Analysis of Performance and Financial Position

QUESTION 1-
Prepare a business report, 6 pages long (+/- 10%), to the board of directors of Sainsburys Plc with tables
and graphs that analyse the performance and financial position over at least 5 financial years and
recommend actions that the board should take.
To: The Board of Directors of Sainsburys Plc
From:
Date:
Title: Financial analysis of Sainsburys Plc.
Introduction
The tools of financial analysis can be useful in assessment of the entity’s trends and performance
of the business operations. Financial analysis is aspect of the overall finance function of business, which
is consists of examining historical data for gaining information about future and current health of
company. The application of financial analysis is done in wide variety of the circumstances for giving
business managers information they require for making critical decisions. The ability for understanding
financial data is vital for any of the business manager. Finance is considered to be the business
language. The objectives and goals of business are set in the financial terms and outcomes are
measured in the financial terms (Baka 2018). Hence, this report aims to analyse financial position and
performance over five financial years of Sainsburys Plc. Further, recommendation of actions will be
given to board based on the analysis.
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Sainsbury Plc is the company that is based in United Kingdom. It is principally engaged in
financial services and grocery and the related services. This company operates Sainsbury supermarkets,
internet-based home delivery services, convenience stores and the Sainsbury bank. This bank offers
credit cards, saving accounts, insurance products, mortgages and consumer loans
(About.sainsburys.co.uk. 2020).
Profitability:
The ratios of Profitability measures overall performance of entity in the terms of total generated
revenue from its business operations. Further, calculation of gross profit margin ratio is done for
analysing profitability of company. The gross profit margin ratio is the metric used for assessing
company’s financial health. It shows efficiency with which entity can generate revenue from sale of its
merchandise and inventories. The cost of manufacturing is consisting of manufacturing expenses,
employees’ benefits costs and material costs (Dahmen and Rodríguez 2014). The graph below shows
gross profit margin of two companies, Sainsbury and Tesco.
2013 2014 2015 2016 2017 2018 2019
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
5.48% 5.79%
5.08%
6.19% 6.23% 6.61% 6.92%
6.31% 6.31%
-3.39%
5.24% 5.19%
5.83%
6.48%
Gross Profit Sainsbury
Tesco
As it can be seen in graph that gross profit margin ratio of Sainsbury in 2013 was 5.48%, in 2014
was 5.79%, in 2015 was 5.08%, in 2016 was 6.19%, in 2017 was 6.23%, in 2018 was 6.61% and in
2019 was 6.92%. The figure shows that the efficiency of company in generating revenues from sale of its
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merchandise and inventories has been increasing over years. This means that company is able to
control its manufacturing costs (Zietlow et al. 2018). Further, in case of Tesco, the gross profit margin
was) 6.31% in 2013, 6.31% in 2014, 3.39% in 2015, 5.24% in 2016, 5.19% in 2017, 5.83% in 2018 and
6.48% in 2019. The trend of company shows that company’s gross profit margin has been quite
fluctuating. In the initial years, the gross profit margin has been decreased. However, later abilities of
company in generating revenue from its inventories and merchandise sale has been increased. After
comparison between both the years, it can be said that Sainsbury Plc is performing more stable than that
of Tesco (EL BOUAZZI, BOUAYAD and ROUGGANI 2017).
Liquidity:
Liquidity ratios are key class of the financial metric that is used for determining ability of debtor for
paying off current debt obligations without raising any kind of external capital.
2013 2014 2015 2016 2017 2018 2019
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.30
0.50 0.51 0.52 0.53 0.59
0.500.49 0.44 0.45
0.63 0.68
0.60
0.49
1 1 1 1 1 1 1
Liquidity Ratio
Sainsbury Tesco Theoritical Ideal
The liquidity ratio of Sainsbury was 0.30 in 2013, 0.50 in 2014, 0.51 in 2015, 0.52 in 2016, 0.53 in
2017, 0.60 in 2018 and 0.50 in 2019. The trend of liquidity ratio of Sainsbury Plc indicates that
company’s ability for paying its debts of short-term has been increased over years, but it got declined in
2019. It shows that company is not able for meeting its debt obligations of short-term (Williams and
Dobelman 2017). Further, the liquidity ratio of Tesco was 0.49 in 2013, 0.44 in 2014, 0.45 in 2015, 0.63
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in 2016, 0.68 in 2017, 0.60 in 2018 and 0.50 in 2019. Hence, the trend of liquidity ratio of Tesco indicates
that company’s position for paying its obligations of short-term from its short-term assets have been
fluctuating over years, such as it decreased then increased and again it decreased. Tesco is not capable
to pay its short-term obligations from short-term assets. Therefore, liquidity position of both entity is not
good, as they are not able for meeting their short-term obligations (Khan and Jain 2018).
Efficiency:
Efficiency ratio helps in measuring ability of company for using its assets in order to generate the
earnings. It is metric that expresses time taken by company by company for converting its inventory and
the other resources into the cash flow from sales.
2013 2014 2015 2016 2017 2018 2019
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
11.5
-13.3
42.0
35.5
26.2 27.0 29.0
11.5 11.6 13.0 10.0 13.0 16.2 13.4
CASH CYCLE DAYS
Sainsbury Tesco
The cash cycle days of Sainsbury Plc was 11.5 in 2013, -13.3 in 2014, 42 in 2015, 35.5 in 2016,
26.2 in 2017 and 27 in 2018 and 29 in 2019. The trend of cash cycle days of Sainsbury Plc indicates that
the time taken for purchasing used raw material for making product and collecting money from the sell of
product of company has been fluctuating, such as initially the days was reduced then it increased, then
again it got reduced and started increasing again (Weygandt, Kimmel and Kieso 2019). Further, the
cash cycle days of Tesco was 11.5 in 2013, 11.6 in 2014, 13.0 in 2015, 10.0 in 2016, 13.0 in 2017, 16.2
in 2018 and 13.4 in 2019. The trends of cash cycle days of Tesco indicate that days taken by Tesco for
purchasing the raw material and collection of money from selling of company’s product has been almost
stable over the years, as there were slight increase and decrease in days. Hence, after comparing both
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