Nowadays, it is important for organizations to know how to survive in the competitive market in which they are involved, markets that require managers who understand and are aware of the internal and external factors that concerns to the company. Therefore, it is vital to know the existence of different techniques of measurement such as financial tools, which can give an idea on how the company's financial situation is going to affect its performance in the marketplace.
One of these tools can be the used of financial ratios, which gives to managers the information to set up strategies in order to make decisions in the future. However, it is important to highlight that this ratios provide an ...view middle of the document...
197), Profitability ratios provide an insight to the degree of success in achieving this purpose. For instance, the profitability ratios of Sainsbury plc are:
|Profitabiliy Ratios |2004 |2003 |
|Return on Capital Employed |8.53% |9.29% |
|Return on Equity |7.64% |8.95% |
|Gross Profit Margin |8.65% |8.14% |
|Net Profit Margin |3.91% |4.25% |
Table 1. Profitability Ratios (Base on data contained in Appendix A)
Regarding on this table, Sainsbury's profitability ratios show a moderately deterioration in profit from 2003 to 2004 in a margin of 6%. This downward trend is due to several changes the company had such as, (1) the sell of JS Development and Shaw's supermarket, this has an impact on the company's current assets (cash) and profit, in one hand it brings in cash for the sell but on the other hand it stops the daily cash input, consequently there were a decline in profit in 2.6%; (2) the purchase of Swan Infrastructure Holdings Limited, which consist of a whole modern IT system and it is part of a Business Transformation Programme, therefore, there was a rise in 6% of the capital employed (fixed assets and net debt), and also a significantly fall in cash in 27%. Because of all these reasons, there was a drop in profit, but as it is a long-term investment it is estimated to be an income generation in the future.
Efficiency and Effectiveness Ratios
These ratios are used to try and identify the strengths and weaknesses of a business using a variety of different ratios (Giles et al., 1994, p. 371). The following table illustrates the efficiency ratios used in Sainsbury's case.
|Efficiency and Effectiveness |2004 |2003 |
|Fixed Asset Turnover |2 times |2.17 times |
|Debtor Collection Period |1.51 days |2.48 days |
|Creditor Payment Period |28.83 days |28.78 days |
|Stock Holding Period |17.61 days |18.67 days |
Table 2. Efficiency and Effectiveness (Base on data contained in Appendix A)
The fixed asset turnover has slightly decreased due to the acquisition of Swan Infrastructure Holdings Limited, which caused a rise of 7.73% on Sainsbury's fixed assets in comparison with the year 2003. Moreover, sales have remained constant which have risen in 0.3%. The purchase of the IT systems will give opportunities to enhanced operational effectiveness, a stronger platform, low costs and an increased in sales.
In what a debtor collection period...