Tesco & Morrisons Business Strategies - Example

Executive Summary Tesco & Morrisons are successful business enterprise in the field of retailing. With their establishment in United Kingdom both of them has shown improvement. The financial analysis for 2010 and 2009 demonstrates the performance for both the company. The different ratios like profitability, efficiency and financial stability ratios reveal special features for both this companies. The limitations present areas where the financial data doesn’t work. The recommendations presents the different areas both this companies need to work upon to improve their performance. Thus, the overall ratio analysis highlights the area where both the companies are strong and areas where they need to work on. Table of Contents Introduction 3 Aim & Objective 3 Financial Analysis 3 Profitability Ratios 3 Efficiency Ratios 5 Financial Stability Ratio 6 Capital Structure Ratio 7 Limitations 8 Conclusion 9 Recommendations 9 References 10 Introduction Tesco is a company based in UK and deals in “consumer products, groceries, financial services and telecom” (Tesco Website, 2011). The company has grown over the period and the product size has aided to it. This makes the company to look towards India and enter the country (Mahapatra, 2010) Morrisons is fourth largets retail gianfin the country and deals in “consumer products, groceries, and financial services”. (Morrisons Website, 2011) The wide range of product and dispersion has made it a huge success (Poskitt, 2005). Morrison as a result is looking towards developing a team which helps them to improve their business (Seth, 2011) Aim and Objectives The aim and objective of this paper is to identify the manner in the performance of Tesco and Morrison in 2010. Along with it the paper looks to compare both the companies so that the areas of improvement can be identified for each. Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010) The following is the ratios for Tesco & Morrisons Profitability Ratios The profitability ratios are as follows Gross Profit Margin = Gross Profit / Sales * 100 Gross Profit = 4606 (Tesco Ltd) Sales = 56910 (Tesco Ltd) Gross Profit margin = 4,607 / 56,910 * 100 = 8.09% Interpretation: Tesco has 8.09% gross profit margin after meeting the direct expenses. (Kennon, 2010) Gross Profit = 1062 (Morrison Ltd) Sales = 15410 (Morrison Ltd) Gross Profit margin = 1,062 / 15,410 * 100 = 6.89% Interpretation: Morrsion has 6.89% gross profit margin after meeting the direct expenses. (Kennon, 2010) Net Profit Margin: Net Profit / Sales * 100 Net Profit = 2336 (Tesco Ltd) Sales = 56910 (Tesco Ltd) Net Profit margin = 2,336 / 56,910 * 100 = 4.10% Interpretation: Tesco has 4.10% net profit margin after meeting the indirect expenses. (Kennon, 2010) Net Profit = 598 (Morrison Ltd) Sales = 15410 (Morrison Ltd) Net Profit margin = 598 / 15,410 * 100 = 3.88% Interpretation: Morrsion has 3.88% net profit margin after meeting the indirect expenses. (Kennon, 2010) Return on Assets: Net Income / Total Assets * 100 Net Income = 2249 (Tesco Ltd) Total Assets = 11765 (Tesco Ltd) Return on Assets = 2,249 / 11,765 * 100 = 19.11% Interpretation: Tesco has 19.11% returns on assets after meeting the expenses and is directly attributed to the shareholders. (Kennon, 2010) Net Income = 537 (Morrison Ltd) Total Assets = 1094 (Morrison Ltd) Return on Assets = 537 / 1,094 * 100 = 49.08% Interpretation: Morrsion has 49.08% returns on assets after meeting the expenses and is directly attributed to the shareholders. (Kennon, 2010) Return on Equity: Net Income / Total equity * 100 Net Income = 2249 (Tesco Ltd) Total Equity = 14681 (Tesco Ltd) Return on Equity = 2,249 / 14,681 * 100 = 15.31% Interpretation: Tesco has 15.31% returns on equity after meeting the expenses and is directly attributed to the shareholders. (Kennon, 2010) Net Income = 537 (Morrison Ltd) Total Equity = 4949 (Morrison Ltd) Return on Assets = 537 / 4,949 * 100 = 10.85% Interpretation: Morrsion has 10.85% returns on assets after meeting the expenses and is directly attributed to the shareholders. (Kennon, 2010) Efficiency Ratios The following ratio helps to calculate the operating efficiency. They are as Asset Turnover Ratio: Sales Revenue / Total Assets Sales Revenue = 56910 (Tesco Ltd) Total Assets = 11765 (Tesco Ltd) Return on Equity = 56,910 / 11,765 = 4.83 Interpretation: Tesco a ratio of 4.83 suggesting that the assets are revolved around five times to generate the required sales Sales Revenue = 15410 (Morrison Ltd) Total Assets = 1094 (Morrison Ltd) Return on Equity = 15410 / 1094 * 100 = 14.08 Interpretation: Morrsion has 14.08 asset turnover ratios suggesting that the assets are revolved around 14 times to generate the same sales. Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory Cost of Goods Sold = 52303 (Tesco Ltd) Average Inventory = 2729 (Tesco Ltd) Return on Equity = 52,303 / 2,729 = 19.16 Interpretation: Tesco a ratio of 19.16 suggesting that the inventory is revolved around nineteen times to generate the required cost of sales Cost of Goods Sold = 14348 (Morrison Ltd) Average Inventory = 577 (Morrison Ltd) Return on Equity = 14,348 / 577 = 24.86 Interpretation: Morrsion has 24.86 inventory turnover ratios suggesting that the inventory is revolved around twentyfive times to generate the same cost of sales. Financial Stability Ratios The ratios which include both the short and long term financial stability are provided below Current Ratio: Current Assets / Current Liabilities Current Assets = 11392 (Tesco Ltd) Current Liabilities = 16015 (Tesco Ltd) Current Ratio = 11392 / 16015 = 0.71 Interpretation: Tesco a ratio of 0.71 suggesting they have current assets of 11392 million to pay current liability of 16015 million Current Assets = 1094 (Morrison Ltd) Current Liabilities = 2152 (Morrison Ltd) Current Ratio = 1094 / 2152 = 0.50 Interpretation: Morrsion a ratio of 0.50 suggesting they have current assets of 1094 million to pay current liability of 2152 million Quick Ratio: Current Assets - Inventories / Current Liabilities Current Assets = 11392 (Tesco Ltd) Inventories = 2729 (Tesco Ltd) Current Liabilities = 16015 (Tesco Ltd) Quick Ratio = (11,392 - 2,729) / 16015 = 0.54 Interpretation: Tesco a ratio of 0.54 suggesting they have current assets of 11392 million and stock of 2729 to pay current liability of 16015 million Current Assets = 1094 (Morrison Ltd) Inventories = 577 (Morrison Ltd) Current Liabilities = 2152 (Morrison Ltd) Current Ratio = 1094 - 577 / 2152 = 0.24 Interpretation: Morrsion a ratio of 0.24 suggesting they have current assets of 1094 million and stock of 577 million to pay current liability of 2152 million Capital Structure Ratio The ratios which help to determine it are as Debt to Equity Ratio: Long Term Debt / Equity Long Term Debt = 15327 (Tesco Ltd) Equity = 14681 (Tesco Ltd) Debt of Equity Ratio = 15327 / 14681 = 1.04 Interpretation: Tesco has 1.04 debts to equity ratio suggesting that the debt of the company is more than equity Long Term Debt = 1659 (Morrison Ltd) Equity = 4949 (Morrison Ltd) Debt of Equity Ratio = 1659 / 4949 * 100 = 0.33 Interpretation: Morrison has 0.33 debts to equity ratio suggesting that the debt of the company is less than equity Interest Coverage ratio: EBIT / Net Finance Expenses EBIT = 3176 (Tesco Ltd) Net Finance Expenses = 579 (Tesco Ltd) Interest Coverage ratio = 3176 / 579 = 5.48 Interpretation: Tesco has 5.48 interest coverage ratios suggesting that interest paying ability is high for the company EBIT = 858 (Morrison Ltd) Net Finance Expenses = 60 (Morrison Ltd) Interest Coverage ratio = 858 / 60 = 14.3 Interpretation: Morrison has 14.3 interest coverage ratios suggesting that interest paying ability is high for the company Earnings per Share: Net Income / Outstanding Shares Earnings per Share = 29.33p (given) Interpretation: Tesco has 29.33p EPS suggesting that the earnigs for the shareholder is 29.33p Earnings per Share = 22.8 cents (given) Interpretation: Morrison has 22.8 EPS suggesting that the earnigs for the shareholder is 22.8 cents Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for which might give different result Conclusion Tesco & Morrisons both have been performing on similar lines and have been successful. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Tesco & Morrisons needs to improve its current ratio so that it reflects soundness in its policies and strategies Both the companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested Morrisons need to take more debt especially long term so that they are able to save on the taxes Tesco needs to improve its operating ratios so that it can match its competitor Tesco needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management References Financial Modelling Guide. 2010. Liquidity ratios. Retrieved on April 22, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Little, K. 2010. Understanding Earnings per share. about.com Guide, The New York Times Company Micro Strategy. 2010. Financial Analysis. Retrieved on April 22, 2011 from http://www.microstrategy.com/financial-analysis/ Mahapatra, D. 2010. Tesco kicks off in Mumbai this year. Retrieved on April 22, 2011 from http://www.dnaindia.com/money/report_tesco-kicks-off-in-mumbai-this-year_1339444 Morrisons Website. 2011. Morrisons. Retrieved on April 22, 2011 from http://www.morrisons.co.uk/ Poskitt, R. 2005. Disclosure Regulation & information risk. Accounting & finance, volume 45, issue 3, page 457-477 Seth, K. 2011. Executing team of Morrisons bolsters. Retrieved on April 22, 2011 from http://www.topnews.in/executing-team-morrisons-bolsters-2303230 Tesco Website. 2011. Tesco Website. Retrieved on April 22, 2011 from http://www.tesco.com/ Transtutor. 2010. Capital Structure Ratios. 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