Morrison's, the UK supermarket may be assessed as a potential investment. The firm may be considered by looking at the way that the share price is performing, comparing it to its past performance as well as benchmarking the performance against the industry
The share price will reflect the market expectations, so as well as looking a past performance it is also necessary to look to the potential future; this is often achieved by looking at the financial ratios of the firm considering the performance both vertically and horizontally.
Morrison's appears to have had a relativity mixed year; the share price stands at 277.60, closing price on the 24th August, 2012 (FT, 2012). The share price has been volatile, increasing and decreasing, over the last 52 weeks the high has been 340.00 and the low has been 261.00 (Yahoo Finance, 2012). Over the year the share price has decreased by 3.41% (FT, 2012). If this is compared with the FTSE 100 the firm has under performed, despite some positive signs towards the end of 2011, when the firm was moving ahead of the gains made by the market, this can be seen in figure 1 in the appendix. However, this underperformance may be appreciated with consideration of the beta, which is generally seen as reflecting risk, but is really a measure of volatility (Howells and Bain, 2007). This is only 0.4067 for Morrison (FT, 2012). The context this performance may also be appreciated by comparing the firm to the UK market leader; Tesco, where the comparable one year performance demonstrates a decrease of 10.15% in the share price, where there is a beta of 0.7022 (FT, 2012).
The current share price appears to be performing weakly compared to the market, although not completely out of line with the industry. In order to assess the potential value of the share it maybe compared in terms of ratios such as the P/E
, the earnings per share indicates the number of years it will take the firm to earn its capitalization. The higher the ratio the longer the firm will take to earn its market value, so the higher the market expectations. Low ratios may indicate a greater room for improvement. The P/E ratio of Morrison's is 10.7, the industry average is higher at 14.5 (MSN Money, 2012). The firm has a lower price to sales ratio which is 0.38 compared to an industry average of 1.25 (MSN Money, 2012). There is also a lower price to book ratio, this is 1.3 for Morrison's compared to an industry average of 3.71 (MSN Money, 2012).
However, when looking at the way share prices are assessed investors may not only be looking at the potential capital growth, they may also be looking at the dividends and income they will gain. Morrison's paid a dividend, which amounted to 10.70 in 2011/12, giving a dividend yield of 3.85% (FT, 2012). By comparison Tesco, which also pays a dividend, had a yield of 4.35% (FT, 2012). Therefore, investing for income has seen Tesco give a superior return.
The examination of the investment performance is only one aspect when assessing a firm in order to determine its' potential future performance. A common assessment is the use of key measures gained from ratio analysis of the firm, looking at trend analysis. This allows the patterns seen in the firms' results to be assessed at the same time as comparing the firm with the industry.
The firm will be assessed based on the potential future performance which may be indicated with the patters of the past. The main ratios are the profit ratios. The first to be considered is the gross profit margin. This is the profit after the direct costs, also known as cost of goods, are deducted (Elliott and Elliott, 20011). The firm has shown a slight improvement here between 2010
and 2011 moving from 6.89% to 6.97% followed by a slight decrease in 2012 to 6.90%, calculation shown in table 1 in the appendix. When comparing this with the industry the average gross profit margin in much higher at 27.4% (MSN Money, 2012). However it is worth noting that the supermarket segment of the retail industry is known for its low margins. When comparing this with the market leader the differential is not as great, with Tesco only having a gross profit margin of 8.15%, higher than Morrison's, but much lower than the industry average. It is also notable that table 1 which sows the revenues also shows that the firm is increasing its revenues each year.
The second profit margin to be considered is the net profit margin. This may be calculated in a number of ways, including before or after tax (Elliott and Elliott, 2011), in this report all net profit figures will be after tax. The firm is showing a general but slow pattern of improvement, as seen in table 2 of the appendix. The net profit level has increased and the margin has risen from 3.82% in 2010 to 3.91% in 2012. However, the firm is below the industry average which is 4.8% (MSN Money, 2012). Making a direct comparison against Tesco the firm is presenting a lower profit margin as Tesco has a net profit margin of 4.58% (FT, 2012).
Efficiency is also important, looking at the way assets and equity is used (Elliott and Elliott, 2011). The return on assets indicates the efficiency of the assets with the net profit shown as a return on the total assets. The same pattern of gradual improvement is seen here, shown in table 3 of the appendix, where it rises from 6.72% in 2010 to 7% in 2012. This time the firm is on par with the industry average of 7% (MSN Money, 2012). It is also notable that the firm is performing better than the rival Tesco, where the return on assets is 6.03% (FT, 2012).
The return on equity also shows improvement, however, when looking at the calculation in table 4, the actual level of equity in 2012 decreased slightly (only by 0.4%), but this decrease will enhance the return rate. The return on equity increases from 11.9% in 2010 to 12.78% in 2012. The industry average is much higher at 23.3% (MSN Money, 2012), and Tesco also presents a higher level of return on equity at 17.18%. Here Morrison's appears to be under performing.
The last ratio used is the current ratio; this is a measure of liquidity (Elliott and Elliott, 2011). For a firm to survive in the short-term and realize its potential the firm has to have sufficient current assets to pay its liabilities. This can be assessed by looking at the proportion of current assets to current liabilities. Traditionally a current ratio should be between 1.0 and 1.5 meaning that a firm has sufficient assets to cover its liabilities (Elliott and Elliott, 2011). However, in markets where there is fast and frequent cash generation, such as the supermarket industry, the ratios can be lower. The current ratio is showing an increased level of current assts to pay the liability, so a general improvement in the liquidity, rising from 0.51 in 2010 to 0.57 in 2012, as seen in table 5 in the appendix. This is lower than the industry average of 1.03 (MSN Money, 2012), however, it is worth noting that the supermarket segment has a faster turnover compared to many other segments of the retail industry. To place this in context Tesco also have a current ratio lower than the industry average at 0.64 (FT, 2012).
Overall, Morrison's are showing improvements; the profit levels are increasing and efficiency appear to be improving. The firm does not have the same performance as the market leader; Tesco, which is also likely to have advantages…