Aim of Report
The aim of this report is to review the performance and financial status of two companies. The two companies compared in this report are J Sainsbury Plc and Wm Morrison Supermarkets Plc. This report will compare the two companies using ratios which will be derived from their financial statements.
What Ratios are
Ratio analysis uses ratios derived from financial statements for calculation and comparison purposes. Ratios show how the company is running with comparison to its competitors or its previous years. It shows a firms weaknesses, strengths and helps to predict the future. Ratios are used to determine weather it is safe to invest in a company or not and which company is best to invest in.
Limitations of Ratios
Ratios are estimates of previous years not taking into account possible future economic changes such as interest rates and inflation. Companies may use different accounting practices which may give misleading information even within the same markets. Ratios have to be compared with something as it cannot show good or bad ratios on its own. Ratios show weaknesses and strengths of companies without showing the cause of problem. Ratio analysis can be expensive causing it unaffordable for small businesses.
Profile of J Sainsbury Plc
Sainsbury founded in 1869 comprises of 934 stores out of which 557 are supermarkets and 377 are convenience. There is 149,600 staff employed in a total of 934 stores. Sainsbury jointly owns Sainsbury bank with Lloyds banking group and has two property joint ventures with Land Securities Group PLC and The British Land Company PLC. (Sainsbury, 2011). Sainsbury primarily offers food and non complementary food products and services under its name. One key operation of Sainsbury is they take the environment into consideration. Recently they purchased 50 electronic vans becoming the largest order by a UK retailer. (Sourcelondon, 2011).
Profile of Wm Morrison Supermarkets Plc
Wm Morrison was founded in 1899 and comprises of 455 stores. Morrison offers a wide range of food products and non food products. 130,000 staff are working in the 455 Morrison stores. Morrison is the second largest retailer after Tesco in the UK. Out of the big four supermarkets Morrison had the smallest market share of 11.8% in 2008 leaving it in fourth place but ahead of Co-operative Group who are in fifth place. One of the objectives of Morrison is to take care of customers and offer low prices compared to their competitors and are also environmental friendly. (Morrison, 2009).
Below are a selection of ratios which are going to be used to compare year on year of each company and then comparing the two companies Morrison and Sainsbury. The calculations of the ratios are added in the appendix.
Gross Profit Ratio
The gross profit margin of Sainsbury has relatively stayed static between 2010 and 2011, although it has risen by 0.08%. The gross profit margin of Morrison has relatively stayed static between 2010 and 2011, although it has risen by 0.08%. Both companies have had 0.08% rise in gross profit margins however the gross profit margin of Morrison is higher than Sainsbury. One reason the gross profit margin is higher in Morrison is that it has lower revenue than Sainsbury and the cost of sales of Sainsbury is higher. Morrison with a higher gross profit of 6.89% in 2011 than Sainsbury with a gross profit of 5.42% in 2011 indicates that Morrison has more money left over than Sainsbury. Morrison can use that left over money in other business operations such as research and development.
The profit margin for Sainsbury has risen from 3.56% in 2010 to 4.03% in 2011. This shows a rise in profit margin by 0.47% and implies operating expenses have been lowered and are being controlled. The profit margin for Morrison has fallen from 5.89% in 2010 to 5.49% in 2011. This shows a fall in profit margin by 0.40% and implies operating expenses have risen and are not being controlled. Over all Sainsbury has increased profit margin whilst Morrison’s profit margin has fallen. However Morrison’s profit margin is still higher in 2011 by 1.46%. Morrison still has more control over costs than Sainsbury’s but it is slowly declining implying price will increase as costs are increasing.
Asset Turnover Ratio
The asset turnover ratio for Sainsbury has increased from 1.84 times in 2010 to 1.85 times in 2011. This shows the use of assets compared to the revenue generated has increased slightly by 0.01 times showing an increase in trading activity between 2010 and 2011. The asset turnover ratio for Morrison has increased from 1.76 times in 2010 to 1.80 times in 2011. This shows the use of assets compared to the revenue generated has increased by 0.04 times showing an increase in trading activity between 2010 and 2011. Both companies have increased their asset turnover ratio however Morrison has had a 0.03 times increase more than Sainsbury in 2011, even though Sainsbury still has a higher ratio. The cause for this increase could be that new assets could have been brought at the end of 2010 or it could be an issue related to the timing of the year for example Christmas.
Return on Capital Employed (ROCE)
Sainsbury has had an increase in ROCE from 6.54% in 2010 to 7.47% in 2011. The reason for this could be efficient use of assets plus the rise in profit margin by 0.47 in 2011. Morrison has had a decline in ROCE from 10.35% in 2010 to 9.88% in 2011. The reason for this could be inefficient use of assets plus the fall in profit margin by 0.40 in 2011.
The current ratio for Sainsbury fell from 1.97:1 in 2010 to 1.41:1 in 2011. This shows that Sainsbury has had problems regarding its short term debts and it became less liquid. The current ratio for Morrison rose from 0.51:1 in 2010 to 0.55:1 in 2011. This shows Morrison is having problems regarding its short term debts even though it has improved slightly. Overall Sainsbury is more liquid than Morrison. The reason for this is that Morrison has more current liabilities than current assets. Both of the companies have lower than the ideal ratio which is 2:1.
The liquid ratio of Sainsbury fell from 1.22:1 in 2010 to 0.74:1 in 2011. In 2010 Sainsbury had a higher ratio then the ideal ratio which is 1:1. The liquid ratio of Morrison was stable in both years with a ratio of 0.24:1. Both companies have a low liquid ratio which implies the companies will have problems to meet their short term obligations. The cause for this low liquid ratio can be collecting debts slowly, paying the bills too quickly and having problems to maintain growth of sales.
The inventory holding period is very stable of both companies which is around 15 days even though Sainsbury’s inventory holding period in 2010 was 14 days. The reason for this increase can be over stocking which can increase costs of storage.
Receivables Turnover and Payables turnover
The collection period for Sainsbury increased from 1 day in 2010 to 2 days in 2011 where as the payables period stayed stable at 34 days over the same period. The collection period for Morrison stayed stable for 2010 and 2011 at 4 days where as the payables period fell from 32 days to 33 days over the same period. Both companies have higher payable ratios than receivable ratios. This shows us that companies are collecting their debts first and then are paying their creditors. A low receivable period means less interest for the company and a high payable period means the company is paying more interest.
The debt ratio of Sainsbury fell from 32.19% in 2010 to 30.13%. This ratio is quite high and puts the firm at higher risk due to higher debts. The debt ratio of Morrison fell from 17.19% in 2010 to 16.25% in 2011. This ratio is low but does not mean that Morrison isn’t at risk because their long term loans have increased from 1027 in 2010 to 1052 in 2011. A possible decrease in both companies debt ratio could be the increase in the shareholders equity.
The interest cover ratio for Sainsbury rose from 5.59 times in 2010 to 5.95 times in 2011. This is quite a low ratio which implies a weakness in the company’s financial strength which can cause the company to become bankrupt. The interest cover ratio for Morrison rose from 20.16 times in 2010 to 25.83 times in 2011. both companies have had an increase in their interest cover ratio. This could be due to the increase in the profit for the 2 year between 2010 and 2011. A reason why Sainsbury has a low interest cover ratio is because it has a high debt ratio. A reason why Morrison has a high interest cover ratio is because it has a low debt ratio.
Earning per Share (EPS)
The earning per share for Sainsbury rose from 32.1 pence in 2010 to 34.4 pence in 2011. This means shareholders of Sainsbury will get paid more per share. The earning per share for Morrison rose from 22.8 pence in 2010 to 23.93 pence in 2011. This means shareholders of Morrison will get paid more per share. Over all share holders of Sainsbury get more than the shareholders of Morrison. The reason for this is that profits of Sainsbury are higher in 2011 and they have fewer shareholders than Morrison implying each shareholder will get paid more for his share.
Dividend per share (DPS)
The dividend per share for Sainsbury rose from 14.2 pence in 2010 to 15.1 pence in 2011. This shows the amount of dividend paid to each shareholder has increased by 0.9 pence. The dividend per share for Morrison rose from 8.2 pence in 2010 to 9.6 pence in 2011. This shows the amount of dividend paid to each shareholder has increased by 1.4 pence. Overall the dividend paid by Sainsbury to shareholders is higher than Morrison in both years. A rise in dividends shows investors that a company is doing well financially.
Sainsbury has expanded 27 of their stores and have opened 47 new conventional stores. This has caused a slow down on the growth of the existing stores as finance will be put towards new stores and their running even though profit was still higher than the previous year. The economic climate has had a great impact on consumer confidence; to over come this Sainsbury’s have increased producing goods in their own ‘taste the difference’ brand. It is said 6000 new taste the difference products were introduced in 2011.
(J, Sainsbury plc, 2011).
Cost of sales for Morrison accounts for 93% of the sales that are made. After this the next two highest costs are store wages and distribution costs. During 2011 Morrison incurred a new big cost which was the opening of new store space. Consumer confidence has had a great impact on sales in 2010 due to the recent recession however to over come this Morrison has started to produce Morrison own company brands. (Wm, Morrison, 2011).
The ratios used are only an indication of the company’s performances. Ratios on their own don’t mean anything but when comparing it with other ratios then you can get an insight of the future performance of the companies. Over all the performance of both companies has improved from 2010 to 2011. However Sainsbury would be a better place for investors to invest their money in as their share prices are higher than Morrison’s. Some places of concern for both companies are their debts and the liquidity of the company.
Sainsbury Plc, 2011. Bussiness Structure. [online] Available at: < http://www.j-Sainsbury.co.uk/about-us/business-structure/ > [Accessed 25 November 2011 ].
Sourcelondon, 2011. Sainsbury. [online] Available at: < https://www.sourcelondon.net sainsburys > [Accessed 25 November 2011 ].
Morrison, 2009. Corporate Social Responsibility in our Bussiness. [online] Available at: < http://www.morrisons.co.uk/Corporate/2009/annualreport/directors_report/taking_ good_care.html > [Accessed 25 November 2011 ].
J, Sainsbury Plc, 2011.Trading and operational review [online] Available at: < http://www.j-Sainsbury.co.uk/about-us/ Trading and operational review / > [Accessed 25 November 2011 ].
Wm Morrison, 2011. [online] Available at: <http://www.morrisons.co.uk/ Corporate/ 2009 /annualreport/directors_report/taking_ good_care.html > [Accessed 25 November 2011 ].
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