AAS3: Introduction to Accounting - Coursework Example

? Introduction to Accounting - AAS3 and Section # of Morrisons which was founded by William Morrison as a stall for eggs and butter is the 4th largest super market chain of UK at present. It is operating in the market that is worth of ?5.6 billion per year and is likely to double in a decade. It has a market share of 11.7% which is just behind that of Tesco, Asda and Sainsbury while its range of products includes grocery items such as food, drinks, nuts, sauces, soups, ready meal, frozen meal, and specialized range of products that are targeted towards health conscious people. (Morrisons Annual Report, 2012) Moreover, it has 475 stores throughout U.K, while the new CEO, Dalton Phillips has quoted to have said to acquire 100 new stores in London and Southeast. (Morby, 2013) According to their latest annual report, Morrisons employ 131 thousand persons who serve 11 million customers every week. (Morrisons Annual Report, 2012) The current year has brought some positives for the chain of stores in form of two major achievements. Firstly, it has been able to strike a very important deal with Ocado to market its food online, and secondly, it has been able to add 200,000 sq feet of space in only 3 months to cop up with the fierce competition that has prevailed within the industry. (The Guardian, 2013) At present, Morrisons is standing tall due to its good practices in supply chain management, which kept it safe from the latest horsemeat scandal that adversely impacted Tesco. (BBC News, 2013) Today, it is growing at a rapid pace as can be seen by their decision to adopt cash management systems, online food business and the opening of new convenient stores. (Neville, 2013) TABLE OF RATIOS Ratio FY2008 FY2009 FY2010 FY2011 FY2012 Industry 2012 Liquidity Quick Ratio 0.25 0.28 0.22 0.21 0.21 0.77 Current Ratio 0.49 0.53 0.51 0.55 0.57 0.95 Efficiency Asset turnover 1.70 1.77 1.76 1.80 1.79 1.49 Inventory turnover 27.43 27.56 24.87 24.03 21.67 17.95 Debtors Collection 5.5 6.1 3.4 4.3 3.9 2.5 Capital Structure Debt to Equity 74.4% 82.0% 77.0% 68.8% 82.7% 100.0% Debt to Asset 42.7% 45.1% 43.5% 40.8% 45.3% TIE 10.2 11.2 18.0 26.0 25.3 Profitability GPM 6.3% 6.3% 6.9% 7.0% 6.9% 29.3% OPM 4.7% 4.6% 5.2% 5.5% 5.6% 6.1% NPM 4.3% 3.2% 3.9% 3.8% 3.9% 3.8% ROCE 10.6% 10.8% 12.2% 12.9% 13.1% RATIO ANALYSIS The very objective of any business is to earn profits, thus financial strength plays a key role in its success. However, profit is not the only measure to assess the strength of the organization as many factors such as its ability to meet its obligations, its growth, its leverage and its efficiency of operations are some important factors in the process. (Brigham, 1998) Thus in order to better understand the Morrisons, not only the trend of the ratios will be considered but its current performance with respect to its industry will be considered as well. Liquidity The ratios of Morrisons indicate its lesser liquid position with a quick ratio that has hovered around 25% only since FY2008. Despite the assumption that Morrisons deals in an industry that prefers keeping large amount of stocks, even then the industrial average of 77% is 3.7 times larger than the 21% of Morrisons. Moreover, the current ratio which ignores the impact of inventory also suggests the same story which increased to 57% from the last year’s 55%, and still has remained considerably below the industry’s average of 95%. However, one may interpret such information in a positive manner as retail sector prefers low amount of cash to ensure minimum cash lying idle. Moreover, the size of Morrisons cannot be denied that allows it to stock large amounts of inventory on credit which only depicts the strength of the Morrisons than any liquidity crunch. (Brigham, 1998) Efficiency The efficiency ratios of Morrisons suggest an efficient system of operations. While asset turnover remained stable at 1.8 since last year, the inventory turnover posted a significant decline from 24 to 21.7, which was still better than the industrial average of 18. However, the point of concern is the continuous decline of inventory turnover since FY2009 when it was 27.6. (Brigham, 1998) This has been due to the fact that Morrisons lacked online business website as well as lacked convenient stores. However, it is expected that the ratio will improve this year owing to the partnership with Ocado and acquisition of 49 new stores from Blockbuster. (The Guardian, 2013) Moreover, if one looks at the industrial average then the chain has definitely performed better than its competitors except for the fact that it has been less efficient in the collection of the receivables. As compared to industry’s average of 2.5 days, Morrison takes 4 days to collect its receivables; however, it is also worth noting that the collection period has significantly reduced over the period of four years from 6.1 to 3.9 days only, which once again confirms our earlier inference of improved efficiency of the chain of stores. (Brigham, 1998) Capital Structure Owing to its expansionary policies, Morrisons Debt to Equity ratio has increased significantly from 69% to 83% since last year, this is still considerably lower than the industry’s average of 100%. Although, the trend of the Morrison’s debt to equity ratio has remained volatile over the five year period, yet the latest news release by CEO suggests that the company will leverage itself by issuing more debt. (Morby, 2013) This possibility can also be confirmed by the improving numbers of the Morrisons TIE ratio which have improved from 10 to 25 over the five year period, thus giving enough room to the chain to leverage its assets over the long term whose Debt to Asset ratio has remained only 45% as compared to the Industrial average of 50%. (Brigham, 1998) Profitability Despite the fact that recession has struck down the backbone of the world economy, even then the Morrisons ensured stability in its net profit margins to post 3.9% profit in FY2012, thus marginally outperforming the industry. (Brigham, 1998) Even though the gross margins of the industry were considerably higher than that of the Morrison, yet there was a meager difference in the operating profit that depicts the operational efficiency of the organization. (Brigham, 1998) However, fortune favored the company in the horsemeat scandal that negatively impacted the Tesco, and favored its rivals to give an added advantage to Morrisons. (BBC News, 2013) Moreover, the returns on capital employed by the Morrisons has also showed a positive trend which increased from FY2008’s 10.6% to 13.1% in FY2012. This increase in ROCE in spite of a reduction in Net Profit Margins has been due to the fact that Morrisons has increased its leverage ratio over the period, thus reducing the base of the equity, which ensured better returns for the common stockholder over the period. (Brigham, 1998) CONCLUSION Although, the last few years were less impressive for the Morrisons yet the vision put forwarded by the new CEO is bringing the chain back on the track that will lead the company towards growth. The online food business and acquisition of more convenience stores is just among few steps by Morrison towards reaching its potential that is huge, while there are many more yet to come. Therefore, it is expected that the chain will continue to grow in the long-term given that it keeps capitalizing on the opportunities available in the market. BIBLIOGRAPHY BBC News (2013) Dutch uncover large-scale meat fraud. [online] Available at: http://www.bbc.co.uk/news/world-europe-22099616 [Accessed: 11 Apr 2013]. Brigham, E. F., & Houston, J. F. (1998). Fundamentals of financial management. Fort Worth, Dryden Press. Emery, D. R., & Finnerty, J. D. (1997). Corporate financial management. Upper Saddle River, NJ, Prentice Hall. Garside, J. (2013) FirstGroup and Morrisons have got problems, but Britain's Got Talent. [online] Available at: http://www.guardian.co.uk/business/2013/apr/07/firstgroup-morrisons-problems [Accessed: 11 Apr 2013]. Macleod, I. (2013) Morrisons looks set to join Sainsbury’s to complain about Tesco price promise. [online] Available at: http://www.thedrum.com/news/2013/04/08/morrisons-looks-set-join-sainsbury-s-complain-about-tesco-price-promise [Accessed: 11 Apr 2013]. Morby, A. (2013) Morrisons steps up store building programme ? Construction Enquirer. [online] Available at: http://www.constructionenquirer.com/2013/04/08/morrison-steps-up-store-building-programme/ [Accessed: 11 Apr 2013]. Morrisons.co.uk (2008) Company history - Morrisons. [online] Available at: http://www.morrisons.co.uk/corporate/About-us/Company-history/ [Accessed: 11 Apr 2013]. Neville, S. (2013) Morrisons axes 700 more jobs. [online] Available at: http://www.guardian.co.uk/business/2013/apr/10/morrisons-axes-700-more-jobs [Accessed: 11 Apr 2013]. Orderannualreports.com (n.d.) Annual Reports Service. [online] Available at: https://www.orderannualreports.com/getpdf.asp?session_ID=A0C4BE249FA544C0&virtual=V0010227187 [Accessed: 11 Apr 2013]. Rankin, J. (2013) Morrisons considers formal complaint over Tesco's price promise ads. [online] Available at: http://www.guardian.co.uk/business/2013/apr/05/morrisons-complaint-tesco-adverts [Accessed: 11 Apr 2013]. Retail-index.com (2011) Top ranking retailers in the UK. [online] Available at: http://www.retail-index.com/HomeSearch/TopretailersinEuropebycountry/ToprankingretailersintheUK.aspx [Accessed: 11 Apr 2013]. the Guardian (2013) Morrisons and Ocado: a match made in purgatory. [online] Available at: http://www.guardian.co.uk/business/2013/mar/14/morrisons-ocado-match-made-in-purgatory [Accessed: 11 Apr 2013]. VAN Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of financial management. Harlow, Financial Times Prentice Hall. Read More