Financial analysis using ratios between key values help investors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds it has deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option.
It shows the relationship between profit & investment e.g. return on investment, return on equity capital. Financial Ratios Can Measure Different Things.
The Net Profit to Capital Employed ratio mentioned above measures the success of a company in using funds available to it. There are ratios to measure the company’s:
Financial health
Operating performance
Cash flows and liquidity
Under each category, there are multiple ratios that measure different aspects, or fine tune the measurements. For example, different profitability ratios measure profit margins at different stages return on owners’ funds and effective tax burden.
Ratio analysis
– Ratios express a mathematical relationship between two quantities taken from financial statements.
– The study and interpretation of the relationships between various financial variables, by investors or lenders.
– A tool to conduct a quantitative analysis of information in a company’s financial statements.
– Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company.
– Ratio analysis is predominately used by proponents of fundamental analysis.
Methods of Ratio Analysis :
There are two methods of Ratio Analysis :
1. Time Series analysis
2. Cross-sectional analysis
Time- Series Ratio Analysis :
– Time-Series Ratio Anlysis evaluates performance over time.
– It allows to analyse trends over a number of years and to examine the way in which performance may have changed over time.
– For instance time series analysis can make by comparing any company’s performance of for two or more years i.e. 2007 and 2008.
Cross-sectional Ratio Analysis :
– Cross sectional Ratio Analysis allows for comparison with the industry average or with competitors at a single point in time.
– This comparison allows a judgement to be made about the firm’s position within the industry.
– For instance to make a comparison of any company’ performance against its rival (competitor) for the same year.
– e.g. Shall Company’s ratios are compared with British Petroleum company.(both are in same industry and same business).
Advantages of Ratios :
The advantages of Ratios are as follow :
– Simplifies Financial Statements.
– Facilitates Inter-Firm Comparison.
– Helps in Planning.
– Helps in Investment Decisions.
Limitations of Ratios :
Ratios have some limitations as well which are mentioned below !
– Limitations of Financial Statements
– Comparative Study Requires
– Ratio alone are not adequate
– Lack of adequate standards
– Limited uses of single ratios
– Personal Bias
Types of Financial Ratios :
There are different types of financial ratios used in carrying out financial analysis.
These financial ratios are mentioned below :
· Liquidity Ratios
· Activity Ratios
· Solvency Ratios
· Profitability Ratios
· Market Ratios
· Cash Flow Ratios
Defining Types of Financial Ratios :
Liquidity Ratios :
– Liquidity ratios assess company’s ability to pay off its short-terms debts obligations.
– Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
– A company’s ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment.
– Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern.
Activity Ratios :
– Activity ratios are used to assess the effectiveness of management towards utilization for generation of sales/revenue.
– Let us know how current and fixed assets are efficiently used by company to generate sales.
– Also analyze the account receivable, payables and inventory roles towards of sales, purchase and cost of goods sold.
– Determine how quickly account receivables are recovered.
– Enable us to know duration in which company pays its payables.
– Inventory conversion period is also calculated under the head of activity ratio.
Solvency Ratios :
· Solvency ratios are used to measure a company’s ability to meet long-term obligations.
– It provides a measurement of how likely a company will be to continue meeting its debt obligations.
– Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy.
– Measures the percentage of total assets provided by creditors or how much debt is supported by assets.
– Shows ability of the company to cover its interest expenses
– Solvency ratios tell about the ratio between equity and total assets.
– Company’s total assets are enough to meet its debt obligations
– These ratios also tell about ratio between debt and total assets.
– Also tell equity ratio in company
– And determine debt ratio in company.
Profitability Ratios :
– Measure the ability of profit generations in company.
– Profitability Ratios are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.
– They are used to measure the overall effectiveness of management to produce the profitability of the company.
– For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well.
– It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.
For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season.
Market Ratios :
· They are used to measure a company’s standing and position in the market.
· These are considered to be the most important ratios for shareholders.
· They are important for potential investors.
Cash Flow Ratios :
· Cash flow ratios are derived from cast flow statement.
· These are used to measure the three activities found in cash flow statement.
ASDA
ASDA launched an online retailer in 1998, but from the start had over estimated demand. It started off from a dedicated depot facility based in Croydon but was closed with a number of redundancies shortly after as sales were not as expected. It continued the online retailer service but copied the Tesco store based model instead.
Wal-Mart’s corporate stance is anti union, which is refelcted in the stance of Asda. In 2006 A planned five-day strike by Asda warehouse staff was been called off, unions have confirmed. The action had been due to begin on June 30 after thousands of workers voted for industrial action in a dispute over pay and bargaining rights. The decision followed prolonged negotiations between unions and the supermarket chain at the TUC. Asda was about to seek an injunction to block the action, claiming “irregularities” in the strike ballot. In 2006 Supermarket giant Asda said they were to offer staff up to two weeks unpaid leave to “go on a German jolly” during the 2006 World Cup tournament. Its 150,000 workers were to be able to take one or two weeks off in the month starting on 9 June. Requests dealt with on a first come, first served basis depending on staffing needs at individual outlets.
The first Act of The ASDA Story was set in the old Queen’s Theatre, Castleford, West Yorkshire in the early 60s. Its roots can be traced to two branches in twenties.
The Asquith family had a family business, a butcher’s shop in Knottingley, W. Yorkshire. The business was eventually expanded to seven butcher shops. The two sons of W.R. Asquith, Peter and Fred were actively involved in the family business and were later to become co founders of ASDA.
At the same period, in the 20s, a group of West Riding dairy farmers joined forces, as Hindell’s Dairy Farmers Ltd. These included the Stockdale family (A. Stockdale), and a subsidiary company, Craven Dairies Ltd, was formed.
Through a process of acquisition and diversification, a new public company was formed in 1949 Associated Dairies & Farm Stores Ltd. with Arthur Stockdale as Managing Director. During the 50s and early 60s Associated Dairies expanded the number of pork butchery shops and also created the fascia Craven Dairies for its cake shops and cafés. The son of Arthur Stockdale, Noel, met and struck up an immediate rapport with the Asquith brothers and so became the other co-founder of the future ASDA.
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ASDA was founded in 1965 by farmers from Yorkshire. The name is a contraction of Associated Dairies. For a short time in the 80s Asda Stores Ltd was a subsidiary of ASDA-MFI plc follwing a merger between the companies. Other companies in the group were Associated Dairies Ltd, the furnture retailer MFI and Allied Carpets. After the sale of MFI and Allied the company name changed to ASDA Group plc. The dairy division was sold to Northern Foods plc.
The company went through a troubled period in the early 90s, but was revived under the leadership of Archie Norman, who became a shadow cabinet Conservative MP. He was chairman of the company in 96-99. ASDA, which then owned 229 stores, was purchased by Wal-Mart of the USA, on July 26, 1999.
Following the takeover by Wal-Mart, several Asda-Wal Mart Supercentres have opened, creating some of the largest hypermarkets in the UK. The first of these stores opened at Patchway, near Bristol, in August 2000. At first, it was criticised for its scale and condemned as an eye sore, but the format has now become extremely popular. In November 2004 a refurbishment of the hypermarket was completed, addressing some of the complaints.
In March 2006, ASDA launched a format called ASDA Essentials in a former Co-op store in Northampton. With a focus on own brand products on a much smaller floorplate than ASDA’s mainstream stores, the Essentials will only stock branded products are perceived to be at the core of a family’s weekly shop. This is seen as ASDA’s response to the increasing strength of Tesco and Sainsbury in the convenience store sector. If the trial is a success, it will be rolled out nationally.
ASDA is expanding its range of services to include Financial Services sold in store and online. Products currently sold are Child Trust Funds and Credit Cards, Car Insurance Home Insurance, Travel Insurance, Life Insurance, Mortgage Life Insurance, Over 50s Life Cover, Pet Insurance. http://www.asdafinance.com
In 2006 Supermarket chain Asda took Brazilian beef off its shelves after claims it could have come from areas where foot-and-mouth disease is rife.
In 2006 Supermarket group Asda started selling property through stores. Shoppers were to be able to browse properties for sale via an in store computer terminal. People choosing to sell their homes through Asda will pay lower than average estate agency fees and receive a free Home Information Pack (HIP). The system will be trialled in 10 Asda stores in the Sunderland area during the summer but is planned to be rolled out across the UK by the end of the year.
Asda has sponsor techniques the name has been put on the WRU Asda Leagues: the lower leagues of the rugby system.
Morrison
Morrison is a mainly food and grocery – the weekly shop. Uniquely source and process most of the fresh food that we sell though own manufacturing facilities, giving us close control over provenance and quality; and have more people preparing more food in store than any other retailer. Every week nine million customers pass through our doors and 124,000 colleagues across the business work hard each day to deliver great service to them. With competitive prices and hundreds of special offers, we are proud to save our customers money every day.
As the ‘Food Specialist for Everyone’, they are different from their competitors. Their expertise helps them deliver fresher food, which is also great value. Being ‘closer to source’, they understand where food comes from; and they can talk with authority to their customers about the provenance and freshness of their food offer. It is one of the country’s largest supermarket chains, offering a range of goods including both branded and own label products aim is to provide all our customers with the very best value for money wherever they live and uniquely, we have always charged the same prices in every one of our large stores.
They view resource efficiency as integral to sustainability and delivering better value to our customers. They approach to CSR recognises both responsibility and opportunity, enabling us to make a difference in ways that are good for the environment and good for business.
They have made considerable progress in meeting our challenging targets. Carbon emissions have been reduced by 56% better than they planned; there’s much less waste going to landfill and they have cut packaging. They are also running their own farm, which is being used as a base for research projects looking at the sustainability of food supplies and the efficiency of agriculture. They research will provide benefits to their business and will also strengthen our relationships with the farming community.
Morrison’s Fresh Food Academy offers training and progression for all their staff, providing them with the opportunity to grow from shop floor to top floor and means they can deliver more knowledgeable service to their customers.
CSR is embedded into their operations and plans. They do not claim to have all the answers but aim to do all they can to make a real difference by being both practical and persistent.
Many of the issues they address are wide ranging, complex and sometimes very challenging. Solutions may develop over the long term and they can sometimes prove elusive for a variety of reasons, including cost effectiveness, practical application, or they lack direct benefits. However, many projects and initiatives have come to fruition successfully to deliver tangible results that are making a real difference.
They offer a number of useful services for your convenience, so you can save time and money while visiting them. To find out when your local store is open, visit our store finder, type in your postcode and you’ll find all the information you need.
Fill up at your convenience
Stop by their petrol station to fill up and enjoy many other services like gas, a car wash and snacks for the road.
Facilities for shoppers with disabilities
They offer lots of services to our shoppers with additional needs, including dedicated parking, wheelchairs, staff assistance, seating and induction loops.
Take a break at our café
If you fancy a relaxing bite to eat, their café serves freshly prepared meals to your table, from all-day breakfasts to hot puddings with custard as well as freshly ground coffee.
Your one-stop medicine counter
Get free advice on medicines and healthcare from their pharmacists – no appointment necessary – and why not have your prescriptions dispensed while you shop.
Print your memories in store
They offer quality photo processing in store, including digital and 1-hour photo printing services.
Latest price
Change
Currency
LSE code
277.50
-4.20
GBX
MRW
Last closing price 277.50 (23 Jul 2010 – 4:30pm )
Current share price information
Bid
277.50
Ask
277.80
Day high
286.00
Day low
277.00
Year high
305.00
Year low
257.60
Day open
280.20
Day volume
10,130,828
On 11th March 2010 the Board comprised a Chairman, four Executive Directors and six Non-Executive Directors. With the retirement of the Chairman and the planned recruitment of an additional Non-Executive Director, at least half of the Board will ultimately comprise of independent Non-Executive Directors.
The Board is responsible for setting and approving the strategy and key policies of the Group, and for monitoring the progress towards achieving these objectives. It monitors financial performance, critical operational issues and risks. The Board also approves all circulars, listing particulars, resolutions and correspondence to the shareholders including the Annual Report, Half yearly financial report and Interim management statements. The “Formal Schedule of Matters Reserved for the Board” can be found in the Corporate Governance Compliance Statement.
Committees of the Main Board
The principal committees of the Board are the Audit, Remuneration, Nomination and Corporate Compliance and Responsibility (CCR) Committees. The composition and terms of reference of each of these Committees are set out in the Corporate Governance Compliance Statement.
Internal control
The Board is responsible for setting a system of internal control for the Group and reviewing its effectiveness. The control system is intended to manage rather than eliminate the risk of not meeting the Group’s strategic objectives. Any such system can only provide reasonable, not absolute, assurance against material misstatement or loss. The Board is satisfied that a continual process for identifying, evaluating and managing significant risks has been in place for the financial year to 31 January 2010 and remains in place.
Shareholder relations
The CEO and the Group Finance Director meet regularly with analysts and institutional shareholders. The Investor Relations Director also maintains a programme of work that reports to the Board the requirements and information needs of institutional and major investors. This is part of the regular contact that the Group maintains with its institutional shareholders. All Directors, Executive and Non-Executive attend the AGM. The Chairs of the Audit, Nomination, Remuneration and CCR Committees are available to answer any questions. Additionally, the Group’s brokers sought independent feedback from investors following the Annual and Interim results in 2009. This feedback was reported to the Board.
Liquidity Ratios (ASDA) :
Ratio Name
Answer
Result
Reason
2009
2008
Current Ratio
0.526
0.491
Favourable
C. Assets increased more in proportion to
C. liabilities
Quick Ratio
0.282
0.252
Favourable
More C. Assets in proportion to C. liabilities
Absolute Quick Ratio
0.111
0.345
Unfavourable
Stock and debtors increased,
C. Assets decreased
Working Capital ratio
(958)
(943 )
Unfavourable
Lower proportion of Assets to Liabilities
W.C. to C. Liabilities Ratio
(0.473)
( 0.508 )
Favourable
Assets increased
Activity Ratios (ASDA):
Ratio Name
Answer
Result
Reason
2009
2008
Current Asset Turnover Ratio
13.628
14.251
Favourable
Assets increased in 2009
Sales to Cash Ratio
44.428
67.900
Favourable
Cash increased in 2009
Fixed Asset Turnover Ratio
2.029
1.928
Favourable
The proportion of sales to fixed assets was a bit higher
W. Capital Turnover Ratio
(15.164)
(13.752)
Unfavourable
Less working capital in 2009
Inventory Turnover Ratio
29.091
25.963
Favourable
CGS increased in 2009
A. Receivable Turnover Ratio :
65.441
58.418
Favourable
More sales in 2009
A. Payable Turnover Ratio
7.101
7.237
Unfavourable
A. Payable increased in 2009
Average Collection Period Ratio
5.501
6.162
Favourable
Higher A.Receivable turnover in 2009
Average Payment Period Ratio
50.704
49.792
Unfavourable
A.Payable decreased in 2009
Solvency Ratios (ASDA):
Ratio Name
Answer
Result
Reason
2009
2008
Debt Ratio
0.450
0.426
Unfavourable
Total Debt increased in 2009
Equity Ratio
0.306
0.573
Favourable
T. Equity and T. Assets increased
Debt to Equity Ratio
1.470
0.744
Unfavourable
Total Equity decreased
Debt Income Ratio
3.656
2.536
Unfavourable
Long term debt increased, net income decreased
Profitability Ratios (ASDA):
Ratio Name
Answer
Result
Reason
2009
2008
Gross Profit Ratio
6.284
6.307
Unfavourable
Lower gross profit in proportion to sales in 2009
Net Profit Ratio
3.166
4.271
Unfavourable
Lower net income in relation to sales in 2009
Return on Equity Ratio
18.253
12.654
Favourable
Higher proportion of net profit to total equity
Return of Total Assets Ratio
5.592
7.255
Unfavourable
Lower net profit in proportion to total assets
Return on Investment Ratio
7.416
9.579
Unfavourable
Lower return on investment
Morrison:
Liquidity Ratio
Ratio Name
Year
2008
Year
2009
Result
Reason
Current Ratio
Quick Ratio
Absolute Quick Ratio
Working Capital
0.48
0.22
0.32
– 947
0.52
0.30
0.42
– 958
Favourable
Favourable
Favourable
Favourable
Cash increased while liability decrease
Cash increased while liability decrease
Cash increased while liability decrease
Cash increased while liability decrease
Reason
Liability increased while cash decrease
Cash increased while liability decrease
Cash increased while liability decrease
Cash increased while liability decrease
Reason
Liability increased while cash decrease
Liability increased while cash decrease
Liability increased while cash decrease
Activity Ratio
Ratio Name
Current Asset Turnover Ratio
Fixed Asset Turnover Ratio
Working Capital Ratio
Inventory Turnover Ratio
Solvency Ratio
Ratio Name
Debt Ratio
Equity Ratio
Debt to equity Ratio
Year
14.31
1.92
13.6
27.4
Year
0.42
0.57
0.74
Year
13.62
2.0
15.1
28
Year
0.45
0.54
0.81
Result
Unfavourable
Favourable
Favourable
Favourable
Result
Unfavourable
Unfavourable
Unfavourable
Profitability Ratio
Ratio Name
Gross Profit Ratio
Operating Profit Ratio
Net Profit Ratio
Operating Ratio
Year
6.30 %
4.7 %
4.2 %
95.7 %
Year
6.28 %
4.6 %
3.1 %
95.6 %
Result
Unfavourable
Unfavourable
Unfavourable
Favourable
Reason
Liability increased while cash decrease
Liability increased while cash decrease
Liability increased while cash decrease
Cash increased while liability decrease
Market Ratio
Earning Per Share
Dividend Pay out Ratio
Cash flow Ratios
Cash flow Operation to Net Income
Cash flow from investing to Operation & Financing
Year
20.7
0.23
Year
1.04
0.25
Year
17.39
0.33
Year
1.71
0.75
Result
Unfavourable
Favourable
Result
Favourable
Favourable
Reason
Liability increased while cash decrease
Cash increased while liability decrease
Reason
Business has excess cash
Business has excess cash
Cash flow from Sales to Total Sales
Cash flow to Long Term Debt
Operations Cash flow to Current Liabilities
Cash Dividend Coverage Ratio
0.044
0.90
0.31
120.6
0.053
0.86
0.38
136.2
Business has excess cash
Business has Cash flow Problem
Business has excess cash
Business has excess cash
Regression Line:
Year
(Sales)
X
(Asda)
y
(Morrison)
xy
(x)^2
(y)^2
Y2007
14856
12115
179980440
220700736
146773225
Y2008
12969
12462
161619678
168194961
155301444
Y2009
14528
12969
188413632
211062784
168194961
Y2010
15180
14528
220535040
230432400
211062784
=
57533
=
52074
=
750548790
=
830390881
=
681332414
B = 4 (750548790) – (57533) (52074)
4 (830390881) – (57533)^2
B = 3002195160 – 2995973442
3321563524 – 3310046089
B = 6221718
11517435
B = 0.54
A = Y – 0.54X
A = 18145.75 – 0.54 X
A = 18145.75 – (0.54) (57533)
A = 18145.75 – 31067.82
A = – 12922.1
Y = – 12922.1 + 0.54 X
Correlation & Co-efficient of Correlation:
R = 4(750548790 ) – (57533) (52074)
[4(830390881) – (57533)^2 ] [ 4 (681332414) – (52074)^2
R = 3002195160 – 2995973442
[ 3321563524 – 3310046089 ] [2725329656 – 2711701476
R = 3002195160
( 11517435 ) (13628180)
R = 3002195160
156961677318300
Time Series Analysis:
ASDA :
Year
Sale
3 point total
3 point moving average
Variation
2006
14756
2007
14856
42581
14193.67
662.33
2008
12969
42353
14117.67
-1148.67
2009
14528
42677
14225.67
302.33
2010
15180
Morrison
Year
Sale
3 point total
3 point moving average
Variation
2006
12115
2007
12462
37546
12515.33
– 53.33
2008
12969
39959
13319.66
– 350.66
2009
14528
42907
14302.33
225.67
2010
15410
Task: 3
Table presents annual net income and net cash flow figures for three projects A, B & C. Initial investment for all three projects is same £98,500.
Year
Project A
Project B
Project C
NI
NCF
NI
NCF
NI
NCF
0
–
(98500)
(98500)
(98500)
1
7500
24750
16450
45000
24500
44300
2
95000
31000
17650
52000
30500
39200
3
14750
34000
17950
59250
19000
39000
4
21250
40250
2400
5000
13000
31250
5
24950
44500
–
–
5000
24200
(1) Calculate ARR (Accounting Rate of Return) by selecting the required rate of return.
(a)Project A
(b)Project B
(c)Project C
(2) Calculating payback periods for A, B & C projects.
Solution:
(a) Project A
Year
Cash flow
Net Cash flow
0
(98500)
(98500)
1
24750
(73750)
2
31000
(42750)
3
34000
(8750)
4
40250
31500
5
44500
76000
Pay back Period project A = 3.22 year
(b) Project B
Year
Cash flow
Net Cash flow
0
(98500)
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