Financial Analysis of rks & Snr and Nt Plc - Example

Financial Analysis of Маrks & Sреnсеr and Nехt Plc Student Name Institution Instructor Date Marks and Spencer and next plc Executive Summary The purpose of every business is to maximize profits and yield good returns to the investors as a pay for their money invested in the business, the performance and prosperity of every business depends on amount of capital invested in the business, good management also good governance should be observed. The management of the business is vested with the manager who acts, manages the company on behalf of the shareholders. The owners who are the providers of the capital are always optimistic to see their business give good returns which are revealed in the financial information which are provided at the annual general meeting at the year end of the company. This financial information includes; balance sheet which shows the true and fair view position the business, income statement shows the net profit generated from operations of the company for the whole accounting period. Cash flow statements it gives clear indication of how company's funds have been utilized, This information can be well understood by use of financial ratios to clearly show how the company is progressing in terms of making profits also ratios helps to compare performance of a company against other companies in the same industry or a set benchmark. 1. Liquidity Ratios: These are ratios which show how company is able to pay off its debt using its quick assets. The ability of the company to meet its current obligations depends on the proportional amount of assets the company can convert to liquid cash to clear its debts; the higher the liquidity ratio the higher the chance of paying-off the company’s debts and vice versa (Tracy, 2012). The quick asset include cash at bank, cash at bank, stock, and all other cash and cash equivalents. This ratio includes current ratio and quick ratio. a) Current Ratio It is financial ratio is ratio that shows the company’s ability to pay off its debt within a period of 12 months using its current assets .It is a portion of company’s current assets and current liabilities. The normal ratio should be 2: 1 if the value is greater the better since it shows current assets are able to cover the current liabilities with easy. If the value is lower it shows the company’s inability to pay off its debt , which may force the company to borrow funds from third parties in order to finance the company’s operations such as paying suppliers dues thus leading to indebtness which may lead to a closure of the business (Tracy, 2012). Formula; Current ratio= current assets Current liabilities See Table 1A The analysis shows that Next plc has the greater current ratio for the three years when compared to the current of Marks and Spencer plc .This indicates that Next plc has a greater chance to pay off its debts compared to Marks and Spencer Plc. B) Quick ratio It is a financial ratio which shows how the company uses its immediate cash or quick assets to pay off its debts immediately. It is given by current assets less inventory divided by total current liabilities, it is similar to current ratio only inventories are excluded, thus the higher the ratio the company’s worthness to pay current obligation efficiently (Tracy, 2012). Formula; Current ratio= current assets-inventory Current liabilities See Table 1 B From the above analysis the quick ratio from Marks and Spencer Plc is lower than that of Next Plc thus Next Plc is able to meet it current obligation using it quick assets. 2. Profitability Ratio This measures the company’s worthiness to yield profits relative to sales, its assets and equity. This ratio shows the company’s profit obtainable from its normal operations .They include net profit margins, return on equity (Tracy, 2012). a) Net profit margin It is obtained by taking after net income divided by sales or total revenues and it is expressed as a percentage. Formula: Net profit margin= profit (after tax)/sales See Table 2 A From the results above it shows Next plc has a higher net margin ratio compared to Marks and Spencer Plc thus is Next Plc is more profitable in thus it is able to expand it is operations,by increases the production capacity by employing more resources which in turn increases the sales revenue of the company, For Mark and Spencer will have limited capacity to expand its operations since its net profits are small it may end up sourcing funds. B) Return on equity It shows the profitability of a company after accounting for assets. It is given by net income as a percentage of sales. It shows the exact returns of the funds invested the owners (Tracy, 2012). Formula: Operating profit =Net income * 100% Shareholders’ equity See Table 2 B Next plc has been making a supernormal returns compared to Marks and Spencer Plc ,I being a shareholder will be attracted to invest in Next plc since it is yielding high returns which is the main objective to invest funds in a business (Next plc, 2014). Marks and Spencer is yielding low returns thus may scarce investors from investing their funds in the business since the ratio trend of the three years is declining ,which may indicate either stockholders are withdrawing their funds out of the company or shares of the company are declining in value (Marks and Spencer plc, 2014). C) Operating Cash flow/Sales Ratio It is a ratio expressed as a percentage of the firm’s net operating cash flow towards its net sales. It compares firm’s operating cash flow to its net sales or revenue; it gives investors an idea of firm’s ability to turn sales into cash. It measure amount of dollars obtainable for every dollar sales made by the company, the higher the sales ratio the more the company is profitable (Tracy, 2012). Formula: = operating cash flow Net sales See Table 3A Next plc has a higher sales ratio when compared to Marks and Spencer Plc this shows that Marks and Spencer Plc, thus Next Plc is more attractive to investors compared to the other company where the sales ratio is decreasing year after year. 3) Cash flow Coverage Ratios This is cash flow ratio which measures the firm’s operating cash flow to meet its obligations both its current liabilities ,long term liabilities also the ongoing concern costs such as debtor costs ,legal fees, accounting fees ,audit fees (Tracy, 2012). The greater the operating cash flow coverage ratio for these items, the greater the company’s worthness to payoff it its obligations, it also provides information on investors on how much funds they can invest in their business, in order to ensure the company operating cash flow meets the company’s liabilities and other going concern costs. These cash flow coverage ratios includes, short term debt coverage ratio, capital expenditure coverage ratio and also dividend coverage ratio (Tracy, 2012). Formula; A) Short term debt coverage=operating cash flow Short term debt This short term debt coverage ratio gives comparison of the firm’s short term borrowing or short term financing and current proportion of its long term debt to operating cash flow See Table 4A Next Plc has a greater short term debt coverage ratio compared to Marks and Spencer Plc this shows Next has a better chance to pay off its current obligations compared to Marks and Spencer plc which has invested much in short term debt resulting to coverage ratio. B) Dividend Coverage This type of cash flow ratio show dividends are paid from the company’s operating cash flow, it bring indicators to the investor on how dividends are paid in each company. Formula: = Operating cash flow Cash dividends See Table 4B From the computation Marks and Spencer is showing high dividend coverage ratio since it is paying more dividends compared to Next Plc, this may make investors like to invest the fund in Marks and Spencer Plc since it has higher dividend coverage but as per profitable ratios next is more profitable (Marks and Spencer plc, 2014). . C) Capital expenditure coverage This capital expenditure coverage ratio shows comparison between the company’s budget for its property, plant and equipment to the company’s operating cash flow. The higher the capital expenditure coverage ratio the more the cash assets the company has to operate with. Formula; = Operating cash flow Capital Expenditure See Table 4C Next Pl c has a higher capital expenditure ratio compared to Marks and Spencer Pl c thus it has more cash assets to operate with compared to Marks and Spencer where there is limited cash assets to work with this can be clearly shown by trend analysis above. The capital expenditure coverage ratio is recommendable to be lower than the industry average ,it recommend to increase operating cash flow and reducing amount spent on capital expenditure of the two companies (Tracy, 2012). 4. Solvency Ratios a) Debt to Equity ratio This ratio measures the proportion of debt or total liabilities of a business to its shareholders funds. It is a measure the degree in which the assets of a firm are financed by debt and shareholder equity of the firm. Formula: =Total liabilities Shareholders’ equity See Table 5A From the above analysis Next Plc has greater debt to equity ratio thus its using more debt capital to finance its operations compared to the amount of equity invested in the company while Marks has a lower debt to equity ratio since it is employing more suitable proportion of debt and equity to finance its operations thus resulting to a lower ratio (Tracy, 2012). B) Debt Ratio This ratio measures the total proportion of debt capital employed by the company in comparison to its total assets employed by the company. =Total Debt/ total assets See Table 5B Next Plc has a higher debt ratio compared to Marks and Spencer plc this shows Next plc is using more debt in financing its operations compared to Marks and Spencer plc, Thus making Next plc to have a greater debt ratio Cash flow analysis for the three years A cash flow shows movement of cash in an organization, it comprises of components with three sections such as financing, operating and investing of the firm’s business activities. For those investors who don’t have the knowhow of the cash flows it is made simply by use of descriptions to the accounts and terminology standardization and formats to present used by organizations Analysis as per cash flow from operations Cash from operations is the main source to generate cash from the company’s operations .it comprises of cash that is generated by the company from its internal operations rather than funds obtained from external investing and financing activities .the net income for income statement is adjusted for non cash charges such depreciation and amortization, impairment of assets ,loss on disposal of property ,plant and equipment, share option , exchange movements and also the increases and decreases of items of working capital such as decrease or increase of inventories ,increase or decrease of trade receivables , increase or decrease in trades payables (Tracy, 2012). From the three years analysis of cash flows Marks and Spencer plc has a higher net cash flow from operating activities compared to Next plc, this is show as follows: See Table 6A Analysis cash flow from investing activities This involves activities that involves cash outflows such as capital expenditure that is payments to purchase property, plant and equipment, also inflows from sale of company assets such as net proceeds from disposal of subsidiary, proceeds from sale of property, plant and equipment .it also comprise of investment in securities This comparison between the companies is shown as follows; See Table 6B From this analysis it is clear that Marks and Spencer plc is using more cash in its investing activities compared to Next plc which is using so small cash to its investing activities. Analysis of cash flow from financing activities This section comprises of equity and debt transactions such as purchase of shares, proceeds from disposal of shares, repurchase of shares, repayment of unsecured loans, interest paid, dividends paid, payment of lease liabilities and also net proceeds from bonds issued. In financing activities it involves frequent borrowing and repayment of debt, cash dividends are paid from cash but not from profits generated from the company. The cash flow from financing activities can be show as below; See Table 6C From the analysis it shows that Mars and Spencer is employing more cash in its financing activities as compared to Next plc which is using few small amount of cash to finance it financing activities . From this cash flow analysis my decision on which company to invest on remains Marks and Spencer plc since it has invested good proportion of cash to operating activities ,investing activities and financing activities , as compared to Next plc which has small amount of cash to invest in operating activities ,investing activities and financing activities . From the above analysis I can comment that Mars and Spencer plc. has a more liquid cash to meet its current obligations compared to Next plc which is relying more on debts Actions the companies should take if the ratios are found to be below the industry average. Current Ratio In this case if the current ratio is found below the industry average which is recommended to be 2: 1 like in the case of Marks and Spencer plc, the company’s management should be advised to reduce the amount of current liabilities such as creditors, Accruals, short term loans, in order to enable the current assets to cover the company’s current liabilities. Also by introducing more current assets such as cash in hand, Cash at bank, debtors, inventors and prepayments is advisable which can be either financed internally or external financing by the companies’ shareholders. Internal financing includes, funds from their companies savings, borrowings from friends and shareholders’ taking monies to finance their business whereas external financing involves obtaining funds from bank loans, companies’ shares floatation Quick Ratio When this quick ratio of the Marks and Spencer plc and Next plc falls below the industry average it is recommended to increase the amount current assets held thus reducing the quantity of the stock held by the companies also reducing the company’s current liabilities is a solution to increase the acid test ratio (Tracy, 2012). When the amount of the stock increases it increases the amount of cash tied up in the businesses resulting to decrease in Quick ratio whereas if the stock reduces the cash amount increases hence increasing the quick ratio. Net Profit Margin Ratio Net profit margin is the difference between the net sales less total cost of sale and expenses if the ratio is lower than the industry average, Marks and Spencer plc and Next plc should maximize efforts on reducing the cost of sales, expenses of the companies by monitoring all business activities ,also companies sales should be increased , either through public awareness i.e. use of television or sales all this will aim at increasing the profit of the companies thus increasing the profit margin ratio. Return on Equity (ROE) This are the rewards of the shareholders obtained when the shareholders’ invests the funds in the business. Every shareholder expects high returns from their business, If the return on equity for the Marks and Spencer plc and Next Plc is lower than the industry average it advisable for the companies to increase its sales and reduce the cost of sales, expenses thus will increase the amount net income, also keeping a suitable level of shareholders equity in it is capital structure helps in increasing the return on equity. This ratio measure how the owners funds are performing in the business against the set industry average ,if it is above the industry benchmark it is said to be performing better thus the shareholders can invest more in the business, if it is below the industry average the owners can shy away from investing more funds in the business. Operating Cash flow/Sales Ratio This ratio measures the companies performance in terms of sales and the operating cash flow When sales ratio of Marks and Spencer plc and Next plc is lower than industry average it is advisable to increase the cash flow to be invested on operating activities and also increasing total sales of the companies (Marks and Spencer plc, 2014). Short term debt coverage This ratio measures the company ability to cover its current obligations using its operating cash flow ,If the short term debt coverage ratio is lower than the industry it is advisable to reduce the amount of short term debt, this can be done by reducing the amount of accounts payables , accruals and overdrafts , increasing operating cash flow increases shorterm debt coverage. Dividend Coverage This ratio measures how the company utilizes it cash flows to pay cash dividends ,If the dividend coverage ratio is lower the industry average it recommends to increases the amount of operating cash flow for the two companies by increasing the amount sales and other cash flow generating activities (Tracy, 2012). Capital expenditure coverage If the capital expenditure coverage ratio is lower than the industry average it recommend to increase operating cash flow and reducing amount spent on capital expenditure of the two companies (Tracy, 2012). Debt to Equity ratio If the return on equity for the Marks and Spencer plc and Next Plc is lower than the industry average it advisable for the companies to reduce debt capital in it is capital structure by sourcing alternative sources to obtain funds, either by borrowing from family members, from owners pockets, however the companies may subscribe more shares in order to raise more capital which will increase the proportion equity to debt (Tracy, 2012). Debt Ratio If the debt ratio is favorable if it is lower to the industry average. I been the investor I will invest my funds in Marks and Spencer plc thou not profitable as Next plc it is offering high cash dividends ,where it is every shareholders desire to get good returns for dollar invested in the business, also Next has lower debt ratio compared to Marks and Spencer plc thus no power dilution. Bibliography Marks and Spencer plc, 2014, Reports, Results & Presentations, [online] Available at: http://corporate.marksandspencer.com/investors/reports-results-and-presentations Next Plc.  2014, Next Corporate, Reports and Results. [online] Available at: http://www.nextplc.co.uk/investors/reports-and-results/2014.aspx Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net. APPENDIX Table 1A. Current Ratio A)Marks and Spencer plc Year 2012 2013 2014 Current asset Current liabilities 1,460.1 2,005.4 1,267 2,238.3 1368 2,349.3 Ratio 1 : 1.3 1: 1.76 1 : 1.72 B)Next plc Year 2012 2013 2014 Current assets Current liabilities 1,139.9 742.4 1,207 816 1,468 834.5 Ratio 1.5 : 1 1.48 : 1 1.76 : 1 Table 1B) Quick ratio A )Marks and Spencer plc Year 2012 2013 2014 C.A-Stocks C.L 1,460.1 – 681.9 2005.4 1,267.9 -767.3 2,238.3 1,368.5-845.5 2,349.3 Ratio 1 : 2.58 1 : 4.47 1: 4.49 b)Next plc Year 2012 2013 2014 C.A-Stocks C.L 1,139.9-371.9 742.4 1,207.8-331.8 816 1,468.1-385.6 834.5 Ratio 1.03 : 1 1.07 : 1 1.3 : 1 Table 2 A Net profit margin ratio A )Marks and Spencer plc Year 2012 2013 2014 profit (after tax)/sales 489.6 *100% 9,934.3 458 *100% 10,026.8 580.4 *100% 10,307.7 Ratio 4.93% 4.57% 5.6% b)Next plc Year 2012 2013 2014 profit (after tax)/sales 474.8 *100% 3441.1 508.6 *100% 3562.8 553.2 *100% 3562.8 Ratio 13.8% 14.35% 14.79% Table 2B)Return on equity A )Marks and Spencer plc Year 2012 2013 2014 Net income *100% Shareholders’ equity 489.6 * 100% 2,778.5 458 *100% 2,486.4 580.4 * 100% 2,706.7 Ratio 17.62% 18.42% 21.44% b)Next plc Year 2012 2013 2014 Net income *100% Shareholders’ equity 462.9 *100% 222.7 492.6 *100% 285.6 525.6 *100% 286.2 Ratio 207% 172.8% 183.65% Table 3A Operating Cash flow/Sales Ratio a) Marks and Spencer plc Year 2012 2013 2014 operating cash flow Net sales 1,203 9,934.3 1,140.2 10,026.8 1,129.6 10,329.7 Ratio 12.2% 11.4% 10.9% b)Next plc Year 2012 2013 2014 operating cash flow Net sales 525.9 3,441.1 659 3,562.8 614.8 3,740 Ratio 15.28% 18.5% 16.4% Table 4 A Cash flow Coverage Ratios a)Marks and Spencer plc Short term debt coverage Year 2012 2013 2014 operating cash flow short term debt Short term debt 1,203 2,005.4 1,140.3 2,238.3 1,129.6 2,349.3 Ratio 59.98% 50.9% 48% b)Next plc Year 2012 2013 2014 operating cash flow Net sales 525.9 742.4 659 816 614.8 834.5 Ratio 70.8% 80.7% 73.7% Table 4 B )Dividend Coverage a)Marks and Spencer plc Year 2012 2013 2014 Operating cash flow Cash dividends 1,203 267.8 1,140.2 271.3 1,129.6 273.6 Ratio 4.49times 4,.2 times 4,12 times b) Next plc Year 2012 2013 2014 Operating cash flow Cash dividends 525.9 135.1 659 147.7 614.8 164.8 Ratio 3.89 times 4.46 times 3.73 times Table 4C )Capital expenditure coverage a)Marks and Spencer plc Year 2012 2013 2014 Operating cash flow Capital Expenditure 1,203 564.3 1,140.2 642.6 1,129.6 440.1 Ratio 2.13 times 1.8 times 2.57 times Next plc Year 2012 2013 2014 Operating cash flow Capital Expenditure 525.9 174 659 261.2 614.8 208.2 Ratio 3.02 times 2.52 times 2.95 times Table 5A .Solvency Ratios Debt to Equity ratio a)Marks and Spencer plc Year 2012 2013 2014 Total liabilities Shareholders’ equity 4,494.5 2,778.8 5,081.3 2,486.4 5,196.3 2,706.7 Ratio 1.6 : 1 2.04 : 1 1.92 : 1 Next plc Year 2012 2013 2014 Total liabilities Shareholders’ equity 1,631.5 222.7 1,608 285.6 1,858.4 286.2 Ratio 7.32 : 1 5.63 : 1 6.49 : 1 Debt Ratio Table 5B)Marks and Spencer plc Year 2012 2013 2014 Total Debt Total assets 4,494.5 7,273.7 5,081.3 7,567.7 5,196.3 7,903 Ratio 61.79% 67.41% 65.75% Next plc Year 2012 2013 2014 Total Debt Total assets 1,631.5 1,854.2 1,608 1,893.6 1,858.4 2,144.6 Ratio 87.98% 84.92% 86.65% TABLE 6A Marks and Spencer Plc Year 2012 2013 2014 Cash from operating activities 1,203 1,140.2 1,129.6 Next Plc Year 2012 2013 2014 Cash from operating activities 525.9 659 614.8 TABLE 6B Marks and Spencer Plc Year 2012 2013 2014 Cash flow from investing activities 757.8 580.4 614.9 NEXT PLC Year 2012 2013 2014 Cash flow from investing activities 70.2 85.7 102.6 TABLE 6C Marks and Spencer Plc Year 2012 2013 2014 Cash flow from financing activities 511 595.8 498.1 Next Plc Year 2012 2013 2014 Cash flow from financing activities 446.1 491.1 371.8 Read More