The gross profit margin plays an essential role in a company’s production process since it measures the manufacturing and distribution efficiency. It shows the percentage of revenue that remains following subtraction of the cost of goods sold. An increase in gross profit margin depicts a higher efficiency in the company. For Sainsbury, there is a reduction in manufacturing and distribution efficiency as the gross profit margin reduced from 56.2% in 2008 to 54.8% in 2009. In addition to that, the net profit margin also reduced to 15.3% in 2009 from 18.4% in 2008 showing a slump in the company’s profit.
The return of capital employed (ROCE) reveals the amount of profit earned by the company through shareholders’ investments. For Sainsbury, there was a trivial increase in ROCE of about 0.9% showing that the shareholders’ investment bore little profit. The company also noted a slight reduction in the return on equity (ROE) thereby showing a decline in the profit earned with respect to the shareholders’ total equity. An organization with high ROE has the capability to generate cash internally, thus implying a negative effect on Sainsbury’s capability as a result of ROE drop.
The current ratio assumes an important role in measuring the liquidity of a company. A company with sufficient liquidity will always have the ratio above 1, otherwise it has insufficient assets to meet its liabilities hence can be considered technically insolvent. For Sainsbury, in 2008 and 2009 the current ratios were below 1 which implies that the company is unable to meet its liabilities thus technically insolvent. Moreover, the company is not improving and is therefore far from meeting its liabilities since a drop in the current ratio was realized in 2009 and the ratio is deviating further from 1. In addition, there was a reduction in acid test for the Sainsbury Company thus providing an implication that its liquidity is at risk. The acid test is essential in measuring the liquidity of a company; its reduction is reflective of a predicament in the company’s liquidity as the company is having difficulties in meeting its liabilities without affecting its stock.
Sainsbury realized a slight drop in the cash ratio from 0.35% in 2008 to 0.3% in 2009. The cash ratio is a representation of the company’s liquidity using the amount of cash or cash equivalents in the current assets and the current liabilities. A reduction in the cash ratio as is the case with Sainsbury shows a reduction in its liquidity position. For an organization, the capital gearing ratio measures the proportion of its capital in terms of prior charge capital and this includes debentures, preference shares among others. In spite of the capital gearing ratio rising, the Sainsbury Company is lowly geared as the ratio is far from 50%.
In a company, earnings per share can be used to show its performance in the market as its increase is reflective of an increase in its financial performance level. For Sainsbury, earnings per share reduced significantly in 2009 with respect to 2008 thereby providing an implication of a reduction in financial performance. Consequently, in its dividend cover the company also realized considerable reduction in 2009 thereby revealing a high risk in its ability to maintain the level of dividend paid out.
The capital turnover ratio indicates the investment capital effectiveness in producing revenues, while the total asset turnover the effectiveness in asset utilization. High ratios are indicative of high effectiveness in the utilization of assets and investment capital by the company in producing revenues. For Sainsbury, these ratios are very low thereby portraying incompetence in the management of its resources. The company is not using its capital and assets adequately to produce revenues thus low ratios were realized.
Moreover, debtor collection period was reduced from 42 days in 2008 to 37 days in 2009 while that of creditors was increased to 508 days from 494 days. This provides an implication that the company was having liquidity issues hence is attempting to increase the amount of funds available. By reducing the debtor collection period more funds will be availed from debtors while an increase in creditor collection period leads to a reduction in the amount of cash going out at any instance thereby providing the company with more available cash.
In conclusion, a financial analysis of Sainsbury Company reveals that the company has liquidity problems. The company noted a decrease in its gross and net profit margins thereby portraying a decline in performance. There was a slight increase and decrease in ROCE and ROE respectively and in addition to that, the acid test, the current ratio, earnings per share, dividend cover reduced significantly while the capital gearing ratio is extremely low thus an indication of technical insolvency. Furthermore, the company is not using its capital adequately as is portrayed by the low capital turnover ratio and the total asset turnover and as result of problems attributed to insufficient funds; the company is attempting to ensure that more cash is availed through manipulation of creditor and debtor collection periods. Regarding the financial ratios, Sainsbury lacks the ability to meet its current obligations and its management lacks skills and knowledge essential for controlling and managing its resources.