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 company’s 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.
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).
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.
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.
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
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). Morrison’s 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 Tesco’s 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.
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 company’s 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 capital 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.
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 company’s 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. Morrison’s inventory period increased by 3.7times within 2011 and 2012 more than the Tesco’s that increased by 1.3 times during the same period this shows that Morrison’s sold more and replaced of their inventories than Tesco’s 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 Morrison’s trade receivables are quiet lower than the Tesco’s Trade payables show how long the company takes to pay off its creditors for account payable balances. This 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 Tesco’s that remained the same during the same period
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 Morrison’s 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.
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).
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