This assignment involves analyzing the cash flow statements of Tesco and Marks & Spencer for the years 2016 and 2017. It requires calculating the net cash from operating, investing, and financing activities, and comparing the performance of both companies. Based on the analysis, recommendations are made to improve liquidity and gross profits.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Business Research and Decision Making
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
TABLE OF CONTENTS INTRODUCTION...........................................................................................................................1 Profitability ratios for Tesco and Marks and Spencer.................................................................1 Liquidity ratios for Tesco and Marks and Spencer.....................................................................2 Working Capital requirement ratios for Tesco and Marks and Spencer.....................................3 Comment on cash flow statement of Tesco and Marks and Spencer..........................................4 RECOMMENDATION...................................................................................................................5 REFERENCES................................................................................................................................6
INDEX OF TABLES Table 1: Profitability ratios of Tesco...............................................................................................1 Table 2: Profitability ratios of Marks and Spencer..........................................................................1 Table 3: Liquidity Ratios of Tesco..................................................................................................2 Table 4: Liquidity ratios of Marks and Spencer..............................................................................3 Table 5: Working Capital requirement ratio of Tesco....................................................................3 Table 6: Working capital requirement ratio of Marks and Spencer.................................................4
INTRODUCTION Ratio analysis helps in ascertaining the financial position of the company in comparison to that of previous year. The comparison can also be made between the companies of similar sector as well (Healy and Palepu, 2012). The report makes comprehensive discussion regarding profitability, liquidity and working capital for Tesco and Marks and Spencer to assess the financial performance. Further, an analysis for the cash flow statement have also been made to assess the liquidity of the companies. Profitability ratios for Tesco and Marks and Spencer Profitability ratios of Tesco Table1: Profitability ratios of Tesco Profitability ratios ParticularsFormula2016-17 (GBP in million) 2015-16 (GBP in million) Increase / Decrease Gross profitGross profit / Net sales 2902284458 Net sales55917539331984 Gross margin ratio0.050.050.00 Operating profits Operating profit / Net sales 10171072-55 Net sales55917539331984 Operating margin ratio0.020.020.00 Net incomeCOGS / Average inventory -54129-183 Assets45853439041949 Return on Assets0.000.000.00 Net incomeNet income / Shareholders investment -54129-183 Shareholders’ investment 64388626-2188 -0.010.01-0.02 Return on Equity Profitability ratios of Marks and Spencer Table2: Profitability ratios of Marks and Spencer 1
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Profitability ratios ParticularsFormula2016-17 (GBP in million) 2015-16 (GBP in million) Increase / Decrease Gross profitGross profit / Net sales 40884128-40.00 Net sales106221055567.00 Gross margin ratio0.380.39-0.01 Operating profits Operating profit / Net sales 190515-325.00 Net sales106221055567.00 Operating margin ratio0.020.05-0.03 Net incomeCOGS / Average inventory 117407-290.00 Assets8292.58476.4-183.90 Return on Assets0.010.05-0.03 Net incomeNet income / Shareholders investment 117407-290.00 Shareholders’ investment 31563445-289.00 0.040.12-0.08 Return on Equity Profitability ratios of a company helps in assessing the ability of the business to generate income. It is the capacity of the entity to make profit out of the expenses being carried out in the specific period (Palepu, Healy and Peek, 2013). A higher profitability ratio reflects good financial position of the organization. The gross margin ratio of Marks and Spencer is 0.38 for 2017 which is higher than that of Tesco, which is only 0.05. Further, the operating margin ratio of Marks and Spencer and Tesco is similar, that is, 0.02. The Return on equity ratio of Marks and Spencer is 0.04 and that of Tesco is -0.01. Hence, based upon the results it can be assessed that the profitability of Marks and Spencer is much higher in comparison to that of Tesco (Weygandt, Kimmel and Kieso, 2015). Liquidity ratios for Tesco and Marks and Spencer Liquidity Ratios of Tesco Table3: Liquidity Ratios of Tesco 2
Liquidity ratios ParticularsFormula2016-17 (GBP in million) 2015-16 (GBP in million) Increase / Decrease Current AssetsCurrent Assets / Current liabilities 1541714828589 Current Liabilities1940519714-309 Current Ratio0.790.750.04 Quick AssetsQuick assets / Current liabilities 1311612398718 Current Liabilities1940519714-309 Quick Asset Ratio0.680.630.05 Total cash and cash equivalents Total cash and cash equivalents / Current liabilities 38213082739 1940519714-309 Current Liabilities0.200.160.04 Cash ratio Liquidity ratios of Marks and Spencer Table4: Liquidity ratios of Marks and Spencer Liquidity ratios ParticularsFormula2016-17 (GBP in million) 2015-16 (GBP in million) Increase / Decrease Current AssetsCurrent Assets / Current liabilities 1723.31461.4261.90 Current Liabilities23682104.8263.20 Current Ratio0.730.690.03 Quick AssetsQuick assets / Current liabilities 964.8661.5303.30 Current Liabilities23682104.8263.20 Quick Asset Ratio0.410.310.09 Total cash and cash equivalents Total cash and cash equivalents / Current liabilities 4064060.00 23682104.8263.20 0.170.19-0.02 Current Liabilities Cash ratio 3
Liquidity ratio helps in assessing availability of liquid cash with the company in order to meet out its current expenses. Further, it also ascertains the ability of the entity to pay out its debts (Higgins, 2012). The current ratio of Tesco is 0.79 and that of Marks and Spencer is 0.73. However, quick asset ratio shows the ability of the enterprise to pay off its short-term debts. The ratio is 0.68 for Tesco and 0.41 for Marks and Spencer. Hence, Quick asset ratio of Tesco is higher than that of Marks and Spencer. The Cash ratio of Tesco is 0.20 for Tesco and 0.17 for Marks and Spencer. In the end, it can be interpreted that, Tesco have better abilities to meet out its short-term obligation in comparison to Marks and Spencer. Working Capital requirement ratios for Tesco and Marks and Spencer Working Capital requirement ratio of Tesco Table5: Working Capital requirement ratio of Tesco Working capital requirement ratios ParticularsFormula2016-17 (GBP in million) 2015-16 (GBP in million) Increase / Decrease Current AssetsCurrent Assets - Current liabilities1541714828589 Current Liabilities1940519714-309 Working capital ratio-3988.00-4886.00898 COGS COGS / Average inventory 53015510891926 Average Inventory2365.52693.5-328 Stock turnover Ratio22.4118.973.44 Working capital requirement ratio of Marks and Spencer Table6: Working capital requirement ratio of Marks and Spencer Working capital requirement ratios ParticularsFormula2016-17 (GBP in2015-16 (GBP inIncrease / 4
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
million)million)Decrease Current Assets Current Assets - Current liabilities 1723.31461.4261.9 Current Liabilities23682104.8263.2 Working capital ratio-644.70-643.40-1.30 COGS COGS / Average inventory 653465340 Average Inventory779.5799-19.5 Stock turnover Ratio8.388.180.20 Working capital requirement ratios helps in assessing whether the company will be able to meet the daily requirement of funds or not (Brigham and Ehrhardt, 2013). It is basically calculated with respect to operational expenses as these expenses plays an important role to carry out the activities which are not directly associated to manufacturing but have vital importance in the process. The working capital amount available with Marks and Spencer is negative, that is, - 644.70. However, the amount is – 3988 which is less than Tesco. Further, stock turnover ratio of Marks and Spencer is 8.38 times and that of Tesco is 22.41 times. It can be concluded that although working capital with Tesco is less but the stock turnover ratio is high. It reflects that Tesco have higher revenues than that of Marks and Spencer. Comment on cash flow statement of Tesco and Marks and Spencer Cash flow helps in assessing to the changes in balance sheet and income directly affecting the cash and cash equivalents (Spiceland and et.al., 2013). As per the statement of cash flow of Tesco has increased from 3,082 million in 2016 to 3,821 million in 2017. Further, net cash from operating activities is 1989 million, cash flow from investing activities is 279 million and cash outflow from that of financing activities is 1387 million in 2017. Hence, it can be stated that majority of cash have been collected through operating activities by Tesco. Examining the data of cash flow from Marks and Spencer, the net cash of the company is 406 million for 2016 and remains the same for 2017 as well. It shows that no growth has been experienced by the company is the last one year of accounting period. Hence, the performance of Tesco is better in comparison to Marks and Spencer (Operating Expense on the Income Statement,2015). 5
RECOMMENDATION From the above analysis, it can be recommended to the companies that there is a requirement to increase their liquidity so that short term obligations can be met by the entities (Weil, Schipper and Francis, 2013). Further, there is a requirement to increase the gross profits as well, as it has been seen at the declining state. It will help the entity to increase its market share and profitability to meet the obligations (Authority, 2013). 6