The Motley Fool

What These Ratios Tell Us About J Sainsbury plc

Before I decide whether to buy a company’s shares, I always like to look at two core financial ratios — return on equity and net gearing.

These two ratios provide an indication of how successful a company is at generating profits using shareholders’ funds and debt, and they have a strong influence on dividend payments and share price growth.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Supermarket J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) has a 16.8% share of the UK market, but how attractive does it looks on these two measures?

Return on equity

The return a company generates on its shareholders’ funds is known as return on equity, or ROE. Return on equity can be calculated by dividing a company’s annual profit by its equity (ie, the difference between its total assets and its total liabilities) and is expressed as a percentage.

Supermarket retailing is a competitive and low margin business, and Sainsbury’s return on equity appears quite low compared to some other industries:

J Sainsbury 2009 2010 2011 2012 2013 Average
ROE 6.2% 12.5% 12.3% 10.8% 10.8% 10.5%

Despite these relatively modest numbers, Sainsbury’s consistency and gradual growth has seen its share price rise by 25%, and its dividend rise by 26% over the last five years, so how does it compare to its peers?

What about debt?  

A key weakness of ROE is that it doesn’t show how much debt a company is using to boost its returns. My preferred way of measuring a company’s debt is by looking at its net gearing — the ratio of net debt to equity.

In the table below, I’ve listed Sainsbury’s net gearing and ROE alongside those of its peers, Tesco and Morrisons.

Company Net gearing 5-year
average ROE
Sainsbury 39.5% 10.5%
Morrison 41.4% 12.0%
Tesco 46.9% 15.5%

Sainsbury’s lower returns may be explained by its margins, which have historically been lower than those of Tesco and Morrisons.

Despite this, Sainsbury has delivered 34 consecutive quarters of like-for-like sales growth, its UK market share expanded last year, and its prospective yield of 4.6% is the highest of the three, by a small margin.

Is Sainsbury a buy?

Looking ahead, all three supermarkets are facing tight market conditions, but are continuing to spend heavily on opening new convenience stores, which are currently the main driver of sales growth.

Sainsbury has outperformed its peers in store and in terms of share price performance over the last five years, but it now seems quite fully priced to me, so I rate Sainsbury as a hold.

Finding market-beating returns

If you already hold Sainsbury’s stock, then you might be interested in learning about five star shares that have been identified by the Fool’s team of analysts as 5 Shares To Retire On.

I own three of the shares featured in this free report, and I don’t mind admitting they are amongst the most successful investments I’ve ever made.

To find out the identity of these five companies, click here to download your copy of this report now, while it’s still available.

> Roland owns shares in Tesco but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.