Financial Analysis of Morrisons3
Critical Assessment of the ratio analysis of William Jackson Food Group8
Limitations and recommendations
This paper deals with the question of how a ratio analysis can help in determining the true value of a company. Therefore a critical ratio analysis of Morrisons, a supermarket which is listed on the London Stock Exchange will be done and then compared with the William Jackson Food Group, another supermarket but a private company in order to figure out if there are any differences or similarities which can help to measure the performance of the companies. At least recommendations of the usefulness of this research will be given and which limitations it might have.
Morrisons is with over 400 stores the fourth largest food retailer in the United Kingdom and has a market share of approximately 12% (Morrison plc.; 2011). It was founded in 1899 by William Morrison in Bradford. Milestone in the development of Morrisons were the opening of the first town centre shop in 1958, the opening of the first supermarket in 1961in Bradford. Nowadays their main business is food and grocery. Uniquely they source and process most of the fresh food through their own manufacturing facilities what gives them close control over the quality of the goods. The company has more than 132,000 employees and approximately 9 million customers every week.
Financial Analysis of Morrisons
Table 1 Sales, market share, gross and operating profit of Morrisons (2009-2011) and Sainbury (2011) Morrisons| 2009| 2010| 2011| Sainsbury 2011|
Sales (excl. VAT) £m| 14,50| 15,40| 16,48| 21,10|
Market share (%)| 12,3| 12,6| 12,8| 16,3|
Gross Profit| 913| 1,062| 1,148| 1,160|
Operating Profit| 671| 907| 904| 851|
Source: Financial annual reports of Morrisons and Sainsbury
Over the last three years there has been a steady growth in sales. Due to a rising number of stores Morrisons had a growth of 1,98 % over three years. A reason for that are the rising prices for oil. The customers looked for higher value and as a result they filled up at Morrisons. Also an increasing numbers of like-for-like sales caused the increase in sales (Morrisons, 2011). The slight increase in the market share shows the loyalty of the customers as well as the opening of new stores in new areas of the country. This is also a reason for the growth in sales. The figures of Sainsbury are comparable in this case although they are slightly higher. Since gross profit and operating profit are driven by sales Morrisons is performing well. In comparison they have a lower gross profit in comparison with Sainsbury but a higher operating profit. That means that they can operate at lower costs. In 2009 they had a bad operating profit which was due to higher administrative expenses (Morrisons, 2009).
Table 2 Profitability ratios of Morrisons (2009-2011) and Sainsbury (2011) Morrisons| 2009| 2010| 2011| Sainsbury 2011|
Operating profit margin (%)| 4,62| 5,89| 5,49| 4,09|
Gross profit margin (%)| 6,28| 6,89| 6,97| 5,5|
ROCE (%)| 14,85| 18,33| 12,8| 11,1|
Source: Authors calculations and companies financial annual reports
Generally it can be said that supermarkets are operating on low prices, therefore their profit margins tend to be very low (Atrill and McLaney, 2011). Morrisons had a steady growth over the last years from 4,62% in 2009 to 5,49% in 2011 what goes along with their increase in sales. In 2011 after paying the costs of goods sold and the expenses for operating the business for every £1 of sales revenue £0,549 was left as operating profit. Sainsburys operating profit margin is slightly lower what proves that Morrisons can operate on lower costs like mentioned before. The gross profit margin ratio measures the profitability in producing and selling goods before any other expenses are taken into account. A major...