Ration Analysis Between Two Companies Essay Example

Ration Analysis Between Two Companies Essay UNIVERSITY OF STRATHCLYDE GRADUATE SCHOOL OF BUSINESS Master of Business Administration International MANAGING FINANCIAL RESOURCES FINANCIAL MANAGERIAL ACCOUNTING ASSIGNMENT October 2008 – September 2009 Prepared by; Submitted On; INDEX No Contents 1 2 3 4 Table of Contents Table of Figures List of Tables Table of Appendices Pg no 3 4 5 6 2 Table of Contents Title 1 2 3 4 5 6 7 8 9 Abstract Profitability Ratios Efficiency Ratios Liquidity ratios Financial Gearing Ratios Investment Ratios Result of the Analysis Limitations of Financial Reports References Pg no 7 10 15 20 22 25 27 27 29 3 Fig No TITLE Pg No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Return on capital employed ratio Return on ordinary shareholders fund Gross Profit Margin ratio Operating Profit Net Profit Margin ratio Inventory holding period(MS) Inventory holding period (J Sainsbury) Debtor payment period Creditors payment period Working capital cycle Current ratio analysis Quick ratio Analysis Gearing Ratio Interest Cover Ratio 10 11 12 13 14 15 16 17 17 18 20 21 23 23 4 List of Tables No 1 2. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Comparison of Ratios Return on Capital Employed Return on Shareholders fund Gross Profit Margin Operating profit margin Net profit Percentage Summary of profitability ratios Inventory holding period Debtor Payment period Creditor payment period Working capital cycle Sales revenue per employee Summary of Efficiency ratios Current Ratio Quick Ratio Summary of Liquidity ratios Leverage Interest cover Summary of Financial structure Dividend cover Dividend yield ratio Earnings per ratio Price/Earning Ratio Summary of Investment ratios TITLE We will write a custom essay sample on Ration Analysis Between Two Companies specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Ration Analysis Between Two Companies specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Ration Analysis Between Two Companies specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Financial statement summary Pg No 8 9 10 11 12 13 14 14 15 16 17 18 19 19 20 21 22 22 23 24 25 25 26 26 27 5 Table of Appendices Title Appendix A Appendix B Financial Statement Marks and Spencer Financial Statement J Sainsbury Page no 30 36 6 1. Abstract The report evaluates the performance and financial position of Marks Spencer plc and J Sainsbury plc. 1. a) Marks and Spencer plcThis UK Group consists of shops that specialize in apparel, food, beauty products and household items. 1. b) J Sainsbury plcThe Company consists of Sainsbury’s, which has a chain of supermarkets, convenience stores and Sainsbury’s bank. 1. ) The Report The report explains financial analysis techniques used to evaluate the performance and the financial position of both the companies for a period of 3 years, from 2006-2008. A vertical and horizontal analysis of financial position of both the companies is done. A series of ratios are used to assess the Profitability, Efficiency, Liquidity, Finan cial gearing and Investment status of the companies. 7 Table 1 FINANCIAL STATEMENT SUMMARY MARKS AND SPENCER 2006 1 Revenue 2 cost of sales 3 Gross profit 4 5 operating profit PBIT interest 7797. 7 4,812. 1 2,985. 6 850. 1 104. 4 745. 7 225. 1 520. 6 1,142. 1 4,116. 5,258. 9 2,007. 8 2013 4020. 8 SAINSBURY 2006 16,061 14,994 1,067 229 125 104 46 58 3,845 8,902 12747 4719 2007 8588. 1 5,246. 9 3,341. 2 1045. 9 109. 2 936. 7 277. 5 659. 2 846. 4 4534. 6 5381 1600. 5 2102. 5 3703 2008 9022 5,535. 2 3,486. 8 1211. 3 82. 2 1,129. 10 308. 1 821 1181. 7 5979. 3 7161 1977. 8 2821. 4 2007 17,151 15,979 1,172 520 43 477 153 324 1,940 7,636 9,576 2707 2008 17,837 16,835 1,002 530 51 479 150 329 1,722 8,393 10,115 2595 6 Profit before tax 7 Tax 8 interest and tax 9 Current asset 10 non current asset Profit after 11 total asset 12 Current liability 13 liability Non current 3877 4799. 2 8596 269 4976 2191 4786 Excluded provisions and deferred tax Excluding minority interest Excluding other receivables Excluding other payables 14 Total liability 15 Total equity 16 receivables 17 Trade Payables 18 Inventory 19 Employees 20 Dividend 21 Dividend per share Earning per share Trade 1,203. 70 1,646. 80 1,956. 70 3,886 4,349 4,935 42 228. 9 374. 3 70310 234. 6 14 168. 24 31. 3 556. 5 67. 9 259. 7 416. 3 75871 310 18. 3 169. 98 39. 1 676. 5 84. 6 242. 6 488. 9 75389 358 22. 3 158. 65 49. 2 396. 3 33 1,419 576 153300 131 9 171. 05 3. 8 330. 8 30 1706 590 146900 140 7. 35 173. 42 19. 2 549. 5 32 1703 681 151000 178 5. 5 174. 70 19. 1 332. 8 22 Number of shares 23 24 Mid market price Closing price 8 Table 2 COMPARISON OF RATIOS SAINSBURY MARKS AND SPENCER 2006 2007 2008 PROFITABILITY RATIOS 1 2 3 4 5 6 7 ROCE ROSF GROSS PROFIT% OPERATING PROFIT MARGIN NET PROFIT 26. 4 43 38 11 6. 7 0. 57 0. 38 27. 9 40 39 12 7. 7 0. 53 0. 27 25. 4 42 39 13 9. 1 0. 60 0. 35 2. 9 1 7 1 0. 4 0. 81 0. 69 7. 9 7 7 3 1. 9 0. 72 0. 50 7. 4 7 6 3 1. 8 0. 66 0. 40 2006 2007 2008 PERCENTAGE LIQUIDITY RATIOS CURRENT RATIO QUICK RATIO EFFICIENCY RATIOS INVENTORY 8 9 10 11 12 HOLDING DEBTOR PAYMENT 28 2 17 13 29 3 18 14 32 3 16 20 14 1 35 -20 13 1 39 -25 5 1 37 -22 PERIOD CREDITOR PAYMENT PERIOD WORKING CAPITAL CYCLE Sales Revenue per employee FINANCIAL STRUCTURE 110904. 6 113193. 4 119672. 6 104768. 4 116752. 9 118125. 8 13 14 LEVERAGE INTEREST COVER 63 8. 1 56 9. 6 59 14. 7 50 1. 8 34 12. 1 31 10. 4 INVESTMENT RATIOS 15 16 17 18 DIVIDEND YIELD EARNINGS PER SHARE DIVIDEND COVER PRICE/EARNING RATIO 2. 52 31. 3 2. 2 17. 8 2. 71 39. 1 2. 1 17. 3 5. 63 49. 2 2. 3 8. 1 2. 72 3. 8 0. 4 87. 1 1. 34 19. 2 2. 3 28. 6 1. 76 19. 1 1. 8 17. 4 9 Financial ratio classification Ratios are grouped into 5 categories which are related to a particular financial performance. In this report, the following categories have been used; 2. )Profitability ratios – A profitability ratio gives an idea to the degree of success in attaining profit and also to compare the financial viability of a business to others in the industry. 2. a) Return on capital employed ratio (ROCE)-The ratio expresses the relationship between the operating profit during a period and the long term capital invested in the business in that period. ROCE Operating profit Share capital+Reserves+Noncurrent liabilities RETURN ON CAPITAL EMPLOYED (ROCE %) 2006 2007 MARKS SPENCER ROCE J SAINSBURY ROCE 850. 1*100/(1203. +2013) 26 229*100/(3886+3877) 3 1045. 9*100/(1646. 8+2102. 5) 28 520*100/(4349+2269) 8 2008 1211. 3*100/(1956. 7+2821. 4) 25 530*100/(4935+2191) 7 Table 3 ROCE 30 25 20 MARKS SPENCER J SAINSBURY % 15 10 5 0 28 26 25 8 3 7 2006 2007 YEAR 2008 RETURN ON CAPITAL EMPLOYED (ROCE %) Fig 1 AnalysisThe capital employed has increased by 16. 5 % in 2007 and 27. 4 % in 2008, but the R OCE has increased only 7. 7 % in 2007 and there is a decline of 10. 7 % in 2008. The capital employed has decreased by 14. 7 % in 2007 and increased by 7. 7 % in 2008,but the ROCE has increased by 166. 7 % in 2007 and decreased by 12. % in 2008. 10 2. b) Return on Shareholders fund ratio (ROSF) – The ratio compares the amount of profit available for owners with the owner’s average stake in the business for a particular period. ROSF Net profit Ordinary Share capital+Reserves This ratio takes a rather narrower view of the capital employed, restricting the investment made by the shareholders only. And it measures how efficiently the company is using the shareholders fund to generate returns. RETURN ON ORDINARY SHAREHOLDERS FUND (ROSF) 2006 2007 MARKS SPENCER ROSF J SAINSBURY ROSF 520. 6*100/1203. 7 43 58*100/3886 1 659. 2*100/1646. 40 324*100/4349 7 2008 821*100/1956. 7 42 329*100/4935 7 Table 4 ROSF 45 40 35 30 MARKS SPENCER J SAINSBURY % 25 20 15 10 5 0 43 40 42 7 1 2006 2007 YEAR 2008 7 RETURN ON ORDINARY SHAREHOLDERS FUND (ROSF) Fig 2 AnalysisIn 2007 with an increase in shareholders fund of 36. 8 %, there is a decrease of 7 % in ROSF, while in 2008 with an increase of equity by 18. 8 %, the ROSF has gone up by 5%. The equity has increased by 11. 9% in 2007 and by 13. 5% in 2008. But there is a marked increase in ROSF in 2007, which is almost 6 times/600% of that in 2006,but it has remained the same in 2008 also. . c) Gross Profit Margin ratio-This ra tio compares the gross profit to the sales revenue during the same period. Gross Profit Margin Gross Profit * 100 Sales Revenue 11 GROSS PROFIT MARGIN % 2006 2007 MARKS SPENCER GROSS PROFIT MARGIN J SAINSBURY GROSS PROFIT MARGIN 2985. 6*100/7797. 7 38 1067*100/16061 7 3341. 2*100/8588. 1 39 1172*100/17151 7 2008 3486. 8*100/9022 39 1002*100/17837 6 Table 5 GROSS PROFIT 39 39 40 35 30 25 MARKS SPENCER J SAINSBURY % 20 15 10 5 0 38 7 7 6 2006 2007 YEAR 2008 Gross Profit Margin ratio Figure 3 Analysis; The sales revenue in 2007 for MS has gone up by 10. % and the gross profit by 11. 9%, compared to 2006. This is because of an increase in the selling price and that the cost of sales increased only at a lower rate compared to the selling price. The sales revenue of Sains compared in 2007 and 2008 has gone up by 6. 8% and 4% respectively, compared to the previous years. While the gross profit in 2007 to that of 2006 shows a hike of 9. 8%, but a decline of (14. 5%) in 2008 when compared with 2007. The decline in gross profit is attributed to a hike in the cost of purchases and a decline of gross profit margin in 2008 as compared to 2007 by a value of (14. %) and suggests a rise in cost of purchase without a rise in selling price. 2. d) OPERATING PROFIT MARGIN -This ratio also known as coverage ratio, compares the operating profit to the sales revenue for a period. Operating Profit margin Operating profit * 100 Sales Revenue 12 OPERATING PROFIT MARGIN % 2006 MARKS SPENCER OPERATING PROFIT MARGIN J SAINSBURY OPERATING PROFIT MARGIN 850. 1*100/7797. 7 11 229*100/16061 1 2007 1045. 9*100/8588. 1 12 520*100/17151 3 2008 1211. 3*100/9022 13 530*100/17837 3 Table 6 OPERATING PROFIT MARGIN 14 12 10 8 MARKS SPENCER J SAINSBURY 4 2 0 2006 1 % 6 11 13 12 3 2007 YEAR 2008 OPERATING PROFIT MARGIN Fig 4 Analysis; J Sainsbury has a much greater % of operating profit compared to MS in 2007 of 127, but it is reduced to 1. 9% in 2008. Even a drastic increase in operating profit in 2007 yields only much less margin compared to MS. The reports of 2006 shows a very high administration expense which was due to the additional head count and was brought down in 06-07 with a result of an increase in operating profit margin of 200% in 07, which is remarkable. But the revenue in 2007 has gone up only by 6. 7% which attributes to a hike in cost of sales. 2. ) Net profit Margin ratio-The ratio relates to the net profit, after taxes, of the company and relates to the sales revenue. Net Profit Margin Net Profit * 100 Sales Revenue 13 NET PROFIT PERCENTAGE 2006 MARKS SPENCER NET PROFIT PERCENTAGE J SAINSBURY NET PROFIT PERCENTAGE 520. 6*100/7797. 7 7 58*100/16061 0 2007 659. 2*100/8588. 1 8 324*100/17151 2 2008 821*100/9022 9 329*100/17837 2 Table 7 NET PROFIT PERCENTAGE 9 9 8 7 6 MARKS SPENCER J SAINSBURY % 5 4 3 2 1 0 2006 2007 YEAR 2008 0 2 2 7 8 Net profit Margin ratio Fig 5 Analysis; Even though the net profit of the Sainsbury hikes by 200% in 2007, this is only 10% profit of MS. But this profit hike could not be maintained by Sains in 2008, which is due to the increase in cost of sales and the increase in operating expenses. The year 2006 was a model year for Sainsbury with cost cutting on over heads and head count. Summary of Profitability Ratios; SAINSBURY MARKS AND SPENCER 2006 2007 2008 PROFITABILITY RATIOS 1 2 3 4 5 ROCE ROSF GROSS PROFIT% OPERATING PROFIT MARGIN NET PROFIT 26. 4 43 38 11 6. 7 27. 9 40 39 12 7. 7 25. 4 42 39 13 9. 1 2. 9 1 7 1 0. 4 7. 9 7 7 3 1. 9 7. 4 7 6 3 1. 8 2006 2007 2008 PERCENTAGE Table 8 14 Analysis- Both the companies have maintained their level of profitability throughout the 3 years. But comparing between the two companies, Marks Spencer has done much better than Sainbury. Considering the fact that supermarkets tend to operate on a low profit margin explains the poor rating of profitability ratios of Sains. As far as Sains is concerned 2007 was an excellent year with ROCE, ROSF and Operating profit increasing upto 150%. 3) Efficiency ratios- These ratios examine the ways in which various resources of the business are managed and also about collections, cash flow and operational result. 3. )Inventory holding period- The ratio gives the average number of days taken by the business to sell a piece of stock and it is desirable for this period to be as short as possible. The comparison of ratio is only meaningful when comparing similar type of companies or with the prior inventory turnover of the same company. Inventory holding period Inventory(stock)*365 cost of sales I NVENTORY HOLDING 2006 MARKS SPENCER INVENTORY HOLDING J SAINSBURY 374. 3*365/4812. 1 28 576*365/14994 2007 416. 3*365/5246. 9 29 590*365/15979 13 2008 488. 9*365/5535. 2 32 681*365/16835 15 Table 9 14 INVENTORY HOLDING INVENTORY HOLDING INVENTORY HOLDING PERIOD 32 31 30 DAYS 29 28 27 26 MARKS SPENCER 2006 28 2007 29 2008 32 Inventory holding period Marks Spencer Fig 6 15 INVENTORY HOLDING PERIOD 15 14. 5 14 DAYS 13. 5 13 12. 5 12 J SAINSBURY 2006 14 2007 13 2008 15 Inventory holding period J Sainsbury Fig 7 Analysis; The inventory holding period varies with different types of businesses. Sainsbury, a supermarket holds more inventories which is noted from the difference in corresponding current ratio and quick ratio. The inventory holding period of Sains is much lower than Marks and can be attributed to the difference in type of goods sold in these stores. . b) Receivables payment period( debtors turnover)- The ratio measures the length of time taken by the debtors to settle the account with the company. Receivables payment period Trade receivables(debtors)*365 Revenue(sales) DEBTOR PAYMENT PERIOD 2006 2007 MARKS SPENCER DEBTOR PAYMENT PERIOD J SAINSBURY DEBTOR PAYMENT PERIOD 42*365/7797. 7 2 33*365/16061 1 DEBTOR PAYMENT PERIOD 67. 9*365/8588. 1 3 30*365/17151 1 Table 10 2008 84. 6*365/9022 3 32*365/17837 1 16 RECEIVABLES(DEBTOR) PAYMENT PERIOD 3 3 2. 5 2 2 DAYS 1. 5 1 1 0. 5 0 MARKS SPENCER J SAINSBURY 1 1 3 2006 2 1 2007 3 1 008 3 1 Fig 8 Analysis; Trade receivables deals with goods or services sold on credit from the company. As noted, the payment in Sains takes place in less than a day i. e. the payments are mainly in cash. In the case of Marks, a credit allowance of up to 3 days is seen. Again this is not a high value in the industry and the risk of nonpayment by the customers is less. 3. c) Payables payment period or creditor turnover – The ratio measures the time taken by the company to make payments to its customers. Payables payment period Trade payables(creditors)*365 Purchase or cost of sales . CREDITOR PAYMENT PERIOD 2006 MARKS SPENCER CREDITOR PAYMENT PERIOD J SAINSBURY 228. 9*365/4812. 1 17 1419*365/14994 2007 259. 7*365/5246. 9 18 1706*365/15979 39 Table 11 2008 242. 6*365/5535. 2 16 1703*365/16835 37 CREDITOR PAYMENT PERIOD 35 CREDITOR PAYMENT PERIOD PAYABLES PAYMENT PERIOD 39 40 35 30 25 DAYS 20 15 10 5 0 MARKS SPENCER J SAINSBURY 2006 17 35 2007 18 39 2008 16 37 17 18 16 35 37 Fig 9 17 Analysis; It should also be noted that the trade payables of Sains is much higher than its inventory holding period. This is quite significant that the company can invest the cash from the sales much before it pays its suppliers. When compared,MS has a lower payable period and higher inventory holding period, which is not beneficial to the company. 3. d) The working capital cycle-The working capital gives the length of the time cash spends are tied up in the current assets. Working capital cycle Stock turnover+ debtors turnovercreditors turnover WORKING CAPITAL CYCLE 2006 MARKS SPENCER WORKING CAPITAL CYCLE J SAINSBURY WORKING CAPITAL CYCLE (28+2)-17 13 (14+1)-35 2007 (29+3)-18 14 (13+1)-39 -25 2008 (32+3)-16 20 (15+1)-37 -22 Table 12 ROUND FIGURE ROUND FIGURE -20 WORKING CAPITAL CYCLE WORKING CAPITAL CYCLE 20 20 15 10 5 DAYS 0 -5 -10 -15 -20 -25 MARKS SPENCER J SAINSBURY 2006 13 -20 -20 -25 2007 14 -25 2008 20 -22 -22 13 14 Fig 10 Analysis;As this ratio measures the time cash is away from the business, it is best to have shorter number of days. A negative number in the working capital happens when the company purchase the goods and sell them and the sales cash is received quicker than the company has to pay its creditors. Even though the number is negative, there is positive cash flow and this can be a model business. But the company should see that it keeps up the goodwill of the suppliers also,since the average creditor payment date is high. 18 3. f) Sales Revenue per employee; It measures the amount of revenue generated by a particular business resource-Labour. The ratio measures the productivity of the employees and a high value suggests an efficient management of the work force. Sales Revenue per employee 2006 2007 MARKS SPENCER Sales Revenue per employee J SAINSBURY Sales Revenue per employee 7797. 7m/70310 110904. 6 16061m/153300 104768 8588. 1m/75871 113193. 17151m/146900 116752. 9 2008 9022m/75389 119672. 6 17837m/151000 118125. 8 Table 13 Analysis; Both the companies have maintained a steady increase in this ratio. But in the year 2007, Sains had reduced the number of employees by (4. 3%), but the revenue hiked by 6. 8%. This is commendable. And also in 2007, with an increase of 2. 8% of employees, the company was able to hike the revenue by 4%. Summary of Efficiency Ratios; SAINSBURY M ARKS AND SPENCER 2006 2007 2008 EFFICIENCY RATIOS INVENTORY 2006 2007 2008 1 2 3 4 5 HOLDING DEBTOR PAYMENT 28 2 17 13 29 3 18 14 2 3 16 20 14 1 35 -20 13 1 39 -25 15 1 37 -22 PERIOD CREDITOR PAYMENT PERIOD WORKING CAPITAL CYCLE Sales Revenue per employee 110904. 6 113193. 4 119672. 6 104768. 4 116752. 9 118125. 8 Analysis; Table 14 Here again the type of business matters a lot with supermarket having a smaller inventory holding days and so on. But the efficiency of MS is showing a decline as far as inventory holding and creditor payment period is analysed. A negative working capital is far but advantageous for Sains by investing the cash from sales much ahead of paying the creditors. 19 ) Liquidity Ratios-These ratios measure the ability of the firm to meet the short term financial obligations and give an idea of financial health. 4. a)Current ratio- This ratio compares the current assets to the current liabilities. The drawback of current ratio is that the inventory in the current asset may be difficult to quickly liquidate . Current ratio Current Asset Current Lia bilities CURRENT RATIO 2006 MARKS SPENCER CURRENT RATIO J SAINSBURY CURRENT RATIO 1142/2007. 8 0. 57 3845/4719 0. 81 2007 846. 4/1600. 5 0. 53 1940/2707 0. 72 2008 1181. 7/1977. 8 0. 1722/2595 0. 66 Current ratio Table15 Current Ratio Analysis 0. 66 2008 0. 6 J SAINSBURY MARKS SPENCER 0. 72 2007 0. 53 0. 81 2006 0. 57 0 0. 1 0. 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 0. 9 Current Ratio Fig 11 AnalysisThe number should be above 1 and if its exceeding 2, its usually a sign of strength for the company. The reason for a low current ratio is because of the type of business, but both the companies are maintaining an average, with a slight advantage for Sainsbury. 4. b) Quick Ratio-The ratio compares the current assets (excluding inventory) by current liabilities. The minimum level for this ratio is 1. 0 times/1:1, where current assets (excluding inventory) equals current liability. 20 Quick Ratio Current asset less Inventory stock Current liability QUICK/ACID TEST RATIO 2006 MARKS SPENCER QUICK RATIO J SAINSBURY QUICK RATIO (1142-374. 3) /2007. 8 0. 38 (3845-576) /4719 0. 69 2007 (846. 4-416. 3) /1600. 5 0. 27 (1940-590) /2707 0. 5 2008 (1181. 7-488. 9) /1977. 8 0. 35 (1722-681) /2595 0. 4 QUICK/ACID TEST RATIO Table 16 Quick Ratio Analysis 0. 4 2008 0. 35 J SAINSBURY MARKS SPENCER 2007 0. 5 0. 27 2006 0. 69 0. 38 0 0. 1 . 2 0. 3 0. 4 0. 5 0. 6 0. 7 0. 8 Quick Ratio Analysis; Fig 12 The low ratios could be attributed to the type of business with inventory forming a major part of the asset and also to a high short term debt and a high investment of capital on inventory. But this ratio ignores stock. Also a vast development is seen in MS which would have increased the liabilities 21 Summary of Liquidity Ratios SAINSBURY MARKS AND SPENCER 2006 2007 2008 LIQUIDITY RATIOS 2006 2007 2008 1 2 CURRENT RATIO QUICK RATIO 0. 57 0. 38 0. 53 0. 27 0. 60 0. 35 0. 81 0. 69 0. 72 0. 50 0. 66 0. 0 Table 17 Analysis; Both the companies are nowhere near the ideal as far as current ratio is concerned, but Sains has a better value and could be due to only high stock of inventory. Even in quick ratio, both the companies are not touching the ideal ratio of 1. The ratios are decreasing in the case of Sains, which is a very bad sign of poor liquidity, but Marks is able to maintain or rather increase the liquidity in 2008. 5) Financial Gearing-The level of gearing of a business shows the extent to which it is financed from sources that require a fixed return. 5. ) Gearing ratio-The ratio measures the non current liabilities to the long term capital structure (share capital+ Reserves + Non current liability) of a business. Gearing ratio Long term borrowing(debt) Long term borrowing + Equity LEVERAGE 2006 MARKS SPENCER LEVERAGE 2013*100/(2013+1 203. 7) 63 2007 2102. 5*100/(2102. 5+1646. 8) 56 2269*100(2269+4349) 2008 2821. 4*100/(2821. 4+1956. 7) 59 2191*100/(2191+4935) J SAINSBURY 3877*100/(3877+3886) 50 LEVERAGE 34 Table 18 31 LEVERAGE 22 GEARING RATIO 31 2008 59 J SAINSBURY MARKS SPENCER YEAR 34 2007 56 50 2006 63 0 20 40 LEVERAGE 60 80 Analysis; Fig 13 There is a significant decrease (38%) in gearing in Sains because of the reduction in long term borrowing by 43% in the 3 years. With a decrease in gearing ratio, the debt of the company and hence the risk of the company also comes down. MS is a much highly geared group and any decrease in the operating profit will bring down the ROSF ratio by a higher degree. 5. b. )Interest cover ratio-The interest cover ratio measures the operating profit to the interest payable . Interest cover Profit before interet and tax Interest expense INTEREST COVER MARKS SPENCER INTEREST COVER J SAINSBURY INTEREST COVER 2006 850. /104. 4 8. 1 229/125 1. 8 2007 1045. 9/109. 2 9. 6 520/43 12. 1 Table 19 2008 1211. 3/82. 2 14. 7 530/51 10. 4 INTEREST COVER INTEREST COVER RATIO 2008 2008, 10. 4 2008, 14. 7 2007, 12. 1 2007, 9. 6 2006, 1. 8 YEAR J SAINSBURY MARKS SPENCER 2007 2006 2006, 8. 1 0 5 10 15 INTEREST COVER Fig 14 23 Analysis; The ratio gives the value of how many times operating profit is to the int erest paid by the business and MS is much ahead of Sains in 2006. But Sains has made an increase of 572% in 2007, which is incomparable. MS also has made an improvement of 53 % in 2008. Summary of Financial Gearing Ratios SAINSBURY MARKS AND SPENCER 2006 2007 2008 FINANCIAL STRUCTURE 2006 2007 2008 1 2 LEVERAGE% INTEREST COVER (times) 63 8. 1 56 9. 6 59 14. 7 50 1. 8 34 12. 1 31 10. 4 Table 20 Analysis In the financial gearing ratios, Sainsbury has shown a marked improvement in the past three years with leverage going down and the interest cover increasing. But the leverage of MS is at a high level throughout which is not good comparatively. 24 6) Investment ratios- The investment ratios that are designed to help investors assess the returns on their investment are distinct from those that are used to interpret financial statements. The ratio also tells us about the dividend policy and the prospects for future growth of the business. 6. a) Dividend cover ratio –The ratio compares the profit for the year to the dividend announced for the year. Dividend cover ratio Profit for the year Dividend announced for the year DIVIDEND COVER 2006 MARKS SPENCER DIVIDEND COVER J SAINSBURY DIVIDEND COVER 520. 6/234. 6 2. 2 58/131 0. 4 DIVIDEND COVER 2007 659. 2/310 2. 1 324/140 2. 3 2008 821/358 2. 3 329/178 1. 8 Table 21 Analysis; The profit for the year which is the earnings available for the dividend cover is compared to the actual dividend. MS is maintaining a steady dividend cover along the 3 years , whereas Sains has shown an increase of more than 400% in 2007. 6. b) Dividend yield ratio- The ratio compares dividend per share to the market value of the share Since this ratio provides a direct measure of the return on investment in the shares of a company, investors can assess the merits of different investments. Dividend yield ratio Dividend per share * 100 Market value per share DIVIDEND YIELD RATIO 2006 2007 18. 3*100/676. 5 2. 71 7. 35*100/549. 5 1. 34 2008 22. 3*100/396. 3 5. 63 5. 85*100/332. 8 1. 76 MARKS SPENCER DIVIDEND YIELD J SAINSBURY DIVIDEND YIELD 4*100/556. 5 2. 52 9*100/330. 8 2. 72 DIVIDEND YIELD RATIO Table 22 Analysis; A drop in the dividend yield ratio in the case of Sains is contributable to the increase in Market price of the shares. Sainsbury has shown a higher profitability in the year 2006-07 and the share price has doubled. But the group was not able to maintain the dividend yield or the mark et price in 2007-08, and seen 25 here is a drastic drop. The case is not different for MS with a sharp fall of share price. 6. c) Earnings per share – The ratio compares the profit for the year to the number of ordinary shares in issue. Earnings per share Profit for the year Number of ordinary shares in issue EARNINGS PER SHARE MS EARNINGS PER SHARE JSAINSBURY EARNINGS PER SHARE 2006 523. 1/168. 24*100 31. 1 58*100/171. 05 3. 4 2007 659. 9*100/169. 98 38. 8 324*100/173. 42 18. 7 Table 23 2008 821*100/158. 65 51. 7 329*100/174. 7 18. 8 EARNINGS PER SHARE Analysis; As it does not value much to compare the earning per share of two companies, the EPS for both the companies can be compared with their previous values. Both the companies show an increasing EPS which need not necessarily be due to an increased profit. In the case of MS in 2008 the ordinary shares issued has been down considerably and the EPS has gone up by 33%. 6. d) Price /earning ratio- The ratio compares the market value of a share to the earnings per share Price/Earnings ratio(P/E ratio) Market value per share Earnings per share PRICE/EARNING RATIO 2006 MARKS SPENCER PRICE/EARNING RATIO J SAINSBURY PRICE/EARNING RATIO 556. 5/31. 3 17. 8 330. 8/3. 8 87. 1 2007 676. 5/39. 1 17. 3 549. 5/19. 2 28. 6 2008 396. 3/49. 2 8. 1 332. 8/19. 1 17. 4 PRICE/EARNING RATIO Table 24 Analysis; The value of this ratio tells us how many times the share value is higher than the EPS. An unusually high P/E value of Sainsbury in 2006, is due to a fall in EPS value and an optimistic view of the investors that the company will perform better in the future.. But the decreasing P/E ratio of MS indicates a low share price compared to the EPS. But it should be noted that the earning per share of MS has steadily increased and doubled in the past 5 years, from 2003 to 2008. 26 SUMMARY OF INVESTMENT RATIOS SAINSBURY MARKS AND SPENCER 2006 2007 2008 INVESTMENT RATIOS 2006 2007 2008 1 2 3 4 DIVIDEND YIELD EARNINGS PER SHARE DIVIDEND COVER PRICE/EARNING RATIO 2. 52 31. 3 2. 2 17. 8 2. 71 39. 2. 1 17. 3 5. 63 49. 2 2. 3 8. 1 2. 72 3. 8 0. 4 87. 1 1. 34 19. 2 2. 3 28. 6 1. 76 19. 1 1. 8 17. 4 Table 25 Analysis; A fall in the EPS gives way to the abnormally high P? E ratio in 2005-06. And the high P/E ratio suggests the investors evaluation and assessment of the future. But both companies have shown a steady increase in EPS in 2007-08. The drop in P/E ratio in 2007-08 could be a result of the financial crisis wave and the sub prime crisis, which had its first taste in mid 2006. 7)RESULT OF THE ANALYSIS; On the basis of profitability, Marks and Spencer has done much better than J Sainsbury. There is a margin of 68% and 20% on an average for ROCE and Net profit for the past three years between the two companies with Marks and Spencer leading the show. But in the Efficiency ratios Sainsbury is much ahead of Marks and the financial structure also has improved to a considerable value for Sainsbury in these 3 years. As far as Investment ratios are studied, both the companies have shown a decreasing order, which could be explained by the global turmoil. The analysis provides an in-depth knowledge of the financial status and performance of the 2 companies. Results interpreted in Abstract) 8)Limitations of Financial Reports- The published financial report provide only a starting point for understanding the entity’s performance. And it should not be the last resort. The managers who prepare the reports know that the statements will be read by potential critics, who can harm the company. So they are unlikely to present the unvarnished truth. o The reports are historical in nature and highlight the past performance of the company, with very little information about the future prospects of the company . 27 o o o o o o o o o o Inflation affects the information in the reports as many of the company’s assets are undervalued because in a fairly high inflation. The company only discloses minimum amount of information which rarely satisfies the need of the users. The assets appear in the balance sheet at their original cost and it is assumed that the purchasing power of money will remain the same. The report restricts themselves to matters that can be measured in monetary terms only. The income appears on the profit and loss account when a consignment of goods is despatched and this is much before the cash is received. Unless one understands the accounting ‘jargon’, the report may be incomprehensible. As companies adopt different methods of financial accounting methods, an inter company comparison is inevitably distorted. The annual reports are often published several months after the financial year-end, by which time the information is to some extent outdated. The statements could be deliberately distorted by creative accounting. Many organisations regard these statements as marketing documents to promote the company and the management. 28 9)Reference: 1. 2. 3. 4. 5. 6. 7. 8. 9. http://uk. finance. yahoo. com/q/pr? s=mks. , company profile of Marks and Spencer http://uk. finance. yahoo. com/q/pr? s=SBRY. L, company profile of J Sainsbury plc http://en. wikipedia. org/wiki/Marks__Spencer, history of Marks and Spencers ‘Accounting and finance for non specialist’,Atrill. p,McLaney. E,Pearson Education Limited,UK,pg 27-181 ‘Financial and Management Accounting’, Ciancanelli. P, Dunn. J, Koch. B, Stewart. M, University of Strathclyde Business School, pg 17-115 www. jsainsbury. uk, Annual Report-2007 2008 www. marksandspencer. com, Annual Report-2007 2008 http://www. studentinvestor. org/downloads, 29 30 31 32 33 34 35 36 37 38 39 40 41