Is Wm. Morrison Supermarkets plc Dependent On Debt?

Are debt levels at WM. Morrison Supermarkets plc (LON: MRW) becoming unaffordable and detrimental to the company’s future prospects?

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Shares in Wm Morrison (LSE: MRW) (NASDAQOTH: MRWSY.US) have had a torrid time in 2014. They are currently down over 9% after a profit warning in early January which said that profit for the year would come in at the bottom of market expectations.

Since then, shares are little changed while the FTSE 100 has recovered from its emerging markets ‘wobble’ to be up 1% year-to-date. However, is more amiss at Morrisons, with its share price reflecting more than just tough trading conditions and a profit warning? In other words, is financial risk becoming a problem and is Morrisons dependent on debt?

Excessive Debt?

Morrisons has historically been averse to packing its balance sheet full of debt, so a relatively low debt to equity ratio of 47% is perhaps to be expected. This means that for every £1 of net assets (total assets less total liabilities) Morrisons has £0.47 of debt. For a company that only sells food, this is very comfortable and could be increased, since the sale of food may not be a growth area at present, but is nevertheless stable when compared to other non-food retail companies.

Furthermore, despite its lack of profit growth, Morrisons is able to comfortably service its debt. Evidence of this can be seen in the interest coverage ratio, which stands at 13.5 and highlights that the supermarket was able to make its net interest payments over thirteen times in its most recent financial year. Again, this shows that current debt levels are unlikely to be a concern for investors or for the market.

Looking Ahead

As mentioned, shares in Morrisons have performed poorly in 2014. Indeed, over the last five years they have underperformed the FTSE 100 by 63% (excluding dividends), which is clearly a disappointing result for investors.

However, with a balance sheet that can accommodate more debt to boost shareholder returns, a yield of 5.2% (making Morrisons the 5th highest yielding share in the FTSE 100) and a price to earnings (P/E) ratio of just 10 (compared to the FTSE 100’s P/E of 13.5), Morrisons could reverse the trend over the medium to long term. In other words, it could be a great value play and surprise the market in 2014 and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter owns shares in Wm. Morrison. The Motley Fool has recommended shares in Morrisons.

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