Tesco and Morrison Companies - Report Example

Financial Analysis Report of Morrison Contents Introduction 4 Comparative financial analysis 5 Profitability analysis 6 Gross profit margin 6 Operating profit margin 6 Pre-tax profit margin 7 Liquidity analysis 7 Current ratio 7 Acid test ratio 8 Efficiency analysis 8 Inventory turnover 8 Solvency analysis 8 Gearing ratio 8 Investment analysis 9 Earnings per share 9 Price to earning 9 Strength and Weakness of Tesco and Morrison 9 Tesco 9 Morrison 10 Conclusion 10 References 12 Appendices 14 Introduction In this project the discussion and analysis will be formulated for the two companies Morrison and Tesco and a brief comparison between them highlighting its nature, strength and weaknesses. The objective behind preparation of this report is to recommend whether or not the potential investor should invest in Morrison. Morrison Morrison is a public limited company. It was founded by William Morrison in the year 1899 in England. It is mainly a retail industry. It is considered as the fourth largest supermarket in London. The stock of the company is listed in the London Stock exchange. It acquired Safeway a supermarket which had around 479 stores. Morrison have its supermarket which is spread over the areas of UK Scotland, North, Midlands, South east, Gibraltar and South west. Tesco Tesco is a retail store. It was established by Jack Cohen in the year 1919. The shares of Tesco are listed in London stock exchange. The chief executive officer of the company is David Lewis. Tesco took over William low and Hilliard’s supermarket. It introduced brand loyalty card for its customers. The card is known as club card. Tesco has a wide operations which are carried out under the name Tesco super market, Tesco express, Tesco metro, Tesco Home plus. Comparative financial analysis Comparing the Financial Statement Analysis of both the companies Morrison and Tesco, it is found that the total asset of Morrison for the financial year 2014 and 2013 is 10729 and 10527 billion pound respectively. Whereas the total asset of Tesco for the financial year 2014 and 2013 is 50164 and 50129 billion pound respectively. It is understood that the total asset of Morrison is more than that of the total asset of Tesco. But again when the total liabilities is compared it is found that the total liabilities of Morrison for the financial year 2014 and the financial year 2013 is (6037) and (5297) billion pound. And the total liability of Tesco for the financial year 2014 and 2013 is (35442) and (33468) respectively. It indicates that the total liability of Tesco is more than that of the Morrison. It provides information that the proportion of difference in liability between both the companies is much more than that of the asset. Therefore it is seen or understood that Morrison is in a better condition than that of the Tesco when it is compared between the total asset and total liabilities of both the company (Bernstein, 2000). Profit is considered as a base for comparison between Morrison and Tesco. The profit of Morrison for the financial year 2013 is more than that of the Tesco. But the profit for the financial year 2014 of Morrison is less than that of the Tesco. When total equity is taken into consideration, it is observed that the total equity of Tesco is more than that of the Morrison. Total equity which is explained as the amount or the value that the company have after paying off its liabilities from the total asset of the company .It is the amount owned by the owner when the owner have paid off its liabilities . Total equity is the combination of common stock and preferred stock. Profitability analysis When the profitability ratio is taken into consideration, it indicates the existence and the survival of the organization and also the long term profitability of the organization. Profitability ratios also serve as an indicator for the effective tax rate and also the profit margin. Gross profit margin Gross profit margin acts as the yardstick for assessing and ascertaining the financial health of an organization. The gross profit margin helps the company in paying off its operating expenses and other related expenses. The gross profit margin for the financial year 2013 for Morrison is more than that of the Tesco. But the gross profit margin for the financial year 2014 of Morrison is less than that of the Tesco. Burt the difference between the two companies on the perspective of gross profit margin for the financial year 2013 is more than that of the difference in the gross profit margin for the financial year 2014. Thus in the context of the gross profit margin Morrison is in a better condition from that of the Tesco (Grant, 2005). Operating profit margin Operating Profit margin helps the company in measuring the amount which is left over after paying off all the variable expenses related to paying off wages to the labour. Operating profit margin is also required for paying off the fixed cost of the organization. It serves as a standard in measuring the quality of the organization. While comparing the operating profit margin of the two retail companies Morrison and Tesco it is observed that the operating profit margin of Tesco is constant for the financial year 2013 and 2014. And the operating profit margin of Morrison which was 1% more than that of Tesco in the financial year 2013. But it has reduced by 3% from that of Tesco in the financial year 2014.Considering the operating profit margin Tesco is in better situation as compared to Morrison (Ruddick, 2014). Pre-tax profit margin Pre-tax profit margin refers to the percentage of the total revenue of the organization. It is the profit earned by the organization before paying off the tax. The pre-tax profit margin of Morrison was more than that of Tesco for the financial year 2013. But the pre-tax profit margin of Tesco is more than that of Morrison for the financial year 2014. In this context also pre-tax profit margin of Tesco shows a growth more than that of Morrison (Shim and Siege, 2005). Liquidity analysis Now in the context of Liquidity ratio of both the companies can be compared as follows. Liquidity ratio can be defined as the company’s ability to convert its short term assets into cash to meet its bad debt obligations. This ratio assists the company in paying off its short term liabilities. Current ratio Current Ratio helps in the measurement of the financial performance of the organization to ascertain the liquidity of the organization to meet its short term obligations. Current ratio of Tesco is more than that of the Morrison for both the financial year 2013 as well as for the financial year 2014. Considering the current ratio also Tesco is in a better position to pay of its liability and short term debt obligation as it has sound liquidity position as compared to that of the Morrison (Clement and Sanyo, 2005). Acid test ratio Acid test Ratio reflects the ability of the organization to meet its short term liabilities with the help of the short term asset of the organization. The acid test ratio is more accurate for determining the liquidity position of the organization as compared to that of the working capital ratio. Working capital includes inventory. Acid test ratio is calculated by deduction of inventory. The acid test ratio of Tesco is more than that of the Morrison for both the financial year 2013 as well as 2014.Tesco company acid test is higher than that of the Morrison which reveals that the inventory of Tesco is not much dependant on its current asset .This signifies that Tesco is in more comfortable and good situation to meet its liquidity as compared to that of Morrison (Paul, 2006). Efficiency analysis Inventory turnover Inventory turnover period signifies that the organization with a high inventory turnover ratio which indicates the organization is earning more revenue. The inventory turnover ratio for the financial year 2013 and 2014 is more in case of Morrison as compared to that of the Tesco. Thus it signifies that Morrison can earn more revenue as compared to that of Tesco (Martin and Baker, 2011). Solvency analysis Gearing ratio Gearing ratio refers to the increase in proportion of debt as compared to that of the equity of the company. The gearing ratio indicates the financial risk of the organization. The gearing ratio of Morrison for the financial year 2013 is much more than that of the Morrison which indicates a high financial risk. The gearing ratio of Tesco is more than that of the Morrison for the financial year 2014 as compared to that of the Morrison which indicates that the financial risk of Tesco is more than that of the Tesco. The debt obligation is more than that of the equity for Tesco, which indicates a high financial risk (Leiwy and Perks, 2013). Investment analysis Earnings per share Earnings per share serve as a yardstick for measuring the profitability of the organization. The earnings per share of Morrison were more than that of the Tesco for the financial year 2013. But the earning per share of Tesco has increased more than that of Morrison for the financial year 2014. It signifies that earning on the basis of per share is more for Tesco as compared to that of Morrison. Tesco is more profitable than Morrison on shareholder basis (Yahoo Finance. 2014). Price to earning Price earnings ratio reveals how much an investor wants to pay. The price earnings ratio of Tesco is more than that of the Morrison for both the financial year 2013 as well as 2014. It indicates that the investors are more willing to invest in Tesco for its high price earnings ratio as compared to that of the Morrison (McLaney, 2008). Strength and Weakness of Tesco and Morrison Tesco The strength of Tesco is reflected from its ratios that the gross profit margin, operating profit margin, pre-tax profit margin and return on capital employed has improved in the financial year 2014 from the financial year 2013 and also it is more than that of the Morrison. It signifies that Tesco is improving and can predict a growth in the future. Due to its more profitability margin, it indicates its high profitability and sustainability in the market which will attract more investors to invest. The price earnings ratio is also more in Tesco. But as compared to the financial year 2013, the price earnings ratio has decreased in 2014. The weakness of Tesco is its high Gearing ratio which indicates that the company debt proportion is more than that of the equity which may lead the company to face a huge financial risk. And also the inventory turnover is less it indicates that the company is not able to increase its generation of revenue in 2014 as compared to that in 2013. The inventory turnover is same in 2014 as it was in 2013. Morrison The strength of Morrison is that it has a low gearing ratio which indicates that the company debt is less than the equity. It is a positive sign. Because high gearing ratio may turn the company to solvency. It has reduced its gearing ratio in 2014 as compared to that in 2013. And also it has a high inventory turnover period that indicates the company is able to generate revenue. The weakness of Morrison is that the profitability ratios have decreased in 2014 from that of the 2013, which signifies a danger for the company for its sustainability and growth in the market. The P/E ratio has also decreased which signifies that the investors will not be attracted or willing to invest. Conclusion Both Morrison and Tesco are from the same retail industry. Morrison was established earlier than Tesco. But the growth of Tesco is much more than that of the Morrison. The profitability ratio shows that Tesco is in better position than that of the Morrison. Tesco profitability ratio has increased in 2014 as compared to that of 2013. And the price earnings ratio have also increased in 2014 and it is more compared to that of Morrison. Morrison is facing a downfall. The profitability, liquidity condition has degraded in 2014 from 2013 which is not good from the growth and sustainability point of view. On the basis of the ratios constructed for the financial year 2014 and 2013 as well as the balance sheet and income statement signifies that it will not provide adequate return on investment for a potential investor investing in Morrison as the growth has decreased . The trend shows a decrease in the value. And the price earnings ratio which generally attracts the investors is also less in Morrison. Therefore it concludes that the investor should not invest in Morrison. References Bernstein, L., 2000. Analysis of financial statements. New York: McGraw Hill. Clement, M.B. and Sanyo, S.Y., 2005. Financial Analyst Characteristics and Herding Behaviour in Forecasting.  Journal of Finance. 60 (1), pp. 307-341. Grant, M., 2005. Contemporary strategy analysis, 5th edition. New York: Blackwell Publishing. Leiwy, D. and Perks, R., 2013. Accounting, understanding and practice, 4th edition. New York: McGraw-Hill. Martin, G.S. and Baker, H. K., 2011. Capital structure and corporate financing decisions: theory, evidence, and practice. New York: John Wiley & sons. McLaney, E., 2008. Accounting, an introduction. New Jersey: Pearson Education limited. Paul, G., 2006. UK GAAP for Business Practice. Amsterdam: Boston Elsevier. Ruddick, G., 2014. Morrisons claims it is making progress despite 6.3pc sales slump. [online]. Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11212529/Morrisons-sales-slump-by-6.3pc.html. [Accessed 17th November 2014]. Shim, J. K. and Siege, J. G., 2005. Handbook of financial analysis, forecasting, and modelling. Stamford: Cengage Learning. Stickney, C., Brown, P. and Wahlen, J., 2003. Financial reporting and statement analysis (6th Ed). New York: Thomson South-western. Yahoo Finance, 2014. Morrison Supermarkets PLC (MRW.L). [Online] Available at: http://finance.yahoo.com/q/is?s=MRW.L+Income+Statementandannual. [Accessed 17th November 2014]. Yahoo Finance, 2014. Tesco PLC (TSCO.L). [Online]. Available at: https://in.finance.yahoo.com/q/is?s=TSCO.Landannual. [Accessed on 17th November 2014]. Appendices   Morison   Tesco Ratio Analysis 2014/13 2013/12 2012/11   2014/13 2013/12 2012/11 Profitability ratios               Gross profit margin -1.35% 3.57% 3.91%   1.53% 0.04% 4.40% Operating Profit margin -1% 5% 6%   4% 4% 7% Pretax Profit margin -1% 5% 5%   4% 3% 6% Return on Capital employed -1% 7% 8%   7% 3% 6% Liquidity ratios               Current Ratio -0.50 -0.57 -0.57   -0.73 -0.69 -0.67 Acid Test ratio -0.20 -0.24 -0.24   -0.56 -0.49 -0.48 Investment ratios               Gearing Ratio -1.17 14.60 24.95   5.89 5.55 10.18 PE Ratio -25.8 9.9 12.2   14.1 17.6 10.3 Efficiency ratios               Inventory turnover period 1.6 1.7 1.8   1.3 1.3 1.3 . Read More