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Financial evaluation is the process of evaluating the performance of the organisation in order to evaluate their strength and weaknesses. The aim of the report is to evaluate the public quoted company from the stance of a potential investor. For this purpose of evaluating the aim of the paper, WM Morrison is selected from the FAME database. The financial performance of the organisation is analysed in comparison to its competitor. For this purpose, ratio analysis is used along with the presentation of use and limitation of ratios. Moreover, the risk and opportunities for faced by Morrison is also described in this paper.
It is noted that profitability ratio is the measure of productivity through which the execution of the association is evaluated. With the assistance of this considered ratio, the capacity of the administration management convert sales into profit and also income is resolved. At the end of the day, it is the method for dissecting the capacity of the business to create incomes in contrast with the costs and other expenditure that happened in the fiscal period. In addition, some of the ratios that are viewed as productivity proportions incorporate ROCE, GP, net income margin and operating profit (Drake & Fabozzi, 2012).
It is noted that the gross profit margin is the profitability ratio through which the gross margin of the business is compared with its net sales. Moreover, it measures the extent to which organisation can offer its stock or merchandise. In addition, higher ratio implies that the organisation is offering their stock at higher cost, while, lower proportion implies that the organisation is offering their stock at lower cost. In addition, high gross profit margin proportion implies that the business would have more cash to pay their operating costs. The main limitation associated with the use of this ratio is that it does not involve all the costs or expenses. The calculation of this ratio only includes production cost and does involve other expenses such as selling, administration and others (Gibson, 2008).
Operating profit margin is the productivity ratio which measures the remaining income after payments of all variable and operating costs. Moreover, this considered ratio decides the income that is accessible with a specific end goal to take care of non-operating costs, for example, interest expense. In addition, this proportion is utilised by both lenders and financial experts since it is the method for examining the strength and productivity of the business operations. The limitation of operating profit margin ratio is that it only provides a broader picture of the profitability of the business instead of drilling down into explicit costs that are incurred. Therefore, it is essential to make use of this ratio together with other profit margin ratios (Fridson & Alvarez, 2011).
It is found that return on capital employed is the profitability proportion with the assistance of which the capacity and productivity of the business to earn profits from the capital employed is measured. Moreover, this proportion tells financial specialists that much profit is generated from the capital employed. It is viewed as the long haul productivity proportion since it shows the adequacy of the performance of benefits by considering long haul financing. The limitation of the use of ROCE is that it does not consider depreciation and amortisation of the capital employed. Moreover, another limitation is that this ratio analyses return depending on the book value of assets (Chandra, 2008).
It is noted that a liquidity ratio is an ideal approach to quantify the limit of the association to change rapidly of its assets into whatever other resources and pay their fleeting responsibility due on time. Moreover, this is the basic estimation which incorporates organising and controlling the current liabilities and assets. The liquidity proportion examination of an organisation must be done with a particular final objective to analysing the association`s cash related position. The liquidity ratio entails quick ratio and current ratio and others (Fabozzi & Peterson, 2003).
It is found that the current ratio measures the capacity of the association to pay their current liabilities by making utilisation of current assets. This shows the organisation has constrained time to raise their assets with the goal that liabilities can be paid easily. With the assistance of this proportion, the lenders and financial experts can decide the liquidity of the association and the amount to which current liabilities can be paid. However, a higher current proportion is ideal as compared to lower current proportion as it verifies that the organisation can make current debt payments effectively. The main limitation of use of current ratio is that it focuses on the quantity of the current assets instead of quality. It does not provide sufficient and precise knowledge regarding the financial position and liquidity of the business (Needles & Powers, 2010).
The quick ratio is the liquidity ratio that measures the capability of the organisation to make use of their cash or assets can be converted into cash instantly in order to cover current liabilities. This ratio helps the investors and creditors in analysing the fact that whether the company would be able to convert their quick assets into cash within ninety days or not. The main limitation of the ratio is that it does not show the liquidity position of the companies that possess higher inventory and relies on their inventory to meet their short-term debts (Gibson, 2012).
It is noted that solvency is the financial ratio that aids in deciding the capacity of the association to meet their obligations and their debts in a more accurate manner. Moreover, with the assistance of this proportion, the administration can confirm that whether the income is sufficiently adequate to meet their short and long-term liabilities. Furthermore, the lower the solvency proportion, the higher is the likelihood that organisation would default in meeting their debt commitments, while, the higher the solvency proportion, the higher the likelihood that organisation would meet its debts obligation. The normal dissolvability proportions incorporate debt to asset proportion and debt to equity proportion (Peterson, et al., 2004).
Gearing ratio is the money related metric that contrasts the equity of proprietor with acquired assets. Moreover, it quantifies the financial point of interest through which the degree of funding the exercises of the business by utilising the creditors funds. In addition, this proportion additionally decides the budgetary risk that is connected with the business in light of the fact that excessive liabilities can turn into the causes for monetary troubles. In addition, high gearing proportion implies high extent of the obligation to value and low gearing proportion implies low extent of the obligation to value. Additionally, a business that has high adapting proportion demonstrates expanded vulnerability to the decline. This is because of the way that association kept on adjusting its obligation regardless of the sales. The main limitation of gearing ratio is that there is not set value or limit of the gearing ratio so that company can decide about the suitable ratio by making use of other companies operating in the same industry (Tracy, 2012).
It is found that the interest cover is the monetary proportion with the ability of which the capacity of the association to pay interest amount on the unpaid debt is analysed. Moreover, this proportion is utilised by financial specialists, creditors, and moneylenders keeping in mind the end goal to manage the risk which is connected with the offer of assets. However, high-interest cover demonstrates that the business is proficient to pay their interest cost, while, low-interest cover shows that there is a chance that association does not be able to make credit payments. Moreover, the limitation of interest cover ratio is that it is very variable in two terms that are when measuring companies in the same industry or different industry (Rist & Pizzica, 2014).
In order to compare the performance of Morrison with one of its competitor that is Sainsbury, different ratios are calculated and analysed. These ratios are presented below along with interpretation and comparison:
Gross Profit Margin
From the above table, it is noted that the gross profit margin of Morrison is decreasing by 1.54% as compared to previous year. This demonstrates that their financial performance in 2015 has weakened due to an extensive decline in its gross profit. On the other hand, the gross profit margin of Sainsbury also depicts a decreasing trend by 0.71% that means they are also not able to meet their set targets. However, by comparing both the organisations, it is evaluated that Sainsbury is performing better than Morrison because their gross profit margin ratio in 2015 is higher. Therefore, Morrison is suggested to focus on their expenses as their gross profit is reducing extensively due to which their ratio is also declining.
Operating Profit Margin
With the help of the ratios provided above, it is observed that Morrison is going through financial distress because their operating profit margin ratio is in negative. The company has faced operating loss in both the years and their loss has increased massively in 2015. Moreover, their revenue has also declined in 2015 which demonstrates that performance of Morrison in terms of sales and cost is deteriorating. While on the other hand, the operating profit margin ratio of Sainsbury has also declined in 2015 but in comparison to Morrison they are performing much better because they have a positive ratio in both the years. There is a difference in the ratio because of the wide difference in the operating profit of the companies.
Operating Profit/Interest Payable
It is evaluated from the interest cover provided in the table that financial performance of Morrison is deteriorating extensively as the ratio is in negative and has increased from 2014 to 2015. While on the other hand, the interest cover ratio of Sainsbury has also declined in 2015 but in comparison to Morrison, they are performing well due to the fact that the interest cover is in positive. However, the major cause behind the difference in the performance of the two organisations is that the operating profit of Morrison has reduced massively which demonstrates that they are not able to maintain their cost. This inability of the Morrison has resulted in operating loss showing they are not able to make interest payments effectively and going in financial distress.
Current Assets/Current Liabilities
It is noticed from the calculations provided above that Morrison is maintaining a stable pace in terms of liquidity. The current ratio above is maintained at a constant level that is 0.5 which means that Morrison possesses enough assets that can be converted into cash easily to make short-term debt payments. While, on the other hand, Sainsbury has also improved its liquidity position by decreasing their current liabilities. However, in terms of current ratio, both Sainsbury and Morrison are strong competitors as they both have adequate assets to meet their current liabilities. This means that both the organisations can deal with the problem of liquidity successfully.
Quick Assets/Current Liabilities
It is noticed from the above table that quick ratio of Morrison has increased in one year which is the indication of good financial position in terms of liquidity. This growth demonstrates that the ability of the Morrison to convert their assets quickly into cash to meet short-term obligation has improved. Moreover, in comparison to Sainsbury, Morrison is performing well due to the fact that they have a higher quick ratio. This means that Morrison would be able to meet their short-term liabilities conveniently as compared to Sainsbury. There is a difference between quick ratios of both the organisations because the current liabilities of Morrison are lower which can be met effectively through quick assets as compared to Sainsbury.
With the help of above table, it has been analysed that the gearing ratio of Morrison has increased significantly from 2014 to 2015 which is not a good indication of the financial performance. The increase has taken place due to the decrease in its level of equity which demonstrates that the ability of the company to make payment for their debts from the equity has declined. This means that Morrison has become riskier as their gearing ratio has increased. Moreover, in the gearing ratio of Sainsbury is lower than Morrison in 2015 which demonstrates the better financial performance of Sainsbury. This is because Sainsbury has been able to control their debt and have lower debts as compared to Morrison.
Return on Capital Employed
Operating Profit/Share Capital + Reserves
It is noticed from the above table that the return on capital employed of the Morrison has reduced extensively because of the wide decrease in their operating profit. The ratio indicates that the company would not able to earn stable operating profit from the capital employed. However, in comparison to Sainsbury, Morrison is not in good financial position because Sainsbury is having positive ROCE. Moreover, the operating profit of Sainsbury is higher than Morrison which demonstrates that they are earning more return on capital employed.
It is noted that there are some possible opportunities that ought to consider by the top officials of Morrison in order to attain their strategic goals and target in a consistent manner. Moreover, some of the most imperative opportunities for Morrison are discussed below:
It is noticed that these days there is a rapid increase in the demand for an organic product in all over the world that is quite encouraging from the prospect of Morrison because they can get the maximum benefit by target the huge audience in all over the world. However, it is imperative from the prospect of Morrison to consider this opportunity quite seriously for the reason that it would help them to maximise their profit in a more proficient manner (Wahlen, et al., 2010).
It is vital from the prospect of Morrison to expand their business operations internationally for the reason that it would assist them to grasp the maximum market share in a more accurate way. Moreover, by expanding the business operations globally they should consider different factors that would help them to execute their business activities substantially. However, it is noted that due to the globalisation most of the large scale organisations adopt it in order to expand their business activities all over the world and get the maximum market share (Robinson, et al., 2015).
Nowadays, people want to consume high-quality products without considering the cost particularly in developed countries that encourage Morrison to sell their products in those regions or places where people can easily afford their products. Therefore, it is a core duty of the top officials of Morrison to consider this aspect and target the maximum audience in order to attract more customers towards their products (Gowthorpe, 2005).
It is found that there are certain risks that often faced by Morrison while executing their business activities in a more accurate manner. In addition, some of the key risks that are faced by Morrison are listed below:
The increase in the competition is one of the most imperative risks that are faced by the Morrison at the time of performing their business operations because there are some huge retail giants that are operating internationally such as Tesco, Sainsbury, Asda, Aldi and others. For that reason, it is important from the prospect of Morrison to consider this factor seriously in order to compete with their competitors importantly (Rigby, 2011).
Due to the increase in the tariffs, it creates problems for Morrison to manage their pricing strategies appropriately because they have to consider this factor as it affects their overall cost of the products. Therefore, it is a core duty of the financial advisors of Morrison to consider the tariff policies very seriously for the reason that it would help them to cope with the challenging situation in a more appropriate way (Les Dlabay, 2007).
In order to expand their business operations, it is vital for them to minimise their HR cost by offering an effective training program that supports them to enhance their productivity without putting further exertions and cost. However, it is a prior duty of the top officials of Morrison to hire effective HR manager that is able to enhance the overall productivity of their business operations in order to tackle the complex situation professionally (Chandra, 2008).
It is concluded that financial performance of Morrison is very weak because they have a negative operating profit which means that they do not have enough income to pay its expenses. Moreover, in comparison to its Sainsbury, Morrison is not performing effectively in the retail sector which means that they have to focus on their financial position. In addition to this, there are different risks and opportunities that Morrison has to consider in order to improve and enhance their business performance