Ratio Analysis Sainsburys Vs Morrisons Finance Essay

Ratio Analysis Sainsburys Vs Morrisons Finance EssayWhen considered as a whole, the grocery market in the UK hassteadily growingin coat, organism about 4biggertoday than it has beena grade ago August 2012 update 12 weeks ending July 8, 2012 harvest rate slows from 4.2% to 2.1% repayable to a greater extent than often than not to a drop in price inflation 6.2% to 3.8%.Morrisons is growing more slowly then Sainsburys the company is on track to add approx. 20 parvenue storesin 2012with most of those locations featuring alarger selection of produce. The UK grocery market was cost 163.2 billion in 2012, an increase of 3.8% on 2011, IGD forecast that the UK grocery market value will be worth 192.6bn in 2017, an 18.0% increase on 2012. The grocery markets package accounts for 54.3p in all(prenominal) 1 of UK retail spending.What is the size of the UK grocery market Source IGD UK channel forecasts 20121.2 The Companies1.2.1 SainsburysJ Sainsbury plc. is the parent company of Sains burys Supermarkets Ltd, commonly known as Sainsburys, the third largest chain of supermarkets in the get together Kingdom with a share of the UK supermarket sector of 16.5%. The group also has interests in property and banking. It was founded in 1869 and today operates over 1,000 supermarkets and convenience stores and employs around 150,000 colleagues. It is listed on the groovy of the United Kingdom Stock Exchange and is a constituent of the FTSE atomic number 6 Index.1.2.2 MorrisonsThe supermarket, which generated gross gross sales of 18.1 billion in the year, said it had not done enough to communicate its promotions and suffered because it still lacked a meaningful presence in the ii fastest growing sectors of the market. Morrisons is the UKs fourth largest forage retailer with over 400 stores. The super market is mainly food and grocery weekly shop. Morrisons employs 129,000 staff at 498 stores. Their reports show that like-for-like sales dropped 2.1% in the year, whil e the add up of 11.4 million customers in its stores each week was down on the prior year.2. adapt Ratio Analysis2.1 Gearing RatiosGearing Ratios (%)Company/ division20122011Sainsbury31.7330.13Morrison22.8616.25Source appendix 1SainsburysA gearing between 25% 50% is generally considered nominal for an established business. It implies that Sainsbury is happy to finance its activities using borrowing. Sainsbury focuses more on investment in revenue growth rather than simoleons as the company increased sales revenue and non- meetd assets but suffered a loss in 2012.MorrisonsThe business is considered low gearing as its gearing is little(prenominal) than 25%. The business is growing through with(predicate) reinvestment of profits and minimizing risk. However, in 2012, in that location is an increase in gearing from 16.25% in 2011 to 22.86% and this is mainly because the business increased pertinacious-run borrowings by 548m and reduced retained cabbage and shared capital.2. 2 use up Cover RatioInterest Cover RatioCompany/Year20122011Sainsbury6.047.40Morrsion20.5920.62Source Appendix 2SainsburysThe ratio indicates that the borrowing capital is used effectively to generate profits and that the business is able to meet its short-term interest obligations from its earnings. Sainsbury is growing, making worthwhile investments to continue to expand.MorrisonsThe ratio suggests that Morrison is generating enough income to remain its interest obligations and is thus financially stable. However, such a high ratio also suggests that Morrison is neglecting opportunities to magnify profits through leverage.3. LIQUIDITY RATIO ANALYSIS3.1 CURRENT RATIOCOMPANY/ division20112012SAINSBURY.580.647MORRISON.545.574Source Appendix 3SainsburysSainsburys true assets are considerably urbane than the current liabilities in both the years as Sainsbury has invested a lot in fixed assets as well as in subsidiaries and joint ventures. Sainsbury is obliged to stomach a l ot of money as a part of tax and also in generating its assets so the indebtedness is therefore more than the assets. For every 1pound liability they take only 64.7 pence worth of asset to height it.MorrisonsMorrison current ratio is smaller than the current ratio of Sainsbury which indicates that Sainsbury is doing slightly better than Morrison in the market. Morrison current liabilities is more than the current assets due to more of borrowing that involves short term loans, investment in fixed assets and payment of tax. For every 1pound liability they realize only 57.4 worth of asset to cover it.3.2 ACID TEST RATIOCOMPANY/YEAR20112012SAINSBURY.304.348MORRISON.239.247Source Appendix 4SainsburysThe acid test ratio is very less as Sainsbury, being a retail store, is highly dependent on sale of inventory. As acid test ratio of Sainsbury is .348 that is less than 1 it nub that Sainsbury cannot pay their current liabilities.MorrisonsLike Sainsburys, Morrison also being highly depen dent on inventories, acid ratio is expected to be less. Morrisons acid ratio is .247, which is less than 1, meaning Morrison cannot pay their current liabilities. It would be only able to generate 24.7 % cash of its current liabilities.Both the companies fails in extinguishing its current liabilities but this is not due to their market position or growth but just due to the nature of the business (retail).4. PROFITABILITY RATIO ANALYSIS4.1 Return on Capital Employed (ROCE)Return on Capital EmployedCo./Year20122011Sainsburys10.11 %11.06 %Morrisons13.83 %13.70 %(Source Appendix 5 )SainsburysROCE growth in 2012 was subvert than last year partly due to the cumulative effect of Sainsburys accelerated investment in space growth since 2009 (Sainsburys, 2011). This initially shrank profits whilst increasing the value of capital employed.MorrisonsMorrisons delivered improved returns to its shareholders. For every 1 capital invested in the business, the annual return is 13.83 pence in 2012 and was 13.70 pence in 2011. This profitability ratio of Morrison is moderately high than Sainsburys, hence Morrisons is able to gain more profit on average capital employed.4.2 Return on virtue (ROE)Return on rectitudeCo./Year20122011Sainsburys10.62 %11.79 %Morrisons12.78 %11.66 %(Source Appendix 6)SainsburysSainsburys Return on Equity in 2012 has decreased by 1.17 % compared to 2011 due to decline in shareholder gold. In 2011, they performed slightly better than Morrisons as they had better reserves and share capital and the cabbage after Tax (PAT) was significantly lower than Morrisons.MorrisonsMorrisons ROE has significantly improved over d last fewer years and continue to background high values. In 2012, they showed a 1.12% increase in ROE compared to 2011 and had a 12.78 % shareholder equity. The shareholders invested a lot which resulted in higher(prenominal) returns.4.3 Gross Profit bankGross Profit MarginCo./Year20122011Sainsburys5.43 %5.49 %Morrisons6.89 %6.96 %( Source Appendix 7)SainsburysA moderate decline in the ratio between 2011 and 2012 explains the fact that the gross profit was lower in relation to sales revenue. This means that cost of sales was higher relative to sales revenue within the period.MorrisonsMorrisons Gross Profit Margin is higher than Sainsburys as they had a lower sales revenue and moderate gross profit compared to the latter. In 2012, 6.89 % of the net sales are available to pay impinge on all the operating expenses.4.4 Net/Operating Profit MarginNet/Operating Profit MarginCo./Year20122011Sainsburys3.74 %4.07 %Morrisons5.48 %5.38 %(Source Appendix 8)SainsburysSainsbury accounted to lower Net Profit Margin than Morrisons because of falling sales and rising be. The market has a lot of competition where small groceries and convenience stores capture quite a bit of jibe UK food retail.MorrisonsMorrisons performed fairly well and showed significant increase in the operating profits from Sainsburys over the past year . It accounted 5.48 % Net Profit Margin in the current financial year (Sales Revenue 17663m). It is a result of superior execution and induction of higher margin products in their sales mix.Morrisons seems to be more advantageous than Sainsburys across all available profitability measures.5.0 Efficiency Ratios(Source of Data, Apendix 9, Financial Reports of Sainsburys and Morrisons)5.1 Fixed Assets TurnoverThis ratio shows how efficiently the company is using fixed assets to generate sales. downcast ratios indicate the company is capital intensive or that company requires a lot of fixed assets to generate a given amount of sales. (Gildersleeve, R. (1999) p.136).Efficiency RatiosYear/Comp.SainsburysMorrisons20112.40 times2.18 times20122.39 times2.22 timesSainsburysIn 2012 Sainsburys shows an increase in Sales Revenue for approx 1, degree centigrade m, which made its ratio slightly lower comparing to 2011. The ratio remained fairly similar because the value of fixed assets at net bo ok value increased as well. The reason for the increase in fixed assets could be explained by Sainsburys tendency for opening new stores. The financial report states that they opened 19 new supermarkets, 28 extensions, and 73 convenience stores, which are only to set out operating and contributing to sales.MorrisonsOn the other hand Morrisons managed to improve their ratio by obtaining similar value of their fixed assets from 2011 to 2012, and using them more efficiently to musical score an increase in sales revenue of 1, cytosinem. Generally looking at the industry the Average ratios for Retail Food companies are between 4-5 (Wal-Mart Stores USA 5.00), (Gildersleeve, R. (1999) p.136), so Sainsburys should aim to increase the use of their fixed assets in order to increase the sales.5.2 Average Inventories TurnoverShows how many days company had to stock goods for sale originally they were sold. In the retail-food industry this period should be kept fairly low because of the nat ure of the business. Lower ratio indicates that company will spend less funds towards stocking items before putting it on sale and getting profit from it.Average Inventories TurnoverYear /Comp.SainsburyMorrison201114.86 Days15.19 Days201215.85 Days16.85 DaysSainsburysSainsburys shows growth in the average of inventories held over the course of year by almost 100 m. As costs of sales have increased from 2011-2012, this ratio shows a slight growth in number of days goods are kept in stock. The increase of inventory in stock could be explained by Sainsburys growth of sales in 2012. Higher demand forces company to have more items in stock in order to satisfy the needs of the customers.MorrisonsMorrisons shows even higher growth in average days the goods are stocked. Morrisons also note the increase in cost of sales, even more than Sainsburys. The financial reports of Morrisons state a few reasons, among which increasingly higher prices of fuel on the market.5.3 Profit Per EmployeeProfit Per EmployeeYear/ Comp.SainsburyMorrison20115,572.78 per emp.6,617.50 per emp.20125,256.58 per emp.7,217.60 per emp.SainsburysIt is notable that companys profit has been reduced from 2011-2012 for 2.8 m, which is 3.4%, even though its sales have risen for 6.8%. This could be explained by the number of reasons, but one of them that is important for this ratio is that they have also increased the number of employees. This has negatively influenced their Profit per Employee ratio, go away it behind the industry average and Morrisons.MorrisonsUnlike Sainsburys, Morrisons notes the increase in profit and reduction of number of employees. This is the most desirable situation for a company. Their profit was higher for 8 % in 2012 than in 2011.5.4 Average Trade Debtor sight PeriodIt indicates the period of time which is needed for company to collect trade debts. This ratio reveals a great deal about a companys credit policy and the efficiency which it can collect money from its custo mers. (Fight, A. (2006) p. 57)).Average Trade Debtor Collection PeriodYear/Comp.SainsburyMorrison20111.61Days4.79 Days20121.90 Days4.34 DaysSainsburysSainsburys shows an increase in the average time that they needed to collect the trade dept. Even though their costs of sales remained fairly similar, there was a substantial increase in the amount of trade debt. Even though this negatively influenced the ratio, Sainsburys has made trades from which they expect to receive money in near future. Furthermore their ratio shows efficiency at collecting debts, comparing both to the industry and Morrisons.MorrisonsMorrisons have significantly higher average debt collection period. Even though they have managed to slightly decrease their Trade receivables from 2011-2012, their costs of sales increased by approx 1,000m which has not made it workable for this ratio to improve further.6. INVESTMENT RATIO ANALYSISFORMULAS* Eearning Per Shares = profit available to shareholders/ no. of shares rank ed for dividend* Dividend Yield= dividend per share/ market price * 100%*Dividend cover = Preference Dividend/Ordinary DividendSAINSBURYS MORRISONS2011 2012 2011 2012(%) (%)EARNING PER SHARE33.831.523.4326.03DIVIDEND YIELD15.1016.19.6010.70DIVIDEND COVER1.751.752.402.396.1 EARNING PER SHARE YEARSainsburysIn 2011 Sainsburys experienced a sharp increase in earnings per share going up by 33.8%. And in 2012 the Sainsbury went down with 31.5% having a loss of 2.3%. It is important that assets are revaluated in order to keep the real value of assets on balance sheet. Earnings per share in 2011 increased by 2.3% to 33.8 p, reflecting the improvement in the operating profit and the effect of the additional shares, more importantly due to the property profits.MorrisonsMorrisons earnings per share compared to Sainsburys are lower. This is driven by smaller profit and the fact that Morrisons is a smaller sized supermarket chain. The earning per share has 23.43% at 2011 mainly caused by the hig her profits on business disposals that the company went through last year, so the return to shareholders was a lower rate per share.6.2 DIVIDEND YIELD YEARSainsburysThe dividend yield had a slightly decreased since the dividend per share only increased by 15.10% from 2011 year. This was a decision from the company and it reflects the reduction in the earning per share already mentioned and the fall in the dividend cover by 1.75% in 2011.MorrisonsMorrison dividend yield is much less in 2011 it was 9.6% and in 2012 the dividend went up to 10.70%.6.3 DIVIDEND COVER YEARSainsburysDividend cover of Sainsburys says that earnings available for dividend cover is 1.75% in 2011 and also in 2012 so there was not change in the divided cover over the past two years. In terms of dividend cover, Sainsburys has its policy based on their calculations to maintain the dividend cover between 1.50 1.75 times. The reason behind it is that if the dividend cover is too low, there is a porta that the comp any will not be able to pay out the investors.MorrisonsIn Morrisons divided cover, it showers that in 2011 it has 2.40% whereas in 2012 it has 2.39%, which is still more than Sainsbury. For the year 2011 Morrisons dividend cover is 2.4 times, claim that it is in line with the European food retail sector average (Morrisons, 2011).7. Future Perspectives and StrategiesBoth Sainsburys and Morrisons have their business strategies for future outlined in their financial statements. Morrisons financial strategy continues to deliver improved margins whilst positioning long term growth. They wish to increase their customer appeal and growth of sales, which is meant to be reborn into profitable growth.They have realized the potential in online retail, so they will finally enter the online groceries market to challenge Tesco, Asda and Sainsburys, making it the last of the major supermarket groups to have an internet presence, but only after reporting its first fall in profits for six years.CUs ersUSERDesktopfinancial management1.JPGSainsburys based their business strategy on encounter consumer needs, taking into the account the on-going inflation over the past four years. The economic downturn has changed how and what consumers buy, and these changes appear to be lasting. In 2012 they have launched their Live Well for little campaign based on awarding loyalty and providing the best quality possible for optimal price. Through Nectar loyalty scheme they have a wealth of data about their customers behaviour. CUsersUSERDesktopfinancial management2.JPGSource of the table Morrisons financial statement 2012.Source Sainsburys Financial Statement 20128 ConclusionsFinancial statements suggest that Morrisons financial performance was very good. They had a profitable year (profit of 58m) while Sainsburys performance was not good compared to 2011 (loss of 42m). Morrisons financial performance was strong, and they continued to invest in long term growth of the business, and to delive r increasing returns to shareholders.Even after having steady increase in sales revenue and gross profit, Sainsbury suffered loss compared to previous year mainly because their interest and tax expenses increased while profit from joint ventures reduced. Though Sainsburys acquisition of non-current assets was underfinanced with long term sources of finance, they still managed to generate more sales and cover the debt payable easily.Alternatively, Morrisons financial management was excellent as they covered all their non-current assets with long term sources of finance. High interest cover ratio indicates that there is no sort of pressure on the company and is very profitable.ReferencesFight, A (2006) Flow Forecasting, UK CFrion Tec. Pvt.Stickney C.P (2010) Financial Accounting an introduction to concepts methods and uses USA South Western Cengage eruditionSmart B.S Megginson W.L (2009) Introduction to Corporate Finance USA South Western Cengage LearningAlberth S.W (2011) Accounti ng, Concepts Applications, What, Why, How of Accounting USA South Western Cengage LearningGildersleeve R. (1999) Winning moving in How to use Financial Analysis and Benchmarks to outscore your competition Houston Tex Gult Pub. Co.Unknown (2010) An evaluation of the business and financial performance of morrisons. Available at http//www.ukessays.com/dissertations/business/financial-performance-of-morrisons.phpixzz2NhjC0HdW (Accessed 15/03/2013)capital of the United Kingdom Stock Exchange (2013) London Stock Exchange Available at www.londonstockexchange.com (Accessed 20/03/2013)Morrison conference (2013) Financial Reports Available at http//www.morrisons.co.uk/Corporate/Investor-centre/Financial-reports/ (Accessed 18/03/2013)Sainsburys Group (2013) Annual Report and Financial Statements 2011 Available At http//www.j-sainsbury.co.uk/ar11/ (Accessed 10/03/2013)Unknown (2013) Forces analyses of Sainsbury Available at http//www.oxbridgewriters.com/essays/management/forces-analyses-of-s ainsbury.php (Accessed at 18/03/2013)Appendix 1Gearing Ratio = Long Term Loans + Value of Preference SharesShare Capital + Reserves + Long term Loans + Minority InterestSainsburys201220112617 + 0538 + 5091 + 2617 + 02339 + 0535 + 4889 + 2339 + 0= 31.73 %= 30.13 %Morrisons201220111600 + 0253 + 5144 + 1600 + 01052 + 0266 + 5154 + 1052 + 0= 22.86 %= 16.25 %Appendix 2Interest Cover Ratio = Profit before interest and taxInterest payableSainsbury20122011834138859116= 6.04= 7.40Morrison201220119684788743= 20.59= 20.62Appendix 3 on-line(prenominal) ratio = current assets / current liabilitiesSainsburys20112012 legitimate assets = 1708Current liabilities = 2942Current ratio = 1708/2942= .580Current assets = 2032Current liabilities = 3136Current ratio = 2032/3136= .647Morrisons20112012current assets = 1138current liabilities = 2086current ratio = 1138/2086= .545Current assets = 1322current liabilities = 2303current ratio = 1322/2303= .574Appendix 4Acid test ratio = liquid asset / current liab ilitiesLiquid asset = current asset inventories20112012Current assets = 1708inventories = 812liquid asset = 1708 812= 896current liabilities = 2942acid test ratio = 896 / 2942= .304Current assets = 2032inventories = 938liquid asset = 2032 938= 1094current liabilities = 3136acid test ratio = 1094 / 3136= .348SainsburysMorrisons20112012current assets = 1138inventories = 638liquid asset = 1138 638= cholecalciferolcurrent liabilities = 2086acid test ratio = 500 / 2086= .239current assets = 1322inventories = 759liquid asset = 1322 759= 569current liabilities = 2703acid test ratio = 569 / 2703= .247Appendix 5Return on Capital Employed (ROCE)ROCE =For Sainsburys20122011834 X 100538 + 5091 + 2617 + 0859 X 100535 + 4889 + 2339 + 0= 10.11 %= 11.06 %For Morrisons20122011968 X 100253 + 5144 + 1600 + 0887 X 100266 + 5154 + 1643 + 0= 13.83 %= 13.70 %Appendix 6Return on Equity ( ROE ) = Profit after Tax X 100Share Capital + ReservesFor Sainsburys20122011598 X 100538 + 5091640 X 100535 + 4889 = 10.62 %= 11.79 %For Morrisons20122011690 X 100253 + 5144632 X 100266 + 5154= 12.78 %= 11.66 %Appendix 7Gross Profit Margin = Gross Profit X 100Sales RevenueFor Sainsburys201220111211 X 100222941160 X 10021102= 5.43 %= 5.49 %For Morrisons201220111217 X 100176631148 X 10016479= 6.89 %= 6.96 %