According to J,R Dyson (2004) there are 4 types of ratio’s when constructing a ratio analysis. They are; Profitability ratios, Liquidity ratios, effieiciny ratios and investment ratios.
Profitability ratios give an indication of how profitable a firm is. J,R Dyson (2004) believes the best way of assessing profitability is through the ratio known as Return on capital employed however this ratio is not universally calculated in one specific way due to “profit” and “capital” being defined in several ways and therefore producing different ratios. The ratio measure the profit figures against investment made by the shareholders and therefore reveals how much profit is being made with the investment being taken into account. (Figure 1) Morrison’s have fared well having made a 5.09% increase in ROCE from 2007 to 2009 whereas Tesco have seen a steady decline in their figures falling from 25.12% in 2007 to 22.73% in 2009. Sainsbury’s on the other hand over the three year period have seen a slight decrease of 0.32% from 10.97% to 10.65%.
One such example is the gross profit margin ratio, this ratio measures how much profit a firm has earned in relation to their respective sales. (Figure 4) compares the GP margins of each supermarket over the period of three years; Morrison’s recorded an increase of 1.21% from 5.10% to 6.31% from the years 2007 to 2008 however, in 2009 GP margin fell to 6.28%. Although sales increased, cost of sales also increased at a high rate and therefore reduced the margin. Tesco saw a fall from 8.12% in 2007 to 7.67% in 2008 however in 2009 Tesco recorded a rise of 0.09% to 7.76%. Sainsbury’s on the other hand saw a substantial fall from their 2007 figure of 6.83% to their 2008 margin of 5.62% this was due to the increase in cost of sales and turnover not improving in correlation to this increase therefore reducing gross profit However, 2009’s Margin did fall but at a less dramatic rate of 0.14%.