Gas Prices and Global Economic Turbulence in Fuel Market - Essay Example

?Marks and Spencer Marks and Spencer - an internationally recognized which is considered analogous for high fashion, trend setting and unmatchable quality. Marks and Spencer is regarded as the premier retailer in the United Kingdom catering more than 21 million customers. Keeping in pace with the globalization, the company is planning to expand its business in other frontiers. As per the latest audited financial statement of the company, the company employees more than 76,000 and has its operations expanded to more than 41 countries in the world. Marks and Spencer’s well established business attracts a great deal of consumer base irrespective of demography. The primary business of the company comprises of selling general merchandise which mainly consists of womenswear. menswear and an expanding kids wear. The company, through its resilient and effective marketing tactics, has able to capture market share of around 11.0% by value and 11.2% by volume. Another source from where the company earns a great deal of its revenue is through selling food items. Marks and Spencer is the leading provider when it comes to selling fine quality food. The company sells everything from fresh meals to canned food items, highly acclaimed and praised range of wines to other groceries products. The company has improved its shelf availability and has adopted the strategy of renewing its food range. The proactive approach has resulted in an increase of 1.8% in sales revenue from food business. The financial year 2010 proved to be another progressive year for Marks and Spencer. During the current year, Marks and Spencer’s revenue increased by 5.2% during the current year to an impressive ?9.5 billion which has caused the operating profit to increase by 9.8%. The company, following its growth strategy, aspires transform its operation into multi channel business. The company has taken major steps in investing its direct sales business which enhanced the revenue by 27% during the current financial year. In addition, the company is actively following its strategy of refurbishing its stores and giving them a new and improved look. The refurbishment has resulted in an increased storage space and has created a fashionable shopping environment. The following table compares the financial results of Marks and Spencer, for the financial year 2010 with that of the year 2009. As quite evident from the above comparison, the financial outlook of the company has improved. The increase in group revenue primarily pertains to the increase in like-for-like sales as well as the addition of new stores and outlets, both in and outside of England. Since Marks and Spencer do a significant number of its sales overseas, the company’s revenue is majorly increased due to the fluctuation in exchange rate. Although the recent credit crisis and global economic meltdown proved to be a hurdle, but the impact was offset by prudent risk management and apt allocation of capital investment. The gross profit to sales ratio for the year ended December 31, 2010 was 8.93% which has decreased by 0.67% during the current year. Despite the decrease in gross profit to sales ratio, the net profit of the company has increased by ?16.2 million. The increase in net profit is due to the fact that during the current year the company did not spend any exceptional cost which it incurred during the prior year on strategic restructure. In addition, the company took strong measures to control its finance cost during the current year and curtailed it by ?52.3 million. An analysis of balance sheet of Marks and Spencer highlights the fact that during the current year the company’s non-current liabilities, in terms of borrowings from banks and other financial institutions, was comparatively less than the previous year. The fact that Marks and Spencer curtailed its borrowings highlight the fact that the company is focusing on gearing is business through raising capital by issuance of share capital, rather than acquiring capital from financers. The earnings per share (EPS) of the company had also increased during the current year to 33.0 p basic and 32.7 diluted which represents an increase of 17% and 16% respectively. Marks and Spencer declared dividend amounting to ?235 million this financial year which is expected to further raise the share holder’s confidence in the company. Profitability ratios analyze the profits in the income statement keeping in view the profitability related to the capital investments as presented in the entity’ balance sheet. The net profit percentage of the company has decreased partially during the current financial year owing to after effects of the much talked about economic turmoil, which is also represented by the decrease in the return on the assets. The return on assets assists a company in identifying non-earning assets and allows them to allocate their resources effectively. From the investor’s point of view the significant ratio are the dividend yield and earning yield are two of the most important ratio as they represent the true worth of the company’s share in the market. Both of these ratios have decreased which further advocate the fact that although the company managed its operations prudently, but stringent market condition casted few consequences on its operations. The liquidity analysis of the company however illustrates that the company is planning to offset the risk in future by expanding its asset base and maintaining more liquid asset. Both the current ratio and acid-test ratio shows improvement from the prior year. Acid test ratio does not include inventory in calculation as it takes considerable more amount of time to convert inventory into cash. Debtor’s turnover has also shown sign of improvement which points towards the fact that the company is managing its credit sales effectively and has been able to recover its debt duly on time. Inventory turnover, however, has displayed slight decline which might be due to the lack of storage space or delayed in shipment etc. Gearing ratio explains whether the company is majorly financed through capital raised by issuing shares, which is termed as equity financing, or through debts from financial institutions. These ratios also measure the ability of the entity to repay its debts in the future. The debt equity ratio highlight the fact that the company is majorly financed through debt financing obtained in the form of financing facilities obtained from various financial institutions. However, the company has been able to limit their borrowing which is represented by the decrease in the borrowing ratio during the current financial year. The ratio is quite similar to the debt equity ration except it only highlights the debt on which the company has to bear cost in the form of finance charge. The fact can also be observed from the income statement of Marks and Spencer according to which the finance cost has reduced by ?52.3 million during the current year. Tullow Oil plc Tullow Oil plc is an independent oil and gas company which has licenses in more than 25 countries. The company has its head quarter in London and has employed more than 900 individuals in various parts of the world. As per the audited financial statement of the company, the company has its key production and development assets in seven countries. The company acquired its first license in Senegal in 1985 and over the last decade the company has its major business established in the continent. Tullow Oil plc has invested in water treatment modules, oil processing modules and gas compression modules. An historical analysis of the company’s financial outlook can easily identify the fact the company financed most of its operations through operational cash flows, portfolio management and reserve based debt facilities. The summary of financial result of Tullow Oil plc for the year ended 2010, in comparison with 2009, is as follows An analysis of the company will highlight the fact that profitability of the company majorly decreased during the current financial year. The company generates 96% of its sales revenue from its oil and gas business. Due to the saturated oil and gas prices and global economic turbulence in fuel market, the business activities of the company was limited and the company was not able to generate its desired level of profits. If we analyze the operating profit before disposal the difference between the current year figure and the prior year figure increases further. The primary reason for variation in current year and prior year is due to the fact that the company did not dispose of any subsidiary during the current year. During the financial year 2008 Tullow completed the sale of Tullow Oil UK Limited, its subsidiary, recognizing the gain of $213.2. Although Tullow has materially strengthened its balance sheet during the current year with $2.25 billion of new debt facilities and $1.3 billion raised from equity placing. An analysis of the balance sheet of the Tullow Oil Company highlights the fact that the asset base of the company has significantly increased during the current financial year 9.74%. The primary reason for increase in the asset base of the company pertains to the acquisition of new property, plant and equipment which is in line with the company’s strategy to expand its operations and broaden its business horizon. Moreover, the company has also recognized deferred tax asset during the current year and the deferred tax liability recognized previously has also decreased to a considerable extent. In order to gear the company through equity financing, rather than through debt financing, the company has issued shares during the current financial year on account of exercise of share options. As discussed earlier, the oil and gas market remained unsteady during the current financial year which is reflected in the profitability ratio of Tullow oil plc. However, the primary reason for deviation in the profitability ratio from the prior year is because of the disposal of the company’s subsidiary which took place during the financial year 2008. The balance sheet analysis of the company represents that the asset base of the company has strengthened which is reflected in the current and acid test ratio of the company. The company has made major capital investment in the purchase of property plant and equipment the total of which amounts to $350.2 million. Tullow oil has been able to appropriately manage its debtors and the debt recovery has shown improvement during the current year though inventory turnover is representing a declining trend. The company’s is geared through debt financing which is highlighted in the debt equity ratio though it has shown a downward trend comparatively. The borrowings of the company have increased majorly based on which the company has been able to make prominent capital investments. Based on the above analysis, it would be sensible and prudent to invest in Marks and Spencer as it displays a more stable financial outlook. The retail business of selling general merchandise and food items is much more lucrative and profitable as compared to the drilling and exploration business. The return on investments in Marks and Spencer would be higher in future years as the company is currently planning to expand its business through restructuring, expanding and reorganizing its business. Although Tullow oil plc is also planning to expand its operations, but investment in these types of business do not reap benefits instantaneously and would require the investor to hold his investment for a considerable longer period of time. Also, the comparison of profitability, liquidity and gearing ratio of the two companies point in the favor of selecting Marks and Spencer as it promises to turn out a better venture to invest in. References [1] “Marks and Spencer Annual Report 2010”. annualreport.marksandspencer.com. Marks and Spencer. Web. 8th March 2010 [2] “Tullow Oil plc – Annual Report 2009”. tullowoil.com/files/reports/ar2009/. Tullow Oil plc. Web. 9th March 2010 Read More