ssets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
This indicates the extent to debt finance involved in a business. Morrisons gearing ratio comes out to 27.7% in 2009 and has been almost at the same level since 2007. Tesco on the other hand has a high gearing ratio.
This means that although short term borrowing capacity of Morrisons is at a very low level, but they can always get good long-term debts in order finance the business in case of cashflow problems. It can also be concluded from this that Morrisons use a source of finance that has a higher rate of return i.e. equity.
The interest coverage ratio indicates the extent of which earnings are available to meet interest payments. An interest cover ratio of more than 3 times is considered safe as even if profits are reduced to half the company will still be able to meet its financing costs.
Morrisons had a high interest cover of 5.16 in 2007 which increased to a striking 11.18 and in comparison Tesco has a cover of 6.71 which is also considered quite safe. So, keeping in view the gearing and interest cover of the group, it can be concluded that long term borrowing is not much of an issue for the group even in these times of recession.
The earnings per share (EPS) measures how much profit after tax is made for each individual share.
EPS of the group, in comparison to Tesco i.e. 28.92p, is a bit on the lower side and stands at 17.16p despite of the increasing revenue in the 2009. In addition there has been some fluctuations in EPS over the three years as in 2007 it stood at a very low 9.31p and increased considerably in 2008 to 20.67p. Another thing to keep in mind is the fact that Morrisons is generating this EPS with a lesser equity (investment) than Tesco which means that it may be more efficient in using its capital to generate income.
The dividend per share of Morrisons was 5.8p and it then increased by 21% from 4.8p in 2008. The group managed to maintain a gradual increase in dividend which is covered 2.96 times by earnings.
Tesco, on the other, is maintaining a larger dividend payout at 11.96p per share which is covered 2.42 times by earnings and thus Tesco seems to be a more favourable investment for investors. Management seems to have noticed this fact and thus states in the Annual Report that :
"We will continue our progressive policy of increasing the dividend by underlying earnings and additionally moving dividend cover towards the average for our sector, which is around 2.5 times, by January 2010." - (Sir Ian Gibson - Chairman)
Limitations of the analysis
Due to limited information available, some of the ratios could not be calculated which would have given an even clearer and in-depth analysis of the group's performance and position.
In addition to the limitations specific to this analysis there are certain other general limitations of the ratio analysis technique:
Limited Comparability - Differing accounting policies can lessen the usefulness of ratio in making comparisons
False Results - Dependant on the accuracy of accounting records and statements otherwise wrong financial position will be presented
Effect of Price Level Changes - changes in general price levels over time make it difficult to compare figures over a period of time
Qualitative factors are ignored - qualitative factors which may be important for the decision making are ignored by ratio analysis
Effect of window-dressing - Ratios can be used by management for "window dressing" and present an unreal financial position of the company
Morrisons seems to be doing well in gradually growing and expanding the business. As compared to Tesco, which is a much larger group than it, Morrisons need to pay more attention to capturing a wider market to increase its turnover. A special attention has to be paid to the liquidity situation of the country. Although Morrisons seems to be a good investment, but from the investors point of view, there are other even better investments available and thus Morrisons need to pay out more dividend to attract