Magoosh GRE

Financial Statements and Stakeholders

| January 14, 2017

Introduction

In this report six different users of financial statements will be identified. Each user group will be described and the reasons why they use financial statements will be examined. Analysis and calculations of relevant and specific financial information will be performed to reflect the performance of the company, and how this is seen by the different stakeholder groups.The two companies I have chosen are J.Sainsbury plc and WM Morrison’s Supermarkets plc, hereafter known as Sainsbury’s and Morrison’s. This is because these two companies are two which have a large number of stakeholders who will be affected by the company’s financial statements. Sainsbury’s and Morrison’s also compete within the same sector and thus the financial statements and companies are obviously comparable, this will help with benchmarking to analyse the data .(Mclaney and Atril.2008). This will help to determine, along with the relevant analysis and calculations, which stakeholders will be more pleased with the financial statements out of the two supermarkets. As of May 2014, Morrison’s had 11% of the market, and Sainsbury’s 16.6% (Garner.2014).

The financial statements we will be assessing are income statements and balance sheets. These are the two statements which are of greatest importance to the majority of stakeholders. I have attained the most recent financial statements from the two companies from their recent annual reports. This report will use financial ratio’s to assess the profitability, efficiency, Liquidity, Financial Gearing and Investment potential within Morrison’s and Sainsbury’s.(Mclaney and Atril.2008.).

 Boards of Directors  

The owners and boards of directors of both Sainsbury’s and Morrison’s would use financial statements to review the performance of management and assess the overall performance of the company. For the smooth operation of the organisation, the managers and owners also need the financial reports to make essential business decisions. For example the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised for making certain business decisions.

This can be determined by using the following formula.

 

Total liabilities
Total assets
 
x 100%

            Sainsbury’s (£m)                                                               Morrison’s (£m)

 

10535
16540

 

x 100%

 

=63.7%

 

6037
10792
 
x 100%

 

= 55.9%

As can be seen Sainsbury’s debt to equity ratio is 63.7% with Morrison’s at 55.9%, a difference of 7.8%. This ratio is one of the key set of 10 identified by Laurent (2006) in being able to predict a firms performance. This thus means that they are financing their growth more by debt than they are by their current assets than Morrison’s. However this is not necessarily a bad thing, and this could mean that they growing more than if they did not utilise this outside financing. If this increases earnings by a greater amount than the debt interest that would be incurred then it is definitely beneficial to do so, thus the board would be pleased with what they have seen from the financial statements.

Shareholders

Shareholders receive a set of financial statements as a right, and are the only stakeholders to do so. The shareholders interest will be in what the company is doing with the money they have invested, and whether it is making a profit or loss.  If it is profitable, they will want a return in the form of dividends, so they will be concerned with the level of dividends the company is paying out year on year and the potential for future profits and dividendsIf profit levels and dividend pay-outs diminish noticeably, or if no dividends are paid out because the company has made a loss, then they will consider selling their shares and investing in something else which will give them a higher return. Obviously operating profit margin is also needed to measure overall performance and this can be calculated as follows.

Profit before interest and tax
Sales

 

x 100%

Sainsbury’s (£m)                                            Morrison’s (£m)

1009
23949

 

x 100%

 

=4.2%

 

(95)
17680

 

x 100%

 

=-0.5%

Supermarkets usually operate at low operating margins, so these results are not wholly surprising (McLaney and Attril.2008) Morrison’s extremely poor performance this year is down to incredibly high administrative costs, this could be seen as possibly due to a new initiative or launch of service which required high costs to get this off the ground, and therefore this may pay dividends in the future. Thus it will be imperative to see how they will perform in the next year without these high administrative costs. Sainsbury’s operating profit margin can be compared with the previous year to see how they are progressing, and this was 3.8%. Thus their net profit margin has increased and the shareholders will be pleased with this performance as it could increase shareholder dividends.

Banks

Banks are extremely interested in a companies such as Sainsbury’s or Morrison’s financial statements. For example if a company has an overdraft or a bank loan, then the banks need to make sure that a company can afford to pay these loans it owes off (Palepu and Healy.2008). If a company is applying for a loan, similar considerations apply, although the bank would in addition insist on looking at more up to date information than the last set of statutory accounts as these could be rather out of date. The banks would calculate this by with the acid test ratio. This shows the company’s ability to pay its current liabilities from liquid assets. This is calculated as follows.

Current assets less inventory
Current liabilities

 

      Sainsbury’s (£m)                                                                Morrison’s (£m)

 

4362-1005
6765

 

=  0.5 : 1

 

1430-852
 2873

 

= 0.2 : 1

Supermarkets by nature have very low acid test ratio scores due to some stock on their shelves not selling as quickly as they would like. However Morrison’s at 0.2:1 is much lower than the company would be wanting to have, whereas Sainsbury’s at 0.5:1 is relatively healthy for a company that operates as a supermarket.

Creditors

A company’s trade creditors and suppliers will also obviously be interested in a companies financial statements such as the balance sheet and income statement.  Such stakeholders will be concerned with whether the company can pay regularly for its purchases from them, so they will have an eye to the cash position of the company – its liquidity.  They will also be interested consequently in any items in the accounts which may affect this liquidity such as bank overdrafts or loans, as such items would usually indicate cash problems in the company which may render it an insecure buyer for the future.

Creditors are also extremely interested in creditor days. This is the average payment period to payables expressed in days. This can be calculated by the following formula.

 

Trade payables x 365

Purchases

 

Sainsbury’s (£m)                                                   Morrison’s (£m)

2272 x 365

16606

 

= 50 days

 

2692 x 365

22562

 

= 44 days

As can be seen, Sainsbury’s creditors will be the more pleased out of the two sets of stakeholders for both supermarkets. This is because they are paid on average six days faster than Morrison’s creditors and thus will have a more efficient flow of cash. This could mean building a better relationship with these creditors. However Morrison’s may also be pleased as it means they are able to hold on to this cash for longer and maximise cash flow with longer creditor days payable.

Trade debtors/customers. 

These persons would be interested in the company’s likely continuance into the future as a secure source of supply, and so would look for any items affecting this, such as production difficulties, sales price increases etc.

These will also be most interested in debtor (receivables) days, this is the Average collection period for receivables expressed in days. It is calculated as follows.

 

Trade receivables x 365

Sales Revenue

 

Sainsbury’s (£m)                     Morrison’s (£m)

 

433  x 365

316  x 365

23949

 

= 7 days

17680

 

= 7 days

Here both Sainsbury’s and Morrison’s debtors will be equally as pleased when analysing the financial accounts for both of these companies. This is because they both receive a similar amount of time in which to pay their debts. Equally both of the supermarket chains will be relatively pleased with this as they will be in a similar position to each other in receiving the money from debtors. Similarly this is much shorter than the time it takes both to pay their creditors, and thus their cash flow efficiency will be maximised.

Competitors

Competitors will also be interested in the financial results of a rival in the same industry sector to see whether its results are better or worse than its own, whether it has brought new products to the market place and how these have been doing (Palepu and Healy.2008). Competitors of Sainsbury’s such as Asda and Tesco may also be interested to compare things such as costs of goods on the income statement to compare this to their own performance. A rival’s bad result, when its own is good, would enhance performance in the eyes of its own shareholders.  A rival’s similar adverse performance may reflect that both are hit by the same business factors.

In the retail business something that both Morrison’s and Sainsbury’s would be interested in seeing is how their inventories turnover period compares with that of their rivals. It can be calculated as follows.

Inventories x 365

Cost of sales*

 

 

                        Sainsbury’s                            Morrison’s

 

1005 x 365 852 x 365

22562

 

= 17 days

16062

 

= 20 days

 

Here Sainsbury’s will have the more pleased boards of the two supermarkets when analysing their competitors in terms of inventory turnover. This is because on average they manage to turn over their inventory 3 days quicker than Morrison’s. This demonstrates that they have a more efficient stock system and are selling their products at a faster rate, which could lead to a better overall performance.

Conclusion

As can be seen, a range of different stakeholders have reason to be interested in a companies financial statements. These stakeholders range from being interested in their own personal gain, those such as Shareholders, as well as being interested in how it impacts upon other stakeholders, through the analysis of both debtor days and creditor days.

Financial reports are important for all different stakeholders so they can decide whether or not it is beneficial to be involved with a certain company, they are always interested in the going concern of the company. It is important for numerous reasons that these stakeholders have access to the accounts to gain clarity and for the continuation of the working relationship with companies such as Sainsbury’s and Morrison’s. It is therefore important that the accounting is accurate and up to standards for these different stakeholders of financial statements, it is also useful for comparison of companies and as can be seen from the analysis Sainsbury’s stakeholders will be more pleased with the financial statements than Morrison’s.

Bibliography

Garner, E. (2014). Kantar, UK grocery growth at lowest level for 11 years, [Online]

http://uk.kantar.com/consumer/shoppers/070514-kantar-worldpanel-uk-grocery-share-data-april-2014/ [Accessed online on 01/11/2014]

J.Sainsbury’s plc, 2014. Annual Report and accounts 2013-2014. [Online]. http://www.j-sainsbury.co.uk/media/2064053/sainsbury_s_annual_report_and_ accounts_ 13-14.pdf. 2014. [Accessed online on 01/11/2014]

Laurent, C.R. Improving the efficiency and effectiveness of financial ratio analysis. Journal of Business Finance and Accounting. [Online] Vol 6(3). 2006. p401-413.

McLaney, E. J.,  Atrill. P. (2008). Accounting and finance : an introduction. Fourth edition. Harlow: Pearson.

Palepu, K. Healy, P. (2008) Business Analysis and Valuation: Using Financial Statements. Mason:Thomson Learning

WM Morrison’s Supermarkets plc , 2014. Morrison’s Annual Report 13-14 [Online]. http://annualreport.marksandspencer.com/downloads/MS_AR2014_Annual_Report.pdf [Accessed online on 01/11/2014]

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Category: Economics, Essay & Dissertation Samples, Finance