1.Financial Analysis:
Profitability Ratio:
The profitability ratio measures the profit deriving capacity of any business. This ratio assesses the overall performance of the business indicating the extent to which the business makes profit (Scott 2015).
The gross profit ratio reflects the percentage of percentage of profit derived after paying off the cost of goods sold. The gross profit ratio reported by Tesco stood 5.27% while in 2017 the ratio stood 5.19%. The net profit margin consequently stood 0.24% and -0.10 respectively in 2016 and 2017. Even though the business has made significant progress however it continues to face challenging operating environment. Financial factors such as business rates in UK have been a burden with the company paying biggest amount of tax. On the other hand, the gross profit margin for Morrison reported in 2016 stood 3.83% while in 2017 the gross profit margin went down by 0.13% to stand 3.70%.
Primarily the market volatility of several market forces with highly competitive retail market have contributed to falling gross profit (Schaltegger and Burritt 2017). The net profit though in 2017 stood 1.87% a rise from the previous year performance of 1.38%. The return on equity for Tesco Stood 1.50% in 2016 while in 2017 it declined to -0.84%. The plunging profits have immensely contributed to the decline in return on equity. Morrison has reported a good year of profit and dividend growth with the return on equity standing 5.91% and 7.51% respectively in 2016 and 2017.
The operating profit ratio represents the margin measures the business pricing strategy and operating efficiency. The ratio act as the measurement for determining the proportion of revenue that is leftover by the company following the payment of variable costs of production (Williams 2014). As evident the operating profit margin for Tesco during 2016 stood 2.0% while in the subsequent year increased to 1.8%. The primary financial factor that contributed to the rise in operating profit margin is because of the increase in the exceptional items by 30% for the company.
The operating profit prior to exceptional items have increased to s £1,280m, up 29.9% from the figures reported in the previous year. Morrison reported an increasing operating profit margin of 1.9% and 2.9% respectively. The operating profit have increased since the impairment made in 2016 with individual store performance has varied however strong underlying profit of £432 million has resulted an increase in operating profit of Morrison.
Under the profitability ratio the return on assets has been computed to indicate the extent of profit generated by any business from its total assets to generate earnings from the assets. The return on asset for Tesco in 2016 and 2017 stood 1.23 and 1.22 respectively. In line with the competitive business environment in which Morrison operates and changes in the macro environment the return on asset represents stable trend with Tesco making an appropriate use of assets to generated profit (Dichev 2017). Morrison on the other hand reported a return on assets of 1.73 in the year 2016 which subsequently declined to 1.57% reflecting that the company is not appropriately generating accessible and increasing amount of returns from its assets.
Liquidity ratios:
The liquidity ratio measures the organizations ability in paying off its debt obligations and along with the margin of safety through the computation of current, quick and cash ratio (Warren and Jones 2018). The current ratio for the Tesco Plc during the year 2016 stood 0.82 while in the following year it marginally declined to 0.80. Morrison on the other hand reported the current ratio of 0.48 and 0.41 in 2016 and 2017 respectively.
Both Tesco and Morrison has reported a marginally lower current ratio. However, during the accounting period Tesco has met its financial obligations by paying off its short term debt. Factors such as non-cash adjustment that is driven by variations in the market valuation of credit and debit risk creates an impact on repayment of short-term debt (Barker and Penman 2016). Morrison reported a relatively lower current ratio however with strong net profit reported the company has been struggling to meet its short term liabilities that have fallen due in the present accounting year.
Quick ratio represents the measurement of how well a company is successful in meeting its short term debt obligation (Henderson et al. 2015). As evident from the quick ratio of Tesco the company reported a quick ratio of 0.25 in the year 2016 while in the succeeding year of 2017 the quick ratio marginally increased to 0.28. This reflects an increase in the current assets with company is in better position of meeting its short term financial liabilities. Morrison on the hand reported a quick ratio of 0.18 and 0.11. The current ratio and quick ratio for 2017 has been on the declining trend reflecting the Morrison might not be sufficiently meeting its short term debt.
Cash ratio represents the ratio where the company’s total amount of cash and cash equivalent in respect of its current liabilities (Carlon et al. 2015). The cash ratio represents the firm’s ability in meeting its liabilities. As evident the cash ratio for Tesco during the year 2016 stood 0.17 while in the subsequent year of 2017 the cash ratio stood 0.20. Therefore, the rise in cash ratio is primarily because of the increase in the cash and cash equivalent with total amount of cash standing 3821 for the year 2017. While Morrison reported a cash ratio of 0.18 and 0.11 reflecting a fall in the ratio. This is primarily because of the repayment of bank overdraft and offset of current liabilities in the financial year of 2017.
Capital structure Ratio:
The capital structure ratio determines the how the business capitals its whole business operations and growth by making use of the different sources of funds.
Evidently under the capital structure ratio the debt ratio is computed to measure the degree of company’s leverage (Schaltegger and Burritt 2017). The debt ratio for Tesco stood 1.24 in the year 2016 while in the succeeding financial year of 2017 the debt ratio declined to 1.17. The reduction in the debt is primarily because of the financial factors such as the increase in the retail operating cash flow of £2.3billion with 9.1% from the figures of last year. This led to reduction in net debt of Tesco to £3.7 bn. The debt ratio of Morrison in 2016 stood 1.68 while in the year 2017 it stood 2.00 representing an increase in gross debt and interest charge.
(Source: As Created by Author)
The equity ratio for Tesco for the year 2016 stood 0.20 while in 2017 it stood 0.14. The fall in the equity ratio Tesco is primarily because of the loss from the discontinued processes that was attributable to the equity holders of the parental business (Freeman et al. 2017). Concerning the equity ratio of Morrison, the ratio stood 0.40 and 0.39 relatively during the year 2016 and 2017. The stable equity ratio of Morrison is primarily attributed to the balance created in its capital structure by managing the outstanding shares.
The debt-equity ratio for Tesco stood 4.10 and 6.12 during 2016 and 2017 respectively. The increasing equity of Tesco is significantly influenced by the virtual of holding 20% equity interest in the associated group (Macve 2015). The debt equity ratio stands 1.48 and 1.28 for 2016 and 2017 respectively for Morrison. Though the company aims to create a balance between the debt and equity however the equity is identified and transferred to the profit and loss in the period. The fall in the debt ratio is primarily attributed to the higher amount of debt payoff reported by the firm.
The gearing ratio refers to the firm’s long debt in comparison to the equity capital. The gearing ratio for Tesco stood 1.57 in 2016 while in 2017 it stood 1.87. For Morrison the gearing ratio stood 0.53 and 0.43 relatively in 2016 and 2017. Evidently throughout the financial year Morrison has complied with the gearing and fixed charge covenants to its credit facility. Tesco reported gearing ratio of 1.57 and 1.87 representing a higher level of long term debt in comparison to the capital employed.
Efficiency ratio:
The efficiency ratio determines the capability of the firm in u sing the assets and liabilities internally (Hoyle, Schaefer and Doupnik 2015). Significantly, the accounts receivable ratio for Tesco in 2016 and 2017 stood 38.36 and 37.91 respectively.
On the other hand, the asset turnover ratio for Tesco stood 1.23 while in 2017 it stood 1.22 representing a stable trend with appropriate use of asset is made in deriving the sales revenue (Cañibano 2017). The asset turnover for Morrison stood 1.73 and 1.57 respectively reflecting a fall in effective of asset. The inventory turnover for Tesco stood 1.23 and 1.22 in 2016 and 2017 respectively. While Morrison reported an inventory turnover ratio of 19.15 and 22.41 respectively. The working capital ratio for the Morrison reported during the year 2016 stood 0.48 and 0.41 respectively. Tesco reported a stable working capital ratio of 0.82 and 0.80 respectively for the year 2016 and 2017.
2.Sustainability Reporting Disclosures:
Tesco refocuses on its environmental strategy on five important environmental strategies such as the climate, freshwater, marine, forests and sustainable agriculture. The sustainability report provides that Tesco has placed its concentration on embedding the sustainable practices in its business and supply chain.
Tesco has been constantly focussed on reducing the carbon concentration of its supplies and delivery centres and it is making development towards the 2020 target of halving the carbon emission per square foot of its supplies and delivery centres with 25% decrease in carbon emission per unit of goods that is distributed. Considering the key achievement of the Tesco during the last financial year has partnered with Maritime Stewardship council (MSC) (Tesco.ie 2018). The label of MSC enables Tesco customers to easily recognize the fish which meet the highest standards of sustainability.
Additionally, Tesco has formed a devoted team of contractor indulgence and Tesco network of suppliers which is an online public community of supplier (Watts and Zuo 2016). Creation of such team can be regarded as the vital steps in creating a closer channels of communication among the suppliers and producers across the world. this provides This provides Tesco with the opportunity of sharing ideas, being innovative and driving sustainability both in terms of supply chain and ultimately in its products that is enjoyed by its customers.
Tesco has continued to maintain the utmost criterions of integrity and belief in its business activities (Tesco.ie 2018). The tactical drivers are considered to generate a sustainable worth for its shareholders and stakeholders in its industry. The sustainability reporting disclosure of Tesco provides that the company is also dedicated to making an accelerated progress in the direction of UN sustainable Development Goals to cut up the per capita global waste of food by 2030. Overall, Tesco has duly followed the sustainable reporting disclosure by remaining committed to its supplies, producers, shareholders and customers.
WM Morrison is underpinned by the gratified legacy that is driven by the strong philosophies with the superiority, value and truthfulness in the execution of the business policy. The company has the vision of being the food expert for its customers and acknowledges the wider communal and conservational accountabilities (Ethicalconsumer.org 2018). The sustainability reporting disclosure of WM Morrison provides that the company is committed to investing in the local and sustainable sourcing and allowing its consumers to eat healthy, while it makes sure that a wide range of quality, fresh and reasonable foods is provided.
The sustainability reporting disclosure provides that the BioEthanol is derived from wide range of agricultural produce together with the forest residue, sugar cane with entirely renewable and sustainable fuel source (Barth 2015). A limitation is found in the packaging of WM Morrison where the company packs the product to essentially protect and arrive the products without damage however more sustainable approach is required to reduce the non-renewable resource that is used in packaging.
A large number of its products are pack with polythene and cardboard which can be regarded as the highest contributors of waste produced from WM Morrison stores. An integrated approach is required to avert the unused through sustainable waste management strategy for optimising, reducing and recycling the waste (Morrisons-corporate.com 2018). Therefore, the sustainability reporting disclosure provides that Tesco has adopted more integrated approach towards carbon reduction while WM Morrison needs to place greater emphasis on promoting integrated sustainable practices.
Conclusion:
An overall conclusion can be drawn by stating that though the net profit of Tesco has declined however the overall financial performance of the company has been better than Morrison. The consumer retail market is presently volatile with changing customer taste and preference makes it difficult for both Tesco and Morrison. Conclusively, the stable equity ratio of Morrison is primarily attributed to the balance that is created in capital structure by administering the outstanding shares. While Tesco reported a lower equity ratio primarily because of the loss from the discontinued operations that was attributable to the equity holders of the parent company. The overall sustainability disclosure of Tesco is comparatively better than Morrison as the company has undertaken initiatives towards environmental commitment.
Jack Cohen the son of Jewish migrants from Poland was the founder of Tesco in 1919 when they commenced selling war surplus groceries from the Well Street Market. The brand of Tesco initially appeared in the year 1924. The first store of Tesco was first opened during the year 1931 in September at Middlesex (Tesco plc 2018). The company was first floated on the London stock exchange during the year 1947 as the Tesco Stores Holding Limited. Concerning the market and products of Tesco, it is multinational grocery and general merchandise retailer having its headquarter in Welwyn Garden City UK.
In terms of profit Tesco is regarded as the third largest retailer in the world market and ninth largest in the world in terms of the revenue. Tesco market its products in 12 countries throughout the Asian and European market. Tesco is regarded as the leader in grocery market in UK. Concerning the operations Tesco purchases a wide range of goods and services, covering everything from the marketing to haulage and consumables (Tesco plc 2018). The UK operations of Tesco ranges from Tesco superstore, Tesco express, One stop etc. Tesco extra store are generally larger because of the out of town hypermarkets that stocks around all of the products of Tesco. Concerning the trading history of the company it can be stated that current share price figures suggest a reasonable price of 487p. Particularly it reflects that Tesco was trading at the historic price earnings of 25p. Presently the outlook of Tesco appears overcast though the revenue of company continues to expand however the profit margins have declined. It is difficult for Tesco to return to 487p.
On the other hand, Morrison Plc was founded in the year 1899 by William Morrison who initially commenced the business as the egg and butter merchant in Bradford England operating under the name of WM Morrison Ltd. His son in the year 1952 overtook from William Morrison and became the first store that had price displayed on the products (Morrisons-corporate.com 2018). During the year 1967 the company became the listed public on the London Stock Exchange. WM Supermarkets. Morrison Supermarkets Plc is regarded as the fourth largest chain of supermarkets in UK. Concerning the market share of Morrison Plc in the middle part of 2015 the company was still regarded as the big four supermarkets having a market share of 11% which though marginally declined by 0.3 in 2014.
Not like other supermarkets, Morrison manufacture a substantial amount of their own food products at 16 sites in the UK. Morrison keeps a thousand of lines products that are sold as their own brand goods ranging from food and drink. Concerning the present operations of Morrison, it has around 498 superstores in UK. The superstore is largely located in English Midlands and North of England. Morrison Supermarkets year on year growth rate has been negative over the last five years. However, the current trading background suggest that the average earnings has gone above average with one year earnings growth exceeding yearly average of 58.2% against the -25.3%.
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