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Analyzing and Interpreting Financial Cost

1. Abstract

Financial statement of Sainsbury’s for 2010 and 2011 has been evaluated using profitability, gearing, liquidity, interest coverage, operating and business performance ratio. Moreover, through ratio analysis, it is found that Sainsbury’s Plc is less competent in managing its cost of goods sold while a high rate of cost of goods sold causes lower revenue for the company. Similarly, the company’s ability to pay short-term financial obligation is also weak, which has been recommended to improve in future.    

2. Introduction

Sainsbury’s Plc, which is the parent company of the Sainsbury’s, is the third largest supermarket in the United Kingdom. In 210, the company’s market share has been 16%, which has increased to 16.6% from 16.3% only a year earlier (Anon., 2011). Considering the significant rise of the Sainsbury’s Plc in the UK retail and grocery market, this assignment paper aims to analyze the financial performance of the company along with comparison with industry and other benchmark to offer dissertation writing service.   

3. Evaluation of Financial Performance of Sainsbury’s Plc

To evaluate the financial performance of the Sainsbury’s for year 2010 and 2011, six financial ratios are selected namely profitability, gearing, liquidity, interest coverage, operating ratio, and business performance ratio of the company.

2.1 Profitability Ratio Analysis

Profitability ratio is a measure, which shows the performance of a company in relation to its profit. Thus, students are assigned essay writing on the ratio analysis, but only an expert essay writing service provider can help the students. The aim of measuring the profitability ratio is to provide the insight of the company for generating revenue for profit (Brentani, 2004, p.156). There are four different ratios used to analyze the profitability of a company, but for analyzing the Sainsbury’s profitability, gross profit margin ratio will be analyzed. 

Gross Profit Margin

Gross profit margin is calculated using the following formula:

2.2 Gearing Ratio Analysis

Gearing ratio analysis focuses on the measurement of the proportion of assets invested and is financed by long-term borrowing (Minaxi, 2011, p.99). In order to analyze the gearing ratio, debt and equity is measured with calculating current liability, non-current liability and shareholder equity.

Debt/Equity Ratio

Debt/equity ratio is calculated using the following formula:

For Year 2010

2.3 Liquidity Ratio Analysis

Liquidity ratio analysis is a financial measure, which show

s the ability of the company to pay its short-term debts (Pardina et al., 2008, p.136). There are two types of ratio used to analyze liquidity ratio, and for Sainsbury’s, current ratio will be calculated.

Current Ratio Analysis

Current ratio analysis for Sainsbury’s is calculated using the following formula:

2.4 Interest Converge Ratio Analysis

Interest coverage ratio is a measure, which is calculated to analyze company’s ability to pay interest on outstanding debt (Bhattacharyya, 2010, p.105).

2.5 Operating Ratio

Operating ratio is a measure, which is calculated to analyze the company’s operating efficiency in terms of generating revenue (Minaxi, 2011, p.45). The formula used for calculating operating ratio analysis is as follows:

2.6 Performance of the Business Ratio Analysis

Performance of the business ratio analysis is a measure, which is calculated to analyze the overall performance of the company (Brentani, 2004, p.102). To calculate whether a company is performing well, asset turnover and inventory turnover analysis are made. In this paper, inventory turnover ratio will be calculated, which will be helpful in analyzing the efficiency of company in managing and selling its inventory. 

Inventory Turnover Ratio Analysis

The formula used for calculating the inventory turnover ratio is as follows:

4. Ratio Analysis for Sainsbury’s Plc  

This section of the paper analyzes the financial performance of the Sainsbury’s and points out the strengths and weaknesses of the company based on the findings of calculated ratio. Moreover, it is further compared with the industry benchmark and other competitors.

3.1 Profitability Ratio 

Since the higher gross profit margin shows that company is better earning profit, and able to manage the down market conditions, therefore, low gross profit margin of Sainsbury’s shows that company is not making a reasonable profit on sales and it has less source for paying its additional expenses. It is observed that company’s gross profit margin for year 2010 and 2011 is 5.42% and 5.50% respectively, whereas gross profit margin of supermarket and grocery industry is 26.6% in 2010. This comparison of gross profit margin with the industry benchmark indicates the Sainsbury’s as vulnerable to face downtrends in future because it has 5% left over on each sale.

3.2 Gearing Ratio

Since the higher gearing ratio shows that company is not managing its debt and at risk because of aggressive financing (Thomas& Gup, 2010, p.212), therefore, from the ratio calculation of Sainsbury’s, it can be observed that debt-equity ratio of the company is 1.18 and 1.

10 in 2010 and 2011 respectively. Thus, it can be stated that company is managing its leverage efficiently therefore, in 2011, debt-equity is reduced to 1.10 from 1.18. If this ratio is compared with the industry benchmark, it can be observed that the company is better performing because debt-to-equity worth of supermarket and grocery industry was 2.3 in 2010 (Anon., 2011).

3.3 Liquidity Ratio

Since higher current ratio of a firm shows that the company is safe for its long-term financial obligations and able to pay its short-term financial obligations, therefore, the lower current ratio of the Sainsbury’s indicates that company is not able to pay its short-term obligations, as current ratio of the company for 2010 and 2011 is 0.64 and 0.58.

3.4 Interest Coverage Ratio

Since the lower interest coverage ratio indicates that the company is under the obligation of paying debts, therefore, the higher interest coverage ratio of Sainsbury’s indicates that the company could make the interest payments on its debt along with the earnings before interest and taxes. The efficiency of company to make the interest payment on its debt can be strength of the company, because company has less burden of debts.

3.5 Operating Ratio

Since the lower operating ratio shows that, the company is efficiently managing its operating cost and operating profit. Therefore, the lower operating ratio of the Sainsbury’s for year 2010 and 2011 indicates that company is managing its operating cost for earning operating profit.

3.6 Business Performance Ratio

Since the higher inventory turnover indicates that the company is efficiently managing as well as selling its inventories, therefore high inventory turnover of Sainsbury’s shows that company is managing and selling its inventories very well, as company’s inventory turnover for year 2010 was 28.43, which reduced in 2011 to 25.98. In addition, if compare this ratio with the industry benchmark, it is observed that in 2010, the inventory turnover trend in supermarket and grocery was 15.0, which shows that company is well in managing and selling its inventories than market trends.   

Based on the above findings and discussion, the Sainsbury’s can be recommended to focus on its weaknesses, which are identified and highlighted in this paper. The major recommendation for the company is to improve its revenue and reduce the cost of goods sold, because the revenue of the company against the cost of goods sold is lower and cost of goods sold is higher. In addition, company should also focus on the payment of short-term liability because liquidity ratio of the company is observed as lower, which means that the company is vulnerable to pay its short-term debts and obligations.

9/15/2017 6:37:47 PM
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