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Executive Summary:

The following assignment focuses on the financial analysis of the annual reports and the effects of the developments and the downturn in the financial markets in U.K for the Morrison Plc. This assignment talks about the financial condition of Morrison plc in London in last few years.

In order to analyze the financial statements we have used different financial tools such as ratio analysis to examine the financial condition of the company.

The recession has hit the world's economy in last few years and had varying degree of effects on the economies of the companies. Some companies were able to cope up and some lost their financial stability. Companies tried various means such as cost cutting in order to cope up with the financial distress.

This assignment talks about the financial condition of the Morrison plc after the global recessional hit. It also talks about the various measures or strategies adopted by the Morrison to overcome the recession.

Discussion also includes ratio analysis of Morrison plc in UK and comparing it with its competitor Sainsbury.

Introduction

The food retail industry is one of the fastest and the biggest growing industry in UK with lots of competition over the price and the quality of the products due to presence of lots of competitors providing the service. Few of the major players of this industry in UK market are Sainsbury, Tesco, Morrison and Asda.

Morrison was founded by William Morrison in 1899 in west Yorkshire in England. He started the business with a small stall in the Bradford market and has grown with time to become a giant player in food retail industry of UK. Morrison started its market operations and continued them for a long time in North of England. In the year 2004 Morrison acquired Safeway and expanded its market operations to southern England. Morrison plc is the UK's fourth largest retailer with 425 stores across Britain and focuses on food and grocery. They source and process fresh food and meat through their own manufacturing units giving them more control over the quality of their products. It has more than 100 years of experience in supermarket business. Approximately nine million customers visit their stores each day and they have around 124,000 colleagues to take care of their customers. It has its warehouses and plants both in UK and abroad to take care of its demand and supply requirement.

Some of the subsidiaries of Morrison plc are-

  1. Farmers boy limited
  2. Neerock limited
  3. Safeway limited
  4. Rathbone kear limited
  5. Optimization developments limited
  6. Bos brothers fruit and vegetables
  7. Farock insurance company limited
  8. Optimization developments limited

On Jan 28, 2010: Loblaw joined as COO in Morrison and on Jan 27, 2010 it appointed a new Non-Executive Director. On Jan 27, 2010 it had new chief executive to its Board. Morrison plc received Red Tractor certification for fresh meats on March 03,2010. On Feb 25, 2010: Morrison joined Zetes wireless IT solution.

Morrison showed an increase in the group turnover, earning before tax, earning per share and total dividend per share for the fiscal year 2010 as compared to 2009.these financial highlights shows that the overall performance was good for the company as well as for the share holders but it showed an increase in net debt in 2010 with respect to previous year which is a negative factor for its financial stability.

The strategy and vision of the company is to become “food specialist for everyone”. With this simple mission and vision the company has focused on the quality and the service for their products through their own manufacturing and distribution system which has proved efficient enough for the positive financial growth of the company during the last few years. Morrison market share has also showed an increase during the last four years with 11.9% in 2007 and increasing to 12.6% in 2010.

Morrison share of grocers UK 2010 is 12.6% as compared to Tesco, Asda and Sainsbury's (combined) 63.5%, Premium (combined) 5.8% and discounters and others (combined) 18.1%.

Recently Morrison is working on making use of digital technology for the marketing purpose by developing a mobile enabled website and applications for the I-Phone due to growing use of Smart phones and mobile phones for the shopping purpose.

Analysis and Evaluation

Financial analysis can be defined as study of the working of an organization in order to plan, budget, monitor, forecast and improve the financials of an organization.

Financial Analysis can also be defined as the study of the balance sheet and the profit and loss account in order to relate them in such a way to conclude the financial strengths and weaknesses of the firm.

Financial analysis of a company helps in decision making as it gives various information about the firm such as:-

  1. firm's long-term debt commitment
  2. shareholder return
  3. financial distress
  4. market share
  5. growth rate etc

All this information helps in doing future forecasts for the company.

Financial analysis of a company gives the following information about the business of the company:

A profitability of the business

B ability to pay the bills or debts

C efficient use of assets

D dividend per share etc

The study and analysis of financial statements of a company is useful for:-

  • Investors
  • Managers
  • Employees
  • Suppliers and creditors
  • Government agencies
  • Public
  • Environmental groups
  • Researchers (academic and professional)
  • Customers
  • Lenders
  • Financial analysts

Tools and Techniques of Financial Statement Analysis:

  1. Horizontal and Vertical Analysis
  2. Ratio Analysis

1 Horizontal Analysis - Analyzing the financial statements of a company for two or more years and comparing them.

For example: the sales for the year 2010 were 20 million pounds, 30 million pounds in 2011 and so on. In percentage it can be calculated as 30-20/20 * 100=50% increase for 2011

Vertical analysis- This analysis is usually carried out on the P&L account and the balance sheet. The figures in the statements are calculated as the percentage of total amount.

For example: if trade debtors were 20m pounds and balance sheet total was 50m pounds in 2011 and for 2012 it was 40m pounds and 80m pounds respectively. Debtors can be expressed in percentage of balance sheet total as for 2011 , 40%of the balance sheet total(20*100/50=40%) and similarly for 2012 , 50% of balance sheet total.

2 Ratio Analysis - It is most widely used and powerful tool for the analysis of financial statements. It is done by expressing one term in terms of another.

Ratio analysis can be used to analyse the financial statements in order to examine the strength and weakness and the past and present performance and financial conditioned can be interpreted.

Top of Form

Bottom of Form

Profitability Ratios:

Profitability ratios can be defined as the evaluation of the total output produced or the performance efficiency of the company.

As the name suggests, profitability ratios are concerned with the efficiency of a business in achieving its targets and generating profits or returns on the invested capital.

So profitability ratios are one of the financial analytical tools by means of which we can judge the ability of a business to generate profits or earnings with respect to the expense met with the business. They measure the firm's performance by comparing the profits produced by the firm with the size. Assets and the sales made by the firm.

There are different types of profitability ratios as follows:

1 Return on Capital Employed (ROCE) - as the name suggests this ratio is a measure of the return or the gain that a company gets by investing its finance and resources.

It can be defined as the percentage of return with respect to the capital employed.

Formula:-

ROCE = [profit before interest and tax/capital employed] x100

For the Morrison plc measure of ROCE ratio is stated below for the years 2007- 2009:-

In 2007 - (369/3927) x100=9.39

In 2008- (612/4378) x100=13.97

In 2009- (655/4520) x100=14.49

2007

2008

2009

9.39

13.97

14.49

The above data shows that there is an increase in ROCE over the years for Morrison plc which shows that the return on capital employed has shown an improvement over the years which is a good symbol for the success of the business.

2 Net Profit Margin- it can be defined as the amount of profit a company makes from every pound of the total revenue it produce or sales it makes. It's good for the company to have more net profit margin as compared to its rivals.

Formula: - Net Profit Margin= [profit before interest and tax/sales or turnover] x100

For the Morrison plc measure of net profit margin ratio is stated below for the years 2007- 2009:-

In 2007 - (369/11826) x100=3.12

In 2008- (612/12151) x100=5.03

In 2009- (655/13615) x100=4.81

2007

2008

2009

3.12

5.03

4.81

The above data shows that the net profit margin shows an increase from 2007 to 2008 but then gradually decreased in 2009.This shows that the performance has gone down with respect to the profit the company has made in the previous year.

3 Net Asset Turnovers- It can be defined as the measure of how capable the management of a firm is in producing returns by the best and optimal utilization of firm's net assets.

If this ratio is very large it signifies very low investment while if the ratio is very small it signifies inept management.

Formula: - sales or turnover/capital employed

For the Morrison plc measure of net asset turnover ratio is stated below for the years 2007- 2009:-

In 2007 - 11826/3927=3.01

In 2008- 12151/4378=2.77

In 2009- 13615/4520=3.01

2007

2008

2009

3.01

2.77

3.01

4 Gross Profit Margin- The gross profit margin ratio can be defined as the amount of profit a firm can produce with respect to the cost of sales, or cost of goods sold.

We can also state it as the amount of gross profit a company makes compared to each 1 pound of the total turnover a business is able to make.

Gross profit is the amount of profit we get before we deduct any cost of administration, sales etc. thus its good if net profit margin is lower then the gross profit margin.

Formula- [gross profit/sales or turnover] x100

For the Morrison plc measure of gross profit margin ratio is stated below for the years 2007- 2009:-

In 2007 - (636/11826) x100=5.37

In 2008- (818/12151) x100=6.73

In 2009- (913/13615) x100=6.70

2007

2008

2009

5.37

6.73

6.70

From the study of above data we have seen that the gross profit margin in higher than the net profit margin for Morrison plc over the years 2007,2008 and 2009 which is good for the financial condition of the company.

Activity ratios- it can be defined as how actively or quickly a company is able to change the assets into sales or cash.

Different types of activity ratios are as follows:

1 Stock days or stock turnover- it can be defined as the measure of the amount of time a company needs to convert its stock into sales. The lesser is the stock days or stock turnover, lower is the cost incurred by the company in holding stock.

Formula- [stock or inventory/cost of sales] x365

For the Morrison plc stock days or stock turnover ratio is stated below for the years 2007- 2009:-

In 2007 - (368/11826) x365=11 days

In 2008- (442/12151) x365=13 days

In 2009- (494/13615) x365=13 days

2007

2008

2009

11 days

13 days

13 days

It has gradually increased from the year 2007 to 2008 and then remained constant. Company should work on plans to be able to make it as small as it can to incur the minimum cost for holding the stock.

2 Fixed Asset Turnover- It can be defined as the sales produced from the fixed assets of a company.

Formula- sales or turnover/fixed assets

For the Morrison plc fixed asset turnover ratio is stated below for the years 2007- 2009:-

In 2007 - 12462/6605=1.8

In 2008- 12969/6726=1.9

In 2009- 14528/7160= 2.02

2007

2008

2009

1.8

1.9

2.02

3 sales/net current assets- this ratio indicates the level of working capital required for a given level of sales while analyzing the financial statements.A reduction in this ratio is a negative sign, signifying that company may have slowed production, lessening the quantity of stock

Formula- sales or turnover/net current assets

For the Morrison plc sales/net current assets ratio is stated below for the years 2007- 2009:-

In 2007 - 12462/766=16.26 times

In 2008- 12969/910=14.25 times

In 2009- 14528/1066=13.62 times

2007

2008

2009

16.26

14.25

13.62

From the above data we can see that the sales/net current assets ratio has decreased during the years 2007, 2008, 2009, which is a negative sign.

Liquidity Ratios- It can be defined as one of the financial analytical toolthatis usedto determine a company's ability to disburse itsshort-terms debts obligations.

Different types of liquidity ratios are as follows-

1 current ratio- it can be defined as the measure of the capability of a company to fulfill its financial obligations that are outstanding.

It is also called as “Liquidity Ratio”, “current asset ratio” and “cash ratio”.

Higher is the current ratio better it is because it shows that the company has higher degree of ability to fulfill its short-term debt obligation that is falling due.

Formula- current assets/current liabilities

For the Morrison plc current ratio is stated below for the years 2007- 2009:-

In 2007 - 766/1855=0.41

In 2008- 910/1853=0.49

In 2009- 1066/2024=0.52

2007

2008

2009

0.41

0.49

0.52

From the above data we can see that the current ratio has shown an increasing trend for the financial years 2007, 2008 and 2009 in Morrison plc which is good as it indicates that the company's ability to fulfill its short term debts and obligations has increased over the years.

2 Quick ratio - this ratio can be defined as the measure of the liquidity of a company. It is the capability of a firm to meet its debts, liabilities and obligations. It is also known as “acid test ratio”.

This ratio can be derived by lessening stock from the current assets and then dividing by current liabilities.

Quick ratio is an indicator of the financial strength and weakness of a company (more is the value of this ratio means stronger the firm is and lower value signifies that the company is weak).

Formula- current assets less stocks/current liabilities

For the Morrison plc quick ratio is stated below for the years 2007- 2009:-

In 2007 - (766-368)/1855=0.21

In 2008- (910-442)/1853=0.25

In 2009- (1066-494)/2024=0.28

2007

2008

2009

0.21

0.25

0.28

From the above data we can see that the quick ratio has shown a gradual increase over the financial years 2007, 2008 and 2009 which is a good signal as higher is the value if quick ratio indicates that the firm is financially strong.

CALCULATIONS FOR THE RATIO ANALYSIS OF SAINSBURY:-

ROCE

For the Sainsbury plc measure of ROCE ratio is stated below for the years 2007- 2009:-

In 2007 - (477/3762) x100=12.67

In 2008- (479/3716) x100=12.89

In 2009- (466/3826) x100=12.17

Net profit margin

For the Sainsbury plc measure of net profit margin ratio is stated below for the years 2007- 2009:-

In 2007 - (477/15979) x100=2.98

In 2008- (479/16835) x100=2.84

In 2009- (466/17875) x100=2.60

Net asset turnover

For the Sainsbury plc measure of net asset turnover ratio is stated below for the years 2007- 2009:-

In 2007 - 15979/3762=4.24

In 2008- 16835/3716=4.53

In 2009- 17875/3826=4.67

Gross profit margin

For the Sainsbury plc measure of gross profit margin ratio is stated below for the years 2007- 2009:-

In 2007 - (1172/15979) x100=7.33

In 2008- (1002/16835) x100=5.95

In 2009- (1036/17875) x100=5.79

Stock days or stock turnover ratio

For the Sainsbury plc measure of stock days or stock turnover ratio is stated below for the years 2007- 2009:-

In 2007 - (590/15979) x365=13 days

In 2008- (681/16835) x365=15 days

In 2009- (689/17875) x365=14 days

Effects and Development

This is a world of globalization and every business wants to expand its reach outside the territories of its own country in order to explore new markets and customers and earn more money. Global recession is the most talked and topic of major concern for all the businesses worldwide. Global recession has hit the markets world wide adversely affecting the businesses of every trade. It all started in United States due to various reasons such as downfall in the house prices, deficiency or unavailability of finance resulting in credit crunch, inflation causing reduction in incomes earned and disposed etc. Global recession entered the territories of most of the countries worldwide affecting their economies and brought a downturn as we have seen in 2008-2009.

The global recession caused a lot of problems such as-

  1. Inflation-the prices of the commodities and products and other supplies started rising causing a problem for the buyers.
  2. Downfall in the wages and salaries
  3. People were thrown out of jobs by the companies in order to cut the cost.
  4. Due to downfall in income earned their was a downfall in the disposable incomes of the consumers which resulted in a vicious circle and inturn continued in adversely effecting the growth and stability of economies and markets of the countries.

The global recession also affected the markets of UK bringing downturn in the economy of the country as seen from 2008-2009 and the conditions are now improving and expected to improve more in upcoming years.

The UK labor market-

The changes in the UK labor market were first observed in the second quarter of 2008.it was seen that their was a 3.6% increase in claimant count,5.6% decrease in vacancy levels and 14% increase in redundancy level with respect to the previous quarter.

There was a fall of 0.3% in the employment levels and 0.4% fall in workforce jobs in third quarter of 2008.

The unemployment rate in UK was recorded as 5.8% for consecutive three months in 2008.it resulted in downfall of disposable income as people tried to cut down their expenses.

Disposable income- the increasing unemployment and inflation and due to the fall in the incomes earned, there was a downfall recorded in the amount of disposable income of the consumers by the recessional hit during the years 2008-2009.

Inflation-As per the national statistics online, an annual inflation rate of 4.5% was recorded in October 2008.it was observed that the rise in the cost of fuels and lubricants in 2008 which later fell down in 2009 had adversely affected the consumer price index.

Interest rate- The interest rate fall from 4.5% in October 2008 to 1.1% in September 2009.it made it easier for people to borrow money due to less interest rate. Savings were reduced due to low interest rate. The weakening of currency made imports costing more for UK. The graph below explains the interest rate in UK

Exchange rate-the UK exchange rate decreased from 2008-2009 due to the recessional hit and the weakening of currency. This made the imports more difficult for UK. The currency kept on weakening recording the all time low of 1.0219 GBP in December, 2009.

The recession showed hard times to companies. Morrison was able to continue its strong growth rate of 7.8 percent from the year 2007.though the UK market was under recession but the Morrison was able to continue its trend of attracting and indulging large customers to buy they products. The Morrison's product prices were hit by inflation. During duration of 24 months company was able to have 1.1 million customers visiting its stores every week drawn through the customers of all the other strong competitors in the supermarket industry. Morrison thinks that it will be able to carry on its ability to attract more customers to visit their stores in the time to come.

The downturn in the economy had adverse effects on the prices which were inflated and customers had to bear this entire problem. Morrison at the same time tried to convince and attract more customers by emphasizing and focusing on the value of their products for its customers.

Morrison is a manufacturer and a retailer and this helped the Morrison to compete and survive in the bad times of downturn in the economy. Morrison was able to offer very competitive prices and attractive offers on its products backed up by its strong promotion helped the Morrison to attract the customers. Due to its own manufacturing Morrison was able to provide fresh items to its customers from its own manufacturing facility which its competitors were lagging in. It was able to enjoy its competence of providing fresh products to its customers but at the same time Morrison also focused on the quality of its products. It got the advantage of being the single giant retailer in UK to provide 100 percent British beef, poultry, lamb and pork. Customers were really convinced with the Morrison's policy which was in favor of and promoting the use of British farming and its focus of providing the fresh products with British standards to its customers. It was observed that Morrison was able to attract more customers as compared to its competitors during the Christmas as said by the chief executive officer of Morrison Marc Bolland. The Morrison was able to show a strong growth figure of 9 percents which was recorder to be highest when compared to the other four leading players in the supermarket industry of UK.

COMPARISON

Morrison

Sainsbury

Return on capital employed (ROCE)

14.49

12.17

Net profit margin

4.81

2.60

Net asset turnover

3.01

4.67

Gross profit margin

6.70

5.79

Stock days or stock turnover ratio

13 days

14 days

Current ratio

0.52

0.66

Quick ratio

0.28

0.31

Ratio analysis carried on Morrison and Sainsbury for the financial year 2009

In the above table we have shown some ratios for Morrison plc and Sainsbury for the financial year 2009.it can be seen that the return on capital invested(ROCE) ratio is high in case of Morrison. So Morrison has good return on the amount of capital employed. This is positive for the performance of Morrison.

The net profit margin of Morrison is more than Sainsbury which means that Morrison has made more profits than Sainsbury with respect to their turnovers respectively.

The net asset turnover ratio of Sainsbury is more than Morrison, which means Sainsbury has made low investments and the Morrison, have inept management of its resources.

Stock turnover ratio of Morrison is less than Sainsbury which is good for its performance as Morrison is taking less time to sell its stock and convert it into capital.

The current ratio of Sainsbury is more than Morrison, which means Sainsbury has more ability to fulfill its short term debts.

The quick ratio of Sainsbury is also higher than Morrison, which means Sainsbury has more financial strength than Morrison.

Similarly we can interpret and compare the results of the financial performance of Sainsbury and Morrison for the past two years 2007 and 2008 from the data shown in the tables below.

Ratio analysis carried on Morrison and Sainsbury for the financial year 2008

MORRISON

SAINSBURY

Return on capital employed (ROCE)

13.97

12.89

Net profit margin

5.03

2.84

Net asset turnover

2.77

4.53

Gross profit margin

6.73

5.95

Stock days or stock turnover ratio

13 days

15 days

Current ratio

0.49

0.71

Quick ratio

0.25

0.40

Ratio analysis carried on Morrison and Sainsbury for the financial year 2007

MORRISON

SAINSBURY

Return on capital employed (ROCE)

9.39

12.67

Net profit margin

3.12

2.98

Net asset turnover

3.01

4.24

Gross profit margin

5.37

7.33

Stock days or stock turnover ratio

11 days

13 days

Current ratio

0.41

0.80

Quick ratio

0.21

0.50

RECOMMENDATIONS-

  1. Morrison should plan to work on adding non food products to their product category instead of just focusing on being food specialist in order to cope up and compete with the other rivals in the supermarket industry in UK such as Tesco, Asda etc.
  2. Morrison should focus on how to analyze its financial statements and take necessary steps and changes in order to make optimal use of its finance and other resources and to manage the capital and its liabilities efficiently.
  3. this is a digital age and thus digital technology plays an important role in the marketing of products. Thus Morrison should lay emphasis on making use of digital technology such as online shopping and make it user friendly with all the range of its products in order to attract more customers and earn more profit.
  4. Morrison should focus on providing best delivery and customer service in order to pace up with the other players in this industry

CONCLUSIONS-

  1. Morrison is able to manage the entities linked with the business such as creditors and debtors effectively and efficiently
  2. Morrison had acquired Safeway limited in 2004.it resulted in merger reserve, which is a reserve in the balance sheet of the firm. The directors of Morrison think that this reserve is not for distribution and rather it will be regarded as capital reserve
  3. Morrison had made donations to the charitable institutes and for the charity purpose amounting a total of 1.18 million pounds
  4. Morrison's financial statement shows a strong flow of cash

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