Analaysis ratio - Research Paper Example

Profitability Ratio Return on Equity When put into consideration the ROE trend of Morrison’s, it can be observed that the company’s profit after taxand preference dividend in the financial year 2008 differs significantly from the subsequent years. In the financial year 2009 it appears that the financial outlook of the company took a massive downward plunge as the ROE of the company decreases by 2.44%. Other reasons, apart from troubled financial conditions, could be the increased in tax charge levied by the tax authorities as the ROE is calculated after subtracting taxation.

Financial outlook of the company appears to regain stability in the financial year 2010 as the ROE shows an inclining trend. In comparison, Tesco offers massive return to its share holders. The trend resembling that of Morrison, the ROE of Tesco also decreases in the financial year 2009. From investor’s point of view, it is far more lucrative to invest in Tesco as compared to Morrison’s as the earlier gives an attractive return on the investments. Return on Capital Employed Being quite similar to the ROE, the ROCE of Morrison’s also illustrates that the profits of the company declined after the financial year 2008.

One reason for decrease in the ratio could be due to the fact that in the years subsequent to the financial year 2008, the Morrison’s might have issued new shares in order to raise capital. It has been generally observed that it takes time for the fresh injected capital to generate the desired returns and even if it does, it is not in proportion. ROCE is better in Tesco comparatively which represents that the company is providing expected and lucrative returns to both the financers and shareholders.

Net Assets Turnover The net assets turnover analyzes how effectively the company is utilizing its asset in generating the sales revenue. Morrison’s net assets turnover ratio increased in the financial year 2009 as compared to 2008. Stable net asset turnover does not necessarily means that the company is making profits, as the ratio only compares gross sales to the average assets and does not take into consideration operating expenses. Displaying a better financial outlook, Tesco net assets turnover is greater which falls in the financial year 2010.

The fall in the net assets turnover could be due to the ineffective management of the average assets. Fixed Assets Turnover Fixed assets turnover represents how well the company is managing its fixed assets in order to generate the sales revenue. This analyses tool illustrates that Morrison’s, as compared to Tesco, is utilizing its operating fixed assets to the optimum. The trend in fixed asset turnover is same as the one showed by the net assets turnover. Decrease in the fixed assets turnover highlights the fact that Tesco has unutilized and idle property, plant and equipment which are not assisting in generating revenue.

Graphical Comparison