Introduction and Overall Performance
The purpose of this report is to show the findings
obtained from ratio analysis, which have been calculated on the financial
statements for both Sainsbury’s and Marks and Spencer. This report will also
cover the activity, operational and financial efficiency of both the businesses
from the perspective of a future investor.
Beginning with Sainsbury’s plc, it is the second
largest UK supermarket group, which consists of large supermarket stores and
smaller convenience stores. Within the larger superstores, aside from the food,
Sainsbury’s has a clothing range called TU and often has a general merchandise
area selling electricals. The company also offers financial services such as
Sainsbury’s Bank. Sainsbury’s
target customer is families as their food is less expensive than more luxury
supermarkets such as Waitrose and M. They target families, as it is more
affordable for parents that have more people in their family. Their target
customer is also mums because although they have male clothing, their extensive
TU women’s clothing range is the focus as it is larger.
Similarly, Marks and spencer plc is also one of the
largest retailers within the UK and they sell products within different
divisions ranging from homeware, to clothing and the food hall which sells
luxury food items. Regarding their target market, M&S have a great focus on
consistency with their clothing range fitting to appeal to women aged 45 and
above (Mintel, 2017). However, their food range is slightly more expensive than
standard supermarkets such as Sainsbury’s and Tesco because it is more of a premium
brand and customers are prepared to spend extra when they’re getting premium
products from the M&S brand.
the income statement shows Sainsbury’s sales were higher than Marks and Spencer
in 2016, Sainsbury’s has a lower gross profit than Marks and Spencer and the
reason for this is the fact that Sainsbury’s cost of goods sold were more than
Marks and Spencer, resulting in Marks and Spencer having a greater gross
regards to the Net Profit, Marks and Spencer has a higher retained profit in
comparison with Sainsbury’s and the reason for this is that although Marks and
Spencer’s overheads calculate to a slightly higher total, Sainsbury’s have paid
more loan interest resulting in Marks and Spencer generating a higher net
reflects the general return on the capital within the business. In the business
valuation literature, it shows proof that Return on Capital Employed is
affected by long term reverts and forces by the market (Palepu, Healy and
Bernard, 2004) Marks and Spencer is having 9% return on their capital employed
whereas Sainsbury’s only has 5%, this indicates that Marks and Spencer have
been able to accurately make good use of their resources.
Marks and Spencer have a higher profit margin and this is because they have
kept their cost of sales to a minimum and charged more for their products to
bring about sales and return a higher revenue. Whereas, Sainsbury’s are buying
their products for a higher price than M&S.
This section of the report will analyse
the financial efficiency of Sainsbury’s and Marks and Spencer, we need to
calculate current ratio because it shows if a business is capable in meeting
its current liabilities with its current assets. This ratio also offers
information regarding the first slight of financial stability. As you can see
from the financial statements, Marks and Spencer’s current ratio is 0.69:1
whereas Sainsbury’s is 0.66:1. Marks and Spencer’s has a higher current ratio,
which indicates that the business has a stronger financial health. Moreover, Marks
and Spencer appears more capable at exchanging their assets into cash in
comparison to their short-term liabilities. Even though both businesses current
ratios are below one, the data indicates Sainsbury’s does not have enough money
to be able to afford the liabilities and deal with its bills better than Marks
Another factor of measuring a company’s
financial efficiency is using the gearing ratio, which is an evaluation of input
of long-term lenders to the firm’s long-term capital format (Atrill &
McLaney, 2008). The gearing ratio for Sainsbury’s is 38% and Marks and
Spencer’s is 46%, because M have a higher gearing ratio they are placed
at a higher risk as they have more debts to pay. In a financial report from the
year before, it shows that Sainsbury has had a gearing ratio of 42.3%
(Sainsbury’s, 2015), which is slightly higher than this year meaning they have
dealt with their debts better this year. From Marks and Spencer’s financial
data from 2015, I calculated that the gearing ratio was 47.4% (The Telegraph,
2017) and this is higher than this year meaning M have also dealt with
their debts better this year.
Calculating efficiency ratios allows investors to assess how well
assets are being managed by a business (Atrill & McLaney, 2008). Using the information drawn from the
financial statements spreadsheet, Marks and Spencer have more inventory days in
comparison to Sainsbury’s. Sainsbury’s has a quick inventory turnover at
roughly 16 days meaning that the value of their average inventory will be sold
in just over two weeks. The reasoning behind Sainsbury’s fast inventory
turnover is their products are selling faster and inventory procedures are more
efficient. In contrast, Marks and
Spencer takes longer at roughly 44.4 days to turnover their inventory goods.
Their stock turnover may be slower than Sainsbury’s as a result of excess
inventory buying and poor marketing and sales.
Sainsbury’s debtor payment period is 7.9 days, which is moderately
stable in comparison to Marks and Spencer where theirs is almost 4 days longer.
It is apparent that Sainsbury’s are able to pay off their debts at a time when
they are experiencing financial difficulty even when debtors may not have the
funds to make payments. Both M and Sainsbury’s have relatively stable receivable
turnover which is great for cash flow and working capital.
M&S creditor payment period is approximately 89.9 days, which is
a lot longer than Sainsbury’s which is 50.9, this indicates that it takes a lot
longer for M to settle their payments owed to trade suppliers. However, before paying their suppliers, both
companies receive payments from their debtors. This is helpful because then
they don’t need to finance themselves as they’re able pay with the money they take
from their debtors.