Financial Ratio Analysis of Morrison Supermarket PLC: 2016-2018

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Table of Contents
Introduction....................................................................................................................................3
Ratio Analysis.................................................................................................................................4
Key strategic decisions taken by the Morrison’s super market for the above financial
analysis............................................................................................................................................8
Conclusion....................................................................................................................................10
References.....................................................................................................................................11
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Introduction
The Morrison Supermarket PLC is basically a retail super market store that is operating under
the brand name of Morrison in the United Kingdom. The company has major emphasis over the
online grocery and in-store grocery retailing activities. This retail organization was established in
the year 1899 by William Morrison and it is currently has it’s headquarter located at Bradford,
West Yorkshire in England. The various products offered by the Morrison group include Food to
Go, Free From, Nutmeg clothing, and World Foods. The organization has standard food
manufacturing capabilities in bakery, meat, fruit, fish, flowers and vegetables. The meat products
of the supermarket store especially chicken, lamb, beef, pork along with eggs and milk are quite
popular across United Kingdom.
The supermarket store is able to serve its customers with the 500 stores located across England
with one online home delivery store. The core competitors of the Morrison supermarket PLC in
the United Kingdom include Tesco, Aldi, Asda and Sainbury’s. In addition to this, the various
subsidiaries of the supermarket include Firsdell Limited, Neercock Farming limited, Kiddicare
Properties limited etc. In the current report, the financial analysis of major accounting ratios of
the Morrison Supermarket PLC will be made for knowing the financial position and efficiency of
the company. Apart from this, the report will also include necessary recommendations and
strategies based on the analysis of the different types of ratios for improving the current level of
profitability, efficiency, liquidity and solvency of the business.
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Ratio Analysis: It is the quantitative analysis of the financial information included in the
financial statements of the company. Ratio analysis of the financial statement is used by the
companies for the evaluation of the various operational and the financial aspects and the
performance of the company (Bogdan, et. al., 2012). For determining the efficiency, profitability,
solvency and the liquidity positions the analyst is used to conduct the ratio analysis of the
company.
Here are the calculations of the few of the ratios of the Morrison’s supermarket plc to determine
the solvency, liquidity and the profitability ratios of the company:
Calculation of the financial ratios of the Morrison’s Supermarket plc:
Particulars 2018 2017 2016 Changes in
2018 (%)
Changes in
2017 (%)
Gross profits 633 604 617 4.80 -2.11
Cost of sales 16629 15713 15505 5.83 1.34
Total sales revenue 17262 16317 16122 5.79 1.21
Net profit after tax 311 305 222 1.97 37.39
Current assets 1278 1176 1316 8.67 -10.64
Current liabilities 3081 2864 2755 7.58 3.96
Closing Inventory 686 614 616 11.73 -0.32
Opening Inventory 614 616 658 -0.32 -6.38
Average inventory 650 615 637 5.69 -3.45
Quick assets 592 562 700 5.34 -19.71
Total Receivables 250 214 192 16.82 11.46
Trade payables 2981 2837 2518 5.08 12.67
Total assets 9663 9246 9307 4.51 -0.66
Capital employed 6582 6382 6552 3.13 -2.59
Source: Morrison Supermarket plc, 2018.annual report
Calculations of the various ratios in the company
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Particulars
201
8 2017 2016
Gross profit ratio ( Gross profits/ net sales)*100 3.67 3.70 3.83
Net profit ratio ( Net profit / net sales)*100 1.80 1.87 1.38
Asset Turnover ratio ( net sales / total assets)*100 1.79 1.76 1.73
Return on capital employed (Net operating profit/ capital employed) 4.73 4.78 3.39
Current ratio ( Current asset / current liabilities) 0.41 0.41 0.48
Quick ratio (Quick assets / Current liabilities) 0.19 0.20 0.25
Receivable turnover ratio (trade debtors/ total revenue)*100 5 5 4
Payable turnover ratio (Trade payable / COGS)*365 65 66 59
Inventory Turnover ratio (Average inventory / COGS)*365 14 14 15
Source: Morrison Supermarket plc, 2015.annual report
Gross profit ratio: It is the type of the profitability ratio which presents the relationship between
the total revenue generated by making the sales in the company and the gross profit earned by
the company. This ratio is known as the popular tool for evaluating the operational performance
of the company.
In the present case the gross profit of the company is on the fluctuating trend. The gross profit
and the sales revenue of the company is on the continuous growth. The gross profit ratio in the
year 2016 was 3.83% and in 2017 and 2018 was 3.70% and 3.67% (Burt and Garvie-Lok, 2013).
The gross profit of the company has decreased by 2.11% from year 2016 to 2017 and the same
has increased by 4.8% in year 2018.
Possible reason for the increase in the gross profit of the Morrison’s Supermarket in the year
2018 can be due to increase in the selling price of the company without any change in the cost of
sales of the company or due to the possible reduction in the cost of sales of the company.
Net profit ratios: It is the type of the ratio which is calculated in the company for calculating the
amount of profit earned by the company after deducting the cost and all the expenses incurred for
the production in the company. The net profit of the company is highest in the year 2017 of
1.87% possible reason of which can be recorded as the highest positive change in the net profit
ratio of the company by 37.39% in the year 2017 from 2016 (Drake and Fabozzi, 2012). The net
profit ratio of the 2018 was 1.80% and in 2016 was 1.38%. The net profit of Morrison’s
Supermarket has increased by 1.97% from 2017 in the year 2018. Possible reason for such
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increase can be due to positive increase in the sales revenue of the company and reduction in the
operating expenses of the company.
Asset turnover ratios: These are the efficiency ratio to calculate the ability of the asset to
generate the revenue in the company. In the other terms it can be explained as the percentage of
the revenue generated from the total assets of the company. In the current case the total assets are
in the decreasing trend from year 2016 to 2017 by 0.66% and then the total assets has increased
by 4.51% in the year 2018 from 2017 which results In the 1.79% ratio in the year 2018 and
1.76% and 1.73% in 2017 and 2016.
Return on capital employed: It is the profitable metrics used by the companies to calculate the
percentage of profit earned by the company from the capital employed invested in the company.
In the current case of Morrison’s Supermarket, the company is generating the revenue of 4.73%
from the capital employed in the year 2018 and 4.78% in the year 2017 and 3.39% in 2016.
Possible reason for the increase in the capital employed ratio of the company can be due positive
change in the capital employed of 3.13% in the year 2018 from 2017 (Gaur and Kesavan, 2015).
It can be considered that the company is making the continuous investments in the assets of the
company and also making the growth in the yearly net profits.
Current ratios: This ratio in the company represents the ability to pay the current liability of the
company at the when it becomes due. These are the ratios which represents the financial strength
and the ability of the company. In the case of the Morrison’s Supermarket the ratio is presenting
that from the 2016 to 2017 there is the increase in the short term debts of the company which
reduced the current ratio of the company from 0.48% in 2016 to 0.41% in the year 2017. There is
no change in the current ratio form year 2017 to 2018. Possible reason for the decrease in the
current ratio of the company in the year 2017 from 2016 can be due to increase in the current
liabilities of the company by 3.96% from year 2016.
Quick ratios: These are also the liquidity ratios of the company which represents the liquidity
position of the company. This ratio does not make the consideration of the current assets which
can’t be easily converted in the cash (Kabajeh, et. al., 2012). In the present case the Morrison’s
Supermarket the quick ratio represents the decreasing trend. The company has experienced the
highest quick ratio in the year 2016 at 0.85% and then 0.20 in the year 2017 and 0.19 in the year
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2018. Possible for the decrease in the quick ratio of the company can be due to the reduction in
the closing inventory of the company 0.32% in the year 2017 from 2016 and the same has
increased by 11.73% in the year 2018 from 2017.
Receivable turnover ratio: It is the activity ratio which is used by the company to calculate the
efficiency of the company he making the collection from the debtors of the company. Decline in
the given ratio of the company indicates the changes in the collection policy of the company
from their debtors. In the current case of the Morrison’s supermarket the receivable turnover
ratio of the company has increased from 2016 to 2017 from 4 days to 5 days. Possible reason of
which can be that the company is making t less efforts in collection of the funds from the debtor.
The debtors of the company are also increased by 16.82% in the year 2018 from 2017.
Payable turnover ratio: This ratio is also called as the creditor turnover ratio. This ratio
indicated the time period in which the company will make the payment to their creditors in the
market (Kirkham, 2012). The possible reason for the high and the low ratio of the company can
be due to the slow or the fast payment policy of the company to their creditors.
In the present case of the Morrison’s supermarket the creditor of the company is increased by
5.08% in the year 2018 from the year 2017 and the same is increased by 12.67% from 2016 to
2017. In the present scenario the payment policy of the company there had made the payment in
59 days to their creditor in the year 2016, in 66 days in 2017 and in 65 days in 2018.
Inventory turnover ratio: The inventory ratio is mainly used for examining the efficiency of
the business i.e. it analyzes how effectively inventory has been managed within the organization
on the basis of comparison of cost of goods sold with the average stock for a specific period
(Drake and Fabozzi, 2012). The inventory turnover period help in measuring that in how many
days inventory would be converted to potential sales during the period. Thus, the ratio show the
time duration for converting £ 1000 of average stock when there is £ 10000 effective sales of the
company.
In the present situation, the time duration for this ratio has reduced by 4.73% from 2016 to 2017
and 0.13% from 2017 to 2018. The possible reason for this could be a reduction of 3.45% in the
average inventory and a small rise in the total revenue by 1.21%.
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Key strategic decisions taken by the Morrison’s super market for the above financial
analysis:
Improves the liquidity:
In the current case of the Morrison supermarket, the liquidity position of the company is weak so
company should develop the strategy for making the improvement in the liquidity status of the
company (Martínez‐Sola, et. al., 2013). It is necessary because the company can make the
payment for their current liabilities as and when arise.
Focus on the improvement in the inventory turnover ratio: In the present case the inventory
turnover ratio of the company is also decreasing due to lack of the monitoring on the stock of the
company. High turnover ratio is always preferential in the companies. In the present case, the
inventory turnover ratio of the company has decreased from 15 days in 2016 to 14 days in the
2017 and 2018. Possible reason for this decline can be due to the employment of the incompetent
team in the organization. So the manager by increasing the interaction with the employees and
the suppliers can make the improvement in the inventory turnover ratio.
Focus on the improvement in the net profit ratio: In the current case it is seen that net profit
ratio of the company is slightly decreasing in the year 2018 from 2017. So, it is the core duty of
the management to adapt the policies for making the improvement in the sales structure and the
net profit of the company.
Focuses on the improvement in the capital employed ratio of the company: It is also noticed
that the return on capital employed of the company is also decreasing in the year 2018 from 2017
(Velnampy and Niresh, 2012). So it is the duty of the management to make the improvement in
the cost structure of the company for increasing the net profit of the company and thereby the
return on capital employed.
Recommendations for making the improvement in the present ratios of the company
Liquid ratios: In the case of the Morrison’s supermarket the company can make the
improvement in the current ratio of the by making the payment of the current debts of the
company. Another way for making the improvement in the current ratios of the company can be
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by taking the long term borrowing for making the current debts of the company as soon as
possible.
Net profit/ Gross profit ratio: If the company wants to make the improvement in the gross and
the net profit ratios of the company then they have to minimize the cost of production and
operating expenses and increase the sales of the company. The Morrison supermarket should
increase the sales revenue by offering the better quality of products to their customers with the
minimum cost of production in the company.
Asset turnover ratio: For making the improvement in the asset turnover ratios of the company,
the management can make the deep analysis that how the assets of the company can be bitterly
used for increasing the revenue of the company (Wu, et. al., 2012).
Return on capital employed: The Company can make use of the same methods and the
processes for making the improvement in the overall profitability of the company. This can
happen when the management of the company keeps the track record on the expenses of the
company and making the continuous efforts for increasing the revenue of the company.
Receivable and the payment turnover ratios: The Company can make improvement in the
receivable turnover ratio by offering the incentives and the other benefits to the debtors.
Continuous reminder for making the payments and the discount offers for making the early
payments can also induce the debtors of the company to make the early payments in the
company.
The payable turnover ratio of the company can be improved by establishing the outsource
payment systems in the company. The adoption of the automated payment systems in the
company also improves the payment relationship with the creditors.
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Conclusion
From the above report it can be concluded that ratio analysis is one of the important techniques
that are used by the management for measuring the liquidity, profitability and solvency of the
business. The current report provided a comprehensive analysis of the various important
accounting ratios such as net profit ration, current ratio etc. and appropriate recommendations
have been provided regarding how the different ratios can be improved for achieving long term
sustainability within the business in case of Morrison supermarket PLC. In addition to this, the
report also include four core strategic decision that are taken by management of the company on
the basis of the given financial ratio analysis.
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References
 Bogdan, S., Bareša, S. and Ivanović, S., 2012. Measuring liquidity on stock market: Impact on
liquidity ratio. Tourism and Hospitality Management, 18(2), pp.183-193.
 Burt, N.M. and Garvie-Lok, S., 2013. A new method of dentine microsampling of deciduous
teeth for stable isotope ratio analysis. Journal of Archaeological Science, 40(11), pp.3854-3864.
 Drake, P.P. and Fabozzi, F.J., 2012. Financial ratio analysis. Encyclopedia of Financial Models.
 Gaur, V. and Kesavan, S., 2015. The effects of firm size and sales growth rate on inventory
turnover performance in the US retail sector. In Retail Supply Chain Management (pp. 25-52).
Springer, Boston, MA.
 Kabajeh, M.A.M., Al Nuaimat, S.M.A. and Dahmash, F.N., 2012. The relationship between the
ROA, ROE and ROI ratios with Jordanian insurance public companies market share
prices. International Journal of Humanities and Social Science, 2(11), pp.115-120.
 Kirkham, R., 2012. Liquidity analysis using cash flow ratios and traditional ratios: The
telecommunications sector in Australia. Journal of New Business Ideas and Trends, 10(1), pp.1-
14.
 Martínez‐Sola, C., García‐Teruel, P.J. and Martínez‐Solano, P., 2013. Trade credit policy and
firm value. Accounting & Finance, 53(3), pp.791-808.
 Morrison Supermarket plc, 2015.annual report [Online]
https://www.morrisons-corporate.com/annual-report-2016/pdf/Morrisons_AR_2015_Web_Full.p
df [Accessed 21 February 2019].
 Morrison Supermarket plc, 2018.annual report [Online]
https://www.morrisons-corporate.com/annual-report-2018/static/downloads/
Morrisons_AR_2017_Web_Full.pdf [Accessed 21 February 2019].
 Velnampy, T. and Niresh, J.A., 2012. The relationship between capital structure and
profitability. Global Journal of Management and Business Research, 12(13).
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 Wu, W., Rui, O.M. and Wu, C., 2012. Trade credit, cash holdings, and financial deepening:
Evidence from a transitional economy. Journal of Banking & Finance, 36(11), pp.2868-2883.
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