5 It indicates the liquidity position of a company helps assess the ability of

5 it indicates the liquidity position of a company

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It indicates the liquidity position of a company; helps assess the ability of the company’s current assets to meet its current obligations (Black, 2005). A very high current ratio indicates unproductive usage of current assets which can be a result of high level of inventories or engaging funds in receivables for longer than necessary. At the same time, a very low current ratio signals to the fact that the company does not have sufficient assets which can be quickly converted into cash to pay short term creditors. It indicates the proportion of long-term liabilities and shareholders’ funds in the capital structure of a company (Proctor, 2006).The lower the ratio, the higher is the cushion provided to long-term creditors and lower is the cost of debt It indicates the percentage of net income given as dividends to shareholders (Garner, 1993). It also highlights the dividend policy of the company by showing how much is being retained for reinvestment and how much is being given out. Limitations : 1. It is difficult to compare the performances of companies that are engaged in multi-sector businesses. Many a times, a company is doing better than the average companies in the industry, thus making comparison and judgement more difficult (Emerald, 1984). 2. Differences in accounting policies of companies can lead to differences in ratios calculated (Keown, 2004). 6
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3. It is difficult to generalise if a high or a low ratio is good or bad. 4. The analysis uses historical cost which might not present the true picture of the financial performance. 1 Findings: My findings of the of the ratio analysis is in the part of profitability, financial stability, financial performance and the efficient use of the recourses of the company. 1. The analysis shows that Tesco experienced a 21% higher GPM than Morrisons during both the years. This can be attributed to Tesco’s revenue which was 2.73 times of Morrisons’ revenue in 2009. Higher revenue of Tesco results in higher gross profit margin; however both the companies have a 6% and 7% GPM, respectively. 2. Tesco’s OPM has remained the same during 2008 and 2009; however Morrisons has had a 2.13% decline in 2009. A comparison indicates that Tesco’s OPM is 26.5% more than that of Morrisons. The excess can be attributed to excess in revenues which results in Tesco’s excess over Morrisons’ GPM and OPM. Thus, comparatively, Tesco is more operationally efficient than Morrisons. 3. PAT for Tesco and Morrisons were almost similar in 2008 at 4.2% and 4.5% respectively; however declined by 25.8% and 11.3% to become 3.1% and 3.9% in FY09 respectively. Despite the fact that Tesco’s OPM and GPM are higher than Morrisons, its PAT falls within the same bracket, which implies that Tesco must be carrying higher level of long-term funds on which it has to incur high finance cost (it was 6.9 times of Morrisons’ finance cost in 2009). Thus, the high finance cost takes away a major chunk of EBIT and leaves lower PAT which makes Tesco and Morrisons to provide almost similar PAT margins.
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  • Spring '14
  • Current Assets, Tesco PLC, Morrisons

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