Financial Performance Analysis of Sainsbury and M&S

This assignment requires a comparative analysis of the financial performance of two major UK supermarket chains: Sainsbury and Marks & Spencer. Students must utilize key financial ratios such as return on capital employed (ROCE) and return on assets (ROA) to assess the profitability and efficiency of both companies over a specific period. The analysis should identify strengths and weaknesses in their financial positions, compare their performance, and offer insights into future prospects.

FINANCIAL STATEMENT
ANALYSIS

TABLE OF CONTENTS
Coursework 2, Financial performance Comparison of Sainsbury and M&S..............................1
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

Coursework 2, Financial performance Comparison of Sainsbury and M&S
For the purpose of comparison of financial performance of both the companies, ratio
analysis of Sainsbury is done in the above coursework that will be considered and the ratio
analysis of Marks & Spencers is conducted below (Financial and key ratios of Marsk &
Spencers, 2017):
Profitability ratio Of M&S
ratios Formulas 2015 2016 2017
GPR Gross profit / revenue *100 38.66% 39.11% 38.49%
NPR Net profit / revenue *100 4.72% 3.86% 1.10%
Revenue 10311 10555 10622
Gross Profit 3986 4128 4088
Net profit 487 407 117

Graphical representation of M&S
GPR NPR
0
5
10
15
20
25
30
35
40
45
Graphical representation of Sainsbury
Gross profit ratio Net profit ratio
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2015
2016
2017
2015
2016
2017

In comparison to both the companies, sainsbury is earning good volume of revenue. It is
approximately just double than the revenue of M&S. However, irrespective of revenue, gross
profit of M&S is more than that of Sainsbury. This shows the profit earning capacity of M&S is
higher than that of Sainsbury. As, it can be seen from the data that sainsbury is showing a
negative net profit which can't be seen in the case of M&S. However, net profit of M&S is
declining over the period of three years. This situation of the company can be seen negatively as
the profit availability to the shareholders is declining in these years. This could be due to
increase in the non operating expenses of the company or increase in the tax liability. Instead,
NPR of sainsbury is showing a positive increase in these years. That means the company has
started taking corrective actions to reduce its non operating expenses or to increase its
investments in other areas. It can be said that at the current position, profit earning capacity and
the profitability position of M&S is better than that of Sainsbury. But to maintain this position
M&S has to take corrective measures as soon as possible to increase its net profit.
Efficiency ratio of M&S
ratios Formulas 2015 2016 2017
Stock turnover ratio COGS / average stock 27.27 times 17.66 times 17.66 times
Fixed assets turnover ratio
net sales / average fixed
assets 2.03 times 2.1 times 2.15 times
COGS 6326 6427 6534
Average inventory 232 364 370

Graphical representation of M&S
Stock turnover ratio Fixed assets turnover ratio
0
5
10
15
20
25
30
Graphical representation of Sainsbury
2015
2016
2017

Stock Turnover Fixed assets Turnover
0
5
10
15
20
25
30
As the name suggests, efficiency ratios indicates the efficient utilisation of the resources
of the company. Stock turnover ratio of Sainsbury is constant in three years while stock turnover
ratio of M&S has been declined in past two years. This can indicate that the efficiency of the
management has reduced in turning over the stock in the period. The stock turnover ratio of both
the companies are high but it is more of Sainsbury. This means goods of sainsbury are selling
faster in the market than that of M&S. Fixed asset turnover ratio of both the companies are
almost similar. It is been studied in the above part that ideal fixed assets turnover ratio is 5 times.
Both the companies are unable to reach this standard that means fixed assets of the companies
are not being utilised fully. From the overall performance of both the companies it can be said
that the management of sainsbury is more efficient in terms of utilising the resources than that of
M&S.
Liquidity Ratio of M&S
ratios Formulas 2015 2016 2017
current assets ratio CA / CL 0.69 0.69 0.73
acid test ratio
Quick assets /current
liabilities 0.22 0.22 0.32
current assets 17.75 17.24 20.78
2015
2016
2017

current liabilities 25.76 24.83 28.56
quick assets 5.6 5.37 9.11
working capital CA – CL -8.01 -7.59 -7.78
Graphical representation of M&S

current assets ratio acid test ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Graphical representation of Sainsbury
current ratio acid test ratio
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
In the financial year, 2016, Sainsbury’s liquidity ratio rose from 0.64 to 0.66 further, in
2017, increased to 0.74:1 that reveals that firm has strongly managed its liquidity. Although, in
2016, its current assets shows a little decline from 26.73 to 26.18 but payment of short-term
business obligation to a large extent make firm able in strong liquidity management. However, in
comparison to this, M&S’s CR remain constant to 0.69:1 because only 0.41% increase in their
2015
2016
2017
2015
2016
2017

short-term assets and 0.33% decline in their current liabilities which is little higher than that of
Sainsbury reveal that it is comparatively more able to pay their suppliers within the available
credit time so, as to maintain good relationship with them and ensure regular supply. In next year
2017, Sainsbury has maximized its CR to 0.74 because of increase in current assets like debtors,
cash, stock and others to 31.98 which indicates that managers focused in this area so, as to have
enough funds available in the business itself for paying their outstanding or deferred payment to
trade creditors timely. The ratio gone high from that of competitor, M&S’s ratio of 0.73:1 which
reflects that this year, Sainsbury has good creditworthiness. However, in retail sector, 2:1 CR is
called benchmark and according to which, firms must have current assets twice of their short-
term obligations. Both the retailers’ ratio are lower than such benchmark and arise the need for
the organization to maximize their short-term assets and pay-off fewer creditors. Strong cash
management, tight monitoring and strategies for prompt receipts from debtors & negotiation
strategies with suppliers can be worked upon (Rahman, 2017). With the help of this, firm can
maximize their working capital (WC) for strong liquidity management. In addition to this,
establishments need to keep tighten or strict monitoring over their daily overheads so that
expenditures on unnecessarily or unproductive operations can be minimized.
Solvency Ratio of M&S
ratios Formulas 2015 2016 2017
shareholders equity 39.04 40.64 38.06
total liability 60.96 59.36 61.94
Debt – equity ratio
total liability / shareholders
equity 1.56 1.46 1.63

Graphical representation of M&S
shareholders equity total liability Debt – equity ratio
0
10
20
30
40
50
60
70
2015
2016
2017

Graphical representation of Sainsbury
shareholders equity Total liabilities Debt-equity ratio
0
10
20
30
40
50
60
70
Solvency is a sign of long-term capability of the business entity to pay their long-term
debt suppliers within right time. Both retailers operate at a large scale as they are spreaded all
over the world, therefore, their capital structure consists of use of both long-term debts and
equity capital from the shareholders. Both the sources have different business implication
therefore, neither the use of only debt is found good nor only the equity composition is
appropriate for the entity. Companies are required to maintain a right balance between debt and
equity source and manage solvency position accordingly.
In FY 2016, Sainsbury’s D-E ratio came down from 1.98 to 1.67 because financial
manager had gathered more long-term capital via ordinary share capital resultant increase from
33.49 to 37.5 however, on the other side, this year, company had repaid few long-term loans.
This changes resultant lower financial leverage in order to get rid of extreme financial burden
because on loan, Sainsbury has to pay fixed installments inclusive of some interest charges
which need enough cash. However, although equity needs dividend, still, there is no obligation
of regularity in dividend payment. Similarly, M&S also reduced its debt from 1.56 to 1.46 to
minimize its leverage and meet out their long-term capital need through equity financing.
Evidencing the same, in the year 2016, equity capital gone up from 39.04 to 40.64 resultant
declined leverage. In the latest year 2017, Sainsbury improved its long-term borrowing in their
2015
2016
2017

capital structure decisions while investors have been repaid with share buy-back plan. In 2017,
equity capital declined from 37.5 to 34.82 whilst more use of debt brought fixed obligation on
the company to pay loan installments decided in the repayment schedule. It is the legal
requirement for the firm to satisfy all the agreed terms and conditions mentioned under debt
covenant. However, shareholders have been repaid because decline in profitability raised
concerns over dividend payment. Compared to rivalry, M&S’s ratio also increased from 1.46 to
1.63 still lower to Sainsbury reveal less fixed burden. In the current year, M&S repaid investors
resultant decline in total equity capital from 40.64 to 38.06 whereas debt increase resultant
higher leverage. As per the prevailing industry standard, firm need to maintain a ratio of 0.50:1
so that firm will be able to balance the composition of both the sources in their capital
composition. On the basis of it, both UK retailers needs to minimize existing high leverage by
repayment of long-term debts and meet out financial need via equity source.
Financial performance ratio of M&S
ratios Formulas 2015 2016 2017
capital employed 4344 4502 3578
return on capital employed net profit / capital employed 11.21 9.04 3.27
return on assets net profit / total assets 6.04 4.88 1

Graphical representation of M&S
return on capital employed return on assets
0
2
4
6
8
10
12
Graphical representation of Sainsbury
return on capital employed return on assets
-2
-1
0
1
2
3
4
5
6
7
Financial performance of the company is sound or not can be determined by using
financial performance ratios. These ratios are also known as profitability ratios but are based on
2015
2016
2017
2015
2016
2017

the performance. Return on capital employed indicates the earning capacity of the organisation
on capital employed (Waworuntu, Wantah and Rusmanto, 2014). Capital employed of sainsbury
is more than the capital employed of M&S. In the years 2015 and 2016, return on capital
employed of sainsbury is less than that of M&S. Here, it can also be seen that saisbury is
showing negative return in 2015. That means the financial performance of the company was
weak. However, in 2017, sainsbury has shown a positive return while M&S has shown a huge
downfall. Same is the case in return on assets as well. In 2015 sainsbury is showing a negative
return but has recovered in the following two years, while return on assets of M&S is showing a
declining trend. This can be because the utilisation of assets are not efficient. In comparing the
overall situation, financial performance of M&S was much better in 2015 in comparison to over
the years and was also better than the financial performance of Sainsbury in 2015. But, in the
following two years, financial performance of sainsbury is better than that of M&S in both the
respects i.e. return on capital employed and return on assets.
CONCLUSION
From the above study it has been concluded that, analysis of financial statements of the
company is necessary in order to run the operations of the company more effectively and
efficiently. Analysis of financial reports also helps the management in taking future economic
decisions and to identify where the company and the management is lacking behind. Financial
performance of the company can be determined and the variations between the actual position
and desired position can be identified and the corrective measures can be taken on time for thr
smooth running of the business. In the present report, financial performance of Sainsbury and
Marks & Spencers have been analysed and interpreted. From the interpretation of the financial
performance of both the companies it has been concluded that the financial position and profit
earning capacity of both the companies are sound but sainsbury is stronger than M&S. However,
liquidity position of both the companies are negative and both needs to make more investments
in current assets.

REFERENCES
Books and Journals
Rahman, A. A. A. A., 2017. The Relationship between Solvency Ratios and Profitability Ratios:
Analytical Study in Food Industrial Companies listed in Amman Bursa. International
Journal of Economics and Financial Issues. 7(2). pp.86-93.
Waworuntu, S. R., Wantah, M. D. and Rusmanto, T., 2014. CSR and financial performance
analysis: evidence from top ASEAN listed companies. Procedia-Social and Behavioral
Sciences. 164. pp.493-500.
Online
Financial and key ratios of Marsk & Spencers. 2017. [Online]. Available through
:<http://financials.morningstar.com/ratios/r.html?
t=MAKSF&region=USA&culture=en_US>. [Accessed on 23rd October 2017]

APPENDIX
Income statement of Sainsbury

Balance sheet of Sainsbury

Income statement of Marks & Spencers