J. Sainsbury Plc. Financial Management Case study

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GPM is usually used to compare between the performances of one company in consecutive periods in order to identify a trend that will help the investors decide if they will consider that the company generates enough or not. One additional particularity is that it showcases the profitability of the business itself without taking in consideration interest or tax. In the case of J. Sainsbury Plc. we can clearly say that its GPM is more or less stable as it increased by 0.32% between 2013 and 2014 but decreased by 0.71% between 2014 and 2015, these changes are not very expressive as we can simply say that the Gross profit margin was stable throughout these 3 years. However, the fact that it ended with a decline, can play against the group as the risk averse investors might not like this ratio if they see in it the beginning of a trend.

The Net Profit Margin (NPM) is a simple ration that show how mush net profit; profit after interest and tax, is generated by the company’s revenues. Usually this ratio varies from an industry to another, yet companies that are active in the same industries can expect similar results. This is why it is mainly used to recognize trends in a company’s Profits throughout the years. (Sharpe, Alexander, and Baily, 1999)

In the case of J. Sainsbury Plc. we can see an increase of 0.42% in the NPM between 2013 and 2014, yet there was a significant decrease in the NPM between 2014 and 2015 as it reached -0.34%, which means that it decreased by 4.55%. If ne looks at the income statement, it is clear that what impacted the most the 2015 profit was the fact that the administrative expenses of the group almost tripled. This is a figure that a lot of investors will dislike, and it has the potential of drawing investors away from J. Sainsbury Plc., may be not right away but if they can raise their profits in the next period, we might see a significant of investors that will leave the group.

To assess the liquidity of the group, the following ratios are to be used:

Ratio 2015 2014 2013

Current Ratio 1.83 1.82 1.58

Quick Ratio 1.41 1.40 0.76

The liquidity ratio measures how easily a firm can meet its short-term liabilities, in other words how mush represent the company’s assets in comparison with its liabilities. It helps assessing the risk there is in getting involved with the said firm. (Lofthouse, 2001). It is composd of two ratios.

First there is the Current Ratio (CR), its name is pretty much self-explanatory. It measures the current assets in relation to the current liabilities, in order to estimate how much of our liabilities does our assets cover. And in the case of J. Sainsbury Plc. we can see that during these three years the current ratio has always been bigger than one, meaning that the group can cover its short term liabilities with no problem. In addition to that the Current ratio is increasing; +0.24% from 2013 to 2014, and +0.01% from 2014 to 2015. Which adds to the attractiveness and the wellbeing of the group.

Then there is the Quick Ratio (QR), the quick ratio is simply a more specific version of the Current Ratio, as it has the same formula except that we reduce the inventory from the current assets before dividing it by the Current liabilities. This has the benefit of calculating if the company can cover its current (short-term) liabilities, without disrupting the main mission of the company (without selling the inventory). And in the case of the group we are interested in we can easily see that appart from 2013 where J. Sainsbury Plc. had a QR of 0.76, it was pretty much of the safe side as it got a QR of 1.4 and 1.41 in 2014 and 2015 respectively. Which means that the company is has in fact improved its situation and is supposed to attract more investors as it shows less risk than it used to have.

Gearing ratio:

Ratio 2015 2014 2013

Gearing 73.56% 62.78% 64.09%

The gearing ratio is used to measure to what extent is the company in dept. And due to the fact that in case of a bankruptcy the debtors have the first call on the bankrupt company’s resources, investor need to know how geared are their returns. (Lofthouse, 2001)

While the gearing ratio of J. Sainsbury Plc. decreased by 1.31% between 2013 and 2014, it increased dramatically between 2014 and 2015 as it increased by 10.78% which can be considered by many as an issue, a seven if it is still less than 100%, it also tells the investors that the company is heavily geared, and so they might go looking to invest somewhere else.

Investment ratio:

Ratio 2015 2014 2013

Dividend Cover 1.53 1.94 1.88

In this part we are only going to talk about the dividend cover, because it is what interests us in this analysis. The dividend cover is a financial ratio that presents how did the investors get from the real earnings of the company, as it is a direct comparison between how much earning is generated by each share and how much dividend is given to each share. It can be considered more or less the most representative ratio of how much does the Company increase its invertor’s wealth.

Surprisingly enough, even if J. Sainsbury technically made a loss in the 2015 financial year, they still distributed dividends and they did s very generously. Which backs up their point when they said that the loss illustrated in their annual 2015 income statement was not representative of what the real performance of the group was. And in addition to that the fact that their Dividend Cover only dropped by a little bit; 0.41%, from 1.94 in 2014 to 1.53 in 2015. Show that the company takes the fact of distributing dividends very seriously, especially after they acquired the remaining 50% Sainsbury Bank joint venture with Bank of Scotland, thing increased the long-term liabilities of the company. So we can say without any hesitation that J. Sainsbury Plc is a company that considers increasing the wealth of it investors to be a serious matter, and they are doing good efforts to keep the investors happy.

The importance of Qualitative factors:

In order to be able to clearly understand the financial performance of a company, and thoroughly analyze its performance, one should be able and willing to investigate the company’s qualitative factors. This due to the fact that it is these qualitative factors that shape the ideology behind the strategy of the company and its application. One cannot claim to be able to understand the objectives of a company, just from