Introduction
Morrison supermarket is the among the largest food retailers in UK. The company success in the market over years has been attributed to establishing its own manufacturing facilities which allows it to control quality of its food. The company keeps its accounting records under the guidance of generally accepted accounting principles (GAAPS). In addition, its financial statements are prepared and presented in accordance with IFRS. The company financial records are audited by independent external auditors. This implies that the financial reports relied in calculating financial ratios are reliable. The ratio analysis of the company shows that the company profitability, solvency, and efficiency at relatively comfortable levels. The liquidity of the company is relatively low. However, when compared with another firm in the same industry it is found to be within the industrial range.
Financial analysis
Liquidity ratios
This ratios gauges the effectiveness of a company to pay current liabilities as they fall due. The importance of keeping good liquidity level is that suppliers would trust the organization and would be willing to supply goods on credit.
Current ratio
Current ratio tests company’s liquidity. The ratio aims at establishing the company’s capability in paying current liabilities from the available current assets .Generally, a company is at a good position to pay current liabilities if the current ratio is almost one is to one (Magoon, 28).
Current ratio = Current AssetsCurrent liabilities
For Morrison Supermarkets
Current ratio 2010 = 10922152=0.5
Current ratio 2011 = 11382038 = 0.5
Morrison’s supermarket current ratio is below one for the two years considered. It therefore seems that the company may not pay all its current liabilities as and when they fall due from the available current assets. 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 revenue of Morrison’s supermarket indicates 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 current liabilities as and when they fall due from the available current assets apart from inventories. The reason for exempting stock from the calculation is because it may take relatively long period before converting inventory into cash. Therefore, this ratio does not apply where stock is easily converted into cash (Raiyani & Bhatasna, 21).
Quick ratio = Current Assets-InventoryCurrent liabilities
The analysis shows that the company could have faced serious liquidity problem if its stock was not easily convertible into cash. This is because the ratio is very low.
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 from its operating cash flows (Magoon, 28). This ensures that there is no need of arranging for overdrafts to meet short term liabilities.
Net Working Capital Ratio = Cash from operating activitiescurrent liabilities
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
Interest cover ratio
It is used to determine whether a company can pay interest expense easily from its earnings. It is therefore calculated as EBITinterest expense.
2010= 81160= 13.51
2011= 90543= 21.04
The above calculations show that Morrison supermarket can comfortably pay its interest expense in both years. This indicates to financiers that the company can still apply for additional loans.
Profitability Ratios
This ratios gauge the ability of a company to generate income for shareholders.
Return on Capital Employed Ratio (ROCE)
Return on capital employed ratio estimates profit gain from share holders’ investments. Increase of ROCE over years indicates increasing profitability of the company (Mosich, & Meigs, 15). In addition, it shows efficiency of the management in controlling overheads so as to increase net profit.
ROCE = EBITTotal assets-Current LIabilities
The above analysis show ROCE did not change for the two years. This ratio is at comfortable level because it is higher than the rate at which the company borrows loans.
Return on equity
This ratio is used to reveal the amount of profit generated from capital provided by shareholders. Therefore, it considers net income of a given financial year (after dividends are paid to preference shareholders but, before divided are paid to common shareholders). The shareholders capital considered does not include preference shareholders’ equity. It is also known as return on net worth.
ROE= net incomeshareholders equity.
ROE 2010 =5374949= 0.1085
ROE 2011= 6585420= 0.121
The above analysis show that owners one dollar of investment generate around 0.1dollars. The analysis also shows that the shareholders profitability rose negligibly from 0.108 in 2010 to 0.121 in 2011.
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 = Net IncomeSales
The profit margin has remained constant over the two years giving an indication that, the management was able to control overhead costs.
Activity Analysis Ratios
Asset Turnover Ratio
Asset Turnover Ratio = SalesAverage Total Assets
This ratio gauges the profitability of a company in respect to the assets it owns. Therefore, it checks the efficiency of management in using the available assets to generate revenue. It is sometimes called return on investment.
2010 = 154108760 = 1.7591
2011 = 164799149 = 1.8
Morrison’s assets turnover has increased from 1.7 in 2010 to over 1.8 in the following year. This indicates an improvement in utilization of assets to generate sales revenue.
Fixed assets turn over
The ratio measures the effectiveness of management in the use of fixed assets to generate sales. This means that an increasing trend of this ratio over years indicates increasing management efficiency.
2010 fixed assets turn over= revenue fixed asssets= 154107668= 2.0
2011= 164798011= 2.1
The above analysis shows that for every dollar invested in fixed assets it generates around 2 dollars in revenue. It also shows that the efficient of management in utilizing fixed assets increased by a small percentage.
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= net income-div.on prefered stockavarage shares
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 in future. This is because they will expect the price of shares to increase.
Dividend cover
It gauges the easy of paying dividends to shareholders.
Dividend cover=dividend per sHareearning per sHare
In 2010=15922.8= 6.97
In 2011=22023.93= 9.19
Capital Structure Analysis ratios
Debt to Equity ratio
Debt to Equity Ratio = Total LIabilitiesTotal Equity
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. A ratio higher than 0.5 indicates the company has relied more on external financing than internal financing (Bull, 2008).
2010 = 38114949 = 0.7701
2011 = 39435420 = 0.72749
The above analysis shows that Morrison’s supermarket has maintained its debt equity ratio above 0.5 in2010 and 2011. This is an indication that its capital composition had more liabilities than share holder’s funds.
Summary of finding
The current ratio of the company is below one; however, the business is not likely to experience liquidity problems because its inventory is easily convertible into cash. The ratio is within a comfortable range because it is near that of Mark and Spencer. The profitability ratios have stayed stable for the two years with small increment. The solvency ratio show the business is financed more by long term liabilities than owner’s equity. Lastly, the efficiency ratios show that the efficiency of management has improved over the last two years.
Conclusion
Morrison has maintained majority of financial ratios constant overtime; however, the efficient ratios have increased by a small margin. In addition, its sales increased an indication of increased market size. The liquidity ratios are not relevant to this type of business because the inventory traded is easily convertible into cash.
The increased profitability of the company can be attributed to ability of the management to control overhead cost and increased turnover. In regard to capital structure, the company has more debt than owners’ equity. Therefore, the company has relied more on external financing than internal financing because debt equity ratio is above 0.5.
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/2011
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
