Financial Analysis of M&S - Essay Example

Marks & Spencer- Financial Report Introduction: Marks & Spenser is one of the top UK’s international retail stores that deal in clothing, home products and food. M&S has over 21 million people visiting their stores every week. They are the leading sellers of women wear and lingerie in UK with 700 stores operative in UK. M&S is an expanding business internationally and has started its operations in many countries of the world with around 390 stores in Europe, Middle East and Asia. Additionally they employ over 78,000 people all over the world. (MARKSANDSPENCER. 2012) Financial Analysis of M&S: Despite of global recession the company has managed to increase its revenues from its UK and international operations. An important point to make here is that M&S is a UK based brand with 50% of its stores being in UK. Its revenue generation is mostly derived from UK operations which accounts for 90% of the total revenue of the company. Profitability: The company has shown steady increase in the revenues in the last three years. In 2011 the revenue increased by 2%, followed by the same in year 2012. However, the operating profits in the last two years haven’t increased in the same line. In year 2011 the operating profit was £836.9m which fell to £746.5m, resulting in operating profit margin of 9.53% in 2011 and 8.84% in 2012. This clearly shows that company’s cost control is weak and the cost of goods sold hasn’t increased in the same line as revenues. The reason for such instability in profits for 2012 is the expansion and improvement plan the company is implementing till 2013 which will result in increased sales and satisfied consumers in the future. Because of the very reasons the company has experienced increased cost of sale, interest expense, administrative and selling expenses. Similarly, the company’s net profit margin has also decreased from 8.13% in 2011 to 7.54% in 2012. The company’s return on capital employed (ROCE) has been increasing at a slow pace from being 17.24% in 2010, 19.0% in 2011 which declined to 18.8% in 2012. The reason for declining ROCE can be linked to decline PAT of the company accompanied by an increase in the total assets. (MARKSANDSPENCER. 2012) Liquidity: The company’s gearing ratio has decreased in last three years. In 2010, the company had a gearing ratio of 108.6% which was a lot, in year 2011, the company reduced it long term liabilities and the ratio fell to 76.91% which further was decreased to 74.54% in 2012. The reason of falling gearing ratio is the fall in the total liabilities of the company, which is beneficial as it will reduce in lower interest payments. However, company’s liquidity/cash flow position might get affected in order to pay off liabilities. The company’s interest cover has remained steady over the past 3 years. Despite of decreasing profits, the company is able to maintain an interest cover of average 6 times. That is because the company has shown good planning here regarding the payments of interest and has reduced the liabilities accordingly with the fall in profits. The company’s current and quick ratios have decreased over three years. The company had a current ratio of 0.8 times in 2010 which has decreased to 0.73 times in 2012. This shows the instability in the liquidity position of the company. The biggest reason of the fall in the current assets of the company is the decrease in the cash in hand and bank which has fallen to £196.1m in 2012 and was £470.2m in 2011, though the other current asset of the company i.e. the stock has increased. Additionally, the company’s current liabilities have also increased tremendously which was £2955.5m in 2011 and increased to £3126.8m in 2012. These factors have contributed to the company’s low current and quick ratios. It seems that company’s management aimed to payoff its long term liabilities to save the interest payments and improve the profitability. This has caused a negative impact on the company’s cash reserves and has made M&S to rely on their short term liabilities more for financing the operations. The company seems to have high inventory days ratio which shows the company stuck its money in inventory for 14-15 days which is also unhealthy for the liquidity of the company. M&S is one of the very few retail companies which have a history of paying dividends to its shareholders despite of low profits. The company has continued to pay dividends to its shareholders from many years. In year 2010 the company paid a dividend of 15p/share, followed by 17p/share in year 2011 and 2012. The dividend cover for the company ranges from 2 to 2.5 times for the company despite of low profits. This could be one of the reasons for the company to have low cash reserves that it continues to pay dividends no matter the performance is weak or the liquidity position isn’t very strong. (MARKSANDSPENCER. 2012; PALEPU & HEALY. 2008) Growth Ratios: The company’s growth performance can be seen by the increase in earning price ratio (EPS). The company had an EPS of 33.5p in 2010, 38.8p in 2011 and 32.5 in year 2012. The variations in the EPS can be linked to decline in PAT in year 2012. Further there seems to be an increase in the share capital of the company which means that the company has issued some shares which is also a factor for the variation in the EPS of the company. Additionally, M&S is one of the very few retail companies which have a history of paying dividends to its shareholders despite of low profits. The company has continued to pay dividends to its shareholders from many years. In year 2010 the company paid a dividend of 15p/share, followed by 17p/share in year 2011 and 2012. Due to continuous payment of divided the dividend growth ratio is either steady or growing which is the best among its peers in the industry. (MARKSANDSPENCER. 2012) Cash flow Position: In year 2012 the cash flow position looked weak when compared to previous years. In 2011 the company had a closing cash balance of £470.2m which declined to £196.1m in 2012. On analyzing the company’s cash flow statement it seems that the company has received less cash from its operations in year 2012 as compared to 2011, where there is a decline in the cash of £33.1m. Secondly the company has spent much cash in its investing activities which could be seen by the fact the investment in plant and property was £564.3m compared to the £327.3m last year. This is also because as mentioned earlier that the company is expanding and improving its operations globally. Additionally, there were further more acquisition of intangible assets and financial assets which have all led to increased outflow in investing activities this year. As mentioned earlier that this year the company has tried to payoff its liabilities. Hence, as other source of finance there seems to be cash inflow from equity issue, employee share options being exercised and issuance of medium term notes. Less interest was paid in year 2012 as compared to last year which decreased by 7%. There was much redemption of medium term notes which amounted to an outflow of £307.6m this year which is the main cause of low cash flow position this year. (MARKSANDSPENCER. 2012; PALEPU & HEALY. 2008) Conclusion: M&S is one of the leading retail stores of UK with global operations. The company is profitable with steadily growing revenues over years. The company is facing a phase of extension and improvement in its operations globally which has caused a decline in the profitability of the company in last few years. The company has a positive cash flow with good dividend pay out history to its shareholders. Appendix A- Summary Financial Statements Some of the key figures that can be used to assess the financial position of Marks & Spencer (M&S) for the period of last three years are as follows: £ Millions 2010 2011 2012 Turnover 9536.3 9740.3 9934.3 Operating Profit 852.0 836.9 746.5 Net Interest 149.3 56.3 88.5 Profit before Tax 702.7 780.6 658.0 Profit after Tax 523.0 598.6 489.6 Total fixed Assets 5633.0 5702.4 5813.2 Stock 613.2 685.3 681.9 Cash in hand and bank 405.8 470.2 196.1 Total Assets 7153.2 7344.1 7273.3 Total Liabilities 4967.3 4666.7 4494.5 Net Assets 2185.9 2677.4 2778.8 Appendix B- Ratios The company’s performance is assessed by considering the following ratios: 2010 2011 2012 Profitability: Operating Margin (%) 9.19 9.53 8.84 Profit Margin (%) 7.78 8.13 7.54 ROCE (%) 17.24 19.01 18.81 Liquidity: Gearing Ratio (%) 108.6 76.91 74.54 Interest Cover (times) 6.45 6.64 6.53 Current Ratios (times) 0.80 0.74 0.73 Quick Ratio (times) 0.48 0.43 0.39 Inventory ratio (days) 15.5 14.2 14.5 Dividend Cover (times) 2.38 2.43 2.15 Growth Ratios: EPS (pence) 33.5 38.80 32.5 Dividend/share (pence) 15.00 17.00 17.00 Dividend/share Growth -34.41 6.39 - (REDMAYNE. 2012; MARKSANDSPENCER. 2012; INVESTING.BUSINESSWEEK. 2012) Bibliography MARKSANDSPENCER. (2012). M&S | Financial Statements | Consolidated cash flow information. [online] Available at: http://annualreport.marksandspencer.com/financial-statements/consolidated-cash-flow-information/index.html [Accessed: 2 Nov 2012]. MARKSANDSPENCER. (2012). Marks & Spencer | Investors | Financial highlights | Five year record. [online] Available at: http://corporate.marksandspencer.com/investors/fin_highlights/five_year_record [Accessed: 2 Nov 2012]. REDMAYNE. (2012) Marks & Spencer Group Financials: Profit & Loss, Balance Sheet, Key Facts & Figures. [online] Available at: http://www.redmayne.co.uk/research/securitydetails/financials.htm?tkr=MKS [Accessed: 2 Nov 2012]. INVESTING.BUSINESSWEEK. (2012) MARKS & SPENCER PLC-ADR (MAKSY:OTC US): Financial Statements - Businessweek. [online] Available at: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=MAKSY [Accessed: 2 Nov 2012]. PALEPU, K. G., & HEALY, P. M. (2008). Business analysis & valuation: using financial statements. Mason, OH, Thomson/South-Western. Read More