Interpretation Of Financial Statements From Morrisons Finance Essay
Morrisons, the fourth largest food retailer in the UK, operates 403 stores across UK selling mainly grocery and food to 9million customers weekly through almost 124,000 people employed. They also run their own manufacturing facilities through which they source and process most of the fresh food being sold at Morrisons. (http://www.morrisons.co.uk/Corporate/About-Morrisons/Company-history1/)
Reasons for using ratio analysis
Investopedia defines ratio analysis as aÂ tool used by to perform a quantitative analysis of the financial informationÂ and performance of a company (http://www.investopedia.com/terms /r/ratioanalysis.asp).
Ratio analysis is used as performance analysis for its following advantages:
Analyzing Financial Statements - stakeholders like management, creditors, investors and bankers analyze financial statements using ratios for the purpose of their own decision making
Judging Efficiency - company's efficiency in terms of its management and operations and asset usage to earn profits can be judged
Locating Weakness - specific areas of weakness can be identified for remedial action
Formulating Plans and forecasting results - can also be used to predict the future financial performance trends
Comparing Performance - trend analysis over time, comparison of performance of different divisions, comparison with competitors or industry benchmark are also among the uses of ratio analysis (http://accountlearning.blogspot.com/2010/02/importance-and-advantages-of-ratio.html)
To workout the solvency - show the relationship between the liabilities and assets
To simplify the accounting information - summarize the results of detailed and complicated computations
To workout short-term financial position - short-term financial liquidity position of the company can also judged (http://www.universalteacher4u.com/cbse/xii/acctheory /ch11/page1.htm)
Analysis and Recommendations
The activities of the company in recent years have resulted in an exceptional financial performance.
The sales revenue of the group increased reasonably well in the three years 2007-2009. Revenue increased from £ 12,462m to £ 12,969m during the year 2008 resulting in an increase of 4.07% and in 2009, revenue further increased by 12% showing a consistent performance. According to the annual report 2009, part of this increase was due to the very high prices of fuel seen in the forecourts business in the year caused by a worldwide spike in oil prices.
Despite the weakened UK economy, the group is doing good in terms of increased turnover and increased market share growth i.e. from 12.1% to 12.3% in the year. Tesco, on the other hand, has both a much larger turnover than Morrisons and a higher percentage in increase in its turnover i.e. about 15.1%. Therefore, Morrisons still has much room for improvement in capturing more market share and increasing its turnover.
Gross Profit Margin and Net profit margin
The gross profit margin remain more or less consistent over the years with a small increase in year 2008 and none in year 2009 getting the overall increase of about only 1% over the three years. This means that gross profit increased in line with revenue. From this it can be concluded that the group has costs under control and they have only allowed a rational increase keeping in view the growth of the group.
Comparing the result with Tesco, where gross profit margin for 2009 is touching 7.76%, which is 1.48% more than that of Morrisons. It can perceived from this that Tesco has more control over their costs keeping in view the fact that it has a much larger turnover thus giving Morrisons an indication and signal to cut down costs even more.
In 2008 net profit margin increased by 114.6% from 1.99% in 2007 to 4.27% in 2008. This was mailny due to the increase in revenue and effective management of overhead costs. In 2009, net profit margin declined by 25.76% from 4.27% in 2008 to 3.99% in 2009. Along with the weak economic environment and the decline in net profit, another reason for this declin