Company Overview: Marks & Spencer - Case Study Example

Financial Analysis Table of Contents Introduction 3 Company: Marks & Spencer 3 Analysis of short term & long term trends 4 Short term trend 4 Long term trend 5 Ratio analysis 7 Analysis of share price and volatility 10 Comparison with industry 12 Recent news 13 Conclusion 13 Reference 15 Appendix 17 Introduction Performance of a company is often interpreted with the help of financial data available in the financial reports. One may come across news like profit of the company increased by 20 present or its sales growth was 10 percent in this quarter. This piece of information is important not only to those who have a stake in the company but also for the ones who are planning to invest in it. However, in order to gain a holistic picture of the company’s performance both present as well as historical data should also be analysed. This project will attempt to analyse the financial fundamentals of a UK based company. For this purpose, the performance of the company for the last few years has been taken into consideration. The results are compared with that of its competitors to determine the relative position of the company within the industry. Comparison will also be made with the industry standards to determine the effectiveness with which it manages its performance. Company: Marks & Spencer Marks & Spencer (M&K) is a UK based retail company that offer products known for their high quality. The product portfolio of Marks & Spencer is highly diversified, comprising of food products, household related goods, apparel and many more. The company started as a single retail store in early 1884 and became an international retail chain in a matter of few years. Within a time span of 125 years, the company had diversified itself and entered more than 41 overseas territories. It boasts of 21 million footfalls per shop per week (M&S-a, 2010). Analysis of short term & long term trends To determine the short term performance of the company, its financial statements for the last three years will be taken into consideration. This time period will be stretched to 5 years to understand its long term trend. Short term trend To determine the current position of the company, its present performance in 2009-2010 is compared with that of 2007-2008. Such comparison is initiated to understand the effect that economic recession had on the company. This will also help to analyse how the company managed to overcome the recessionary phase. Reports have revealed that recession had no major impact on the total revenue of the company. Only, a fall of 0.44 percent was registered in the total revenue. However, the operating profitability did suffer a fall of 28 percent. In the same way, the net profit (profit after tax) also reduced by 38 percent. As the operational cost increased, the management reduced its net debt by 19 percent. From the above fact and figures, it can be concluded that the revenue of M&S was affected marginally but its profitability declined to a considerable extent. The economic condition of several developed companies began to revive from 2009-10 onwards, but the most note worthy performance was reserved for the developing economies. Changing fortune of the economy was accompanied with the recovery of companies also. With changes taking place in the international market, the revenue of M&S increased by 5 percent y-o-y in 2010. This growth was attributed to increasing demand in developing countries. However, operational profitability failed to revive. In 2010, it declined by 2 percent. A slight growth in profit after tax is positive information for the company. In 2010, the net profit grew by 3 percent which is quite decent. Decline was noticed in the net debt possessed by the company. In 2010, it decreased by 17 percent. Reduction in net debt is a healthy sign for long term solvency position of the company. After considering the performance of the company for three consecutive years, it appears that Marks & Spencer has managed to revive its financial position. The company possess a sound financial state and its performance in terms of market share and profitability is expected to grow in future. Long term trend To understand the financial fundamental of Marks & Spencer, its historical data for last five year has been analysed. For this the main financial indicators like revenue, profitability and debt position were used to study the past trend. In the last five years (2006-2010), revenue of the company had registered a continual growth. The recession phase did result in a slump but it picked up after that. From the past trend it can be assumed that the revenue of the company will grow, mainly in the developing nations. Operating profit of the company was increasing at a steady rate till 2008, the period of economic recession, when it fell drastically. Even in 2010, the company has failed to revive its operational profitability. If the same trend continues for the next few years, the market image of the company might get tarnished. For better understanding of net profit earning capability of M&S, its profit after tax for the last five years was analysed. This trend is quite similar to the one followed by operating profit in the same time frame. The only difference was that in 2010, profit after tax showed a slight improvement in contrast to operating profit. However, this growth is not satisfactory as compared to past performance in pre-recession phase. Ratio analysis Often, the financial data provided in the financial report of a company is not comprehendible to the stakeholders. Financial ratios come to the rescue under such circumstances. They present the information in a clearer and comprehendible manner. Some of the vital financial ratios are provided below. Considering these ratios it can be said that in the last five years, short term liquidity position of the company has increased. Both current ratio and quick ratio increased consistently. To analyse the efficiency maintained by the management in several aspects of business, efficiency ratios were calculated. The inventory turnover ratio indicates that from 2006-2010, the rate of inventory rotation has reduced and thus efficiency of the company has deteriorated. Both receivable and payable ratios reflect cash management efficiency of the company. In these last five years, receivable turnover ratio slightly increased whereas payable turnover ratio has increased drastically in 2009 and 2010. Such high payable ratio indicates high current liability on the company. After the onset of recession, asset turnover ratio increased. This means, the company’s efficiency to use its assets to generate sales has deteriorated. However, with time assets turnover ratio is improving, which is a good sign. Leverage ratios of company are often used to determine the long term solvency risk. As compared to 2006, in 2007 debt-equity ratio of the company reduced but in post recession phase, i.e. from 2008 onwards, it has been increasing at a high rate. This reflects the increasing risk of solvency. In the manner of debt-equity ratio, debt ratio also increased in these five years. To understand the risk associated with interest default on M&S; interest coverage ratio was calculated. From 2006 to 2008, it changed from 6.3 to 13.63. This reflects high risk of default while paying the interest. However, from 2009 onwards, this ratio is improving and thus the risk associated with it is minimising. Profitability of a company is a vital indicator of its performance in the market. The recession phase in 2008-2009 directly affected the profitability of the company. The operational profit ratio declined from 13.31% (2008) to 9.56% (2009) and even in 2010 the fall continued. The same trend was noticed in the net profit ratio of M&S in the last five years. From 2006 to 2008, the return on asset was increasing but declined almost to half during the recession. However, it is improving with time. Return on equity was not much affected by recession and surprisingly in 2009 it became almost double on y-o-y basis. It registered growth in 2010. To understated market performance of the company, valuation ratios were calculated. The price-earnings ratio of M&S fell drastically in 2008 which reflects the poor market image and negative sentiment among the investors. With revival in market conditions, investors are regaining faith in the company and thus the P/E ratio is improving at a healthy rate. Many a time, the dividend payout ratio affects the market image of a company. The dividend payout ratio of M&S increased constantly from 2006 till 2009. This was done to provide healthy returns to shareholders and to improve market image. However, in 2010, the company reduced the dividend payout ratio from 69.97% to 45.12%. As the company’s image has improved by now, it needs to concentrate more on internal growth and expansion in order to retain profit. To determine the market risk associated with Marks & Spencer, the beta has been calculated for the last five years (2006-2010). The beta value indicates that in 2007 beta was too low as the market was performing quite well but as soon as the economic recession hit the market, the beta value increased a lot. However, with improvement in the market dynamics the company’s beta has started reducing. If the prevailing correction in economic and market condition continues, there is a possibility that the value of beta may reduce further in future. Analysis of share price and volatility Apart from financial reports, one should also take into account the share price movement of the company. Therefore, historical share price of Marks & Spencer has been derived to interpret the trend followed by the company. The chart representing the share price movement in the last five years is given below: Figure 1: Share price of M&S (Nov 2006-Nov 2010) (Source: Yahoo! Finance, 2010) The graph shows that from 2007 onwards, share prices were gradually falling. This fall was quite sharp in 2008, as the international share market became a victim to negative sentiments of the investors and subprime crisis. With gradual improvement in market conditions, shares are performing well and share prices are increasing at a gradual rate. As the global economy will gain momentum, share prices will perform much better. Figure 2: Comparison of share price of M&S against Dow Jones and FTSE 100 (Source: Yahoo! Finance, 2010) In that one year, M&S performed comparatively poorer against the market index as well as FTSE 100. However, in the month of October 2010, M&S performed better then the market average. The beta (risk indicator) of M&S is 0.7792 (Yahoo! Finance, 2010). Beta value below one reflects defensive character of the shock. This means, in the ‘bull run’, the share price of the company may perform below the stock market index but in ‘bear run’ the stock will have a comparatively low fall and the effect of recession will not be that harsh. In the present market conditions, when there is still uncertainty regarding the performance of stock market, investing in a defensive stock is a better option. Comparison with industry Before arriving at any conclusion regarding the financial performance of a company, it is necessary to understand how it performed as compared to the industry standards. Performance of Marks & Spencer was thus compared against the industry average. Figure 3: Financial performance of M&S against the industry (Source: mns money, 2010) The above given table reveals that M&S has a higher debt-equity ratio as compared to the industry average. This reflects high risk of long term insolvency. The liquidity ratios are lower than that of the industry, specially the interest coverage ratio. Therefore, short term liquidity position is poor. The book value per share price is used to determine the future prospect of the share price move (whether it is overpriced or under priced). Small book value per share of M&S implies that in ‘bull run’ the share price may increase further. Figure 4: Comparison of investment return of M&S against industry (Source: mns money, 2010) As compared to the retail industry, M&S succeeded in generating higher returns. Return on equity, return on asset and return on capital, all these ratios of M&S are higher than the market average. This entails that the company enjoys a leadership position in terms of generating revenues for investors and other stakeholders. Recent news The company is following a dual strategy. On one side, it is concentrating on expanding its overseas business and on the other hand it is trying hard to penetrate the European market. The company is in the process of re-acquiring the property it sold in early 2001 in Europe (Crust, 2010). The company also announced that it will open 15 stores in the world’s second fastest growing economy and one of the attractive retail market, India, within a time frame of two years (The Economic Times, 2010). The company is also taking aggressive initiatives to make its business model more eco-friendly. The company has announced that it will invest £1.25m over five years in recycling activities (Young, 2010). All these information entails that the company is in the process of reviving its business model to attain sustainable growth in future. Conclusion After taking into account the financial performance of Marks & Spencer for the last five years; it appears that despite the fall in profitability during recession, the company has managed to recuperate from the shock quite early. The financial data of the last three years provide a clear indication of revival in financial position of M&S. This change is also visible in the share price movement of the company. As compared to the industry, the company managed to generate higher returns. However the risk of liquidity and solvency is slightly higher than the industry average. That the company enjoys a strong financial fundamental is proved beyond doubt, which will further improve if the market conditions are stable. Reference Crust, J. October 31, 2010. M&S looking to relaunch in Europe: report. Reuters. [Online]. Available at: http://uk.reuters.com/article/idUKTRE69U0Y820101031 [Accessed on November 03, 2010]. M&S-a. 2010. Company overview. About us. [Online]. Available at: http://corporate.marksandspencer.com/aboutus/company_overview [Accessed on November 02, 2010]. mns money. 2010. Marks and Spencer Group PLC.I [Online]. Available at: http://uk.moneycentral.msn.com/investor/invsub/results/compare.asp?Page=FinancialCondition&Symbol=GB%3amks [Accessed on November 03, 2010]. The Economic Times. July 02, 2010. Marks and Spencer Reliance India to open 15-stores in 2 years. [Online]. Available at: http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/Marks-and-Spencer-Reliance-India-to-open-15-stores-in-2-years/articleshow/6200509.cms [Accessed on November 03, 2010]. Yahoo! Finance. 2010. Detailed Technical Analysis. [Online]. Available at: http://uk.finance.yahoo.com/q/tt?s=MKS.L [Accessed on November 03, 2010]. Young, T. February 18, 2010. Marks & Spencer strikes innovative council recycling deal. Business Green. [Online]. Available at: http://www.businessgreen.com/business-green/news/2258121/marks-spencer-strikes [Accessed on November 03, 2010]. Appendix Calculation of financial ratios   All the figures are in £million             Profitability ratio 2006 2007 2008 2009 2010 1 Current ratio (Times)             Current Assets (CA) 1142.10 846.40 1181.70 1389.80 1,520.20   Current Liabilities (CL) 2017.00 1606.20 1988.90 2306.90 1,890.50   (CA/CL) 0.57 0.53 0.59 0.60 0.80               2 Quick ratio (Times)             Inventory 374.30 416.30 488.90 536.00 613.20   (CA-Inventory)/CL 0.38 0.27 0.35 0.37 0.48                 Efficiency ratio           3 Inventory turnover ratio (days)             Sales 7810.6 8656.1 9098.70 9110 9,536.60   Inventory 374.3 416.3 488.90 536 613.20   (Sales/Inventory) 21 21 19 17 16   Inventory turnover cycle (Days)             (365/Inventory turnover ratio) 17 18 20 21 23               4 Receivable turnover ratio (Days)             Sales 7810.6 8656.1 9098.7 9110 9,536.60   Receivables 210.5 196.7 307.6 285.2 281.4   Receivable turnover ratio (Times)             (Sales/Receivables) 37 44 30 32 34   (356/Receivable turnover ratio) 10 8 12 11 11               5 Payable turnover ratio (days)             Sales 7810.6 8656.1 9098.7 9110 9536.6   Payables 210.5 196.7 307.6 1,073.50 1,153.80   Payables turnover ratio (Times)             (Sales/payables) 37 44 30 8 8   (365/Payable turnover ratio) 10 8 12 43 44               6 Total assets turnover ratio             Sales 7810.6 8656.1 9098.7 9110 9536.6   Total assets 5,210.50 5,381.00 7,161.00 7,258.10 7,153.20   (Sales/Total assets) 1.50 1.61 1.27 1.26 1.33                 Leverage ratio           7 Debt/Equity ratio             Debt 2,038.20 2,126.60 3,208.10 5,157.50 4,967.30   Equity 1,155.30 1,648.20 1,964.00 2,100.60 2,185.90   (Debt/Equity) 1.76 1.29 1.63 2.46 2.27               8 Debt Ratio             Debt 2038.2 2126.6 3208.1 5157.5 4967.3   Total assets 5,210.50 5,381.00 7,161.00 7,258.10 7,153.20   (Debt/Assets) 0.39 0.40 0.45 0.71 0.69               9 Interest coverage ratio             PBIT 850.1 1,045.90 1,211.30 870.7 852   Interest 134.9 123.4 88.9 197.1 163.4   (PBIT/Interest) 6.30 8.48 13.63 4.42 5.21                 Profitability ratios           10 Operating profit ratio (%)             Operating profit 850.1 1045.9 1211.3 870.7 852   Sales 7810.6 8656.1 9098.7 9110 9536.6   (Operating profit/Sales)*100 10.88 12.08 13.31 9.56 8.93               11 Net profit ratio (%)             Net profit 523.1 659.9 821 506.8 523   Sales 7810.6 8656.1 9098.7 9110 9536.6   (Net profit/Sales)*100 6.70 7.62 9.02 5.56 5.48               12 Return on assets (%)             Net profit 523.1 659.9 821 506.8 523   Total assets 5,210.50 5,381.00 7,161.00 7,258.10 7,153.20   (Net profit/Total assets)*100 10.04 12.26 11.46 6.98 7.31               13 Return on equity (ROE)             Profit to the equity shareholders 1,155.30 1,646.80 1,956.70 2,081.70 2,168.60   Shareholders net worth 523.1 659.9 821.7 508 526.3   (Profit to the equity shareholders/ Shareholders net worth) 2.21 2.50 2.38 4.10 4.12                 Valuation ratio           14 Price Earning ratio (P/E)             Market price (31 March) 556.5 676.5 387.25 296 370.1   EPS 31.4 39.1 49.2 32.3 33.5   (Market price/EPS) 17.72 17.30 7.87 9.16 11.05               15 Dividend payout ratio (%)             Equity dividend 204.1 260.6 343.6 354.6 236   Net profit 523.1 659.9 821 506.8 523   (Dividend/Net profit)*100 39.02 39.49 41.85 69.97 45.12 Table 1: Consolidated balance sheet of M&S 2010 Table 2: Consolidated balance sheet of M&S 2009 Table 3: Consolidated balance sheet of M&S 2008 Table 4: Consolidated balance sheet of M&S 2007 Table 5: Consolidated balance sheet of M&S 2007 Read More