Financial Management : Marks & Spencer

Financial Management

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Assessment.......................................................................................................................................1
TASK 1............................................................................................................................................1
a. Explaining purpose and the relevance of the selected ratios in respect of the stakeholders...1
b. Ratio analysis of Marks and Spencer Group Plc for the year 2018 and 2019........................2
c. Highlighting the performance of the company by showing the concern areas for the
stakeholders.................................................................................................................................4
d. Critically evaluating the use of the financial ratios in context of interpreting and
performance measurement .........................................................................................................5
TASK 2............................................................................................................................................6
Critically evaluating the agency theory and its use in various business situation under which
the conflict is been reported........................................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial management referred as significant activity or the practice of planning,
controlling, organising and monitoring the financial resources for achieving the organizational
goals effectively and efficiently. The present study is based on Marks and Spencer, a British
global retailer, deals in clothing, food and the home products. Furthermore, the study throws a
deep insights towards the financial analysis of the Marks and Spencer financial results through
ratio analysis. Moreover, it describes the agency theory and the problems relating to it that has
been faced by the company.
Assessment
TASK 1
a. Explaining purpose and the relevance of the selected ratios in respect of the stakeholders
Ratio analysis refers to the quantitative method that is been used for gaining the insight
towards the towards the liquidity, profitability and the operational efficiency by making the
comparison of the figures that are contained in the financial statements of Marks and Spencer
(Karadag, 2015). This helps the internal and the external stakeholders in assessing the trend of
the company's performance and the position over the time which in turn helps them in making
suitable decisions through comparing the results of M&S with its competitors. Under this study,
liquidity, profitability and the gearing ratios has been selected in order to measure the
performance of an enterprise.
Liquidity ratios- It means the ratios that are used for measuring the capability of the
organization in paying off its current obligations. It includes the current ratio and acid test or
quick ratio. These ratios makes comparison in between various combination of the liquid assets
with that of the current liabilities. It has been stated that greater the ratio, better is the liquidity
position of the company in meeting its short term liabilities effectively. Liquidity ratios helps the
stakeholders like the suppliers and the creditors in knowing the liquidity position of Marks and
Spencer in terms the use of its current assets against its short term liability so as to assess the
ability of the firm in meeting its liability on time (Ward and Forker, 2017). It also helps the
stakeholder in determining the efficient use of the working capital is been made or not within the
organization. It enables the rating agencies for making the analysis of the solvency position so
that it could provide the ratings accordingly.
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Profitability ratios- It refers to the financial metric that is used for assessing the ability of
the firm in generating the earnings in relation to its revenues, assets, shareholders equity and the
operating cost for a particular accounting period. It includes operating profits, net profit margin,
return on assets and the return on capital employed. The major purpose of profitability ratio is to
provide for the results to the users regarding the earnings and the profits that are gained by the
organization against its sales, assets and the capital (Choi and et.al., 2018). All the stakeholders
are very much concerned about the profitability or the performance of an entity because of the
investments made by them with expectation to gain maximum profit margins. Investors and the
shareholders are the major stakeholders that are has the keen interest in finding out that the
company is performing good or not and in making the decisions regarding further investment,
withdrawal or decreasing the holding.
Gearing ratios- It refers to the financial ratio that is been utilized for measuring
proportion of the borrowed funds towards the equity of the company. This ratio reflects financial
risk through which the business is been affected as the excess of the debts could result to the
financial difficulties. It involves the debt-equity and the interest coverage ratios. Greater gearing
ratio indicates the high proportion of the debt to the equity, whereas the lower gearing ratio states
the lower proportion of the debt against the equity. The purpose of gearing ratio is to assess the
capital structure of the organization and in providing the results to the users regarding the long-
term stability of the Marks and Spencer business (Uechi and et.al., 2015). This information assist
the stakeholders in evaluating failure risk associated with the business and in analysing that the
company is capable in paying off its borrowings on time. It also helps the users in finding out the
interest burden on the firm and in assessing that it has the ability to cover its finance cost or not.
Lenders and the creditors are the main stakeholders that has the interest in the results that are
ascertained from the gearing ratios.
b. Ratio analysis of Marks and Spencer Group Plc for the year 2018 and 2019
Particulars 2018 (in £million) 2019 (in £million )
Liquidity ratio
Current Ratio
Current Assets 1317.9 1490.4
Current Liabilities 1826 2228.4
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Current Ratio = Current Assets/ Current
Liabilities 0.72 0.67
Acid Test Ratio
Quick Asset 536.9 790
Current Liabilities 1826 2228.4
Acid Test Ratio = Current Assets/ Current
Liabilities 0.294 0.355
Profitability ratios
Operating Profit Margin
Operating Profit 156.5 162.4
Total Revenue 10698.2 10377.3
Operating Profit Margin = Operating Profit
/Total Revenue 1.46% 1.56%
Net Profit Margin
Net Profit 29.1 37.3
Net sales 10698.2 10377.3
Net Profit Margin = (Net Profit/ Net sales)*100 0.27% 0.36%
Return on Assets
Net Income 29.1 37.3
Total Assets 7550.2 7200.2
Return on Assets = Net Income/ Total Assets 0.39% 0.52%
Return on Capital Employed
Net Operating Profit 66.8 84.6
Total Assets 7550.2 7200.2
Current Liabilities 1826 2228.4
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Total Assets – Current Liabilities 5724.2 4971.8
Return on Capital Employed = Net Operating
Profit/ (Total Assets – Current Liabilities) 1.17% 1.70%
Gearing ratios
Debt -equity ratio
Total debt 125.6 513.1
Shareholders' equity 2956.7 2681
Gearing = Total debt /Shareholders' equity 0.04 0.19
Interest coverage
EBIT 156.5 162.4
Interest Expenses 113.8 111.6
Interest coverage = EBIT/Interest Expenses 1.4 1.5
Earning per share
Amount available for equity holders 2956.7 2681
Number of outstanding shares 1624.1 1624
Earning per share =Amount available for
equity holders/Number of outstanding shares
1.82 1.65
Interpretation- From the above analysis it has been interpreted that current ratio of the
Marks and Spencer is declining from 0.72 in the year 2018 to 0.67 in the year 2019. this means
that company has to take appropriate measures in order to maintain liquidity such as by making
optimum use of its current assets and by reducing the liabilities. However , the quick ratio is
increasing that is from 0.294 to 0.355 which means that the company is good at converting its
inventory into cash. The overall profitability ratio indicates that the company earns very low
profit margins and the percentage increase in the profits is also very little over the year as
operating profit margin in 2018 resulted as 1.46% and in 2019 it equates to 1.56%. The net profit
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margin in the year 2018 were 0.27% to 0.36% during the year 2019. Similarly, the return on
assets and capital employed are also increasing. The gearing ratio is also showing an increasing
results which means that the borrowings of the firm has increased over the year and the
shareholders equity has decreased. Increase in the interest coverage ratio reflected a good sign as
it states that the company is capable of meeting its interest obligation.
c. Highlighting the performance of the company by showing the concern areas for the
stakeholders
The overall performance of M&S is not sound and does not reflect better results as its
earning capacity is very low due to lower sales margins which of great concern for the
stakeholders as the performance of the company is been depicted by the profitability and if the
profits are low than the shareholders will get very low amount of dividend. Investors who has
made the investment in the enterprise also gets affected as they could not be able gain higher
returns from as the profits margin is low. The borrowings of the company are also increasing
with a higher amount which and the shareholders equity is decreasing which is considered as the
major concern for the stakeholders as this results in higher debt-to-equity ratio which means that
the financial burden on the enterprise is getting higher and the size of holding within the firm is
declining, this results in higher obligation on the corporate which in turn affects the solvency
position of an entity (Altman and et.al., 2017). The liquidity position is also showing a declining
trend which is also counted as the concern because stakeholders are highly affected by the liquid
position of an enterprise as it is directly linked with meeting the short term obligation which
plays a critical role in smooth functioning of the routine operations within the work environment.
d. Critically evaluating the use of the financial ratios in context of interpreting and performance
measurement
Financial ratios refers to the relationship which is been determined from the financial
information of the company and is used for the purpose of making the comparison.
Advantages Limitations
 Ratio analysis helps in validating and
disproving financing, operating and the
investment decisions of an entity. It
helps in summarizing final reports into
the comparative figures and thus
 Financial ratios ignores the changes in
the price level because of the inflation.
This leads to the incorrect evaluation of
financial health of an entity.
 It also ignores qualitative
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enables the management in comparing
and evaluating financial position of the
company.
 It is used for simplifying the complex
financial statements and the financial
data into the ratios of the operating and
financial efficiency.
 It helps in identifying the problem if
any present in the management and the
financial areas.
 It allows the enterprise in conducting
the comparative analysis with its
competitors, industry standards etc.
which in turn helps in developing better
understanding of the fiscal position
throughout the economy.
characteristics that are associated with
the performance of the firm. It only
considers monetary aspects.
 Accounting ratios are not the good
measure for resolving the financial
problems faced by the organization
(Gomez-Mejia, Patel and Zellweger,
2018). They only act as the means and
could not be used for getting actual
solution.
TASK 2
Critically evaluating the agency theory and its use in various business situation under which the
conflict is been reported
Agency theory refers to the principle which is been used for resolving the issues that
occurs in the relationship of the business and their agents. For example- it reflects the
relationship in between the shareholders as the principle and the executive of the company as the
agents. Theory of agency addresses the disputes that might arise majorly in two areas that
includes the difference in the goals and the in the risk aversion. This theory makes the
assumption that there is the conflict in relation to the interest of the principal and the agent. In
other words it means there is no any alignment in between the principal and the agent because of
the difference in their interest.
In accordance with the Edwards, Schwab and Shevlin, (2015), it has been reviewed that
under the agency theory helps in developing the good relationship between the principal and its
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agent. This reflects that the both of them are been assumed as solely motivated by their self-
interest. However, Shogren, Wehmeyer and Palmer, (2017) analysed that agency theory
anticipate for the complete contracts which includes the catering of all the possible contingencies
like language ambiguity, uncertain events and inadvertence. Such bounded rationality results in
inefficient and incomplete contracts. On the other state, it has also been suggested by the Bosse
and Phillips, (2016) that, at the time when the principal delegates the responsibility regarding
the decision making to its agent, this creates self-motivation within the agents which in turn
could result in better performance. On the other hand, sometimes the agent could use it as the
power in promoting their well-being and will opt for such actions that might not be best to the
interest of the principal.
Pepper and Gore, (2015) also identified that, In the agency relationship, agents and the
principals are assumed as the rational persons who are been capable in forming the unbiased
anticipation relating to the effect of the problem in the agency in consideration with the
associated value of their future wealth. Moreover, agency theory also assumes that the
contracting could eliminate the agency cost and the competence aspect is also not taken into
consideration. Mitnick, (2015) also viewed that the there exist the contractual relationship in
between the principal and the agent which implies for making decisions in such a way that
results in maximizing returns for the shareholders in order to maximize the wealth of the
organization. Banks and et.al., (2018) also stated that, agency theory provides for conflicting
interest of the principals and the agents as the shareholders has the keen interest in the financial
performance while the directors or the executives might has the interest in their duty. This theory
does not recognises for the effect of the third party. These are the party that are been affected by
contract but are not the party that are indulged in the contract.
It has also been determined by the Chari and et.al., (2019) that as per the theory the agent
does not own the resources of the corporation, so they may make misuse of those resources or
might commit for the moral hazards like shirking the duties or enjoying leisure and also hiding
the in efficiencies in order to avoid the reward loss. It is been done by the Prosman Scholten and
Power, (2016) because of the enhancing their personal wealth at cost of its principal. However,
as per the Bendickson and et.al., (2016) it has also been viewed that, for minimizing such
problems mainly two steps has been recognised that includes, firstly the risk-bearing capacity of
the principal-agent is to b monitored by nexus of the contracts and the organization. Secondly,
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determining it as the positive theory of agency by clarifying the ways in which the enterprise
uses contractual monitoring and the bonding that is been bear on which structure is designed.
On the other side, it is been highlighted that this theory does not considers the
competence aspect and because of this even those managers who are not competent and are
incapable in carrying out the task are appointed. Agency theory does not call for those persons
who are been loyal towards the organization. Moreover, it is the theory that treats the mangers as
they are opportunistic, solely motivated with that of their self-interest. Thus, in accordance with
the agency theory it has been studied that there exist the divergence of the interest and the
purpose of the mangers and the shareholders, one is the person who expects for the separation of
an ownership and the control leads to the damaging effect over the performance of an entity.
This problem could be overcome by direct monitoring on the shareholders through the
concentrated ownership. Such use of the ownership helps in increasing the improvement in the
performance of an enterprise.
The agent under this theory has more of the information as compared to the principal, this
difference of knowledge is been called as the asymmetric information. It is also been studied by
the Bøe, Gulbrandsen and Sørebø, (2015), that the principal could not always ensure for the
performance of the agent to their best interest. This departure of the interest from principal to
agent is called as agency cost. Hence agency theory cause many problems that includes the
difference of interest, personal goals etc. Agency theory assess the cost incurred by reviewing
financial decisions in context of the risk, trade-off and the profitability in between the parties
interest. Principal bears particular costs for reducing possibility of agent in prioritizing the value
of its agent. For the equity holders, such cost are classified as the monitoring cost, residual cost
and the bonding cost.
Examples- Portfolio managers and the financial planners are considered as agents and are
having the responsibility towards their principal assets.
In the real life business situations, this problem occurs in respect of the ways in which the
company is been owned and is operated. The owners elects the BODs, who will be responsible
for monitoring and guiding management team such as supervisors (agents). In the case of the
green-lighting project, more of the authority was in the hand of the agents rather than pursuing
the something that maximizes value of the shareholder.
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“ Too Big To Fail” was another example of the agency problem. The idea behinds this business
project was that some organization are so critical and important to economy, that even if they do
anything as per their wish, the government will be helping in bailing out them. It is the situation
that creates the moral hazards, under which the agents will be having no incentive for doing the
right things as they are aware of the not get blamed at end if anything happens.
Market failure is also a critical component for the business and could resulted because of the
conflict of interest in the between principal and the agent. This occurs due to the misallocation in
the resources which leads to the distortion in market (Chang, Kang and Li, 2016). This in turn
creates the inefficiency in overall market. Market failure causes due to four reasons that includes
power abuse, externalities, sole buyer, externalities, information distribution and the public
goods. Mainly the market failures occurs when agent pursues self-interest instead of the
principals interest.
CONCLUSION
By summing up the above report it has been analysed that financial management is an
important aspect for each and every organization because it relates to optimum utilisation of the
resources in order to gain larger profits. It helps the firm in attaining growing success in the long
run and in meeting with the uncertainty occurs if any.
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REFERENCES
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