M05EFA: FINANCIAL ANALYSIS AND DECISION MAKING (October 2011)
Interpretation & Analysis of Financial Statements for
&
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Team Members:
Subin (ID: 4037972) Shreenath Nair (ID: 3989438) Nizil Crasto (ID: 3926709) Kevin Doddamani (ID: 2755874)
Module Tutors:
Prof. JOHN PANTHER Prof. DANNY RYAN
NB: Definitions, Calculations and Analysis with reference to ‘time’ benchmark have been included in the appendices due to the limit of 4000 words. TOTAL WORD COUNT : 4107 Excluding, Tables, Appendices & Graphs
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Table of Contents
1. INTRODUCTION ......................................................................................................................................... 5 1.1 J SAINSBURY SAINSBU RY PLC ................................. ................ .................................. ................................... ................................... ................................... .................................... ............................. ........... 5 1.2 Wm MORRISONS SUPERMARKETS PLC ................................................................................................... 6 2. Ratio analysis Of Financial Statements ..................................................................................................... 7 2.1 PROFITABILITY PROFITA BILITY RATIOS ................................... ................. ................................... .................................. ................................... ................................... ................................... .................. 7 2.1.1 Return on Capital Employed (ROCE) ................................................................................................ 7 2.1.2 NET PROFIT MARGIN (NPM) ................................. ................ ................................... ................................... ................................... ................................... .................... ... 9 2.1.3 ASSET TURNOVER (AT) ................................................................................................................... 10 2.2 LIQUIDITY RATIOS ................................................................................................................................. 12 2.2.1 CURRENT RATIO (CR) ..................................................................................................................... 12 2.2.2 ACID TEST RATIO (ATR) .................................................................................................................. 13 2.3 EFFICIENCY EFFICIE NCY RATIOS ................................... .................. .................................. ................................... ................................... ................................... .................................... ..................... ... 14 2.3.1 TRADE RECEIVABLES PAYMENT PERIOD (TRPP) .......... ................... .................. .................. .................. .................. ................... ................... ............ ... 15 2.3.2 TRADE PAYABLES PAYMENT PERIOD ............................................................................................. 16 2.3.3 AVERAGE INVENTORY TURNOVER ................................................................................................. 17 2.4 SOLVENCY RATIOS ................................................................................................................................. 19 2.4.1 Gearing Ratio ................................................................................................................................. 19 2.5 INVESTMENT RATIOS ............................................................................................................................ 21 2.5.1 EARNINGS PER SHARE .................................................................................................................... 21 2.5.2 DIVIDEND PER SHARE ..................................................................................................................... 22 2.5.3 DIVIDEND PAYOUT RATIO .............................................................................................................. 24 2.5.5 DIVIDEND YIELD ............................................................................................................................. 26 2.5.6 PRICE EARNINGS RATIO (P/E)......................................................................................................... 27 2.5.7 RETURN ON SHAREHOLDERS FUND (ROSF) ................................................................................... 28 2.5.8 TOTAL SHAREHOLDER RETURN (TSR) ............................................................................................ 30 3. ANALYSIS OF J SAINSBURY PLC AND Wm MORRISONS PLC WITH REALTION TO THEIR INDUSTRY...... 31 3.1 Profitability Comparison ....................................................................................................................... 31 3.2 Per Share data Comparison .................................................................................................................. 32 3.3 Growth Rate Comparison...................................................................................................................... 33 3.4 SHARES COMPARISON .......................................................................................................................... 34
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3.5 SHARE PRICE FORECAST COMPARISON ................................................................................................ 35 3.6 EARNINGS, DIVIDENDS AND REVENUES ESTIMATES ......................... ................................... ................... .................. .................. .................. .............. ..... 36 3.7 SEMI ANNUAL AND ANNUAL EARNINGS AND REVENUES GROWTH GR OWTH RATE COMPARISONS ................. ................. 37 4. CONCLUSION AND RECOMMENDATIONS ............................................................................................... 38 5. REFERENCES ............................................................................................................................................ 39 6. APPENDICES ............................................................................................................................................ 40 6.1 DEFINITIONS & TIME ............................................................................................................................. 40 6.2 CALCULATIONS ...................................................................................................................................... 48
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1. INTRODUCTION
1.1 J SAINSBURY PLC
Incorporated: 1869 as J. Sainsbury Ltd.
Employees: 141,000
Sales: £10.6 billion ($18 billion)
Stock Exchanges: London
SICs: 5411 Grocery Stores; 5210 Lumber and Other Building Materials; 5261 Retail Nurseries and Garden Stores; 6552 Subdividers and Developers, Not Elsewhere Classified; 2030 Preserved Fruits and Vegetables Britain’s second largest supermarket group.
(www.fundinguniverse.com/j-sainsbury-plc-company/history.html www.fundinguniverse.com/j-sainsbury-plc-company/history.html))
Sainsbury‟s is the most respected and largest retailer of wine and food in Britain. The company has high
standards for product, quality and service and has turned out to be a leader in successful development, efficient management, marketing and advertising, profitability and outstanding financial performance.
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1.2 Wm MORRISONS SUPERMARKETS PLC
Incorporated: 1899 as William Morrison (Provisions) Ltd.
Employees: 23,294
Sales: £2.99 billion (US$4.79 billion) (2000)
Stock Exchanges: London
Ticker Symbol: MRW.L NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores England’s fifth largest supermarket group.
“Principal Competitors: ASDA Group Limited; Boots Company Plc.; Budgens Plc.; Greggs Plc.; Iceland
Group Plc.; J Sainsbury Plc.; John Lewis Partnership Plc.; Marks & Spencer Plc.; Safeway plc.; Somerfield Plc.; Tesco Plc. Morrison stores stock some 20,000 items; Morrison's private labels account for more than half of all sales. The stores feature a 'Market Street' concept, with wit h specialty shops, including fishmongers, fishm ongers, butchers, pizza, and baked goods, and American shops--selling doughnuts and hotdogs & mdash′oviding a High Street shopping experience to Morrison's largely suburban customers. Morrison boasts to be the sole grocer in the United Kingdom that offers the same prices in all of its stores. The company also produces most of its own products, through its Farmers Boy and Wm. Morrison Produce subsidiaries, enabling it to keep its prices--and costs--low. ”
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2. Ratio analysis Of Financial Statements In order to analyse the financial statements of J Sainsbury PLC and Wm. Morrison‟s PLC various financial ratios have to be calculated which includes Profitability ratios, Liquidity ratios, efficiency ratios , investment ratios , Investment ratios and analyse the ratios with respect to three main benchmarks namely TIME, INDUSTRY and EXPECTATION. Analysing these ratios reflects the financial standing, profitability and efficiency of these companies.
2.1 PROFITABILITY RATIOS Most investors are concerned about the profitability of the company in which they are investing their money because profitability determines the capability of any company to provide returns to lenders and its investors. Profitability ratios give the measure of the ability of a business to generate enough cash which depends on the profit made by a business. A company which manages its resources efficiently produces more profits which imply that much production efficient company can be spotted by analysing the profitability ratios.
2.1.1 Return on Capital Employed (ROCE) [Definition and Significance: See Appendix]
ROCE =
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Company
2009
2010
2011
J Sainsbury
(673 ÷ 8705) × 100 = 7.73%
(710 ÷ 8062) × 100 = 8.8%
(851÷ 8457) × 100 = 10.06 %
WM Morrison
(671÷6202) × 100 = 10.8 %
(907 ÷ 6608) × 100 = 13.72 %
(904 ÷ 7063) × 100 = 12.8 %
Return on Capital Employed 16% 14% 12% 10%
% E C 8% O R
6% 4% 2% 0%
J Sainsburys PLC
Wm Morrisons PLC
2009
7.73%
10.80%
2010
8.80%
13.72%
2011
10.06%
12.80%
Graph 2.1.1 Time: See Appendix Industry Competition and Expectation: Year on year the revenue of J Sainsbury PLC increased by 5.70% from 20 billion to 21 billion. There has been an increase in the operating profit which is part of the net income growth which determines the value of ROCE. The cost of goods sold as a percent of sales has been reduced for J Sainsbury PLC. Furthermore, general, administrative expenses and selling expenses as a percent of sales and interest paid as a percent of sales is also reduced. These reductions contributed around 9.40% increase in the Net Profit and hence resulted in increasing percentage of ROCE for three consecutive years The revenues of Wm Morrison‟s PLC grew from 15.41bn to 16.48bn
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during the period 2010 to 2011 and at the same time its net income increased from 598m to 632m giving an overall increase of 5.69% in net income. The comparison of the values of the ROCE percentages for three consecutive years for both J Sainsbury‟s PLC and Wm Morrison‟s PLC shows that the return on capital employed is greater for Wm Morison‟s PLC which indicates that Wm Morrison‟s PLC
converts more percentage of their capital employed in to operating profits. J Sainsbury in the coming future should think about increasing their ROCE percentages.
2.1.2 NET PROFIT MARGIN (NPM) [Definition and Significance: See Appendix]
NPM =
Company
2009
J Sainsbury
(673 ÷ 18911) × 100 = 3.5%
WM Morrison
(671 ÷ 14528) × 100 = 4.62%
2010
2011
(710 ÷ 19964) × 100 = 3.5%
(907 ÷ 15410) × 100 = 5.90%
(851÷ 21102) × 100 = 4.03 %
(904 ÷ 14679) × 100 = 5.48 %
Net Profit Margin 7% 6% 5% M4% P N 3%
2% 1% 0%
J Sainburys PLC
Wm Morrisons PLC
2009
3.50%
4.62%
2010
3.50%
5.90%
2011
4.03%
5.48%
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Graph 2.1.2 Time: See Appendix Industry Competition and Expectation: The revenues were increased by J Sainsbury PLC from 18bn to 20 billion during the period 2009 to 2010 but still the Net Profit Margin remained the same because the same percentage of Revenue was converted in to operating profit which didn‟t help in increasing the
profitability generally. But , in the year 2011 , J Sainsbury PLC increased its Net Profit Margin which was a result of reduction in the expenses of the company which was in line with the view to increase the profitability of the company .On the other hand, Wm Morrison‟s PLC have been effectively converting
their revenues in to operating profit. Wm Morrison‟s PLC converts more proportion of its revenue in to operating profits and hence is able to pay for its fixed costs and debts more effectively than J Sainsbury‟s PLC.
2.1.3 ASSET TURNOVER (AT) [Definition and Significance: See Appendix]
AT =
Company
2009
2010
2011
J Sainsbury
(18911 ÷ 8705) = 2.12
(19964 ÷ 8062) = 2.47
(21102 ÷ 8457) = 2.49
WM Morrison
(14528 ÷ 6202) = 2.34
(15410 ÷ 6608) = 2.33
(16479 ÷ 7063) = 2.33
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Asset Turnover 2.6 2.5 2.4 2.3 2.2 2.1 2 1.9
J Sainsbury PLC
Wm Morrisons PLC
2009
2.12
2.3 4
2010
2.47
2 .3 3
2011
2.49
2 .3 3
Graph 2.1.3 Time: See Appendix Industry Competition and Expectation : The Asset turnover of J Sainsbury PLC have been increasing steadily year on year which demonstrates their effectiveness of management and the effective implementation of marketing strategies which is definitely helping them to increase their revenue over the net capital employed .The slight decrease in asset turnover of Wm Morrison‟s PLC indicates the slight increase in the long term liabilities of the company which have been incurred in order to increase the sales but there is no major contrast between the year ‟s data which makes Wm Morrison‟s PLC to appear normal in Asset turnover ratio analysis. J Sainsbury PLC is more capable of generating sales and revenues. Both companies are showing an increase in their revenues year on year which demonstrates their capabilities and indicates that both the companies are trying efficiently to meet their target sales and generating enough revenue from their respective capitals employed.
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2.2 LIQUIDITY RATIOS Liquidity ratios are helpful to analyse the financial standing of a company .It is the measure of the company's ability to raise sufficient cash when needed and indicates whether or not the company will be able to meet its financial obligation within the stipulated time.
2.2.1 CURRENT RATIO (CR) [Definition and Significance: See Appendix]
Company
2009
2010
2011
J Sainsbury
(1570 ÷ 1328) = 1.18
(1797 ÷ 2793) = 0.64
(1708 ÷ 2942) = 0.58
(1065 ÷ 2024) = 0.53
(1092 ÷ 2152) = 0.51
(1138 ÷ 2086) = 0.55
WM Morrison CR =
Current Ratio 1.4 1.2 1 0.8 0.6 0.4 0.2 0
Jsainsbury PLC
Wm Morrisons PLC
2009
1.18
0. 5 3
2010
0.64
0. 5 1
2011
0.58
0. 5 5
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Graph 2.2.1 Time: See Appendix Industry Competition and Expectation: J Sainsbury PLC held the ability to pay off its short term debts more effectively under stipulated time as compared to Wm Morrison‟s PLC in the year 2009 but the current ratio of J Sainsbury PLC fell steeply in the year 2010 which indicates the loss in ability to pay short term debts. J Sainsbury‟s experienced an increase in current liabilities year on year from 2009 to 2011 which questioned the ability of J Sainsbury‟s to clear off its short term debts. This company was unsuccessful in increasing its current assets proportionally with its increasing current liabilities. Wm Morrison PLC displays a rather steady change in the values of current ratio which is due to the fact that Wm Morrison‟s PLC increased their current assets fairy enough to tolerate the effect of increasing liabilities in order to increase revenues and sales . Both the companies are less capable of paying off their obligations and are not having satisfactory performance when it comes to paying the liabilities within stipulated time or short term. Both companies have capabilities to deal with their short term liabilities and increase their current ratio in near future.
2.2.2 ACID TEST RATIO (ATR) [Definition and Significance: See Appendix]
ATR =
Company
2009
2010
2011
J Sainsbury
(1570 – 689 ÷ 1328) = 0.66
(1797 - 702 ÷ 2793) = 0.392
(1708 - 812 ÷ 2942) = 0.304
(1065 – 494 ÷ 2024) = 0.28
(1092 – 577 ÷ 2152) = 0.24
(1065 – 638 ÷ 2086) = 0.20
WM Morrison
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Acid Test Test Ratio Rati o 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
J Sainsburys PLC
Wm Morrisons PLC
2009
0. 6 6
0.28
2010
0.392
0.24
2011
0 .3
0.2
Graph 2.2.2
Industry Competition & Expectations: It is usually observed that companies having ATC less than 1 might get into problems paying their current liabilities. The companies must realize and look into the matter for improving it. If the working capital ratio is much than ATC, then it states that the current assets are dependent on inventory. This is usually noticed in case of most retail stores. According to present scenario, J Sainsbury PLC has a better ATR compared to Wm Morrison‟s PLC but both are not liquid enough to meet their financial requirements
2.3 EFFICIENCY RATIOS In an organisation there are many resources. We need a proper program and analyse to manage them. Efficiency ratio plays a good role in the same. They can be used to analyse how organisations make proper use of their assets and lower the liabilities. The ratios can be found out from dynamic statement and static statement for income statement and balance sheets respectively. These ratios play an important role in achieving short n long terns of an organisation. Better the efficiency ratio better is the profit
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2.3.1 TRADE RECEIVABLES PAYMENT PERIOD (TRPP) [Definition and Significance: See Appendix]
Company
2009
2010
2011
J Sainsbury
195 ÷ 18911 x 365 = 4 days
251 ÷ 19964 x 365 = 4 days
343 ÷ 21102 x 365 = 6 days
WM Morrison
245 ÷ 14528 x 365 = 6 Days
199 ÷ 15410 x 365 = 5 Days
268 ÷ 16479 x 365 = 6 Days
TRPP=
Trade Payables Payment Period 7 6 5 s y a D
4 3 2 1 0
J Sainsbury
Wm Morrison
2009
4
6
2010
4
5
2011
6
6
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Graph 2.3.1 Time: Time: See Appendix Industry Competition & Expectation: Expectation: J Sainsbury and Wm Morrison‟s are supermarket groups and therefore majority of their sales are in cash which is basis of high mortgagor payment figure. J Sainsbury had 12.4%, 12% &20% of their current assets related to debtors for 2009, 2010 & 2011 respectively. The financial statement shows that J Sainsbury Plc. experienced growth in the amount of debtors year by year, which was almost double the previous year value in 2011, which resulted in the increase in the trade receivable payment pa yment period. Wm Morrison‟s had 22.9%, 18%, 23.5% of their current assets related to debtors for 2009, 2010 & 2011 respectively. The financial statement shows that Wm Morrison‟s Plc. has a relatively stable trade receivable payment period even though there was a slight improvement in the year 2010.
2.3.2 TRADE PAYABLES PAYMENT PERIOD [Definition and Significance: See Appendix]
Trade Payables Payment Period =
Company
2009
2010
2011
J Sainsbury
2488 ÷ 17875 x 365 = 51 days
2466÷18882 x 365 = 48 days
2597÷19942 x 365 = 48 days
1915 ÷ 13615 x 365 = 51 days
1845 ÷ 14348 x 365 = 47 days
1914 ÷ 15331 x 365 = 46 days
WM Morrison
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Trade Payables Payment Period 7 6 5 s y a D
4 3 2 1 0
J Sainsbury
Wm Morrison
2009
4
6
2010
4
5
2011
6
6
Graph 2.3.2 Time: Time: See Appendix Industry Competition & Expectation: Expectation: J Sainsbury had 85.23%, 88.32% &88.27% of their current liabilities related to creditors for 2009, 2010 & 2011 respectively. The financial statement shows that J Sainsbury Plc. experienced slight growth in the amount of creditors compared to 2009, which resulted in the decrease in trade payable payment pa yment period. Wm Morrison‟s had 94.6%, 85.73%, 91.75% of their current liabilities related to creditors for 2009, 2010 & 2011 respectively. The financial statement shows that Wm Morrison‟s Plc. experienced slight growth in the amount of creditors compared to 2009, which resulted in the decrease in trade payable payment
2.3.3 AVERAGE INVENTORY TURNOVER [Definition and Significance: See Appendix] Average Inventory Turnover =
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Company
2009
2010
2011
J Sainsbury
685 ÷ 17875 x 365 = 14 days
702 ÷18882 x 365 = 14 days
812 ÷ 19942 x 365 = 15 days
WM Morrison
494 ÷ 15615 x 365 = 13 days
577 ÷ 14348 x 365 = 15 days
638 ÷ 15331 x 365 = 15 days
Trade Payables Payment Period 15.5 15 14.5 s 14 y a D13.5
13 12.5 12
J Sainsbury
WM Morrison
2009
14
13
2010
14
15
2011
15
15
Graph 2.3.3 Time: See Appendix Industry Competition & Expectation: Expectation: From the given financial statements we have analyzed that both companies have a stock turnover period of approximate approxim ate fourteen days. Fourteen days is high considering the lifecycle of vegetables, fruits, dairy products and other food products. These items should be kept fresh. Both these supermarket groups also sell entertainment, house wares, electronics and other domestic goods. In this case it is good to consider that both groups keep a stock of these. For domestic and household items; the spin is expected to be in longer period of time as these stocks take a longer
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time to be rotated.
2.4 SOLVENCY RATIOS Solvency ratios: they are used to calculate the company`s power to service its long term loans. These ratios measure the total liabilities of a firm, and indicate a possible over dependency on outside sources for long term financial support.
Solvency Ratios are comprised of the following: -
2.4.1 Gearing Ratio
[Definition and Significance: See Appendix]
Gearing Ratio =
Company
2009
2010
2011
J Sainsbury
4376 ÷ 8705 × 100 =49.70 %
3096 ÷ 8062 × 100 =38.40 %
3033 ÷ 8457 × 100 =35.80 %
1682 ÷ 6202 × 100 = 27.10 %
1659 ÷ 6608 × 100 = 25.10 %
1643 ÷ 7063 × 100 = 23.30 %
WM Morrison
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Gearing Ratio 60% 50% 40% 30% 20% 10% 0%
J Sainsbury PLC
Wm Morrisons PLC
2009
49.70%
27.10%
2010
38.40%
25.10%
2011
35.80%
23.30%
Graph 2.4.1 Time: See Appendix Industry: Ideally, gearing should not be greater than 50%, although new, small businesses often do exceed this percentage. If cash flow is stable and profit is fairly stable, then the business can afford a higher gearing. So comparing the gearing ratios of Sainsbury and Morrison‟s it can be deduced in the year 2009 Sainsbury‟s gearing ratio started declining through the years 2010 and 2011. Since the profit margins
were stable at 3.5 % and grew by about 0.53% and gearing ratios have reduced they can effectively service their long term loans in the future. Morrison‟s gearing ratio also has reduced from the year 2009 to 2011 and their profit margins have shown a growth. In 2009 it was 4.62 % and grew by 1.28% 1.28% in 2010 and decreased by 0.42 % so even Morrison‟s wouldn‟t face any issues in servicing their long term debts. Expectations As of 2011 both Sainsbury and Morrison‟s have shown a reduction in their gearing ratios with increase in their overall profit which indicates a good sign for both business, in the future both companies need to keep the gearing ratios stable and try to lower it as much as possible.
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2.5 INVESTMENT RATIOS
Investment ratios help an investor in making intelligent investment decisions. decisions. However, it should not be considered as an easy way to make quick money. Experts consider some ratios to be an important guide to invest in a company. These ratios can guide an investor to choose a stock of high value value that endures recession because the company has the ability to pay its investors. The investment ratios are as follows:
2.5.1 EARNINGS PER SHARE [Definition and Significance: See Appendix]
EARNINGS PER SHARE=
Company
2009
2010
2011
J Sainsbury
16.6%
18.2%
18.6%
17.4%
22.8%
23.9%
WM Morrison
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Earnings per share 30% 25% 20% 15% 10% 5% 0%
J Sainsbury PLC
Wm Morrisons PLC
2009
16.60%
17.40%
2010
18.20%
22.80%
2011
18.60%
23.90%
Graph 2.5.1
Time: See Appendix Industry Competition and Expectation EPS is used to measure the performance of a company‟s management which determines the amount of
earnings the company makes for its investors. Since the EPS of WM Morrison Plc. has shown shown an upward trend and is greater than J Sainsbury Plc. it clearly indicates WM Morrison has better prospects in generating earnings for its investors. Shareholders do expect the company to perform perform better in order to increase their capital.
2.5.2 DIVIDEND PER SHARE [Definition and Significance: See Appendix]
DIVIDEND PER SHARE=
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Company
2009
2010
2011
J Sainsbury
13.2
14.2
15.1
WM Morrison
5.8
8.2
9.6
(Panther 2011)
Dividend Per Share 16 14 12 10 8 6 4 2 0
J Sainsbury PLC
Wm Morrisons PLC
2009
1 3 .2
5.8
2010
1 4 .2
9. 2
2011
1 5 .1
9. 6
Graph 2.5.2 Time: See Appendix Industry competition and Expectation For every share held by an investor J Sainsbury generates a higher dividend compared to W M Morrison. Shareholders examine the performance of an industry that earns a better payout that motivates them to invest into the business.
Shareholders expect a growth in dividends to match up with the level of
consumer prices which increases the spending power p ower of shareholders.
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2.5.3 DIVIDEND PAYOUT RATIO [Definition and Significance: See Appendix]
DIVIDEND PAYOUT RATIO=
Company
2009
2010
2011
J Sainsbury
(13.2 ÷ 16.6) × 100 = 79.5%
(14.2 ÷ 32.1) × 100 = 44.2%
(15.1 ÷ 34.4) × 100 = 43.8%
WM Morrison
(5.8 ÷ 17.4) × 100 = 33.33%
(8.2 ÷ 22.8) × 100 = 35.96%
(9.6 ÷ 23.9) × 100 = 40.16%
Dividend Payout Ratio 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
j Sainsbury PLC
Wm Morrison PLC
2009
79.50%
33.33%
2010
44.20%
35.96%
2011
43.80%
40.16%
Graph 2.5.4
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Time: See Appendix Industry Competition and Expectation 2.5.4 DIVIDEND COVER
[Definition and Significance: See Appendix]
DIVIDEND COVER=
Company
2009
2010
2011
J Sainsbury
(16.6 ÷ 13.2) = 1.25%
(32.1 ÷ 14.2) = 2.26%
(34.4 ÷ 15.1) = 2.27%
WM Morrison
(17.4 ÷ 5.8) = 3.0%
(22.8 ÷ 8.2) = 2.78%
(23.93 ÷9.6) = 2.49%
Dividend Cover 4% 3% 3% 2% 2% 1% 1% 0%
J Sainsbury PLC
Wm Morrisons PLC
2009
1.2 5%
3%
2010
2 .2 6 %
2.78%
2011
2 .2 7 %
2.49%
Graph 2.5.4 The calculations suggest that J Sainsbury has a dividend cover that is lower than that of W M Morrison.
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This means that Sainsbury has a lower cover for paying its dividends to shareholders from profits earned. Overall W M Morrison has a stronger stronger cover compared to Sainsbury. Normally it is said that the company that has higher cover is said to have have a safer dividend. Since both companies are based in the United Kingdom, it is important to look at this ratio as this is most commonly used in the UK to analyse the liquidity of the business.
2.5.5 DIVIDEND YIELD [Definition and Significance: See Appendix] DIVIDEND YIELD=
Company
2009
2010
2011
J Sainsbury
(13.2 ÷ 309) × 100 = £4.27
(14.2 ÷ 333) × 100 = £4.26
(15.1 ÷ 351) × 100 = £4.30
WM Morrison
(5.8 ÷ 271) × 100 = £2.14
(8.2 ÷ 289) × 100 = £2.84
(9.6 ÷ 264) × 100 = £3.64
Dividend Yield 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
J Sainsbury PLC
Wm Morrisons PLC
2009
4.27
2.14
2010
4.26
2.84
2011
4. 3
3.64
Graph 2.5.5
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Industry Competition and Expectation Investors are expected to invest in companies that are well established as they earn higher yield compared growing companies. J Sainsbury is comparatively a better established company compared to WM Morrison as it earns higher hi gher yields for the investor.
2.5.6 PRICE EARNINGS RATIO (P/E)
Price to earnings ratio or P/E ratio is the assessment of the existing share price in comparison to the price per share of income which in other words words is called Earnings Per Share (EPS). An investor looks at the P/E ratio to determine determine which company to invest in. They would look to invest in a company where where they have a healthy earning compared to the price they pay for the stock. The comparison of company‟s
can only be done with those of the same industry. P/E is calculated as the existing share price over earnings per share (EPS).
PRICE EARNINGS RATIO =
Company
2009
2010
2011
J Sainsbury
(309 ÷ 16.6) × 100 = 18.61%
(333 ÷ 34.4) × 100 = 10.20%
(351 ÷ 32.1) × 100 = 10.37
WM Morrison
(271 ÷ 17.39) × 100 = 15.83
(289 ÷ 22.80) × 100 = 12.67
(264 ÷ 23.93) × 100 = 11.03%
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Price Earnings Ratio 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
J Sainsbury PLC
Wm Morrisons PLC
2009
18.61%
15.83%
2010
10.20%
12.67%
2011
10.37%
11.03%
Graph 2.5.6 The P/E ratio suggests that the share price for J Sainsbury‟s stock is high and is not earning returns as
much as W M Morrison. The share price paid by an investor in W M Morrison is much lesser but their earnings per share are much higher than than J Sainsbury. An investor will be keen to pay less to buy buy a share and receive greater earnings. In this case W M Morrison is a better bet to invest invest in.
2.5.7 RETURN ON SHAREHOLDERS FUND (ROSF) [Definition and Significance: See Appendix] RETURN ON SHAREHOLDERS FUND =
Company
2009
2010
2011
J Sainsbury
(466 ÷ 5982) × 100 = 7.79%
(733 ÷ 7007) × 100 = 10.46%
(827÷ 7905) × 100 = 10.46 %
WM Morrison
(655 ÷ 4520) × 100 = 14.49%
(858 ÷ 4949) × 100 = 17.34%
(874÷ 5420) × 100 = 16.13%
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Return on Shareholders Funds 20% 15% 10% 5% 0%
J Sainsburys PLC
Wm Morrisons PLC
2009
7 .7 9 %
14.49%
2010
10.46%
17.34%
2011
10.46%
16.13%
Graph 2.5.7
Time: See Appendix Industry Competition and Expectation Investors look at industries industries they have a high return on shareholders‟ shareholders‟ funds. ROSF is a more detailed
examination compared to ROCE, of how profitable the industry is and how much of the profit is accessible to its shareholders. WM Morrison clearly has a h igher return on shareholders‟ funds and thus can be considered more profitable compared to J Sainsbury. Sainsbury. On average WM Morrison earns about 16% on shareholders „investment over three years compared to 9.6% for J Sainsbury.
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2.5.8 TOTAL SHAREHOLDER RETURN (TSR) [Definition and Significance: See Appendix] -
TOTAL SHAREHOLDER RETURN =
D1 = Dividend per share for the year P1 = Share price at the end of the year
Company
2009
2010
2011
Not Calculated
14.2 + (333-309) ÷309 × 100 = 12.36
15.1 + (351-333) ÷333 × 100 = 9.93
Not Calculated
8.2 + (289-271) ÷ 271 × 100 = 9.66%
9.6 + (264 - 289) ÷ 289 × 100 = -5.32
J Sainsbury
WM Morrison P0 = Share price at the beginning of the year
Total Shareholder Return
s y a D
14 12 10 8 6 4 2 0 -2 -4 -6 -8
J Sainsbury
WM Morrison
2010
12.36
9.66
2011
9.93
-5.32
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Graph 2.5.8 Time: See Appendix
Industry Competition and Expectation Shareholders keep a close watch at this this ratio as it gives them the total earnings earnings after all deductions. TSR shows the total return on shares in the previous year. This ratio shows how the industry has has performed in the past and shareholders shareholders are normally apprehensive about future future returns. J Sainsbury has performed performed better in the past compared with WM Morrison. This ratio gives a trend as to how the other competitors have performed in the past which can guide investors where to invest.
3. ANALYSIS OF J SAINSBURY PLC AND Wm MORRISONS PLC WITH REALTION TO THEIR INDUSTRY
3.1 Profitability Comparison Net Profit Margin- Trailing Twelve Months (TTM) “The percentage of revenues (or sales) retained by the company in earnings. It is the sum of all interim
periods' income after taxes in the past twelve months divided by the sum of all interim periods' total revenue in the same period, expressed as a percentage; also known as return on sales”
(http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=MRW:LSE)
()Company
Net Profit margin (TTM)
Net Profit margin(5 yr. average)
5.74
2.73
2.28
---
3.63
---
Gross margin
Gross margin
(TTM)
(5 yr. average)
J Sainsbury PLC
5.44
O key Group SA
20.74
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Wm. Morrison Supermarkets PLC
6.89
6.10
3.93
3.47
X5 Retail Group NV(EDR)
23.32
26.76
2.42
- 4.0404
TABLE 3.1.1 (Market Data adopted from FAME) The net profit margin (TTM) for J Sainsbury‟s PLC is currently indicated as 2.73 whereas for Wm Morrison‟s PLC the net profit margin (TTM) for the current year is 1.20 units greater than that of J
Sainsbury PLC. O Key Group SA and X5 Retail Group NV (EDR) are the companies which operates in the same industry which has reportedly higher Gross Margins (TTM) as compared to J Sainsbury PLC and Wm Morrison‟s PLC. The Net Profit Margin (TTM) for Wm Morrison‟s PLC is greater than that of O Key Group SA by 0.30 units whereas J Sainsbury‟s PLC lags behind O key Group SA by 0.93 units. The net profit margin (5 yr. average) of Wm Morrison‟s leads J Sainsbury‟s PLC by 1.19 units which indicates that, the 5 year average value of the net profit margin (TTM) for Wm Morrison‟s PLC is greater, the Wm Morrison‟s PLC have been consistently making more profits on their investments as compared to J Sainsbury‟s PLC in the same industry
3.2 Per Share data Comparison The per share data comparison of the same industry companies has been displayed in the table below. J Sainsbury Earnings per share excluding the extra ordinary items is 0.07 units greater than that of Wm Morrison‟s PLC .The Revenue per share (TTM) of J Sainsbury PLC is 4.96 units above the Revenue per
share of Wm Morrison‟s PLC. This comparison indicates that J Sainsbury PLC may provide more dividends to the shareholders because of the greater earnings per share by the investors but this can be misleading because Wm Morrison‟s PLC has the capability to increase its EPS and revenue per share. The key factor is the growth rate of the companies with respect to earnings and income because the a particular company will appear to be doing good presently but it may not be the same case in the long run
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which is very important im portant for the investor . Company
EPS (excluding extraordinary items )(TTM)
EPS (including extraordinary items)(TTM)
Revenue per share
Book value per share (MRQ)
(TTM) J Sainsbury PLC
0.3139
0.3139
11.30
3.00
O key Group SA
0.3756
0.3756
10.38
1.49
Wm. Morrison Supermarkets PLC
0.2496
0.2496
6.34
2.07
X5 Retail Group NV(EDR)
1.24
1.24
51.40
8.83 8.83
Table 3.2.1 (Market Data adopted from FT. com)
3.3 Growth Rate Comparison Company
Revenue (yearover-year change %)
Revenue(5 yr. growth rate)
Net income (5 yr. growth rate)
Capital expenditure (5 yr. growth rate)
Dividend (5 yr. growth rate)
J Sainsbury PLC
5.70
5.61
58.49
15.71
13.55
O key Group SA
21.79
--
--
--
--
Wm. Morrison Supermarkets PLC
6.94
6.35
--
-1.405
21.01
X5 Retail Group
29.40
61.88
56.29
21.70
--
NV(EDR) Table 3.3.1 (Market Data adopted from FT.com) FT .com)
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The Growth rate comparison of the companies in the same industry shows that O key Group SA and X5 retail Group NV (EDR) have significant values of revenue growth rates and income growth rates. Redirecting the focus on Wm Morrison‟s and J Sainsbury PLC , in which the investor is interested interested , it is apparent from the table above that Wm Morrison’s PLC has higher growth rate with respect to revenue(year-over-year change%) , Revenue (5 yr. change) and Dividend (5 yr. growth rate) as compared to J Sainsbury PLC. The Earnings per share for J Sainsbury PLC was higher but it can be predicted from the growth rate comparison of the two companies that Wm Morrison’s in the near future will be a good option to invest in because the dividend (5 year growth rate) of Wm Morrison’s PLC have been increased by 5 units over J Sainsbury PLC and it will further increase in the coming years which will inevitably increase the earnings per share for the investors.
3.4 SHARES COMPARISON The latest share price comparison of Wm Morrison’s PLC shows that the GBX of Wm Morrison’s PLC is greater than GBX of J Sainsbury PLC by 19 units and the number of shares traded of Wm Morrison‟s PLC is 1.50 m which is much greater than J Sainsbury PLC which trades 1.05m shares.
Wm ’ Plc.
J ’ Plc.
GBX = 310 (Latest price)
GBX = 291.7 (Latest Price)
Today‟s Change = 0.60 / 0.19 %
Today‟s Change = 0.10 / 0.03 %
Shares Traded = 1.50 m
Shares Traded = 1.05 m
1 Year change = 13.55 % (increase)
1 Year change = 19.38 % (decrease)
Beta = 0.4362
Beta = 0.7152 Table 3.4.1 (Market Data adopted from FT.com)
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The percentage change in share price over the period of one year shows that the share price of Wm Morrison’s have been increased by 13.55% but 13.55% but , on the other hand, the share price of J Sainsbury PLC have been decreases by 19.38 % in previous one year time.
3.5 SHARE PRICE FORECAST COMPARISON (As per 29 analysts over 12 month price targets) Wm ’ Plc.
High = 389
(+25.7%) Median
=
325(+5.0%)
Median
=
310(+6.3%)
LOW = 279 (-9.8%)
J ’ Plc.
High = 460.00
(+57.8%)
LOW = 279
(-17.7%)
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The share price forecast comparison for Wm Morrison‟s PLC and J Sainsbury PLC estimates that the highest share price reached by J Sainsbury PLC is greater than Wm Morrison‟s PLC and the lowest level of share price is estimated to be the same price for both the companies. Furthermore, it is apparent that the Median share price of Wm Morrison’s PLC is estimated to be 325((+5%) which is greater than the median estimated for J Sainsbury PLC which is 310(+6.3%).
3.6 EARNINGS, DIVIDENDS AND REVENUES ESTIMATES Wm ’ PLC Current Dividend
J ’ PLC
0.10 GBP
0.15 GBP
Increase in dividend
17.07% over last year
6.34% over last year
Expected Dividend
0.11 GBP (11.46% increase)
0.16 GBP (3.97 % increase)
0.1166 per share
0.138 per share
7.37 %
6.15 %
Annual 2011 earnings
0.2254 per share
0.261 per share
Semi Annual Revenue
8.74 billion (7.40 % increase)
11.69 billion(6.11 % increase)
Annual 2011Revenue
16.48 billion (6.94 %
21.10 billion(5.70 % increase)
Semi Annual 2012 earnings Expected Increase in earnings
increase)
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3.7 SEMI ANNUAL AND ANNUAL EARNINGS AND REVENUES GROWTH RATE COMPARISONS Analysis of the growth rates with respect to earnings and revenues for J Sainsbury PLC and Wm Morrison PLC shows the clear picture of the standing of the company.
40.00% 35.00% Semi Annual Earning growth rate
30.00% 25.00%
Annual earnings growth rate
20.00%
Semi Annual Revenue growth rate
15.00% 10.00%
Annual Revenue growth rate
5.00% 0.00% Wm Morrisons PLC
J Sainsburys PLC
Wm Morrison’s PLC have annual revenue growth rate just above 5 % and J Sainsbury PLC annual revenue growth is under 5 % and the Annual earnings growth percentage of Wm Morrison’s PLC is more than double the annual growth rate percentage of J Sainsbury’s PLC.
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4. CONCLUSION AND RECOMMENDATION RECOMMENDATIONS S
As a group of investment analysts, c onsidering Chris‟s low risk attitude towards investment, the financial statements of Wm Morrison‟s PLC & J Sainsbury PLC like lik e Cash flow statements, Income Statements and balance sheets for three consecutive years i.e. 2009, 2010 & 2011 were analyzed. The research was purely based on multiple references, accounting and financial theories. For providing an extensive report, we have calculated the Profitability Ratios, Liquidity Ratios, Efficiency Ratios, Solvency Ratios and Investment Ratios for both the firms.
Based on the analysis, J Sainsbury faced problems in their marketing management, financial management and their supply chain. J Sainsbury‟s have an investment for a long term venture and therefore they are very positive in prospective progression in coming years. To achieve this aim they should work hard and closely examine the reasons reason s behind the success of its competitors. They should be ready with low price and good quality products for customers on their shelves.
There is still good and strong position for J Sainsbury‟s in the UK‟s retail sector. Considering these reasons, we would recommend Chris Houghton to wait and watch J Sainsbury‟s progress in the coming years. Considering current situation we would not recommend J Sainsbury as an investment option
Annual growth rate of Earnings, Revenues, ROCE and Net profit margins are higher for Wm Morrison‟s PLC in comparison with J Sainsbury PLC. It is highly recommended to invest in Wm Morison‟s PLC considering the current scenario as its more efficient, liquid, geared and P rofitable. Wm Morrison PLC‟s performance is more reasonable while that of J Sainsbury PLC should not be considered for now.
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5. REFERENCES Fame-Peer Analysis (2011) Peer Analysis [online] Available from < https://fame2.bvdep.com/version20111124/PeerAnalysis.serv?editedformat=nc&context=36LD760XUGGUP81&_cid=277> 20111124/PeerAnalysis.serv?editedformat=nc&context=36LD760XUGGUP81&_cid=277 > [22 November 2011] Ft.com/Marketsdata (2011) J Sainsbury PLC [online] PLC [online] 21 November 2011 available from [21 November 2011] Ft.com/Marketsdata (2011) Wm Morrisons Supermarkets PLC [online] [ 21November 2011 ] Available from [21 >[21 November 2011] FundingUniverse (2001) Wm Morrisons Supermarkets PLC [online] 2001 Available from
History.html>[ History.html >[ 11 November 2011] FundingUniverse
(2001)
J
Sainsbury
PLC
[online]
2001
Available
> November 2011]
from
[11
J Sainsbury plc (2011) Annual Report and Financial Statements [online] 07 June 2011available from
2011/> 2011/ > [15 November 2011] Morrisons (2011) Annual Reports and financial statements [online] 30 January 2011 available from [15 November 2011]
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6. APPENDICES 6.1 DEFINITIONS & TIME
RETURN ON CAPITAL EMPLOYED (ROCE) Return on capital employed indicates what proportion of capital employed is converted in to operating profit. This ratio is very helpful in analysing the performance of a business. TIME: The ROCE of J Sainsbury PLC was observed to be 7.73% in the year 2009. The ROCE for J Sainsbury PLC increased steadily year by year until 2011 with an increase of 1.07% from 2009 to 2010 and an increase of 1.26% in ROCE from 2010 to 2011. For Wm Morrison‟s PLC the ROCE % for the year 2009 was noted to be 10.80 %. The ROCE % for the
year 2010 increased by 2.92 % as compared to the previous year and decreased by 0.92 % in the year 2011 as compared to ROCE % in 2010. NET PROFIT MARGIN Net profit margin gives the measure of the proportion of the sales that is contributed towards profit after all overheads have been accounted for and deducted accordingly. A higher net profit margin is an indication of the balance between business efficiency and cost reduction and eventually reducing the overheads effectively. TIME: The Net Profit Margins of J Sainsbury PLC for the years 2009 and 2010 remained the same at 3.5 %. In 2011 the net profit margin of the company increased by 0.53%.
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For Wm Morrison‟s PLC the Net Profit Margin was observed to be 4.62% in the year 2009. The Net
profit margin increased by 1.28% in the year 2010 and further decreased by 0.42% 0.4 2% in the year 2011 ASSET TURNOVER Asset turnover shows what proportion of the capital employed is converted in to revenue which in turn reflects the capability of a company to generate sales and increase the revenue. A higher value of asset turnover is preferred by investors while investing in any company. TIME: The asset turnover for J Sainsbury PLC year year on year kept increasing increasing from 2009 to 2011 .The Asset turnover was 2.12 times in the year 2009 which further increased to 2.47 times in the year 2010 .There has been only slight difference between the values for the year 2010 and 2011 which recorded a value of 2.49 times in 2011. The asset turnover of Wm Morrison‟s PLC experiences a slight downfall in the year 2010 (from 2.34 times to 2.33 times) which continued to be the same in the year 2011. CURRENT RATIO Current Ratio gives the measure of the ability of the company to pay off its current liabilities as compared to the current assets the company possess. This ratio indicates whether the short term assets, which the company possesses, are sufficient to pay the short term liabilities. A higher value of this ratio indicated the ability of a company to pay its short term liabilities with ease and within the stipulated time. TIME: The Current ratio of J Sainsbury PLC in the year 2009 was 1.18 which was at the peak value of current ratio. After 2009 year on year the current ratio for J Sainsbury kept falling until 2011, 0.64 in 2010 and 0.58 in 2011.
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Wm Morrison‟s PLC have had a current ratio of 0.53 in the year 2009, after which, it reduced slightly
to 0.51 in 2010 and plunged to 0.55 in 2011. ACID TEST RATIO Acid test ratio indicates the ability of the company to clear its financial obligations without selling off its inventories. This ratio gives more precise information about the financial standing of the company .A company which has highly liquid current assets and can repay its current debts easily can be spotted by analysing this ratio and hence provides useful information for the investors in vestors and shareholders. TIME: TIME: After comparing the ATR of J Sainsbury PLC and Wm Morison‟s. J Sainsbury maintains a better ATR compared to Wm Morrison‟s. J Sainsbury had a good short term liability in 2009 to compensate its liabilities without vending its stocks. But it significantly dropped in the following years i.e. 2010 & 2011. It is seen from the analysis that Wm Morison‟s maintained their ATR. ASSET TURNOVER Acid test ratio indicates the ability of the company to clear its financial obligations without selling off its inventories. This ratio gives more precise information about the financial standing of the company .A company which has highly liquid current assets and can repay its current debts easily can be spotted by analysing this ratio and hence provides useful information for the investors and shareholders. TRADE RECIEVABLES PAYMENT PERIOD When an organisation comes into business with its client, the trade receivables/ or debtors period plays an important role. The average trade receivables tell us that on an average how long it will take the customer to pay the amount that they owe to the company. The faster the payment more the cash flow and the organisation can take more m ore orders and flourish their business TIME: The trade receivable periods of J Sainsbury PLC rem ained almost the same at an average of 3.8 days. In 2011 the trade payables of the company increased by 55.26 % to 5.9 days. Fo r Wm Morrison‟s PLC the trade receivables were observed to be 6.2 days in the year 2009. The trade receivable period decreased
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by 24.1 % to 4.7 days in the year 2010 and again further increased to 25% to 5.9 days by the year 2011. TRADE PAYABLES PAYMENT PERIOD This calculation is entirely opposite of average trade receivables. The company makes different payment dates to debtors. If the company fails or or delays the payment to to its debtors or in other other words if the turnover ratio is dropping at different intervals then it is proving that the organisation is taking more time to pay its dues to its debtors compared to its previous months. It is vice versa if the opposite happens and proves that organisation is paying its debts at faster and good rate. TIME: The trade payable payment periods of J Sainsbury PLC dropped to an average of 47 days in 2010 and 2011 compared to 50 days as of 2009. The company paid their debts 6.3%more compared to 2009 For Wm Morrison‟s PLC, the trade payables payment period dropped to an average of 46 days in 2010
and 2011 compared to 51 days d ays as of 2009. The company paid their debts 9.8%more compared to 2009 INVENTORY TURNOVER It is the calculation of ratios which shows the cycling of stocks in a company over a period of time. As the average inventory turnover increases better is the company‟s output. Low inventory turnover is not a good sign as the stocks tends to wane as they sit in the storehouse. Considering supermarkets, it should have high turnover rates because of selling fresh items. TIME: After comparing the average inventory turnover days for J Sainsbury PLC and Wm
Morrison‟s
Supermarket PLC. J Sainsbury maintains their average inventory turnover. But for Wm Morrison‟s Supermarket PLC trade payables are increasing over the years which show the decline in cycling the stocks. It can be concluded that J Sainsbury PLC has a better Average Inventory Turnover period with
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that of WM Morrison‟s PLC in the last three years i.e. 2009, 2010 and 2011
GEARING RATIO The higher the gearing, the higher the dependence on borrowings and long term financing. The lower the gearing ratio, the higher the dependence on equity financing. Traditionally, the higher the level of gearing, the higher the level of financial risk due to the increased volatility of profits TIME: For J Sainsbury PLC the gearing ratio in the year 2009 was 49.70 % which declined shapely to 38.40 % in the year 2010 and further declined to 35.80 % in the year 2011. For Wm Morrison`s the gearing ratio in the year 2009 was 27.10 % which decreased to 25.10 % in the year 2010 and further decreased to 23.30 % in i n the year 2011 INTEREST COVER The interest cover ratio is used to determine whether J Sainsbury and WM Morrison‟s has a good,
satisfactory or unsatisfactory amount of operating profit available to cover their interest payments. It should be noted that both companies have different start and end times for their accounting period and as a result these results will not occur at the same point in time for each company EARNINGS PER SHARE Earnings per share is a measure used to calculate how much income a particular company is generating which is then available for shareholders over a particular period of time. In other words it basically checks how the shares of a business are doing in the market. An investor can use EPS to compare two or more companies of the same industry in order to decide where to invest. The way EPS is calculated for equity or ordinary shareholders is represented by the profit after tax by the number of ordinary shares outstanding.
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TIME: J Sainsbury‟s data shows an increase in EPS from 2009 to 2011.
This indicates, for every pound
invested shareholders can earn on average of 17.8 pence. This also suggests an increase in earnings earnings of 2 pence over three years. WM Morrison has generated an E PS that is higher than Sainsbury‟s, which means for every pound invested they receive they the y earn an average of 21.4 pence over three years. DIVIDEND PER SHARE “Dividend per share (DPS)” is the income generated from each share that has been issued by the
company.
Dividend received depends on how the business is performing and can be increased or
decreased depending on the company‟s performance. An increase in the dividend per share received
can mean an increase in share price. price. DPS is normally represented by the net dividend by the number of shares outstanding. “Dividend” is the earnings that the business generates which is normally distributed
to its shareholders in the form of cash TIME: For every share sold J Sainsbury gets a dividend of 13.2, 14.2 and 15.1 pence for 2009, 2010 and 2011 respectively in the form of dividend. There has been a steady increase in earnings for the the company as the data suggests. W M Morrison has also received an increase in earnings from the shares sold by the company. For every share sold they get an income of 5.8, 8.2 and and 9.6 pence respectively. DIVIDEND PAYOUT RATIO This ratio determines the percentage of the earnings that is utilized to pay out dividends to shareholders. The payout ratio for dividends also gives a clue as to how much of the dividend payments can be supported by the earnings earnings of the company. Normally established companies have the tendency to have a greater payout ratio as compared com pared to relatively established companies. TIME: This ratio determines that J Sainsbury‟s has paid out a huge percentage of dividends to its shareholders
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in 2009 of 79 percent and then seen a decline in dividend payout in 2010 and 2011, yet a relatively good payout. The spike in 2009 shows that the company had a higher payout payout ratio to attract investors to to invest into the the company. W M Morrison had a steady steady increase in its payout to its shareholders. shareholders. This is could be a good sign for the company especially to investors who would want to invest with relatively low risk. A rise in payout can suggest suggest that the risk is comparatively comparatively lower. DIVIDEND COVER This is an important ratio that investors investors have a close eye on. The Dividend cover basically shows the ability of the company to pay out dividends that go out to shareholders from the profits the company has earned. It is always said that “higher the cover, safer the dividend.” This ratio also enables an investor to
evaluate the liquidity of the the business. Dividend cover is similar to the Dividend Payout Ratio and is used most commonly in the United Kingdom. This is derived by using the value of the EPS by the value of the DPS. DIVIDEND YIELD Dividend yield can be defined as the amount of dividend a company pays every year compared to the share price of the company. With respect to the investors Dividend yield is the way they measure the cash flow for every pound invested in a dividend yielding stock. It is also said that dividends are not always definite income as companies have the choice to disregard its dividend in times of financial trouble or adversity. Therefore dividend yield should be one among various other factors that should be measured before choosing a stock. Dividend yield is measure as DPS over the share price of the stock.
TIME: J Sainsbury has a higher yield in the form of dividend that they pay pay out to investors. For every pound invested into the stock the company pays pays out £4.27, £4.26 and £4.30 for 2009, 2010 and and 2011. That is
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higher than what W M Morrison pays its investors which is £2.14, £2.84 and £3.64 for 2009, 2010 and 2011 respectively. PRICE EARNINGS RATIO Price to earnings ratio or P/E ratio is the assessment of the existing share price in comparison to the price per share of income which in other words words is called Earnings Per Share (EPS). An investor looks at the P/E ratio to determine determine which company to invest in. They would look to invest in a company where they have a healthy earning compared to the price they pay for the stock. The comparison of company‟s
can only be done with those of the same industry. P/E is calculated as as the existing share price over earnings per share (EPS). RETURN ON SHAREHOLDERS FUND Return On Shareholders Fund (ROSF) or Return On Equity (ROE) is used to calculate profit before tax deductions on investment made by shareholders. In other words words it is used to calculate the profitability profitability of the company by showing how much profit the company has earned with the utilization of the shareholders‟ investment.
TIME: The calculation of ROSF for both companies reflects that WM Morrison has been more profitable as compared to J Sainsbury. There has been an upward trend for both companies in terms of profit earned earned from shareholders‟ investment. W M Morrison has been more successful in converting capital employed
into profits compared to J Sainsbury from the figures shown above. This can because WM Morrison has invested lesser on Non-current Assets and has a lower long term liability to pay off compared to J Sainsbury and hence greater return on investment on shareholders‟ funds.
TOTAL SHAREHOLDER RATIO The Total Shareholder Return (TSR) is one of the most straightforward ratios that determines or calculates the overall return on investment to an investor. On the other hand investors want to know how
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much are they likely to earn in future and the various ratios that will be calculated from here on should give the investor an idea of future returns on investment. TIME: TSR shows that J Sainsbury‟s gets a higher total return on shareholders‟ investment compared with WM
Morrison as shown on the graph. One of the main reasons that J Sainsbury has a better total return on investment by shareholders is because they have a better return on DPS, stronger payout to shareholders in the form of dividend and higher yield on every pound invested into the company.
6.2 CALCULATIONS CALCULATIONS 1. PROFITABILITY RATIOS
a) Return on Capital Employed (ROCE) ROCE =
Company
2009
2010
2011
J Sainsbury
(673 ÷ 8705) × 100 = 7.73%
(710 ÷ 8062) × 100 = 8.8%
(851÷ 8457) × 100 = 10.06 %
WM Morrison
(671÷6202) × 100 = 10.8 %
(907 ÷ 6608) × 100 = 13.72 %
(904 ÷ 7063) × 100 = 12.8 %
b) |Net Profit Margin (NPM)
NPM =
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Company
2009
J Sainsbury
(673 ÷ 18911) × 100 = 3.5%
WM Morrison
(671 ÷ 14528) × 100 = 4.62%
2010
(710 ÷ 19964) × 100 = 3.5%
2011
(851÷ 21102) × 100 = 4.03 %
(907 ÷ 15410) × 100 = 5.90%
(904 ÷ 14679) × 100 = 5.48 %
c) Asset Turnover (AT)
AT =
Company
2009
2010
2011
J Sainsbury
(18911 ÷ 8705) = 2.12
(19964 ÷ 8062) = 2.47
(21102 ÷ 8457) = 2.49
WM Morrison
(14528 ÷ 6202) = 2.34
(15410 ÷ 6608) = 2.33
(16479 ÷ 7063) = 2.33
2.) LIQUIDITY RATIOS a) Current Ratios (CR)
CR =
Company
2009
2010
2011
J Sainsbury
(1570 ÷ 1328) = 1.18
(1797 ÷ 2793) = 0.64
(1708 ÷ 2942) = 0.58
(1065 ÷ 2024) = 0.53
(1092 ÷ 2152) = 0.51
(1138 ÷ 2086) = 0.55
WM Morrison
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b) Acid Test Ratio (ATR)
ATR =
Company
2009
2010
2011
J Sainsbury
(1570 - 689÷1328)=0.66
(1797 - 702÷2793) = 0.39
(1708 - 812÷2942) = 0.304
(1065 - 494÷2024)=0.28
(1092 - 577÷2152) = 0.24
(1065 - 638÷2086) = 0.20
WM Morrison 3. EFFICIENCY RATIOS a) Trade Receivables Payment Period (TRPP)
TRPP =
Company
2009
2010
2011
J Sainsbury
195 ÷ 18911 x 365 = 4 days
251 ÷ 19964 x 365 = 4 days
343 ÷ 21102 x 365 = 6 days
WM Morrison
245 ÷ 14528 x 365 = 6 Days
199 ÷ 15410 x 365 = 5 Days
268 ÷ 16479 x 365 = 6 Days
b) Trade Payables Payment Period Trade Payables Payment Period =
Company
2009
2010
2011
J Sainsbury
2488 ÷ 17875 x 365 = 51 days
2466÷18882 x 365 = 48 days
2597÷19942 x 365 = 48 days
1915 ÷ 13615 x 365 = 51 days
1845 ÷ 14348 x 365 = 47 days
1914 ÷ 15331 x 365 = 46 days
WM Morrison
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c) Average Inventory Turnover Average Inventory Turnover =
Company
2009
2010
2011
J Sainsbury
685 ÷ 17875 x 365 = 14 days
702 ÷18882 x 365 = 14 days
812 ÷ 19942 x 365 = 15 days
WM Morrison
494 ÷ 15615 x 365 = 13 days
577 ÷ 14348 x 365 = 15 days
638 ÷ 15331 x 365 = 15 days
4. SOLVENCY RATIOS a) Gearing Ratio
Gearing Ratio =
Company
2009
2010
2011
J Sainsbury
4376 ÷ 8705 × 100 =49.70 %
3096 ÷ 8062 × 100 =38.40 %
3033 ÷ 8457 × 100 =35.80 %
1682 ÷ 6202 × 100 = 27.10 %
1659 ÷ 6608 × 100 = 25.10 %
1643 ÷ 7063 × 100 = 23.30 %
WM Morrison
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5. INVESTMENT RATIOS a) Earnings Per Share (EPS) EPS =
Company
2009
2010
2011
J Sainsbury
16.6%
18.2%
18.6%
17.4%
22.8%
23.9%
WM Morrison
b) Dividend Per Share (DPS) DPS=
Company
2009
2010
2011
J Sainsbury
13.2
14.2
15.1
WM Morrison
5.8
8.2
9.6
c) Dividend Payout Ratio (DPR)
DPR=
Company
2009
2010
2011
J Sainsbury
(13.2 ÷ 16.6) × 100 = 79.5%
(14.2 ÷ 32.1) × 100 = 44.2%
(15.1 ÷ 34.4) × 100 = 43.8%
WM Morrison
(5.8 ÷ 17.4) × 100 = 33.33%
(8.2 ÷ 22.8) × 100 = 35.96%
(9.6 ÷ 23.9) × 100 = 40.16%
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d) Dividend Cover (DC)
DC=
Company
2009
2010
2011
J Sainsbury
(16.6 ÷ 13.2) = 1.25%
(32.1 ÷ 14.2) = 2.26%
(34.4 ÷ 15.1) = 2.27%
WM Morrison
(17.4 ÷ 5.8) = 3.0%
(22.8 ÷ 8.2) = 2.78%
(23.93 ÷9.6) = 2.49%
e) Dividend Yield (DY)
DY=
Company
2009
2010
2011
J Sainsbury
(13.2 ÷ 309) × 100 = £4.27
(14.2 ÷ 333) × 100 = £4.26
(15.1 ÷ 351) × 100 = £4.30
WM Morrison
(5.8 ÷ 271) × 100 = £2.14
(8.2 ÷ 289) × 100 = £2.84
(9.6 ÷ 264) × 100 = £3.64
f) Price Earnings Ratio (P/E)
P/E =
Company
2009
2010
2011
J Sainsbury
(309 ÷ 16.6) × 100 = 18.61%
(333 ÷ 34.4) × 100 = 10.20%
(351 ÷ 32.1) × 100 = 10.37
WM Morrison
(271 ÷ 17.39) × 100 = 15.83
(289 ÷ 22.80) × 100 = 12.67
(264 ÷ 23.93) × 100 = 11.03%
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g) Return on Shareholders Fund (ROSF)
ROSF =
Company
2009
2010
2011
J Sainsbury
(466 ÷ 5982) × 100 = 7.79%
(733 ÷ 7007) × 100 = 10.46%
(827÷ 7905) × 100 = 10.46 %
WM Morrison
(655 ÷ 4520) × 100 = 14.49%
(858 ÷ 4949) × 100 = 17.34%
(874÷ 5420) × 100 = 16.13%
2009
2010
2011
Not Calculated
14.2+(333-309)÷309× 100 = 12.36
15.1 + (351-333)÷333 × 100 = 9.93
Not Calculated
8.2 + (289-271) ÷ 271 × 100 = 9.66%
9.6 + (264 - 289) ÷ 289 × 100 = -5.32
h) Total Shareholder Return (TSR)
TSR =
-
D1 = Dividend per share for the year P1 = Share price at the end of the year P0 = Share price at the beginning of the year
Company
J Sainsbury
WM Morrison
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