e was the 5% increase in the administration costs since 2008. This increase, according to the report is due to the marketing expense which forms a major part of operating expenses and is useful in capturing a wider market.
The net profit margin of Tesco is quite at the same level as compared to Morrisons.
Return on Capital Employed
The return on capital employed (ROCE) assesses profits with the amount of funds (capital) employed to make the profits. This increased from 7.80% in 2007 to 11.62% in 2008. This represents an increase of 32.87%. But due to the economic unstability, the group could not maintain its high rate of increase in ROCE over the years and it minutely declined by 0.78% from 11.62% in 2008 to 11.53% in 2009.
On the other hand Tesco's ROCE in 2009 stands at 12.25% which is not very larger than Morrisons. So this means that in relation to the industry, Morrisons is doing well to keep its ROCE at that level. The reason for a low ROCE could be high overhead costs. It must control its costs in order to generate a higher return and free up additional extra capital invested.
Liquidity & Efficiency Ratios
This is a measure of the adequacy of company's current assets to meet short-term liabilities as they fall due, i.e it's a basic liqiudity ratio. A ratio between 1 and 2 thought to be a standard level of liquidity. Morrison's current ratio was 0.40, 0.49 and 0.59 in 2007, 2008 and 2009 respectively. This shows a weak situation of the group as it has less current assets than its current liabilities as the ratio is less than 1, therefore this to be an area of concern for the group. Although the ratio is improving over the years but even in 2009, Morrisons have enough assets to just cover about 60% of its liabilities. As current ratio is of particular interest to short-term creditors of the group so the situation may create difficulties in obtaining short-term credit.
If we compare the ratio of 0.59 in 2009, with that of Tesco i.e. 0.76, it can be seem that although even Tesco has current ratio less than one 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 a