Financial Appraisal of Morrisons Company

Topics: Stock, Dividend yield, P/E ratio Pages: 5 (1747 words) Published: March 14, 2011




London, 2010
Founded in Bradford over a century ago, Morrisons Supermarkets have grown from a small shop to being the fourth biggest food retailer with stores across the UK following the acquisition of Safeway in 2006. Having achieved a market share of approximately 12%, the company’s main UK-listed competitors include Sainsbury’s, ASDA and Tesco, the latter leading the industry by far with a remarkable market share close to 30%. In this light, Tesco and Sainsbury will be the two companies of choice for analysis and comparison throughout this report, as well as the grocery store industry.

Although Morrisons is not the largest, it could offer a promising investment in the food retail industry as it is in a comfortable position, with high cash inflow, low debt and ownership of most of its stores. It will also be interesting to identify the benefits and disadvantages of an investment in Morrisons in comparison to such a big competitor as Tesco, where allegedly one in every three pounds used on food is spent. However, different companies in the food retail have different strategies, as Morrisons focuses on being a food specialist, Tesco is highly reliant on technology and non-food sales. This offers investors a various choice as each model may have its own benefits (i.e. Technology sales may be more profitable, however, specialising on producing own quality food products may not only attract customers and customer loyalty, but also provide more comfort during a financial crisis).

When considering an investment in the food retail sector, it is also important to take into consideration the future of a company and that of its competitors. Whereas some argue that Tesco may have reached an expansion peak within the UK, Morrisons is in the position where Tesco was a decade ago. It has a lot of ground for expansion and diversification, and the announcement that they will experiment with online shopping and open three new convenience stores, describes that they are doing just that. These and other factors raise doubts as to whether Morrisons provides a good investment opportunity or if its uncertain future should scare away investors towards a safer choice such as Tesco. Although the future cannot be predicted, the financial analysis provides one with essential tools for assessing a future investment.

To begin, the analysis we will focus on the shareholders point of view and in order to do that our main point of interest throughout the report will be a small number of profitability and investment ratios. Profitability ratios provide an insight into the main purpose of business success, which is considered in the wealth it creates for its owners and shareholders. To evaluate profitability the first that should be analysed is the return on capital employed ratio, which can help measure the business performance. The ROCE showed a performance of 13.98%, 14.49% and 17.34% for the years 2008, 2009, and 2010 respectfully. The calculated ROCE reflects the industry’s average and has a positive trend throughout the years analyzed. If the ROCE is high it is because either the profit margin, or the asset turnover is high, or both. Although there is a rule that the higher the ratio, the better the business, one needs to take in account also the type of the business and the industry’s average to know whether the ratio can be evaluated as a sign of a good performance. In the Morrisons case all figures from 10% and higher are considered good. Thus, we can conclude that Morrisons obtains adequate profits in relation to the funds invested.

The return on equity ratio measures the rate of the return on the ownership interest of the common stock owners. Return on equity ratio was from 12.65%, to 12.08% for the observed period. If the return...
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