 but they have it maintained to more close to 1 than Morrisons. So in order to secure group's outlook for short term borrowings, management need to implement efficient working capital management techniques.
Quick Ratio and Average Payment Period
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values, so quick ratio is used instead which normally range from 0.7 to 1.
Morrisons' quick ratio has been 0.21, 0.25, 0.28 for 2007, 2008 and 2009 respectively. The ratio has gradual increase over time but shows an alarming situation in relation to liquidity. This is mainly due to the high amount of trade creditors of the group. These figures are much less as compared Tesco where the ratio comes out to 0.61 that is quite acceptable. So management needs to pay close attention at careful monitoring of this issue which is what they are doing as in the Annual Report 2009 it is stated that:
"...... It is Group policy to ensure all payments are made within mutually agreed credit terms. Where disputes arise, the Group attempts to sort these out promptly and amicably to ensure delays in payment are kept to a minimum. Trade creditors for the Group at the financial year end represented 33 days of purchases (2008: 34 days)."
Another major asset turnover ratio is inventory turnover. The inventory turnover often is reported as the inventory period, which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold.
Morrisons seem to be maintaining a good inventory turnover period which stands at 13.24 days in comparison to Tesco where it comes out to 19.44 days. This means that Morrisons take only 13 days to sell it stock and resultantly it addresses the issue of stock obsolescence and holding costs.
Financial Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets 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 cov