It is important for the business concerns to keep an eye on their financial performance as well as financial position in a market. When a company is in a need to expand its operations, then it can focus on different options including JV, acquisition and differentiation (Luo and Tung, 2007). Being a financial analysist, advice for acquisition strategy will be made to ASDA on the basis of financial aspects. In this report, two companies that are ‘Morrison’ and ‘Marks & Spencer’ will be evaluated on financial grounds and then the most suitable or appropriate acquisition target will be selected for ASDA. Both selected companies are super stores, operating in UK as well as in other international markets.

Task 1: Critical evaluation of financial performance and financial position of Morrison and Marks & Spencer.

The financial performance as well as financial position of both M&S and Morrison can be evaluated with the help of different types of ratios. In order to get to know the financial aspects of both companies, their annual statements from year 2009-2014 are evaluated. The data from financial statements including balance sheet, income statement as well as cash flow statement is selected for calculation of different ratios. Different financial ratios will be calculated for both companies and a comparison will be made as well. Through comparative analysis and evaluation of ratios of companies, their financial performance and position can be easily assessed (Ross et al., 2005). 

1.Profitability ratios

Profitability ratios are considered to be the techniques that are used to evaluate the firm’s capability to produce earnings against expenses as well as other costs, for a specific time period/financial year (Brealey et al., 2012).

1. Return on capital employed ratio 

In order to assess the profitability of both companies, ROCE ratio will be calculated for past 5 years. The data will be taken from annual reports of both companies. It can be calculated with the following formula:

 

1. 
   ROCE for Morrison and M&S

 

Years	Morrison	Marks & Spencer
2009	0.125	0.175
2010	0.145	0.160
2011	0.125	0.175
2012	0.135	0.150
2013	0.115	0.140
2014	-0.020	0.110

 

Graphical representation:

Figure: Comparison of ROCE for Morrison and M&S (2009-2014)

Explanation:

It can be seen from the above figure that profitability of M&S is higher as compared with Morrison. But, the profitability of Morrison is more stable. It is clear that the profitability of Morrison experienced a drastic decrease in year 2014. The profitability of Morrison in 2014 is in negative figures but for Marks and Spencer, it is quite greater. In total five years, the profitability of M&S remained higher than Morrison but Morrison’s profitability was more stable. This indicates that Morrison is a profit making firm and despite of intense competition, Morrison is able to stay in the market for long period of time. The drastic decrease in the profitability of Morrison in 2014 was due to exceptional nonrecurring costs, including kiddicare.

2.Efficiency ratios

Efficiency ratios measures that how effectively a business concern is using its assets as well as liabilities (Lewellen, 2004). It also measures that how well a company uses its assets to produce income/profits.

2.1. Asset turnover ratio

Asset turnover ratio is an important efficiency ratio that measures the capability of a business concern to produce sales by using its assets. It can be calculated as:

 

2.2. Asset turnover ratio for Morrison and M&S for five years

Years	Morrison	Marks & Spencer
2009	1.25	1.79
2010	1.39	1.80
2011	1.39	1.80
2012	1.40	1.80
2013	1.35	1.58
2014	1.34	1.60

 

 

Graphical representation:

 

Figure: Asset turnover ratio of Morrison and Marks & Spencer

It can be seen from the above figure that asset turnover ratio for five years for Morrison is higher than that of Marks & Spencer. This indicates that the management of Morrison has used its assets in a better way to produce sales. Certain improvements in the asset turnover ratio of Marks and Spencer are observed between 2009-2012 but between 2012-2014, the asset turnover ratio of Marks and Spencer again started decreasing. On the other hand, the asset turnover ratio of Morrison is higher than Marks and Spencer for five years. In addition, the asset turnover ratio of Morrison remained same from 2009 to 2012, but decreased from 2012-2014. This means that the efficiency of both the companies decreased since 2012. But, efficiency of Morrison is better than Marks and Spencer.

3.Liquidity ratio

Liquidity ratio measure the capability of a company to pay its short term liabilities at the time they become due (Saunders and Cornett, 2003). It tells that either the current assets of company are sufficient to meet the current obligations of company or not.

1. Current ratio

The liquidity of both Morrison and Marks & Spencer will be calculated with the help of current ratio.

 

1. Current ratio for Morrison and Marks and Spencer

 

Years	Morrison	Marks & Spencer
2009	0.39	0.60
2010	0.50	0.80
2011	0.55	0.75
2012	0.59	0.85
2013	0.60	0.58
2014	0.49	0.60

 

Graphical representation:

Figure: Current ratio of Morrison and Marks & Spencer

Explanation:

The comparison of liquidity of both companies indicates that the liquidity of Morrison increased over the 5 years. On the other hand, the liquidity of Marks & Spencer decreased slightly in the 5 years. In 2013, it can be observed that its current ratio drastically decreased. This was due to the fact that the current assets were decreased and company’s ability to pay off its short term liabilities by using current assets became low.

4.Gearing ratio

Gearing ratio is an important financial technique to compare owner’s equity with the funds borrowed by business concern (Heaton, 2002).

1. Debt ratio

Debt ratio for both Morrison and Marks and Spencer can be calculated. This ratio tells the amount/percentage of assets that are backed up/financed by debt. It is calcuated for both companies by using following formula:

1. Debt ratio for Morrison and M&S for five years

Years	Morrison	Marks & Spencer
2009	0.150	0.57
2010	0.250	0.59
2011	0.220	0.48
2012	0.300	0.48
2013	0.380	0.52
2014	0.400	0.50

 

Graphcial represnetation:

Figure: Debt ratio of Morrison and Marks & Spencer

Explanation

The analysis indicates that the gearing ratio of Morrison shown a tremendous growth in 2014 as compared with year 2009. On the other hand, the gearing ratio for M&S showed some ups and downs but remained almost stable between 2009-2014. The level of debt for Morrison increased considerably in 2012–2014, producing the progress of the debt ratio. High debt ratio or increase in debt ratio is not a positive sign.

 

Task 2: b.  Critical analysis of working capital and cash flow management

2.1. Importance of working capital and cash flow management

Working capital management as well as cash flow management is essential for every business concern. Working capital is actually the difference between current assets and current liabilities. Working capital is actually the cash that is required by companies to run their day to day operations (Brigham and Ehrhardt, 2013). It is essential for both Morrison and Marks & Spencer to keep a specific amount of cash with them to run the business. For this purpose, working capital management is useful for both companies. Both Morrison and M&S have current assets and current liabilities as well. The management of both companies have to manage sufficient liquidity to run daily business operations. There are different ratios that can be used to determine the working capital ratio like current ratio.

2.2. Working capital management for Marks & Spencer and Morrison

Current ratio for last six years will be calculated for M&S to evaluate its working capital management.

Current ratio = current assets/ current liabilities

Liquidity ratio for M&S for 6 years:

(Note: All amounts are in £m)

Year (2009) = 1389.8/ 2306.9 = 0.60

Year (2010) = 1520.2/ 1890.5= 0.80

Year (2011) = 1641.7/115.0= 0.75

Year (2012) = 1460.1/2005.4= 0.73

Year (2013) = 1267.9/2238.3= 0.57

Year (2014) = 1368.5/2349.3= 0.58

Liquidity ratio of Morrison for 6 years:

Year (2009) =1065/ 2024 =0.53

Year (2010) =1092/2152=0.51

Year (2011) = 1138/2086= 0.55

Year (2012) = 1322/2303= 0.57

Year (2013) = 1342/2334= 0.57

Year (2014) =1430/2873= 0.50

2.3. Graphical representation

Figure: Current ratio of Morrison and Marks & Spencer (2009-2014)

Explanation:

The liquidity of Morrison is stable from 2009 to 2014. It has increased from 2009-2013 and then slight decrease was observed between 2013 to 2014. On the other hand, the liquidity of Marks and Spencer changed in every year and is not stable. This shows that the working capital management of Morrison is better than that of Marks & Spencer. The management of Morrison has effectively managed current assets and current liabilities. The management has kept enough amount of current assets to fulfill the current obligations of business.

 

Cash flow management of Morrison and M&S

Cash flow management is an important technique that is used by both Morrison and M&S to plan their cash requirements/needs to avoid crises of liquidity in future. Both companies organize and formulate cash flow statements. Both the companies get cash flows from operating activities as well as cash flows before financing. Both the companies get enough cash flows to meet daily expenses and to run the operations effectively. In 2009, the cash flow generated by Morrison from operating activities was 790?m and cash flow from financing activities was ?m46. On the other hand, net cash flows from investing activities for M&S were ?m356.3, while cash flows from financing activities were -?m355.5. In 2014, net investing cash flow of Marks & Spencer was -?m 618.3. Net financing cash flow for M&S in 2014 was -?m499.2. Cash flows from operating activities for Morrison in 2014 were ?m715. This indicates that cash flow management of Morrison is better than M&S.

 

Task 2: c: Improvements

M&S and Morrison can make improvements in cash flow management and working capital management by focusing on:

• Maintaining cash reserves for any unforeseen event or for urgent need
• Creating and maintain cash flow worksheets for better record
• Collecting receivables as soon as possible so that sufficient cash always remain in hand to fulfill current obligations
• Extending payables as long as possible
• Increasing sales with the help of innovative promotional techniques
• Proper cash flow forecasting should be done by both companies and unforeseen demands of working capitals should be catered in financial planning
• Addressing the working capital at corporate level
• Latest and innovative technology should be used by both companies, in this way, costs will be lowered and efficiency will be improved

 

 

Task 3: selecting good acquisition target

In this section, the preferred acquisition target for ASDA will be selected. In the previous two tasks, financial performance, financial position, cash flow management as well as working capital management of both Morrison and Marks & Spencer are discussed. On the basis of information of previous two tasks, Morrison is selected as a good/better acquisition target for ASDA. ASDA should acquire Morrison because:

• High profitability

By focusing on the comparative analysis of Morrison and M&S, conducted in task 1, it is observed that the profitability of Morrison is more stable as compared with M&S.  It is clear that the profitability of Morrison experienced a drastic decrease in year 2014 but it was due to exceptional nonrecurring costs, including Kidd care.  In total five years, the profitability of M&S remained higher than Morrison but Morrison’s profitability was more stable. This indicates that Morrison is a profit making firm and despite of intense competition, Morrison is able to stay in the market for long period of time. After acquisition, Morrison can be a source of profitability for ASDA.

• High efficiency

On the basis of evaluation of financial performance and financial position of Morrison and M&S, it can be known that the efficiency ratio for five years for Morrison is higher than that of Marks & Spencer. This indicates that the management of Morrison has used its assets in a better way to produce sales and its efficiency to use assets is also high. The asset turnover ratio of Morrison is higher than Marks and Spencer for five years and is quite stable too. In addition, the asset turnover ratio of Morrison remained same from 2009 to 2012, but decreased from 2012-2014. This means that the efficiency of both the companies decreased since 2012. But, efficiency of Morrison is better than Marks and Spencer. On the basis of this information, Morrison is selected as best acquisition target for ASDA. After acquisition, the financial management of ASDA can collaborate with the financial employees of Morrison for better financial planning to improve efficiency.

 

• Stability of liquidity

The comparison of liquidity of both companies done in section 1, with the help of current ratio indicates that the liquidity of Morrison increased over the 5 years. This means that Morrison had enough amount of current assets to meet the current obligations in past 5 years. Morrison has high liquidity as compared with Marks & Spencer. That is why, Morrison is more suitable acquisition target as compared with M&S.

• Better working capital management

Working capital management of both Morrison and Marks & Spencer is evaluated in task 2 by focusing on liquidity ratio. The liquidity of Morrison is stable from 2009 to 2014. It has increased from 2009-2013 and then slight decrease was observed between 2013 to 2014. On the other hand, the liquidity of Marks and Spencer changed in every year and is not stable. This shows that the working capital management of Morrison is better than that of Marks & Spencer. The management of Morrison has effectively managed current assets and current liabilities. The management has kept enough amount of current assets to fulfill the current obligations of business. That is why, Morrison is best suitable acquisition target for ASDA.

Conclusion

It can be concluded that Morrison is suitable acquisition target for ASDA. Comparison of financial performance and financial position of Morrison and Marks & Spencer is done. On the basis of analysis, it is found that Morrison is more profitable, liquid as well as efficient company as compared with Marks and Spencer. The working capital management of Morrison is better than Marks and Spencer. Thus, ASDA should acquire Morrison because it can give financial benefits.

References

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Heaton, J.B., 2002. Managerial optimism and corporate finance. Financial management, pp.33-45.

Lewellen, J., 2004. Predicting returns with financial ratios. Journal of Financial Economics, 74(2), pp.209-235.

Luo, Y. and Tung, R.L., 2007. International expansion of emerging market enterprises: A springboard perspective. Journal of international business studies, 38(4), pp.481-498.

Ross, S.A., Westerfield, R. and Jordan, B.D., 2008. Fundamentals of corporate finance. Tata McGraw-Hill Education.

Saunders, A. and Cornett, M.M., 2003. Financial institutions management: A risk management approach. Irwin/McGraw-Hill.