Financial Statement Analysis for M&S Limited - Case Study Example

Financial Statement Analysis for M&S Limited Contents Financial Statement Analysis for M&S Limited 1 Contents 2 Background 3 Financial performance of the company 3 a.Profitability 3 Gross profit margin 3 Net Profit Margin 3 Return on Capital Employed (ROCE) 4 b.Liquidity 4 Inventory Turnover Ratio 4 Current ratio & quick ratio 5 c.Efficiency 5 Trade payable payment period 5 Trade receivable collection period 5 d.Gearing 6 Debt to equity ratio 6 e.Investment potential 6 A reappraisal of the group’s recent financial performance and position 7 a.The Chairman’s Statement 7 b.The CEO’s Strategic Update 7 c.The Marketplace Report 8 d.The Operating Performance Review 8 e.The KPIs and Financial Review 8 f.The Risk Management Review 9 A review and recommendation for investors of the investment potential of the group 9 An explanation of the limitations of my analysis 11 Bibliography 12 Background M& S Plc is the leading British global retailer with its head office in City of West miner. The company is listed in the London stock exchange and it is a constituent of FTSE 100 index. The company’s source of income is from selling cloths, home products as well as luxury product. The company has started selling branded product like the Kellogg’s Corn Flakes. M&S have 960 stores across the United Kingdom and many worldwide stores. In recent years, the company’s clothing revenue has been declining while the food revenue has been growing as a result of axing the St Michael naming for their own product branding. Financial performance of the company a. Profitability Gross profit margin The company Net profit margin ratio depicts an increasing trend from 2015 to 2016 with a profit margin ratio of 38.65 and 39.11 respectively. This is a result of the growth in the food sales with a decline in the competition in the retail industry. Some of the systematic risk was as a result of the worldwide retail stores that reported a decline in revenue as a result of the shift in current, decline in product prices as well as stunted Chinese economy. Net Profit Margin During the financial period ending 2015/16, as much as the income increased for the company as a result of the increase in income from food and international segment, the overall net profit margin for the company depicted a declining trend of 4.72% and 3.85% for the financial period ending 2015/16 respectably (James, 2015). The decline is as result of the growth in workers benefit cost, Amortization. Deprecation cost as well s other occupancy cost. The stakeholder benefit ratio like the dividend payout ratio depicted a growth to 3.89% as well as s the entire effect on Net profit margin which depicted a decline in net profit margin by 0.85% Return on Capital Employed (ROCE) During the financial period 2015/16, it was evident that the return on capital employed decline from 11.21 to 9.04. This depicts a growth in earning before interest and tax and a decline I average net operating asset. The decline from the financial year 2015/16 leads to 2.33% change in ROCE for the company. b. Liquidity Inventory Turnover Ratio During the financial period ending 2015/16, the company reported a growth in inventory turnover to 8.05 in the year 2016 from 7, 69 times in the year 2015. This depict 1.31 growth on the basis of the year 2016 which is chiefly as a result of the cost of selling increasing to 1.57% from £6325.9 million in the year ending 2015 to £6427million in the year ending 2016. The growth in the revenue depicts a positive implication to the growth in the inventory turnover which implies that more sales were made. The company centers on driving revenue by implementing action to re-establish clothing styles, constant focus on the latest clothing design as well as supervising clients online shopping experiences through social media in order to have a compression of the client’s needs. Current ratio & quick ratio It is evident that the company depicts a large steady level of inventory which implies that the company has dependable suppliers with good association with food suppliers, c. Efficiency Trade payable payment period The ratio evaluates how time the business will take to pay the suppliers and servicing the credit. From the ratio analysis, it is evident that the M&S depict a decline in creditor’s payment period with a credit payment period of 57 in 2015 and 58 in 2016. A long term credit payment period is ideal since it enhances the company’s liquidity and more susceptible to taking full advantage of the credit terms permitted by its suppliers (King, 2006) (Shi, 2001). The company has a payment of period 11 weeks as the business main executive makes an effort of improving the sales for the clotting segments Trade receivable collection period The collection period points out the time period that it will take before the debtors of the company pays for their debts. It is recommended that the company to have a short debtor’s collection period and long creditor’s payment period in order to have an improved cash management. From the company’s ratio analysis, it is evident that the trade receivable period is 4 days in the year 2016 which is ideal since the capital tied up in stock is less unlike the trade collection period for the financial period ending 2015. The decline might have been a as a result of keep up to date frequently with the customers on payments and by providing large discounts offers to client s for payment on time. The company is encouraging the latest prompt payment in return for substantial discount offers. d. Gearing Debt to equity ratio This ratio measures the amount of debt capital to equity capital in the company and whether the company is having an optimal capital structure. Form the debt to equity ratio for M&S. it is evident that the company is experiencing a decline in debt to equity ratio from 0.55 to 0.52 for the financial period ending 2015/16 respectively. This implies that the ability of the company to sue debt capital more than equity is declining hence risky to the business since, equity capital is deem the expensive capital unlike the debt capital. e. Investment potential Subsequent tot comprehensive ratio analysis for M$S for the financial period ending 2015/16, my judgment is that the company is ideal for investment since, The profitability as well as the liquidity and the company’s efficiency is guaranteed hence, the company yeas going concern. From the analysis of report, it is evident that the company’s gross profit is increasing each year implying that the operating management is efficient. Furthermore, there is least product being pumped into the market which leads to serious challenges and an opportunity for the company and the Market in the prospect. Nonetheless, the net profit margin for the company is declining as a result of workers benefit cost as well s the amortization/ depreciation cost meaning that the supply management is anticipated to be enhanced. In my judgment, the most significant thing is that there is a growth in earning per share as well as the dividend per share which implies that an investor might realize positive returns on investing in M&S Company. A reappraisal of the group’s recent financial performance and position a. The Chairman’s Statement It was evident in the chairman statement that the company’s performance during the financial period ending 2015/16 experienced a mix of good performance and bad performance as depicted by the overall growth in profit and the decline in sales revenue from clothing industry. The company delivered better performance in the food and substantial performance home margins with clothing sales not that excellent. The over outcome as per the chairman is good since the profit before tax for the financial period ending 2016 increased by 3.5% to 684.1 million pounds. While the statutory profit decline to 483.3 million pounds depicting a decline of 19.5% b. The CEO’s Strategic Update The CEO message depicts an overall indication of company’s good performance in terms of profit creation. Nonetheless, the company experienced challenges in its international business both from internal and external. The company’s reported net profit was affected by many factors like the impairment cost for the international business and its UK stores portfolio as well as a review of the clothing segments which experienced detrimental loses (William Petty, 2015). However, the CEO insisted on improving few years in order to ensure that the business performance is guaranteed. In his statement, it was evident that the CEO focused more on some key priorities to improve business operates which is the implementing action to recover and growth clothing segments constantly growing the food segments as well as driving profitability for the company’s shareholders. c. The Marketplace Report The market place report depict that consumer confidence in the company’s product has been declining over the years as competition increases. On the contrary, the economy of the United Kingdom has remained fixed while the rate of employment had been declining with housing price increasing. Many micro aspects have created wariness. indecision over the future economy as well as the growth of terrorism have an impact of firm financial performance since, many clients are worried about their financial situation and are scared to spend more which in turn affect the company’s sales level which is already experienced in some of the international segments as well as division like the clothing that had negative performance. d. The Operating Performance Review The company’s main clothing and home were to enhance the gross margin and Increase the revenue level. While attaining the gross margin level, with a245 bps growth as a result of enhanced sourcing capacity, the company didn’t deliver on gross margin. The sales declined by 2.2% which affected the market portion in main segments. This performance was less satisfactory (Davies, 2013). The superior street clothing market experienced a hard times with biggest portion cycle as well rare weather trend. But the company’s performance stressed on some intricacies with the core clothing offer as well as these was as result of failures in executing. e. The KPIs and Financial Review The KPI shows that the company’s revenue increased as a result of the strong performance in its food business. The profit before tax increased due to the growth in the food and clothing as well as some profits and tight cost management, even though this was partially offset by the decline in profit in the company’s international business. The growth in return on capital employed from the last financial period mainly depicts the growth in underlying earning before interest and tax and small decline in the average net operating asset. The company delivered a strong cash flow up to 2.9% on the previous years f. The Risk Management Review The company’s clothing and home transformation is affected by inadequacy of enhancement in product importance execution. It is vital for the company to comprehend its clients’ needs to strengthen brand awareness in an increasing competitive market whilst substantial focus must be placed on enhancing the advantage which is yet to be realized in the company’s revenue performance. Transforming the clothing and home business to enhanced business performance turns to be the main priority for the company. The company operates with the use of much intricate as well as autonomous system. The efficient integration of the is dependent on the company to have access to as well as leverage the correct skills, coupled with culture of operational correctness. The integration of the latest address risk to the business. There is a scope to enhance the integration involving the system to leverage linked advantages as well as driving the business forward and capitalizing on operational effectiveness. A review and recommendation for investors of the investment potential of the group From the appraisal of the financial performance for M&S company, I recommendation is that the company is doing good and ideal for invest thought the company faces some few challenges like the decline in sales for the clothing which is not a good single with regards to business profitability as well as the liquidity as well as the trend of future business performance. As per the ratio analysis, it was evident that the company gross profit is increasing with a decline in net profit margin depicting a 0.46% growth due to the firm strategic priorities even though clothing as well as home and worldwide business experienced financial difficulties (Henderson, 2015). The revenue from food product was positive but still the loses from clothing and international business makes the business run at a loss in other segments which implies that M &S depict potential expansion ability in the prospect. The net profit margin for the company depicted a decline e which is a result of the growth in the workers benefits cost as well as the deprecation cost and the decline in revenue from the international business. The company incurred huge impairment loses leading to decline in the reported net profit. The company reported a growth in return on capital employed while the company’s profitability was effective. The profit before operating cost was good whilst the operating profit depicted a declining trend as a result of the non underlying cost. From the ratio analysis and comprehension of the general performance of M&S Company, I would advise that an investor must consider investing in the company since, it is evident that the company is a going concern entity since, its liquidity is not at risk and the company’s profitability is enhanced. For the last two finance period ending 2016, the company has been struggling to uphold the best business performance (James, 2015). Even though the firm wasn’t a triumphant as anticipated, they did depict some attainment. In recent years, the revenue of clothing declined and stores were closed which implies that M& S share prices might decline. Nonetheless, special events will growth the share prices such as the appointment of new chief executive officers as well as constant expansion of adjusted earning per shares which depict potential stocks An explanation of the limitations of my analysis The limitation in our analysis is that the ratio analysis as an appraisal tool doesn’t consider other external factors that may affect the company operations factors like the effect of inflation or the effect of innovation will not be reflected by the result of the ratio analysis when it will be complex top provide a comprehensive conclusion on the current as well as prospect business operations. Also, the ratio analysis doesn’t factor in the fundamental as well as technical analysis whereby, we compare the company’s ratio with its peer and the market trend in order to have a clear understanding of the general trend other firm in the same industry and the firm business performance in order to give a conclusive remarks with regards to business situation in m& s. our ration analysis focused on the international operations of the company by ascertaining its liquidity situation ,profitability as well as efficient situation without factoring in other external factors as well as comparisons with its peer review and market trend. Bibliography Davies, H. (2013). Global Financial Regulation: The Essential Guide. Henderson, S. (2015). Issues in Financial Accounting - Page 991. London: Cingage learning . James, W. (2015). Financial & Managerial Accounting - Page 992. London: John Wiley. Kaoma, K. (2006). Legal Aspects of Financial Services Regulation . King, A. (2006). Fair Value for Financial Reporting: Meeting the New FASB Requirement. London . Schuster, U. G. (2015). Investment Appraisal: Methods and Mode. New York: Cingage Learning. Shi, J. (2001). Handbook of Financial Analysis, Forecasting, and Modeling - Page 311. London. Tessa Hebb, ‎. P. (2015). The Routledge Handbook of Responsible Investment. William Petty, ‎. T. (2015). Financial Management: Principles and Applications - Page 705. London: Springer. Read More