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Understanding and interpreting financial statements

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Understanding and interpreting financial statements

The information contained in the financial statements can be used by financial analysts to perform ratio analysis. The purpose of this paper is to analyze the financial performance of Morrisons Inc. Company Profile: Morrisons Morrisons was founded in 1899 by William Morrison. The first supermarket chain was opened in 1961. Today the company has become the 4th largest supermarket retailer in the United Kingdom . The initial public offering of the company occurred in 1967. The company serves over 10 million customers each week across its network of 382 stores. Morrisons helps the United Kingdom’s economy by providing the community with 124,000 jobs. One of the aspects of the Morrisons operation that makes this company different is that the firm owns its supply chain logistics. The company has its own packing facilities, baking capabilities, distribution centers, and fleet of trucks to deliver fresh goods to its stores. Ratio Selection The use of ratio analysis can help a person evaluate the financial performance of a company. To perform ratio analysis one must retrieve the financial statements of the company. The two financial statements that are mostly used when performing ratio analysis are the income statement and the balance sheet. There are different categories of ratios that an analyst can utilize. The five categories of ratios are profitability, solvency, efficiency, liquidity, financial gearing, and investment. To evaluate Morrisons this paper uses a variety of financial ratios from the different categories mentioned. A profitability ratio that will be used in the paper is net margin. Net margin is calculated dividing net income by sales (Besley amp. Brigham, 2000). It is preferable to have a high net margin because higher net margins imply that the company is more profitable. Another profitability ratio of importance is the gross profit. The gross profit is calculated with the following formula. (Sales – CGS) / Sales (Weygandt amp. Kieso amp. Kimmel, 2002). High profit margins are preferable. Two additional metrics that will be used to evaluate Morrisons is return on assets and return on equity. Return on assets is calculated dividing net income by total assets, while return on equity is calculated dividing net income by total equity (Dictionary, 2011). An efficiency ratio that will be used to evaluate Morrisons is sales revenue per employee. Obtaining high sales revenue per employee is preferable because it implies that each employee of the company is helping the firm generate more money. Another efficiency ratio that will be used in the analysis of Morrisons is sales revenue to capital employed. The ratio is calculated dividing revenues by capital. A liquidity ratio that was selected for the Morrisons ratio analysis was the current ratio. The current ratio determines the capabilities of the company to pay off its short term debt (Investopedia, 2011). The formula to calculate current ratio is current assets divided by current liability. Two gearing ratios that will be used in the analysis of Morrisons are the debt ratio and the debt to equity ratio. The debt ratio is calculated by dividing total assets by total liabilities. The debt ratio measures the ability of the company to pay off its long term debt (Garrison amp. Noreen, 2003). The debt to equity ratio is calculated dividing total assets by total equity. The investment ratios chosen to perform the ratio analysis on