INTERNATIONAL FINANCIAL REPORTING – Term Paper

Introduction

This report presents an analysis of financial statements of J Sainsbury Plc and Wm Morrison Supermarkets Plc. The aim and objective of the report is to interpret and analyze their financial position through ratio analysis and comparison to make informed and better decisions for stakeholders. This information will be relevant to stakeholders as it will help them form an opinion or judgment that is based on facts and figures (Sinha, 2012). Ratios have limitations in that, they are based on historical information and the companies’ under comparison may be using different accounting methods. Since there are many ratios a firm may have good ratios under a particular category and bad ones under another thus difficult to determine if it is a weak or strong company. Also, the analysis is quite expensive, and for the ratios to be important, they have to be compared with others.

Company Profiles

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Morrison Supermarkets Plc

Morrison Supermarkets Plc operates retail supermarket stores in Britain. It is among the top five grocery chains in Britain operating 598 core stores and 336 filling stations. Morissons retails products that include fresh fruits, vegetables, baked products, wines, spirits, medicine and electrical accessories. Key operations involve the production of foods which are then moved to the national and regional distribution centers that supply the supermarkets. These are then sold together with other nonfood products in the company’s stores or through Ocado an online grocery. Morrisons had reported a loss of ; 792 million during the year 2014/15 which was attributed to the ;1.27billion write down in property values and price wars with competitors (Ft.com, 2017).

Sainsbury Plc

Sainsbury plc is top food retailer in Britain with interests in banking and property investment. The supermarket chain commands a 16.9% market share under the grocery;s category (Kantarwordpanel.com, 2017). It has 601 supermarkets, 773 convenience stores, an online grocery, and merchandise operation. Its operations are in three segments namely retailing, banking and property investment. The retailing segment sells groceries like meat, fish, fruits, vegetables, drinks and some other non-food items. The banking segment offers financial services through Sainsbury’s Bank Plc which provides loans services, insurance, and credit cards. It undertakes investments in property through joint ventures. The company had reported a loss of £72M during the year 2014/15 due to write-downs in values of property, industry’s price wars and deflation in food prices. This led to employee restructuring, a fall in its shares by 4% and a slash in the proposed full year dividend to £13.2 per share (Reuters UK, 2017).

Analysis

Liquidity ratios

 

 

WM Morrison

Sainsbury

 

2016

2015

2016

2015

Quick ratio

0.25

0.21

0.54

0.51

Current ratio

0.47

0.5

0.769

0.65

Cash/liquidity ratio

0.18

0.11

0.17

0.19

Profitability Ratios

 

 

WM Morrison %

Sainsbury%

 

2016

2015

2016

2015

Gross profit margin

3.8

4.53%

6.2

5.08

Net profit margin

1.38

-0.05%

2

-0.7

Return on capital employed

5.3

5.6

8.7

9.7

Return on equity

5.91

-21.10%

7.4

-3

Activity Ratios

 

 

WM Morrison

Sainsbury

 

2016

2015

2016

2015

Inventory turnover

25.3

26.4

23.9

24.2

Average collection period

4.88 days

4.68 days

7.6 days

7.5 days

Total assets turnover

1.75

1.82

1.4

1.42

Fixed assets turnover

2.02

2.11

2.18

2.2

Debt and Long-term solvency ratios

 

WM Morrison

Sainsbury

Item in 2015/2016

2016

2015

2016

2015

Gearing ratio

46%

65%

28.70%

42.30%

Interest cover

4 times

5 times

6.7 times

7.4 times

Market Ratios

 

 

WM Morrison

Sainsbury

 

2016

2015

2016

2015

Earnings per share

7.77

10.93

24.2

26.4

Dividend per share

5

13.65

12.1

13.2

Workings

 

 

Profitability ratios

 

 

WM Morrison

Sainsbury

   

2016

2015

Gross profit Margin

Gross profit/sales*100

617/16122*100-3.8%

761/16,8165*100=4.53%

2456/23506*100=6.2%

1208/23,775*100=5.08%

Net profit margin

Net profit/sales*100

222/16122*100=1.37%

761/16,816*100=- (0.05)%

471/23,506*100=2%

166/23,775*100= (0.7)%

Return on equity

Net Income/shareholders equity*100

222/3,756*100-5.91%

761/3,594*100= (21.1)%

471/23506*100=7.4%

166/5,539*100= (2.72)%

 Return on capital employed.

Earnings before interest, tax, amortization/Finance costs

 Ratio published in the financial statement.

 Ratio published in the financial statement.

 Ratio published in the financial statement.

 Ratio published in the financial statement.

 

 

2016

2015

2016

2015

 

Liquidity Ratios

Liquidity ratio=

 Cash + Cash Equivalents

488/2,747=0.177

241/2,273=0.09

1,143/6,724=0.17

1,285/6,923=0.186

 

Current liabilities 

 

 

 

 

Current ratio

Current assets

1,308/2,747=0.476

1,228/2,273=0.54

4,444/6,724=0.66

4,505/6,923=0.65

 

Current liabilities

 

 

 

 

Quick Ratio

Current Assets-Stock

1,308-616/2,747=0.25

1,228-658/2,273=0.25

4,444-968/6,724=0.52

4,505-997/6,923=0.51

 

Current liabilities

 

 

 

 

Activity Ratios

 

 

2016

2015

2016

2015

 

 

WM Morrison

Sainsbury

Inventory Turnover

Turnover/Average Inventory

16,122/637=25.3

16,816/637=26.4

23,506/982.5=23.9

23,775/982.5=24.2

Assets turn over

Turnover/Average total assets

16,122/9,235=1.745

16,816/9,235=1.82

23,506/16755=1.4

23,775/16755=1.42

Fixed assets turnover

Turnover/Average fixed assets

16,122/7,967-2.02

16,816/7,967=2.11

23,506/10,750=2.18

23,775/10,750=2.2

Average collection period

Average debtors/turnover*365

215.5*365/16,122=4.88

215.5*365/16,816=4.68

489.5*365/23,506=7.6

489.5*365/23,775=7.5

 

 

 

 

 

 

Market valuation ratios

   

2016

2015

2016

2015

 

 

WM Morrison

Sainsbury’s

Gearing Ratio

Net debt/net assets*100

1,746/3,756*100=46.4%

2,340/3,594*100=65.1%

1,826/6,365*100=28.7%

2,343/65,539*100=42.3%

Interest cover

Earnings before interest and tax/Interest expense

Ratio published in the financial statement.

Ratio published in the financial statement.

Ratio published in the financial statement.

Ratio published in the financial statement.

The liquidity for both companies is relatively low since all ratios were below one meaning Morrison and Sainsbury will have problems to meet their short-term obligations. Management of the companies needs to sustain sufficient liquidity without impairing levels of profitability. Due to the low ratios, suppliers may review the credit terms they offer to the companies. Sainsbury’s reported a higher return on capital employed of 8.8% compared to Morrison’s 5.3% meaning it made more profit on the average capital employed implying their sales revenue rose with no subsequent increase in cost. Investors of Sainsbury will be happy as the ratio shows the company is generating higher returns on the capital they injected and will maintain ownership, however, those of Morrison may opt to sell their shares since the return is lower. Management of Morrison should efficiently utilize resources at hand to improve profitability. A comparison between the two companies’ shows that Sainsbury’s was more profitable than Morrison’s across all available profitability measures for both years 2015 and 2016.

Average collection period indicates the number of days taken to convert debtors into cash. A shorter period is better. However, it also depends on the company’s credit terms. Morrison’s had a shorter collection period that averaged four days while Sainsbury’s was seven days. Morrisons had a higher assets turnover ratio of 1.75 compared to Sainsbury’s 1.4 implying that it was producing higher revenues from its asset base. The total assets turnover of Morrison’s had declined from 1.82 in 2015 to 1.75 in 2016, and this resulted from the increase in its fixed and current assets which had an effect on increasing total assets though there was no growth in revenues. 

Morrison’s is highly geared with a ratio of 46% compared to Sainsbury’s 28.7% meaning much of its capital financing was through debt. Lenders will rely on this ratio to determine to what extent they can advance funds to the companies. Investors will opt to invest in Sainsbury’s whose debt level is lower as they will get more returns. The interest cover for both companies had improved from 7.4 times and 5 times to 6.7 times and 4 times respectively for Sainsbury’s and Morrisons in 2015/16 implying an increase in profits generated sufficient to cater for interest expense. Sainsbury’s cover is, however, higher at 6.7 times compared to Morrisons 4 times in 2016 implying that in case its operating profits shrank by 6.7 times it would still cover the expense. 

Sainsbury’s and Morrisons reported declined earnings per share of £24.2 and £7.77 respectively from £26.4 and £10.93 due to the drop in underlying profit. However, Sainsbury’s with eps of ;24.2 outperformed Morrisons with ;7.77 meaning it was more profitable hence better for shareholders. Sainsbury’s and Morrisons reported a decrease in their dividend per share from £13.2 and £13.65 in 2015 to £12.1 and £5 respectively in 2015.The decline in dividends is in line with the companies’ strategies for conserving cash and investing it in turning around and stabilizing them. 

Performance Factors

Competition

Increased competition from cheaper stores led to sales of Morrison’s and Sainsbury’s falling by ;16billion and ;12.5 billion respectively which prompted them to spend ;315 million and ;150 million in price cuts to retain customers. (Ft.com, 2017).

Impairment costs.

;Morrison’s wrote off £1.27billion as property impairment in the year 2014/15 while its competitor Sainsbury wrote down £698 million (Reuters UK, 2017). These non-cash charges that reflect changes in the value of assets instead of money lost by the company had negatively impacted on the supermarkets’ performances and contributed primarily to the losses of ;792M and ;72M respectively.;

Food producing segment.;

Deflation results from the intense war of prices between the supermarkets causing them to lower prices to maintain customers. Morrisons and Sainsbury had invested millions of pounds in lowering prices to maintain customers however these were not effective as they still reported declined sales and invested more on price cuts (Reuters UK, 2017).

Based on the ratio analysis, it may be concluded that the performance of the two companies had slightly improved for the two years 2015 and 2016. Sainsbury’s is a good company to invest in as shown by the high profitability ratios which drive shareholder dividends. Market ratios also indicate high returns for invested funds. Management should identify means of mitigating against the impact of financial factors like write-downs in property values, food price deflation and non-financial factors like competition, online marketing and changing consumer habit which affected the companies’ performance.

References

Sinha, G., 2012. Financial statement analysis. 2nd ed. New Delhi: Phi Learning.

Rao, P. M., 2011. Financial statement analysis and reporting. New Delhi: Phi Learning

Ft.com. 2017. Property write down pushes Morrison to £792m loss. [Online] Available at: https://www.ft.com/content/ea2b1508-c887-11e4-8617-00144feab7de [Accessed 11 Feb. 2017].

Reuters UK. 2017. Sainsbury’s posts first loss in a decade. [Online] Available at: http://uk.reuters.com/article/uk-sainsbury-results-idUKKBN0NR0FV20150506 [Accessed 11 Feb. 2017].

Atril, P. ; E.J.McLaney, 2008. Accounting and finance for non specialists. s.l.:Prentice Hall Financial Times.

Combe, C. 2006. Introduction to e-business. 1st ed. Amsterdam: Butterworth-Heinemann, p.380.

Sainsbury’s reports further fall in sales. 2017. [Online] Manufacturing Journal. Available at: http://www.manufacturing-journal.net/companies-news/1311-sainsburys-reports-further-fall-in-sales [Accessed 10 Feb. 2017].