Comprehensive Sainsbury's financial analysis: profitability, liquidity, solvency & efficiency ratios over 3 years with strategic recommendations for performance improvement.
Financial analysis refers to the process of evaluating business, budget, project and other transaction as to identify organization’s overall suitability and performance. For students seeking help writing assignments on financial ratio analysis, this Sainsbury case study offers practical examples. This is most critical aspect of each organization as it aids in identifying whether a business entity is stable, liquid, solvent and profitable or not. Sainsbury is the second largest London based Supermarket Chain in UK which was established in year 1869 by John James Sainsbury. The firm is involved towards providing larger number of product that includes fresh vegetable, fruits, fish, meat, diary, product, frozen food, financial services, clothing and many more. Total revenue of Sainsbury is 137 million pound in year 2023 and has a market share of 16% (Description of Sainsbury, 2023). Mission statement of Sainsbury is to help customer to eat healthier by enhancing quality of food. Further, Firm is having vision of becoming most trusted retailer by offering best possible shopping experience to customer. Moreover, Sainsbury’s Value is to promote Health, community, environment and offer support to colleagues. The current report is based on determining financial position of Sainsbury by calculating ratio of three consecutive years. Further, it will include reason for particular outcome and also depict on strategies to overcome the same.
| Particulars | Formula | Amount (£m) | ||
| 2021 | 2022 | 2023 | ||
| Gross Profit | 1765 | 2366 | 2004 | |
| Net profit | -280 | 677 | 207 | |
| Sales revenue | 29048 | 29895 | 31491 | |
| GP ratio | Gross profit / sales * 100 | 6% | 8% | 6% |
| NP ratio | Net profit / sales * 100 | -1% | 2% | 1% |
Gross profit ratio: From the above table, it has been identified that there is reduction in gross profit of industry by 2% as compared to year 2022. Further, in year 2021 and 2023 there is similar amount of gross profit which increased to 8% in year 2022. It has been determined that firm is not able to attain the ideal ratio of 40% which indicates ineffective profitability position. This situation has risen as firm is unable to attract significant number of customer and manage its overall cost. To overcome situation, Sainsbury should focus on enhancing its marketing strategy which help in influencing large number of customer and eventually result in higher profitability. Further, company should revise its pricing strategy so that higher amount of profits could be earned by selling additional unit.
Net profit ratio: On the basis of above table, it has depicted that Sainsbury is having very low net profit ratio which denotes firm’ efficient cost structure and poor pricing strategies. Company is having negative Net profit in year 2021, which increased by 3% in year 2022 and again reduced by 1%. It has depicted that firm’s sales revenue is continuously increasing but it is not able to increases net profit denoting ineffective cost management. To overcome the situation, firm should emphasis on optimize its operation, negotiate better deals with suppliers and reduce utilities which help in enhancing profits. Further, automation should be introduced which help in reducing overhead and operation cost of the company.
| Particulars | Formula | Amount (£m) | ||
| 2021 | 2022 | 2023 | ||
| Current assets | 7049 | 6742 | 7893 | |
| Current liabilities | 11717 | 9868 | 11614 | |
| Inventory | 1625 | 1797 | 1899 | |
| Quick assets | 5424 | 4945 | 5994 | |
| Current ratio | Current assets / current liabilities | 0.60 | 0.68 | 0.68 |
| Quick ratio | Current assets - (stock + prepaid expenses) | 0.46 | 0.50 | 0.52 |
Current ratio: The above table depicted that there is no significant change in current ratio of Sainsbury in year 2023 as compared to previous year. Current ratio of company is very low which denotes firm’s inefficiency in paying out all short term expenses with the help of current assets. This situation has risen as company is investing fewer amounts towards current assets and having large amount of liabilities. To overcome situation, firm should sell out all the unproductive fixed assets which increases overall cash flow of the company. Beside this, all the short term debt should be paid off which help in reducing current liabilities. Moreover, dynamic pricing should be used in which prices should be decided on the basis of market demand that will help in earning higher revenue and enhancing overall cash inflow.
Quick ratio: There is 0.02% and 0.06% increase in quick ratio in year 2023 as compared to year 2022 and 2021.Firm is unable to attain ideal ratio of 1:1 which denotes firm’s inefficiency in paying out all the short term liabilities by utilizing quick assets. There is continuous increase in investment towards inventories which has resulted in reducing overall amount of quick assets ratio. For overcoming such situation, Sainsbury should adopt an efficient inventory management system which will help in avoiding situation of over or under investment towards stocks. Further, firm should enhance its receivable management which help in timely collecting funds from the debtor that result in managing overall cash balance of organization (Kadim, Sunardi and Husain, 2020). Moreover, all the short term liabilities should be paid off which contribute towards reducing current liabilities and help in boosting overall quick asset ratio.
| Particulars | Formula | Amount (£m) | ||
| 2021 | 2022 | 2023 | ||
| Long term debt | 6976 | 7407 | 7145 | |
| Shareholder's equity | 6604 | 8423 | 7253 | |
| Debt-equity ratio | Long-term debt / shareholders equity | 1.06 | 0.88 | 0.99 |
Debt to equity ratio: On the basis of above table, it has determined that in year 2023, Sainsbury has reduced both debt and equity in its capital structure which help in increasing debt equity ratio. Firm was having higher amount of debt in year 2021 that resulted in increasing overall financial risk of business entity. In year 2023, there is almost similar amount of debt and equity which help in maintaining a balance between overall risk and cost of organization. Further, company should reduce debt in the capital structure which will help in decreasing overall debt to equity ratio.
| Particulars | Formula | Amount (£m) | ||
| 2021 | 2022 | 2023 | ||
| Average Inventory | 1678.5 | 1711 | 1848 | |
| Turnover or sales revenue | 29048 | 29895 | 31491 | |
| Debtors | 725 | 683 | 627 | |
| Creditors or payables | 4488 | 4546 | 4837 | |
| Stock turnover ratio (In times) | 16 | 16 | 16 | |
| Receivables or debtors turnover ratio (in days) | (Debtors * 365) / Credit sales | 9 | 8 | 7 |
| Creditors turnover ratio (in days) | (Creditors * 365) / COGS | 60.04 | 60.31 | 60.03 |
Stock turnover ratio: On the basis of above table, it has been identified that there is constant stock turnover ratio of Sainsbury in three consecutive years. This indicates that firm is offering most adequate product which is able to fulfil the needs and demand of target market. To increase the ratio, Sainsbury should offer attracting discounts which will help in attracting large number of customers (Kyere and Ausloos, 2021). Along with this, firm should used various different marketing technique which will help in developing demand in large target market and support in increasing overall sales. Moreover, an adequate inventory turnover software should be adopted which will contribute towards reducing cost and aids in enhancing overall turnover ratio.
Creditor turnover ratio: There is no significant change in creditor ‘turnover ratio of Sainsbury which indicate that firm is not optimally utilising allocated time period for gaining higher returns.
Debtor turnover ratio: From the above table, it has determined that there is continuous reduction in debtor receivable days which denotes firm’s efficiency in collecting from its debtors. It is positive situation for the company as it aids in successfully managing overall cash inflow and outflow of the organization.
| Particulars | Formula | Amount (£m) | ||
| 2021 | 2022 | 2023 | ||
| Net income | -280 | 677 | 207 | |
| Number of outstanding share | 2210 | 2270 | 2310 | |
| Earnings per share | Net income/number of outstanding share | -0.13 | 0.30 | 0.09 |
Earning per ratio: From the above table, it has been identified that there is reduction in shareholder earning by 0.21 pound as compare to year 2022. Moreover, there was negative EPS in year 2021 as firm was unable to earn significant amount of profit due to Corona Pandemic. Moreover, company is not able to manage its expenses in year 2023 that result in lower net profit and ultimately reduces overall earning of shareholder. This is not an optimum position of organization as low EPS denotes less return on shareholder’s investment which develop situation of dissatisfaction. To overcome the situation, firm should involve towards attracting large number of customers and attain economies of scale which will help in reducing cost and support in enhancing overall profitability of organization. Along with this, Sainsbury should involved in buyback its own shares from the existing shareholders which will aids in reducing number of shares and support in enhancing overall EPS.
10 Years | MSc
Profitability ratio
From the above graph, it has been identified that there was increasing trend in year 2022 but it changed to decreasing trend in year 2023. This indicates that firm is not able to manage its cost and earn a significant amount of profits leading to decreasing profitability trend in Sainsbury.
Liquidity ratio
The above graph shows an increasing trend of liquidity position within Sainsbury. This is positive situation for all creditors as it defines company’s ability to pay off all its liabilities by utilising its assets. Moreover, this trend develops trust and confidence within existing lenders which aids in easily sourcing funds in upcoming time.
Solvency ratio
Based on the above graph, it has been depicted that in year 2022, there is decreasing trend in Debt equity ratio, however in year 2023 the ratio has been increased. An increase in debt equity ratio is not optimum situation as it defines higher financial risk for the business entity. Moreover, high debts in capital structure will result in utilizing significant amount of profit to pay off interest obligations which eventually reduces overall profitability of organization.
Efficiency ratio
On the basis of above graph, it has identified that there is no significant change in efficiency position of the company.
Investment ratio
On the basis of above graph, it has identified that there is decreasing trend in EPS of Sainsbury which ultimately creates dissatisfaction within existing shareholders. This trend denotes that there is reduction in overall profit of company which ultimately reduces trust and confidence of the entire stakeholder.
Following are various purpose and objective of the chosen rations:
Gross profit ratio: This is the type of profitability ratio which denotes firm’s earning after deducting all the direct cost and expenses.
Net profit ratio: It is another crucial profitability ratio which helps in describing firm’s profitability percentage after reducing the entire direct, indirect and extraordinary item from the profit (Nugraha, Puspitasari and Amalia, 2020). This method has been selected as it helps in identify actual profit after cutting down all the expenses.
Current ratio: This ratio has been selected as to identify firm’s ability in paying out all the short term liabilities by utilising all current assets.
Quick ratio: It is another type of liquidity ratio which has been used to identify company’s capability in paying out liability by using current asset expects inventories (Heo et al, 2020).
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Debt to equity ratio: This ratio is used to determine capital structure of company which indicate total amount of cost and risk involved in business entity.
Stock turnover ratio: It is type of efficiency ratio which helps in identifying total time required to convert inventories into cash (Fizabaniyah et al, 2023). This ratio supports in determining efficiency of firm marketing strategies which help in managing overall cash inflow.
Creditor turnover ratio: It is another efficiency ratio which denotes time taken by company to pay out its creditors.
Debtor turnover ratio: This ratio denotes firm’s efficiency in collecting funds from its debtors.
Earning per ratio (EPS): It is investment ratio which depict total amount of return that will be earned by shareholder on its shares their owned.
Profitability position:
After evaluating gross profit and net profit ratio of Sainsbury, it has been determined that firm is not able to generate a significant amount of profit which creates issue in managing long term stability within industry. After critically analysing all the aspect, it has concluded that there is increasing sales revenue in each year but firm is unable to manage cost that leads to reducing overall profits. Further, it has determined that there is over staffing within Sainsbury due to which there is very high overhead cost leading to reducing overall profits. In the course of overcoming such situation, Sainsbury has decided to cut off 3000 jobs worldwide which help in reducing labour cost and eventually assists in enhancing overall profitability of business entity.
Liquidity position:
After evaluating diverse liquidity ratio, it has identified that Sainsbury is not having adequate liquidity position which creates issue in successfully paying out all short term obligation. This position has risen as firm is having very low trade receivable and cash balances as compared to liabilities. Further, Sainsbury has made an excessive investment towards opening cafes which has created cash imbalance within firm and negatively impacted on overall liquidity position of business entity (Ginting, 2021). To overcome the same, Firm has decided to shut down various cafes which will help in mitigating unnecessary expenses and support in enhancing cash balances within organization.
Solvency position:
After evaluating debt-equity ratio, it has been depicted that Sainsbury is having Low solvency position as company is having huge amount of debt in its capital structure. Company has increased debt amount with the aim of reducing tax liabilities and increasing shareholder earning (Kliestik et al, 2020). However, excessive debt in capital structure has resulted in increasing financial risk for the firm which will develop issue in sourcing higher debt in upcoming time.
Efficiency position:
After critically evaluating the entire efficiency ratio, it has been identified that firm’s policy are optimum which help in successfully collecting form debtor and enhancing overall turnover over ratio. This situation has risen as firm is capable to modify its policy with changing market needs which help in managing overall position.
Investment position
After critically evaluating EPS, it has been recognised that firm is not offering adequate EPS to investors which reduces their overall satisfaction (Ozturk nand Karabulut, 2020). This situation has risen as firm is not able to earn significant amount of profit and there is high amount of debt in capital structure which is increasing interest obligation leading to reducing overall profits.
Conclusion
By summing up the report, it has been identified that ratio analysis is most effective process which aids in determining overall liquidity, solvency and profitability position of business entity. It has identified that Sainsbury is unable to manage overhead cost which result in higher reducing overall profitability of business entity. Further, there is lower current asset and quick assts which creates issue in effectively paying put all liabilities. Moreover, there is excessive debt in capital structure which increases financial risk for company. To increase all ratios, firm should adapt inventory management software, reduces overhead costs, reduce debt liabilities and modify its pricing strategy which will help in enhancing overall financial position of company.
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