The City
Financial Analysis: Marks and Spencer
Marks and Spencer is one of the leading UK leading retail with over 1330 outlets across the globe. The company specializes in home products, clothing, and food. Food consists of the largest share of the company revenue. The company financial statements are prepared and audited by independent external auditors. This makes sure that they reflect a true and fair view of the financial position of the company. This report is based on the company’s financial statement for the financial year 2014 and 2015. The ratios used in the analysis are liquidity, profitability, and efficiency among others (Marks and Spencer, 2015).
Liquidity Ratios
These are the ratios that gauge the company’s ability to meet its short-term obligations as they fall due. The current assets should service the current liabilities in a company without the need to arrange for bank overdrafts and other financial sources that pose additional burden of interest to the company. Thus, liquidity ratios are also known as the solvency ratios. These ratios are the current ratio, acid test ratio, and cash ratio.
Current ratio
This is the ratio that measures the ability of the company to pay all its payables from the sale of inventory, current assets, and cash. Current ratio = current assets/ current liabilities.
The current ratio of both years falls below one. A current ratio that fall below one indicates that the company may face difficulties in paying credit suppliers within the required time. However, this general assumption is not applicable to retail outlet stores like Mark and Spencer because the company's current assets are easily convertible into cash.
Acid Test Ratio
Acid test ratio is used to determine the ability of the company to meet current liabilities from current assets excluding inventories. This ratio excludes inventories because a low stock turnover makes it difficult for the organization to rely on sales revenue to meet current liabilities.
The company cannot meet its current obligations without disposing of inventory. However, this is not a weakness because Mark and Spencer is a retailer outlet with the wide customer base and high stock turnover.
Profitability Ratios
These ratios gauge the organizational ability to raise profits from its activities. The ratios mainly consider the relationship between revenue and expenses or resources used to raise the revenue. The profitability ratios are quite important to the organization because profit realizable is used to pay dividends and grow shareholders wealth. The wealthy of shareholders increase when company’s profit increase because apart from dividends received the market price of shares increase.
Return on Equity (ROE)
This ratio is used to determine the amount of net profit realized by a company for a dollar of shareholders’ investment. Therefore, it is calculated using the formulae net profit /common stock; in this case, common stock refers to ordinary shareholders.
Return on Equity (ROE) = Net profit /common stock
Return on Equity year 2015 = 746.1/412 = 1.81
Return on Equity year 2014= 387.6/408.1 = 0.949
The year 2014 ratio shows that the company was able to raise almost one dollar for every dollar invested by the shareholders. In the year 2015, the company raised 1.8 dollars for every one dollar invested regarding equity. This shows that shareholders wealth grew more in the year 2015 than in the year 2014. This shows that the management efficiency in controlling expenses and its marketing and sales strategies have improved.
Return on Assets (ROA)
This ratio determines the amount of dollars raised from every dollar invested in company’s assets. An increasing return on asset ratio indicates that the company has increased its efficiency in using assets to raise revenue that translates to profit.
Return on assets (ROA) = net profit/ total assets
Return on assets (ROA) 2015= 746.1/ 8196.1= 0.091
Return on assets (ROA) 2014 = 387.6/ 7903.0= 0.049
The ratio is higher in the year 2015 than in the year 2014. This shows that the company is efficiency in utilizing assets to raise profit has increased. It may however be important to compare the company ratios with industrial average to gauge management’s efficiency in the use of organizations assets in comparison with the other firms in the industry.
Return on Capital Employed (ROCE)
This ratio is used to determine the amount of dollars realizable out of every dollar invested in terms of long-term debt and shareholders’ equity (long-term capital). This ratio recognizes the impact debt capital on returns unlike return on equity that considers shareholders capital only.
Return on capital employed (ROCE) = operating profit/ capital employed
Capital employed= long term debt+ equity
Capital employed 2015 = 2885.7+3198.8 =6084.5
Return on capital employed (ROCE) 2015 = 701.3/6084.5= 0.115
Capital employed 2014= 2847+ 2706.7 = 5553.7
Return on capital employed (ROCE) 2014= 694.5/5553.7= 0.125
The company ROCE in the year 2015 is low than that in the year 2014. This shows that each dollar of capital employed in the year 2015 earned less returns than in the year 2014. This is an indication of decreasing profitability attributable to increased debt and cost of capital. However, it is important to compare the ROCE with the company’s borrowing rate. The ROCE ratio of an efficient company should either be above or at par with the borrowing rate of the company.
Gross Profit Margin
This ratio is used to determine the percentage of profit realizable out of the sale of inventory. A company with increasing profit margin shows increasing profit realized from the sale of inventory. High-profit margin also indicates increasing the price of company inventory without an increase in the cost of goods sold. The increase in selling price may only be sustainable if the company is in an industry where firms engage in non-price competition. Otherwise, increase in selling price lead to a decrease in market share resulting in low revenue and profits.
Gross profit margin= gross profit/ sales
The above calculations show that, For every dollar of sales revenue, the company earns around 0.06 dollars. This ratio has remained at around the same level in both years. Thus, the company is likely to increase and maintain its market share because it has not increased its market prices to earn more returns.
Net Profit Margin
It is used to determine the percentage of profit realizable after paying for the goods sold and other business expenses. An increasing net profit margin shows that the management has been able to control overheads so as to increase the profit realizable in a given period.
Net profit margin= net profit/ sales
The ratio has slightly decreased in 2015. Thus, it should be compared with that of main competitors to get some more insight on the management efficiency to control overheads (Mark and Spencer, 2015).
Efficiency Ratios
This is ratios that are used to determine the level of management efficiency in utilization of resources to raise revenue. The most popular efficiency ratios are the inventory turnover, receivable turnover, payable turnover, asset turnover ratio and fixed assets turnover ratio.
Asset Turnover Ratio
This is the ratio that is used to determine the extent the management uses total organization assets to raise revenue.
Asset turnover= total assets/ total sales revenue
Asset turnover 2015= 8,196.1 /10311.4= 0.794
Asset turnover 2014= 7903.0/ 10309.7= 0.767
The asset turnover ratio has remained at a relatively stable level in both years considered.
Fixed Assets Turnover Ratio
The ratio determines how efficiently management of a company uses the fixed assets to raise revenue.
Fixed Asset Turnover= fixed assets/ total sales revenue
The efficiency of management in utilizing fixed assets to raise revenue has remained almost the same in the year 2015 and 2014. Thus, insight in this ratio can be obtained if comparison with industry average is carried out.
Receivables turnover
This ratio determines the number of days a firm takes to collect cash from debtors.
Receivables turnover= (receivables/sales)*365
Payable turnover
This ratio is used to determine the number of days the company takes to pay for inventory obtained on credit from suppliers
Payable turnover= (payables/ cost of goods)*365
The company receivable turnover is less than the payable turnover in both years. This shows that the company will be able to collect cash from debtors and pay its credit suppliers without any problem. The high payable turnover shows that the suppliers have confidence in the company’s ability to pay (Marks and Spencer, 2015).
Conclusion
The company has kept its liquidity ratios below one. This means that it does not keep excessive cash to meet current liabilities because its stock can easily be converted into sales. The efficiency ratios show that the management is running the organization in efficiency manner. This is because the asset turnover ratio has slightly increased in the year 2015 in comparison with the year 2014. The payable and receivable turnover have also been managed in an effective manner that allow the company time to collect money from debtors to pay credit suppliers. The profitability ratios also indicate that the management is sensitive to maintaining a stable gross profit margin. This margin enables the company to raise adequate money to cover the general overheads. Moreover, stable profit margin indicates that the management is maintaining stable prices that allow the company to maintain and increase its market share.
References
Marks and Spencer, 2015. Annual Report. Retrieved January 6, 2016, from
http://annualreport.marksandspencer.com/
