1.0 Company Overview
2.0 Analysis on Sainsbury
Gearing ratio is used to measure the financial leverage, indicating the degree to which a company’s activities are funded by owner’s funds against the creditor’s funds (Watson and Head 2013). In fact, the higher the company’s degree of leverage, it’s considered to be that the company is at a risky state because no matter how bad the company’s sales are but still it be able to finance its debts.In this context, there are three ratios is to be considered, the debt to equity ratio capital gearing ratio and the interest cover.
Debt to equity ratio – shows the extent to which the assets are financed by either debt or equity. This could be calculated by the following equation. The decision on the ratio of long term debt to equity is considered as a strategic one for managers i.e. future oriented and has a long term effect (Watson and Head, 2007). Capital structure decision directly affects entity’s profits; this makes it the important decision in corporate finance, so it must not be taken lightly. Debt to equity ratio = Long term debt
Using the aforementioned formula the debt to equity ratio was calculated for 5 years and as per the graph shown below the debt to equity ratio has been below 100% for the past 5 years. This is quite good for shareholders as the organization is able to pay off its debts using the equity that they have. In contrary, if the debt to equity ratio is high (i.e. above 100%) that means the company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. As you can see, in 2011 the ratio has been come down to 56% but has been increased to 64% in 2012 and remained the same in 2013 as well. However, in 2014 the ratio has been reduced to 63%. Therefore in conclusion we can say that Sainsbury’s debt to equity ratio is on the low side and they are able to settle off their debts quite...
Please join StudyMode to read the full document