Kourtis and Curtis 2019). The overall financial leverage position is determined by analysing different types of ratios.
On analysing the debt ratio of Sainsbury, it has been noticed that there is a marginal increment in the metric to 73.75% in 2021 as compared to 2020. Initially, it has improved its financial leverage but due to covid-19 pandemic, the overall performance has deteriorated in the current year, implying that the company is having a greater number of debts in comparison to total assets. Hence, Sainsbury is extremely leveraged and are highly risky to the investor and a considerable portion of total assets is financed with debt and has higher financial risk.
Based on the calculation, the debt-to-equity ratio of the company pertaining to 2021, 2020, and 2019 is calculated at 281.01%, 259.41%, and 239.23%. Thus, it indicates that Sainsbury has financed a considerable proportion of its potential enlargement through borrowing and there is also a higher risk or financial leverage to the lender in the current year as compared to previous year (Robinson 2020). However, the level of potential risk or financial leverage is also high in 2021 due to a coronavirus a pandemic.
Top Competitors
The interest coverage ratio of Sainsbury decreases considerably to 0.26 times in 2021 as compared to 2020 (1.64 times) and (3.41 times). Over the past three years, the metric was decreasing significantly, implying that the group is burdened by the debt expenses and less amount of net capital has been utilized in another manner. However, Sainsbury cannot cover all of its interest payments as there is less net capital is available and the group is weaker to inflates its interest rates (Setiawan and Amboningtyas 2018).
As per the statement that has been mentioned in the assignment “Financial Ratios do not tell us why the numbers are altering. Analysis of the firm’s business context is necessary to comprehend why the numbers might be changing”. Yes, I agree with this statement as it is required to calculate the financial ratios in order to determine the financial performance of the company. However, financial ratio analysis includes financial data to evaluate the firm’s positions and make recommendations about how it might enhance going forward. But it also has certain limitations, hence the following are discussed and mentioned below:
- Ratio analysis is done by considering historic data only and as a result, it does not show effects of the price level and real economic values.
- In ratio analysis inflation factor is not taken into consideration.
- It is not considered a useful tool for comparing companies that belong to two different industries.
- Accounting practices are different.
- It is considered as a quantitative measure and not a qualitative measure.
- While performing ratio analysis audited financial statements are used.
- It fails to capture the impact of seasonality and at the same time impact of market, the condition is also not taken into consideration.
- It does not take into consideration contingent liability.
Furthermore, there are various another alternative approaches of the financial ratio analysis and the following are:
- Vertical analysis includes looking at different elements of an income statement and dividing them by net revenue in order to express them in percentage. Sometimes, this approach is also known as a “common-sized income statement”, because it enables an analyst to contrast companies of various sizes by measuring their margins.
- Horizontal analysis includes taking many years of data or information and comparing them in order to decide the growth rate. Thus, this would assist an analyst in determine if an organization is declining or growing, and recognize significant trends.
Conclusion
On the basis of above discussion, it can be concluded that financial ratio analysis has been utilized to examine the overall financial performance of the company. Whereas, financial ratio delivers considerable information to the users of an accounting information with respect to the business’s performance. It also assists in determining both the long-term solvency and liquidity of the company. Lastly, based on the analysis it is quite important for the company to enhance its profitability, solvency, and liquidity position.
References
Benrqya, Y. and Jabbouri, I., 2021. Performance evaluation of European grocery retailers: a financial statement analysis. International Journal of Logistics Economics and Globalisation, 9(1), pp.24-39.
Dance, M. and Imade, S., 2019. Financial ratio analysis in predicting financial conditions distress in indonesia stock exchange. Russian Journal of Agricultural and Socio-Economic Sciences, 86(2).
Firdaus, F. and Endri, E., 2020. Financial Statement Analysis: Evidence from Indonesian Bank BUKU IV. International Journal of Innovative Science and Research Technology, 5(4), pp.455-461.
Grimm, S.D. and Blazovich, J.L., 2016. Developing student competencies: An integrated approach to a financial statement analysis project. Journal of Accounting Education, 35, pp.69-101.
Ishibashi, K., Iwasaki, T., Otomasa, S. and Yada, K., 2016. Model selection for financial statement analysis: Variable selection with data mining technique. Procedia Computer Science, 96, pp.1681-1690.
Jackson, A.B., 2021. Financial statement analysis: a review and current issues. China Finance Review International.
Kourtis, E., Kourtis, G. and Curtis, P., 2019. An integrated financial ratio analysis as a navigation compass through the fraudulent reporting conundrum: a case study.
Otekunrin, A.O., Nwanji, T.I., Olowookere, J.K., Egbide, B.C., Fakile, S.A., Lawal, A.I., Ajayi, S.A., Falaye, A.J. and Eluyela, F.D., 2018. Financial ratio analysis and market price of share of selected quoted agriculture and agro-allied firms in Nigeria afteradoption of international financial reporting standard. The Journal of Social Sciences Research, 4(12), pp.736-744.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Setiawan, H. and Amboningtyas, D., 2018. Financial Ratio Analysis For Predicting Financial Distress Conditions (Study on Telecommunication Companies Listed In Indonesia Stock Exchange Period 2010-2016). Journal of Management, 4(4).
TEXTS, I.A., 2018. Financial statement analysis. Instructor.
Williams, E.E. and Dobelman, J., 2017. Financial statement analysis. Quantitative Financial Analytics. London: World Scientific, pp.109-69.
Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting and Accounting
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