Executive Summary
Estimating the performance of a company using ratio analysis is essential in determining the company’s profitability for internal and external users of financial statement. In this regard, the paper focused on establishing the level of performance for Morrison Supermarkets Company, and compared with Mark & Spencer, a similar company in the industry. Therefore, liquidity, profitability, activity, and capital structure ratios of the company were evaluated.
Morrison’s sales have increased from 12969 million Euros in 2008, to 15410 million Euros in 2010 then to 16479 in 2011. The company was able to have reasonable sales volume even in the word financial crisis of 2009 which adversely affected other companies in the same industry like Mark & Spencer. Morrison Supermarkets VS Mark & Spencer Performance Analysis
The company deals with clothing, home care products, and foods. On average, the clothing and home care business accounts for 49% of the total business, while, 51% of the company’s business is from foods. They provide foods ranging from fresh foods and grocery to partly prepared foods. The company uses foods and other raw materials from all over the world.
Liquidity ratios
Current ratio
Current ratio tests company’s liquidity. The ratio aims at establishing the company’s capability in settling off shorter debts as they fall due from its short term assets (cash, market securities, cash equivalents, inventory, and receivables). Generally, a company is at a good position to pay current liabilities if the current ratio is high (Magoon, 2008).
Current ratio =
For Morrison Supermarkets
Current ratio 2010 = = 0.5584
Morrison’s supermarket current ratio is below one basing calculations on financial statement of 2011as well as that of mark & Spencer.. This means that the company may have difficulties to meet its current liabilities. However, the company may not face liquidity problems because it is dealing with readily disposable inventory and its ratio is not so far below that of Mark & Spencer. The high sales of Morrison’s supermarket indicate that the company can make adequate sales to meet short term liabilities.
Quick ratio
Quick ratio, also known as acid test ratio, is a measure of liquidity that estimates the company’s position to pay off its current liabilities by disposing off its current assets apart from its inventory; since, inventory may not be easily sold. This ratio does not apply where stock is easily converted into cash (Raiyani & Bhatasna, 2011).
Quick ratio =
The ratio is very low where if the company’s stock was not easily convertible into cash the company could face liquidity problems. However, the company will be able to pay short term debts from its high sales.
Operating cash ratio
Net working capital ratio measures the company’s liquidity in short run whereby it is used to show the ability of company to meet daily bills (Magoon, 2008).
Net Working Capital Ratio =
The operating cash flow ratio for Morrison’s is below one however, when compared to that of Mark and Spencer whose ratio is also below one it has a higher ratio. This shows that in this industry it is comfortable for accompany to maintain a low operating cash flow ratio because the inventory is easily disposable
Profitability Ratios
Return on Capital Employed Ratio (ROCE)
Return on capital employed ratio estimates profit gain from share holders’ investments. A high value of ROCE is an indication of good company performance (Mosich, & Meigs, 1975).
ROCE =
The projection of the ROCE for the years 2011 to 2013 yielded the results below after caring out linear regression using Microsoft excel.
The graph below shows the comparison of ROCE for Morrison and Mark & Spencer for years 2008-2013
Morrison’s ROCE has been increasing overtime since 2008 to 2011. The ratio increased from 0.09 in2008 to 0.12 in 2010. The company is likely to experience gradual increase in ROCE because of increased profits. The increased ROCE overtime is an indication that many investors will be willing to purchase company shares. Therefore, it is probable that the company market share prices may increase overtime.
Profit Margin
It is used to show the fraction of sales on net income. High net profit margin means that the operating expense is low; however, when the margin starts to fall due to decrease in net income without considerable fall in sales then operating expense must be increasing.
Profit Margin =
The vales of the profit margin were projected for the year’s 2012 to 2013 using linear regression model
PROFIT Margin
Morrison supermarkets
The graph below shows the Morrison’s net profit margin since 2008 and a projection up to 2013
Activity Analysis Ratios
Asset Turnover Ratio
Asset Turnover Ratio =
It is a ratio which tries to scrutinize how effective is the company utilizing its assets to generate sales revenue. High asset turnover is an indication of better asset utilization in increasing sales.
Morrison’s assets turnover has increased from 1.6 in 2008 to over 1.7 in the following year and it has maintained the same in 2010 while in 2011 the value rose to 2.057.
Earnings per share
It shows how much a shareholder gets for every share invested. The higher the earning per share the more attractive it is to invest in the company.
EPS=
This ratio is given in the consolidated financial statement as 22.8 for 2010 and 22.93 for 2011. This means that the shareholders have earned more in 2011 than in 2010. Therefore, if the trend goes on this way many investors may be willing to purchase Morrison’s shares.
Dividend cover
Dividend cover=
In 2010==1.281
In 2011=1.1854
The ratio has decreased from 1.284 in 2010to 1.184 in 2011 this shows that the company has been decreasing the amount of profit ploughed back.
Capital Structure Analysis ratios
Debt to Equity ratio
Debt to Equity Ratio =
This is a leverage ratio which attempts to compare company’s liabilities to the entire company’s equity. It gives the composition of company’s capital. If the ratio is low then it means that the company has relied extensively on internal financing as compared to external financing (Bull, 2008).
Conclusion
Morrison’s has been maintained majority of financial ratios constant overtime. In addition its sales have also increased since 2008 to 2011. The company was able to have reasonable sales volume even in the word financial crisis of 2009 which adversely affected other companies in the same industry like Mark and Spincer. In regard to profitability ratios, it can be seen that the company profit has been increasing over time. In addition, the liquidity ratios, though, low give an indication that the company can meet its current liabilities because its inventory i.e. stock is readily disposable. The leverage ratios also indicate that Morrison’s has not heavily relied on external financing and it is likely that it will maintain a balance between external and internal financing.
References
Bull, R. (2008). Financial ratios: how to use financial ratios to maximize value and success for
your business. Amsterdam: CIMA.
Harrison, W. T., & Horngren, C. T. (2001). Financial accounting (4th ed.). Upper Saddle River,
NJ: Prentice Hall
Magoon, L. M. (2008). Dictionary of financial formulas and ratios. London: Global Professional
Pub.
Marks & Spencer company. Financial reports. Retrieved from
http://corporate.marksandspencer.com/investors/reports_publications/2007
Meigs, W. B., Mosich, A. N., & Meigs, R. F. (1975). Financial accounting (2d ed.). New York:
McGraw-Hill.
Morrison Company. Financial Reports. Retrieved from,
http://www.morrisons.co.uk/Corporate/Investor-centre/Financial-reports/
Raiyani, J. R., & Bhatasna, R. (2011). Financial Ratios and Financial Statement Analysis. New
Delhi: New Century Publications
