Introduction
In this paper, we will be conducting financial analysis for the UK based supermarket chain, J Sainsbury PLC. The sole objective of this report will be to arrive at a conclusion related to the investment opportunity in the stock. Therefore, as part of the traditional analysis, we will be unearthing the financial trend using the tool of horizontal analysis and liquidity analysis for the period of past two years.
About the company
Founded in the year, 1869, J Sainsbury PLC is a UK based supermarket chain. By the end of 2014, the company operated 1304 supermarkets and convenience stores around the nation, making it second largest supermarket company after TESCO. The company is listed on London Stock Exchange under the ticker symbol of ‘SBRY’, and is also a constituent of FTSE 100 Index.
Industry and Competitors
J Sainsbury PLC operates in retail industry and face severe rivalry from market players such as TESCO, ASDA and Morrisons, thus forming the group of so called, Big-Four Supermarkets in United Kingdom. In addition to the close rivals, new market entrants such as Aldi and Lidi, are also eroding company’s market share significantly by offering huge discounts to the customers that are constantly looking for better bargains and offers in the enormous supermarket sector. By the end of April, 2015, Sainsbury held 16.4% of the total market share, while TESCO continued to lead the industry with the market share of 28.4%. Other two rival companies, ASDA and Morrsion settled with the market share of 17.1% and 10.9%, respectively.
Horizontal Financial Analysis
Horizontal Analysis of the financial statements allows the analysts to analyze the trend or change in the relative financial item over a number of accounting periods. Important to note, the raw financial figures in the income statement or the balance sheet, offers no use and it is only through analysis techniques such as horizontal analysis, analysts are able to unearth the behavior of revenue, expenses and other financial items over a period of time. Below introduced are the horizontal financial statements for J Sainsbury PLC over the period of three years:
-Horizontal Income Statement
-Horizontal Income Statement Analysis
Referring to the above table, we can witness that during 2014, the entity witnessed a prosperous run with an appreciable surge in revenue and profit figures. As for the revenue, the amount increased by 2.77%, while controlled operating expenses, allowed the operating profit to increase by 15% relative to 2013, while the net income increased by 16.61%.
However, the recent financial year of 2015 introduced an ultra-bearish trend where -0.73% decline in the revenue figures and an enormous increase of 154.95% in the operating expenses were capable enough to erode the operating income and net profit figures by -91.94% and -123.18%, respectively.
-Horizontal Balance Sheet
-Horizontal Balance Sheet Analysis
As noted from the table above, the year 2014 was indeed a bullish period for Sainsbury. As for the current assets, the amount increased by 129.46% with major contribution from cash amount that surged by 169.90%. Overall, the asset base increased by 30.29%.
However, the situation transformed upside down the very next year as the current assets could only manage an increase of 1.29% while current liabilities soared high by 2.34%. Even the total asset base decreased by -0.02%, while the liabilities surged by 4.38%.
Liquidity Analysis
Analysis of the liquidity ratios allows the analysts to understand the ability of the entity to honor its short-term commitments. Below calculated are the three liquidity ratios for Sainsbury PLC over the period of past two years:
i)Current Ratio: Current Assets/ Current Liabilities
2014: 4362/6765= 0.64
2015: 4421/6923= 0.63
ii)Acid Ratio: (Current Assets- Inventory- Prepaid Expenses)/ Current Liabilities
2014: (4632-1005-61)/6765= 0.52
2015: (4421-997-99)/6923= 0.48
iii) Cash to Current Liabilities: Total Cash/ Current Liabilities
2014: 1641/6765= 0.24
2015: 1354/6923= 0.19
As noted from the above calculations, we can witness that while the current ratio of the company declined marginally from 0.64 to 0.63 owing to higher proportion increase in the current liabilities that increased by 2.34% relative to current assets that went up by 1.35%. However, the real liquidity position was unfolded by our calculation for acid ratio and cash ratio. As for the acid ratio, the multiple plummeted down from 0.52 to 0.48, while the cash ratio also decreased from 0.24 to 0.19, thus confirming the poor liquidity position of the company.
Conclusion: Sell
At the end of this paper, post conducting multiple financial analysis for the financial statements of Sainsbury PLC, we hereby issue a sell recommendation for the company’s stock. As we have noticed in the horizontal analysis of the income statement, during the latest financial year, the revenue figures declined and amid uncontrollable operating expenses that increased by around 155%, the profit figures took a downside slide also affecting the liquidity position of the entity.
Therefore, considering the above analysis, we recommend that the investors should avoid the Sainsbury stock for now, and rather wait for its performance over the coming quarters.
References
Balance Sheet: Sainsbury PLC. (2015, June 23). Retrieved from Morningstar: http://financials.morningstar.com/balance-sheet/bs.html?t=SBRY®ion=gbr&culture=en-US
Duncan, H. (2015, June 23). Tesco and Sainsbury's continue to lose market share this year despite rising sales, industry figures show. Retrieved from http://www.thisismoney.co.uk/money/markets/article-3030730/Tesco-Sainsbury-s-continue-lose-market-share-year-despite-rising-sales-industry-figures-show.html
Income Statement- Sainsbury. (2015, June 23). Retrieved from Morningstar: http://financials.morningstar.com/income-statement/is.html?t=SBRY®ion=gbr&culture=en-US
Profile- Sainsbury. (2015, June 23). Retrieved from Yahoo Finance: https://in.finance.yahoo.com/q/pr?s=SBRY.L
