Financial Performance Evaluation of Sainsbury- Assignment
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Added on 2020-02-05
Financial Performance Evaluation of Sainsbury- Assignment
Added on 2020-02-05
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Finance for managers 1
Table of Contents INTRODUCTION................................................................................................................................3 1. Parameters for the financial as well as non-financial analysis.....................................................3 2. Different financial and non-financial areas need to be consider by investor:..............................5 3. Evaluation of financial and non-financial performance of Morrison with its competitor Sainsbury..........................................................................................................................................6 4. Reflection....................................................................................................................................12 RECOMMENDATION......................................................................................................................12 CONCLUSION..................................................................................................................................12 REFERENCES...................................................................................................................................14 APPENDIX........................................................................................................................................16 2
INTRODUCTION Finance is the most crucial element which has high level of impact on the growth and success of the firm.It is mainly because, in order to carry out regular business operations and functions, companies are require to gather appropriate amount of fund for meeting out its daily expenditures and CAPEX such as investment in plant and property, meet out debt obligations, administration and selling payments and so on. Looking at the present corporate world, companies gather large amount of money from the investors either domestic or international.Before making investment in any firm, investors ones assess their risk and return relationship associated with their potential investment and invest money in that organization where risk is minimum and possibility of return is maximum. In order to make such analysis, investors need to evaluate business operational outcome and financial strength by calculating number of ratios like profitability, long-term solvency and liquidity and so on. This assignment lay emphasizes on financial as well as non-financial performance evaluation of two British retailers, Morrison and its competitor Sainsbury. It will be done by ratio analysis strategic analysis, CSR initiatives, SWOT analysis, business model and others so as to advice investors to make solid decisions. Brief overview of business UK retail sector shows a rapid growth as numbers of retailers are delivering excellent services to the customers. WM Morrison Supermarket is a public limited company listed on LSE, founded in 1899 and operates in retail sector. It provides retailing services to the people through via both the established retail stores and online medium. The main aim of the company is to deliver top- quality food and grocery products to the customers so as to gain competitive advantage. Another retail organization that has been chosen for comparative analysis is Sainsbury founded in the year 1869, listed on LSE. It delivers retailing services to the people through its convenience stores, forecourt stores, hypermarket, supermarkets and superstores. Company also deliver services to the target audiences using online channel i.e. website development and web marketing etc. 1. Parameters for the financial as well as non-financial analysis In the current era of tough competition, all the commercial establishments require to examine and interpret their actual performance including both financial as well as non-financial results. There are many parameters available to business analysts to compare and evaluate their actual outcome either quantitative or qualitative for a given duration. The most often use parameters for monetary as well as non-monetary analyses are enumerated hereunder: Strategic Financial Analysis: SFA regarded as the process of examining and evaluating 3
financialperformanceofanorganizationsoastodiagnosebusinessproblems,operational difficulties and reason for poor performance. There are various techniques available to the Morrison for performance analysis such as common-size/vertical analysis, trend analysis and ratio analysis (Shiller, 2013). Out of these, ratio analysis is considered as the best methodology that assesses relationship between each and every variable of the reported annual accounts. Profitability analysis: WM Morisson’s profitability can be examined by utilizing ratios like gross profit and net profit (Brealey & et.al., 2012). In this, gross profits indicate the percentage that company earned through adding a mark-up on their total turnover. However, net margin helps to identify surplus percentage that company earned by generating excess revenue over total business expenses. Return on capital employed:This parameter can be used to determine percentage that firm earned on their total capital invested. In other words, it measure that how efficiently Morrison is generating yield on their total capital employed (total assets-current liabilities) in the business. Earning per share:Companies like Morrison and others generate huge proportion of long- term fund by shareholders. They invest money in the business so as to get optimum and maximum return to meet their yield expectations (Masubuchi, 2013). EPS is an effective and often used parameter to assess investment performance to interpret that in what extent, organization is able to deliver favourable financial reward to their investors in return for undertaken risk. Current ratio:This ratio helps to measure the proportion between current assets and liabilities typically used to evaluate business ability to repay suppliers on right time. It is essential for the managers to examine their liquidity position or creditworthiness to meet their short-term obligations within extended credit period(Uechi & et.al., 2015). Dividend payout ratio: In the real market, retailers kept some amount of their net earnings in the business for the future growth, success and financial risk management (Wilson, 2016). DPS is often used by the analysts to determine the proportion of net income that is distributed among stockholders as dividend. Gearing ratio: Investors often use this ratio as a parameter to determine the proportion or mix of debt and equity fund so as to examine potential risk associated with their investment(Shiller, 2013). Non-financial analysis/quantifiable performance SWOT: It is a model used for identifying internal business strength and weaknesses as well as market opportunity and threats due to volatile external market forces. Strategic planning: Business strategies and planning can also be evaluate to measure that how efficiently executives and managers plans proves successful for the corporate growth and 4
success (Uechi & et.al., 2015). Brand reputation: Market reputation and position also works as an indicator of business strength. Customer loyalty, use of upgraded and advanced technology, globalized operations, strong brand portfolio, expansion and growth projects helps to build a strong brand reputation. CSR activities: In the present times, establishments like Morrison and other retailers have to take several initiatives so as to meet their responsibilities towards all their stakeholders like consumer, society, suppliers, employees and so on(Masubuchi, 2013). 2. Different financial and non-financial areas need to be consider by investor: Every potential investor who is planning to invest fund in an organization desires to get maximum return. Therefore, they require examining both the quantitative as well as qualitative aspects so as to make solid investment decisions. According toUechi and et.al., (2015),presented ratio analysis as the best methodology for conducting quantitative and financial analysis. With the help of this, investor can examine and evaluate business performance by computing variety of ratios like profitability, solvency, liquidity and managerial efficiency. Gross margin, net margin, return on shareholders fund, ROCE, debt to equity ratio, leverage and current ratio can be used for examining the outcome of regular functions and financial health as well. Likewise,Shiller (2013),presented that investors put their money in an organization to get maximum reward henceforth, they need to examine current investors return. It can be done by computing investment ratios like earnings per share and dividend payout ratio. EPS indicates return on each holding whereas dividend payout ratio indicates that what proportion of net corporate yield is distributed among stockholders as dividend. However, it has been criticised byWilson (2016),as the study outlined that ratio analysis method has number of shortcomings. One of the most important limitations is that it gives information about quantitative values and figures of historical years, however, investors are highly motivated by the future performance. Moreover, the success of the decision based upon strategic financial analysis of company’s annual accounts is highly dependent upon reliability, truthfulness andvalidityoftheinformationreportedinfinancialstatements.Incorrectandmisleading information can lead to take wrong decisions. Further, although comparative analysis is consider useful for better decisions, but still, in the real corporate sector, companies use distinguish accounting policies and rules which differentiate financial reporting structure and can lead to take harmful decisions. In addition to this, changes in business performance may be the result of volatile market conditions that are not considered by financial statement. Therefore, investors have to use a combination of both the quantitative as well as qualitative methods for more accurate analysis. 5
According toChia-Hsing, Padmanabhan and Zhang (2013),initially, investor has to evaluate several company/firm-specific factors, more importantly, business model. Before investigating annual accounts, investors have to look at company’s business model at its website or financial reports. It delivers information to the investors that how company work out its operations and regular business activities. On the other hand,Masubuchi (2013),commented that it seems to be difficultfortheenterprisestounderstandbusinessmodelclearlyandprecisely,therefore, competitive advantage is considered as more essential element that an investor need to consider beforeputtingtheirmoney.Itisanindicatoroflong-termbusinesssuccess,growthand sustainability. In such respects, investor has to evaluate unique business preposition, strategic planningandactivities,technologies,operationaleffectiveness,strategiccapabilities,market presence and so on. Despite this, in the study ofGelman, Carlin & Rubin (2014),it has been observed that managers play a crucial role in the enterprise success, as they make policies, decisions and prepare plans for the smooth functioning. Therefore, managerial efficiency is a key or vital element that an investor needs to evaluate so as to invest money in that organization which managers are highly skilled, talented and experienced and capable to reach business towards greatest heights. However, on the critical note,Berk and et. al., (2013),said that every organization is a part of society and have some responsibility towards all the stakeholders. Establishing excellent managerial structure to meet interest and expectations of all the stakeholders is a sign of good corporate governance. In other words, it refers to a set of transparent rules, policies, activities and operational system which is developed to maintain reliability, integrity and meet out obligations towardsallthestakeholders.Incontrasttothis,Brealey&et.al.(2012),arguedthat SWOT/PESTEL models can be used to conduct both the internal as well as external analysis. This method gives assistance to the investor to examine the effectiveness of internal operations and the impact of external market forces on regular business activities and functions. It enables investors to make better and stronger decisions so as to make sure sufficient financial return for the money invested. 3. Evaluation of financial and non-financial performance of Morrison with its competitor Sainsbury Financial performance analysis of Morrison Profitability narratives: Gross margin:Morrison’s GM got declined from 6.89% to 3.83% in the year 2016 indicates that company is generating lessreturn on their total turnover due to following reasons: YearTurnover% change 6
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