Relative Strengths and Weaknesses of Performance Measurement Techniques at Sainsbury Plc - Essay Example

Market value added has been explained to be the difference between the existing market value of the company and the capital contributed by investors of the company. In the case of Sainsbury Plc, the overall MVA from 2009 to 2014 is quoted as £4410.37m. In its specifics, the graph below depicts the trend of MVA for the company.

Writing on the variable for critiquing MVA of companies, Baum, Sarver, and Strickland (2004) emphasized the need for the MVA to increase at an even rate with the market value of the company. Rightly so, it can be said that for most of the years, Sainsbury’s MVA has been directly proportional to its market value, which is a major strength for the company. The reason this is an important variable is that when MVA is not proportional to market value, it exposes the company to too much external deficit. On the other hand, Bender (2012) also mentioned that it is very important for companies to have a steady growth rate in their MVA. This is a major weakness with Sainsbury as the company has been highly inconsistent with its MVA. Apart from the inconsistency, the rate has been declining sharply since 2009. This is a major weakness for the company as it suggests that the company is not income resourceful when the capital input from investors is taken out. The table below summarizes the strengths and weaknesses of Sainsbury’s MVA.

Strength

Weakness

1.      Overall MVA has increased to £4410.37m from 2009 to 2013.

2.      The market value is a major growth indicator for the company.

3.      Due to the market value size, investors will see it as the best external market indicator.

1.      The MVA does not make consideration for dividend return to investors.

2.      There is a lack of correlation between company size and its actual value creation ability.

3.      It is highly dependent on market prices

On the second external performance measure which is total shareholder return (TSR), Bender (2012) explained that TSR is calculated by dividing the sum of the change in stock price and dividends paid by beginning stock price. The relevance of TSR as an external performance measure is that it highlights the returns that shareholders make from investing in stocks. To have a perfect critique of the TSR of Sainsbury, it is important to relate the calculated TSR to the share price and dividend per share. This is because according to Stern (2011, p. 5), “firms with high retention ratios (low payout ratios) generally have higher growth rates in earnings than firms with lower retention ratios (higher payout ratios).” In the figure below, the share price, dividend per share, and calculated TSR of Sainsbury since 2009 are compared.

From the chart above, the only area of strength can be found with the dividend per share, which has steadily increased each other year from 2009. This means that in a fiscal measure, investors can be sure that once they purchase shares from the company, they can be sure that at the end of the year, their dividend per share will show a positive value. However, when approached from a more generalized perspective by looking at the TSR, the rate has been very unstable and this is a negative situation. Once such a situation prevails, Favaro K and Rotz G. (2011) noted that “TSR can be measured only for publicly traded companies because it requires observable stock prices.”

The table below summarizes the strengths and weaknesses of the company’s TSR.

Strength

Weakness

1.      There is steady value creation for investors on their dividend per share

2.      In some of the years such as 2011 and 2012, the TSR was above FTSE 100 values

3.      The TSR serves as the best measure of value for shareholders

1.      This is not ideal for forecasting value as it only emphasizes on the past value of the company

2.      The TSR is highly dependent on time

3.      Does not emphasize related risk such as credit risk as the focus is only on share price performance.