Ratio Analysis

Profitability Ratio
By profitability ratio findings, the company can evaluate its ability to yield income in contrast to
its expenses and other costs related to generating income.

Net Profit Margin

Net profit is the result of including indirect income and excluding indirect expenses from gross
profit (Nariswari, 2020). It measures the overall profitability than the gross profit ratio. The
formula for finding the net profit margin is:

Net profit Margin = (Net income / Revenue) *100

2021 2020
NET INCOME (280) 152
REVENUE 29,048 28,993
NET PROFIT MARGIN (%) -0.96 5.25
*in million

Explanation

In 2020, the company’s profitability is 5.25 % as the company profited that year. But Sainsbury’s
has faced losses in 2021 facing negative profitability. Because of Britain’s exit from European
Union, many direct costs have been increased and again, Govt has raised vat and taxes as well.
The third wave of covid-19 also impacted the loss of the company

Operating Profit Margin

All costs of generating income are not directly related to the company’s revenue. To evaluate
direct operational ability company uses operating profit margin (Langemeier,2018). The formula
for finding the operating profit margin is:

Operating Profit Margin = (Operating Profit/ Net sales) *100

 2021 2020
OPERATING PROFIT 60 650
NET SALES 29,048 28,993
OPERATING PROFIT MARGIN (%) 0.21 2.24
*in million

Explanation

According to the operating profit margin, the company’s competencies in profitability have also
decreased from 2.24 to .21. Following the explanation of the net profit margin, it can be stated
that production costs have increased because of price hikes. The company had to bear more
material costs in 2021 than in 2020 because of the price hike.

Return on Asset
Companies do business using their assets. The return on assets ratio expresses the effectiveness
of the company to generate income from its assets (Husna,2019). The formula of Return on
assets is:

Return on assets = (Net income/Assets) *100

2021 2020
NET INCOME (280) 152
ASSETS 25162 27937
RETURN ON ASSETS (%) -1.11 0.544
*in million

Explanation

The company’s return on assets has decreased to negative 1.11% from 0.544%. But it does not
indicate the company’s performance as well as it increased because of a decrease in assets. So, it
can be said that the company’s profitability performance is not well according to these tests.
Liquidity Ratio
This parameter is important to maintain balance in liquidity as higher liquidity causes low
interest and low liquidity can be a reason for the inability to pay debts (Chasanah,2019).

Current Ratio

The company’s capacity to pay the short-term loan is being tested by the current ratio. It
measures if the company has enough resources in contrast to its short-term obligations
(Chasanah,2019). The formula for finding the current ratio is:

Current Ratio = Current Assets / Currents liability

2021 2020
CURRENT ASSETS 7,049 7582
CURRENT LIABILITIES 11,717 12,047
CURRENT RATIO 0.60 0.62
*in million

Sainsbury’s current ratio is 0.62 and 0.60 for the years 2020 and 2021. The company cannot
meet with current liabilities using current assets. The situation is getting worse than the previous
year. The company’s total assets have been decreased as well as current assets. On the other
hand, its liability has increased.

Acid Test Ratio

The other name for the acid test ratio is the quick-test ratio. It is more precise than the current
ratio. Quick-test ratio and Current ratio, here are almost look alike but in the context of current
assets, it differs (Chasanah,2019). The formula for acid test ratio is:

Acid Test Ratio = (Cash + Accounts Receivables+ Marketable Securities) / Current Liabilities

2021 2020
CASH 1477 994
ACCOUNT RECEIVABLES 725 811
MARKETABLE SECURITIES 90 82
CURRENT LIABILITIES 11717 12047
ACID TEST RATIO 0.196 0.16
*in million

Finding from the acid test ratio also indicates that it can’t meet its current liabilities with its most
quickly liquidity assets. However, performance in the acid test is good than in the previous year
2020. The liability has decreased and the current assets have increased more than in the previous
year.

Efficiency Ratio
Inventory Turnover

The number of times a company sales or uses inventory can be found by the inventory turnover
ratio (Amanda, 2019). The formula for inventory turnover is:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

2021 2020
COST OF GOODS SOLD 27283 26977
AVERAGE INVENTORY 1625 1732
INVENTORY TURNOVER RATIO 16.79 15.58
*in million

Sainsbury’s inventory turnover is high. The ideal inventory turnover rate is between 5 to 10 for
most companies. The company is selling products well. In 2020, the company has used inventory
15.58 times, and it has increased in 2021. The reason behind the increase is the rise in the cost of
goods sold and the decrease in the amount of inventory.

Shareholder Ratio
Equity Ratio

It represents the assets on which shareholders have a claim. It also describes the amount of
company’s assets are invested using stock instead of borrowing money (Nuryani, 2020). The
formula is:

Equity Ratio = (Shareholder’s equity / Total assets) *100

2021 2020
 SHARE HOLDER’S EQUITY 637 634
TOTAL ASSETS 25162 27937
EQUITY RATIO 0.02 0.02
*in million

Sainsbury’s has more debt than its equity from shareholders. The shareholder equity ratio is the
same in both years. The company is leveraged as its equity ratio is less than 0.5. The company’s
current debt position is higher for the last two years and major changes cannot be seen in the
capital structure of the company in these years as well.

Earnings Per Share

It expresses income based on shares of stockholders (Almira,2020). The formula is:

EPS = Net income / Number of ordinary shares

2021 2020
NET INCOME (280) 152
NUMBER OF ORDINARY SHARES 2320 2470
EPS (26) 11.6

Sainsbury has shown a significant downward in terms of EPS for the company in 2021 from
2020. Earning per share is the same as the profitability ratio. The higher the earnings per share,
the company is doing well. As the company has faced loss in 2021, the earnings per share are
also low this year indicating a negative residual for the shareholders of the company. A minimal
portion of the negative changes is because of the deduction of the number of outstanding
shareholders of the company this year as well.
Appendix
Reference

Almira, N.P.A.K. and Wiagustini, N.L.P., 2020. Return on asset, return on equity, dan earning
per share berpengaruh terhadap return saham. E-Jurnal Manajemen, 9(3), pp.1069-1088.

Amanda, R.I., 2019. The impact of cash turnover, receivable turnover, inventory turnover,
current ratio and debt to equity ratio on profitability. Journal of research in management, 2(2).

Chasanah, N. and Sucipto, A., 2019. Liquidity ratio, profitability, and solvency on stock returns
with capital structure as an intervening variable (study on food and beverage sub sector listed in
Indonesia Stock Exchange (Idx) period 2013-2017). Ekspektra: Jurnal Bisnis dan Manajemen,
pp.52-68.

https://about.sainsburys.co.uk/.../2020/Annual_Report_and_Financial_Statements_2020.pdf

https://www.about.sainsburys.co.uk/investors/results-reports-and-presentations/2021
Husna, A. and Satria, I., 2019. Effects of return on asset, debt to asset ratio, current ratio, firm
size, and dividend payout ratio on firm value. International Journal of Economics and Financial
Issues, 9(5), p.50.

Langemeier, M. and Yeager, E., 2018. Operating profit margin benchmarks. farmdoc daily, 8.

Nariswari, T.N. and Nugraha, N.M., 2020. Profit growth: impact of net profit margin, gross
profit margin and total assests turnover. International Journal of Finance & Banking Studies
(2147-4486), 9(4), pp.87-96.

Nuryani, Y. and Sunarsi, D., 2020. The Effect of Current Ratio and Debt to Equity Ratio on
Deviding Growth. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi Akuntansi), 4(2), pp.304-
312.