Financial analysis of Morrisons and comparison with Tesco Coursework

Financial analysis of Morrisons and comparison with Tesco - Coursework Example Ratio analysis of an organization presents facts on a comparative basis and enables the drawing of inference regarding the performance of a firm (Khan & Jain, 2006). This analysis gives a useful indication of the performance of the organization. Financial ratios are often used by shareholders, bankers, trade creditors, analysts, management and the general public at large to measure the performance of the company in various aspects such as liquidity, profitability, debt and market position (Stoltz et al., 2007). However, these ratios often should be analyzed keeping in mind the accounting policies and the principles used by companies and is dependent on the industries under consideration (Siegel and Shim, 2006). The objective of this report is to analyze the performance of Morrison’s. In order to do this, ratios will be calculated for the company over a period of two years: 2009 and 2010. The ratios will be compared to Tesco which is a leading competitor in the same industry. F our categories of ratio will be calculated for both the companies: 1. Profitability 2. Liquidity 3. Efficiency 4. Gearing ratios Analysis Profitability Ratios Profitability ratios can be used to measure how good the company is using its assets and how well the company is controlling its costs to generate an acceptable rate of return (Gitman and McDaniel, 2008). The various profitability ratios are given below Gross Margin Gross margin can be defined as the ratio of gross profit to total sales. The graph below shows the trend of the same: As can be seen from the graph, the gross margin of Tesco is more than that of Morrison’s in the year of 2009. However, while the gross margin has increased for Morrison’s from 2009 to 2010 while the same has decreased for Tesco. One point to note here is the sales done by both the companies. While Tesco had sales of the order of ? 56,910m in 2010, Morrison’s had just ? 15,410m. This difference is an indication of the size of the two companies. It is evident that in terms of sales, Tesco is well ahead of Morrison’s. Profit Margin Profit margin of a company can be defined as: The graph below shows the trend for profit margin for both the companies: Here again, the margin is more for Tesco as compared to that of Morrison’s in 2009. While the profit margin has increased considerably from 2009 to 2010, the same has remained almost equal for Tesco. The higher profit margin of Tesco indicates that the company is having a better control over its costs as compared to Morrison’s (Investopedia). Just like the gross sales, the value of net profit of Tesco (? 2,336m) is almost four times that of Morrison’s (? 598m). Return on assets and investments While return on assets measure the amount of net income generated for each unit of assets, return on investment measures the amount of income generated from each unit of owners’ equity. Return on assets is an ideal tool for comparing compan ies within the same industry. RoA is an indication of both the profit margin as well as asset turnover (Needles et al., 2010). The graph on the side here shows the Return on Assets for both the organization. The RoA is almost equal for both the companies. This indicates that both the organizations have almost equal efficiency in utilizing their assets. The graph on the side here shows the Return on Investment for both the organizations. RoI is more for Tesco in 2009 which indicates better return on investor wealth. One issue being faced by Tesco is a reduction in the RoI from 2009 to 2010. This imply that the average profit generated from the amount of income generated from owner’

FINANCIAL ACCOUNTING Essay Example | Topics and Well Written Essays - 1750 words

FINANCIAL ACCOUNTING - Essay Example â€Å"The terms depreciation and amortization have various meanings in finance and investing. For example, depreciation can refer to the devaluation of a currency, and amortization can be used to describe the payment structure in a common type of loan† (What is the difference between Depreciation and Amortization? 2003). Depreciation is charged to tangible assets, whereas amortization is charged to intangible assets. Fixed or tangible assets are those assets of the organization, which last more than one year, for example: furniture, buildings and machinery. Intangible assets are invisible assets that incur cost to the company, in terms of brand recognition, intellectual property and goodwill. Both amortization and depreciation are non cash cost of the industry and they cause reduction in the earning, whereas, on the other hand, they lead to an increase in the cash flow. The reason for recording depreciation as a cost is to increase the early purchase cost of the fixed asset mo re than its useful life. Whenever an industry makes its financial statements, it records a cost of depreciation to assign the loss in price of equipment, machines and other fixed assets it has purchased. On the other hand, unlike other costs, depreciation is a non-cash charge. This means that no money is actually paid at the period in which the expenditure is incurred. The function of depreciation is to match the price of a creative asset to the incomes earned from using the asset. Since it is difficult to observe a direct relation to revenues, the asset’s price is usually assigned to the years in which the property is used. â€Å"Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset† (What is the Purpose of Depreciation, 2004). The International Accounting Standard Board (IASB) states that it is appropriate for plant and machinery to be depreciated and intangible assets to be amortized by employing a revenue-based amortization or depreciation method. A revenue based amortization or depreciation process is one that is derived from the transaction between price and units, and this considers the possible future fluctuations in price as the basis of depreciation distribute the quantity of an asset that is to be amortized or depreciated. Tax benefits are also likely to arise along with depreciation. While depreciation stands for non-cash payments in the income statement, it does decrease the industry’s net income. Lesser net income will result in a lesser tax liability. To expand this benefit, industries frequently utilize an accelerated depreciation process. According to the International Accounting Standards Committee, depreciation is the part of the depreciable p rice of an asset more than its expected useful life. â€Å"Depreciation for the accounting period is charged to income either directly or indirectly. Thus, it is clear from the above definition that depreciation is a loss arising on account of circumstances, some of which are known whereas others are not† (Need Help with Accounting Assignment? 2002). The Internal Revenue Service provides organizations with an