Evaluation of Financial Strategy of Sainsbury Plc

Running head: FINANCIAL STRATEGY
Financial Strategy
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL STRATEGY
Executive Summary:
The current report would aim to evaluate the financial issues and position of an
organisation, which is listed on the London Stock Exchange. Thus, Sainsbury Plc is selected as
the organisation, which is the second biggest supermarket chain in UK having 16.9% of the
market share. It could be observed that the organisation uses debt for financing majority of its
assets. It has been assessed that the leverage position of Sainsbury Plc is high, since majority of
assets are funded through debt, as the ratio has been above 0.5 over the years except in 2014,
when it was 0.49. This signifies that Sainsbury Plc have greater risk in leverage terms. Hence,
various recommendations are provided to Sainsbury Plc for improving its financial standing in
the UK supermarket.

2FINANCIAL STRATEGY
Table of Contents
Introduction:....................................................................................................................................3
Question 1:.......................................................................................................................................3
a. Evaluation of the financing strategy of Sainsbury Plc with particular reference to its gearing:
.....................................................................................................................................................3
b. Evaluation of the liquidity and solvency position of Sainsbury Plc:.....................................12
Conclusion:....................................................................................................................................19
References:....................................................................................................................................21

3FINANCIAL STRATEGY
Introduction:
The current report would aim to evaluate the financial issues and position of an
organisation, which is listed on the London Stock Exchange. Thus, Sainsbury Plc is selected as
the organisation, which is the second biggest supermarket chain in UK having 16.9% of the
market share (Sainsburys.co.uk 2018). With the rising competition in the UK supermarket, it is
becoming increasingly difficult for the business organisations to sustain their competitive
advantage in the market. In this report, adequate emphasis would be placed on gearing, liquidity
and solvency position of Sainsbury Plc for analysing its financial performance in the UK
supermarket industry. The first section would concentrate on critical dissection of the financial
strategy of the organisation with special reference to its gearing position. The latter section of the
report would shed light on analysing the liquidity and solvency position of Sainsbury Plc to
enable the shareholders and investors in their decision-making process.
Question 1:
a. Evaluation of the financing strategy of Sainsbury Plc with particular reference to its
gearing:
In 2017, the total liabilities have increased by £2,257 million (21.28%). On the other
hand, equity including reserves and retained earnings have increased by £507 million (7.97%).
Such increase constituted of 10.50% increase (£408 million) in long-term liabilities and 21.58%
increase (£664 million) in trade payables. Such increase in trade payables was not in line with
the growth in revenue of Sainsbury Plc, which was 11.56% (£2,718 million). The long-term debt

4FINANCIAL STRATEGY
of the organisation has been 33.36% of the total liabilities in 2017, which was 36.61% in 2016
(Sainsburys.co.uk 2018).
Even though the debt burden has been minimised in 2017, Sainsbury Plc has been reliant
more on raising funds through debt rather than equity financing. As a result, it has increased
gearing of the organisation from 37.90% in 2016 to 38.45% in 2017. Such increase in debt has
been fuelled through increase in revenue generating assets and investments in property, plant and
equipment (Barr 2018). This is the primary reason that the long-term borrowings of Sainsbury
Plc have declined by 6.89% in 2017 (£151 million). This implies that the rising levels of the debt
of the organisation are used for funding investment in cash as well as “other interest-bearing
securities”.
There are various sources of finance from which Sainsbury Plc obtains funding for
carrying out its overall business operations and they are demonstrated briefly as follows:
Long-term debt versus short-term debt:
The role of the long-term debt is highly significant in the context of the financial strategy
of Sainsbury Plc. In 2013, the long-term debt of the organisation was 55.25% of the overall debt
(Adewuyi 2016). However, in 2017, this proportion has fallen to 33.36% of the total debt amount
of the organisation. It has been identified that Sainsbury Plc has made investments in property,
plant and equipment along with revenue generating assets in 2013. However, these investments
have provided returns to the organisation, which are used for repaying long-term debts as well as
in improving existing business operations (Almamy, Aston and Ngwa 2016).

5FINANCIAL STRATEGY
2013 2014 2015 2016 2017
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Long-term debt versus short-term debt
Current liabilities
Non-current liabilities
Figure 1: Long-term debt and short-term debt of Sainsbury Plc for the years 2013-2017
(Source: Sainsburys.co.uk 2018)
It is evident from the above figure that the long-term financial strategy of Sainsbury Plc
has provided the organisation with additional time and flexibility in repaying its debt. As a result,
the overall financial risk of the organisation is minimised (Buckland and Davis 2016). In
addition, this long-term policy has contributed in promoting the long-term stability of Sainsbury
Plc along with reducing the cost of capital of the organisation.
In addition, the declining use of long-term debt has contributed to the growth of
Sainsbury Plc in online sales and in-stores. Furthermore, the multi-channel sales growth has
enabled Sainsbury Plc in expanding its revenue streams along with assuring long-term
sustainability through minimisation of the business risk. This paves the path for investment in
emerging markets like China, while lower interest rates are locked in over the long-term (Casu
and Gall 2016).