The Return on Equity - Assignment Example

?Question A shareholder can be defined as an individual or an organization that holds one or more than one shares in a particular company. As an ordinary the areas of greatest concern when considering an investment in companies such as Morrison and Tesco would be to judge their current market share, the projected rate of a return on investment as well as the effective allocation of capital to ensure the lowest running possible without jeopardising brand position or long-term debt increases. In order to conduct my comparison I will be comparing the figure for 2012 with 2011’s figures. As the UK supermarket sector standings show it is Tesco who have had the advantage over its competitors for the last decade (30.4% share, 3.3% sales rise in 2012) although in recent years this position is beginning to look less unassailable. Sainsburys is second in terms of market share, ASDA is third and Morrisons is fourth (with 11.8), according to Reuters Finance. But when we look into market share increase over the past two years we find that Tesco’s profit margin in 2011 was 8.47% and decreased to 8.15% in 2012 perhaps reflecting the overall decline in retail profits due to the weakened economy. It is important to note though that Tesco was still operating with a profit margin of over 8%. When comparing this to Morrisons, who experienced an slightly decrease from 6.9% in 2011 to 6.89%, even though this was only a slight decrease it was still operating on a loss for both the years. The inability to change the profitability of the business has meant a decline in the share price of 13% and as a result ordinary shareholders would be put off investing the this business. ROE The Return on equity (ROE) is defined as the net income that is returned to the shareholder as a percentage of the shareholder’s fund. ROE of a company actually measures the profit that the company generates from the shareholders money (Warren, 2009). Thus, change in ROE of both the companies is compared to see which company is favourable for the investor to invest in, so that he will receive a higher ROE. From the analysis, it is seen that the ROE of Tesco Plc has decreased by 0.25% in 2012 as compared to 2011. It indicates that the shareholders have received fewer amounts as return in 2012 by losing a part of their investment. Comparing the ROE of Morrison, it is found that there has been 1.12% increase in 2012 from 2011. It indicates that if investment is made in Morrison’s share then an investor will be getting greater return in 2012. But if both the companies ROE is compared, then it can be stated that the shares of Tesco Plc are worth investing than Morrison’s, since it gives higher ROE (White, Sondhi and Fied, 2003). EPS Earnings per share are defined as the portion of profit of the company that is allocated to the shareholder. It actually indicates the profitability of the company. The Earning per Share (EPS) of Tesco Plc has increased in 2012 from 2011 by 0.01. The EPS of Morrison shows an increase in 2012 from 2011 by 0.20, but if EPS of both the companies are compared, then it is found that Tesco Plc is giving a higher earning than Morrison (Lucy, 2003). The EPS of both the companies can be compared because both are from the retail industry. Dividend per share Dividend per share (DPS) can be defined as the total dividends that are paid out over an entire period of time to the shareholders divided by number of the shares that are issued by the company. The dividend per share of Tesco Plc 14.7 p in 2012 is higher than that of Morrison 11.6 p. Thus it can be said that the customers of Tesco Plc. will be getting more as dividend if they invest in Tesco Plc. The change in dividend per share of Tesco Plc is negligible, 1.2 p, as compared to Morrison which is 3.3 p in 2012. The DPS of both companies can be compared since they belong to the same retail industry. Dividend payout ratio The dividend payout ratio is the percentage of the earning of the company that is paid to the shareholders as dividend. The dividend payout ratio of Morrison (44.6) is better than that of Tesco Plc. in 2012. The change in the payout ratio (10.6) of Morrison is high than the change in dividend ratio of Tesco Plc (3.1). Thus it can be said that Morrison is giving higher percent of company earning to the shareholders in that case the investors will be benefited if they invest in Morrison. Dividend Cover Dividend cover is defined as the ratio of earning of the company i.e. net income to dividend paid to the shareholders. The dividend cover of Morison has decreased by 0.006 and that of Tesco is has decreased by 0.001. But comparing the change in dividend cover of Tesco Plc and Morrison in 2012 to 2011, it can be said that the investors will be profitable, if they invest in the shares of Morrison. The reason behind the decision is that, Morrison is giving out a higher percentage of their income to the investors as dividend. Cash Dividend Cover The cash dividend coverage ratio indicates the ability of the company to pay the dividends from the operating cash flow. The cash dividend coverage of Tesco Plc and Morrison has decreased in 2012 from 2011 by 0.18 and 1 respectively. But comparing both the companies’ cash dividend coverage, it can be said that Tesco Plc is performing well than Morrison as the cash dividend coverage of Tesco Plc is higher. Operating cash flow Operating cash flow is defined as the amount of cash, a company can generate from revenues that it earns, which excludes the costs that is linked with the long term capital investment (White, Sondhi and Fied, 2003). From the data that is obtained from comparing the operating cash flow of 2011 and 2012, it can be concluded that Tesco Plc. is performing well as it has increased by 0.02, in comparison to Morrison which has increased by 0.01. The reason behind the decision is that Tesco Plc. is having higher operating cash flow ratio that means Tesco is generating good revenue from the investments that are made by the investors. Gearing ratio Gearing ratio is defined as the ratio that compares the owner's equity or the capital with the borrowed funds. The term gearing is defined as the measure of financial leverage, which demonstrates the degree to which a company’s activities are financed by the fund of the owner in comparison to the fund of the creditor (Maher, 2012). From the data it can be analysed that the change in gearing ratio from 2011 to 2012 of Tesco Plc. (18.85%) is very high in comparison to Morrison (1.50%), which shows that the investors have invested more in Tesco than in Morrison over the years 2011 and 2012. Debt equity ratio Debt equity ratio can be defined as the measure of the financial leverage of the company that is calculated by dividing the total liabilities with the equity of the stockholders. Comparing the debt equity ratio of the two companies, it can be concluded that Tesco Plc. has been aggressive in funding it asset through debt, which denotes that they have higher liability since its debt equity ratio is 55.67%. But Morrison has been conservative in planning for their assets as the debt equity ratio is smaller than that of Tesco Plc since its debt equity ratio is 11.37%. Conclusion To conclude it may be said that the investors will be benefited if they invest in Morrison as they are giving the higher percent of their earning to the shareholders. But if the dividend per share, revenue, dividend coverage ratio, debt equity ratio are analyse it can be concluded that Tesco Plc is best company to invest for the shareholders. The shareholders are reluctant to invest in those companies which have low revenue and return on equity which is the case of Morrison, despite of paying good percentage of earnings to the shareholders it lacks in comparison to Tesco Plc. Question 2 Employees are divided into 4 main sections in a supermarket – firstly, Directors and central management team, local management (includes distribution), full-time employees throughout the company and finally part-time employees on a mostly seasonal and peak time basis. The part time employees face the highest rate of turnover. Therefore a permanent long-term employee would vary from anyone between the CEO and someone in the lowest paid role, such as self-stacker or cleaner. The central management team has more of a stake in overall finance profitability while the more junior employees have very little stake and therefore minimal interest. In order to acquire a more accurate opinion on the financial stability of both companies I will be focusing on a senior management figure on the firm who works out of the central office, perhaps a CFO or COO. For Morrisons a major problem that has only recently been solved is the lack of an online retail presence, something all its main competitors have had in operation for the previous three years. The shrink in market share of 0.4% between 2011 and 2012 came at a time when the other three larger supermarkets managed to increase their share, Sainsburys with 6.4% increase and ASDA with a 6% increase (statistics from guardian.co.uk/business). This could be perhaps due to the emergence of Lidl and Aldi in the UK supermarket sector with their focus on discount buying, something that Morrisons had offered as an incentive. The important financial analysis that would affect a long-term employee’s perspective on the company would involve ROCE, Gross profit, Net profit, Quick ratio, Operating cash flow, Current ratio, Interest cover, Cash interest cover, efficiency, Payable turn-over ratio and Receivable turn over ratio. ROCE Return on capital employed (ROCE) is defined as the overall profitability of the company. It should be higher than the rate at which the company borrows its fund (Hitchner and Mard, 2011). The ROCE of Tesco has decreased by 0.3%, whereas the ROCE of Morrison has increased by 0.16%. The situation favours investment in Morrison, but if the profitability of the company is taken into account keeping aside the fluctuation of the increase and decrease of ROCE, Tesco is performing better than Morrison with higher ROCE. So the overall profitability of Tesco is better than Morrison. Thus the employees of Tesco Plc get the benefit of earning a good percentage of profit if they invest in the shares of their company. Gross profit Gross profit is defined as the residual profit of the company which is earned after selling services or products and after the deduction of the cost associated with the sale and production of the same. The gross profit of Tesco Plc. (8.15%) is greater than Morrison (6.9%), so it can be concluded that the Tesco Plc. is performing well than that of Morrison (Hitchner and Mard, 2011). The net profit of Tesco Plc. is also identified to be greater than Morrison. Thus, the overall performance of Tesco Plc in terms of profit is better than that of Morrison. Thus it implies that, the employees of Tesco Plc will receive a good return if they invest in the share of their company as the gross profit is notable. Net profit Net profit can be defined as the net income or the net earnings which measures the profit of the company after deduction of all costs. The net profit of Tesco Plc (6.17%) is more than that of Morrison (5.5%) in 2012 which indicates to the fact that employees of Tesco Plc will be receiving higher return on the investments in the share of their company. Quick ratio Quick ratio is defined as the ratio that is used by the financial analysts, when they want to identify whether a firm has enough short term asset, so that it can meet up the current obligations without affecting the inventories (Hitchner and Mard, 2011). Comparing the quick ratio that is obtained from the analysis of the ratio analysis of the companies, it can be said that Morrison is consistent in their commitments at 0.24 and have not increased their liabilities. But if the quick ratio of Tesco (0.48) is considered then it can be said that the company has reduced its debt obligation in 2012 compared to 2011, so that their inventories are not affected. If a particular company has huge debt obligation it has a chance to get bankrupted and if it happens then the employees are affected at the first place. Their salary and the shares they have invested in are subject to the risk of the insolvency. Thus it can be said that Morrison has a good financial position and their employees will not face such a problem. Operating cash flow The operating cash flow measures the cash that is generated by the company’s normal operations. Operating cash flow is very important for a company because it identifies whether the company can generate enough cash flow for maintaining the growth of its operations, as it has to take the external help for its financing (White, Sondhi and Fied, 2003 : Lucy, 2003). Comparing the changes in operating cash flow of 2011 and 2012 of Morrison (0.01) and Tesco (0.02), it is identified that the Morrison is performing well than Tesco. Morrison is consistent in generating cash from the normal operations, whereas the operating cash flow of Tesco Plc. has decreased from 2011 to 2012. The poor ability of the company to generate cash can affect the employees of the company as they are stakeholders who are bound to draw a good amount of profit if the company does well. Interest cover ratio Interest Coverage ratio is defined as the measure to analyse that how a company will pay the interest on the debt that is outstanding to the company. The lower coverage ratio indicates that the company has huge burden as debt expense (White, Sondhi and Fied, 2003). Comparing the interest coverage ratio of the two companies, it can be said that Tesco (9.97) has the better ability to generate revenue for satisfying their interest expenses as it has higher interest coverage ratio of 20.4 in 2012 (Hitchner, 2003). Cash coverage ratio The cash coverage ratio is used to determine the cash amount that is available for paying up the interest of the company. It is expressed as the ratio of cash available to amount of the interest to be paid by the company. The change in cash coverage ratio of Tesco is higher (1.45) than that of Morrison (1.00), so the performance of this ratio is better in case of Tesco Plc (Block, Hirt and Danielsen, 2011). If the performance of the company is good with regard to its finance then their employees are bound to get good return on their investments they make in the company shares. Payable turnover Payable turnover is defined as the days in which the suppliers are paid off by the companies (White, Sondhi and Fied, 2003). It is measured by taking total purchases that are made from the suppliers and dividing the result with the average payable amount during the same period of time. The payable turnover days have reduced in 2012 from 2011 in case of Tesco from 37.2 to 35.8, which indicate that the suppliers are paid off in shorter time period from that of 2011. This indicates that the business is performing well and the suppliers are paid in time (Block, Hirt and Danielsen, 2011). The employees form an integral part of the company so they are expected to get their right return if they invest in the shares if the company is performing well. The ability to pay off the suppliers as soon as possible shows that a company has good cash back up. These indicate to the fact that the employees will be paid a good amount of return. Receivable turnover Receivable turnover is defined as the firm’s ability to extend credit period and the period of collecting the debts (White, Sondhi and Fied, 2003). It measures how efficiently a firm uses its assets (Warren, 2009). The credit period that is given by Morrison (29 days) is greater than that of Tesco Plc (10.45 days). The higher receivables turnover indicates that the company operates on a cash basis and they are extending the credit period, which means they will not need the cash immediately. Conclusion To conclude it may be said that the employees may find Tesco Plc. to be better company to work at than Morrison. The overall profitability of Tesco Plc is noteworthy and it will help the employees in earning better returns for the investments they make in the shares of the company. Tesco has reduced the payable turnover days which indicate that their business is generating enough cash to pay off their suppliers. The higher cash coverage ratio of Tesco Plc. indicates to the fact that the company possesses larger amount of cash. The employee’s strength, the overall efficiency of the employees and performance of the financial ratios are favouring Tesco Plc. so it can be concluded that the permanent and the long term employees of the company are benefited from performance of Tesco Plc as compared to the employees of Morrison. Read More