Analyzing the Financial Performance of Marks & Spencer

Marks & Spencer (M&SP) has shown an overall growth in profitability by 2.61%, which is considered good compared to the competitive industry. The company's net profits have been increasing, with a double-digit growth rate. M&SP effectively manages its trade payables and receivables, indicating strong internal management. The earnings per share ratio indicates that the company has increased profit availability for each shareholder, suggesting a good sign of future dividend payments.

FINANCIAL
PERFORMANCE
ANALYSIS OF A GROUP
OF COMPANIES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
SECTION-A....................................................................................................................................3
Section-B..........................................................................................................................................7
Conclusion.......................................................................................................................................9
REFERENCES..............................................................................................................................10
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INTRODUCTION
Financial Analysis is the detailed explanation of the Company's annual reports and
Financial Statements in order to project a comparative analysis of its past,present and future
revenues. This process of reviewing helps the company to plan and make a better economic
decision making and take effective strategic decisions(Subramanian and Ravichandran, 2016)..
The following report presents the analysis of the financial statements of Marks And Spencer Plc
which is the large multi brand leading retailer in UK. This company is operating over 1382 stores
all over the world dealing mainly in packed Food items, clothing and home products. Also the
company has an online platform to buy its products in domestic as well as internationally.
The key competitors of the company are Next Plc, ASDA group, Tesco Plc. Thus the analysis of
the data will be made in comparison to the other competitors operating in the industry will make
an effective judgment for prospective investors(Orlitzky, Schmidt, and Rynes, 2009).
SECTION-A
Profitability Analysis-
 Gross Profit Ratio implies how much gross profit is generated from the sales incurred
during the period. It is given by-
Gross Profit/ Net sales
 Net Profit ratio is the measure of the income derived from the sales during the period. It
is given by
Net Profit/Net Sales
 Return On Capital Employed measures the percentage return derived by the investment
or capital contributed by the shareholders. It is given by
Net profit before interest and taxes / Capital
employed
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Particulars Year Ending
2016 in
(m£)
Year
Ending
2015
in (m£)
Year
Ending
2014 in
(m£)
Year ending
2013 in
(m£)
Year ending
2012 in (m£)
Gross Revenues 10555 10311 10310 10026 9934
Net profits 406 487 524 454 513
Gross Profit Ratio 39.11% 38.65% 37.54% 37.86% 37.80%
Net Profit Ratio 5.16% 4.65% 5.09% 4.72% 3.85%
Return On Capital
Employed
9.04% 11.21% 12.89% 11.45% 11.86%
Table 1:- Profitability Ratios
Liquidity Analysis- Evaluation of liquidity is done to find out the firms capability to repay its
immediate cash obligations. There are following ratios to analyze the liquidity of the company-
Current ratio- It evaluates the ability of the company to pay its short term obligations using its
current assets. It is given by the following formula
Current Assets/Current liabilities
Quick Ratio- It evaluates the ability of the company to repay its short term obligations by using
its more liquid assets. It is given by the following formula
Quick Assets/Current Liabilities
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Inventory Turnover ratio- It is defined by the frequency of the inventory is sold and replaced. A
high ratio represents the company is efficient in managing the sales.
It is given by the following formula-
Cost Of sales/Average inventory
Trade Receivables Collection Period- It is the frequency of the number of times the company
collects its receivables (Orlitzky, Schmidt, and Rynes, 2009). A high ratio indicates an efficient
collection and credit process. It is given by the following formula-
Net credit Sales/Average Accounts Receivables
Trade Payable Collection Period - It is the frequency of the number of times a company pays its
accounts receivable during a period. It can be given by the following formula:-
Net credit purchases/Average Accounts Parables
Particulars Year
Ending
2016
Year
Ending
2015
Year
Ending
2014
Year Ending 2013 Year Ending
2012
Current Ratio .69 .69 .58 .57 .73
Quick ratio .24 .24 .17 .17 .33
Inventory
Turnover
Ratio
8.05% 7.69% 7.98% 8.60% 9.04%
Trade
Receivables
Collection
88.15 days 82.33 days 87.70 days 89.97 days 93.32 days
Trade
Payable
Collection
56.49 days 60.92 days 59.99 days 57.45 days 56.35 days
Table-2 Liquidity Ratios
Analysis of the Profitability Ratios
 Gross Profit Margin Ratio- This ratio implies how efficiently the company controls its
inventory's cost. In case of Marks & Spencer, in the five years period it has been showing
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an overall increasing trend. It is the signal of good financial health of the company which
is further improving. However the ratio was almost stable till 2014 with slight variations
but then it started increasing. A similar trend will have a positive impact on the growth of
the company(Subramanian and Ravichandran, 2016)..
 Net Profit Ratio-A high net profit ratio implies the efficiency of the company to control
its expenses or costs. It basically measures the capacity of the company in converting its
revenues to profits. The net profit ratios is continuously increasing except for the year
2015 where it decreased. However the company bounces back in the year 2016 where it
has achieved highest profitability in the entire period of five years. If this trend continues
to be increasing it will have a positive impact on the market price of the company.
 Return On capital Employed- A higher return on the capital employed will lead to more
satisfied investors as it will generate higher returns on their capital invested. In case of
Marks & Spencer this ratio is showing an increasing trend till the year 2014, then it is
decreased in 2015 which further has gone to the lowest level in the year ending 2016.
This will lead to dissatisfied investors. Further if this trend continues then it will have an
impact on the market price of the share of the company.
Analysis of Liquidity Ratios-
 Current Ratio- This ratio indicates how efficiently the company manages its current
assets to repay its current liabilities. These ratios are measured in short term perspective.
In the given company that is Marks & Spencer it shows a declining trend till 2014 than it
got increased in 2015 and then became constant. Moreover in this case every year the
company is has more to current liabilities to pay off than the available current assets.
Hence it may face liquidity crises in short run. Ideally the company should maintain
enough short term assets to pay off its current or outstanding liabilities. Hence efforts
should be made to improve the situation(Subramanian and Ravichandran, 2016)..
 Quick Ratio- This ratio indicates the ability of the company to deploy its most liquid
assets that consists of current assets except inventories to repay its current liabilities. The
trends of this ratio are as it decreased in 2013 than became constant that again it increased
than it again became constant in the year 2015 to year 2016. The low quick ratio suggests
that the company is having very less of the liquid assets. It may face liquidity crises in
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short span and may have to avail immediate working capital loan to repay its current
liability.
 Inventory turnover Ratio- This ratio will indicate how efficiently the company manages
its resources to generate profits. If this ratio is very low it implies that a large amount of
inventory that may be in the form of raw material or finished goods is stuck up in the
stores of the company. On the contrary a high ratio is sign of increased or high sales
which is a good indicator or a sign of inefficiency of the company in its purchasing power
that its facing difficulty in inventory management. Here the company's inventory
turnover ratio is continuously declining till the year 2015 than it got increased in the year
2016. An increasing trend is a good indicator that that the company has started to manage
its inventories efficiently.
 Trade Receivables Collection Period- It is the time period in which the company collects
its receivables. It will directly affects the cash flows status of the company. Therefore
should be fixed after due consideration to the cash flow requirements and analysis of the
current debt receivable period of the industry. In the given case of Marks & Spencer the
collection period is continuously decreasing till the year 2015 and than it increased a bit
by 6 days in 2016. Company is effectively managing its receivable by following an
almost constant period for receivables(Subramanian and Ravichandran, 2016)..
 Trade Collection Period- The implication of calculating this ratio is to analyze the overall
liquidity requirements of the company in a period of an year. In the given case this ratio
shows no trend over a period of five years that is it is constantly fluctuating. This should
be fixed after giving due consideration to the cash requirements of the company. In
Marks & Spencer although the exact values are fluctuating, but only by few days, it
implies that the company is effectively managing its creditors.
SECTION-B
The above analysis is based on the leading retailer of clothes, foods and home utility products
named Marks & Spencer. The company has very well expanded in international markets and also
offers an online portal where it displays its products. This even facilitates the consumers to avail
its services. In this manner this company has made strategic moves to develop a brand name both
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in the domestic as well as international markets. Based on the above report the following
conclusions can be drawn-
On reviewing the profitability ratios it suggests that the revenue of the company has grown over
a period of last five years. It has achieved an overall growth in profitability by 2.61% which is
considered to be good in comparison with the competitive industry. Net profits of the company
shows an increasing trend and further the company is able to register a double digit growth rate.
Further its profits distribution to investors are also high as compared to the general trends in the
industry(Subramanian and Ravichandran, 2016).
Further the company effectively manages its trade payable and trade receivables which can
further be considered as a good sign of internal management. The earnings per share ratio of the
company indicates the profit available to each shareholder who aims to invest in the company
with the purpose of earning dividends. Earning Per share Ratio of the company has increased
from the last five years.
From the above analysis it is clear that the company is effectively following sustainable growth
strategy and heading towards achieving core competency.
Moreover analyzing the position of the current assets it is quite evident that the company has
employed all the assets into long term funds and that is why it short falls with the short term
current assets. Thus there may a requirement of availing working capital loan in the company in
short run to repay its current liabilities.
Recommendations:
On the basis of ROI- Based On the analysis of ROI it has decreased in the recent years but the
decrease is not high so an investor who is longing for a long term gain can buy the share of the
company(Orlitzky, Schmidt, and Rynes, 2009).
On the basis of Revenues- The revenues of the company are increasing constantly and so
analysis would suggests the company is growing in terms of increase in the sales figure. Hence
the person can opt to buy this share.
On the basis of Profitability- The profitability ratios of the company are positive and high as
compared to industry figures that indicates a high profitability of the company. Based on the this
aspect it would be recommended that the investment in this share would be profitable for the
prospective investors.
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CONCLUSION
As per above study, it can be concluded that in case of Marks & Spencer, in the five years
period it has been showing an overall increasing trend. In order to have better opportunities in
the market the company need to improve its control over short term assets. Along with this, high
net profit ratio implies the efficiency of the company to control its expenses or costs. By having
effective consideration of key measures in respect to financial measures the overall development
can be advanced in significant manner. ROI and other aspects' analysis helps in understanding
the overall performance of M&S.
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REFERENCES
Books and journals
Orlitzky, M., Schmidt, F.L. and Rynes, S.L., 2009. Corporate social and financial performance:
A meta-analysis. Organization studies, 24(3), pp.403-441.
Subramanian, M.V. and Ravichandran, M., 2016. A Study on Financial Performance Analysis of
Force Motors Limited. International Journal for Innovative Research in Science and
Technology, 2(11), pp.662-666.
Ved, R.D. and Joshi, P.M., 2016. A Financial Performance Analysis of Selected Nationalised
Banks of India. Global Journal For Research Analysis
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
O’Neill, P., Sohal, A. and Teng, C.W., 2016. Quality management approaches and their impact
on firms׳ financial performance–An Australian study. International Journal of
Production Economics, 171, pp.381-393.
financial performance: a case study of a manufacturing company.
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