Morrison Is A Uk Company That Operates Finance Essay - Free Essay Example

Morrison is a UK company that operates retail food stores in the UK ,,it is known to be the fourth largest food retailer by sales with the total turnover in excess of  £17 billion the Morrison have the total number 475 stores across Britain with over 11 million customers and 131,00 employees. According to www.morrisons.co.uk the companys strategy for sustainable growth is designed to provide a distinctive offer to customers centered around fresh food, craft skills and vertical integration ,offering outstanding service and seizing opportunities to grow the business profitably through new formats ,categories and channels. This focused report aims at analyzing the suitability of Tesco which is way bigger that the Morrison and ranked number 1st as the largest retailers in the UK with operations in 14 countries, with 500,000 employees with the strategy that aims to broaden the scope of the business to enable it to deliver strong sustainable long-term growth. Ratio analysis There are many users of financial statements such as shareholders, investors, managers and so many more. In regards to conducting a business analysis, Ratio analysis can be used to access the performance of a company therefore giving a closer connection to shareholders wealth maximization. Understanding the ratio analysis will allow users of accounts make reasonable decisions for instance an investor will be able to determine if the business is worthy of its investment due to the past accounts. The ratios show how profitable the business is, how efficient it is, and also how a company is financed in respect to their equity and debts (Mclaney Atrill, 2008). Profitability ratios The profitability ratio is gives an insight on how well a company is doing in terms of profit making the ratios are calculated in terms turnover or profit over the years. TABLE 1 PROFITABILITY RATIOS MORRISONS TESCO ROSF% CHANGE 2012 2011 2012 2011 13% 12% 15.8% 16.0% 1% 0.2% ROCE % CHANGE 12.9% 12.8% 14.3% 14.9 % 0.1% -0.6% GROSS PROFIT % CHANGE 6.8% 6.9% 8.1% 8.4% -0.1% -0.3% OPERATING MARGIN % CHANGE 5.5% 5.4% 6.1% 6.4% 0.1% -0.3% Return on ordinary shareholders funds According to Mclaney Atrill,( 2008) ROSF is used to compare the total profit for the period available to the owners available to the owners average stake in the business during that same period .However the Morrison ROSF increased slightly in 2012 by 1% this is an improvement in the ratio compared to Tesco ROSF which reduced by 0.2% during the same period. Return on capital employed (ROCE) The ROCE is a fundamental measure of the profitability of the company. It is a popular indicator of the management efficiency because it contracts the net profit generated by the company with the total value of fixed and current assets, which are presumed to be under management control (Elliott and Elliott, 2007).ROCE measures the performance of a business fundamentally (Mclaney Atrill, 2008). Morrison had a slight increase of 0.1% from 2011 to 2012. Although this is not a huge increase, it is much better than having a decrease change. This is not a good sign for the company as it shows its profitability is either fluctuating or growing slowly. Tesco on the other hand had a decrease in ROCE of 0.6% from 14.9% down to 14.3%. Although in 2012 Tesco had a decrease, it is in a better situation than Morrison is in terms of the ROCE ROCE FOR MORRISON AND TESCO (2011-2012) Gross profit margin The gross profit margin is used to measure the profitability in buying and selling of goods or services before any other expenses are taken (Mclaney Atrill, 2008). Morrisons gross profit margin reduced by 0.1% between the period of 2 years from 6.9% down to 6.8% this reflects that the gross profit was lower relative to the sale revenue in 2012 than it had been in 2011.This may have been as a result of the recent expansion of the business through acquisition of new retail stores .just like the Morrison Tescos gross profit margin dropped more than the Morrison during the same period by a difference of 0.3% from 8.4% in 2011 down to 8.1% in 2012 this may have occurred due to the fact that they may be selling at a higher margin and not at a stage of expansion. As a result of the wet weather in the summer 2012, sales became weak, and overall gross profit declined. Operating margin According to Mclaney Atrill (2008). The operating profit margin is regarded as the most appropriate measure of operational performance because it represents profits from trading operations before interest payable expense is taken into account. Operating profit margin is a way of measuring a companys strategy and operating efficiency and it shows users of accounts if the fixed costs are too high for the production or sales volume. The percentage increase of Tesco from 2011 to 2012 was 28.57% decrease as the ratio was initially 6.4% and went down to 6.1% respectively. The fall in OPM may have occurred due to the profit from operations 33.39% decrease in 2012 which was as a result of high expenses Margate incurred. Having a low OPM is a negative implication for Margate as they may find it difficult to have a profit in future years as a result of the operations and expenses are high figures in relation to their sales at this occurrence. This however might cause them to have low capita l to run the business smoothly which can also lead to financial assistance from banks or other sources of finance. In conclusion to this section there was a strong performance in the business says Tesco especially in Asia. Thailand experienced the worst flooding for 70 years which caused over 150 stores to close down but with the dedication and cooperation of their staff, they maintained a good supply line for with their customers. Table 2 Efficiency ratio Morrisons Tesco 2012 2011 2012 2011 Return to capital employed 2.1times 2.1times 2.1times 2.0times Receivables 6.6days 5.9days 15days 14days 0.7day 1day Payables 44.9days 45.5days 69.1days 69.1days 0.6days same inventory 16.8days 15.1days 22.1days 20.8times 1.7times 1.3times Efficiency ratios The efficiency ratio measures how efficient the business is in terms of collection of debts, payments of loans and also the stock turnover. The inventory period shows how many times a companys inventory is sold and replaced over a certain period of time. According to Richard Loth, (2005) It is said that the higher the ratio the better the turnover of inventory. Morrisons inventory period increased by 3.7times within 2011 and 2012 more than the Tescos that increased by 1.3 times during the same period this shows that Morrisons sold more and replaced of their inventories than Tescos did. Trade receivables ratio shows the number of times average receivables are collected during a year. A high ratio is usually a good indicator to the users of accounts of the business but a ratio that is too high requires monitoring the Morrisons trade receivables are quiet lower than the Tescos Trade payables show how long the company takes to pay off its creditors for account payable balances. T his could be as a result of accepting payments of sales on credit which means they do not have any funds till they make enough from their sales. The payables for Morrison reduced within 2011 and 2012 from 45.5days to 44.9days which is a sign of improvement, which is better than the Tescos that remained the same during the same period Table 3 Liquidity ratios Morrisons Tesco 2012 2011 2012 2011 Current Ratio=Current assets/current liabilities 0.5 0.5 0.6 0.7 Acid Test =Current assets Inv /Current liabilities 0.2 0.2 0.4 0.4 Liquidity Liquidity ratio shows the solvency of a company and its ability to repay its debt in the short to medium term. The current ratio shows how many times a companys current assets cover its current liabilities. The quick (acid) ratio is calculated in the same way as the current ratio but the value of inventory is excluded from current liabilities as it is less liquid than other current assets and may take time to be converted to cash or cash equivalent. In both years, Morrisons had more current liabilities than current asset with approximately half of it inventory. There wasnt any change in both the current ratio and acid ratio at 0.5 and 0.2 respectively in the 2 years under review same as the Tesco. Investment ratio Table 4 Investment ratio Morrisons Tesco 2012 2011 2012 2011 Leverage % change 28.5% 23.2% 0.3% 0.3% Interest Cover =Profit before interest/Interest payable 20.7 times 21.0 times 9.5 times 8.1 times Earnings per share 26.68p 23.93p 36.75p 34.43p Tesco have improved their interest cover over the period from 8.1 to 9.5 times, this can be attributed to rising profits before interest and tax and decline in interest payable. While Morrisons operating profits increased, interest payable increase at a higher rate and with this their interest cover reduced from 21 to 20.7 times. Interest cover is a short term measure of the firms ability to meet its financial obligations, and sometimes can be manipulated to achieve immediate results. Therefore there is a risk of investing at this period until the share earning price is increased. The earning per share ratio is used to measure share performance. However for Morrisons EPS increased by 2.75p which was a slightly higher than Tesco. There are many limitations to the use of the ratios when making important investment related decisions. Ratios focus on past performances of businesses in the sense that the figures used do not take into consideration what will happen in the future. The ratios obtained will only enable the company to predict what can happen in future years (Mclaney Atrill, 2008). Due to the fact that ratios deal with numbers, factors such as the quality of products, customer service, employee behaviour and so many more are not put into consideration. Therefore such areas of the business will not be considered or highlighted when improving the activities of the business.(Mclaney Atrill, 2008). There are different accounting policies used by several different companies, therefore causing it to be difficult to compare the ratios.(Mclaney Atrill, 2008). APPENDIX 1 RATIOS FORMULA PROFITABILITY RATIOS Return on capital employed Operating profit x 100 Debt + Equity Return on shareholders fund Profit of the year x 100 Equity Gross profit margin Gross profit x 100 Sales revenue Operating Margin Operating Profit x 100 Revenue EFFICIENCY RATIOS Return to Capital Employed  Cost of Sales Return on Capital Employed Receivables Trade receivables x 365 Revenue payables Trade payables x 365 Cost of Sales Inventory Inventory________________ Cost of Sales INVESTMENT RATIO Leverage Debt Number of employees Dividend pay out Profit as dividend Profit of the year Interest Cover Operating profit Finance cost LIQUIDITY RATIOS Current ratio  Current assets Current liabilities Acid test ratio Current assets (excluding inventories) Current liabilities APPENDIX 2 RATIO ANALYSIS FOR MORRISON PROFITABILITY RATIO 2012 2011 RATIOFOR 2012 RATIO FOR 2011 Return on capital employed 973/5,397+2,159100 = 12.9% 904/5420+1643x 100= 12.8% 12.9% 12.8% Return on Shareholders Fund 690/5,397100= 13% 632/5,420100 =12 % 13% 12% Gross profit margin 1,217/17,663100= 6.8% 1,148/16,479100= 6.9% 6.8% 6.9% Operating Margin 973/17,663 x100=5.5% 904/16,479 x100=5.4% 5.5% 5.4% EFFICIENCY RATIOS Return to Capital Employed 16,446/7,559= 2.1times 15,331/7,063= 2.1times 2.1times 2.1times Receivables 320/17,663365= 6.6 days 268/16,479365= 5.9days 6.6 days 5.9 days Payables 2,025/16,446365=44.9 days 1,914/15,331365= 45.5days 44.9 days 45.5 days Inventory 759/16,446 x365= 16.8 days 638/15,331365= 15.1 days 16.8 days 15.1 days Investment ratio Leverage 2,159/7,556100=28,5% 1,643/7,063 x100=23.2% 28.5% 23.2% Interest Cover 973/47 904/43 20.7times 21.0 times Earnings per share Basic Basic 26.68p 23.93p LIQUIDITY RATIOS Current ratio 1,322/2303= 0.5 times 1138/2086= 0.6 times 0.5 times 0.5 times Acid test ratio 1,322-759/2203=0.2 times 1138-638/2086= 0.3 times 0.2 times 0.2 times RATIO ANALYSIS FOR TESCO RATIO USED 2012 2011 RATIOFOR 2012 RATIO FOR 2011 PROFITABILITY RATIO Return on capital employed 3,985/9911+17801=14.3% 3,917/9689+16535100= 14.9% 14.3% 14.9% Return on Shareholders Fund 2,814/17801100=15.8% 2,671/16623100= 16.0% 15.8% 16.0% Gross profit margin 5,261/64539 x100=8.1% 5,060/60931100= 8.4% 8.1% 8.4% Operating Margin 3,985/64539 x100=6.1% 3,917/60445 x100=6.4% 6.1% 6.4% EFFICIENCY RATIOS Return to Capital Employed 59,278/27,686 x365=2.1 times 53,330/26,224365= 2.0 times 2.1 times 2.0 times Receivables 2,657/64,539365=15.0 days 2,330/60,445365= 14.0 days 15.0 days 14.0 days Payables 11,59,278/x365=69.1 days 10484/55,330365= 69.1 days 69.1 days 69.1 days Inventory 3,598/59,278 x365=22.1days 3,162/55,33023 x100= 20.8 days 22.1days 20.8 times Investment Ratio Leverage 9,911/27686=0.3% 9,689/26,224=0.3% 0.3% 0.3% Interest cover 3,985/417=9.5 times 3,917/483=8.1 times 9.5 times 8.1 times Earnings per share Basic Basic 35.75p 34.43p LIQUIDITY RATIO Current ratio 12353./19180=0.6 times 11438/17731= 0.7 times 0.6 times 0.7 times Acid test ratio 12353-3598/19180= 0.4 times 11438-3162/17731= 0.5 times 0.4 times 0.4 times APPENDIX 2 TESCO 2012 ROCE (12.8% ) Asset Turnover (2.3 times) X Net Profit margin (6.1%) 2011 ROCE (12.8% ) Asset Turnover (2.3 times) X Net Profit margin ( Morrisons 2012 ROCE (14.3% ) Asset Turnover (2.6 times) X Net Profit margin (5.5%) 2011 ROCE (14.9% ) Asset Turnover (2.8 times) X Net Profit margin (5.4