To:Lyala Stewart

From:
Date: 23/11/10

Subject: Financial comparison of J Sainsbury Plc and Wm Morrison Supermarkets Plc.

Introduction
The aim of this report is to analyse financial performance and position of J Sainsburys Plc and WM
Morrisons by analysing financial statements of two companies. This will be helpful to different stake
holders such as shareholders, lenders, owners and current potential investors to make decisions
effectively.
Although this type of analysis give information to stakeholders to take decisions there are some
limitations of using ratio analysis as they dont reflect true and fair view of companies condition.
Some of these limitation are accounting ratios can be calculated in more than one way, this makes
hard to compare the financial statements with another companies or with previous years of the
same company. Another limitation is the companies use different accounting policies (depreciation,
provision for bad debts, valuation for inventories) the figures calculating might be different from
another company though they use the same formula to calculate the ratios. Sometimes figures from
analysed ratios leads to mislead information as it doesnt take in to account the available evidence.
In this report Im going to analyse the financial performance of J Sainsburys Plc and WM Morrisons
which are leading super markets retailers in UK
J Sainsburys Plc
J Sainsburys which is listed in London stock exchange was incorporated by John James Sainsbury and
Ann Sainsbury in 1869.It is now the 3
rd
largest supermarkets i UK with a share of 16.3% of UK
supermarkets. J Sainsburys is popular for selling all types of products and DIY. Though Sainsburys is
popular as a one of the best supermarket retailer, it has increased its activities to Sainsburys bank, J
Sainsburys convenient store Sainsburys property company and J Sainsburys development
Limited.(JSD)
WM Morrisons Plc products ,clothing
Morrisons was established in 1899 as a little store in Bradford market by Williams Morrisons. Today
Morrisons is the fourth largest supermarket retailer in UK with more than 400 stores. This company
listed in London stock exchange with total market share of 12.6%. By 2005 Safeway become part of
the Morrisons family as they completed acquiring Safeway. Morrisons focus is to become a larger
convenient supermarket which focuses on selling products such as groceries, household products,
clothing and furnishing and fewer electronics.
Analysis
Profitability Ratios
The gross profit margin measures the difference between the revenue and the cost of sales as a
percentage of sales revenue. Sainsburys had a gross profit margin of 5.48% in 2009 and 5.42% in
2010 which slightly different from previous year.(Appendix 1)Even though the sales figure increased
by 5.57% (Appendix)over the 2 years. There is a 0.06% decrease in gross profit margin. This should
be due to 5.63% increase in cost of sales .Morrisons gross profit margin is increased from 6.28% in
2009to 6.89%in 2010 Although there is a 5.108%(Appendix) increase in cost of sales,6.07% increase
in sales revenue led to a higher gross margin in 2010. According to the figures Morrisons is relatively
more efficient in production and better in control on their cost of sales when compared to
Sainsburys for both years.
The profit margin ratio expresses operating profit as a percentage of sales revenue. High Margin
indicates that the business controlled its expenses effectively. Even though the sales revenue and
operating profit has increased, the operating profit margin remains the same over the two years as
3.56 %( appendix). The profit margin ratio for Morrisons has increased from 4.62% in 2009 to 5.89%
in 2010. Even though there was a increase in cost of sales the ratio increased because the decrease
in companys administrative income by 57 million (higher) and increase in sales revenue by 6.07%
compared to previous year. Though the Sainsburys operating profit margin hasnt change, the
Morrisons operating profit margin has showed an improvement with a increase of 1.27%. This
indicates that how efficiency Morrisons control their operating profit than Sainsburys.
The asset turnover ratio represents how efficiency a business is in utilising its total assets in
generation of its revenue. Sainsburys asset turnover ratio has decreased 1.88 times in 2009 to 1.84
times in 2010(appendix). Even though there is increase in revenue during the period the asset
turnover ratio has decreased due to acquisition of Non-Current assets. In 2009 Morrisons generated
a return of $1.77 for every $1 of assts but it has decreased in 2010 to $1.76 return for $1 of assets.
For both companies the ratio has fallen but Sainsburys asset turnover ratio is higher than
Morrisons.
The return on capital employed ratio measures efficiency of utilising long term capital resources to
generate revenue. Sainsburys ROCE has increased from 6.71% in 2009 to 6.54% in 2010(appendix).
This is due to $822 million increase in total assets over the two years (note 7). $236 million
increment in operating profit caused to bring up the ROCE by 2.19% in 2007. For this year they earn
a return of $10.35 for every $100 they have invested. For Morrisons ROCE for 2009 is 8.16% and for
2010 it is 10.35 %( appendix). When compared to two companies Morrisons is the best company to
invest for share holder since it generates higher ROCE than Sainsburys.

Financial management ratios
The current ratio is used to measure the companys ability to meet its short term liabilities compared
to its current assets. For 2009 Sainsburys had $0.5 of current assets to meet $1 of current
obligations. This has increased to $0.64 of assets for every $1 current asset in 2010. Even though
there is a increase, the current asset ratio is below the acceptable level of 2:1 for both companies.
Morrisons current ratio has fallen from 0.53:1 in 2009 to 0.51:1 in 2010, due to increase in $128
million current assets during the year(note 8). As they are below the norm 2:1 they will face liquidity
problems when dealing with day today activities.
The liquidity ratios show the companys ability to meet a current liability with more liquidity assets
by removing inventory from calculation. For Sainsburys this ratio has increased 0.30:1 in 2009 to
0.39:1 in 2010. Morrisons liquidity ratio has fallen 0.28:1 in 2009 to 0.24:1 in 2010. Both companies
are not performing well in liquidity ratios as they are below the acceptable standards of 1:1. Lenders
prefer a high liquidity ratio, current ratio which shows sufficient level of liquidity to pay the
obligations.
Inventory turnover measures the average number of days takes a company to sell its goods in stocks.
In 2009 Sainsburys had a stock turnover period of 14 days which remains the same in
2010(appendix). Morrisons inventory turnover ratio has increased from 13 days in 2009 to 15 days
in 2010. High period of time takes to convert inventory into sales may result in high storage cost
which could be used to another investment. The Morrisons inventory turnover higher than
Sainsburys which indicates Sainsburys performs well in inventory turnover.
Payables turn over indicates how many days it takes to pay to short term creditors. Sainsburys
payable turnover ratio has decreased from 35 days in 2009 to 34 days in 2010. Morrisons ratio has
fallen from 39 days in 2009 to 34 days in 2010. This indicates that a better control over creditors.
When compared to two companies Morrisons has taken less days to settle the short term creditors.
Receivables turnover measures how long it takes to receive money from receivables. For Sainsburys
this ratio remains the same over the two years as a day (appendix). In these type of businesses
customers pay by cash or by electronically.






Note 7
Sainsburys annual report page 47.

Note 8
Morrisons annual report page 53.