Finance and Accounting at Marks and Spencer - Report Example

Marks and Spencer

Marks and Spencer is a UK retailer that has over 1,330 stores worldwide. It among the leading retailers in the UK as well as worldwide. The company prides itself in providing sustainable value for its shareholders and enhancing the lives of the shareholders the provision of high quality clothing, brand food and home products. The company sells through its physical stores as well as through its online stores. The company’s business is in two main divisions. The food division accounts for about 57% of the company’s turnover while the general merchandise division accounts for 43% (Marks and Spencer, 2015). The M&S.com platform provides flexibility, which takes into consideration the changing shopping habits of customers. The company has operations in Europe, Asia and the Middle East with a total of 59 countries making up the territories where it has a presence.

Ratio Analysis

Profitability Ratios

Gross Profit Margin = Gross Profit ÷Sales

= 701.3 ÷ 10,311.4

= 0.068

The company has a gross margin of 6.8% in 2015. That indicates the company’s efficiency in generating profit from its sales. It means that the profits constitute only 6.8% of the total sales.

Return on Assets = Net Income ÷ Assets

= 481.7 ÷ 8,196.1

= 0.058

The company’s return on assets for 2015 is 0.058. The ratio is a measure of the company’s efficiency in generating income from its assets. It demonstrates that income is only 5.8% of total assets. That shows that the company’s efficiency in generating income from its assets is low.

Return on Equity = Net Income ÷ Equity

= 481.7 ÷ 3,199.6

= 0.151

The company has a return on equity of 0.151 in 2015. That is an indication of high efficiency in the utilization of equity by the company to generate income. It means that the income the company generates in 2015 is 15.1% of total equity.

Return on Capital Employed = Net Operating Profit ÷ Capital Employed (Total assets – Current Liabilities)

= 481.7 ÷ (8,196.1 – 64.0)

= 0.059

The company has a low return on capital employed. The return on capital 0.059 in 2015, demonstrating that the company’s ability to turn capital employed into income is low.

Liquidity Ratios

Working Capital/ Current Ratio = Current assets ÷ Current Liabilities

= 1,455.0 ÷ 2,111.6

= 0.689

The current ratio for Marks and Spencer for the year 2015 is 0.689. That indicates that the current assets are 68.9% of the current liabilities. It implies that the company is likely to have difficulties in meeting its current obligations.

Quick Ratio = (Cash + Cash Equivalents + Current receivables) ÷ Current Liabilities

= (321.8 + 205.9) ÷ 2,111.6

= 0.172

The company’s quick ratio is low in 2015. That implies that when meeting obligations using its most liquid assets, the company is likely to face difficulties.

Investor Ratios

Price/ Sales ratio = Stock Price per share ÷ Net Revenue per share

= 5.30 ÷ (10,311.4 ÷ 1,635.6)

= 0.84

The company’s price/sales ratio is 0.84 in 2015. That indicates that the company generates higher revenue per share comparative to its price per share. The ratio indicates that the company generates high revenue for its shareholders.

EPS = Profit ÷ Total Common Shares outstanding

= £0.297

The company has an earnings per share of £0.297 in 2015. The earnings are quite low for the company in 2015. The ratio means that shareholders receive £0.297 for every share they hold in the company in 2015.

Gearing Ratio = (Long-Term Debt + Short-Term debt + Bank Overdrafts) ÷ Shareholder’s Equity

= (1745.9 + 279.4) ÷ 3,199.6

= 0.632

A gearing ratio of 0.632 means that company is 63.2% financed by debt. The debt means that the company may not be in a good financial position.

Price to Earnings = Stock Price per Share ÷ EPS

= 5.30 ÷ 0.297

= 17.845

The company’s price to earnings ratio is 17.845 in 2015. That is an indication that for every £1 of earnings, the company’s investors are willing to pay £17.85 for the firm’s shares in 2015.

• Asset Management Ratios
• Asset Turnover
• Asset turnover = Revenue / Average total assets
• = 10,311.4 ÷ 8,196.1
• = 1.26 times
• The company’s asset turnover ratio is 1.26. That shows that revenue generated in 2015 is 1.26 times more that total assets. It shows that the company is efficient in utilizing its assets to generate revenue.
• Accounts Payable Turnover
• Accounts payable turnover ratio = Total purchases / Average accounts payable
• Purchases = Cost of sales + Ending inventory – Starting inventory
• Purchases = (10,311.4 – 701.3) + 797.8 – 845.5
• = 9,562.7
• Accounts payable turnover ratio = 9,562.7 ÷ (1,642.4 + 1,692.8)/2
• = 5.73
• In terms of days = 365 ÷ 5.73
• = 64 days
• The accounts payable ratio demonstrates how fast the company pays its creditors. According to the financial report for the year 2015, the company pays its creditors 5.73 time every year. Translated into days, the company pays its creditors every 64 days.
• Fixed Asset Turnover
• Fixed Asset Turnover Ratio = Sales Revenue / Total Fixed Assets
• = 10,311.4 ÷ 6,741.1
• = 1.5 times
• The company has a fixed asset turnover ratio of 1.5. That demonstrates that the revenue it generates in 2015 is 1.5 times more than fixed assets. It shows the company’s efficiency in using fixed assets to generate revenue. Therefore, the company is efficient in managing its fixed assets.
• Inventory Turnover
• Inventory turnover = Cost of goods sold / Average Inventory ((beginning inventory + ending inventory)/2)
• = 9,610.1 ÷ ((797.8 + 845.5) ÷ 2)
• = 11.7 times
• In days = 365 ÷ 11.7
• = 32 days
• The company has an inventory turnover ratio of 11.7. That means that the company replenishes its inventory 11.7 times in a year. In terms of days, the company replenishes stock every 32 days. The ratio shows that the company’s inventory is not obsolete as its turnover is high (Erhadt and Brigham, 2014).
• Return on Equity Using DuPoint System
• ROE = Profit Margin (Profit/Sales) × Total Asset Turnover (Sales/Assets) × Equity Multiplier (Assets/Equity)
• = 0.068 × 1.26 × (8,196.1 ÷ 3,198.8)
• = 0.25
• Using the DuPoint system, the return on equity for the company is 0.25. The ratio is higher than the ratio previously calculated. That demonstrates the effect of assets on the return on equity. It demonstrates the company’s ability to utilize its assets to generate returns. However, the equity multiplier for the company is 2.56. The high equity multiplier ratio may be an indication that the company overuses debt to generate its returns (Damodaran, 2012). The company has a low profit margin as well as low total asset turnover. That may be an indication of poor management and hence investors should be cautious when investing in the company.
• Pro Forma Statements
• Pro Forma Income Statement
• 2016
• Revenue11,342.54
• Cost of Goods Sold10,571.11
• Operating Profit 771.43
• Finance income 15.5
• Finance costs (116.8)
• Profit before Tax 670.13
• Income Tax expense (126.49)
• Profit for the year 543.64
• The various ratios indicate that the company has a good performance. Most of the ratios are good indicating high profitability and liquidity. The company also has a good return on equity ratio. However, the company has a high gearing ratio indicating that the company is highly leveraged (Erhadt and Brigham, 2014). The return on equity using the DuPoint system further indicates that the company highly uses debt finance to fund its operations. It would therefore be wise for investor to exercise caution when buying its stock. The company has a great financial position and would therefore provide good returns for investors. However, the debts may also affect the returns.
• References
• Damodaran, A., (2012). Investment Valuation: Tools and Techniques of Determining the Value of Any Asset. New Jersey: Wiley.
• Erhadt, M.C. and Brigham, E.F., (2014). Financial Management: Theory and Practice. Mason: Cengage.
• Marks and Spencer, (2015). Annual Report, 2015. Marks and Spencer.