Business ratios and formulas a comprehensive guide Essay
Business ratios and formulas a comprehensive guide
Net profit margin of the company shows how much the profit after-tax profit made by a business for every $1 generated in revenue or sales (Bragg, 2008). A higher net profit margin is better in comparison to that of its competitors.
In 2011 and 2012, Tesco was more profitable followed by Morrison’s Supermarkets PLC. However, in 2013, Morrison’s Supermarkets PLC was more profitable followed by Sainsbury.Roce
This financial ratio measures the profitability and efficiency of a company with which its capital is employed (Bragg, 2008). In 2011, Tesco was more profitable than Morrison’s Supermarkets PLC and Sainsbury. The following year, it was overtaken by Morrison’s Supermarkets PLC while Sainsbury remained the least profitable. In year 2013, Morrison’s Supermarkets PLC was the most profitable company followed by Sainsbury.
Return on Equity – ROE
Return on equity shows how much profit a firm earned compared to the total amount of shareholder equity as contained in the balance sheet (Horrigan, 2010). In 2011, Tesco made a higher profit than Morrison’s Supermarkets PLC and Sainsbury. It was Morrison’s Supermarkets PLC . in year 2012 Morrison’s Supermarkets PLC and Sainsbury reported a higher profit compared to the previous year while Tesco reduced it profitability. However, the three companies reported lower profit in 2013 than in 2011 and 2012. Morrison’s Supermarkets PLC was more profitable followed by Sainsbury in 2013.
Gross Profit Margin
It is used to assess company’s financial health by showing the proportion of money that is left over from sales revenue after deducting the cost of goods sold. It shows the financial health of a company (Jenkinson, 2011). In 2011, Tesco had the highest financial health followed by Morrison’s Supermarkets PLC. In year 2012, all the three companies reported lower gross profit margin. Morrison’s Supermarkets PLC and Sainsbury have had a stable gross profit margin.Net asset turnover
This is a financial measurement intended to measure how a company turns its assets into revenue (Horrigan, 2010).
In 2011, Sainsbury was the most efficient company in turning assets into revenue compared to Morrison’s Supermarkets PLC and Tesco. Tesco was performed the least in turning assets into revenue. In 2012, all the three companies had a lower net asset turnover with Sainsbury having the higher ratio followed by Morrison’s Supermarkets PLC. In 2013, Tesco and Sainsbury increased their ratio while Morrison’s Supermarkets PLC’s ratio decreased. Sainsbury still had the highest ratio followed by Morrison’s Supermarkets PLC.Efficiency and effectiveness Ratios
Asset turnover ratio
This is a ratio of a firm’s sales to its assets. It is an efficiency ratio that shows how successfully a company uses its assets to generate revenue. A comparison of asset turnover ratio for the three companies shows that in 2011 Sainsbury was the most efficient company followed by Tesco in turning assets into revenue. In 2012, Tesco showed a decrease in efficiency which the other two companies increased they’re efficient. All the three companies increased their efficiency in using assets to generate sales with Morrison’s Supermarkets PLC having the highest ratio followed by Sainsbury (Jenkinson, 2011).
The debtor’s day’s ratio
It is a measure of how quickly cash is collected from debtors. Different periods are compared for the same company since it is less meaningful since results largely depend on the nature of the business. Tesco is the most efficient company in collecting cash. Morrison’s Supermarkets PLC and Sainsbury have also been decreasing the number of days with Tesco having a lower collection period (Novak, 2009).
Supplier credit days
This shows the number of days that a company takes to pay its suppliers (Novack, 2009).
In 2011 and 2012, the numbers of days for Morrison’s Supermarkets PLC and Sainsbury has been increasing which can be a sign of financial hardship or increase confidence of suppliers on the company. Tesco has a high ratio which could be a sign of a financial crisis.
Stock holding period
It refers to the period between the purchase of a product and its sale. There is a general decrease in the stock holding period for the three companies indicating an improvement in investment performance. Sainsbury have the highest holding period followed by Morrison’s Supermarkets PLC (Palmer, 2013).
Liquidity and capital ratiosQuick Ratio
This determines if the company has resources to pay its short term liabilities with its liquid assets. The analysis shows that Morrison’s Supermarkets PLC has the highest ability to pay its short-term debt followed by Sainsbury (Peles, 2008).
It measures how a company can use its near cash or quick assets to retire its current liabilities immediately. Analysis shows that Morrison’s Supermarkets PLC has the highest ability to convert its near cash items into cash in order to pay the debt followed by Sainsbury.Gearing ratiosDebt/equity ratio
It shows how a company finances its growth. Sainsbury has the highest debt in its capital structure compared to Tesco and Morrison. Tesco has the least debt ratio (Peles, 2008).
Times interest covered
This ratio is a measure of number of times a business can make the interest payments with its earnings on its debt before interest and taxes. Morrison has the lowest possibility of bankruptcy followed by Sainsbury.
Capital gearing ratio
It measures financial strength of a company. Tesco is a high risky investment to investors. In 2013, Morrison was second after Tesco in terms of riskiness. Investors expect a high return in the future in Sainsbury compared to Morrison and in Tesco.
It shows how much a company pays out the shareholders in divided relative to share price. Sainsbury have the highest dividend yield showing that investors get a lot of funds for investing in Sainsbury. When share price increases, shares with high dividend yield earn more cash. Investors who need cash prefer investing in shares that have high dividend yield.
This shows the number of times dividends of a company paid to shareholders can be paid out of annual profits after tax. It is an indication of the probability which shows that dividends can be maintained in the future. In 2013, Morrison had the highest divide cover followed by Sainsbury (Shimerda, 2011).Corporate strategy
Morrison’s Supermarkets PLC can increase its profitability by using Tesco as a benchmark for its operations. This is because Tesco has a higher net profit margin and Return on capital employed. Morrison’s Supermarkets PLC has not been effectively in efficiently utilizing their assets in generating more revenue. It should ensure that acquisitions are attractive and that they help the company increase its return. It should also ensure that they produce better products and services in order to combat competition. Some assets should also be sold.
Morrisons Supermarkets PLC should also reduce the amount of debt from their capital structure. This is because it ranks second after Tesco in terms of capital gearing ratio. Debtor’s collection period should be reduced to a minimum.
Bragg, S. M. (2008). Business ratios and formulas a comprehensive guide. Hoboken, N.J.: Wiley.
Horrigan, J. O. (2010). Financial ratio analysis: an historical perspective. New York: Arno Press.
Jenkinson, N. H. (2011). Investment, profitability and the valuation ratio. London: Economics Division, Bank of England.
Novack, D. E. (2009). Liquidity Ratios And Recent British Monetary Experience. The Journal of Finance, 13(4), 510-526.
Palmer, J. E. (2013). Financial ratio analysis. New York, N.Y.: American Institute of Certified Public Accountants.
Peles, Y. C., & Schneller, M. I. (2008). Liquidity Ratios and Industry Averages-New Evidence. Abacus, 15(1), 13-22.
Schmidgall, R. S., & Defranco, A. L. (2009). Ratio Analysis: Financial Benchmarks for the Club Industry. The Journal of Hospitality Financial Management , 12(1), 1-14.
Shimerda, T. A. (2011). Financial ratios as predictors of profitability. Ann Arbor, Mich.: University Microfilms International.