Financial Analysis of Sainsbury Plc: A Study of KPIs, Ratios and Trends

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Financial Management for Managers
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Module Title: Financial Management for Managers

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Table of Contents
Answer to Question 1:...............................................................................................4
Answer to Question 2:.............................................................................................12
Answer to Question 3:.............................................................................................15
References:..............................................................................................................21
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Table of Figures
Figure 1: Profitability ratios of Sainsbury Plc for the years 2015-2017....................5
Figure 2: Efficiency ratios of Sainsbury Plc for the years 2015-2017......................7
Figure 3: Liquidity ratios of Sainsbury Plc for the years 2015-2017........................9
Figure 4: Financial gearing ratios of Sainsbury Plc for the years 2015-2017.........10
Figure 5: Investment ratios of Sainsbury Plc for the years 2015-2017...................12
Figure 6: Risk management framework of Sainsbury Plc.......................................18
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Table of Tables
Table 1: Income statement of Sainsbury Plc for the years 2015-2017....................25
Table 2: Balance sheet statement of Sainsbury Plc for the years 2014-2017..........26
Table 3: Profitability ratios of Sainsbury Plc for the years 2015-2017...................27
Table 4: Efficiency ratios of Sainsbury Plc for the years 2015-2017......................28
Table 5: Liquidity ratios of Sainsbury Plc for the years 2015-2017.......................29
Table 6: Financial gearing ratios of Sainsbury Plc for the years 2015-2017..........30
Table 7: Investment ratios of Sainsbury Plc for the years 2015-2017....................31
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Answer to Question 1:
For meeting the purpose of this assignment, Sainsbury Plc has been chosen
as the organisation, which is one of the leading retailers in the province of UK. The
organisation operates through four divisions, which include food retailing, general
merchandise retailing, clothing retailing along with property investment and
financial services (Sainsburys.co.uk 2018). In order to carry out the financial
analysis of the organisation for the past three years along with the financial actions
and policies undertaken, the following KPI analysis and ratios are taken into
consideration:
KPI analysis:
KPIs Analysis
Underlying profit before tax The trend of the past five years clearly
indicate the decline in profit due to the
rise in cost of revenue and operating
cost despite the fall in finance costs.
Retail underlying EBITDAR margin The fall in this indicator is inherent over
the years as well particularly due to the
rise in selling, general and
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administrative expenses.
Core retail capital expenditure The organisation has reduced its
spending on capital assets due to the
sale of some of its fixed assets for
increasing its working capital base.
Underlying basic earnings per share The earnings per share have degraded
over the years due to the lower return on
investments made, which is again
because of the falling popularity in the
market.
Retail underlying operating margin The operating margin has experienced
downfall as well for rise in cost of sales
and operating cost.
Retail operating cash flow The trend is fluctuating due to the lower
proceeds generated from the asset base
of the organisation.
Dividend per share The dividend per share could not be
increased due to the falling net profit.
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Profitability ratio analysis:
The three ratios that have been considered for conducting the profitability
analysis of Sainsbury Plc include gross margin, net margin and return on capital
employed (ROCE) and their detailed calculations are depicted in the form of a
table (Refer to Appendices, Appendix 4).
2015 2016 2017
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
5.08%
6.19% 6.23%
-0.70%
2.00% 1.44%
0.79%
5.91%
3.82%
Profitability ratios
Gross margin
Net margin
Return on capital
employed
Figure 1: Profitability ratios of Sainsbury Plc for the years 2015-2017
(Source: Sainsburys.co.uk 2018)
The above figure clearly illustrates that the gross margin of Sainsbury Plc
has increased from 5.08% in 2015 to 6.19% in 2016 and 6.23% in 2017. In this
regard, Adewuyi (2016) stated that gross margin helps in gauging the profitability
of a firm in manufacturing and selling products before considering any other
expenditure. On the other hand, net margin gauges the profit level after all the
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operating expenses, finance costs and corporate tax are taken into account. The net
margin of the organisation has increased from -0.70% in 2015 to 2% in 2016;
however, it has fallen again to 1.44% in 2017.
The increasing trend behind gross margin is the rising sales growth due to
opening of new 92 stores in 2014 (Maynard 2017). In addition, constant growth is
observed in selling price by 16% since 2009. In addition, the stable market share of
the organisation denotes customer loyalty and it has managed to gain one million
additional customers in 2011 due to initiation of club cards and gift vouchers.
Thus, it has resulted in improved gross margin for Sainsbury Plc. However, net
margin has declined in 2017 due to the rise in operating expenses, especially
advertising and promotion for drawing customers as a part of its financial strategy.
ROCE gauges the ability of an organisation with which investment of new
cash is made and through which profit is delivered via existing capital (Casu and
Gall 2016). In case of Sainsbury Plc, the ratio has increased from 0.79% in 2015 to
5.91% in 2016; however, it has declined to 3.82% in 2017. The growth of ROCE
has been lower in 2017 due to the cumulative effect of the accelerated investment
of Sainsbury Plc in space growth. On the other hand, due to the lower pricing
structure of the UK retail sector, an average of £0.297 is left as operating income
for every £1 revenue earned (Davies 2017). Hence, based on profitability
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Module Title: Financial Management for Managers