Financial Performance of Marks and Spencers Example for Free

CURRENT RATIO

The current ratio tells us about the liquidity of the company. It is the ratio which tells us the company's ability to pay off its liabilities using the current assets in case the company is liquidated. Higher the current ratio, the better it is. Marks and Spencer's current ratio is on the lower side year by year from the year 2010-2009 in comparison with rivals such as Tesco Plc and this ratio indicates a higher margin of safety with respect to meeting current obligations. Marks and Spencer's current ratio will not allow them to take more debt as compared to previous years practices. Although, Marks and Spencer has made short-term investments but it still the current ratio is reported on the lower side and not stable and healthy as compared to the previous years Besley, Brigham, Scott, Eugene F. (2001). Marks and Spencer's current ratio haven't strong current ratio and its gives a not a strong and positive signal to the creditors that company's business operation is running on a right path. The current ratio of Marks and Spencer suggests that company have not sufficient and ample reserve cash or liquid asset and Marks and Spencer can't utilize the excess or reserve cash on their ongoing business.

RETURN ON CAPITAL EMPLOYED

An ROCE of 16% (Annual Report, 2010) in the year 2010 indicates that Marks and Spencer is slightly downward in order to generate more EBIT in accordance with the balance sheet composition. The ROCE is slightly negative in the year 2010 as compare with the year 2009 primarily because of Marks and Spencer's internal policies or due to macro factors. Company's inconsistent performance in the shape of EBIT year by year not make a significant impact on the ROCE of the company in contrast with the industry as we know that the stockholder equity, which includes retained earnings, also makes a reflection on the company's stock prices Meigs (1999).

GROSS PROFIT MARGIN

Efficient management strategy reflects in the gross profit sales which increased in the year 2010 with 38% (Annual Report, 2010) as compared with the year 2009. In the year 2009, Marks and Spencer hasn't focuses on reduces the cost of goods sold which gives a slightly negative reflection on the gross profit. Slight decrease in the year 2009 gross profit because of economic recession in the economy reflects on the gross profit of Marks and Spencer. Moreover, Marks and Spencer high ratio of COGS in the shape of FOH, Purchases etc and also due to internal restructuring. On the whole the gross profit margin is fair enough and one should hope that the percentage of gross profit margin will increase in years to come Meigs (1999).

NET PROFIT MARGIN

The profit margin on sales ratio tells us the ability of the firm to convert its sales into profits. A low profit margin on sales indicates high expenses which consume most of the revenue earned by the firm. In such a case, the firm needs to analyze and point out areas which are producing more expenses than usual. The higher the ratio, the better it is for the company. From the perspective of Marks and Spencer there is not significant moment is reviewed in all the three years. Marks and Spencer's net profit margin is almost constant in the previous years and the company's net profit margin in the year 2010 is 5% (Annual Report, 2010)because of margins in selling, administration expenses, R&D expenditure, etc. In that case Marks and Spencer still has a room for improvement in the net profit margin Garrison (2004). Moreover in the year 2010, because of rough economic and business condition, Marks and Spencer's efficient business running strategy hit badly in terms of net profit margin. It is viewed that Net Profit margin rate will increase in years to come. The management strategy has helped generate more revenue but there has been significant impact made on the net profit Myers, Brealey and Marcus (2001).

STOCK TURNOVER PERIOD

Marks and Spencer is able to convert its inventory into cash every 38th day in the year 2010 and 34th day in the year 2009, which is not good going for the company in comparison with the previous years. This shows that Marks and Spencer is better at managing its inventory especially in the years 2009. Marks and Spencer's inventory management strategies make a strong reflection on this ratio and it is evident that company's operating cycle is slightly high in comparison with the previous years which is fair practice as far as company's perspective is concerned.

RECEIVABLE (DEBTORS) DAYS

Receivable debtors' days tells us the average number of days it will take to recover the accounts receivables balance. This allows the investors and the management of the company to analyze the effectiveness of the current credit policy and its implementation. Slow collection period increases the probability of bad debts and this important factor make a reflection on the Marks and Spencer Average collection period. Marks and Spencer has employed an effective credit policy for its customers and adopted an aggressive credit policy to collect their receivables. As a result, Marks and Spencer's allowance for bad debts is also significantly lower than the industry. Industry trend on the other hand is very sluggish primarily due to recession in the economy.

PAYABLES CREDITORS DAY

Marks and Spencer's payable creditors day is in high zone in the year 2010. Marks and Spencer paid out its liabilities in 71st day in the year 2010 as compare with the year 2009 in which payable creditor's day is 69th. This ratio clearly reveals that company is slightly tentative and hesitant in paid off its liabilities. The core reason behind is the economic recession prevail in the industry. Late payment to the supplier emerged and portrait negative image of the company. So, it is the prime responsibility of the management to ensure that payment is made as early as possible because it will in the end made an impression on the operating cycle of the company.

WC CYCLE DAYS

In the year 2010 and 2009, Marks and Spencer's WC cycle days remained constant in the negative zone with -23 days. It is a worrying sign for the management and showed that company's WC cycle days is very sluggish. This is not a good practice as far as company's future operations are concerned. It also reveals that company not paid any attention towards its working capital management strategies.

GEARING RATIO (DEBT TO ASSET RATIO)

Marks and Spencer D/A ratio, is around 69% in the year 2010 (Annual Report, 2010) .In the year 2009, the debt to total assets is around 71% which is good as far as the performance is concerned (Annual Report, 2010). The year 2009 is worst for Marks and Spencer Plc, the main reason behind is the improper utilization of debt in order to capitalize assets. Moreover, it also reveals the fact that the management of the company can't generate more assets in response with the debt. A higher D/A ratio would place the company under increased amount of risk, especially if the interest rates are rising. Hence, a lower D/A ratio would be more desirable Besley, Brigham, Scott, Eugene F. (2001).

INTEREST COVERAGE RATIO

This ratio helps the analysts analyze the ability of the firm to pay interest on the debt. This ratio is especially of concern to the creditors of the firm or the banks who are interested in providing debt financing to the firm. If the company is able to pay its interest expense, only then it is able to obtain financing. The TIE ratio of Avon is satisfactory since it is showing a high earning before income and tax and a better one than its industry competitors. TIE ratio is concerned it looks healthy as far as company's future operations are concerned and it also gives an indication that debt holders are not concerned about the company's performance because Marks and Spencer has reported an excellent TIE ratio through out two years. It is a good signal for the company's perspective (Besley, Brigham, 2001).

2. WORKING CAPITAL MANAGEMENT

The primary objective of the Marks and Spencer Plc is to maintain an optimum balance among the different components of the working capital. The different techniques of Marks and Spencer Plc to manage its working capital are stated below: Marks and Spencer Plc adopts both conservative and aggressive policy to manage its working capital. Because it is an open book reality that the most of the automotive industry have fewer current assets and more of fixed assets it is good for the perspective of profitability but on the respective side if the current assets are less than the current liabilities it brings curse for the Marks and Spencer Plc. So on one hand, company adopts the aggressive policy by making profit and on the other hand by using the conservative policy, the working capital of the company is on the declining side. Marks and Spencer Plc employs proper inventory control technique such as JIT. Just in time (JIT) system works on the manufacturer's coordination with the supplier. The production is started in a manner that supplier provides raw material or part of raw materials which enable them to begin the process of production, however what makes the JIT more efficient is that the raw materials arrive just before they were to be used in production. JIT aims at combining technology and the various processes involved to satisfy or link all the essential level of production and corporate affairs Finkler, (2003). In its true essence, JIT means that a corporation should have just the appropriate level of inventory or raw materials in order to satisfy all production process and also the customer demands. JIT is also referred as demand pull system because each work station produces its product when the next workstation is ready to receive more inputs Garrison (2004). Marks and Spencer Plc uses the decentralized cash management system. In the pharmaceutical industry it is very onerous to collect the money from the debtors. So keeping this thing into consideration Marks and Spencer Plc introduces the decentralized cash management system which not only reduces the cost of collection but also makes a positive impact on the increment of working capital.

3. LONG-TERM SOLVENCY

Marks and Spencer Plc is highly dependent on debt financing with a percentage of 69% to be accurate, which shows the fact that there is a high leverage cost being bore by the management in order to run its business smoothly and efficiently. The management not only takes the short term borrowing but also the long term borrowing in the shape of Bank loans and overdrafts, Syndicated bank facility, etc and the timing of these loans varied from Within one year to More than five years. In the year 2010, the Bank loans and overdrafts is £m (267.4) as compare with the year 2009 in which Bank loans and overdrafts was £m (159.1).It clearly showed that management is highly dependent on Bank loans and overdrafts due to which 68% increment is observed in Bank loans and overdrafts. Syndicated bank facility was also decreased significantly in the year 2010 as compare with the year 2009 (2010 - £219.8 million, 2009 - £781.2 million) (Marks and Spencer Plc Annual Report, 2010, p.103). While on the other forms of financing like in Medium-term notes remained constant in the year 2010 (2010 - £2183.9 million, 2009 - £2018.5 million) (Marks and Spencer Plc Annual Report, 2010, p.103). Overall slightly low tendency has been recorded in the total debt in the year 2010 the company paid off some more debt as compared to the previous year, which is very high in comparison to previous years because Marks and Spencer Plc's volume of business is high and has been soaring since 2009 and the trend is increasing. So, there is a high need to finance increase in operations with debt. Furthermore, Marks and Spencer Plc is primarily financing their activities through debt. Debt holders showed a confidence on the company's prospective so they granted a loan to the Marks and Spencer Plc. Due to expansion in the business volume company acquiring debt to financing their business activities Finkler, (2003).

(b) A SECTOR ANALYSIS:

Marks and Spencer Plc relates with service sector and associate with Retail (Department and Discount) industry. After the thorough analysis of the company's financial performance it is important to compare the financial performance of the company with its industry rivals. The facts are stated below: Marks and Spencer Plc P/E ratio is around $10.36 and in comparison sector's ratio is $10.35. It is a healthier sign that company produces excellent earnings in accordance with market demanded (Reuters, Industry Data, 2010). Company's dividend yield is 4.37% whereas sector's 1.15%. It showed that the stockholders pay attention and respect to towards company's policies which in the end made an impression on the dividend yield of the company (Reuters, Industry Data, 2010). Marks and Spencer Plc's current ratio is 0.80 and the sector's current ratio is 0.79 and it showed that both company and industry is in a state of slight liquidity problem due to this both company and industry's ratio is slightly vulnerable (Reuters, Industry Data, 2010).

(c) A CRITICAL EVALUATION OF HOW THE COMPANY IS ADDRESSING THE AGENCY PROBLEM.

The directors of Marks and Spencer also emphasise and addresses agency problem on long term basis among the employees, stockholders and debt holders and take all possible measures to build a strong chain and relationship among all the stakeholders. The basic motive behind this is to review the strategy and performance in the interest of the company on long term basis. Marks and Spencer is a big name in the market. Company is heavily relying on debt financing and the company's management paid prominent interests to the debt holders. In the year 2010-09, company's management buy back bonds worth £200m because of favorable debt market position. This move allowed the management of Marks and Spencer to strengthen its long term position by broadening the average maturity date of debt capital Annual Report 2010, Page 09. It is very onerous decision for the management of Marks and Spencer is paid out the dividend @ 15.0p per share because of economic downturn but the company's management decided to pay out dividend @ 9.5p per share in order to safeguard the interest of stockholders. In addition, company grows dividends in accordance with the adjusted earnings per share Annual Report 2010, Page 09. The table of key management compensation is drawn below:

KEY MANAGEMENT COMPENSATION

2010 £m

2009 £m

Salaries and short-term benefits 9.6 6.0 Termination benefits 0.2 1.1 Share-based payments 3.1 1.8

Total

12.9 8.9 (Marks and Spencer Plc, Annual Report, 2010, pg. 111) The management of Marks and Spencer strictly followed the compensation to keep the balance among all the stakeholders of the company. Marks and Spencer allocated huge part of its earnings to the management compensation as the above table suggested that in the year 2010, company pay full attention towards Salaries and short-term benefits and Share-based payments due to which on overall key management compensation increased with 4 £m as compare with the year 2009. Although, the market conditions and circumstances has changed rapidly but the management of Marks and Spencer has took all possible measures to safeguard all the interests of the stakeholders of the company and the management of the company is confident that all possible steps which will take in future put the a step forward which in the end builds a strong financial shape of the company also under the time of uncertainty and come up stronger as the economy shaped up.

(d) REFLECTIVE JOURNAL

The economic system has grown enormously since its beginning and accounting has become more complex. It is a crystal clear fact that it is an onerous task to translate physical quantities into numbers, as accountants must do when they construct the financial statement. However the original reason for financial statements still apply like investors need accounting information to make intelligent decisions, mangers need it to operate their businesses, and tax authorities need this information to assess taxes in reasonable way. In my point of view, Balance Sheet provides a more clear reflection of a company's performance in recent past. The balance sheet is an ideal starting point for the analysis of company's resources and obligations including the liquidity and solvency of the organization. The balance sheet provides information about the nature of the assets that the firm uses as debt collateral and also gives an insight on the company's mode of financing (Equity or Debt). The balance sheet also reports on a firm's earnings-generating ability in two ways. Firstly, assets of the company, which can be defined as economic resources, are expected to provide the future benefits and their worth should be analyzed very carefully. Consistent with the long run going concern perspective of the firm, these future benefits are not only cash flows but also the ability to generate earnings over a relatively long period of time. The balance sheet can also help forecast a company's future cash flow needs and evaluates the firm's profitability with regards to the level of investment required for a specific level of sales or profitability. Fixed assets (Equipment, Land, Building of the company), methods of valuating depreciation like straight Line, declining method etc and inventory in the shape of food items that are stocked and the valuation of merchandise like using LIFO, FIFO etc, all hold importance. Investors, creditors, lenders and other interested groups need to evaluate the financial performance of company (in the shape of financing modes equity or debt). In addition, management itself has to gauge the performance of the firm to see if any improvements could be implemented. So, first financial statement to be reviewed is the balance sheet, which reflects the company's financial condition at a given point in time and next would be the income statement, which shows the company's performance over a specific time period.

THE LIMITATIONS OF THE COMPANY'S MARKS AND SPENCER PLC

The limitations are stated below: The implementation of different accounting policies might distract the reported figures. Like frequently made changes in depreciation methods, in inventory valuation technique etc (Besley, Brigham, Scott, Eugene F. 2001, p. 98). If the reported figures on financial statement are out of date then the ratio can't portrait the true picture of the company. The ratio are also not debated on the risk associated the figures. If the employees or the management of the company manipulated with the figures or uses the big bath accounting technique then the ratios are also not clearly projected the company's performance. (Besley, Brigham, Scott, Eugene F. 2001, p. 98) Ratios are also not clearly drawn the valid projection of the company's capital structure or the size of the company's business (Besley, Brigham, Scott, Eugene F. 2001, p. 98). It is the reality that inflation distorts the reported amount. Ratio are not provides any appropriate judgment over the issue related with inflation. The factor of risk is beyond the control of ratios and the ratios are provides any proper evaluation related with risk.

COMPANY NEWS

On 06 August 2010, Horticulture Week reported that Marks and Spencer Plc has reported 404% increment in the sales of lavender Horticulture Week (2010). On 06 August 2010, Retail Week reported that the appointment of Marks and Spencer Plc Finance chief welcomed by city analysts Retail Week (2010). On 05 August 2010, the reporter Joeseph Connor reported that Marks and Spencer Plc appointed Alan Stewart as Chief Financial Officer MOO News (2010).

APPENDIX

S.No.

RATIO

Marks and Spencer Plc Year by Year

2010

2009

1 Current Ratio (Current Assets/Current Liabilities) =1520.2/1890.5 =1389.8/2306.9 2 ROCE (EBIT/Total Assets - Current Liabilities) =852/(7153.2-1890.5) =870.7/(7258.1-2306.9) 3 Gross Profit Margin (Gross Profit/Net Sales x 100) =3618.5/9536.6 =3371.9/9062.1 4 Net Profit Margin (Net Profit/Net Sales x 100) =523/9536.6 =506.8/9062.1 5 Stock Turnover Period (Stock held/(Cost of Sales/ 365)) =613.2/(5918.1/365) =536/(5690.2/365) 6 Receivables (Debtors) days (A/Receivable*365/sales) =281.4*(365/9536.6) =285.2*(365/9062.1) 7 Payables (creditors) days (A/P / Cost of Sales/365) =1153.8/(5918.1/365) =1073.5/(5690.2/365) 8 WC cycle Days (Days Rec.+ Days Stock - Days Payable) =11+38-71 =11+34-69 9 Gearing Ratio (Total Debt / Total Assets) =4967.3/7153.2 =5157.5/7258.1 10 Interest Coverage (EBIT/Interest Expense) =852/162.2 =870.7/214.5 (Marks and Spencer Plc, Annual Report, 2010-2009)

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