Ratio Analysis of Sainsbury Plc

2008 2009 2010 2011 2012

1 Current Ratio 0.607089 0.537855 0.643394 0.584976 0.647959
2 Quick Ratio 0.350302 0.301816 0.392052 0.308973 0.348852
3 NWC -1042 -1349 -996 -1104 -1221
4 Working Capital Ratio 0.15917 0.156484 0.165546 0.177826 0.164668
5 Receivables Turnover 86.58738 96.97949 92.85581 61.52187 77.95105
6 Inventory Turnover 24.721 25.9434 26.89744 24.55911 22.47655
7 Days Payable Outstanding 49.43273 50.80392 47.66921 47.5331 47.43632
8 Days Inventory Held 14.76478 14.06909 13.57007 14.8621 16.23915
9 Days Sales Outstanding 4.215395 3.763683 3.930825 5.93285 4.682426
10 Debt Ratio 51.21107 56.38393 54.2515 52.41688 54.38412
11 Cash Cycle -30.4526 -32.9711 -30.1683 -26.7381 -26.5147
12 ROE 6.666667 6.604205 12.88764 11.79941 10.624
13 Gross Profit Margin 5.617537 5.478293 5.419756 5.497109 5.431955
14 Net Operating Margin 3.00% 3.26% 3.36% 3.50% 3.54%
15 Earnings Per Share 0.191 0.166 0.321 0.344 0.32
16 Sustainable Growth Rate 3.059777 1.622486 7.578371 6.839971 5.56049
17 Actual Growth Rate(Operating Profit) 24.13% 15.14% 8.90% 10.00% 6.90%
18 Z-Score 2.15 2.3 2.29 2.32 2.27
19 Times Interest Earned 4.308943 5.257813 6.396396 6.793651 5.626761
20 Cash Turnover -11.9859 -11.0703 -12.0988 -13.6509 -13.7659
21 ROA 3.252595 2.880494 5.389222 5.614528 4.846029
22 Working Capital Requirement -1594 -1777 -1762 -1654 -1674
23 Net Liquid Balance 552 428 766 550 453
24 Current Liquidity Index 11.20958 7.688442 21.61972 -37.6122 4.562937











Current Ratio:
Current ratio compares liquid assets with current liabilities. Supermarket chains have a relatively low ratio, as they hold only
fast-moving inventories of finished goods and all of these sales are made for cash immediately (no credit sales). The higher the
ratio, the more liquid the business is, which is vital for business. On the other hand, too high current ratio is not demanded
because the resources could be used more efficiently. It is expressed as follows:
Current ratio = Current Assets / Current liabilities

The current ratio for Sainsbury's is not very strong as can be seen from the calculations. The highest value of current ratio for
Sainsbury's in the past 5 years is 0.6479 in the year 2012 and the lowest is 0.53785 in the year 2009. There has not been much
fluctuation in the current ratio in these years for Sainsbury's.

Quick Ratio:
Quick ratio is very similar to current ratio, but it represents a stricter test. It can be argued that inventories cannot be converted
into cash quickly, so it may be better to exclude them when measuring the liquidity. The minimum level is often claimed to be
1.0 times, however it is not unusual for food retailers to be below 1.0. It is expressed as follows:

Quick ratio = (Current assets - Inventory) / Current liabilities

The quick ratio for Sainsbury's is also very poor can be understood from the above calculations. The highest value of quick ratio
for Sainsbury's in the past 5 years is 0.3920 in the year 2010 and the lowest is 0.3018 in the year 2009. Here also, it can be seen
that there is very low fluctuation in the quick ratio in these years in spite having a low quick ratio throughout.

Net working capital:
A measure of both a company's efficiency and its short-term financial health. This ratio indicates whether a company has
enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While
anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is
sufficient. The working capital ratio is calculated as:

Net working capital = Total Current Assets - Total Current Liabilities

The net working capital for Sainsbury's throughout the years 2008 - 2012 is very poor as the value is constantly negative. It
proves that their current assets are not sufficient to meet up their current liabilities. This further proves Sainsbury's poor
liquidity condition in the recent years which might put them into more trouble in the near future. There has not been much
fluctuation in the working capital in those years except one in the year 2010 when they had the best working capital figure.


Cash Cycle:

A cash conversion cycle (or jut cash cycle) is the amount of time it takes for a company, business or organization to receive
payment for its products after it has paid for its materials or inventory. It attempts to measure the amount of time each net
input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. The
formula to calculate cash cycle is:

Cash cycle = Days inventory held + Days sales outstanding - Days payable outstanding

The lower the cash cycle the better it looks for a companys finances, so a negative cash cycle is very desirable. A negative cash
cycle is one in which you dont pay for your inventory or materials until after youve sold the final product associated with
them. It means youre using your working capital as efficiently as possible and have available cash for other things. As from the
above calculations, it can be seen that Sainsbury's is consistently having a negative cash cycle.

Net Liquid Balance:

Solvency of a company is measured using net liquid balance. Solvency can also be described as the ability of a corporation to
meet its long-term fixed expenses and to accomplish long-term expansion and growth. The larger the amount, the better it is
for the company. Net liquid balance is calculated using the following formula:

Net liquid balance = (Cash + Short-Term Investments) - (Notes Payable + Current Portion of Long-Term Debt)

There is quite a bit of fluctuation noticed in the net liquid balance for Sainsbury's. The values are seen to be low for all the years
which is a bad signal for the company. The highest amount of net liquid balance held by Sainsbury's is in the year 2010 and the
lowest was in the year 2009. In the most recent year 2012, it can be seen that the net liquid balance is quite low which implies
poor performance.

Times Interest Earned:
It is used to measure a company's ability to meet its debt obligations. It is usually quoted as a ratio and indicates how many
times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into
bankruptcy. Smaller values indicate reduced financial It is calculated using the following formula:
Times interest earned = EBIT / Interest Expense
The higher the value for the times interest earned, the better it is for the company. As can be seen from the calculation above,
the highest times interest is in the year 2011 which is 6.794 and the lowest is 4.309 in the year 2008. In the most recent year
2012, the times interest earned is 5.627 which means company's operating profit could drop 83% before its ability to pay
interest is impaired.

Altman's Z-score:
The Altman Z-Score is a measure of a companys health and likelihood of bankruptcy. Several key ratios are used in the
formulation of an Altman Z-Score Value. For a publicly traded company when the value for Altman's Z-score is greater than
2.99, it implies that the company is in the safe zone which implies that in the next 3 to 4 years, there is no possibility of the
company to get bankrupted. If the value of Altman's Z-score is less than 2.99 but greater than 1.81, it is in the grey zone and if it
is less than 1.81, the company is in the distress zone which leads the company to get bankrupted. The formula used to calculate
Altman's Z-score is:
Z = 1.2 T1 + 1.4 T2 + 3.3 T3 + 0.6 T4 + 0.99 T5
From the table above, it is visible that Sainsbury's is consistently in the grey zone which implies that there is a good chance of
the company getting bankrupted within the next two years if necessary steps are not taken to improve the financial health of
the company.

Current Liquidity Index:
It is developed by combining cash assets (cash plus marketable securities) and cash flow from operations in the numerator
divided by current liabilities. Such a ratio, when it decreases over time, signals potential liquidity problems. The following
formula could be used to calculate the current liquidity index:
CLI = (Cash assets
t-1
+ Cash flow from operations
t
) / (Notes payable
t-1
+ Current maturing debt
t-1
)
There is a wide fluctuation in the current liquidity index for Sainsbury as can be seen from the above calculated figures. A
decreasing trend is visible which shows the company is facing liquidity problems. This should be soon addressed and necessary
precautions need to be taken.

Sustainable growth:
The sustainable growth rate is the maximum growth rate a company can achieve consistent with the firm`s established financial
policy. Basically, it is calculated as:
Sustainable growth = (m*(1-d)*(1+(D/E))) / ((A/S)-(m*(1-d)*(1+(D/E))))
The company's sustainable growth as can be seen from the above table has remain constant other than the year 2009. In 2009,
there was a sharp decline in the profitability of Sainsbury's which has in turn affected their sustainable growth rate. Later in
2009, they overcame the loss and again were able to maintain their sustainable growth.