Of these two, the best indicators of liquidity, when trying to show trends, are the Current Ratio. A current ratio of 2 is considered "adequate liquidity". Tesco has Current Ratio numbers for 2006 and 2005 were 0.52 and 0.7 and Morrison has the current ratio of 0.4 and 0.6 for the FY year 2006 and 2005. Each sets of these ratio figures indicate that Tesco would possibility have some difficulties in meeting its financial obligations, so these numbers will be important to watch closely in the future. On the other hand Morrison has also a bad current ratio it means in the company could have problems in paying their debts.
Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. Tesco has working capital of m 165 for the year 2006 and for the year 2005 is m 24 which is a good sign for the company. The liquidity of the company is not so good and they have to focus on it. (M C Shukla, 1999)
The return on assets of the company shows how well the company is in generating revenues from their assets. i.e.how many dollars of EBIT (earnings before interest and taxes) they can achieve for each dollar of assets they control.the ratio for Tesco is 7.89% and 8.0 for the year 2006 and 2005 and for morrison the ratio is 4 and 14 for the year 2006 and 2005. by comparing the two companies we have analysed that TESCO is much efficient in generating revenues from their assets than Morrison. (Sheldon Gates, 1993)
Now we look at the return on equity ratios of the companeis . Return on Equity (ROE, Return on average common equity) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. ROE is viewed as one of the most important financial ratios. It measures a firm's efficiency at generating profits from every dollar of net assets, and shows how well a company uses investment dollars to generate earnings growth .tesco financial statements shoewd return on equity of 17.57% in FY 2006 and 20 in FY 2005.howevwr the morrison showed return on equity of 7.3 in FY 2006 and 24.3 in FY 2005. as the ratio speaks about the performance of the companies there is decline in the return on equity of TESCO in FY 2006 it means TESCO is not maintaining its performance records. by comparing the two companies the ratio is high for tesco in FY 2005 and FY2006 by morrison. High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS). The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate.
A business is concerned with the debtors ratio as this ratio will tell that how long the credit customers take to pay the amounts owed to the company . this ratio also tells that how well the company is in collecting the amounts from the credit customers. (Joseph E Palmer, 1983)
Tesco's debtor ratio indicates that in the year of 2005 the