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Executive Summary
J Sainsbury plc is one of the leading public listed companies in the UK with around
1500 retail supermarket chains the company holds around 14% market share in the
UK and stands behind the largest supermarket chain, Tesco Plc. Last financial year
(2021) the company generated around £2,9048 million in revenue which is very high
but due to the high cost of revenue and others cost factors the company faced a loss
of £287 million.
In the last financial year, the company lost its value because of the loss suffering.
After a comprehensive analysis, it was found that everything was not good within
Sainsbury. The profitability ratios indicated a worse performance during the period.
In the final loss of the company, its capital structure also played a significant role. A
higher portion of debt capital within Sainsbury is one of the main reasons that the
company suffered a loss in 2021. During the period, the company lost more short-
term liquid positions, and the working capital went more negative than in the
previous year.
From the WACC analysis, it is seen that the capital structure is much optimised as
the WACC is lower than the cost of debt. However, the company needs to reduce its
debt capital as it hurts profitability, in the end, it can be said that the company needs
to restructure its capital structure and cost-cuttings one of the main reasons that the
company lost its performance and position over the year.

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 Table of Contents
Executive Summary......................................................................................................3

Introduction...................................................................................................................5

Company background brief.......................................................................................5

Ratio Analysis...............................................................................................................5

Profitability ratios.......................................................................................................5

Liquidity ratios...........................................................................................................6

Efficiency ratios.........................................................................................................7

Leverage ratios.........................................................................................................8

Financial Projection Analysis........................................................................................9

Breakeven Analysis....................................................................................................12

Analysing the source of finance of Sainsbury Plc......................................................13

Conclusion..................................................................................................................15

Reference List.............................................................................................................16

Appendices.................................................................................................................20

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Introduction
The report is written to help you understand some of the most important financial
practices in business. Financial performance and position analysis, financial
projections, and cost management are examples of these. The report not only
discusses the theoretical aspects of this business practice but also demonstrates a
practical application of these tools. Choose ratios for the report's past performance
analysis of the selected company. The report concludes with a brief critical
conclusion of findings from the financial analysis.
Company background brief
Sainsbury's is one of the large British multinational supermarket chain
corporations in the United Kingdom. The company controls approximately 15% of the
market share in the UK's supermarket chain. John James Sainsbury established the
company in 1869 as a retail grocery store, later it expands its business to many other
sectors. Currently, the company offered in the banking sector, grocery, supermarket
chains and IT (Sainsburry.com, 2022). Although the company performed very well in
the past, ASDA Group outperformed it in the market from 2003 to 2014, but the
merger was blocked by the CMA (Competition and Markets Authority). According to
the most recent annual report, the company operated around 1500 stores with
180,000 employees. The group's revenue in 2021 was £29.048 billion, but it lost £-
(280) million during the same period (Sainsburry.com, 2022).

Ratio Analysis
Profitability ratios are metrics that measure a company's earning capacity and are
thus known as the key profitability metrics for any company. There are numerous
profitability ratios that assess profit against various key accounts (Pattiruhu & Paais,
2020).
Profitability ratios

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The profit margin ratio or the net profit margin ratio is measuring the net profit
earnings capacity of the company against its revenue. According to Madushanka &
Jathurika, (2018) a higher net profit margin of the company shows that the
company’s performance was high as well as its capacity of earnings was high. Here
in the company Sainsbury, the net profit margin was (-) 1.0% for the year 2021, this
was an indication of a loss for the period means the company had negative
profitability. During the period all the sales related cost accounts are rises very much
and that resulted in these losses (Jurakulovna, 2021). As the supply chain of the
company was largely affected by the pandemic situation hence it is one of the most
potential reasons that the cost of revenue rises highly. However previous financial
yarer the company had a profit margin of 0.4%. Although in 2020 the profit margin
was very low it was a profitable situation and comparing the profitability rate between
2020 and 2021, it can be said that in 2021 its profitability rate was worse (Kajola et
al., 2019).
In the same period one other key profitability metric, Return on Equity ROE was
showing the same worse profitability situation within the company. During the period
of 2020-21, the ROE was negative (-4.3%) as the company was in losses. This
negative ROE indicated that the firm lost its value by 4.3% during the period.
However, comparing it to previous shows a downward trend, as in 2020 the ROE
was 1.7%. The equity value within Sainsbury decreased by an average rate and
which indicated a bad situation for the company if the company suffered losses for
some more periods. From the ROE prospects, it has been seen that the company’s
profitability performance during the period of 2021 was poorly (Madushanka &
Jathurika, 2018).
Some of the ratios would show negative results due to a loss, but the value of the
ratios demonstrated the degree of measurement. This means that the value of ratios
determines how much they impacted the company. Sainsbury's Return on Assets
(ROA) was -1.1 per cent, which means that the value of its assets was reduced by
1.1per cent because of the loss. Its ROA was 0.5 per cent in the previous year
(2020), indicating a positive value addition to assets. When the previous year's
performance is compared to the recent current year, the company's profitability is
very poor and negative in 2021 (Pattiruhu & Paais, 2020).

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Liquidity ratios
Liquidity ratios are the combination of current and quick ratios that analysed the
short-term liquidity position of the company. Amanda, (2019) mentioned that for any
company the liquidity ratios not only measure the liquidity position but also measure
the managerial efficiency of managing working capital. Here below is an analysed of
the company’s liquidity position as well as working capital management (Palepu et
al., 2020).

For the last three consecutive years, the company Sainsbury Plc continuously hold a
negative working capital on its balance sheet which indicated that the company
suffered from low liquidity (Kajola et al., 2019). The current assets of the company
were not sufficient to pay its current obligations and therefore there was a large
chance that the company need to sacrifice its fixed assets if any bad circumstances
happened. This also indicated the high risk of short-term insolvency within Sainsbury
Plc. For the period 2021, the working capital in the company was (-) £4,658 million
(HASANUDDIN et al., 2021).
For the period 2021, the current ratio of the company was 0.61, which indicated that
the current assets were 0.61 compared to 1 current liabilities. As per the situation, it
is not possible to meet all the current obligations of Sainsbury and there was a larger
chance of insolvency for a shorter period. Compared to the previous year (2020) the
ratios were lowered this year by 0.02. which means the company further lost its
liquidity position in the year 2021 from 2020. One of the potential reasons for the
changes was the decrease in current assets (Husna & Satria, 2019a).
The quick ratios on other hand measure short-term liquidity after excluding the
inventories and prepaid expenses from current assets. The quick ratio of the
company is an important metric of liquidity, and it should be 1:1, below it indicates
the company need to sacrifice its inventory if any bad circumstances happened.
Here in the company, the quick ratio was 0.46 for the period of 2021. Previous year it
was slight strong as the quick ratio was 0.49. As the current assets decreased by a
significant rate because of cash insufficiency the quick ratio became lowered in 2021
(Herawati & Fauzia, 2018).

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Efficiency ratios
The efficiency ratios of the company show how effectively the company managed its
key accounts which helped the company in day-to-day operations.

The average collection periods of the company are showing the period which was
taken to collect the credit sales of the company. The lowest days of the average
collection referred to good credit collection management (Husna & Satria, 2019b).
For the period 2021, the days of average collection period was 9.1 days that means
on average, within 9.1 days company collected cash from its debtors. The Collection
period of the company for 2021 was very low which is a good managerial efficiency
indication. Compared to the previous year (2020) this year the efficiency enhanced
as in 2020 the collection period was 10.2 days. As the company facing low liquidity
that is why the company decreased the credit collection period and that is the main
reason, that company’s collection ratio was enhanced (Mulyadi & Sihabudin, 2020).
During the same period company’s inventory turnover ratio was 16.8 which means
the inventory was converted 16.8 times into revenue. This was a good inventory
turnover ratio and indicated good inventory management efficiency within Sainsbury.
Previous year the inventory turnover ratio was 15.6, which means in the year 2021
the inventory managerial efficiency was enhanced than the previous year. The
inventory days within the company were 23.4 and 21.7 days for 2020 and 2021. The
inventory management efficiency of the company is also good as the credit collection
of the company, and both helped the company in short-term liquidity management
besides negative working capital (Mulyadi & Sihabudin, 2020).
Leverage ratios
The leverage ratios of the company show the financial stress or leverage of the
company and also help to understand the capital allocation of the company (Welc,
2022).

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The debt to total assets ratio is the ratio between total debt and total assets of the
company and this shows how many assets were funded with the debt capital. Here
in the company, the debt to assets ratios were 73.5%, 72.1% and 72.2% for the
years 2021, 2020 and 2019, respectively. From the ratios, it was seen that in the
year 2021, nearly 73.5% of the assets of the company were funded by debt capital
and remained from equity. This indicated high financial leverage within the company
as the financial stress of the company is mostly on debt capital. The debt to assets
ratio rose in 2021 because of the debt capital increment. During the period because
of loss equity capital was reduced but at the same time, debt capital was increased
by a significant rate this change increased the debt to assets ratio (Devi et al., 2020).
The debt-to-equity ratio of the company was showing the capital allocation of the
company. Traditional scholars stated that the debt capital should be controlled
because high debt balances caused the financial loss, but modern approaches
stated differently. As per the modern approach debt should be the maximum
possible as it financial leveraged the company (Supriyanto & Darmawan, 2018).
Here in Sainsbury, the debt-to-equity ratio for the period 2021, was 277% this means
the company has 277 debts compared to 100 equities. The debt portion for 2021 in
the balances sheet was very high indicating high financial leverage. In the year 2020
the debt-to-equity ratio of the company was 258.6% that means in 2021 the debt was
increased. The rise of debt balance and loss of equity during the period was the
main reason for this upsurge in the debt-equity ratio in 2021. Whether the current
allocation of debt equity was risky or analysed through the time’s interest earned
ratio (Ichsan et al., 2021).
The time’s interest earned ratio of the company was 0.2 times for the period 2021.
This indicated that the company had earned lower profits than the cost of interest. In
this situation, the company could not pay its interest cost from profits and a loss of
profits was recorded. Therefore, it also indicated that the company suffered loss
because of high debt, and this disclosed a risky capital structure within Sainsbury

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Plc. However previous ears times earned ratio was 1.6 which means the company
had earned more profits than the interest costs (Fridson & Alvarez, 2022).

Financial Projection Analysis

Financial planning is the practice of anticipating a company's future financial
obligations. Financial projections aid in the management of your money. In contrast
to statements, which offer specifics of current development, they are future
projections of your company's finances. The financial manager is concerned with the
financial performance's future. The forecasting process allows a company to convey
its targets and objectives while also ensuring that they are internally consistent.
Financial estimating is an imperative aspect of corporate planning that forecasts
upcoming firm performance based on past financial performance and contemporary
circumstances or trends. In other words, financial forecasts are an instrument for
businesses to make and achieve targets (Laubscher, 2019).
Some of the advantages of projections or forecasting business planed are discussed
below.
1) It may be used as a control mechanism to set performance requirements and
evaluate the outcomes.
2) It assists you in developing a business plan so that expenditures may be
reduced for the benefit of your company.
3) It aids in explaining the firm's need for finances as well as the funds of the
suppliers.
4) It aids in spotting risks and fiscal constraints in the firm so that required
arrangements may be made to keep the firm from losing money.
5) It also helps to clarify the right financial needs and their optimal usage, as well
as how excess funds if any, might be allocated differently (Otudi &
Almaktoom, 2021).
6) It forecasts the future requirement for cash.
7) It also helps to clarify the right financial needs and their optimal usage, as well
as how surplus/excess cash, if any, might be invested differently.
8) It provides an estimate of the future requirement for cash and allows you to
decide whether or not to take out loans.

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 9) It aids you in obtaining a loan from a bank or other financing; investors and
financiers demand financial predictions to demonstrate the capability to repay
the loan (O’Trakoun, 2022).
The projected key accounts of the income statement, balance sheet, and cash flow
statement are included in this report. Because some of the overheads are highly
volatile and are not included in the company's financial statements, the projection
only includes key accounting figures. The trends of previous years are used in this
report's projection, and accounts are projected based on the trends (Dash et al.,
2019). The projections for the next three years (2022-24) are shown below.

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From the projection of Sainsbury, the company may face a loss in the year 2023 as
per current trends. Also, it shows that the total assets in the company will be
decreased besides cash balance increments. However, as the past three years
were very uncertain because of the Covid-19 pandemic therefore there is a high
chance of the performance of the company will be very good in the near future. Also,
the company may perform better in actuality than in the forecast (O’Trakoun, 2022).

Breakeven Analysis
The breakeven analysis is one of the important management accounting tools that
help in decision-making. In the cost analysis of any company, it played a crucial role.
The breakeven is the point at which the company recovered all its costs including
fixed and variable costs. It can say that by crossing the break-even points the
company can earn super profit. The breakeven analysis helps the management to
understand what number of units it needs to sell out during a specific period to get a
profit or cost recovery. As the company has not published complete product data
therefore all data for practical representation were based on assumptions. The sales
price, variable costs and fixed costs were based on assumptions.
Fixed cost £ 20,000.00
Variable cost in units £ 45.00
Selling price per unit £ 70.00
Break-even points in units 800

Break-even points (BEP) = Fixed cost/ (selling price- variable cost)

Or BEP = 20,000/ (70-45)
Or, 800 units or 56,000 as sales value.

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 Break-Even Chart
Total Cost (TC) Total Revenue Fixed Cost (FC)
£120,000.00

£100,000.00

£80,000.00

£60,000.00

£40,000.00

£20,000.00

£-
50 200 350 500 650 800 950 1100 1250 1400 1550

Figure 1: BEP Chart of J Sainsbury Plc.

From the above charts of BEP, it is seen that the total revenue and total cost line of
the company intersect at the point of 800 units. This is referred that at 800 units sold
the company will recover its total cost.

Analysing the source of finance of Sainsbury Plc

The sources that the company takes over its funds are known as sources of finance.
The Source of finance is important for the company as it shows the impact of finance
costs on the company. From a basic overview of the balance sheet of the company.
Mainly companies are collected funds by utilising two major option that is debt and
equity. The debt is the finance source that is not required to sacrifice its own rather it
costs outflows cash. On the other hand, the cost of capital is an imaginary thing and
due to this the company has not faced any changes (Chauhan, 2019).
2022 (last Three years average)
Cost of Equity 5.14%
Cost of Debt 4.43%
WACC 4.71%
Risk-free rate (US Bond) 2.38%

After a critical analysis of the sources of finance, it is seen that the company utilised
both of its financing sources. For the period 2020-21, the value of equity within the
company was GBP6701 million that are collected from the equity shareholders. Also,
during the same period, the company’s debt balance was GBP 6,730 million. The
debt within the company was higher than its equity volume for the period 2021.

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However, the difference between debt and equity was lower compared to its past
years when the company holds more debt than its equity funds (Sainsburrys.com,
2022). The debt-equity combination of the company is very much optimised (but not
optical) as its Weighted Average Cost of Capital was lower than the cost of equity.
From the cost of debt and equity ratio and WACC, it can be said that the company
needed more debt financing with a low cost to optimise WACC. From the debt-to-
equity ratio, it is seen that the company were hold a very large amount of debt
percentage than its equity value (Sainsburrys.com, 2022). The Debt-to-equity
allocation of the company offered the company a very high financial leverage, but
this was not a good indication to the company for a longer period as it referred to the
high-rate risk of financing (Szüle, 2020). Below chart showing the long-term debt and
shareholders’ equity comparison of the company.

J Sainsbury Plc
Debt capital vs. equity capital
2019-2021
Total Non-Current Liabilities Total Shareholders' Equity
$8,380 $8,096
$7,782 $7,791
$6,730 $6,701

2019 2020 2021

Figure 2: Debt capital Vs. Equity capital of Sainsbury Plc.

The major equity sources in the company are as below.

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 Figure 3: Top ten largest institutional equity shareholders of Sainsbury Plc.

(Source: Morningstar.com, 2022)

Blackrock fund advisor is the largest equity holder of the company, and Aberdeen
Assets Investment Limited is the second largest stockholder holding around 2.14%.
Whereas Halifax UK Growth B is the highest fund that holds the highest holdings in
Sainsbury (Morningstar.com, 2022).

Conclusion
After a comprehensive critical analysis of the company, some of the key findings are
exposed. The initial aspects that are known were the financial performance and
position insights for the last financial year. Except for the managerial metrics, all the
other metrics were adverse within the company. The company suffered a loss in
2021 and because of this, the company loses around 4% value. Also, the short-term
liquidity position within the company is very poor and the management needs to be
concerned and makes some brave steps (e.g., fixed assets disposal) to increase its
short-term liquidity position. The most important aspects that impacts the company
most were the capital structure and the sources of finances. The portion of debt

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capital was very high in the company and resulted in a high risk of insolvency.
Therefore, the company need to reduce some of the portion of debt capital from its
balance sheet. In addition, it needs to be restricted from further debt funding until the
situation within the company improved.

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Appendices

Note: For the calculations please look on the worksheet.

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