Financial Analysis - Assignment Example

? Financial Analysis Lecturer Introduction Financial analysis is to the study of organizational financial operations and forecasts in orderto monitor, budget, plan, forecast and improve the finance base of an organization. It is also the study of balance sheet and profit-loss account in order to ascertain their relationship and infer on financial performance and position of the firm. Financial strengths and weaknesses of a firm can hence be generated from financial analysis. There are various users of financial analysis statements: shareholders, managers, auditors, customers, donors, lenders, competitors, and managers, for specific reasons such as ascertaining profitability and financial position of a firm. The purpose of financial analysis is therefore spread among the users of financial statements who have defined reasons for accessing the statements. For example, to determine the firms’ ability to pay bills or debts, use of assets efficiently, dividends per the share and the profits gained from its business. This paper hence seeks to give a detailed strategic review and financial analysis of two organizations: Morrison and Target. The purpose of financial analysis is significant and pivotal to the mentioned users of financial statements: it helps the stakeholders such as investors with the provision of more detailed information on the businesses of the company. the information from financial analysis can be used to determines the profitability of a firm and investors may derive conclusions as to whether to invest in such firms or not. The analysis of financial statements is useful to one and every stakeholders such as the employees, managers, creditors and suppliers, government agents, researchers, customers, lenders and financial analysts. This is so as financial analysis result reflects the trends of the financial growth of the firm and this motivates them in strengthening their relationship with the firm. In performing an accounting analysis in order to assess the quality of the financial information provided by the firms, two approaches or techniques in studying the financial statements for the organizations will be used: horizontal and vertical analysis and the ratio analysis. The horizontal analysis is studying or analyzing the financial statements of the organizations for two or more years in operations and comparing them. On the other hand, the vertical analysis is the analysis carried out on the balance sheet and the profit and loss account. The figures in the statements on the vertical analysis are calculated as the percentages of the totaled amount. Ratio analysis will be used to interpret the financial conditions and to examine the past and present performance as well as the strength and weaknesses of the firms. Background A strategic review of the firms Morrison Plc has various core competencies in the industry. Some of the core competencies from which the firm derives competitive advantage include: production of various forms of pastry and proprietary recipes; production of seafood, enrobe meat, vegetables and sauce in pastry that are carried out in facilities inspected by the government; producing sauces and fillings in house; and manufacturing of products with combinations of starch with vegetables, protein and sauce. In the industry, Morrison firm has expertise in categories such as: pastry enrobed products like puff pastry, portable pastry like sweet and savoury snacks, short crust pastry baked or unbaked, and dinners or bowls such as family entrees and pasta entrees (Morison, 2009). In the industry by market share, Morrison is the fourth largest grocery. They offer freshest food and ingredients to their customers. This promotes marketing issues in the industry which has been implemented in marketing mix and brings a feeling of belonging into real market environment by the customer. In the industry, Morrison focuses on the corporate social responsibility strategy which is an extension to their vision, to be the food specialist for everyone. Morrison also owns 13 manufacturing sites, one in Netherlands and 12 in UK. The strategic issues implied by Morrison include values, talent, leadership and performance. Some of the financial issues that the firm focuses on include: maintaining operational control of the stores, maintaining strong balance sheet investment grade, planning investment that are funded by existing facilities, and sustaining funded pension schemes to the basis of IAS 19 (Morrison, 2009). Target Corporation is one of the top general retailer merchandise in the US. The company’s core competencies include the mix of stylish products and its day to day essentials at low prices which grant the company a unique strategy. Target Corporation is one of the companies in the industry that incorporate simultaneously price differentiation and price leadership as a strategic business model. As a competitive advantage and a strategic issue, the company’s strong private brand labels have allowed it to capture high margins of profit. Target Corporation implies large size in order to achieve economies of scale to better compete with its giant merchandise competitors such as Wal Mart. Target Corporation is the sixth largest retailer in the US and operates over 1418 stores. Its products range from groceries, retail goods, garmets and clothing, automobile and pet supplies, consumer electronics, food and beverages, house wares, furniture and appliances among others (Target Corporation, 2009). Financial Analysis Morrison Plc Return on Capital Employed The return on capital employed (ROCE) is the measure of the gain or return that the company gets by investing its resources and finance and is defined to as the percentage of the return with respect to the employed capital. ROCE = [profit before interest and tax/capital employed] x100 The ROCE ratio of Morrison plc for the years 2008- 2012 are as follows from the given table:     2008 2009 2010 2011 2012 ROCE Morrison 0.13 0.10 0.12 0.12 0.13 The data shows there was a decrease of ROCE from 2008 to 2009, this was due to a financial crisis that hit the company, however, over the advancement of years Morrison saw an improvement on the return on capital employed after the end of the crisis. This shows a success of the business over the years. Target Corporation Return on Capital Employed The return on capital employed (ROCE) is the measure of the gain or return that the company gets by investing its resources and finance and is defined to as the percentage of the return with respect to the employed capital. ROCE = [profit before interest and tax/capital employed] x100 The ROCE ratio of Target Corporation for the years 2008- 2012 are as follows:     2008 2009 2010 2011 2012 ROCE Target 0.19 0.16 0.16 0.19 0.19 The data shows there was a decrease of ROCE in 2009 due to the recession experienced in the company in the two years, however, an increase of ROCE in Target Corporation in the year 2012 was witnessed due to the improvement on sales and general success in business (Barwise, 2004). Financial Tables and Analysis of the two firms DRIVERS OF PROFITABILITY (ROCE)     2008 2009 2010 2011 2012 ROCE Target 0.19 0.16 0.16 0.19 0.19 Morrison 0.13 0.10 0.12 0.12 0.13               First-Level Decomposition             RNOA Target 0.11 0.09 0.10 0.11 0.11   Morrison 0.10 0.10 0.10 0.08 0.11               FLEV Target 1.03 1.39 1.01 0.97 1.13   Morrison 0.18 0.23 0.23 0.19 0.32               SPREAD Target 0.08 0.05 0.06 0.08 0.07 (RNOA-NBC) Morrison 0.10 0.07 0.08 0.08 0.09               NBC Target 0.03 0.03 0.04 0.04 0.04   Morrison 0.01 0.01 0.02 0.02 0.01               Second Level Decomposition             PM Target 0.05 0.04 0.05 0.05 0.05   Morrison 0.04 0.03 0.04 0.04 0.04               ATO Target 2.04 1.98 2.12 2.21 2.08   Morrison 2.52 2.61 2.53 2.55 2.48 Tables and graphs for financial analysis of the two firms First Level The graph shows that Target Corporation has higher ROCE compared to Morrison Plc as discussed earlier. However, the ROCE of the two firms increases consistently over the six years. The graph shows that Target Corporation has higher RNOA, however, Morrison’s RNOA was higher in 2009 but decreased steadily through to 2011 and later increased in 2012. The FLEV of Morrison is very low compared to that of Target Corporation. Althought Target Corp has a higher FLEV, it inconsistently decreases and increases over the financial periods. NBC in Target Corp is higher and increases consistently compared to that in Morrison that is very low and decreases over the financial period. The Target’s SPREAD is higher, however, it decreases gradually and matches that of Morrison in 2011. Second Level In the second level, the profit margin of Target Corp is significantly higher than that of Morrison. The two firms experienced a decrease in profits between 2008 and 2009, however, this changed through to 2012 that saw the company experience steady growth in profits. The Target Corp has a higher asset turnover compared to Morrison Plc. The two firms has a constant asset turn over over the financial periods. Comparisons of Financial Analysis As it can be shown in the table, the return on capital invested (ROCE) ratio is high for Target than of Morrison. This means that the Target Corporation had a good return on the capital invested hence a positive performance of that organization than that of Morrison plc. Similarly, the profit margin of Target Corp is higher than that in Morrison. In addition, the ratio of net asset turnover of Target is more than of Morrison meaning Target made low investments while Morrison, on the other hand, had inept management of their resources. Conclusion and Recommendation Both retailers should desist from the analogy of being specialist to the specific products but also focus on stocking other complimentary products. For example, if Morrison specializes on being food specialist, the company should also focus on planning how they can add non food products to their stock. This will enhance them to compete well and cope up with their rivals in the retailing industry. Morrison’s rival competitors in UK include Asda, Tesco among others. The companies should at all time focus on how to analyze their financial statements and act accordingly on the necessary steps to optimize the utilization of its resources and finance in order to have a good management of their capital and efficient liabilities. The companies should also embrace the revolution of technology and should invest on innovating new ideas for their operations. This is because the digital technology plays important roles in product marketing. Both Target Corporation and Morrison plc should emphasize on making use of digital technology such as online platforms where one can shop online. This can be realized by making user friendly platform where all range of products are made available in order to attract more customer as they earn extra profits. The companies can also use the digital technology to innovate new systems where they can automate their operations to improve the performance. In summary, the positions of Morrison plc and Target Corporation in the market as among the leaders shows their ability to manage the entities linked to the business such as debtors and creditors in an effective and efficient manner. Both companies’ financial statements show their strength and weaknesses of cash flows over the time. This issue needs to be addressed by all companies in order to keeping touch on the trend of the company and find a prompt solution if the trend is alarming. It helps the management to keep in track with the shortcomings and the avoidance of failure. Third Level THIRD LEVEL    2012  2011  2010 2009   2008               PM GM/SALES 0.31 0.31 0.33 0.30 0.34   operating expense/SALES 0.23 0.23 0.25 0.23 0.26   TAXES/SALES 0.03 0.03 0.03 0.02 0.03   Other income/sales 0.000 0.000 0.000 0.000 0.000     0.051 0.052 0.047 0.044 0.052               ATO 1/ATO 0.48 0.45 0.47 0.50 0.49   CASH/SALES 0.003 0.003 0.004 0.003 0.004   RECEIVABLES/SALES 0.104 0.110 0.126 0.141 0.142   INVENTORIES/SALES 0.1133 0.1127 0.1098 0.1032 0.1070   OTHER CURR. ASSETS/SALES 0.0261 0.0271 0.0305 0.0312 0.0408   PPE/SALES 0.4172 0.3783 0.3868 0.3966 0.3802                 ACCOUNTS PAYABLE/SALES 0.0899 0.0900 0.0914 0.0882 0.0968   INCOME TAXES/SALES 0.0037 0.0021 0.0075 0.0066 0.0018   OTHER .LIABILITIES/SALES 0.0889 0.0872 0.0852 0.0751 0.0841     0.48 0.45 0.47 0.50 0.49 In the third level, Target saw a decrease in sales generally from 0.34 in 2008 to 0.31 in 2012. Operating expenses also reduced from 0.26 to 0.23 in 2008 and 2012 respectively with a constant tax. This may have been due to a recession period the company witnessed and the low production of services and good in the company. Although income increased from 0.45 in 2011 to 0.48 in 2012, there is a general decrease over the years due to the same reason of low productivity and recession (Target Corporation, 2009). MORRISON THIRD LEVEL THIRD LEVEL    2012  2011  2010 2009   2008               PM GM/SALES 0.09 0.09 0.09 0.08 0.09   operating expense/SALES 0.03 0.03 0.03 0.04 0.04   TAXES/SALES 0.02 0.02 0.02 0.01 0.00   Other income/sales 0.000 0.000 0.000 0.000 0.000     0.040 0.040 0.040 0.033 0.043               ATO 1/ATO 0.40 0.39 0.40 0.38 0.40   CASH/SALES 0.014 0.014 0.016 0.023 0.015   RECEIVABLES/SALES 0.013 0.013 0.010 0.012 0.010   INVENTORIES/SALES 0.0430 0.0387 0.0374 0.0340 0.0341   OTHER CURR. ASSETS/SALES 0.0383 0.0308 0.0177 0.0439 0.0463   PPE/SALES 0.4497 0.4586 0.4827 0.4534 0.4784                 ACCOUNTS PAYABLE/SALES 0.0798 0.0850 0.0876 0.0993 0.0888   INCOME TAXES/SALES 0.0092 0.0104 0.0061 0.0074 0.0075   OTHER .LIABILITIES/SALES 0.0665 0.0671 0.0744 0.0761 0.0893     0.40 0.39 0.40 0.38 0.40 In the third level, Morrison saw constant sales generally from 0.9 in 2008 to 0.9 in 2012, with a decrease in 2009. Operating expenses also reduced from 0.4 to 0.3 in 2008 and 2012 respectively with an increased tax from 0.00 in 2008 to 0.02 in 2012. This may have been due to the financial crisis the company witnessed and the low production of services and goods in the company. Generally, the income remained constant at 0.4 from except for 2009 and 2011 where income decreased to 0.38 and 0.39 respectively, this may be due to the same reason of low productivity and financial crisis experienced by the company.       WM MORRISON SUPERMARKETS P L C (MRW)       Reformulated Income Statement       (in millions)       2012 % of Revenues 2011 % of Revenues 2010 % of Revenues 2009 % of Revenues 2008 % of Revenues Operating Income       Revenues 100.00 100.00 100.00 100.00 100.00 Cost of sales 91.23 91.14 91.16 91.72 91.46 Gross margin 8.77 8.86 8.84 8.28 8.54 Operating expenses 3.70 3.81 3.95 3.93 4.29 Other operating income (expense) 0.47 0.43 0.90 0.29 0.56 Operating income from sales(before tax) 5.54 5.48 5.78 4.64 4.80 Taxes       Tax as reported 1.46 1.47 1.69 1.34 0.45 Other tax adjustments       Tax benefit on net interest 0.05 0.05 0.07 0.04 0.01 Operating income from sales (after tax) 4.04 3.96 4.02 3.26 4.34 Dirty surplus items       Equity Earnings 0.00 0.00 0.00 0.00 0.00 Operating Income (after tax) 4.04 3.96 4.02 3.26 4.34 Financing Expense (Income)       Interest expense 0.29 0.25 0.32 0.33 0.42 Interest income 0.04 0.04 0.08 0.17 0.28 Other interest adjustments       Net interest expense 0.18 0.18 0.21 0.13 0.08 less Tax benefit from Net Interest Expense       Preferred dividends       Net Financial Expense (after tax) 0.13 0.12 0.14 0.09 0.07 Minority interest       Comprehensive income to Common 3.91 3.84 3.88 3.17 4.27       Morrison saw a heavy decrease in the comprehensive income to common from 4.27 in 2008 to 3.91 in 2012, there is a general decrease over the years due to the low productivity and financial crisis.       Target Corporation (TGT)       Reformulated Income Statement       (in millions)       2012 % of Revenues 2011 % of Revenues 2010 % of Revenues 2009 % of Revenues 2008 % of Revenues Operating Income       Revenues 100.00 100.00 100.00 100.00 100.00 Cost of sales 69.08 69.08 67.42 70.47 66.11 Gross margin 30.92 30.92 32.58 29.53 33.89 Operating expenses 23.24 23.08 25.30 22.76 25.57 Other operating income (expense) 0.00 0.03 -0.03 0.11 0.00 Operating income from sales(before tax) 7.68 7.87 7.25 6.89 8.32 Taxes       Tax as reported 2.19 2.34 2.12 2.04 2.80 Other tax adjustments       Tax benefit on net interest 0.37 0.36 0.39 0.43 0.34 Operating income from sales (after tax) 5.12 5.17 4.75 4.42 5.17 Dirty surplus items       Equity Earnings 0.00 0.00 0.00 0.00 0.00 Operating Income (after tax) 5.12 5.17 4.75 4.42 5.17 Financing Expense (Income)       Interest expense 1.31 1.21 1.34 1.56 1.18 Interest income 0.00 0.00 0.00 0.04 0.03 Other interest adjustments       Net interest expense 1.30 1.20 1.33 1.44 1.02 less Tax benefit from Net Interest Expense       Preferred dividends       Net Financial Expense (after tax) 0.93 0.84 0.94 1.01 0.68 Minority interest       Comprehensive income to Common 4.19 4.33 3.81 3.41 4.50       Target experienced total decrease in the comprehensive income to common from 4.50 in 2008 to 4.19 in 2012; there is a general decrease over the years due to the low productivity and recession period experienced (Target Corporation, 2009). References Barwise, Patrick (August 16, 2004). Bullseye: Target's Cheap Chic Strategy – HBS Working Knowledge. Available at: http://hbswk.hbs.edu/archive/4319.html. Retrieved on March 09, 2013 Target Corporation (2009). Annual and Financial Statements (online) Wm Morrison’s Supermarket Plc, (2009). Annual and Financial Statements 2009. (online) Available at http://www.morrison.co.uk/ Read More