Profitability Analysis J SAINSBURY PLC - Assignment Example

Question divided into two parts You are required to examine in detail the latest available Annual Reports of the companies whose and websiteaddress you have been allocated 2) Absorption Costing OR Investment Appraisal Name of the student: Student ID: Name of the university: Contents Question 1 3 J SAINSBURY plc. 3 The overall Return on Capital Employed 3 Comparative analysis with regard to pricing and cost management 3 W M MORRISONS plc. 4 The overall Return on Capital Employed 4 Comparative analysis with regard to pricing and cost management 5 Question 2- Management Accounting 6 References 8 Question 1 J SAINSBURY plc. The overall Return on Capital Employed The return on capital employed for the company is an important metric for measuring the performance of a company in terms of generating returns in the capital invested by the shareholders in the company (Baker and Powell, 2009, p.101). The Return on capital employed (ROCE) for the group increased to 11.2 % in 2014 which is an increase of an impressive 19 basis points calculated on a year on year basis. This growth was enhanced by the shifts in the net pension deficits that have led to a reduction in the employed capital values. This indicates that the company has been proficient in generating returns for the shareholders and has maximized shareholders’ value through effective management processes (McLaney, 2008, p.90). Comparative analysis with regard to pricing and cost management The pricing management of the group is mainly based on the employment of the competitive pricing strategies (Leiwy and Perks, 2013, p.56). Since, the food retail segment is an intensely concentrated and competitive market sector. Therefore, Sainsbury Plc. has managed to maintain its critical success factor through the employment of aggressive competitive pricing of the products (Paul, 2006, pp.60-62). Review of the most recent available Annual Reports through Financial ratio Analysis The financial statements are the most critical components of the annual report which can be analysed through the use of the financial ratio analysis tool to evaluate the financial performances of the business (Khan, 2004, p.44). Financial Ratio analysis Sainsbury   2013 2014 Profitabilty         Gross profit margin (1387000 / 23949000)*100 5.79% (1277000 / 23303000)*100 5.48% Operating profit margin (912000 / 23949000)*100 3.81% (866000 / 23303000)*100 3.72% Liquidity         Current ratio (4369000 / 6765000) 0.65 (191400 / 3115000) 0.61 Quick ratio (4369000-1005000) / 6765000 0.50 (1914000-1005000) / 3115000 0.30 Efficiency         Inventory turnover (23949000 / 1005000) 23.83 (23303000 / 987000) 23.61 Asset tunrover (23949000 / 16540000) 1.45 (2330300 / 1269500) 1.84 Invetsemnt         Debt to equity (10535000 / 6164000) 1.71 (6857000 / 5976000) 1.15 EPS 28.26 28.26 27.3 27.3 W M MORRISONS plc. The overall Return on Capital Employed The Return on Capital Employed (ROCE) is a major performance metric that is used for the measurement of the performances of the WM Morrison Plc. group of companies. The value of the ROCE indicates the focus of the group of the capital discipline maintenance (Bernstein, 2000, p.60). It can be evaluated form the annual report of 2013-2014 that this financial year has been a peak year for the investment and financial profits for the company. As a result of the high value investments made by the group in new projects including acquisitions and business expansions, the ROCE value of the group decreased to 8.4% from 9.6% in the financial year 2012-2013. The non-recurring exceptional costs have also resulted in the fall in the ROCE value for the group. However, the company is continuously committed towards the improvement of the shareholder groups return on investments, for which, the company has to improve the ROCE values in the future years (Brigham and Ehrhardt, 2010, p.45). Comparative analysis with regard to pricing and cost management The pricing and cost management of the company has been done efficiently through the employment of honest and transparent pricing strategies in the business (Periasamy, 2009, pp.56-60). The use of clear shelf edge costs and price management as well as transparent promotions help to provide customer flexibility, while the vertical integration approaches embedded in the business model help to distribute the costs in a value creating manner throughout the supply chain (Grant, 2005, p.50). These approaches are also highlighted in the statements given by the Board of Directors and other senior corporate of the group. Review of the most recent available Annual Reports through Financial ratio Analysis Financial Ratio analysis Morrison   2013 2014 Profitabilty         Gross profit margin (1074000 / 17680000)*100 6.07% (1206000 / 18116000)*100 6.66% Operating profit margin (807000 / 17680000)*100 4.56% (945000 / 18116000)*100 5.22% Liquidity         Current ratio (1430000 / 2873000) 0.50 (1342000 / 2334000) 0.575 Quick ratio (1430000-852000) / 2873000 0.24 (1342000-781000) / 2334000 0.240 Efficiency         Inventory turnover (17680000 / 852000) 20.75 (18116000 / 781000) 23.196 Asset tunrover (17680000 / 10729000) 1.65 (1811600 / 10527000) 0.172 Invetsemnt         Debt to equity (6037000 / 4692000) 1.29 (5297000 / 5237000) 1.011 EPS 14.24 14.24 10.23 10.23 The ratio analysis and the comparative analysis of the business strategies show that the financial and operational performances of Sainsbury Plc. is better that that of Morrison Plc. in terms of liquidity, profitability and efficiency. The EPS of Sainsbury’s is higher than that of Morrison which suggests that the investment, cash and the overall financial management of the company is more efficient than that of the other group (Pandey, 2006, p.14) Question 2- Management Accounting Cash management and financial management are the key priorities of a business in the competitive modern business environment. Investment Appraisal techniques are used as important components for taking different types business decisions during the business simulation processes used in a company to optimize the financial management abilities of the business (Sofat and Hiro, 2008, p.44). Both the operations managers and the financial managers in the corporate world have to take the responsibility to continuously appraise and improve the profit margins and cash flows in the company apart from the other main financial and operational metrics in the business. Since the managers have to become more proactive and create efficient solutions for managing finances in the company, therefore, the practical business based approaches and tools like the Winning Margin should be used to enhance the skills and proficiency of these managers (Whipple, 2006, pp.178-180). The Winning Margin is a simulation approach used to demonstrate certain financial management practices like the demonstration of the fact that “Cash is king” is a profit oriented business, addressing of the financial issues and operational issues concerning the profit and cost management and working capital management in the company which are primary requirements for the continuity of the business in an unhindered manner (Savvides, 2001, p.199). Investment appraisal techniques are important for making real world corporate decisions as well as propagating the business simulation processes. The investment appraisal techniques like the Internal Rate of Return (IRR) calculation, Payback Period calculation and Net Present Value (NPV) calculation are the most commonly used investment appraisal techniques which allow the corporate and managers to take critical decisions regarding the investments that are to be made by the business (Rothschild, 2001, p.240). The investment appraisal technique involves the evaluation of the feasibility and attractiveness of different investment proposals for the business. These techniques not only help to analyse the profitability of the business by investing in new projects but also helps to pave ways for the expansion and diversification of the business, all of which are necessary for creating competitive advantage and sustainability in the current business world (Thorne and Piekarski, 2012), pp.90-91). Since, investment appraisals are integral parts of the capital budgeting process, therefore, they would play an active role in any decisions taken regarding the new projects that are to be taken up by a company and also help to steer the business simulations in the desired direction for attaining the business objectives and missions (Westerfield, 2005, p.45). References Baker, H. K. & Powell, G. (2009). Understanding Financial Management: A Practical Guide. New Jersey: John Wiley & Sons. Bernstein, L. (2000). Analysis of Financial Statements. New York: McGraw Hill. Brigham, E. & Ehrhardt, M. (2010). Financial Management: Theory & Practice. Stamford: Cengage. Grant, M. (2005). Contemporary Strategy Analysis, 5th Edition. New York: Blackwell Publishing. Khan, M. Y. (2004). Financial Management: Text, Problems and Cases, 4e. Delhi: Tata McGraw-Hill Education. Leiwy, D. & Perks, R. (2013). Accounting, Understanding and Practice, 4th edition. New York: McGraw-Hill. McLaney, E. (2008). Accounting, an introduction. New Jersey: Pearson Education limited. Pandey, I. M. (2006). Finance: A Management Guide For Managing Company Funds And Profits. New Delhi: PHI Learning Pvt. Ltd. Paul, G. (2006). UK GAAP for Business Practice. Amsterdam: Boston Elsevier. Periasamy, P. (2009). Financial Management, 2E. New Delhi: Tata McGraw-Hill Education. Rothschild, R. (2001). Ten simple lessons in strategy from the games firms play, Management Decisions, Vol. 33(9), 240. Savvides, S. (2001). Risk Analysis in Investment Appraisal, Project Appraisal, Vol. 9(1), 199. Sofat, D. & Hiro, I. (2008). Basic Accounting. New Delhi: PHI Learning Pvt. Ltd. Thorne, H. & Piekarski, J. (2012). Techniques for Capital Expenditure Analysis. Stamford: Cengage. Westerfield, J. (2005). Corporate Finance: Seventh Edition. New Jersey: McGraw Hill International. Whipple, R. (2006). Valuation and Analysis: Second Edition. London: Thomson Lawbook Co. Read More