Financial Analysis of WM Morrison
Added on 2020-02-05
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Financial decision making for managers 1
Table of ContentsINTRODUCTION ...............................................................................................................................3A. Comparative ratio analysis of Morrison for the time period for the year 2014 and 2015..........3B. Comment on business structure and financial structure of Morrison.........................................4C. Compare the financial figures for the year 2014 and 2015.........................................................5D. Advice a potential investor of Morrison to invest money in the business..................................5E. Meeting financial requirement through possible alternatives and assessing its implications.....6F. Advice how working capital can be managed by Morrison.........................................................7TASK 2 ................................................................................................................................................7A. Preparation of cash flow budget.................................................................................................7B. Make recommendations to administrate cash flow.....................................................................8TASK 3 ..............................................................................................................................................10A. Using discounted and non-discounted investment appraisal techniques..................................10B. Recommendation on the basis of results identified...................................................................11CONCLUSION..................................................................................................................................12REFERENCES...................................................................................................................................13APPENDIX........................................................................................................................................15Index of TablesTable 1: Comparison of financial figures of Morrison ........................................................................5Table 2: Cash budget of Green Limited for the period of six months ending on 31st December........8Table 3: Calculation of cash inflow of project A................................................................................10Table 4: Calculation of cash inflow of project B...............................................................................10Table 5: Calculation of pay back period.............................................................................................10Table 6: Calculation of accounting rate of return...............................................................................11Table 7: Calculation of Net present value and internal rate of return ................................................11Illustration IndexIllustration 1: Business structure of WM Morrison..............................................................................42
INTRODUCTION Managers play an important role in business as they are responsible for framing policies andtaking decisions in achieving success in the market. Finance manager in an organization have theduty to evaluate company's financial strengths and weaknesses so that effective financial decisionscan be carried out to perform better in the future. WM Morrison is the fourth largest supermarketchain of UK which operates in the retail industry. This assignment will conduct comparative studyof financial performance of Morrison for two financial years i.e. 2014 and 2015. It will be done byusing ratio analysis techniques like profitability, solvency, liquidity and efficiency so that each andevery aspect can be examined. Moreover, cash budget will be constructed for Green Limited andanalysed to assure surplus funds every time. In the last, investment decision will be taken forHanley Manufacturing Ltd by using capital budgeting techniques. TASK 1A. Comparative ratio analysis of Morrison for the time period for the year 2014 and 2015Profitability:In 2015, Morrison's GM and NM have been declined from 6.07% to 4.53% and 1.35% toadverse 4.53%. It reflects that WM Morrison do not performed well in the year 2015 because offewer earnings through operations. Less turnover and ineffective control over cost are the tworeasons behind decreasing profitability in 2015 (Alnaa, Adongo and Juabin, 2016).Liquidity:In 2015, CR remained unchanged to 0.5 while QR shows a little bit increase by 0.02 as it hasbeen reached to 0.18. High proportionate decrease in current assets (CA) due to having lessinventory, trade receivables and cash position as compare to proportionate reduction in currentliabilities (CL) such as payables is the reason behind such occurrence. Idle CR and QR for retailsector is 2:1 and 1:1. It implies that Morrison is not able to meet their short term liabilities timely(Petruzzo and et.al., 2015).Solvency:Debt/equity ratio has been improved from 0.53 to 0.7 while standard ratio is 0.5:1. It showsthat there is high financial risk to invest money in Morrison. It has been increased because of usingadditional debt and less equity in the capital structure.Although company achieved industrialstandard but still, it must be keep in mind that very high use of equity capital also create negativeimpact (Matthew, Fada and Ukonu, 2016). It is because in this situation, investors will demandmore return on their capital. Thus, the profit of less cost of debt capital is offset by increase in thecost of equity which is not good. 3
Efficiency: ATR has been increased to 1.69 times while ITR has been reduced from 20.34 to 21.26 in2015. It is because of having declined total asset, COGS and inventory as well. It demonstrates thatMorrison is using assets efficiently to generate more revenue while inventory is not utilized in aneffective manner (Alnaa, Adongo and Juabin, 2016). B. Comment on business structure and financial structure of MorrisonBusiness structure: It defines the process of work allocation, coordination, monitoring andsupervisions towards attainment of targets and objectives. With regards to WM Morrison, it hasdecentralised organization structure in which decision-making authority is spreaded out to differentpeople in the business hierarchy (Thurshika and Andrew, 2016). In this, Morrison's store managerhave authority to take decisions in areas such as staffing, promoting sales etc. Moreover, he isresponsible to make reports to the regional or area manager. Further, owners have authority to takeon the spot decisions to mitigate consumer complaints. Different department managers are liable totake decisions to assure smooth functioning of their department and give an effective contribution toaccomplish target objectives. Illustration 1: Business structure of WM Morrison(Source: Thurshika and Andrew, 2016)Financial structure: It indicates the balance between company's assets and liabilities duringa financial year. Thus, it comprises all the short-term as well as long term liabilities, fixed as well ascurrent assets and shareholders equity. Capital structure is the most important and crucial element offinancial structure which indicates the balance of debt and equity. In the year 2015, Morrison's D/Eratio has been improved from 0.53 to 0.70. It is because in 2015, Morrison repaid its debt worth£28m and issue additional share capital amounted to £1098m (Morrrison annual report andfinancial statement, 2015). As a result, total debt and equity capital in 2015 goes to £2508m and£3594m. Further, total assets and liabilities has been declined by £1558m (14.52%) and £460m4
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