Comparison Of ‘financial Performance’ And ‘financial Position’ Of Wal-Mart And Morrison

In today’s competitive business world, it is important for companies to focus on adopting those practices through which they can get competitive position, increased revenues, high profitability and long term success in the market(Ongore and Kusa, 2013). This report is written for analysing financial performance as well as financial position of ASDA and Wal-Mart for advising a very large multinational company regarding selection of company for the purpose of acquisition.

According to Karna et al (2015) financial position of a company is identified through analysis of balance sheet like assets and liabilities of a company, whereas profit and loss statement helps in identifying financial position of a company. For examining the financial condition of both companies, their financial statements are analysed. In accordance with Richard et al (2013) financial statements are prepared with the goal to know the profitability and financial soundness of companies.

Task 1: Evaluation and comparison of ‘financial performance’ and ‘financial position’ of Wal-Mart and Morrison

1.1. Financial Performance Analysis

 

Wal-Mart

 

2014

2015

Revenues

476294

485651

Cost of sales

258069

365086

Gross profit

118225

121146

Administrative expenses

91353

93418

Operating expenses

449422

458504

Operating income

26872

27147

Loss/profit before tax

24656

24799

Taxation

8105

7985

Loss/profit for the year

16551

16814

 

 

 

Morrison

 

 

2014

2015

Revenues

 

26328

25813

Cost of sales

 

2407

2370

Gross profit

 

23921

23443

Administrative expenses

 

0

0

Loss/Profit arising on property-related items

 

0

0

Operating Loss/Profit

 

873

720

Share of post-tax losses/profits of joint ventures and associates

 

30

6

Finance income/cost

 

-111

-170

Loss/profit before tax

 

898

-72

Taxation

 

-182

-94

Loss/profit for the year

 

-166

716

 

1.1.1. Profitability Ratios

1.1.1.1. Gross Profit Margin

Gross profit margin is used for assessing financial health of a business through finding the proportion of money retained by company for revenues after deducting cost of goods sold (Brigham and Ehrhardt, 2013).

 

 

Wal-Mart

 

Morrison

 

2014

2015

 

2014

2015

 

 

 

 

 

 

GPM

46%

25%

 

91%

91%

 

From above table, it can be seen that gross profit margin for Wal-Mart is less than Morrison, and even in 2015 for Wal-Mart the gross profit margin was further decreased. In opposite to this, the financial performance of Morrison with respect to its gross profit margin is very high. In both 2014 and 2015, the gross profit margin of Morrison was almost 91%. It shows that management of Morrison put a lot of effort for minimizing its cost and through various efficient and effective activities earned a lot of revenues. It means financial performance of Morrison is far better than Wal-Mart on the basis of gross profit margin.

 

1.1.1.2. Net profit margin

Brigham and Houston (2012) stated that net profit margin is the ratio of net profit to sales of a company. It depicts that how much of revenue is translated by a company into profit.

 

Wal-Mart

 

 

Morrison

 

 

2014

2015

 

2014

2015

NPM

3%

3%

 

-1%

3%

 

The above table shows the values of net profit margin for both Wal-Mart and Morrison. It can be clearly seen that Wal-Mart earned 3% net profit margin in 2014 and it was same in 2015. In contrast to this, Morrison improved its performance from 2014 to 2015, with having a net profit of 3% in 2015.

1.1.1.3. Earnings per Share

Earnings per share (EPS) are some portion of firm’s profit allocated to each outstanding share of common stock. It tells about the profitability of a company. If company is earning high profitability then value of earning per share is also high. It tells amount of net income earned per share of outstanding stock (Lasher, 2013).

The above graphs show the EPS values for both Wal-Mart and Morrison for the year 2014 and 2015. The value of EPS for Wal-Mart was increased from 2014 to 2015, but for Morrison the value was dropped to negative in 2015.

1.2. Financial Position Analysis

 

Wal-Mart

 

Morrison

 

2014

2015

 

2014

2015

Non-current assets

143566

140212

 

8873

9082

Current assets

61185

63278

 

1612

1535

Inventory

44858

45141

 

1612

1535

Current liabilities

69345

65253

 

4847

4589

Non-current liabilities

59151

56843

 

1269

1582

Equity

76255

81394

 

4369

4461

 

1.2.1. Liquidity Ratios

1.2.1.1. Current Ratio

According to Molinaand Preve (2012) current ratio helps in measuring ability of a firm for paying its both short term and long term obligations. For gauging this capability, current assets relative to current liabilities are considered through current ratio

 

 

Wal-Mart

 

Morrison

 

2014

2015

 

2014

2015

Current ratio

 $       0.88

 $       0.96

 

 $       0.33

 $       0.33

 

On the basis of current ration, it can be seen that Wal-Mart has higher capability of paying off its debts than Morrison. Although, the value of current ratio for Wal-Mart was reduced in 2015 as compared to 2014, but still the value is much higher than Morrison’s value.

1.2.1.2. Quick Ratio

Quick ratio is used for measuring how well a firm can fulfil its short-term liabilities. It tells that a company has how many assets that can be quickly converted in to cash. The more the quick ratio, the more company has better cash flow management (Andreou et al, 2014).

 

 

 

Wal-Mart

 

Morrison

 

2014

2015

 

2014

2015

Quick ratio

 $       0.65

 $       0.69

 

 $       0.33

 $       0.33

 

The above table shows that again, for Wal-Mart the value of quick ratio is higher than Morrison. It means the cash flow management of Wal-Mart is better than Morrison. In case of need, Wal-Mart can easily and quickly get cash as compared to Morrison.

Task 2

b) Two aspects of company

1) Importance of Working Capital Management

Working capital (abbreviated WC) is termed as a financial metric which depicts the operating liquidity that is available for the entity, organization or business, involving governmental organizations. In addition to the fixed assets like equipment and plant, operating capital is also comprised of working capital (Corelli, 2016). Gross working capital is equivalent to the recent assets. The calculation of working capital can be done as the current assets out of current liabilities. If current liabilities are more than the current assets, then it depicts that entity owns the working capital deficiency, which is also termed as working capital deficit (Naser et al, 2013).

According to Napompech (2012) working capital is the outcome of removing recent liabilities through recent assets. It is the measure of the solvency of organization, its ability to develop purchase and to get benefit through discounts, and its feature to get the customers attracted through offering beneficial credit terms.The management of working capital are important for the operational success and financial health of the organization. The management of good business can be termed as the characteristic to use working capital management for maintenance of balance in between liquidity, profitability and development.

2) Importance of Cash Flow Management

From all of the assets, cash is the most liquid one. Therefore; most of the managers get attracted to the factor that how much cash is present for the business at some particular time period (Kaplan and Atkinson, 2015). Due to the fact, that cash flow into and out of business matters a lot in terms of investment (purchasing assets), analysis of cash flow and disinvesting (assets disposing) can assist in the measurement of performance of management.

Cash flow management is referred to as two various approaches which are based on the number of responsibilities involved. These responsibilities are advance cash management and basic cash management (Jose et al. 2008).Basic cash management is termed as the strategy conducive for the optimization of level of assets to be organized through a business and for preventing gaps or breaks in the cycle because of less cash (Benedito et al, 2016).

Administrator needs to calculate the cash amounts which are most appropriate with the operational level. The timing of collections and payments needs to be planed. An investment policy should be drawn with more liquidity that can be transformed into cash at a very less transactional cost, for serving as support for the funds that are organized through the business (Wu et al, 2016). Advanced cash flow management is a set of strategies that perform on the business’s liquidity. At similar time, it influence the processes and factors that do the immediate translation into cast, with the target of enhancing the business’s profit and making improvement in the working capital management (Brigham and Houston, 2012). The definition of cash flow can be done as the shift of money out of and into the business. The cycle of cash outflows and inflows identify the solvency of business. The analysis of cash flow assists in maintaining the proper cash flows for organization and gives the fundamentals for the management of cash flows (Ongore and Kusa, 2013).

Cash through operations identify the characteristics of business to perform the operation. As shown through different resources, an organization that goes through poor cash cannot survive for long term. As identified by Disatnik et al (2014) the positivity of development of internal cash identifies the financial power of business. Cash flow through activities is the best procedure to acquire a positive and stable business and it is the best feature for running the operations of business. Proper cash flow management should be done constantly through the business for getting enough able to maintain a cash flow, through ensuring that it monitors the shifting of cash in and out of the organization. Yao et al (2013) stated that cash flow management is significant for the achievement of operational objectives because of the reason that it plays the most important part in the maintenance of business in effective and efficient way. These authors stated that the basic agenda for all of the businesses is that they should develop profits. If the business does not develop positive cash flow, it does not get enough able to be in the business. Robinson and Sensoy (2013) states that most of the businesses are dependent over less significant problems instead of management of cash flow, due to the fact; that no business without much cash can survive in business environment today.

Good cash management is important because of the reason that much cash can be more costly, as interest is paid on such cash which is not even required. Less cash is also costly, due to the fact; that businesses miss out the opportunities or discounts due to less cash (Disatnik et al, 2014). Practices of cash management are crucial work for the managers of business. When the business cannot pay back the money then it gets insolvent. This is the major reason of bankruptcy among all of the small businesses. The objective of this type of implication is to force organizations to manage the cash efficiently with some caution.

Cash management if done properly can avoid bankruptcy, and hence can increase the sustainability and profitability of organizations. Efficient and proper cash management are compulsory for the developing and established businesses. The cash flow of smaller organizations can result into development of issues when the business actually refer to number of customers who cannot be tracked easily and when such products are sold which are more demanding as compared to the competitors. Attig and Cleary (2014) stated that practices of cash management are very important. Cash management involves all of the payments and incomes which are made within some particular time period, enlightening the inconsistencies which can be there for that time period.

c) Suggestions for Walmart and Morrison for bringing improvements in cash flow management and working capital management

Working capital management is important for the technique of accounting having focus over the maintenance of balance in between liabilities and recent assets of the organization. Wal-Mart and Morrison should focus on effectiveness of capital management system to cover the financial terms and to boost the profits. Management of working capital implies that Wal-Mart and Morrison should manage accounts receivable, accounts payable, cash and inventories. Management of efficient working capital should be done through the ratios of performance, like the turnover ratio of inventory, working capital ratio and collection ratio for assisting the identification of areas that need to be focused for maintenance of profitability and liquidity (Kam and Shin, 2016).

According to Yao et al (2013) the working capital should be managed in such a way that cost of firm can be minimised through managing cash, receivables or inventory and current assets. The management of Wal-Mart and Morrison should ensure the level of inventory for operating full level of capacity with minimum inventory. Moreover, current assets must be used for doing operations of business. In other words, the aim of working capital management should be optimisation of production and sales with minimum risk and cost.

In addition to working capital management, the management of Wal-Mart and Morrison should also focus on proper cash flow management. The management should properly monitor the in and out flow of cash. Cash flow management should be considered with respect to overall liquidity requirements of company, particularly its current assets and liabilities (Naser et al, 2013). For reducing the effect of uncertainties with respect to cash requirements and for ensuring adequate liquidity, Wal-Mart and Morrison should gauge the requirement for protective liquidity. Cash management should be done in such a way through which required level of cash can be reduced along with minimizing the risk of being not capable of discharging claims against the firm. If too small cash is held by the company then it will result in weak liquidity position of company, although the profitability of firm will be high. This will also increase the risk of technical insolvency. In contrast to this, Wal-Mart and Morrison should maintain too much cash balance for having a sound position of liquidity and lesser risk. Both companies should sustain an optimal cash balance which is neither small nor large. The companies should ensure achievement of liquidity and profitability goals (Corelli, 2016).

Task 3: Conclusion and Recommendations

From the above analysis of financial performance and position of Wal-Mart and Morrison, it can be seen that financial performance of Morrison is far better than Wal-Mart. Morrison is earning higher profitability as compared to Wal-Mart. So, if multinational company considers profitability of both companies, then on that basis they should acquireMorrison. In contrast to this, on the basis of liquidity ratio like working capital and cash flow management, it has been analysed that Wal-Mart’ position is better than Morrison. Wal-Mart’s working capital management is efficient. The company has a considerable number of assets for paying off its liabilities. Moreover, earning per share of Wal-Mart is also higher than Morrison. As, working capital and cash flow management of Wal-Mart is effective, so there will be less chances of getting insolvent. In order to get long term success, the multinational company should acquire Wal-Mart.

 

 

References

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