Write a memo to the managing director of the worst

Question

Accounting and Finance for Managers-ACC3015 

Question

The following financial data (a,b,c)is forthree retail businesses, which are listed on the London Stock Exchange.

a)  Tesco PLC

Tesco PLC
Annual Ratios
[GBP Millions]
	22-Feb-2014	23-Feb-2013	25-Feb-2012	26-Feb-2011	27-Feb-2010
Financial Strength
Current Ratio	0.61	0.66	0.64	0.65	0.71
Quick/Acid Test Ratio	0.42	0.43	0.43	0.45	0.51
Working Capital	-8,314.0	-6,520.0	-6,896.0	-6,123.0	-4,623.0
Long Term Debt/Equity	0.63	0.60	0.56	0.59	0.80
Total Debt/Equity	0.76	0.65	0.66	0.67	0.91
Long Term Debt/Total Capital	0.36	0.37	0.34	0.35	0.42
Total Debt/Total Capital	0.43	0.39	0.40	0.40	0.48
Interest Coverage	24.82	32.63	-	217.61	72.02
Payout Ratio	62.15%	77.40%	37.51%	42.00%	44.49%
Effective Tax Rate	15.36%	25.72%	21.64%	23.73%	26.45%
Total Capital	25,928.0	27,477.0	29,524.0	27,610.0	27,869.0
Efficiency
Asset Turnover	1.27	1.26	1.30	1.30	1.24
Inventory Turnover	16.27	16.14	17.31	18.78	19.38
Days In Inventory	22.43	22.61	21.08	19.43	18.84
Receivables Turnover	11.87	12.76	13.90	14.61	15.95
Days Receivables Outstanding	30.75	28.61	26.26	24.98	22.89
Revenue/Employee	124,513	125,097	122,993	123,795	120,548
Operating Income/Employee	5,154	4,700	8,047	8,021	7,323
EBITDA/Employee	8,177	7,766	10,855	10,929	10,254
Profitability
Gross Margin	6.31%	6.55%	8.44%	8.48%	8.10%
Operating Margin	4.14%	3.76%	6.54%	6.48%	6.07%
EBITDA Margin	6.57%	6.21%	8.83%	8.83%	8.51%
EBIT Margin	4.14%	3.76%	6.54%	6.48%	6.07%
Pretax Margin	3.55%	3.24%	6.32%	6.02%	5.58%
Net Profit Margin	3.01%	2.42%	4.94%	4.57%	4.09%
COGS/Revenue	93.69%	93.45%	91.56%	91.52%	91.90%
SG&A Expense/Revenue	2.61%	2.34%	2.52%	2.71%	2.68%
Management Effectiveness
Return on Assets	3.81%	3.03%	6.46%	5.96%	5.10%
Return on Equity	12.22%	8.90%	18.40%	17.74%	16.96%
Valuation
Free Cash Flow/Share	0.00	-0.02	0.09	0.09	0.22
Operating Cash Flow/Share	0.36	0.35	0.55	0.53	0.59
Current Market Multiples
Market Cap/Earnings (TTM)	17.55
Market Cap/Equity (MRQ)	1.12
Market Cap/Revenue (TTM)	0.24
Market Cap/EBIT (TTM)	6.02
Market Cap/EBITDA (TTM)	3.75
Enterprise Value/Earnings (TTM)	28.04
Enterprise Value/Equity (MRQ)	1.79
Enterprise Value/Revenue (TTM)	0.39
Enterprise Value/EBIT (TTM)	9.62
Enterprise Value/EBITDA (TTM)	5.99

 

b)  Morrisons PLC

 

WM Morrison Supermarkets PLC
Annual Ratios
[GBP Millions]
	02-Feb-2014	03-Feb-2013	29-Jan-2012	30-Jan-2011	31-Jan-2010
Financial Strength
Current Ratio	0.50	0.58	0.57	0.55	0.51
Quick/Acid Test Ratio	0.16	0.20	0.21	0.21	0.19
Working Capital	-1,443.0	-992.0	-981.0	-948.0	-1,060.0
Long Term Debt/Equity	0.53	0.46	0.29	0.19	0.21
Total Debt/Equity	0.65	0.47	0.31	0.19	0.25
Long Term Debt/Total Capital	0.32	0.31	0.22	0.16	0.17
Total Debt/Total Capital	0.39	0.32	0.24	0.16	0.20
Payout Ratio	-127.08%	44.28%	40.10%	40.10%	35.96%
Effective Tax Rate	-	26.39%	27.14%	27.69%	30.30%
Total Capital	7,725.0	7,662.0	7,094.0	6,472.0	6,169.0
Efficiency
Asset Turnover	1.66	1.78	1.86	1.84	1.81
Inventory Turnover	20.34	21.96	23.54	25.24	26.79
Days In Inventory	17.95	16.62	15.50	14.46	13.62
Receivables Turnover	87.31	81.97	78.15	88.84	77.05
Days Receivables Outstanding	4.18	4.45	4.67	4.11	4.74
Revenue/Employee	337,953	322,481	308,961	282,722	276,646
Operating Income/Employee	-1,816	16,893	17,020	15,509	16,283
EBITDA/Employee	5,620	23,373	22,827	20,982	21,776
Profitability
Gross Margin	6.07%	6.66%	6.89%	6.97%	6.89%
Operating Margin	-0.54%	5.24%	5.51%	5.49%	5.89%
EBITDA Margin	1.66%	7.25%	7.39%	7.42%	7.87%
EBIT Margin	-0.54%	5.24%	5.51%	5.49%	5.89%
Pretax Margin	-1.00%	4.85%	5.36%	5.30%	5.57%
Net Profit Margin	-1.35%	3.57%	3.91%	3.84%	3.88%
COGS/Revenue	93.93%	93.34%	93.11%	93.03%	93.11%
SG&A Expense/Revenue	2.01%	1.85%	1.86%	1.96%	2.04%
Management Effectiveness
Return on Assets	-2.24%	6.35%	7.26%	7.06%	7.04%
Return on Equity	-4.80%	12.18%	12.76%	12.19%	12.63%
Valuation
Free Cash Flow/Share	-0.13	0.05	0.05	0.12	-0.06
Operating Cash Flow/Share	0.31	0.47	0.37	0.34	0.28
Current Market Multiples
Market Cap/Earnings (TTM)	-12.70
Market Cap/Equity (MRQ)	0.88
Market Cap/Revenue (TTM)	0.24
Market Cap/EBIT (TTM)	6.64
Market Cap/EBITDA (TTM)	4.09
Enterprise Value/Earnings (TTM)	-20.63
Enterprise Value/Equity (MRQ)	1.43
Enterprise Value/Revenue (TTM)	0.39
Enterprise Value/EBIT (TTM)	10.78
Enterprise Value/EBITDA (TTM)	6.64

 

c)  Sainsbury PLC

J Sainsbury plc
Annual Ratios
[GBP Millions]
	15-Mar-2014	16-Mar-2013	17-Mar-2012	19-Mar-2011	20-Mar-2010
Financial Strength
Current Ratio	0.64	0.61	0.65	0.59	0.66
Quick/Acid Test Ratio	0.48	0.25	0.33	0.27	0.36
Working Capital	-2,403.0	-1,214.0	-1,104.0	-1,221.0	-940.0
Long Term Debt/Equity	0.37	0.45	0.46	0.43	0.47
Total Debt/Equity	0.46	0.48	0.48	0.44	0.49
Long Term Debt/Total Capital	0.26	0.30	0.31	0.30	0.32
Total Debt/Total Capital	0.32	0.32	0.33	0.31	0.33
Payout Ratio	45.83%	52.19%	50.36%	43.86%	44.22%
Effective Tax Rate	20.27%	22.02%	25.16%	22.61%	20.19%
Total Capital	8,787.0	8,619.0	8,488.0	7,837.0	7,396.0
Efficiency
Asset Turnover	1.64	1.86	1.88	1.90	1.91
Inventory Turnover	22.65	22.88	24.09	26.34	27.15
Days In Inventory	16.11	15.95	15.15	13.86	13.44
Receivables Turnover	25.04	85.67	78.64	93.17	129.22
Days Receivables Outstanding	14.58	4.26	4.64	3.92	2.82
Revenue/Employee	484,798	474,603	456,844	438,711	422,072
Operating Income/Employee	20,425	17,963	17,910	17,692	15,011
EBITDA/Employee	31,579	28,493	28,135	27,713	25,137
Profitability
Gross Margin	5.79%	5.48%	5.43%	5.50%	5.42%
Operating Margin	4.21%	3.78%	3.92%	4.03%	3.56%
EBITDA Margin	6.51%	6.00%	6.16%	6.32%	5.96%
EBIT Margin	4.21%	3.78%	3.92%	4.03%	3.56%
Pretax Margin	3.75%	3.31%	3.58%	3.92%	3.67%
Net Profit Margin	2.99%	2.58%	2.68%	3.03%	2.93%
COGS/Revenue	94.21%	94.52%	94.57%	94.50%	94.58%
SG&A Expense/Revenue	1.82%	1.98%	1.88%	1.98%	2.00%
Management Effectiveness
Return on Assets	4.90%	4.81%	5.04%	5.75%	5.60%
Return on Equity	12.09%	10.42%	10.73%	12.32%	12.52%
Valuation
Free Cash Flow/Share	0.01	-0.06	-0.10	-0.16	-0.02
Operating Cash Flow/Share	0.49	0.52	0.56	0.46	0.54
Current Market Multiples
Market Cap/Earnings (TTM)	185.15
Market Cap/Equity (MRQ)	0.83
Market Cap/Revenue (TTM)	0.19
Market Cap/EBIT (TTM)	5.26
Market Cap/EBITDA (TTM)	3.15
Enterprise Value/Earnings (TTM)	248.56
Enterprise Value/Equity (MRQ)	1.12
Enterprise Value/Revenue (TTM)	0.26
Enterprise Value/EBIT (TTM)	7.06
Enterprise Value/EBITDA (TTM)	4.23

 You are required to:

(a) Select and justify at least 10 financial ratios and calculate 2 non-financial ratios to analyse the performance and financial position of the three companies. You are expected to use charts to compare performance of the three companies. You will need to look at the audited financial statement and carry out further research to explain the performance of the company over the five years. For clarity, you are expected to rank the companies based on the individual benchmarks and overall.

(b) Write a memo to the managing director of the worst performing company with recommendations of how the financial performance of the business can be improved.

(c) Outline the limitations of relying on financial ratios to interpret firm performance?