Financial Ratio Analysis of Morrison in Comparison with Tesco

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Financial Ratio Analysis of Morrison in Comparison with Tesco


The purpose of this report is to critically analyse the financial ratio results of Morrison 2008 and 2009 as an equity analyst and compare it with like for like by using Tesco supermarket.
To achieve this report will be looked at in four main areas. Firstly, we will use financial ratios obtained from annual reports of 2008 and 2009 to analysis and appraise Morrison’s financial performance. This would be followed by a comparative analysis with Tesco, for the same period. In addition, a trend analysis will be done to show the pattern of Morrison’s financial performance over the years 2006 to 2009. Furthermore, a comparison will be made with industry average figures where available to show its development in the industry.

Finally, a conclusion would be argued to reveal how well the managers and the company have performed and how well they handled the demands of the economic downturn to reduce the shock on their financial performance.

The ratios would be looked at in five broad areas: Profitability, Liquidity, Gearing, Working Capital management and Investors.


“…Profitability relates profits to the investment made to achieve them.” R.H Parker (2007) it also provides an insight to the degree of success in achieving the purpose of the business.

Morrison Tesco
Profitability ratios20092008 20092008

ROCE- Return on Capital Employed10.82%10.58% 11.44%14.03% Operating profit margin4.62%4.72% 5.90%5.90%
Gross profit margin6.28%6.31% 7.76%7.67%
Mark up (Not calculated in class)6.71%6.73% 8.42%8.31% Asset turnover ratio (useful productivity/ efficiency ratio)2.35 times2.24 times
1.94 times2.38 times
Cost of sales as % of sales93.37%93.69% 92.24%92.33%
Operating expenses as % of sales1.93%3.03% 2.30%2.17%
ROSF/ ROE10.18%12.65% 16.67%17.90%

Morrison had a desirable slight increase of 0.24% from 2008 to 2009 for ROCE which may have been achieved through an increased sales revenue to capital employed ratio which made up for the small decrease in the gross profit margin. Thus they were more effective at generating sales in 2009 than in 2008. So for every £100 invested they achieved a net profit of £10.82 in 2009. However, they had an increase of 8.83% from 2006 to 2009 which is very good. (Please see appendix1) Although the denominators have increased they still managed to make a profit in the downturn which is not an unhappy result. There is a slight drop of 2.47% in the ROSF results between from 2008 to 2009, which is not great. However, over a four year period this result looks very impressive. It has gone up by 3.33% even with the economic downturn. The slight increase in return on asset may mean that the use of these assets is the same for both years. There was a significant increase of 3.62% in GP for Morrison from 2006 to 2009. The OPM has dropped by 0.10% from 2008 to 2009 even though the sales have increased the managers have not been able to improve profit from the sales. It may well be that the managers are inefficient or that might be other factors affecting this. Horizontally however, there is a significant increase of 3.7% from 2006 to 2009, which might keep the shareholders satisfied.

Tesco’s ROCE ratio reveals a drop of 2.59% from 2008 to 2009 which is not good. It is a competitor’s environment especially because of the decrease in disposable household income hence Tesco’s OPM figures are same for both years.

Overall the Tesco’s ratio indicates that it has made far better use of its capital in 2009 by achieving £11.44 net profit for every £100 invested. Nevertheless, Morrison’s figure is still healthy especially because it is higher than the industry average GPM ratio of 3.53% (Source: London Stock exchange 2009)


Paul M Collier (2009) stated, ‘Improvements in the working capital and acid...
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