(BMG704) International finance assignment on the financial performance and the impact of two recent developments of Morrison

Question

Task: Which two recent developments in the international financial environment which appear to have impacted on your chosen Multinational Enterprise’s recent performance and development? Analyze the financial performance of the Multinational Enterprise in this international finance assignment.

Answer

Introduction to the international finance assignment
The financial statement in the international finance assignment provides a glimpse of the company's functioning in terms of status, health, performance and operations. It is therefore imperative to consider the recent development in the financial statement so that the related parties can provide an updated version of the financial statement (Pucheta-Martiinez. & Garcia-Meca 2019). The aim of the international finance assignment is to analyse the supermarket chain based in the UK. The Morrisons group (which includes its subsidiaries as well) is involved in retail sale of food, fuel, general merchandise products, clothing and providing services throughout the United Kingdom and online as well. The net profit margin has reduced from 1.98% in FY20 to 0.55% in FY21. In the year 2020 the net profit after tax was £348 million followed by £96 million for the year 2021. The international finance assignment sheds light on the recent development in the international financial environment and to development that will impact the company. The second part of the international finance assignment discusses the management strategy in terms of sources of finance and dividend policy. The last part of the international finance assignment is based on the company's financial performance, which is done with the aid of ratio analysis.

a) Two recent developments in the international financial environment
In terms of size, it is the 4th largest supermarket chain in the United Kingdom. Two recent developments in the international financial environment which appear to have impacted Morrison’s recent performance and development mentioned in the international finance assignment would be :

• Covid 19
• Russia Ukraine war (and the related global inflation )

Development 1 -Covid 19
• Description of the development in the international finance assignment
The global pandemic of COVID 19 and the lockdown have been challenging for the company and the entire group of stakeholders. As per the international finance assignment, COVID 19 lead to disruption of global supply chains, shortage of workforce, Increased input and input service costs, coupled with the inability to shift the burden of these price increases to the customer to a large extent (Deloitte 2020). In line with the companies value and core principle of making and providing food to the entire country, Morrisons supported various sections of the society (for example having a 5% farmers discount, 10% NHS discount, 10% teachers discount and donating lunch boxes daily to the people who are in need). Ever since the pandemic, we can now see in the international finance assignment that a significant Increasing the volume of online transactions. The company almost had 4X growth of its online business.

• Effect on financial performance
The group revenue for the financial year 2020-2021 was 17.6 billion pounds, while that for the financial year 2019 to 2020 was 17.5 billion pounds. Talking about the current year in the international finance assignment, for the 39 weeks ended 31st of October 2021, the group's revenue is 13.4 billion pounds that are extrapolated to the entire year. The revenue for the entire year is expected to close at around 17.8 billion pounds (Morrison 2021). Therefore, we can clearly infer that despite the challenges faced due to the pandemic, the company has been able to paint revenue and did not face a crisis in terms of revenue like its other competitors. However, if we look at the net debt of the company in the international finance assignment, the net debt has increased from 2458 million pounds in 2019-2020 to 3169 million pounds in 2020-2021. Talking about figures for the current year for the same, for the 39 weeks ended 31st of October 2021, the company's net debt is at 2954 million pounds (Morrison 2021).

• Strategy developed
The company had an increased debt requirement during the peak pandemic times as found in the international finance assignment. However, that is now slowly but surely improving. Talking about the pandemic's impact on the company's performance in the near future, we can safely bet that the company would hold up its performance and continue to deliver good results, albeit at a slower pace..

Development 2 - Russia Ukraine war
• Description of the development
Due to the Russia Ukraine war, it is found in the international finance assignment that there has been an unprecedented increase in global inflation and disruption of global supply chains, especially in the food industry. Russia and Ukraine being primary food producing and exporting countries, their continued absence from the global markets has hurt the global supply chain and has resulted in reduced supply, thus triggering an unprecedented upward pressure on the prices of food products. Further it is found in international finance assignment, Russia also happens to be one of the world's largest energy exporter countries in the form of coal natural gas and crude oil. Again due to the disruption in the supply chains caused due to the war, the prices of these critical resources have also reached record levels which have again fuelled inflation (Matt 2022).

• Effect on financial performance
Further, this war is coming at a time when the economy hasn't fully yet recovered from the pandemic. These factors mentioned in the international finance assignment are causing record inflation, hurting our economy as well. This is a cause of concern for the company as very high levels of inflation have started to result in lower spending on the part of the customer, and higher input prices do result in higher costs. This directly cuts down on the profits and is putting a lot of pressure on the already brittle state of financial affairs in the post-pandemic period.

In an update for the investors mentioned in the international finance assignment, Morrisons reported that in the 13 weeks to January 30 2022, the company's adjusted earnings is 316 million pounds. The exact figure for the similar period last year was 350 million pounds. This means a decrease of 9.7% in the adjusted earnings (Morrison 2021).

• Strategy developed
The spending visibility was one of the major way through which Morrison tried to curb the inflation. This technique mentioned in the international finance assignment helps the management to understand where money is spent and who spends it. It is one of the major productivity method and helps in bringing the right form of accountability.
b) Key elements of the Morrison international financial strategy
Above is a snapshot of the statement of consolidated financial position from the annual report of Morrisons.

• Dividend Policy:
A dividend policy of the company as per the international finance assignment is the decision undertaken by the company in respect to the dividend distribution to the shareholders (Pucheta-Martiinez. & Garcia-Meca 2019). This policy is a financial decision that hints at deciding the dividend payout ratio that is the dividend frequency and whether dividend should be paid or not. It is done by the board of the company and is a guideline for the distribution of dividend to the investors.

The relevance theory of dividend is applicable in this scenario provided in the international finance assignment. This theory states that the investors want dividend in comparison to the capital gain due to the uncertainty involved in capital gains. Through this discussion, it can be commented that Morrisons shareholders have a strong want for the dividends. Henceforth, the Bird in Hand theory is applicable in this scenario. Moreover, a decline in the dividend payout has been noted in 2021. A decrease in dividends and an increase in long-term borrowings again corroborate that the entity is looking for long-term growth and expansion projects From the annual report mentioned in the international finance assignment it has been witnessed that there has been a decrease of £41M or 13.5% in the dividends distributed in the year 2021 (£261M) as compared to the prior year 2020 (£302M). A decrease in dividends and an increase in long-term borrowings again corroborate that the entity is looking for long-term growth and expansion projects (Morrison 2021). That being said in the international finance assignment, the final ordinary dividend for the year ended 31 January 2021 of 5.11p per share has yet to be approved and is not included in the above figures.

Talking about the dividend percentage in the international finance assignment, the combined interim, special interim, final and special final dividend figures for the period ended 31 January 2021 comes to 11.15p per ordinary share (8.77p per ordinary share for the prior year). As every ordinary share has a nominal value of 10p, this means a dividend % of 111.5% for the period ended 31 January 2021 and 87.7% for the period ended 31 January 2020 (Morrison 2021). This combined dividend percentage is a healthy dividend percentage and is likely to keep the investors happy. We can further observe in the international finance assignment that there has been a 23.8% increase in the dividend percentage compared to the prior year this is again a move that would make the investors happy.

Therefore, in conclusion of the international finance assignment, we can state that the chosen policies with regard to sources of finance and the company's dividend policy are wise given the company's state of affairs and are expected to generate positive results for the company in future if appropriately executed.

• Borrowings:
It can be seen in the international finance assignment that the borrowings (current and non-current combined) have increased by £878M or 51.67%, from £1345M in 2020 to £2040M in 2021 (Morrison 2021). It is worth noting that at the same time, there has been an almost negligible increase in the share capital. Therefore, the company has chosen to fund its new growth, expansion and working capital requirements primarily on debt and not equity. It should also be noted that the overall increase in borrowing is primarily driven by the increase in non-current borrowings, not current ones. It suggests in the international finance assignment that the company is taking up increased debt to fund long-term growth and expansion policies and goals. An increase in debt to fund expansion goals is not a negative sign and can benefit the company if the growth and expansion policies are executed well (Beaver, Correia & McNichols 2014). This breakdown of the maturities of the combined borrowings corroborates our understanding in the above paragraphs. The new borrowings taken up during the year are primarily long term borrowings with maturity period of approximately 5 years.

From the above projection in the international finance assignment it can be seen that the increase in borrowing during the year has been under non-current revolving credit facilities and not fixed interest bearing bonds. This both exposes the company to higher interest rate risks but can also be beneficial in case the interest rate falls.

From the above international finance assignment we can see that there has been little to negligible change in the finance costs year on year. However, we know that there has been an approximately 51% increase in the total borrowings during the current year. But in spite of increase in borrowings by 51% we can see that there has been little to no change in the interest/finance costs (Morrison 2021). This hints at there being some sort of a moratorium with regard to interests for the new loans acquired during the year.

c) Financial performance
The profitability ratio as per the international finance assignment is one of the most critical ratios a stakeholder looks up to. With the help of the ratios, we can measure the company's performance and take economic decisions wisely (Carlon 2019)

Net profit margin ratio: This ratio measures the company's net profit, and we can compare the net profit and its margin with the comparative years of the company to measure the company's performance. In FY20, the company's net profit was £348m, but the net profit in FY21 was only £96m, which was because of an increase in the cost of sales in FY21. The cost of sales as a percentage of revenue was ~96% in FY20, but the same has increased to ~98% in FY21, thus which has affected the profitability of the company (Morrison 2021). Therefore it is deduced from the international finance assignment, the net profit margin has also reduced from 1.98% in FY20 to 0.55% in FY21.

Return on Equity: The account of lower profitability in FY21 as compared to FY20, the return on equity has also reduced from 7.66% in FY20 to 2.19% in FY21. Thus it can be said in the international finance assignment, the return on equity is directly linked to the profitability and outstanding number of shares of the company at that year. The outstanding number of shares has not changed much; thus the effect of reduced return on equity is majorly on account of reduction in profitability.

Return on assets: The account for lower profitability in FY21 as compared to FY20 the return on assets has also reduced from 3.19% in FY20 to 0.87% in FY21. Thus it can be said in the international finance assignment, the return on assets is directly linked to the company's profitability and closing total assets at year-end. The net change in total assets in FY21, i.e., increases by £116m and the decrease in profit from £348m in FY20 to £96m in FY21 thus; the effect of an increase in total assets and a reduction in profit harmed the ratio (Morrison 2021). Liquidity ratio: This measures the company's ability to pay its short term and long term liability. This ratio should be within the ideal ratio for smooth operations of the company and to avoid cash flow crunches (Ferris, Noronha & Unlu 2010)

Current ratio: The current ratio of the company is calculated by considering the assets and liabilities of the company, which are receivables or payable within 12 months (Madura & Fox 2011). The company's current ratio in FY20 was 0.39 times, which has improved to 0.48 times in FY21 as per the analysis of international finance assignment. This is on account of increase in current assets in FY21 to £1430 from £1322 in FY20 and a decrease in current liabilities in FY21 to £2981 from £3396 in FY20. Even though there is a slightly improved current ratio of the company, the ratio is still not ideal. An ideal current ratio should be 2 times, whereas the ratio of the company is around ~0.50 times which is an adverse ratio and the company will face cash flow crunches, and the same shall be met by capital infusion or raising of short-term liabilities or selling of fixed assets to meet its present obligation (Madura & Fox 2011) Quick Ratio: Quick ratio as per the international finance assignment measures the company's ability to pay its immediate obligation; thus, an ideal quick ratio is at least 1 (Atril 2014). The quick ratio excluded inventory from the current asset in the computation of the quick ratio. Thus, the quick ratio in Fy20 was 0.19 times and in FY21 is 0.21 times which is almost identical, but in both years, the ratio was below the ideal ratio. Thus, the company will face difficulty in paying its immediate obligations.

Gearing ratio
The ratio as per the international finance assignment measures the company’s capital structure. The outstanding Debt to equity ratio is not more than two times. Debt equity ratio: This ratio measures the capital structure of the company (Peirson et al 2015). In the given company, the debt-equity ratio of FY21 is 1.62 times as compared to FY20, which was 1.40 times. This is because in FY21, the company raised additional long-term borrowing and the borrowing in FY21 is £1986m compared to FY20, which was £1108m (Morrison 2021). Therefore it can be stated in the international finance assignment, the debt-equity ratio in FY21 has increased. Currently, the company ratio is within the ideal ratio and should try to keep within the ideal range.

Debt ratio: The company's debt ratio in FY20 was 0.55 times; in FY21, it is 0.57 times. This is almost in the similar line because the Debt and assets in FY21 have increased in the same proportion and thus the ratio is almost the same.
Equity ratio: The company's equity ratio in FY20 was 0.45 times; in FY21, it was 0.43 times. This means the ratio has reduced slightly because the equity has reduced by £325m on account of current year negative comprehensive income attributed an increase in non-current assets on account of increase in plant property and equipment by £211 in FY21.
Efficiency ratio (Asset turnover ratio) : This ratio as per the international finance assignment measures the efficiency of the company. The asset turnover ratio denotes the efficiency with which the company deploys the assets for producing revenue (Atril 2014). Herein, the ATO is 1.64 times which is justified for the company as the company is producing sufficient sales with the assets.

Conclusion
The aim of the international finance assignment was to shed light upon the recent changes in financial reporting of the company, followed by the financial performance of the company. The analysis in the international finance assignment reflects that the financial environment was highly influenced by the Covid-19 pandemic followed by the Russian-Ukraine War. In the future, it can be commented that investors and experts might see a dip in earnings and hence financial performance will be impacted. Coming to the financial analysis, it is noted that the company is struggling in the present scenario because the net profit margin of the company has reduced, followed by a dip in the liquidity. Hence, the company's liquidity is weak, and the profit scenario is weak. Overall, it can be concluded by commenting that the management needs to understand the changes in the economic environment and accordingly work upon the parameters. Further it can be stated in this international finance assignment, it needs to devote special attention in terms of uplifting the profitability and rectifying the profitability.

References
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Beaver, W.H., Correia, M., McNichols, M.F 2014, Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy? Review of Accounting Studies, vol. 17, no. 4
Matt, B 2022, Accounting and reporting implications resulting from the Ukraine war, viewed 18 July 2022 https://www2.deloitte.com/us/en/pages/audit/articles/accounting-russia-ukraine-war.html
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Deloitte 2020, How COVID-19 infects financial reporting and results presentations, viewed 18 July 2022 https://www2.deloitte.com/ch/en/pages/audit/articles/financial-reporting-survey-q1-2020.html Ferris, S.P., Noronha, G. & Unlu, E 2010, The more, merrier: an international finance assignment of the frequency of dividend payment. Journal of Business Finance and Accounting, vol. 37, vol.1, pp. 148–70
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Morrison 2021, Morrison 2021 annual report, viewed 18 July 2022, https://www.morrisons-corporate.com/investor-centre/annual-report/ Peirson, G, Brown, R., Easton, S, Howard, P. & Pinder, S 2015, Finance, 12th ed. North Ryde: McGraw-Hill Australia.

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