Financial analysis of Morrisons and comparison with Tesco Coursework

Financial analysis of Morrisons and comparison with Tesco - Coursework Example Ratio analysis of an organization presents facts on a comparative basis and enables the drawing of inference regarding the performance of a firm (Khan & Jain, 2006). This analysis gives a useful indication of the performance of the organization. Financial ratios are often used by shareholders, bankers, trade creditors, analysts, management and the general public at large to measure the performance of the company in various aspects such as liquidity, profitability, debt and market position (Stoltz et al., 2007). However, these ratios often should be analyzed keeping in mind the accounting policies and the principles used by companies and is dependent on the industries under consideration (Siegel and Shim, 2006). The objective of this report is to analyze the performance of Morrison’s. In order to do this, ratios will be calculated for the company over a period of two years: 2009 and 2010. The ratios will be compared to Tesco which is a leading competitor in the same industry. F our categories of ratio will be calculated for both the companies: 1. Profitability 2. Liquidity 3. Efficiency 4. Gearing ratios Analysis Profitability Ratios Profitability ratios can be used to measure how good the company is using its assets and how well the company is controlling its costs to generate an acceptable rate of return (Gitman and McDaniel, 2008). The various profitability ratios are given below Gross Margin Gross margin can be defined as the ratio of gross profit to total sales. The graph below shows the trend of the same: As can be seen from the graph, the gross margin of Tesco is more than that of Morrison’s in the year of 2009. However, while the gross margin has increased for Morrison’s from 2009 to 2010 while the same has decreased for Tesco. One point to note here is the sales done by both the companies. While Tesco had sales of the order of ? 56,910m in 2010, Morrison’s had just ? 15,410m. This difference is an indication of the size of the two companies. It is evident that in terms of sales, Tesco is well ahead of Morrison’s. Profit Margin Profit margin of a company can be defined as: The graph below shows the trend for profit margin for both the companies: Here again, the margin is more for Tesco as compared to that of Morrison’s in 2009. While the profit margin has increased considerably from 2009 to 2010, the same has remained almost equal for Tesco. The higher profit margin of Tesco indicates that the company is having a better control over its costs as compared to Morrison’s (Investopedia). Just like the gross sales, the value of net profit of Tesco (? 2,336m) is almost four times that of Morrison’s (? 598m). Return on assets and investments While return on assets measure the amount of net income generated for each unit of assets, return on investment measures the amount of income generated from each unit of owners’ equity. Return on assets is an ideal tool for comparing compan ies within the same industry. RoA is an indication of both the profit margin as well as asset turnover (Needles et al., 2010). The graph on the side here shows the Return on Assets for both the organization. The RoA is almost equal for both the companies. This indicates that both the organizations have almost equal efficiency in utilizing their assets. The graph on the side here shows the Return on Investment for both the organizations. RoI is more for Tesco in 2009 which indicates better return on investor wealth. One issue being faced by Tesco is a reduction in the RoI from 2009 to 2010. This imply that the average profit generated from the amount of income generated from owner’