Managerial Finance Analysis of Wm Morrison PLC and Tesco PLC


Technischer Bericht, 2011
57 Seiten, Note: Distinction

Leseprobe

Table of contents

1 .INTRODUCTION

2. FIRST PART
i) PROFITABILITY AND RETURN ON CAPITAL RATIOS
ii) LIQUIDITY, CAPITAL AND GEARING RATIOS
iii) EFFICIENCY RATIOS
iv) Tabiel: The results of ratios of the Wm Morrison PLC and Tesco PLC for 2010 and 2009

3. SECOND PART

4. THIRD PART
i) Forecasted Income Statement of Wm Morrison Supermarkets PLC for 2011
ii) Forecasted Statement of Financial Position of Wm Morrison Supermarkets PLC
iii) Forecasted Cash Flow Statement of Wm Morrison Supermarkets PLC for 2011

5. FOURTH PART

6. APPENDIX -1

7. APPENDIX-2

8. APPENDIX-3

9. APPENDIX-4

10. BIBLIOGRAPHY

Introduction:

Wm Morrison Supermarkets PLC, “which is known as Morrison”, is one of the "Big Four" grocery retailer supermarket chains in the UK and it is included in the FTSE-100. It offers a range of goods consisting of both branded and own label products. It offers 18,000 product lines in a typical store, 32% of which are its own-brand labels. This company’s head quarter is situated in the Bradford, the UK. It employs about 124,530 people, of which 73,596 employees are employed as part-time employees (Datamonitor, 2010).

This essay will explain the differences of the financial performances of Wm Morrison Supermarkets PLC and Tesco PLC. Various aspects of Wm Morrison Supermarkets PLC and Tesco PLC of 2009 and 2010 financial reports are used for the analysis of the financial performances. In the first part of this essay, the various kinds of ratios and formula of different ratios will be discussed. Later, the Ratio calculation of the two companies (Wm Morrison Supermarkets PLC and Tesco PLC) for two years (2010 and 2009) will be shown in this part. In the second part of this essay, financial performance and position of Wm Morrison Supermarkets PLC will be discussed using trend analysis and cross sectional analysis. Then, the forecasted income statement, balance sheet, and cash flow statement will be presented in the third part by using trend analysis and information from the published accounts and press. Finally, the limitation of ratios, problems of using financial reports, and impact of the recent recession will be critically discussed in the fourth part of this essay.

2 FIRST PART:

Ratio:

According to Atrill and McLaney(2006, pg.168), “Financial ratio provides a quick and relatively simple means of assessing the financial health of a business. A ratio simply relates one figure appearing in the financial statement to some other figure appearing there or, perhaps, to some resource of the business, for example, net profit per employee, sales revenue per square meter of counter space and so on.”

i) PROFITABILITY AND RETURN ON CAPITAL RATIOS:

i) Return on capital employed {ROCE):

ROCE is a fundamental measure of business performance. It represents the relationship between the net profit generated within a period and the average long­term capital invested in the business during that period. ROCE is a primary measure of profitability. Inputs (capital invested) with outputs (profit) are compared in this ratio, which is essential in assessing the effectiveness of the organization. (Atrill and McLaney, 2006).

Calculation:

The formula of this ratio is as follow:

Profit before interest and tax (PBIT) x 100 Capital employed

ii) Profit margin:

According to Atrill and McLaney (2006), the net profit margin represents the relationship of the net profit for the period to the sales revenue during that period. The net profit before interest and taxation are used in this ratio as it represents the profit from trading operations before the interest cost taken into account. This is often considered as the most appropriate measure of operational performance. This ratio compares one output (profit) of the business with another output (sales revenue). This ratio also varies according to the types of business. There are some other factors, which influence the net profit margin. Those are degree of competition, the types of customers, the economic climate and industry characteristics (such as level of risk) will influence the net profit margin of a business.

Calculation: The formula of this ratio is as following:

= PBIT X 100 Revenue

iii)sset Turnover:

This ratio compares sales to total assets employed. A business with a large asset infrastructure, perhaps steel works, has a lower ratio than business with minimal assets, such as management consultancy or dot.com business. (Jones, 2006)

Calculation: The formula of this ratio is as following:

Revenue expressed as “# times”

Capital employed

iv)Gross profit margin:

considerable expense for many businesses, a change in this ratio can have a significant effect on the bottom line. (Atrill and McLaney, 2006).

Calculation: The formula of this ratio is as following:

= Gross profit x 100 Revenue

v) Earnings uer share ŒPS):

According to Atrill and McLaney(2006), the Earning per share represents the earnings generated by the business, and it also represents the availability to the shareholders within a period to the number of shares in issue. In case of equity shareholders, the amount represents the net profit after tax (less any preference dividend, where applicable). It is immensely helpful to compare the earning per share of a business with those of another. It can be very useful to monitor the changes that occur in this ratio for a business over time.

Calculation: The formula of this ratio is as following:

= Profits after tax Number of ordinary shares

vi)Price Earnings ratio 1P/E ratio):

The price earnings ratio relates the market value of the share to the earning per share. This ratio is also a measure of market confidence in the future of a business. Higher P/E ratio represents the greater confidence in the future earning power of the business and investors are more encouraged to pay in relation to the earnings stream of the business. In addition, it provides the useful guide to market confidence concerning the future. Thus, they are helpful when comparing different business. (Atrill and McLaney, 2006).

Calculation: The formula of this ratio is as following:

Share price Earnings per share

i) Current ratio:

The current ratio compares the liquid asset of the business with the current liabilities. An Ideal current ratio is 2:1 for business, because different types of business require different current ratios. For example, a manufacturing business will often have a relatively high current ratio because it is necessary to hold inventories of finished goods, raw materials and work in process. I also sell goods on credit, thereby giving rise to receivables. On the other hand, a super market has a relatively low ratio, as it will hold only fast moving inventories of finished goods and all its sells will be made for cash. The higher the ratio, more liquid the business considered being. As liquidity is vital to the survival of a business, a higher current ratio might be thought to be preferable to a lower one. (Dyson, 2004)

Calculation: The formula of this ratio is as following:

= Current Assets Current Liabilities

ii)Acid Test ratio (or Quick ratio):

According to to Atrill and McLaney(2006), the acid test is remarkably similar to the current ratio, but it represents exceptionally stringent of liquidity. It can be argued that for some business inventories cannot be converted into cash quickly. As a result, it may be good to exclude this particular asset from any measure of liquidity. The minimum level for this ratio is often stated as 1:1 that is current asset (excluding inventories) equals current liabilities. In many highly successful businesses that are regarded as having adequate liquidity, however, unusual for the acid test ratio to be below 1 without causing any liquid problems.

Calculation: The formula of this ratio is as following:

= (Current assets - less inventories)

Current liabilities

iiDGearing:

The gearing ratio measures the contribution of long term lenders to the long term capital structure of a business. (Atrill and McLaney, 2006).

Companies are financed out of a mixture of share capital retained profits and loans. Loans may be long-term (such as debentures), or short-term (such as credit given by trade creditors). If a company finances itself from a high level of loans, there is an obviously higher risk in investing in it. This arises for two main reasons:

1 ) The higher the loans, the more interest that the company will have to pay, and may affect the company's ability to pay an ordinary dividend.
2) If the company cannot find the cash to repay its loans, the ordinary shareholders do not get any money back if the company goes into liquidation. (Dyson, 2004)

Calculation: The formula of this ratio is as following:

=Non-current liabilities x 100

Equity + non-current liabilities

EFFICIENCY RATIOS:

¡^Inventories turnover:

According to Elliot and Elliot (2006), the inventory turnover ratio measures the average period for which inventories are being held. A business normally prefers a short inventory turnover period to a long one. As the fund tied up in inventories, so it cannot be used for other purposes. When judging the amount of inventories, the business must consider such thing as the likely demand for the inventories, the possibilities of supply shortage, the likelihood of price rises, the amount of shortage space available and the parish ability of the inventories.

Calculation: The formula of this ratio is as following:

Inventories x 365 days Cost of sales

ii)Trade receivables payment period:

A business will usually be concerned with how long it takes for customers to pay the amounts owing. The speed of payment can have a significant effect on the business cash flow. The trade receivable period calculates how long, on average, credit customer takes to pay the amount that they owe to business. A business will normally prefer a shorter average settlement period to a longer one as, once again, funds are being tied up that may be used for more profitable purposes. Though this ratio can be useful, it is necessary to remember that it produces an average figure for the number of days for which debts are outstanding. (Atrill and McLaney, 2006)

Calculation: The formula of this ratio is as following:

= Trade receivables x 365 days Revenue

ii) Trade payables payment period:

The trade payable payment period measures how long, on average, the business takes to pay its trade payables. This ratio provides an average figure, which, like the average settlement period for the receivables ratio, can be distorted by the payment period for one or two large suppliers. (Atrill and McLaney, 2006)

Calculation: The formula of this ratio is as following:

= Trade payables x 365 days Purchases

Now, the results of ratios of Wm Morrison Supermarkets PLC and Tesco PLC for 2010 and 2009 are presented in the following table (table 1) and the calculation details of these ratios are given in the Appendix 1 [on page 28]

Tabiel: The results of ratios of the Wm Morrison Supermarkets PLC and Tesco PLC for 2010 and 2009

illustration not visible in this excerpt

1. Return on capital Employed (ROCE):

WM Morrison PLC’s Return on capital employed (ROCE) increased .26% in the year 2010 because of the increase in profit in 2010. The return on capital employed (ROCE) for WM Morrison is 13.73 % whereas Tesco PLC’s ROCE is 11.52%. We cannot say here that ROCE of WM Morrison PLC was better than Tesco PLC because Tesco PLC is a larger company than WM Morrison PLC. However, there is an improvement from 2009 to 2010, which shows that Morrison PLC used its capital more efficiently to generate more profits.

Graphical Representation of ROCE:

Return on capital employed (ROCE):

2. Net Profit Margin:

Low Net Profit Margin with the high Gross Profit suggests a high level of expenses. Wm Morrison PLC’s Net Profit Margin was 4.62 % in the 2009. In 2010, it was 5.89%, which indicates a reduction of expenses because Morrison has opened new home production and packaging houses, which is reducing down cost. Tesco's net profit margin of 2010 is 6.07%. Therefore, it can be said that WM Morrison is just trying to reach the level of this market leader.

illustration not visible in this excerpt

A business with a large asset infrastructure has a lower asset turnover ratio than business with minimal assets. WM Morrison PLC’s asset turnover ratio decrease from 2.34 in 2009 to 2.33 in the year 2010 because of the increase in capital employed during 2010. On the other hand, Tesco PLC’s asset turnover ratio is 1.90 in 2010 which indicates that Tesco PLC has larger asset infrastructure than the WM Morrison PLC’s asset infrastructure. Moreover, the asset turnover ratio for 2009 was 1.93, and it decreased to 1.90 in 2010 because the capital employed of Tesco PLC increased in 2010.

Asset Turnover:

4. Gross Profit Margin:

Gross Profit Margin increased .09 % in 2010 though the increment is not very high, but still it shows the company performance getting better than the previous year. Gross profit margin for Tesco was 8.10% in 2010 whereas the gross profit margin for WM Morrison was 6.89%. Moreover, the reason for low Gross Profit Margin for Morrison was its high cost of sales, which eventually resulted in low Gross Profit Margin.

Graphical Representation of Gross Profit Margin:

Gross profit margin

5. Earnings per share (EPS):

The earnings per share ratio of WM Morrison PLC were increased from .17 in 2009 to .23 in 2010 because the net profit after tax increased in 2010. It also means that the earning generated by the WM Morrison during 2010 is more available to the share holders comparing to the earning of 2009. On the other hand, in 2010, the earning per share for Tesco PLC is .29, which is more than the earning per ratio of WM Morrison PLC. This indicates that the earning of Tesco PLC during 2010 is more available to its share holders than the WM Morrison PLC.

Graphical Representation of Earninus per share (EPS! :

Earnings per share (EPS):

6. Price Earnings ratio ΓΡ/Ε ratio):

The price earnings ratio of WM Morrison PLC was 12.09, which is less than 13.24 of the Tesco PLC’s price earnings ratio. This indicates the less market confidence regarding the future of WM Morrison PLC than the price earnings ratio of Tesco PLC. We cannot say here that P/E ratio of Tesco PLC was better than WM Morrison PLC because Tesco PLC is a larger company than WM Morrison PLC. Moreover, higher P/E ratio sometimes indicates higher risk.

Price Earnings ratio (P/E ratio):

illustration not visible in this excerpt

7. Current Ratio:

Current Ratio was well below 1 for WM Morrison, which means the company has more current liabilities in both years to pay than having more current assets. There was slightly decreased from 0.53 in 2009 to 0.51 in 2010 in the current ratio because of the increase in trade payables. In addition, Tesco's current ratio was 0.71, which was better than WM Morrison (0.51), and it shows that they had more cash to pay their current liabilities than WM Morrison, but still if we would look at the market size of Tesco in comparison to Morrison, then there is not a very big difference of Current Ratio for both companies.

Graphical Representation of Current Ratio:

Current ratio:

8. Acid Test ratio (or Quick ratio):

The acid test ratio of WM Morrison PLC was decreased from .28 in 2009 to .24 in 2010. However, the standard of this ratio is often stated as 1:1. The acid test ratio of WM Morrison PLC represents that the liquidity risk of WM Morrison PLC amplified in 2010 because of the increase in the inventory comparing to the 2009. On the other hand, the acid test ratio of Tesco PLC is .54 which is more than .24 of the WM Morrison PLC. We cannot say here that acid test ratio of Tesco PLC was better than WM Morrison PLC because Tesco PLC is a larger company than WM Morrison PLC. However, the acid test ratio of WM Morrison PLC decreased because of increased inventory due to opening of new stores in 2010.

Graphical Representation of Acid Test ratio for Quick ratio):

Acid Test ratio (or Quick ratio):

9. Gearing Ratio:

It decreased .074% in 2010 mainly because of the decrease in Long term debts in 2010. Moreover, Gearing Ratio for Tesco is high at 51.08%, whereas gearing ratio for WM Morrison is 25.11%. So, there is a possibility of risk for Tesco as they have long term debt so if their profit fall or Interest rises their financial position will be at more risk. On the other hand, it can be said that the risk factor is reduced for WM Morrison in comparison to last year.

illustration not visible in this excerpt

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Ende der Leseprobe aus 57 Seiten

Details

Titel
Managerial Finance Analysis of Wm Morrison PLC and Tesco PLC
Hochschule
University of Lincoln
Veranstaltung
Masters of Business Administration
Note
Distinction
Autor
Jahr
2011
Seiten
57
Katalognummer
V200032
ISBN (eBook)
9783656333746
ISBN (Buch)
9783656334248
Dateigröße
5867 KB
Sprache
Deutsch
Anmerkungen
This Managerial Financial report on Wm Morrison PLC and Tesco PLC achieved Distinction Mark.
Schlagworte
Financial ratio, ratio analysis, financial forcast, tesco, Morrison, Managerial, Finance, accounting, income statement, balance sheet, cash flow statement, profitability ratio, liquidity, ratio, efficiency ratio, limitation, i) Return on capital employed (ROCE), Profit margin, Asset Turnover, Gross profit margin, Earnings per share (EPS), Price Earnings ratio (P/E ratio), Current ratio, Acid Test ratio (or Quick ratio), Gearing, EFFICIENCY RATIOS, Inventories turnover, Trade receivables payment period, Trade payables payment period
Arbeit zitieren
Md. Rajibul Hasan (Autor), 2011, Managerial Finance Analysis of Wm Morrison PLC and Tesco PLC, München, GRIN Verlag, https://www.grin.com/document/200032

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