Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

What Do These Ratios Tell Us About Wm. Morrison Supermarkets Plc (MRW)?

Page 1 of 2

LONDON — Before I decide whether to buy a company’s shares, I always like to look at two core financial ratios — return on equity and net gearing.

These two ratios provide an indication of how successful a company is at generating profits using shareholders’ funds and debt, and they have a strong influence on dividend payments and share price growth.

Today, I’m going to take a look at Wm. Morrison Supermarkets plc (LON:MRW) to see how attractive it looks on these two measures.

Return on equity
The return a company generates on its shareholders’ funds is known as return on equity, or ROE. ROE can be calculated by dividing a company’s annual earnings by its equity (i.e., the difference between its total assets and its total liabilities) and is expressed as a percentage.

Wm. Morrison Supermarkets plc (LON:MRW) has doubled its annual dividend payout over the last five years, rewarding long-term shareholders. Let’s take a look at the firm’s ROE over the same period:

Wm. Morrison 2009 2010 2011 2012 2013 Average
ROE 10.3% 12.6% 12.2% 12.8% 12.2% 12%

Morrisons’ ROE has been extremely consistent over the last four years, and its five-year average of 12% is similar to those of other U.K. supermarkets.

What about debt?
One weakness of ROE is that it doesn’t show how much debt a company is using to boost its returns. A good way of assessing a company’s debt levels is by looking at its net gearing — the ratio of net debt to equity.

In the table below, I’ve listed Wm. Morrison Supermarkets plc (LON:MRW)’ net gearing and ROE alongside those of its peers,Tesco and J. Sainsbury:

Company Net Gearing 5-Year
Average ROE
J. Sainsbury 39.5% 10.5%
Wm. Morrison 41.4% 12%
Tesco 46.9% 15.5%

The supermarkets’ average ROE and net gearing appear to be closely correlated, highlighting the influence that debt can have on ROE.

Page 1 of 2