The City
Mark and Spencer is among the leading retail outlets in the United Kingdom. The company has over 1330 retail stores in various countries across the globe. The company mainly specializes in retail goods. The company stocks quality clothes, food stuff and a variety of home products. The company prepares its accounting statement per generally accepted accounting principles. Moreover, the financial statements are presented as per internationally financial reporting standards. This financial analysis is based on the company’s annual financial statement for the last five years (Mark and Spencer, 2015).
Liquidity Ratios
Liquidity ratios are used to gauge the company’s ability to meet its entire current obligation as and when they fall due. The main current ratios are the current ratio and acid test ratio. These two ratios tell whether a company will need to arrange for a bank overdraft to meet some of its current liabilities. A company that arranges for bank overdraft to meet the current liabilities faces additional costs of high-interest rate.
Current Ratio
This ratio gauges mark and spencer’s ability to pay its current liabilities from, cash, disposal of inventory, and conversion of receivables and short-term investments into cash. Current ratio = current assets/ current liabilities (Morningstar, 2016).
The current ratio falls below one for the entire period considered. Such a low ratio indicates that the company has been facing a lot of difficulty in meeting current obligations. However, the assumption cannot be applied to a retail store with high stock turnover whose inventory is easily convertible into cash. Thus, Mark and Spencer have not faced any challenge in settling current liabilities.
Acid Test Ratio
This ratio determines the ability of Mark and Spencer to meet current obligation without disposing of its inventories. The general assumption in analyzing this ratio is that it takes considerable time for a company to dispose of its inventory. Quick ratio = (current assets-inventory)/ current liabilities (Morningstar, 2016).
The above analysis shows the acid test ratio fell below 0.5 in all the years considered. Thus, Mark and Spencer could not meet its current obligations without disposing of inventory. However, this weakness cannot be taken as management inefficient because the company ability to convert its stock into cash is quite high.
Capital Structure Ratios
These ratios determine how the management uses both debt and shareholders’ equity to finance company’s projects. A company that uses more debt than equity faces a higher risk of insolvency than the one that uses more shareholders equity. However, a company that has little or zero debt raises questions especially if the rate of return of its projects is higher than the cost of debt.
Debt to Equity Ratio
(Morningstar, 2016).
The debt to equity ratio has been falling over the past five years. Moreover, the ratio has not gone above 2 in all the years. Thus, the risk of bankruptcy or volatile earning as a result of high-interest rate is considerably low. However, it is important to compare Mark and Spencer ratio with the industry average.
Profitability Ratios
The profitability ratios measure company’s ability to raise profit from its projects. The ratios are calculated by considering the revenue, expenses, and resources used in carrying out business activities. Many investors and shareholders keep a keen eye on profitability ratios because they determine the business ability to raise returns for shareholders. Moreover, there is a positive correlation between company's profit and share prices.
Return on Equity (ROE)
The ratio determines the returns raised by a company for every dollar or pound of shareholders’ equity. Return on Equity (ROE) = Net profit /common stock. Thus, the shareholders wealth and returns increase as return on equity increases (Morningstar, 2016).
The analysis shows that return on shareholders’ investment has been declining. The declining trend likely to have a negative impact on the price of shares and dividends paid to ordinary shareholders.
Return on Assets (ROA)
This ratio determines management’s ability to use company’s assets to raise profit. Thus, the increasing trend of the ratio indicates increased efficiency in the use of company’s assets. (ROA) = net profit/ total assets (Morningstar, 2016).
The analysis shows that the trend of return on asset is similar that of return on equity. Thus, the management efficiency to utilize company assets to raise returns has been decreasing. This trend may be attributed to purchase of new assets or high cost of maintaining old assets. It is important to compare Mark and Spencer ratio with the industry average ratio.
Gross Profit Margin
The ratio measures profit realizable out of the sale of one dollar of inventory. Increasing gross profit margin indicates increasing profit realizable out of the sale of inventory. Thus, increase in profit margin results from an increase in selling price as the cost of goods remains constant or as the cost of sales increases at a lower percentage than selling price. Gross profit margin= gross profit/ sales (Morningstar, 2016).
The analysis shows that the gross profit margin has been fluctuating. In 2014, the ratio was at the lowest point however it increased in the year 2015. The ratio has shown that every sale of one dollar of inventory raised at least 0.37 dollars of gross profit. It is likely that the company has been decreasing its selling price to attract more customers and increase its market share.
Net Profit Margin
This ratio determines the overall profit realizable out of every dollar realized upon the sale of inventory and payment of all business expenses. Thus, unlike gross profit margin, it considers all the expenses incurred in day to day running of business. Net profit margin= net profit/ sales (Morningstar, 2016).
The net profit margin has a declining trend. Thus, the management of Mark and Spencer has not been able to control effectively operating overheads. This may be attributed to decrease in selling price of goods aimed at increasing revenue and total profit.
Working Capital Management
It is always important to compare the day’s sales outstanding, day’s inventory and payable period in determining the efficiency of management in managing the working capital. The working capital of a company is said to be well managed if the payable period is longer than the day’s sales outstanding, and day’s inventory (Morningstar, 2016).
The above analysis shows that the payable period is longer than the day’s sales outstanding, and day’s inventory. Thus, the company has not experienced working capital problems for the last five years.
Stock Market Performance
The performance of common share is determined by the increasing profitability of the company and overall confidence of investors in the management ability to increase the company’s market share.
The following table shows how the prices of common shares of Mark and Spencer for the last five years (Morningstar, 2016).
The graph shows that the prices of company shares have been increasing for the last five years. This illustration indicates that the company's profit has been increasing as well investors’ confidence in management ability to run the company.
Conclusion
The ratio analysis indicates that the company is well managed. This is reflected in working capital management and profitability ratios. The stock market analysis shows that it is advisable for investors to invest in the company because the prices of company’s shares have maintained an increasing trend for the last five years. Thus, shareholders wealth has been increasing since 2011. Shareholder wealth likely to increase in future because of the expansion plans of the management.
References
Mark and Spencer.,2015. Annual Report. Retrieved February 19, 2016, from
http://annualreport.marksandspencer.com/
Morningstar. (2016). Marks & Spencer Group PLC ADR. Retrieved February 19,
2016, from http://financials.morningstar.com/ratios/r.html?t=MAKSY
