Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) delivered a car-crash set of results last week, triggering a slide in its share price that’s left it down by 33% on the shares’ 52-week high.
The reasons have been chewed over thoroughly already: discounters, online, convenience, loyalty cards — Morrisons is lagging behind on them all. My focus today is on Morrisons’ finances; are they still strong, or is a dividend cut likely this year?
I’ve taken a look at three key financial ratios that could highlight potential problems.
1. Operating profit/interest
Morrisons is already forecasting a big fall in underlying profit in 2014/15. This means that using last year’s underlying profit figure could give us a false sense of security, so what I’ve decided to do is to use Morrisons’ own forecast for the year ahead.
What we’re looking for here is a ratio of at least 1.5, preferably over 2, to show that Morrisons’ earnings cover its interest payments with room to spare:
Mid-range forecast underlying 2014/15 profit divided by net interest paid in 2013/14
£350m / £89m = 3.9 times cover
Although this level of cover appears adequate and is above the minimum required, it is much lower than J Sainsbury (7.5 times) or Tesco (6.5 times). Morrisons’ commitment to raise its dividend by at least 5% this year looks questionable to me — I don’t expect it to happen.
2. Debt/equity ratio
Commonly referred to as gearing, this is simply the ratio of debt to shareholder equity, or book value. I tend to use net debt, as companies often maintain large cash balances that can be used to reduce debt if necessary.
At the end of 2013, Morrisons reported net debt of £2,772m and equity of £4,692m, giving net gearing of 59%. This is higher than either Tesco or Sainsbury, and could become quite a demanding burden, given the low margin nature of Morrisons’ business.
Morrisons’ plan to sell £1bn of freehold property might help moderate its net debt, but it remains a concern for me.
3. Operating profit/sales
This ratio is usually known as operating margin and is useful measure of a company’s profitability.
Morrisons reported an underlying operating margin of 4.6% last year, but planned price cuts and other changes this year mean that this will almost certainly fall further in 2014.
