Introduction……………………….. Page 3
Ratio analysis…………………….. Page 4,5,6,7,8,9
References……………………….. Page 11,12
The role given for this report is to show a financial analyst acting on behalf of a large institutional investor advising them on their future investment in Sainsbury plc. This report will explore calculations of the financial ratios, such as gross margin which measures the performance of how suitable a company manages its costs (Campbell R.Harvey, 2004a). For Sainsbury’s this report will investigate the ratios within the period of 2008-2010 using the financial statements of Sainsbury’s. To illustrate the findings of the ratios, diagrams and tables will be used. The report will then conclude the overall findings and provide relevant recommendations.
Sainsbury’s PLC was founded in 1869 by John James and Marry Ann Sainsbury. Sainsbury’s grew to be well known for offering customers high quality products at low prices. Since 1869 Sainsbury’s expanded from one shop to currently operating in a total of 890 stores, comprising 547 supermarkets and 343 convenience stores. (Sainsbury, 2011a)
The aims for Sainsbury’s is to focus on being the best for food and health, sourcing with integrity, respect for the environment, making a difference to the community and a pleasant place to work. Sainsbury’s serve over 19 million customers a week and have a market share of over 16 per cent. (Sainsbury, 2011b)
Ratio analysis is used in organisations as a way to demonstrate and define the company’s financial accounts, it analyses the strengths and limitations within the business. Businesses should be achieving well in profitability, liquidity, gearing, investment and management. Ratio analysis is used in establishing trends from previous years and used against industry averages in certain sector it operates in. (Cox, Fardon.2008) Gross margin ratio
Gross margin - This ratio demonstrates how much gross profit the business is earning per one pound of the sales, it shows us the profit the business generates on their cost of sales. (Harrison, page 30 2008a) Gross profit
In Sainsbury’s the gross margin seems to be going on a stable figure, although there is a slight decrease in the 2009 figure where it decreases slightly by 0.14% and a further 0.08% in 2010. The cause of this decrease maybe because of less disposable income due to the poor financial climate, which Britain has currently experienced having just come out of the recession and therefore is becoming extra cautious. However Sainsbury’s, is still performing well, this can be seen since compared to the industry average, which is 3.54 percent, Sainsbury’s still remains to be above.
Sainsbury’s must ensure that they are effectively competing with their competitors Tesco and Asda, by expanding and diversifying into new markets, this will enable them to increase their gross margin figure.
Return on capital employed (ROCE)
Return on capital employed
Return on capital employed - This ratio illustrates how much profit is obtained from investments and shareholders; it specifies how efficiently and effectively the company is converting capital to sales. (Harrison page 31 2008b) Profit before interest and tax
Shareholders’ funds and long term loans
In Sainsbury’s the return on capital employed 2009 figure has gradually increased to 6.55%, 0.13% greater than 2008 and has dramatically increased in 2010 by 2.54%. This means in 2010 for every one pound invested, the business obtains 9 pence, this means generally the business is doing well, and as a result, this would increase the dividend value given to shareholders. Overall for Sainsbury’s, this is a positive sign since it means their confidence levels for...
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