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This report shall be conducted to provide a brief overview of the financial structures of Sainsbury’s. The additional emphasis of this report shall be further provided on the application of finance theory as well as the implications of theories of finance. In order to further establish detailed understanding the additional emphasis of this report shall be given to cash surplus and the estimation and discussion on credit rating. The additional emphasis of this report shall be further provided on highlighting the external involvement of stakeholders with Sainsbury’s to further accomplish suitable findings about business sustainability.
2.1: Characteristics of Business Environment
Business environment refers to the forces and the factors which affect the firm ability to maintain or build an effective relationship with the customers. As per the view of Attwood et al. (2021), there are basically five types of the business environment such as social, legal, economic, environmental, and political. All these environments are the responsible element to determine the success rate of a firm. The characteristics of the business environment are specific, general, dynamic, uncertain, complex and full of external forces. As per the author Cole et al. (2019), in order to show the different aspects of the business environment, Sainsbury Company is chosen. The company operates in a retail and free business environment where its main focus is to provide “quality, provenance and sustainability”. Sainsbury offers a wide range of product varieties regarding the food items, daily care, electronic products and general products to their customers.
2.2: PESTLE analysis for identifying core business objectives
Pestle analysis of the company Sainsbury plc
Political factors (P)
Economic factors (E)
Social factors (S)
Technical factors (T)
Legal factors (L)
Environmental factors (E)
Table 1: pestle analysis of Sainsbury plc
From the above pestle analysis it can be stated that the company is the largest retailer in the country and has various subsidiaries around the world. As stated by Goyal et al. (2018), the retail services are provided with full competence. The political factors show that the dubbed Brexit rules which are formed by the Europe government can create consequences where the firm has to face many issues. The European markets have to pay extra taxes as the outer companies are slowly capturing the European retail markets. The economic factors show the GDP of around $3.54 trillion and the Rising fuels and other costs make the country more authentic. As opined by Kundu et al. (2018), the company uses different technology to serve their customers with more varieties of products and services. The legal and environmental factors imply the companies' premises where they strictly follow the norms which are stated by the country's government.
3.1: Factors involved in the retention of surplus in Balance Sheet
The retention of surplus in the balance sheet is deemed to be a common terminology for all concerned major business organisations in this day and age. The long practised procedure of deploying surpluses into traditional financing methods is considered to be outdated, therefore leading to a majority of companies scrapping them. The retention of surplus in the balance sheet further enables organisations to accumulate a large influx of wealth to compensate for future potential losses in the future to further justify the durability of the business. As per the views and opinions of Acerete, Gasca and Stafford (2019), various factors are involved in the retention of surplus in the balance sheet, which is further discussed as follows.
3.1.1: Direct Impairment
The first factor involved with the retention of surplus in the balance sheet involves the direct impairment of costs within the financial performance of the organisation. The direct impairment of costs further allows the organisations to encourage cost optimisation to encourage the smooth operational conduct of business structure for Sainsbury’s. The direct impairment of costs is further related to the appropriate allocation of assets, which further relates to the potential cash flows that could be generated in the long run. As per the opinions and illustrations of Atkinson et al. (2018), the direct impairment strategy by Sainsbury’s is further suitable to define prolonged business sustainability, particularly during crunch economic situations. Moreover, the retention of surplus in the balance sheet attributed to the direct impairment of costs leads to a b presentation of financial statements to attract a large share of investors to engage with the company directly. The direct impairment is a critical aspect for the organisation to retain large chunks of surplus and establish business dominance in the industry as well as the market.
3.1.2: Importance of Shareholder's values
The second important adherence to the factors involved with the retention of surplus in the balance sheet is attributed to the importance of shareholder values. The adherence and importance to shareholder values further enable Sainsbury’s to encourage and uphold the investor interests in the company. As opined and illustrated by Craig (2020), the importance of shareholder values further benefits the organisation to offer high yield dividends to its respective shareholders and thus maintain a healthy balance sheet to file on the stock exchange. The adherence to shareholder values is considered to be a crucial part for Sainsbury’s to further define long-run business suitability in the industry as well as the market. Thus the absorption and retention of surplus in the balance sheet owing to the increased importance for shareholders lead to a unified and collaborative command in the accomplishment of financial goals and objectives, which directly or indirectly benefits all associated stakeholders.
3.2: Implications of Traditional Finance Theory
The traditional finance theories are considered to be an integral part and component of the organisations defining near and distant sustainability and profitability for the companies. The traditional finance theories are also involved in the operational and financial structures of Sainsbury’s. The traditional finance theories can be further subcategorised based on the features and financial attributes contained in the theories and further discussion and implications are mentioned as follows.
Classical Decision Theory
The first theory considered an integral part of the traditional finance theory includes the classical decision theory. The main attributes and characteristics associated with the classical decision theory involve the thorough diligence of the organisation to encourage the coherent involvement of customers, organisations as well as investors. The implications of classical decision theory further encourage Sainsbury’s to stimulate the financial growth of the organisation by maintaining professional harmony with its near and close aids further justifying the maximised profitability in the long run.
Rationality Risk Aversion Theory
The second theory involved in the application of traditional finance theories includes the rationality risk aversion theory. As per the illustrations and explanations of Gocer and Ongan (2020), the rationality risk aversion theory further consists of financial predictions being made by companies to encourage the high probabilities of fetching profitability. The implication of rationality risk aversion theory further comprises optimal risk-taking facilitations by Sainsbury haveto ensure continual financial growth in the market.
Model Portfolio Theory
The third important theory involved as the key component of traditional finance theory involves the model portfolio theory. In order to further streamline the available investment options available for an organisation, the application of model portfolio theory is suitable to select multiple available projects based on their risks and rewards. The implications of model portfolio theory further classify the available options as either high risk and high reward or low risk or low reward. The implication of Model portfolio theory in Sainsbury’s is further applicable to ascertain suitable and justified domestic or overseas collaborations, thus ensuring perpetual business growth in the short and long run.
Capital Asset Pricing Model (CAPM)
The fourth important traditional or historical theory associated with the financial structures of an organisation involves the Capital Asset Pricing Model (CAPM). The application of CAPM model is a key component in the organisational structures of Sainsbury’sto further ensure ample financial growth opportunities for its investors. The implications of CAPM model are further important to define a prolonged risk aversion measure available for the company for its investors to assure a suitable risk including the cost of capital (coindesk.com,2022). This model is essentially crucial for any major retail organisation to implement as the resulting potential of achieving a high investment return remains at a large scale in the market.
Efficient Market Hypothesis (EMH)
The fifth important aspect or determinant of the traditional theory involves the efficiency market hypothesis (EMH). The application of EMH can be further distributed on the suitable market hypothesis for a company, which is classified on the basis of b hypothesis, weak hypothesis or medium hypothesis. The implication of a b hypothesis by Sainsbury'sfurther allows the organisational spearhead to present true and fair company-oriented financial information to the public to rightly value the stock prices in the market. Moreover, the implications of a weak or medium hypothesis carry the possibilities of containing financial disparities, thereby reducing the engagement and dependency levels of external stakeholders.
4: Apportionment of Cash Surplus
The cash surplus is obtained through the deduction of cash disbursement from cash receipts. As per the author Mayer et al. (2021), the surplus is managed by adopting various measures, such as investment, project appraisals, purchase of assets, and investment in assets. The excess cash is usually used to mitigate the debts and obligations of the firm. In the context of Sainsbury plc, the cash surplus is invented in providing extra services for social and environmental needs. As the company is one of the largest retail sectors in the country they do not need the excess cash that needs to be restored for engaging the products. As per the view of Muruganantham et al. (2021), therefore the extra surpluses are used in deploying the latest technologies and providing social welfare in the country. The cash surplus may be distributed among the shareholders.
4.1: Sources of Deployment
The sources of deployment refer to the codes that are used to maintain or allocate the excess cash which is ascertained through profits. As opined by Sainsbury and Breunig (2020), the policy which is allotted to the firm to reserve its cash flows and other components can be seen through the financial aspects. The value of the company's sales is estimated at around 2.3 billion in the current year. This shows the excess profits or cash which are ascertained tough the sales can be reserved for further distribution. In a general manner, deployment can be availed through the codes which are done with cloud computing where the software is appointed to make the recording system effective. As per the view of Setia et al. (2022), the sources can be shifted to other departments to perform different functions.
4.2: Reasons for Apportionment
Apportionment is an essential part of the decennial census, where the representatives how up their place values to get new places. As per the author Vezér and Morrow (2019), cost apportionment is required when the costs of different segments are quickly represented in the firm. In this contrast, the direct cost can be specifically managed by developing other measures of costs. Any costs which do not belong to one of the departments can be easily divided into another department where it is needed. This simple ligament between the various departments makes the firm more effective. As mentioned by Zhu et al. (2021), this dividing segment is done by adopting the apportionment, methods where limited and equal amounts are divided among the departments. In the context of Sainsbury plc, the costs are mainly allotted in the production and manufacturing units.
The company deals in retail services where the wholesalers sell their products in large quantities and the consumer buys in small units. In this, the retail amounts are aggregated after the whole selling aspect and then the costs are reunited in a group. As per the view of Sidorov et al. (2018), the low levels are covered up with the extra profits whereas the profits are distributed among other departments using the Apportionment method. The main reason behind this apportionment is to rejuvenate the costs which are left in the company into useful sources. The costs are allotted by applying Apportionment principles after paying off all the overheads in the firm.
5.1: Application of a financial or non-financial framework
The significance and importance of a financial framework are considered to be an area of paramount relevance, thereby influencing the decision-making attributes and skills of an organisation. In order to establish solidified legislations and ethical financial considerations, the application of a financial framework further puts an organisation in positive stead with respect to its associated stakeholders. As per the demonstrations and explanations of Hall, and Millo (2018), the financial frameworks can be further classified based on the nature of financial reporting done by the framework. The various available nature of financial considerations carried out by a financial framework is further discussed as follows.
The first important nature of a financial framework is attributed to the clarity or proportion of clarity possessed by the companies. The clarity for Sainsbury’sis mostly dependent upon the true and fair presentation of financial and other important organisational documents to ensure harmonised and cordial professional relations with investors, suppliers and customers.
The second important aspect of the nature of financial framework is largely attributed to the relevance it possesses. As per explanations and opinions of Hubbard et al. (2018), the relevance of financial reporting by Sainsbury’s further leads the organisation to implement suitable decision-making streams, which ultimately favours the financial and organisational structure over a prolonged time span.
The third important aspect of the nature of the financial framework involved with an organisation includes the reliability in the industry or the market. The significance of reliability in the present organisational structure of Sainsbury’s is a key consideration. This further allows the external forces to evaluate the past and present financial performance of the company and subsequently decide whether to invest in future projects or not.
The fourth major aspect of the financial framework includes comparability, where the financial statements of a company are compared in a horizontal or vertical manner. Rosenow et al. (2018) further explained that the comparability for Sainsbury’s allows the organisation to compare its previous financial performance with the current year's performance. Moreover, the comparability feature also allows Sainsbury’s to compare its financial performance with market competitors and make suitable changes in the organisational structure to achieve sustained profitability.
5.2: Calculation of Credit Rating
|Debt Equity Ratio||2.81||2.59||2.66||2.08||1.98||High|
|Interest Coverage Ratio||-0.73||0.64||1.2||0.88||0.74||Low|
|Dividend Yield Ratio||7.58%||1.56%||2.76%||5.12%||6.23%||High|
Table 1: Credit Rating
(Source: Created by Learner)
5.3: Discussion on Credit Rating
The above-mentioned table of credit ratings has been considered for five years concerned with the performance of Sainsbury’s gearing ratios. The credit rating depicted above shows the classification of risks associated with financial performance considering the involvement of external and internal stakeholders. The credit rating is considered to be an important area of consideration for the companies to further ensure the liabilities do not overwhelm the financial structure of the company. As per the illustrations and explanations of Sanders, Marx and Stenkula (2020), the first and most important category of the credit rating involves the debt-equity ratio. The resulting debt-equity ratios for Sainsbury’s is considered to be 2.81%, 2.59%, 2.66% , 2.08% and 1.98% respectively for the years 2021, 2020,2019,2018 and 2017.The associated credit risk category is slated to be high as the debt-equity ratio exceeds the normal threshold and industry-standard applicable for this ratio in the UK.
The second category of credit risks is largely attributed to the debt ratios and the resulting debt ratios have been calculated for five consecutive years 2021, 2020, 2019, 2018 and 2017 respectively. The resulting ratios have been calculated as 74%, 72%, 71%, 78% and 62% respectively and the category of risks is considered to be moderately or medium risky. The third category of risks involves the interest coverage ratio and the ratios have been calculated for five consecutive years. The risk category of this particular ratio is considered to be on the lower side as the optimum interest coverage ratio with the performance of Sainsbury’s is almost collinear (investopedia.com, 2021).
The last category of credit risk management involves the computation of dividend yield ratio and the ratio calculations suggest that the nature of risks is considered to be high. As per statements and explanations of Vissing-Jorgensen (2021), the high-risk dividend yield ratio is a significant barrier for Sainsbury’s to further establish coherent investor relations and furt5her develop additional revenue generation streams.
In the context of this report, a detailed discussion of the business environment of Sainsbury’s has been discussed. The report has also discussed the usage of Pestle analysis to further calibrate the external surroundings of the company. A detailed discussion on the retention of surplus has been done, which is attributed to the safeguarding of investor and stakeholder interests. The report also discussed various traditional theories of finance and special emphasis is being given to the application of CAPM and EMH theories. A detailed discussion on the applications of the financial framework has been conducted where special emphasis is being laid on reliability and comparability. A detailed discussion on the credit rating is being conducted and special emphasis has been given to the categorical division of risks.
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