Financial Insights And Business Intelligence
Introduction
Financial performance of an organisation shows their position and strength in the market. Financial performance help organisation to compare their current performance with previous years as well as with other organisations in the same industry. Financial performance can be easily understanding with the help of ratio analysis of the organisation. Financial plan is an investment plan which help organisation to achieve their goals and objective. This report will discuss the financial plan and financial analysis of J Sainsbury Plc. this report also covers the project ideas that help to improve financial performance of J Sainsbury Plc.
J Sainsbury plc is public limited company trading as Sainsbury plc. It is the largest chain of supermarket in UK. J Sainsbury plc is split into three divisions namely Sainsbury supermarket limited, Sainsbury’s bank and Argos. It is listed on London stock exchange. In 2020 its revenue is £28.993 billion, operating income is £986 million and net income is £152million.
1. Project idea that helps further improve the financial performance of a public company.
Organisation has to always analysis their financial performance by comparing with past year performance or with other organisation. Organisation can improve their performance if performance is stable or decreasing. There are many ways which help organisation to improve financial performances of the company.
- By lowering expense organisation’s operating profit and net profit will increase.
- By timely recovering outstanding payments from debtor’s organisation can improve their debtor’s turnover ratio and debtor’s collection period.
- By increasing interest cost organisation may take advantage of tax saving for the organisation.
- Organisation should sell unwanted and unused assets so that fixed asset turnover ratio will improve.
- Using capital investment approach organisation may increase their efficiency which increases revenue of the organisation.
- Using working capital investment approach organisation may improve its current ratio and quick ratio and helps in smoothly running of operating cycle of organisation. This may improve the financial performance of organisation (Batchimeg, 2017).
- Managing debt or equity also help organisation to improve their performances.These are the ways which helps organisation to improve their performances.
2. Create a financial plan that critically evaluates a company’s performance and assess the merits of the proposed project performance.
Financial plan of an organisation
Financial plan help organisation to know how much money they required and how they meet their long term and short term obligations. For preparation of financial plan organisation needs to analyse business. Organisation has to make assumption about cash flow for capital investment that how much cash organisation generate and how much organisation has to pay for that investment (Cole, 2018). There are some important points which J Sainsbury has to include in its plan
- Amount of capital required
- Use of that amount
- Future earning
- Balance sheet
- Cash flows
Proposed project plan of J Sainsbury Plc
J Sainsbury Plc requires a capital investment of £300 million in their business to expand their business and improve financial performances. J Sainsbury required capital investment for purchasing of fixed asset so that this will increases efficiency of organisation which leads to increases in sales and revenue for organisation. This will improve financial performance of organisation as NP ratio will improve as well as asset turnover ratio will be improved. There are many ways through which organisation can arrange funds like issue of equity share capital, preference share capital, long term borrowings and reinvestment of profits etc.
- Amount of fund required: £300 million
- Use of that amount: purchase of plant, machinery and equipment
- Future earning: it will increase the sales of organisation as production capacity will increases with the use of new fixed assets. And reduce the cost of maintenance of old machine.
Following are the ways to arrange funds and their effects on the financial statement of the organisation.
| Source of raising fund | Details | Effects on financial statement |
| Equity share capital | J Sainsbury can issue share capital to raise fund for capital investment in the organisation. Organisation does not have to pay any fixed dividend on the equity share capital. This means there is no outflow which decreases net profits of organisation (Caiani et. al. 2015). | Due to issue of equity share capital number of equity shareholders and share capital will increase which may affect the earning per share of organisation.
Revenue will be increased with capital investment will maintain the EPS of J Sainsbury plc. |
| Reinvestment of net profits | This can also be used by J Sainsbury as it does not require issue of any amount from public and others. Organisation uses its net profit for capital investment. Due to this organisation does not have to pay to anyone. | If organisation uses this approach than organisation does not have to pay from its net profits. Revenue will be increased but organisation does not have to bear any cost (Clough et. al. 2015). |
| Preference share capital | J Sainsbury can issue redeemable preference shares for arrangement of funds for capital investment. These share can be redeemed after 5 years or 10 years at premium or at par | If Sainsbury uses this approach for fund arrangement than organisation has to pay dividend every year from net profits.
Revenue will also be increased from capital investment. |
| Loan from banks | Organisation can take loan from banks with interest for example 8% pa. Every year organisation has to pay interest and with the predefined term they have to repay loan (Chirkunova et. al. 2016). Rate of interest of loan should not be more than capital employed rate of organisation. | If Sainsbury uses this approach, then organisation has to pay yearly interest this will gives organisation tax benefits. Interest is paid before tax is paid. This way also organisation can increase revenue. |
| Debentures | Organisation can use debentures as long term borrowing for capital investment purpose. Organisation can issue certain % debentures to public. Interest will be paid half yearly. Organisation should not issue high % debentures as compare to organisation rate of capital employed. | If Sainsbury uses this approach this will also tax saving approach as interest will be paid to debenture holder before the tax paid. Interest can be paid quarterly, half yearly or annually.
By using this approach organisation can generate fund for capital investment and increase revenue (Sen and Mehta, 2018). |
3. Financial analyses provided of firm and project.
Financial analysis of any organisation can be done through identifying company strategies, assessing financial statements of the company, assessing current profitability and risk factor situation of organisation and forecast the financial statement of organisation.
For assessment of financial statement and current profitability and risk factor of organisation ratio analysis plays an important role. It compares current data with past year data as well shows risk about debt and equity of the organisation (Andjelic and Vesic, 2017).
Ratio analysis of J Sainsbury Plc
Ratio analysis helps organisation to understand the financial performance of J Sainsbury Plc. Ratio analysis helps to measures the ability of business to generate revenues and profits for the organisation. Following are the ratio analysis of J Sainsbury Plc which helps to understand the financial performance of organisation.
| Ratios | 2020 | 2019 | Ratio analysis |
| Profitability ratio | |||
| Net profit ratio =
(NP / sales)* 100 |
(152 / 28993)* 100
= 0.52% |
(186 / 29007)* 100
= 0.64% |
This ratio shows that J Sainsbury not profit is decreasing as compare to last year which is not good for organisation. |
| Operating profit ratio =
(operating profits / sales)) 100 |
(255 / 28993)* 100
= 0.88% |
(202 / 29007)* 100
= 0.70% |
Operating profit ratio of J Sainsbury is increasing which is good for organisation (Satryo et. al. 2017). |
| Liquidity ratio | |||
| Current ratio =
Current assets / current liabilities |
7586 / 12047
= .63 |
7558 / 11849
= .64 |
Current ratio should be 2:1 it is ideal ratio. But J Sainsbury ratio is less than 1 which is not good as they have issues to meet their short term obligations. |
| Quick ratio =
Quick assets / current liabilities |
(7586 – 1732) / 12047
= .49 |
(7558 – 1929) / 11849
= .48 |
Ideal quick ratio is 1:1 but J Sainsbury plc ideal ratio is less than the ideal ratio which indicates that J Sainsbury in not having enough current assets excluding inventory which is readily available to meet short term obligations (Martina et. al. 2019). |
| Capital structure ratios | |||
| Equity ratio =
Shareholder’s equity / Net asset |
7277 / 15890
= .46 |
7286 / 16162
= .45 |
Higher the ratio is lower the risk for the lenders. Equity ratio shows the owners fund proportion in relation to find used in business. |
| Debt ratio = total debt / net asset | 19967 / 15890
= 1.25 |
20025 / 16162
= 1.24 |
This ratio is used to analysis long term solvency of business. Ratio more than 1 shows that organisation is mostly funded by outsiders which is risk for organisation. J Sainsbury ratio shows that they take more funds from outsiders which is organisation having risk (Ghosh et. al. 2017). |
| Interest coverage ratio
= EBIT / interest |
396 / 650
= .61 |
427 / 601
= .71 |
Higher ratio shows organisation’s ability to meet its interest expense. Lower ratio shows over use of debt and insufficient operations in the business. J Sainsbury plc’s interest ratio shows that they have taken large amount of debt. So there interest expense is more. |
| Performance ratio | |||
| Total asset turnover ratio = sales/ total asset | 28993 / 27937
= 1.03 |
29007 / 28011
= 1.03 |
Higher the ratio shows sufficient utilisation of asset of the organisation to generate sales during the year. It ratio shows that J Sainsbury using its assets properly. |
| Return on asset ratio=
(NP + interest) / total asset |
(152 + 398) / 27937
= 1.96 % |
(186 + 427) / 28011
= 2.18% |
This ratio measures the profitability of organisation employing assets of the organisation to earn profits. Higher the ratio is good for J Sainsbury (Supardi et. al. 2018). |
| Return on capital employed =
(NP + interest) / capital employed |
(152 + 398) / 15890
= .03
|
(186 + 427) / 16162
= .03 |
Return on capital employees should be always more than the rate at which company borrows money for the organisation. |
| Profitability ratios from owner’s point of view | |||
| Earnings per share =
Net profit available for equity share holder / number of equity shares |
5.8 | 7.6 | It shows how much earning organisation earns for their equity shareholders. J Sainsbury EPS is deceased from last year which is not good for organisation (Nurfadillah, 2016). |
Financial performance analysis of J Sainsbury using ratio analysis
Net profit of J Sainsbury is decreasing as compare to operating profit ratio. It is because of finance cost of J Sainsbury. J Sainsbury takes long term debt more as compare to equity in the organisation which is risk for J Sainsbury. Equity ratio is also very low as it shows J Sainsbury has less equity in proportion of assets employed in the business. Interest coverage ratio of J Sainsbury is low which shows that they have more long term debt because of interest expense is increases as finance cost of J Sainsbury Plc (Mudakemwa, 2020). J Sainsbury current ratio and quick ratio shows that organisation has not much liquidity to meet its short term objectives. Overall financial performance of J Sainsbury Plc is not good as its earnings per share also reduced from last year.
Financial performance analysis of J Sainsbury using projected plan
Using projected plan financial performance of J Sainsbury Plc will improve. Using capital investment approach organisation’s total asset turnover will be improved. Capital investment approach organisation using this amount for purchasing Property plant and equipment this will increases efficiency of organisation due to this revenue will be increased. Organisation net profit will have increased.
Due to use of this capital investment plan approach cash flows of organisation will be affected like issue of share and redemption of share will impact on financial activities, purchase of property plant and equipment will impact on investment activities and other operational activity and working capital will impact on the operating activities of cash flow statement of organisation (Mudakemwa, 2020).
Conclusion
This report discusses the various projected ideas that helps organisation to improve their financial performances. This report also covers the financial analysis of Sainsbury. Financial analysis helps to know the organisation’s policy and business activities of the organisation. This report also discusses the ratio analysis of J Sainsbury Plc to understand their current situation and risk factor in the organisation. This report discusses the projected plan of J Sainsbury. J Sainsbury uses capital investment approach which helps organisation to improve their performance by increases their revenues and utilising its fixed asset efficiently. This report also contains the performance analyse of J Sainsbury suing ratios and using projected plans and impact on cash flow statement using that projected plan. This report briefly discusses the ways which can used to arrange funds and their impact on financial statement of organisation.
Reference
Books and journals
Andjelic, S. and Vesic, T., (2017). The importance of financial analysis for business decision making. In Book of proceedings from Sixth International Scientific Conference Employment, Education and Entrepreneurship (pp. 9-25).
Batchimeg, B., (2017). Financial performance determinants of organizations: The case of Mongolian companies. Journal of competitiveness, 9(3), pp.22-33.
Caiani, A., Godin, A. and Lucarelli, S., (2015). Innovation and finance: a stock flow consistent analysis of great surges of development. In The Evolution of Economic and Innovation Systems (pp. 401-430). Springer, Cham.
Chirkunova, E.K., Kireeva, E.E., Kornilova, A.D. and Pschenichnikova, J.S., (2016). Research of instruments for financing of innovation and investment construction projects. Procedia Engineering, 153, pp.112-117.
Clough, R.H., Sears, G.A., Sears, S.K., Segner, R.O. and Rounds, J.L., (2015). Construction contracting: A practical guide to company management. John Wiley & Sons.
Cole, K. (2018). Leadership and Management: Theory and Practice. Australia: Cengage Learning Australia.
Ghosh, A., Cai, F. and Fosberg, R.H., (2017). Capital structure and firm performance. Routledge.
Martina, S., Sadalia, I. and Bukit, R., (2019). The effect of quick ratio, debt to equity ratio, earning per share, price to book value and return on equity on stock return with money supply as moderated variables (Study of Banking Companies Listed on Indonesia Stock Exchange Period 2008-2017). International Journal of Public Budgeting, Accounting and Finance, 2(3), pp.1-10.
Mudakemwa, A. (2020). The Role of Financial Analysis on the Financial Performance of Microfinance Institutions in Rwanda. A Case Study of Inyongera SACCO/Cyuve from 2011 to 2015. Germany: GRIN Verlag.
Nurfadillah, M., (2016). Analisis pengaruh earning per share, debt to equity ratio dan return on equity terhadap harga saham pt unilever indonesia tbk. Jurnal Manajemen dan Akuntansi, 12(1).
Satryo, A.G., Rokhmania, N.A. and Diptyana, P., (2017). The influence of profitability ratio, market ratio, and solvency ratio on the share prices of companies listed on LQ 45 Index. The Indonesian Accounting Review, 6(1), pp.55-66.
Sen, A.A.Y.U.S.H.I. and Mehta, V.E.D.A.N.J.A.L.I., (2018). Impact of debentures on company and its stakeholders. International Journal of Research and Analytical Reviews (IJRAR), 6(1), pp.90-96.
Supardi, H., Suratno, H.S.H. and Suyanto, S., (2018). Pengaruh Current Ratio, Debt to Asset Ratio, Total Asset Turnover dan Inflasi Terhadap Return on Asset. JIAFE (Jurnal Ilmiah Akuntansi Fakultas Ekonomi), 2(2), pp.16-27.
Online
J Sainsbury Plc (2020). Ratio analysis. [Online]. https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/annual-reports/2020/Annual_Report_and_Financial_Statements_2020.pdf
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