FINANCIAL ANALYSIS OF A FTSE COMPANY
Wm Morrison Supermarkets plc is a multinational renowned trading company involved mainly on fresh foods and grocery. They are ranked as the 4th largest supermarket in the UK. They serve over 11 million customers each week through its over 500 stores and online platforms. The company’s market share has averagely been at the 10% mark behind Tesco, Sainsbury and Asda. The company has remained afloat over the years through their vigorous change adoption strategies. They are quick to study the market and adapt sales strategies such as providing takeaways, eat-outs, door to door deliveries, Offering unique personalized deals for various clienteles.
J Sainsbury plc is a thriving multi-industry business. It owns the 2nd largest chain of supermarkets that encompass their convenience stores, and they also own Sainsbury Bank and an energy-related firm named Argos. Their supermarket holds a 16% share of the UK market. They started as a shopping centre and have diversified over the years to serve different markets. Like their Counterpart Morrison, they have delved into creating attractive incentives that retain and invites customers, thus making voluminous sales over the years. For instance, they have online shopping services; they also have incentive products such as gift cards, gift vouchers and food tokens.
I chose to look at Morisson and its rival Sainsbury because they have a long history that is inscribed in the history of England and that of its customers. They are reliable and have a solid financial base. They have made many innovative and creative decisions to stay afloat and even thrive amidst many changes throughout their years of existence. As such, this paper conducts a comparative study of their performance, strategies, it proves and provides a logical recommendation for the investors.
Management Strategies
Amid a struggling economy in the UK and political uncertainty due to the Brexit. Many businesses have had to strategize to protect investor interest and ensure continuity of business. Similarly, both companies have resorted to using online platforms as a means to reach customers who do not want or are unable to visit their physical stores. They have invested in massive online marketing, and these campaigns have been successful to the point of raising £6 billion of sales for Sainsbury. At the same time, Smartshop revenues contribute up to 20% of their sales despite the slowing demand in the food and non-food retail divisions. The model has eased delivery of products and made customer shopping to be fast and seamless. They have expanded and established facilities in different geographic territories to reach more customers. They have both closed multiple stores in a bid to cut costs on struggling stores.
Financial analysis
Profitability
Profitability can be evaluated through ratios that measure a firm’s capacity to yield a profit when contrasted to the revenues, operational expenses, assets, and equity. Conferring to Weetman (2019), a margin ratio calculates the conversion of sales into profits, whereas return ratios confirm the ability of a company to make returns for its investors. In most instances, a higher profit margin compares to an opponent indicates that the company is more successful and reliable.
For instance, Sainsbury’s sales have depreciated consistently; thus, they are not predictable. According to J Sainsbury Plc annual financial reports (2020), their supermarket sales decreased by 0.1% in 2019. They also experienced a drop in their operational profits as compared to 2018. According to (J Sainsbury Plc annual financial reports 2020, 107.) Their profits before tax also experienced a dip and reduced by 2% in 2019 to 586 Million pounds. This is an alarming signal since a decline in retail sales brought it. Profit after tax of dipped by 18 per cent from 186 million in 2018 to 152million in 2019 due to the effect of non-tax-deductible expenses such as the diminishing fixed assets.
Whereas In the financial year, 2019/20 Morrison reported profits, substantial unrestricted cash flow and higher ordinary dividends. Their revenue dipped by 1.1% year-on-year to record sales worth 17.5 bn. Their profit before tax (PBT) was £435m while PBT and exceptional rose to £408m from £396m, a £12m gain compared to the previous year. Finally, they marked a 7.0% return on capital employed (ROCE).
An evaluation of Wm Morrison Supermarket Plc between 2017 to 2018 shows the following trends. First, they grew steadily to record an 11% profit growth. They had a gross profit ratio of 3.6% and a net profit ratio of 1.8%. This means that the company can control its production, administration, and financing costs and ensure its operations lead to a profitable engagement. They had almost similar profit margins last year, and this was a strong indication of financial strength and independence. It is worth noting that their operating profits declined from £468 million in 2017 to £458 million in 2018 and their profit before tax rose from £325 million in 2017 to £380 million in 2018 (Morrisons Corporate, 2019). Net profit ratios are a temporary evaluation because it does not show Morrison’s engagements to retain profitability over the long run.
Similarly, it shows that J Sainsbury Plc experienced a drop in their operational profits as compared to 2017. According to (J Sainsbury Plc annual financial reports 2019, 94), their profits before tax also experienced a dip and reduced by 18.7%. Conversely, their asset base went up despite a reduction in cash that was used to increase their investments. In addition, their underlying Group sales (VAT inclusive) went up by 9%. Cost savings of £185 million were made in 2018 while retained earnings grew by 599 Million. Sainsbury’s balance sheet remained sturdy as the net debt was significantly reduced. Net debt went down mostly due to their profitable retail operations. Their earnings per share reduced by 24.0 per cent. Operating cash flows went up by 212 million compared to the year 2017 (Sainsbury, 2019).
| Items | Morrisons | Sainsbury | ||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |
| £ M | £ M | £ M | £ M | £ M | £ M | |
| Gross Profit | 689 | 633 | 604 | 2016 | 1882 | 1634 |
| Operating profit | 521 | 458 | 468 | 650 | 518 | 642 |
| Profit before Tax | 435 | 380 | 325 | 255 | 409 | 503 |
| Profit for the Period | 348 | 311 | 305 | 152 | 309 | 377 |
| Total Current Assets | 1322 | 1282 | 1176 | 7586 | 7866 | 6322 |
| Retained Earnings | 1492 | 1533 | 1084 | 4068 | 3789 | 3190 |
| Cash gained from Operating Cash Flows | 826 | 744 | 978 | 1372 | 1365 | 1153 |
| Cash used in investing activities | -467 | -380 | -282 | -426 | -470 | -750 |
An evaluation focusing between financial year (2017 to 2019)
Gearing rates of each Company
Gearing Morrison has maintained their gearing ratios below 50%. This ratio indicates that they have controlled their long-term debt levels. They have been able to minimize their long-term liability commitments when compared to the capital employed. This control will help safeguard them from bankruptcy (Bragg, 2012). They use their capital effectively, thus, improved margins and minimal debt obligations with their current capital gearing ratio of 24%, its easier to entice investors and access equity-based funding. Furthermore, their steady attractive earnings per share rose to 13.30 in 2018. This is a confirmation of a steady income-generating investment for many shareholders.
Debt ratio = (Total long-term debt/Capital employed) x 100%
= (1108/4541) *100
=24.40%
Liquidity position
Conversely, for both 2018 and 2019, Morrison’s liquidity position has been quite low. As of 2019, their current ratio was 0.4 and an acid test ratio of 0.2. This ratio is below the standard rate of 1, meaning that the company owes more liabilities than the value of assets they own (Weetman, 2019). Morrison’s net debt dropped by £221m as they reduced their operating cash flow commitments (Morrisons Corporate, 2019). On the other hand, they increased their investment expenditure and their total current assets as compared to the previous year. According to Financial Reports of Morrisons Corporate (2019), they have heavily invested in manufacturing facilities and other production facilities. Thus, the company may reduce liquidity risks and cash flow problems in case the trend keeps improving. On the other hand, Sansbury has a current ratio that is below 1 but is higher than Morrison’s. This result, therefore, means that they have more assets compared to liabilities as compared to Morrison.
Morrisons
Current ratio = Current assets/Current liabilities
=1322/3396
=0.4
Acid test ratio = Current assets less stock/Current liabilities
= (1322-660)/3396
=0.2
Sainsbury
Current ratio = Current assets/Current liabilities
=7586/12047
=0.62
Acid test ratio = Current assets less stock/Current liabilities
= (7586-1732)/12047
=0.48
According to Financial Reports of Morrison Corporate (2020), they recorded revenues of up to £17bn, similarly, in 2019 they had revenues of £17bn which was a 5.8% growth from the year 2017. Besides, they had a considerable asset turn over, which was high. It shows that they can conveniently convert their assets into sales (Bragg, 2012). This may be tied to their new model that incorporates a wholesaler wing and online sales which were born out of the increased partnerships. This result can also be supported by their favourable inventory turnover. They are also able to speedily convert their inventory into sales and replenish with other inventory inputs. According to Financial Reports of Morrison Corporate (2020), they recorded an average of 11 million transactions per week.
Efficiency ratios
Sainsbury has reduced its bad debts from 1.6bn to 1.1 bn pounds (Sainsbury, 2020). That reduction is an indication that they can collect their receivables within a favourable period. On the other hand, Morrisons has been able to recover receivables from its customers without incurring material losses. This may be as a result of customers paying either via credit card or using cash such that there is minimal customer credit. According to (Weetman, 2019), efficiency ratios show whether a company is able to utilize and control its assets and liabilities in the short term to improve its financial status. Three methods can be used to determine the efficiency ratio. They are trade receivables collection period, trade receivables payment period and inventory turnover period. Mostly, a quicker or shorter period is more preferable since it increases liquidity, minimizes the probability of writing off credit sales, thus higher profits.
Investment performance
Investment performance is calculated through evaluating indicators such as earning per share, earning ratio and dividend cover (Monea, 2019). Both companies have declared their EPS. The EPS for Morrisons has been rising since 2015 when it was 7.7, and currently, it’s at 13.33 though the rise has not been linear. This growth can be linked to an intensified investment in business processes and online sales channels that have strengthened the cashflows and created a strong sales momentum. Their dividend share outs to shareholders have cumulatively grown to 64.7% since 2014. Similarly, Sainsbury’s basic EPS has increased from 7.6 to 9.1. It is much lower when compared to their competitor. Furthermore, their dividend per share in 2019 reduced steeply to 3.3 pence from 11.0 pence in 2018. These changes are not welcoming to investors and may be signalling a cash strapped company.
Recommendation
2019 marked the 5th year of Morison’s turnaround journey. Thus, showing that their turnaround is steady and unceasing. Their wholesale sector expanded through the growth of their brands and store format innovations. Through their progression and performance indicators we have observed, I would recommend that it would be better to invest in Morrison Plc. Apart from financial performance, they have a strategic plan that is unfolding slowly and is more stable than Sainsbury’s. I would not invest in Sainsbury since they are on a downward trend despite having heavy resources to back up their plans. This translates that in the event they are cash trapped, their business may be materially affected. Conversely, Morrison’s are returning from a loss period, and they have learnt from their mistakes. They have reduced their risks and increased partnerships, assets and brought in a capable and strategic management team.
Finally, Morrison’s foundation is built on a strong, balanced balance sheet. They have a diversified portfolio that encompasses extensive freehold property among non-current assets, in addition to their 7% return on capital employed. Their audited financial statements are not tainted with negative reports such as fraud, any material audit concerns. According to their annual customer satisfaction indexes, it appears their numbers have been soaring, thus confirming a solidified command of its market share.
References
Bragg, S.M., 2012. Business ratios and formulas: a comprehensive guide. Hoboken, NJ: John Wiley & Sons.
London Stock Exchange, 2020. Diageo Plc DGE Stock | London Stock Exchange. [Online] Londonstockexchange.com. Available at: <https://www.londonstockexchange.com/stock/DGE/diageo-plc/company-page> [Accessed 14/10/ 2020].
Monea, M., 2009. Financial ratios–reveal how a business is doing? Annals of the University of Petroşani, Economics, 9(2), pp.137-145.
Morrisons Corporate, 2019. Financial reports. [Online] Available at: https://www.morrisons-corporate.com/investor-centre/financial-reports/ [Accessed 14/10/2020].
Morrisons Corporate, 2020. Financial reports. [Online] Available at: https://www.morrisons-corporate.com/investor-centre/financial-reports/ [Accessed 15/10/2020].
Sainsbury, 2020. Results, Reports and Presentations. – Sainsbury’s. Available at: https://about.sainsburys.co.uk/investors/results-reports-and-presentations.
Sainsbury, 2020. Results, Reports and Presentations. – Sainsbury’s. Available at: https://about.sainsburys.co.uk/investors/results-reports-and-presentations.
Weetman, P., 2019. Financial and management accounting. London, UK: Pearson UK.
Appendices
Relevant financial statements are accessible through the following links;
https://www.morrisons-corporate.com/investor-centre/financial-reports/
https://about.sainsburys.co.uk/investors/results-reports-and-presentations.
https://www.londonstockexchange.com/stock/DGE/diageo-plc/company-page