Discuss about The Financial Issues And Position Of Sainsbury Plc.
The current report would aim to evaluate the financial issues and position of an organisation, which is listed on the London Stock Exchange. Thus, Sainsbury Plc is selected as the organisation, which is the second biggest supermarket chain in UK having 16.9% of the market share (Sainsburys.co.uk 2018). With the rising competition in the UK supermarket, it is becoming increasingly difficult for the business organisations to sustain their competitive advantage in the market. In this report, adequate emphasis would be placed on gearing, liquidity and solvency position of Sainsbury Plc for analysing its financial performance in the UK supermarket industry. The first section would concentrate on critical dissection of the financial strategy of the organisation with special reference to its gearing position. The latter section of the report would shed light on analysing the liquidity and solvency position of Sainsbury Plc to enable the shareholders and investors in their decision-making process.
In 2017, the total liabilities have increased by £2,257 million (21.28%). On the other hand, equity including reserves and retained earnings have increased by £507 million (7.97%). Such increase constituted of 10.50% increase (£408 million) in long-term liabilities and 21.58% increase (£664 million) in trade payables. Such increase in trade payables was not in line with the growth in revenue of Sainsbury Plc, which was 11.56% (£2,718 million). The long-term debt of the organisation has been 33.36% of the total liabilities in 2017, which was 36.61% in 2016 (Sainsburys.co.uk 2018).
Even though the debt burden has been minimised in 2017, Sainsbury Plc has been reliant more on raising funds through debt rather than equity financing. As a result, it has increased gearing of the organisation from 37.90% in 2016 to 38.45% in 2017. Such increase in debt has been fuelled through increase in revenue generating assets and investments in property, plant and equipment (Barr 2018). This is the primary reason that the long-term borrowings of Sainsbury Plc have declined by 6.89% in 2017 (£151 million). This implies that the rising levels of the debt of the organisation are used for funding investment in cash as well as “other interest-bearing securities”.
There are various sources of finance from which Sainsbury Plc obtains funding for carrying out its overall business operations and they are demonstrated briefly as follows:
The role of the long-term debt is highly significant in the context of the financial strategy of Sainsbury Plc. In 2013, the long-term debt of the organisation was 55.25% of the overall debt (Adewuyi 2016). However, in 2017, this proportion has fallen to 33.36% of the total debt amount of the organisation. It has been identified that Sainsbury Plc has made investments in property, plant and equipment along with revenue generating assets in 2013. However, these investments have provided returns to the organisation, which are used for repaying long-term debts as well as in improving existing business operations (Almamy, Aston and Ngwa 2016).
It is evident from the above figure that the long-term financial strategy of Sainsbury Plc has provided the organisation with additional time and flexibility in repaying its debt. As a result, the overall financial risk of the organisation is minimised (Buckland and Davis 2016). In addition, this long-term policy has contributed in promoting the long-term stability of Sainsbury Plc along with reducing the cost of capital of the organisation.
In addition, the declining use of long-term debt has contributed to the growth of Sainsbury Plc in online sales and in-stores. Furthermore, the multi-channel sales growth has enabled Sainsbury Plc in expanding its revenue streams along with assuring long-term sustainability through minimisation of the business risk. This paves the path for investment in emerging markets like China, while lower interest rates are locked in over the long-term (Casu and Gall 2016).
As could be observed from the above figures, the growth in trade payables is more in contrast to the overall revenue growth of Sainsbury Plc. However, in 2016, the organisation has managed to pay a portion of its trade payables, as their growth has been more than that of revenue in 2015. From that time, trade payables of the organisation have varied between 12.50% and 14%. Such percentage is lower in contrast to Tesco Plc, the fierce competitor of the organisation, since its trade payables have been 19% of revenue; however, it is greater than Morrison’s Plc with 11.5% (Rahman 2015).
In 2017, the trade payables in days have been 50.6 days in 2017, which have increased from 49.97 days in 2016. Such increase would have negative impact on the financial flexibility of Sainsbury Plc, since the staggers of market growth and trading conditions remain tough. In case, this policy, if maintained, would have negative consequences on the long-term growth and flexibility of the organisation (Damodaran 2016). Hence, it is crucial for Sainsbury Plc to ensure that the trade payables do not increase over the long-term, since it would lead to increase in overall financial risk of the organisation.
In this section, the use of debt in proportion to equity as a source of funding has been explained. This section would take into consideration the overall debt of Sainsbury that includes deductions like cash and other interest bearing assets (Eccles, Krzus and Ribot 2015).
it has been found out that there is remarkable increase in the overall debt of Sainsbury Plc, especially due to the rise in short-term debt. In 2017, it could be observed that the overall debt of the organisation has been twice as much as equity, which was 1.2 times in 2013. Based on the annual report of Sainsbury 2017, it could be stated that the rising debt burden of Sainsbury Plc has been due to the increases in trade payables and amounts due to the customers of financial services.
Besides, the above-stated funding sources, Sainsbury Plc gathers funds from certain other sources as well, which are discussed briefly as follows:
It has been identified from the annual report of Sainsbury Plc that the organisation has made profit in all the years; the only exception could be observed in 2015, where it has incurred net loss. Hence, it could be stated that the organisation has maintained profitability over the years, which are used as a source of funding for improving the existing business operations (Haleem and Jehangir 2017). This denotes that the organisation has adequate amount of cash base available. However, as argued by Maynard (2017), this might not be feasible, since Sainsbury pays a major portion of its earnings in the form of dividends and the remaining money is saved for future investments.
In order to accumulate money for investment, Sainsbury Plc often minimises its level of stock or improves its future control. In addition, it has developed policies so that it could collect the debtors’ amount within limited timeframe and payments are made to the creditors lately. This policy has helped the organisation in saving additional cash that are used for funding new assets or business operations (Metzger 2014).
This would rely on the selling price of the assets and the organisation might be able to sell the surplus or the special leasing company might sell the existing assets (Scott 2015). With the help of the amount collected, Sainsbury Plc sometimes funds its new operations for including additional product lines in in-stores.
In the words of Finkler et al. (2016), the preferred stock comprises of both shares of common equity and debt. These shares are termed as preferred, since their priority is more compared to the shares of common equity in relation to dividend payment and capital during business liquidation. Sainsbury Plc sometimes issues a special type of preferred shares, which are termed as cumulative preferred shares and the dividends are collected until the payment is not made. This type of payment could be delayed, which provides an opportunity to Sainsbury Plc to raise funds from the market for funding its new projects or improving the existing ones.
|
Particulars |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Non-current liabilities |
3,846 |
3,770 |
4,075 |
3,884 |
4,292 |
|
Total equity |
5,734 |
6,005 |
5,539 |
6,365 |
6,872 |
|
Gearing ratio |
40.15% |
38.57% |
42.39% |
37.90% |
38.45% |
Table 1: Gearing ratio of Sainsbury Plc for the years 2013-2017
(Source: Sainsburys.co.uk 2018)
Based on the above figure, it could be found that the gearing ratio of Sainsbury Plc has been 38.45% in 2017, which increased slightly from 37.90% in 2016. However, stability could be observed in gearing ratio of the organisation over the five-year period, since it has between 38% and 42.5%, even though there are fluctuations in between the years. The standing gearing ratio in the UK supermarket varies between 40% and 45% (Thompson and McLarney 2017). In this case, Sainsbury Plc has maintained the desired ratio and hence, no corrective action is required at the moment for the organisation.
The slight increase in gearing in 2017 is due to the funding of revenue generating assets like new stores and other pertinent property, plant and equipment. At the time these assets accomplish their overall operational capacity, the gearing would full back towards 35% with the passage of time.
Based on the above evaluation, the following measures would be extremely useful in raising funds for Sainsbury Plc with little negative impact on gearing:
In order to evaluate the liquidity position of Sainsbury Plc, the ratios that have been taken into consideration comprise of current ratio and quick ratio and their interpretation is represented as follows:
|
Liquidity Ratios:- |
|||||
|
Particulars |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Current assets |
1,914 |
4,505 |
4,369 |
4,444 |
6,322 |
|
Inventories |
987 |
1,005 |
997 |
968 |
1,775 |
|
Current liabilities |
3,115 |
6,765 |
6,923 |
6,724 |
8,573 |
|
Current ratio |
0.61 |
0.67 |
0.63 |
0.66 |
0.74 |
|
Quick ratio |
0.30 |
0.52 |
0.49 |
0.52 |
0.53 |
Table 2: Liquidity ratios of Sainsbury Plc for the years 2013-2017
(Source: Sainsburys.co.uk 2018)
As observed from the above figure, the current ratio of Sainsbury Plc is observed to increase over the years; the only exception could be seen in 2015 where it has fallen to 0.63 from 0.67 in 2014. As commented by Dokas, Giokas and Tsamis (2014), current ratio contrasts the liquid ratio with current liabilities. The ratio for supermarket chains is relatively low, since they hold fast-moving inventories of finished products and the sales are made at immediate cash. Hence, there are little or no credit sales for the retail entities in the UK supermarket sector. The greater the ratio, the more is the liquidity, which is crucial for the business organisations (Enekwe 2015). On the contrary, greater current ratio is not effective, since the resources could be used more appropriately.
It has been observed that the ideal current ratio in the UK retail market is considered as 2 (O’Hare 2016). In case of Sainsbury Plc, the ratio is well below the desired margin, even though it has remained between 0.60 and 0.75 over the years. This seems to be a risky observation for the organisation. Risks have been inherent in the business operations of Sainsbury Plc, as the management is not in a position to clear short-term liabilities with the available current asset base. The increase in trade payables and other liabilities have lead to such lower ratio for the organisation. As a result, there might be difficulties for the creditors to deliver goods and raw materials to the organisation. Certain likely reasons are evident behind such trend of current ratio in the past five years. The increase in trade payables and other liabilities have lead to such lower ratio for the organisation. Unnecessary inventory, ineffective methods of product promotion or marketing have contributed to lower movement of products and services. As a result, the impact would be severe on the overall inventory flow (Omar et al. 2014). In addition, Sainsbury Plc might have faced slow movements in collecting trade receivables, which resulted in holding up of funds for the organisation.
On the other hand, the nature of quick ratio is identical to that of current ratio; however, it signifies a stricter test. It has been argued that it is not possible to convert inventories into immediate cash. As a result, it might be better to not include them at the time of gauging liquidity (Erdogan 2014). The minimum quick ratio is considered as 1; however, it is usual for the food retailers to have the ratio of below 1. The trend of quick ratio is similar to that of current ratio. This implies that if the inventories are not taken into account, Sainsbury Plc is more liquid in the UK supermarket.
In order to evaluate the solvency position of Sainsbury Plc, the ratios that have been taken into consideration comprise of debt-to-equity ratio, debt to assets ratio, equity multiplier and interest coverage ratio and their interpretation is represented as follows:
|
Solvency Ratios:- |
|||||
|
Particulars |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Non-current liabilities |
3,846 |
3,770 |
4,075 |
3,884 |
4,292 |
|
Total equity |
5,734 |
6,005 |
5,539 |
6,365 |
6,872 |
|
Total assets |
12,695 |
16,540 |
16,537 |
16,973 |
19,737 |
|
Operating income |
887 |
1,009 |
81 |
707 |
642 |
|
Interest expense |
142 |
159 |
180 |
167 |
136 |
|
Total liabilities |
6,961 |
8,139 |
8,580 |
10,608 |
12,865 |
|
Debt-to-equity ratio |
0.67 |
0.63 |
0.74 |
0.61 |
0.62 |
|
Debt to assets ratio |
0.55 |
0.49 |
0.52 |
0.62 |
0.65 |
|
Equity multiplier |
0.45 |
0.36 |
0.33 |
0.38 |
0.35 |
|
Interest coverage ratio |
6.25 |
6.35 |
0.45 |
4.23 |
4.72 |
Table 3: Solvency ratios of Sainsbury Plc for the years 2013-2017
(Source: Sainsburys.co.uk 2018)
Debt-to-equity ratio is the amount of borrowings of an organisation (external resources) and the funds of the shareholders, which are available internally within the organisation. The lower figures are desirable, which imply that the organisation uses equity for financing its major business activities. On the other hand, high gearing ratio denotes that most of the capital that the organisation needs is financed through borrowings (Pijper 2016).
According to the above figure, it could be seen that the debt-to-equity ratio of the organisation has varied between 0.60 and 0.74 over the five-year period. A decrease by 13% in 2016 compared to 2015 is notable due to strong balance sheet. The overall debt of Sainsbury Plc has increased considerably in 2015; however, it has fallen due to the minimisation in net debt and overall increase in net assets. In 2017, the net debt has increased again slightly due to the result of property disposals.
Debt to assets ratio is a metric, which is utilised in ascertaining the financial risk of an organisation by computing the asset quantity used for funding debt (Templar, Findlay and Hofmann 2016). This ratio is obtained by dividing the total liabilities (current liabilities and non-current liabilities) with the overall assets of the organisation. In case, if the ratio falls below 0.5, it indicates that majority of the assets of the organisation are funded through equity. On the contrary, if the ratio is exceeding 0.5, it signifies that the organisation uses debt for financing majority of its assets (Titman, Keown and Martin 2017).
The above figure clearly states that the leverage position of Sainsbury Plc is high, since majority of assets are funded through debt, as the ratio has been above 0.5 over the years except in 2014, when it was 0.49. This signifies that Sainsbury Plc have greater risk in leverage terms. Hence, the creditors of the organisation have greater chances to demand for their debt (Van Duijn et al. 2016). As a result, Sainsbury Plc needs to perform its operations more carefully, since there are concerns regarding the creditors.
With the help of equity ratio, the contribution of owners could be identified into funding of overall assets (Zainudin and Hashim 2016). More specifically, this ratio denotes the percentage of assets of an organisation hold on the part of its shareholders. In addition, with the help of this ratio, it is possible to identify the solvency position of the organisation. The organisations having greater ratios are always preferred, since they denote better financial stability in the market.
In case of Sainsbury Plc, it could be observed that Sainsbury Plc that the equity multiplier of the organisation has declined from 0.45 in 2013 to 0.36 in 2014 and the trend is inherent further in 2014 to 0.33. The only increase could be observed in 2016 where the ratio has increased to 0.38; however, it has fallen again to 0.35 in 2017. It has been observed that the standard equity in the UK supermarket is 0.55 (Zalata and Roberts 2017). Sainsbury Plc is lagging sharply behind the standard ratio, as it has relied heavily on raising funds through debt over the years. This has resulted in increased solvency risk and if the debt burden is not minimised, it could lead to liquidation of the business in future.
The interest coverage ratio depicts the association between the amounts of operating income available for covering interest payable. If the interest coverage ratio is lower, there is increased risk for the shareholders regarding the actions of the lenders (Zietlow et al. 2018). It is clearly evident from the above figure that the operating income of Sainsbury Plc is significantly higher in contrast to its interest expense.
In case of Sainsbury Plc, it could be observed that the interest coverage ratio of the organisation has increased from 6.25 times in 2013 to 6.35 times in 2014; however, there is a significant decline in the ratio to 0.45 in 2015. If the ratio falls below one, it denotes the struggling position of an organisation to meet its interest payable with the operating income. However, the ratio has increased significantly to 4.23 in 2016 and the increase is inherent further to 4.72 in 2017. This denotes that if the operating profit of Sainsbury Plc shrank 4.72 times, it would still have the ability to cover its interest expense.
In order to improve the overall liquidity and solvency position of Sainsbury Plc, it could undertake the following considerations:
Conclusion:
Based on the above discussion, it could be stated that the long-term financial strategy of Sainsbury Plc has provided the organisation with additional time and flexibility in repaying its debt. As a result, the overall financial risk of the organisation is minimised. In order to accumulate money for investment, Sainsbury Plc often minimises its level of stock or improves its future control. In addition, it has developed policies so that it could collect the debtors’ amount within limited timeframe and payments are made to the creditors lately. In addition, it could be observed that the organisation uses debt for financing majority of its assets. It has been assessed that the leverage position of Sainsbury Plc is high, since majority of assets are funded through debt, as the ratio has been above 0.5 over the years except in 2014, when it was 0.49. This signifies that Sainsbury Plc have greater risk in leverage terms. Hence, various recommendations are provided to Sainsbury Plc for improving its financial standing in the UK supermarket.
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