The main purpose of this report is to perform the financial performance analysis of two selected companies. Ratio analysis have been conducted to understand the financial condition of the companies. The two selected companies are Sainsbury Plc and Morrison. The chosen category of financial ratio analysis is profitability ratios. The ratios that are used to evaluate the performance include gross profit margin, operating profit margin, net profit margin, return on assets, return on capital employed and return on equity.
Sainsbury is the second largest supermarket chain in the United Kingdom. With the market share of 16%, it has a very customer base in UK. The company was established in 1869 as a public limited company, The company is operating in a retailing industry with the headquarter in London, UK. It was started as the fresh food retailer and later entered into the grocery market. Wm Morrison supermarket, popularly known as the ‘Morrisons’ is the fourth largest chain of supermarket in the United Kingdom. The headquarter of the company is situated in Bradford, Yorkshire, England. The company was established in the year 1899 by William Morrison. The company was started as an egg and butter stall. The major products of the Morrison include food drink, petrol, books, clothing, florists, homeware and magazines.
The ratio analysis is one of the most important quantitative methods which is widely used for determining the profitability, efficiency, liquidity and gearing ratios. The financial ratios are also used to compare with the competitors and the industry average (Kourtis, Kourtis & Curtis, 2019). The profitability ratios suggest the ability of the company to generate profit.
The profitability ratios represents the class of financial metrics that are used to assess the ability of the business for generating profits while utilizing the assets owned by the business and bringing operational efficiency within the organization. The profitability ratios are often used by the investors and analysts to compare the company’s performance with that of competitors or the overall industry.
The gross profit ratio is assessed using the net sales revenue earned by the firm and the gross profit. The gross profit represents amount left with the firm after meeting the direct expenses of the firm (Nariswari & Nugraha, 2020). It is calculated by dividing the gross profit by the net sales revenue of the firm. The gross profit is calculated by subtracting the cost of goods sold from the total sales revenue of the firm. The gross profit ratio of Sainsbury Plc is calculated as 6.1% and 7.0%, for the year 2021 and 2020 respectively. This indicates that the company’s is incurring more direct expenses in comparison with the last year. The gross margin of Morrison is calculated as 3.6% and 2.2% for the year 2020 and 2021 respectively. It indicates that the Sainsbury Plc is in a better position in generating gross profit for the firm.
The operating profit margin refers to the ratio that compares the net sales revenue with that of operating profit earned by the firm during the financial year. The operating profit indicates the amount of revenue that is left after meeting the direct and indirect expenses, excluding interest and tax expenses (Wahyuni & Peride, 2021). The operating profit of Sainsbury has decreased drastically from £650 million in 2020 to £60 million in 2021. This had a serious impact on the operating margin of the firm as it has reduced from 2.2% in 2020 to 0.2% in 2021. The decline in operating profit is may be due to the impact of covid-19 and the increase in operating expenses of the firm. The operating margin of Morrison is reduced from 3% in 2020 to 1.4% in 2021. This shows that the operating margin of Morrison is better than Sainsbury Plc. Morrison has been more efficient than Sainsbury Plc in managing its operational expenses.
The net profit margin reflects the ability of the company to convert the net sales revenue to the actual profit of the firm. The net margin ratio is widely used by the analyst to determine the profitability position of the company (Dewi & Solihin 2020). It is calculated by dividing the net profit of the company by the net sales generated during a particular year. The net profit margin of Sainsbury’s Plc is calculated as 0.5% and -1.0% whereas that of Morrison was 2% and 0.5% for the year 2020 and 2021.
The ROA provides information about the company’s ability to generate net income using the total assets owned by the firm (Fauzan, Ayu & Nurharjanti, 2019). The ROA of both the companies has declined in 2021 when compared to the year 2020. The ROA of Sainsbury Plc has reduced from 0.5% in 2020 to -1.1% in 2021 whereas that of Morrison was 3.2% and 0.9% for the year 2020 and 2021 respectively. The negative ROA is mainly due to the losses incurred by the business in the current year. It indicates that the company’s ability to utilize its assets have been reduced. Morrison has been in a better position in utilizing its assets to generate income for the firm.
The return on capital employed is calculated by dividing the operating profit by the capital employed by the firm. The ROCE is an important indicator of financial profitability of the business. The ROCE of Sainsbury Plc is calculated as 4.1% and 0.4% for the year ended 2020 and 2021 respectively. The experienced a sharp decline in the ROCE of the company which is mainly due to the inability of the company to maintain the operational efficiency within the organization. The ROCE of Morrison has also reduced from 6.9% in 2020 to 3.2% in 2021.
The ROE of the company indicates the ability of the company to utilize the total equity invested into the business. It is ascertained by comparing the net income with the total shareholder’s equity of the firm (Efendi, Putri & Dungga, 2019). The ROE is calculated by dividing the net income by the total equity of the firm. The ROE of Sainsbury Plc has been reduced from 2.0% in 2020 to -4.2% in 2021. The company’s ROE has reduced sharply due to the reduction in the net income during the year 2021. The ROE of Morrison has reduced greatly from 7.7% in 2020 to 2.3% in 2021. However, the company has a positive ROE during the year 2021.
The accounting policies refers to the set of principles and procedures that are adopted by the management team while preparing the financial statements of the firm. Sainsbury’s Plc financial statements are prepared in accordance with the IFRS in conformity with the Companies Act. The company has incorporated the financial transactions carried out by the its subsidiaries while preparing the consolidated financial statements. The Group has applied IFRS to record for joint arrangements depending upon the rights and obligations of each investor. The financial statements are presented in Sterling, which is the functional currency of the firm. The Group has revised their accounting policies in relation with the amendments in IFRS 3, IAS 37, IAS 1, IAS 16, and IFRS 17. The group has also noted the exemption that are granted under the Covid-19 concession, according to the amendments to IFRS 16.
The financial statements of Morrison have been prepared for 52 weeks ended 31 January 2021. The elements in the financial statements are recorded in pounds sterling to the nearest million. In some cases, the company has presented the figures rounded to one decimal places. Such amounts are ascertained using the historical cost of accounting. The amendments of accounting standards that are utilized in financial statements include IFRS 3, IFRS 7 and IAS 1 and IAS 8.
The corporate culture of Sainsbury Plc involves creativity and diversity among the colleagues, sourcing with integrity, respecting the environment and ensuring excellent customer services and thereby providing the positive difference within the community that are determined to achieve sustainability throughout its operation. The Morrisons is focused on building the culture that is based on teamwork. The company is cost focused which is evident from the operational efficiency. The main features of Morrison include easy shopping experience, good quality groceries, friendly colleagues and always great value.
Conclusion
From the above discussion and analysis, it has been revealed that the profitability condition of Morrisons was better during the year 2021. The profitability ratios of Sainsbury Plc indicates that the company has not been able to maintain its operational efficiency and generate higher profit for the firm. It is to be noted that the profitability of both the companies has reduced during the year due to the impact of Covid-19 on the business. The global pandemic has caused a change in the consumer behaviour against the operational strategy of the firm. The non-financial metrics shows that Sainsbury Plc is in a better position with the market share of 16% in the United Kingdom.
References
Dewi, I. K., & Solihin, D. (2020). Pengaruh Current Ratio Dan Net Profit Margin Terhadap Harga Saham Pada Perusahaan Makanan Dan Minuman Yang Terdaftar Di Bursa Efek Indonesia (BEI) Periode 2015-2018. Jurnal Ilmiah Feasible (JIF), 2(2), 183-191. https://openjournal.unpam.ac.id/index.php/JFB/article/download/6231/4376
Efendi, A., Putri, L. P., & Dungga, S. (2019, August). The effect of debt to equity ratio and total asset turnover on return on equity in automotive companies and components in Indonesia. In 3rd International Conference on Accounting, Management and Economics 2018 (ICAME 2018) (pp. 182-188). Atlantis Press. https://www.atlantis-press.com/article/125917124.pdf
Fauzan, F., Ayu, D. A., & Nurharjanti, N. N. (2019). The Effect of Audit Committee, Leverage, Return on Assets, Company Size, and Sales Growth on Tax Avoidance. Riset Akuntansi dan Keuangan Indonesia, 4(3), 171-185. https://journals.ums.ac.id/index.php/reaksi/article/download/9338/5084
Kourtis, E., Kourtis, G., & Curtis, P. (2019). An integrated financial ratio analysis as a navigation compass through the fraudulent reporting conundrum: a case study. https://www.um.edu.mt/library/oar/bitstream/123456789/73117/1/%CE%91n_integrated_financial_ratio_analysis_as_a_navigation_compass_through_the%20_fraudulent_reporting_conundrum.pdf
Morrisons., 2022. About Us – Morrisons Corporate. Retrieved 31 March 2022, from https://www.morrisons-corporate.com/about-us/
Nariswari, T. N., & Nugraha, N. M. (2020). Profit growth: impact of net profit margin, gross profit margin and total assests turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), 87-96. https://www.ssbfnet.com/ojs/index.php/ijfbs/article/download/937/712
Sainsbury’s Plc., 2022. Welcome to Sainsburys Home. Retrieved 31 March 2022, from https://about.sainsburys.co.uk/?_ga=2.257579787.1835774112.1648711867-1496547397.1648711867
Wahyuni, S. F., & Peride, F. R. (2021). Influence investment opportunity set, operating profit margin, cash flow from operating activities and cash flow to equity on policy dividend on a metal company that listed on indonesia stock exchange. Morfai journal, 1(2), 293-310. https://radjapublika.com/index.php/MORFAI/article/download/102/102
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