In Depth Financial Analysis Of Morrisons And Asda Finance Essay

Financial analysis using ratios between key values help investors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds it has deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option.

It shows the relationship between profit & investment e.g. return on investment, return on equity capital. Financial Ratios Can Measure Different Things.

The Net Profit to Capital Employed ratio mentioned above measures the success of a company in using funds available to it. There are ratios to measure the company’s:

Financial health

Operating performance

Cash flows and liquidity

Under each category, there are multiple ratios that measure different aspects, or fine tune the measurements. For example, different profitability ratios measure profit margins at different stages return on owners’ funds and effective tax burden.

Ratio analysis

– Ratios express a mathematical relationship between two quantities taken from financial statements.

– The study and interpretation of the relationships between various financial variables, by investors or lenders.

– A tool to conduct a quantitative analysis of information in a company’s financial statements.

– Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company.

– Ratio analysis is predominately used by proponents of fundamental analysis.

Methods of Ratio Analysis :

There are two methods of Ratio Analysis :

1. Time Series analysis

2. Cross-sectional analysis

Time- Series Ratio Analysis :

– Time-Series Ratio Anlysis evaluates performance over time.

– It allows to analyse trends over a number of years and to examine the way in which performance may have changed over time.

– For instance time series analysis can make by comparing any company’s performance of for two or more years i.e. 2007 and 2008.

Cross-sectional Ratio Analysis :

– Cross sectional Ratio Analysis allows for comparison with the industry average or with competitors at a single point in time.

– This comparison allows a judgement to be made about the firm’s position within the industry.

– For instance to make a comparison of any company’ performance against its rival (competitor) for the same year.

– e.g. Shall Company’s ratios are compared with British Petroleum company.(both are in same industry and same business).

Advantages of Ratios :

The advantages of Ratios are as follow :

– Simplifies Financial Statements.

– Facilitates Inter-Firm Comparison.

– Helps in Planning.

– Helps in Investment Decisions.

Limitations of Ratios :

Ratios have some limitations as well which are mentioned below !

– Limitations of Financial Statements

– Comparative Study Requires

– Ratio alone are not adequate

– Lack of adequate standards

– Limited uses of single ratios

– Personal Bias

Types of Financial Ratios :

There are different types of financial ratios used in carrying out financial analysis.

These financial ratios are mentioned below :

· Liquidity Ratios

· Activity Ratios

· Solvency Ratios

· Profitability Ratios

· Market Ratios

· Cash Flow Ratios

Defining Types of Financial Ratios :

Liquidity Ratios :

– Liquidity ratios assess company’s ability to pay off its short-terms debts obligations.

– Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

– A company’s ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment.

– Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.

Activity Ratios :

– Activity ratios are used to assess the effectiveness of management towards utilization for generation of sales/revenue.

– Let us know how current and fixed assets are efficiently used by company to generate sales.

– Also analyze the account receivable, payables and inventory roles towards of sales, purchase and cost of goods sold.

– Determine how quickly account receivables are recovered.

– Enable us to know duration in which company pays its payables.

– Inventory conversion period is also calculated under the head of activity ratio.

Solvency Ratios :

· Solvency ratios are used to measure a company’s ability to meet long-term obligations.

– It provides a measurement of how likely a company will be to continue meeting its debt obligations.

– Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy.

– Measures the percentage of total assets provided by creditors or how much debt is supported by assets.

– Shows ability of the company to cover its interest expenses

– Solvency ratios tell about the ratio between equity and total assets.

– Company’s total assets are enough to meet its debt obligations

– These ratios also tell about ratio between debt and total assets.

– Also tell equity ratio in company

– And determine debt ratio in company.

Profitability Ratios :

– Measure the ability of profit generations in company.

– Profitability Ratios are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.

– They are used to measure the overall effectiveness of management to produce the profitability of the company.

– For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well.

– It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.

For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season.

Market Ratios :

· They are used to measure a company’s standing and position in the market.

· These are considered to be the most important ratios for shareholders.

· They are important for potential investors.

Cash Flow Ratios :

· Cash flow ratios are derived from cast flow statement.

· These are used to measure the three activities found in cash flow statement.

ASDA

ASDA launched an online retailer in 1998, but from the start had over estimated demand. It started off from a dedicated depot facility based in Croydon but was closed with a number of redundancies shortly after as sales were not as expected. It continued the online retailer service but copied the Tesco store based model instead.

Wal-Mart’s corporate stance is anti union, which is refelcted in the stance of Asda. In 2006 A planned five-day strike by Asda warehouse staff was been called off, unions have confirmed. The action had been due to begin on June 30 after thousands of workers voted for industrial action in a dispute over pay and bargaining rights. The decision followed prolonged negotiations between unions and the supermarket chain at the TUC. Asda was about to seek an injunction to block the action, claiming “irregularities” in the strike ballot. In 2006 Supermarket giant Asda said they were to offer staff up to two weeks unpaid leave to “go on a German jolly” during the 2006 World Cup tournament. Its 150,000 workers were to be able to take one or two weeks off in the month starting on 9 June. Requests dealt with on a first come, first served basis depending on staffing needs at individual outlets.

The first Act of The ASDA Story was set in the old Queen’s Theatre, Castleford, West Yorkshire in the early 60s. Its roots can be traced to two branches in twenties.

The Asquith family had a family business, a butcher’s shop in Knottingley, W. Yorkshire. The business was eventually expanded to seven butcher shops. The two sons of W.R. Asquith, Peter and Fred were actively involved in the family business and were later to become co founders of ASDA.

At the same period, in the 20s, a group of West Riding dairy farmers joined forces, as Hindell’s Dairy Farmers Ltd. These included the Stockdale family (A. Stockdale), and a subsidiary company, Craven Dairies Ltd, was formed.

Through a process of acquisition and diversification, a new public company was formed in 1949 Associated Dairies & Farm Stores Ltd. with Arthur Stockdale as Managing Director. During the 50s and early 60s Associated Dairies expanded the number of pork butchery shops and also created the fascia Craven Dairies for its cake shops and cafés. The son of Arthur Stockdale, Noel, met and struck up an immediate rapport with the Asquith brothers and so became the other co-founder of the future ASDA.

ASDA was founded in 1965 by farmers from Yorkshire. The name is a contraction of Associated Dairies. For a short time in the 80s Asda Stores Ltd was a subsidiary of ASDA-MFI plc follwing a merger between the companies. Other companies in the group were Associated Dairies Ltd, the furnture retailer MFI and Allied Carpets. After the sale of MFI and Allied the company name changed to ASDA Group plc. The dairy division was sold to Northern Foods plc.

The company went through a troubled period in the early 90s, but was revived under the leadership of Archie Norman, who became a shadow cabinet Conservative MP. He was chairman of the company in 96-99. ASDA, which then owned 229 stores, was purchased by Wal-Mart of the USA, on July 26, 1999.

Following the takeover by Wal-Mart, several Asda-Wal Mart Supercentres have opened, creating some of the largest hypermarkets in the UK. The first of these stores opened at Patchway, near Bristol, in August 2000. At first, it was criticised for its scale and condemned as an eye sore, but the format has now become extremely popular. In November 2004 a refurbishment of the hypermarket was completed, addressing some of the complaints.

In March 2006, ASDA launched a format called ASDA Essentials in a former Co-op store in Northampton. With a focus on own brand products on a much smaller floorplate than ASDA’s mainstream stores, the Essentials will only stock branded products are perceived to be at the core of a family’s weekly shop. This is seen as ASDA’s response to the increasing strength of Tesco and Sainsbury in the convenience store sector. If the trial is a success, it will be rolled out nationally.

ASDA is expanding its range of services to include Financial Services sold in store and online. Products currently sold are Child Trust Funds and Credit Cards, Car Insurance Home Insurance, Travel Insurance, Life Insurance, Mortgage Life Insurance, Over 50s Life Cover, Pet Insurance. http://www.asdafinance.com

In 2006 Supermarket chain Asda took Brazilian beef off its shelves after claims it could have come from areas where foot-and-mouth disease is rife.

In 2006 Supermarket group Asda started selling property through stores. Shoppers were to be able to browse properties for sale via an in store computer terminal. People choosing to sell their homes through Asda will pay lower than average estate agency fees and receive a free Home Information Pack (HIP). The system will be trialled in 10 Asda stores in the Sunderland area during the summer but is planned to be rolled out across the UK by the end of the year.

Asda has sponsor techniques the name has been put on the WRU Asda Leagues: the lower leagues of the rugby system.

Morrison

Morrison is a mainly food and grocery – the weekly shop. Uniquely source and process most of the fresh food that we sell though own manufacturing facilities, giving us close control over provenance and quality; and have more people preparing more food in store than any other retailer. Every week nine million customers pass through our doors and 124,000 colleagues across the business work hard each day to deliver great service to them. With competitive prices and hundreds of special offers, we are proud to save our customers money every day.

As the ‘Food Specialist for Everyone’, they are different from their competitors. Their expertise helps them deliver fresher food, which is also great value. Being ‘closer to source’, they understand where food comes from; and they can talk with authority to their customers about the provenance and freshness of their food offer. It is one of the country’s largest supermarket chains, offering a range of goods including both branded and own label products aim is to provide all our customers with the very best value for money wherever they live and uniquely, we have always charged the same prices in every one of our large stores.

They view resource efficiency as integral to sustainability and delivering better value to our customers. They approach to CSR recognises both responsibility and opportunity, enabling us to make a difference in ways that are good for the environment and good for business.

They have made considerable progress in meeting our challenging targets. Carbon emissions have been reduced by 56% better than they planned; there’s much less waste going to landfill and they have cut packaging. They are also running their own farm, which is being used as a base for research projects looking at the sustainability of food supplies and the efficiency of agriculture. They research will provide benefits to their business and will also strengthen our relationships with the farming community.

Morrison’s Fresh Food Academy offers training and progression for all their staff, providing them with the opportunity to grow from shop floor to top floor and means they can deliver more knowledgeable service to their customers.

CSR is embedded into their operations and plans. They do not claim to have all the answers but aim to do all they can to make a real difference by being both practical and persistent.

Many of the issues they address are wide ranging, complex and sometimes very challenging. Solutions may develop over the long term and they can sometimes prove elusive for a variety of reasons, including cost effectiveness, practical application, or they lack direct benefits. However, many projects and initiatives have come to fruition successfully to deliver tangible results that are making a real difference.

They offer a number of useful services for your convenience, so you can save time and money while visiting them. To find out when your local store is open, visit our store finder, type in your postcode and you’ll find all the information you need.

Fill up at your convenience

Stop by their petrol station to fill up and enjoy many other services like gas, a car wash and snacks for the road.

Facilities for shoppers with disabilities

They offer lots of services to our shoppers with additional needs, including dedicated parking, wheelchairs, staff assistance, seating and induction loops.

Take a break at our café

If you fancy a relaxing bite to eat, their café serves freshly prepared meals to your table, from all-day breakfasts to hot puddings with custard as well as freshly ground coffee.

Your one-stop medicine counter

Get free advice on medicines and healthcare from their pharmacists – no appointment necessary – and why not have your prescriptions dispensed while you shop.

Print your memories in store

They offer quality photo processing in store, including digital and 1-hour photo printing services.

Latest price

Change

Currency

LSE code

277.50

-4.20

GBX

MRW

Last closing price 277.50 (23 Jul 2010 – 4:30pm )

Current share price information

Bid

277.50

Ask

277.80

Day high

286.00

Day low

277.00

Year high

305.00

Year low

257.60

Day open

280.20

Day volume

10,130,828

On 11th March 2010 the Board comprised a Chairman, four Executive Directors and six Non-Executive Directors. With the retirement of the Chairman and the planned recruitment of an additional Non-Executive Director, at least half of the Board will ultimately comprise of independent Non-Executive Directors.

The Board is responsible for setting and approving the strategy and key policies of the Group, and for monitoring the progress towards achieving these objectives. It monitors financial performance, critical operational issues and risks. The Board also approves all circulars, listing particulars, resolutions and correspondence to the shareholders including the Annual Report, Half yearly financial report and Interim management statements. The “Formal Schedule of Matters Reserved for the Board” can be found in the Corporate Governance Compliance Statement.

Committees of the Main Board

The principal committees of the Board are the Audit, Remuneration, Nomination and Corporate Compliance and Responsibility (CCR) Committees. The composition and terms of reference of each of these Committees are set out in the Corporate Governance Compliance Statement.

Internal control

The Board is responsible for setting a system of internal control for the Group and reviewing its effectiveness. The control system is intended to manage rather than eliminate the risk of not meeting the Group’s strategic objectives. Any such system can only provide reasonable, not absolute, assurance against material misstatement or loss. The Board is satisfied that a continual process for identifying, evaluating and managing significant risks has been in place for the financial year to 31 January 2010 and remains in place.

Shareholder relations

The CEO and the Group Finance Director meet regularly with analysts and institutional shareholders. The Investor Relations Director also maintains a programme of work that reports to the Board the requirements and information needs of institutional and major investors. This is part of the regular contact that the Group maintains with its institutional shareholders. All Directors, Executive and Non-Executive attend the AGM. The Chairs of the Audit, Nomination, Remuneration and CCR Committees are available to answer any questions. Additionally, the Group’s brokers sought independent feedback from investors following the Annual and Interim results in 2009. This feedback was reported to the Board.

Liquidity Ratios (ASDA) :

Ratio Name

Answer

Result

Reason

2009

2008

Current Ratio

0.526

0.491

Favourable

C. Assets increased more in proportion to

C. liabilities

Quick Ratio

0.282

0.252

Favourable

More C. Assets in proportion to C. liabilities

Absolute Quick Ratio

0.111

0.345

Unfavourable

Stock and debtors increased,

C. Assets decreased

Working Capital ratio

(958)

(943 )

Unfavourable

Lower proportion of Assets to Liabilities

W.C. to C. Liabilities Ratio

(0.473)

( 0.508 )

Favourable

Assets increased

Activity Ratios (ASDA):

Ratio Name

Answer

Result

Reason

2009

2008

Current Asset Turnover Ratio

13.628

14.251

Favourable

Assets increased in 2009

Sales to Cash Ratio

44.428

67.900

Favourable

Cash increased in 2009

Fixed Asset Turnover Ratio

2.029

1.928

Favourable

The proportion of sales to fixed assets was a bit higher

W. Capital Turnover Ratio

(15.164)

(13.752)

Unfavourable

Less working capital in 2009

Inventory Turnover Ratio

29.091

25.963

Favourable

CGS increased in 2009

A. Receivable Turnover Ratio :

65.441

58.418

Favourable

More sales in 2009

A. Payable Turnover Ratio

7.101

7.237

Unfavourable

A. Payable increased in 2009

Average Collection Period Ratio

5.501

6.162

Favourable

Higher A.Receivable turnover in 2009

Average Payment Period Ratio

50.704

49.792

Unfavourable

A.Payable decreased in 2009

Solvency Ratios (ASDA):

Ratio Name

Answer

Result

Reason

2009

2008

Debt Ratio

0.450

0.426

Unfavourable

Total Debt increased in 2009

Equity Ratio

0.306

0.573

Favourable

T. Equity and T. Assets increased

Debt to Equity Ratio

1.470

0.744

Unfavourable

Total Equity decreased

Debt Income Ratio

3.656

2.536

Unfavourable

Long term debt increased, net income decreased

Profitability Ratios (ASDA):

Ratio Name

Answer

Result

Reason

2009

2008

Gross Profit Ratio

6.284

6.307

Unfavourable

Lower gross profit in proportion to sales in 2009

Net Profit Ratio

3.166

4.271

Unfavourable

Lower net income in relation to sales in 2009

Return on Equity Ratio

18.253

12.654

Favourable

Higher proportion of net profit to total equity

Return of Total Assets Ratio

5.592

7.255

Unfavourable

Lower net profit in proportion to total assets

Return on Investment Ratio

7.416

9.579

Unfavourable

Lower return on investment

Morrison:

Liquidity Ratio

Ratio Name

Year

2008

Year

2009

Result

Reason

Current Ratio

Quick Ratio

Absolute Quick Ratio

Working Capital

0.48

0.22

0.32

– 947

0.52

0.30

0.42

– 958

Favourable

Cash increased while liability decrease

Reason

Liability increased while cash decrease

Cash increased while liability decrease

Reason

Liability increased while cash decrease

Activity Ratio

Ratio Name

Current Asset Turnover Ratio

Fixed Asset Turnover Ratio

Working Capital Ratio

Inventory Turnover Ratio

Solvency Ratio

Ratio Name

Debt Ratio

Equity Ratio

Debt to equity Ratio

Year

14.31

1.92

13.6

27.4

Year

0.42

0.57

0.74

Year

13.62

2.0

15.1

Year

0.45

0.54

0.81

Result

Unfavourable

Favourable

Result

Unfavourable

Profitability Ratio

Ratio Name

Gross Profit Ratio

Operating Profit Ratio

Net Profit Ratio

Operating Ratio

Year

6.30 %

4.7 %

4.2 %

95.7 %

Year

6.28 %

4.6 %

3.1 %

95.6 %

Result

Unfavourable

Favourable

Reason

Liability increased while cash decrease

Cash increased while liability decrease

Market Ratio

Earning Per Share

Dividend Pay out Ratio

Cash flow Ratios

Cash flow Operation to Net Income

Cash flow from investing to Operation & Financing

Year

20.7

0.23

Year

1.04

0.25

Year

17.39

0.33

Year

1.71

0.75

Result

Unfavourable

Favourable

Result

Favourable

Reason

Liability increased while cash decrease

Cash increased while liability decrease

Reason

Business has excess cash

Cash flow from Sales to Total Sales

Cash flow to Long Term Debt

Operations Cash flow to Current Liabilities

Cash Dividend Coverage Ratio

0.044

0.90

0.31

120.6

0.053

0.86

0.38

136.2

Business has excess cash

Business has Cash flow Problem

Business has excess cash

Regression Line:

Year

(Sales)

X

(Asda)

y

(Morrison)

xy

(x)^2

(y)^2

Y2007

14856

12115

179980440

220700736

146773225

Y2008

12969

12462

161619678

168194961

155301444

Y2009

14528

12969

188413632

211062784

168194961

Y2010

15180

14528

220535040

230432400

211062784

=

57533

=

52074

=

750548790

=

830390881

=

681332414

B = 4 (750548790) – (57533) (52074)

4 (830390881) – (57533)^2

B = 3002195160 – 2995973442

3321563524 – 3310046089

B = 6221718

11517435

B = 0.54

A = Y – 0.54X

A = 18145.75 – 0.54 X

A = 18145.75 – (0.54) (57533)

A = 18145.75 – 31067.82

A = – 12922.1

Y = – 12922.1 + 0.54 X

Correlation & Co-efficient of Correlation:

R = 4(750548790 ) – (57533) (52074)

[4(830390881) – (57533)^2 ] [ 4 (681332414) – (52074)^2

R = 3002195160 – 2995973442

[ 3321563524 – 3310046089 ] [2725329656 – 2711701476

R = 3002195160

( 11517435 ) (13628180)

R = 3002195160

156961677318300

Time Series Analysis:

ASDA :

Year

Sale

3 point total

3 point moving average

Variation

2006

14756

2007

14856

42581

14193.67

662.33

2008

12969

42353

14117.67

-1148.67

2009

14528

42677

14225.67

302.33

2010

15180

Morrison

Year

Sale

3 point total

3 point moving average

Variation

2006

12115

2007

12462

37546

12515.33

– 53.33

2008

12969

39959

13319.66

– 350.66

2009

14528

42907

14302.33

225.67 2010

15410

Task: 3

Table presents annual net income and net cash flow figures for three projects A, B & C. Initial investment for all three projects is same £98,500.

Year

Project A

Project B

Project C

NI

NCF

NI

NCF

NI

NCF

–

(98500)

7500

24750

16450

45000

24500

44300

95000

31000

17650

52000

30500

39200

14750

34000

17950

59250

19000

39000

21250

40250

2400

5000

13000

31250

24950

44500

–

5000

24200

(1) Calculate ARR (Accounting Rate of Return) by selecting the required rate of return.

(a)Project A

(b)Project B

(c)Project C

(2) Calculating payback periods for A, B & C projects.

Solution:

(a) Project A

Year

Cash flow

Net Cash flow

(98500)

24750

(73750)

31000

(42750)

34000

(8750)

40250

31500

44500

76000

Pay back Period project A = 3.22 year

(b) Project B

Year

Cash flow

Net Cash flow

(98500)

45000

(53500)

52000

(1500)

59250

57750

5000

62750

Pay back period project B = 2.03 Year

(C) Project C

Year

Cash flow

Net Cash flow

(98500)

44300

(54200)

39200

(15000)

39000

24000

31250

55250

24200

79450

Payback period project C = 2.38 year

(3) Calculating NPV (Net Present Value) by assuming interest rate 9%.

As we know that

Where;

A= Cash flow for the year

i= Rate of interest (return)

Ao= Initial investment

(a) Project A :

(b) Project B :

(c) Project C :

(4) Calculating IRR (Internal Rate of Return).

Year

Project A

NCF

Project B

NCF

Project C

NCF

(98500)

24750

45000

44300

31000

52000

39200

34000

59250

39000

40250

5000

31250

44500

24200

As we know that

(a) Project A :

(b) Project B :

Conclusion and Recommendation :

After doing ratio analysis and commented on both companies, I can now conclude that there was not much difference between the performance of both companies. As far as ASDA is concerned, it did reasonably well. Although despite the fact that we have recently come out of the recession. In terms of liquidity and activity, it performed well. In terms of solvency, it could not perform a good job. The same case turned out be for the profit. Now if we have a look at Morrison, it performed more of less the same as ASDA. It did well in terms of liquidity, but as far as solvency, market and profitability are concerned, it suffered the same set back.

Although, the recession can be easily blamed for not so good performance, the companies need to make sure that they are fully ready to meet any challenge they might face in post recession scenario. Both companies should also prepare themselves if there is another recession comes, as being mentioned by some economists.

References :

www.asda.co.uk

www.morrison.co.uk

www.markets.ft.com

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