Professional Documents
Culture Documents
Managing
Financial
Resources
2010/11
Assignmen
t
Module: Managing
Financial Resources
Module Tutor: Paul
Smith
Jitender Singh
12/6/2010
Executive summary
Introduction to Company
J Sainsbury plc was established in 1869 and today it is one of the leading
players in supermarket having 537 supermarkets and 335 convenience
stores. It has diversified its business in banking with Lloyds Banking
Group and in real estate sector by two joint ventures with Land Securities
Group PLC and The British Land Company PLC. (J Sainsbury Annual
Report 2010, p.1)
The Company is focusing on five main areas. J Sainsbury has good brand
name and reputation for providing quality food and services. The five
areas of focus are:
Britton and Waterston pointed that (2010, p.55), “they have usually been
implicit and understood as a common culture of accounting......”
By above statement we can state that it is not necessary that all the
companies follow the identical concepts as they are not specified in the
companies act. This means that their records may differ because they can
record and organise the accounts, they think is best. This ultimately
affects the corporate reporting.
• Income statement
• Statement of total recognised gain and losses
• Position Statement (Balance Sheet)
• Cash Flow Statement
(Halmes, et al., 2008, p.1-2)
• Inventories are valued at the lower of cost and net realisable value.
Inventories at warehouses are valued on a first-in, first-out basis.
Inventories at retail outlets are valued at calculated average cost
prices. (J Sainsbury Annual Report 2010, p. 54)
Ratio Analysis:
Ratio analysis is one of the potent tools of the financial analysis and easy
to calculate. A ratio can be used as yard measure for evaluating the
financial position and performance of a business because the absolute
accounting cannot provide the reasons behind it. Ratios give us a common
scale to measure which is helpful in appropriate evaluations because it’s
very difficult to analysis absolute figures. By calculating few ratios, it’s
possible to find out the strengths and weaknesses of the business but
they do not explain the reason behind it.
• Profitability ratios
• Efficiency ratios
• Short-term solvency and liquidity ratios
• Long-term solvency and liquidity ratios
• Investment ratios
Profitability ratios:
(FAME 2010a)
(FAME 2010a)
The return on owner’s equity has been also improving from last three
years after lots of ups and downs in the decade; presumably shareholders
are benefited from the increase in profit margin and turnover.
Shareholders hope that it doesn’t fall again, as it is at its highest of the
decade and consistently improving from past three years.
Gross margin %
(FAME 2010a)
“The Gross profit margin ratio relates the gross profit of the business to
the sales revenue generated for the same period” (Atrill and McLaney,
2008, p.192)
The graph shows that J Sainsbury has slight downturn for consecutive
three years which indicate that cost of sale has increased as a percentage
of sales. It is quite unusual to observe that gross margin of the company
was consistently rising for consecutive three years from 2001; after
reaching its highest in the decade in 2004, next year it suddenly slip to its
lowest in the decade.
This is the area where company really need to think because if they want
to sustain or improve their position in the market they need to be cost
efficient.
Profit margin %
(FAME 2010a)
“Net margin shows the proportion of sales which resulted in a profit after
all overheads (other than finance charges) had been deducted.”(Black,
2009, p 213)
Efficiency ratios:
(FAME 2010a)
Return on asset is the efficiency ratio which shows how efficient company
is using its assets. (Black, 2009, p.214)
It’s good to see that company has used its assets more efficiently as
compared to its past because of increase in sale. After decline in turnover
in 2005 company has managed to come back very well in just 5 years,
moreover from 2009 to 2010 company has enormously become more
efficient.
Current ratio
(FAME 2010a)
There is decline in current ratio throughout the ten years except a slight
rise in 2003. As published in most of the books that the idle current ratio
is 2:1, then this is severe position of the company as it has maintained
quite low current ratio. Even though in 2005 there was dramatic fall in
sale, company could face liquidity problems but the company passed
through that nightmare with the low current ratio. As J Sainsbury is a
Supermarket, there inventory turnover and debtors collection period is
quite low as comparative to other businesses.
Gearing %
(FAME 2010a)
There is no idle ratio proposed by any scholars, it is only depend upon the
company that how much company want to raise the debt. In 2010, the
gearing ratio of the company is quite low, which indicated that company
has long-term solvency. There was a hike in 2006 in gearing ratio in 2006
that was because company raised lot of debt and spent it on long term
assets which was a good decision by the company, moreover company’s
operating profit also raised that was also good news for investors. In 2007,
gearing ratio fell from 169.92% to 65.97%, because company pay back
debt by issuing shares that was also a good decision by company because
in 2007 world economy met with recession, because of the low debt
company needed to pay low interest; next year company again reduced
its debt, the low gearing ratio helped the company in surviving through
the recession. Company still maintain a low gearing ratio because UK
economy still has not out of the recession.
It’s good to compete with your previous benchmarks and should set new
benchmark for yourself but it does not mean that you should not consider
your competitors performance. One should do comparison with its
competitors in order to know its efficiency and effectiveness. Comparative
analysis is a helpful tool for investors and shareholder as both are
interested in maximising their wealth; by comparative analysis they are
able to make better decision.
Figure 1
(Fame 2010a, b)
Figure 2
(FAME 2010a,b)
Figure 3
(FAME 2010a, b)
Figure 4
(FAME 2010a, b)
does not have idle ratios like 2:1 is said to be idle current ratios; it does
not mean that business is going to experience solvency or liquidity issues
or we can’t conclude that the business will experience long-term solvency
problem, if the gearing ratio of the organisation is high, it may be that
company has very good relations with stakeholders or management is
very smart in handling these issues or they have aggressive approach.
Till now I have analysed and interpreted the data by using the financial
accounting tool i.e. ratio analysis. Now it’s time to through some light on
the management accounting and its role in evaluating business
performance.
In 2007, they identified following five areas of focus for developing their
business:
Conclusion
J Sainsbury is one of the finest supermarkets in the market and known for
providing quality of food and services. In recent years company has made
many changes in its operations and diversified in banking and real estate
sector. Company has improved its performance in financial and non-
financial field. Its increasing return on capital, operating profit and low
gearing ratio is good sign of its future growth. After 2005, company has
shown continuous improvement almost in all areas. Company’s return on
capital and equity is better than many other companies in the current
recession scenario, moreover company able to maintain its good
relationship with customers by providing quality food and services.
Company has won many awards in corporate social responsibility
moreover company has won Dow Jones Sustainability index award for year
REFERENCING
Book
Holmes, G., et al. (2008) Interpreting Company Reports and Accounts. 10th
ed. Harlow: FT Prentice Hall
Shim, Jae K., et al. (1999) Management Accounting. 2nd ed. USA: The
McGraw-Hill.
Online sources
BIBLIOGRAPHY:
Book
Holmes, G., et al. (2008) Interpreting Company Reports and Accounts. 10th
ed. Harlow: FT Prentice Hall
Shim, Jae K., et al. (1999) Management Accounting. 2nd ed. USA: The
McGraw-Hill.
Online sources