Current ratio analysis

 
Case study  
Student Name
Central College



 
Table of Contents
Answer 1	3
Part A	3
Current ratio	3
Quick ratio:	4
Long Term debt/Equity	5
Total debt/ Total capital	6
Asset Turnover	7
Inventory Turnover	8
Gross Margin	9
Operating Margin	10
Return on assets	11
Return on equity	12
Non-financial KPI:	13
Part B	15
Part C	16
Answer 2	17
Financial feasibility	17
Taxation approach	19
Alternate investment appraisal method	20
Other factors	20
References	21
Appendices	22


Table 1: Average Full Time Employee	14
Table 2: Total sales area (000s square feet)	15
Table 3: Income statement of JBZ	18
Table 4: Cash flow statement of JBZ	19
Table 5: Capital allowances computation	20
Table 6: Tax computations	20


 
Answer 1
Part A 
Current ratio
Figure 1: Current ratio analysis
 
	Current ratio of J Sainsbury Plc has been in narrow range in last five years while current ratio of Tesco Plc declined over the years and current ratio of WM Morrison has been at quite lower level. Usually, current ratio of one or higher than it is desirable. Current ratio of WM Morrison has been as low as 0.5 and remained lower than other two competitors for all five years. Current ratio of J Sainsbury has been relatively very stable compared to other two firms. 

Individual performance:
	Best performing: J Sainsbury Plc, Worst performing: WM Morrison Supermarkets Plc
Overall:
	Best performing: Tesco Plc, Worst performing: WM Morrison Supermarkets Plc
Quick ratio:
Figure 2: Quick ratio analysis
 
	Quick ratio is considered more liquid than current ratio as it doesn’t consider inventory as liquid assets (GÂDOIU, 2014). While quick ratio of Tesco Plc declined for first two years and remained stable for last three years, the ratio of J Sainsbury improved drastically in last year. Quick ratio of J Sainsbury has been in range of 0.25 to 0.36 between 2010 to 2013 and improved to 0.48 in 2014. Quick ratio of WM Morrison has been at very low level and was in range of 0.16 to 0.21 in last five years. 

Individual performance:
	Best performing: J Sainsbury Plc, Worst performing: WM Morrison Supermarkets Plc
Overall:
	Best performing: Tesco Plc, Worst performing: WM Morrison Supermarkets Plc
Long Term debt/Equity
Figure 3: Long Term debt/equity analysis
 
	Long term debt to equity belongs to long term solvency ratio. It helps to identify the financing structure of business. As it shows relative financing of long term debt and equity, the ratio higher than one shows debt funding is higher than equity and ratio lower than one indicates equity funding is higher than debt. For all three companies, portion of equity funding is higher. As investors prefer stability of business, stable financial structure is preferred over volatile structure. For every $1 in equity, debt funding is $0.61, $0.64 and $0.50 for Tesco, Morrison and J Sainsbury respectively in 2014 compared to $0.71, 0.66 and $0.51 in 2010. end reversal identified for Morrison in 2014.

Individual performance:
	Best performing: J Sainsbury Plc, Worst performing: WM Morrison Supermarkets Plc
Overall:
	Best performing: J Sainsbury Plc, Worst performing: WM Morrison Supermarkets Plc
Total debt/ Total capital
Figure 4: Total debt/Total capital analysis
  
	Total debt to total capital ratio shows proportion of debt funding used to finance the resources of the firm. As higher debt ratio increases default risk it’s not recommended that companies have higher debt ratio or increasing debt level. Moreover, as it belongs to financial structure ratios, it’s desirable that the ratio remains stable. Debt ratio of Morrison is increasing since 2011 year on year which is somewhere negative indicator (GÂDOIU, 2014). Debt ratio of Tesco and J Sainsbury is stable over the years but debt ratio of J Sainsbury has been more stable. 
	Debt ratio of WM Morrison Supermarkets Plc increased from 0.16 to 0.39 between 2011 to 2014. 

Individual performance:
	Best performing: Tesco Plc, Worst performing: WM Morrison Supermarkets Plc
Overall:
	Best performing: J Sainsbury Plc, Worst performing: Tesco Plc
Asset Turnover

Figure 5: Total asset turnover analysis
 
	Asset turnover ratio shows sales generated over the total assets. Higher ratio shows the firm is able to generate more sales with available assets. Though asset turnover ratio is increasing for Tesco Plc but the ratio is already at lower level than other two companies. While Asset turnover improved by 2.42% for Tesco and declined by 8.29% and 14.14% for Morrison and J Sainsbury respectively. Still, historical performance of J Sainsbury is more reliable than other two players. 

Individual performance:
	Best performing: Tesco Plc,	Worst performing: J Sainsbury
Overall:
	Best performing: J Sainsbury, Worst performing: Tesco Plc
Inventory Turnover

Figure 6: Inventory turnover analysis
 

	The trend of inventory turnover ratio is declining for all three companies. Similar to asset tur