Calculation of Ratios at Morrison, Tesco, and Sainsbury - Research Paper Example

of Chester BU4002 Finance for Managers Assessment TASK IN TEST 2009-10 Task 20% Calculation of ratios - Answers Morrison 2009 2008 2007 1. Current assets ratio 0.53:1 0.49:1 0.41:1 2. Acid test ratio 0.28:1 0.25:1 0.21:1 3. Return on capital employed 14.49% 13.98% 9.40% 4. Gross profit margin 6.28% 6.31% 5.10% 5. Mark up 6.71% 6.73% 5.38% 6. Expenses to sales ratio 1.78% 1.59% 2.14% 7. Net profit margin 4.51% 4.72% 2.96% 8. Stock turnover ratio (times) 27.56 27.49 32.14 9. Fixed assets turnover ratio 2.03 1.92 1.87 10. Capital gearing ratio 27.12% 24.30% 28.81% Tesco 2009 2008 2007 1. Current assets ratio 0.78:1 0.61:1 0.56:1 2. Acid test ratio 0.63:1 0.37:1 0.32:1 3. Return on capital employed 22.73% 23.55% 25.10% 4. Gross profit margin 7.76% 7.67% 8.12% 5. Mark up 8.42% 8.31% 8.84% 6. Expenses to sales ratio 2.33% 1.77% 1.91% 7. Net profit margin 5.44% 5.93% 6.22% 8. Stock turnover ratio (times) 18.77 17.97 20.29 9. Fixed assets turnover ratio 1.70 1.98 2.11 10. Capital gearing ratio 53.61% 40.19% 36.52% Sainsbury 2009 2008 2007 1. Current assets ratio 0.54:1 0.65:1 0.71:1 2. Acid test ratio 0.31:1 0.39:1 0.50:1 3. Return on capital employed 10.65% 9.71% 10.97% 4. Gross profit margin 5.48% 5.62% 6.83% 5. Mark up 5.80% 5.95% 7.33% 6. Expenses to sales ratio 3.02% 2.65% 3.80% 7. Net profit margin 2.46% 2.69% 2.78% 8. Stock turnover ratio 25.94 24.72 27.08 9. Fixed assets turnover ratio 2.24 2.12 2.25 10. Capital gearing ratio 38.49% 33.87% 36.56% Task 2- 30% Financial Analysis The focus of this paper is to analyse the financial statements of three leading supermarkets in UK. The purpose of which is to evaluate the performance of the companies as well as understand the levers of management control implemented in each company. The primary goal in financial reporting is the dissemination of financial statements that accurately measure the profitability and financial condition of a company (Carreyrou & Maremont, 2000). Moreover, the purpose of financial reporting is to obtain cheap capital for the company (Fridson & Alvarez, 2002). Financial Performance A company exists for the benefit of its shareholders. Its objective is not to educate the public about its financial condition, but to maximise its shareholders' wealth. Reporting financial results in a transparent and straightforward fashion is a means to an end (Fridson & Alvarez, 2002). The financial performance of a company can be discerned by the different financial ratios in accounting that tries to evaluate the overall financial condition of a company. The different financial ratios can be categorised into liquidity ratios, activity ratios, debt ratios and profitability ratios. Liquidity ratios measure the company's availability of cash to pay its obligations and debts. Activity ratios measure the ability of the company to convert non-cash assets into cash. Debt ratios measure the company's capability to repay long term obligations. Profitability ratios measures how the company controls its expenses and uses its assets in order to generate an acceptable rate of return. Liquidity Based on the financial statements and financial ratios calculated, Tesco is more liquid than Sainsbury and Morrison. The liquidity of the company is measured by the current assets ratio as well as the acid test ratio. An asset is liquid if can be readily converted to cash, while a liability is liquid if it must be repaid in the near future. The current assets ratio compares the assets that will turn into cash within the year to the liabilities that must be paid within the year. The acid test ratio is a more conservative liquidity measure where the numerator of the current ratio is reduced by the value of its inventory. (Higgins, 1995) The trends of Tesco's liquidity ratios are increasing from 2007 to 2009. This means that the company has better capability to pay its debts in the 2009 than the other two companies. It is also noteworthy to show that Sainsbury is experiencing some liquidity problems because its current ratio and acid test ratio are decreasing in three years. Activity Based on the financial statements and financial ratios calculated, Morrison and Sainsbury are more efficient than Tesco in terms of operations. The stock turnover shows that items in Morrison's stocks are turn over 27.56 times in a year or almost every two weeks on an average. Compared to Tesco and Sainsbury, they're stocks are easily sold in every supermarket. However, the fixed assets turnover showed that Morrison and Sainsbury are more capital intensive as compared to Tesco. Profitability Based on the financial statements and financial ratios calculated, Tesco is more profitable than Morrison and Sainsbury. The return on capital employed ratio in 2009 shows that Tesco earned 22.73 cents on each dollar capital invested in the business as compared to Morrison and Sainsbury that earned only 14.49 cents and 10.65 cents, respectively. Furthermore, the capital gearing ratio shows that Tesco is more effective in controlling capital. The gross profit margin as well as the net profit margin shows that Tesco earns more as well as controls its expenses better than Morrison and Sainsbury. For Tesco in 2009, 7.76 percent of its sales dollar is a contribution to fixed costs and profits or 7.76 cents of every sales dollar is available to pay for fixed costs and to add to profits, as reflected on their gross profit margin. Moreover, the net profit margin shows that Tesco has 5.44 cents of every sales dollar that is available to add to profits. The other companies has lesser profitability in terms of gross profit and net profit margin, where, Sainsbury is the least profitable of the three. The profitability of Tesco can be attributed to its higher mark up and lower fixed costs. In 2009, the mark up of Tesco from the cost of its goods with respect to the sales price is around 8.42% as compared to Morrison with 6.71% and Sainsbury with 5.80%. The higher the mark up a company utilise will create a bigger gross profit margin. As for its fixed costs such as administration expenses, Sainsbury has the greatest amount of fixed cost of 3.01% of its total revenues generated. Tesco, on the other hand, has 2.33% while Morrison has 1.78%. A company with high percentage of fixed costs will gain lesser profit as compared to a company with lower fixed costs. (Brealey, Myers, & Marcus, 2001) References Brealey, R., Myers, S., & Marcus, A. (2001). Fundamentals of Corporate Finance. Boston: McGraw-Hill Companies, Inc. Carreyrou, J., & Maremont, M. (2000, November 30). Lernout Files for Bankruptcy Protection. Wall Street Journal , p. A3. Fridson, M., & Alvarez, F. (2002). Financial Statement Analysis. New York: John Wiley & Sons. Higgins, R. (1995). Analysis for Financial Management. Chicago: Irwin. Read More