Financial Performance Analysis of Marks & Spencer: A Report

This report provides a detailed financial analysis of Marks & Spencer's performance from 2010 to 2012, employing various financial ratios to assess profitability, liquidity, performance, and efficiency. The analysis includes the calculation and evaluation of gross profit margin, net profit margin, operating profit margin, current ratio, quick ratio, return on assets, return on capital employed, return on equity, earnings per share, accounts receivable turnover, average collection period, asset turnover ratio, and inventory turnover ratio. The report critically evaluates the trends and implications of these ratios, offering insights into the company's financial health and providing recommendations for improvement. The second part of the report explores investment appraisal techniques, comparing and contrasting two project proposals and discussing their advantages and disadvantages.

FINANCIAL MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1.1 Calculation of profitability, liquidity, performance and efficiency ratios for the past three
years of Marks & Spencer...........................................................................................................1
Ratios for Marks and Spencer......................................................................................................5
1.2 Critical evaluations of the ratios calculated for the last three years and advise to the
company.......................................................................................................................................6
1.3 Summarized Report...............................................................................................................9
PART 2..........................................................................................................................................11
2.1 Appraisal of two projects.....................................................................................................11
2.2 Other appraisal techniques...................................................................................................14
2.3 Advantages and disadvantages of the investment appraisal methods.................................15
2.4 Summarized Report.........................................................................................................18
REFERENCES..............................................................................................................................19

Table 1Ratios for Marks & Spencer................................................................................................5
Table 2 Report of ratios...................................................................................................................9
Table 3 PV of project 1..................................................................................................................11
Table 4 PV of project 2..................................................................................................................11
Table 5 PV of project 1 at 11%.....................................................................................................13
Table 6 PV of project 2 at 9%.......................................................................................................13

INTRODUCTION
Evaluation of the financial data of a company can be termed as financial management. It
helps to analyze that whether a company is gaining profits or incurring losses. The concept is
used by companies to analyze the implementation of resources in an appropriate manner. It also
provides a framework to the business units in order to make decision making. With the help of
financial data available, it is easier for companies as well as investors to evaluate the
performance of a firm in monetary terms. There are various tools of financial management which
are used and employed by companies to assess the efficiency of their operations. The most
widely used among them are ratio analysis and investment appraisal or capital budgeting
techniques (Financial Management - Meaning, Objectives and Functions, 2013).
In part 1 of this project, performance of a retail company will be analyzed. The company
taken is Marks & Spencer. The performance is judged with the help of ratios for three financial
years. The data is compared to judge the progress of the company. In the second part of the
project, two project proposals will be analyzed and decision will be made on them by making use
of capital budgeting or investment appraisal methods.
PART 1
In this section, a company is taken particularly from the retail sector which is among the
top 100 companies being traded on FTSE- 100 index on London Stock Exchange. The annual
reports of the company are evaluated for the last three years. The financial ratios of the company
are analyzed. The company taken in this report is Marks & Spencer.
1.1. Calculation of profitability, liquidity, performance and efficiency ratios for the past three
years of Marks & Spencer Profitability ratios – These ratios are used to show the profitability or profit earned by a
company during an operating year. Following are the profitability ratio-
 Gross profit margin
G ross profit margin= gross profit
net sales
Gross profit margin is the ratio of gross profit or income to that of sales. The
amount of sales that is left over after taking the cost of goods sold is determined
by this ratio (Financial ratios, 2010).
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 Net profit margin
N et profit margin= net income
sales
The ratio of net profit or income and sales done by a company is known as the net
profit margin. The amount of sales that is left after all expenses is indicated by
this ratio.
 Operating profit margin
O perating profit margin= operating income
sales
Operating income is also known as the income before interest and taxes. This
ratio indicates that how much pound of sales conducted by a company is left after
incurring operating expenses (Ismail and et. al., 2005).
 Liquidity ratios – These ratios indicates that how much liquid assets is maintained by a
company.
 Current ratio
C urrent ratio= current assets
current liabilies
Current ratio is used to show that how much liquidity is maintained by a company
or does it has the ability to pay for its short term obligations. If assets are more
than the liabilities, then this is considered ideal for a company (Collier, 2012).
 Quick ratio
Q uick ratio= current assets−stock
current liabiliies
Quick ratio is considered to be an ideal ratio to judge the liquidity of a business
because it does not include inventory or stock in the current assets and includes
only the cash and cash equivalents. It is possible that a company’s current assets
are more because of inventory which is excluded in the quick ratio (Reid and et.
al., 2008).
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 Performance ratios – it is used to judge the performance of a company by looking that
whether its shareholders are satisfied or not with the profits earned. Following are some
of the performance ratios –
 Return on assets
ℜturn on assets= net income
total assets
Return on assets ratio indicates that how much profit is earned by a company in
relative to the total assets. It indicates that how efficiently a company has
managed its total assets in order to generate profits or earnings (Atrill and
McLaney, 2008).
 Return on capital employed
R eturn on capital employed= net income
total assets−current liabilies
Return on capital employed is the amount a company expects to get in return from
the capital it has employed into the business. It should be higher than the rate at
which a company takes loan from the bank.
 Return on equity
R eturn on equity= net income
shareholde r' s equity
Return on equity is the profit which is earned on each of the pounds which has
been invested in the firm. It is the amount of net income earned by a company as a
percentage of equity of shareholders. Shareholder’s equity is the amount which
the shareholders have invested into the business. It tells about how much profit is
made by the firm from the money shareholders have invested (Ahrendsen and
Katchova, 2012).
 Earnings per share
EPS=net income available ¿ shareholders ¿
number of shares outstanding
EPS is the income which is being made available to the shareholders of a
company.
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 Efficiency ratios – this is used to depict the effective management of a company. Below
are the types of efficiency ratios.
 Accounts receivable turnover
A ccounts receivable turnover= sales on credit
accounts receivable
The ratio indicates that how many times in an operating year credit sales have
been created and collected (Collier, 2012).
 Average collection period
A verage collection period= average receivables
365
Average collection period is the time period in which the amount of receivables
will be received by a company on the sales it has given on credit. The less it is the
more favorable for a company as it will be able to receive the credit on time
(Crowther, 2004).
 Asset turnover ratio
A sset turnover= sales
total assets
The ratio indicates the extent up to which an investment in total assets has
resulted into sales.
 Inventory turnover ratio
I nventory turnover= cost of goods sold
inventory
Inventory turnover ratio is the number of times inventory comes and leaves a
company within a complete annual year.
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Ratios for Marks and Spencer
Table 1Ratios for Marks & Spencer
Ratios Formula 2010 2011 2012
Profitability ratios
Gross profit margin Gross income/sales 7% 8% 6.66%
Net profit margin Net income/sales 5.4% 6.1% 4.9%
Operating profit margin Operating income/sales 8.9% 8.5% 7.5%
Liquidity ratios
Current ratio Current assets/current liabilities 0.804 0.74 0.728
Quick ratio Current assets-inventory/current liability 0.479 0.43 0.338
Performance ratios
Return on assets Net income/total assets 7.3% 8.15% 6.7%
Return on capital employed Earning before interest and taxes/total assets-current liability 16% 16.3% 15.8%
Return on equity Net income/shareholder’s equity 24.1% 22.3% 17.5%
Earnings per share Net income available to shareholders/no of shares outstanding 33.2p per share 34.4p per share 34.6p per share
Efficiency ratios
Accounts receivable turnover Sales/accounts receivables 33.88 38.9 39.2
Accounts receivable period 365/accounts receivable period 10.77 days 9.25 days 9.3 days
Asset turnover Sales/total assets 1.33 1.32 1.365
Inventory turnover Cost of goods sold/inventory 15.55 times 14.22 times 14.56 times
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1.2. Critical evaluations of the ratios calculated for the last three years and advise to the
company.
 Profitability ratios
Gross profit margin – Gross profit is the ratio of gross income to sales. From the
calculated ratios of Marks &Spencer, it can be seen that the company has brought an
increase in the gross profit from 7% in 2010 to 8% in 2011 but it decreased to 6.66%
which is approximately more than 1%. This happens because the expenses of the
company have risen. In this case, the company should make efforts to reduce its direct
expenses and increase sales. It also has to pay attention on the cost of its inventory.
Net profit margin – Net profit is the ratio of net income and sales. The calculated values
of Marks & Spencer exhibit that it has escalated from 5.4% in 2010 to 4.9% in 2011. This
depicts that the company has increased its sales. Also, Marks & Spencer is able to control
on its debts but, in the very next year 2012 again a decrease in the net profit is being
noticed and lead to 4.9%. From this, it can be evaluated that the company has increased
its operating expenses, but to raise its net profit a control has to be made over its
expenses. It also has to control its debts, so as to reduce its expenses on the interest
charges.
Operating profit – Operating profit is the profit margin in the form of earnings before
interest and taxes out of the entire sales. The calculated values of Marks & Spencer
depicts that the value has shown a slight decrease in it from 8.9% in 2010 to 8.5% in
2010. This means that the company is efficiently carrying out its day to day expenses.
But, this has again fallen to 7.5% in 2012 which embarks that the expenses of daily
activities are not taken care of properly.
 Liquidity ratios
Current ratio – An ideal current ratio is considered to be as 2:1. This ratio for Marks &
Spencer is 0.804 in 2010 and 0.74 in 2011. This shows that the current asset of the
company is less than current liabilities which is not good for the operations. This again
has fallen to 0.728 in 2012. This denotes that Marks & Spencer is facing lack of liquidity.
From the calculated ratios, it can be suggested to the company that necessary efforts
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should be made to increase its current assets so that it has sufficient liquidity whenever
required.
Quick ratio - This ratio is considered to be a true indicator of liquidity maintained by a
company. An ideal quick ratio is 1:1. For Marks & Spencer, it is 0.479 and 0.43 in year
2010 and 2011 respectively. Then in the next year, it has fallen down to 0.33. This
denotes that not much part of inventory is included in the current assets of Marks &
Spencer, but on the other side the ratio also shows that cash and cash equivalents of the
company are quite low and current liability exceed them. Efforts have to be made by the
company to increase its liquid assets in order to raise its quick ratio.
 Performance ratios
Return on assets – The return on assets for Marks & Spencer has increased from 7.3% in
2010 to 8.15% in 2011 which shows that the company is properly utilizing its assets but
this has shown a downfall in 2012 to 6.7%. With this, it can be evaluated that the assets
are not utilized properly and the company is not able to convert it into sales.
Return on capital employed – The figures have shown a slight increase in the ROCE from
16% in 2010 to 16.3% in 2011 which shows that funds are being utilized by Marks &
Spencer. But, it also has decrease in 2012 to 15.8% from which it can be evaluated that
the return earned by the company on the capital employed by is not as expected. The
suggestion for the company is that it should pay attention on utilizing its funds properly.
Return on equity – It tells about the returns earned by the company on equity. It is
increasing in year 2011 from 24.1% in 2010 to 22.3%. This shows that Marks & Spencer
is making profit and is able to distribute a good amount to its shareholders. But it can be
seen that this has decreased in 2012 to 17.5%. From this, it can be interpreted that the
profits earned by the company has reduced and it is being recommended that the
company should pay attention on reducing its expenses and increasing profits.
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Earnings per share - EPS is that part of a company’s share that is being allocated to
each outstanding share of the common stock. As given in the annual report of Marks &
Spencer of three consecutive years it can be seen that it is increasing for all the three
years. This shows that the company is able to distribute a good earning to the
shareholders. For future, it is being suggested to the company that it should keep on
increasing earnings per share as it is a tool for attracting investors towards them.
 Efficiency ratios
Accounts receivable turnover – Through this ratio, it is indicted that how much a
company sell its goods on credit. From the calculated figures, it can be seen that this is
increasing for all three years. It was 33.88 in 2010, 38.9 in 2011 and 39.2 in the year
2012. This depicts that Marks & Spencer is giving more and more goods on credit and for
future also, it is recommended to the company to sell goods on credit.
Accounts receivable period/average collection period – This time period is almost similar
for Marks & Spencer in all three years of which the annual reports are being evaluated.
For future also, it is being suggested to the company that it should reduce the number of
days of collection so that it will have its assets or liquidity on right time.
Asset turnover – Through this ratio, management of a company is revealed and is shown
that how much capable a company is. The ratio has shown a slight increase in the three
years for Marks & Spencer which shows that company is able to utilize the assets
properly. It should further try to increase its management of assets.
Inventory turnover - It reveals a complete cycle within a specified time period in which
specific number of times inventory moves in and out of a company. For Marks & Spencer
it is 15.22 times in 2010 but has shown a slight decrease in the subsequent two years.
This means that company is replacing its inventory quite fast of 14.66 times in a year.
This shows that company has no outdated goods and its products are always updated. For
future also, it is suggested to maintain such a good inventory turnover.
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1.3. Summarized Report
Table 2 Report of ratios
Ratios 2010 2011 2012 Suggestions
Profitability ratios
Gross profit margin 7% 8% 6.66% The company should have a control on expenses related to inventory.
Net profit margin 5.4% 6.1% 4.9% The company should reduce its operating expenses
Operating profit margin 8.9% 8.5% 7.5% Trend is good but the company should have a control on the daily
expenses.
Liquidity ratios
Current ratio 0.804 0.74 0.728 Marks &Spencer should bring it to the ideal ratio of 2:1
Quick ratio 0.479 0.43 0.338 Need for the company to bring to 1:1.
Performance ratios
Return on assets 7.3% 8.15% 6.7% Mare efficient use of assets and resources has to be done
Return on capital employed 16% 16.3% 15.8% Long term funds need to be properly employed
Return on equity 24.1% 22.3% 17.5% More emphasis on increasing returns because of equity
Earnings per share 33.2p per share 34.4p per share 34.6p per share It is well maintained
Efficiency ratios
Accounts receivable turnover 33.88 38.9 39.2 The trend is good and should be followed
Average collection period 10.77 days 9.25 days 9.3 days It is also favorable and should be continued
Asset turnover 1.33 1.32 1.365 Though good but more assets need to be converted to sales
Inventory turnover 15.55 times 14.22 times 14.57 times It is well maintained
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PART 2
2.1. Appraisal of two projects
In this, two projects are given and a company PLC Plc has to decide that in which project
it should invest. Three different techniques of investment appraisal are used to take a decision on
this.
Net present value
Table 3 PV of project 1
Year Cash inflow (000)£ PV factor at 10% Present value of
project 1
1 -110 0.909 -99.99
2 200 0.826 165.2
3 400 0.751 300.4
4 500 0.682 341
5 520 0.621 322.92
Residual value 150 0.621 93.15
1122.68
Initial outlay given is -1100, 000£
Net Present Value=Present Value−Initial Investment
= 1122.68-1100
= £22680
Table 4 PV of project 2
Year Cash inflow (000)£ PV factor at 10% Present value of
project 2
1 -20 0.909 -18.18
2 140 0.826 115.64
3 250 0.751 187.75
4 300 0.682 204.6
5 380 0.621 235.98
Residual value 49.68
775.47
The initial outlay is -20,000£
NPV = 775.47-800
= £- 24530
Since the value of NPV is positive for project 1 therefore PLC Plc. Should invest into it.
Average rate of return method
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Average rate of Return= Average Annual Profits after Taxes
Average Investment
the life of the project
∗100
For project 1
Average annual profits after tax= -110+200+400+500+520/5
= £332000
Average investment = 150+1/2(1100-150)
= £625000
ARR = 332000/625000*100
= 53.12%
For project 2
Average annual profits after tax = -20+140+250+300+380/5
= £226000
Average investment = 80+1/2(800-80)
= £440000
ARR = 226000/440000*100
= 51.36%
Since the average rate of return is more for project 1 therefore PLC Plc. Should invest into it.
Internal rate of return method
NPV of project 1 is coming out to be positive so its internal rate of return value will be
above 10%. This method is a hit and trial method. So, NPV is now calculated at 11%.
Table 5 PV of project 1 at 11%
Year
Project 1
(£000)
PV Factor
@ 11%
Present
Value of 1
Year 1 -110 0.901 -99.11
Year 2 200 0.812 162.4
Year 3 400 0.731 292.4
Year 4 500 0.659 329.5
Year 5 520 0.593 308.36
Residual
Value 150 0.593 88.95
1082.5
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NPV= 1082.5-1100
= £-17500
IRR= NPV on low discount rate ( LDR)
LDR +PV on LDR−PV on high discount rate (HDR)∗c h ange∈rate
IRR=10+ 1122.68−1100
1122.68−1082.5∗1
IRR= 10.56%
For project 2, the NPV value is negative so its internal rate of return will be taken at 9%.
Table 6 PV of project 2 at 9%
Year
Project 2
(£000)
PV Factor
@ 9%
Present
Value of 2
Year 1 -20 0.917 -18.34
Year 2 140 0.842 117.88
Year 3 250 0.772 193
Year 4 300 0.708 212.4
Year 5 380 0.65 247
Residual
Value 80 0.65 52
803.94
NPV= 803.94-800
= £3940
IRR=9+ 803.94−800
803.94−775.47∗1
IRR= 9.14%
The value of IRR is more for project 1 so PLC Plc is suggested to go for it.
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2.2. Other appraisal techniques
Payback period
Year
Project 1
(£000)
Cumulative
(£000)
Project 2
(£000)
Cumulative
(£000)
Year 1 -110 -110 -20 -20
Year 2 200 90 140 120
Year 3 400 490 250 370
Year 4 500 990 300 670
Year 5 520 1510 380 1050
Residual
Value 150
80
For project 1, the payback period will be between 4th and 5th year.
Payback period= 1100-990/520*12
= 2.53
= 4 years two and half months
For project 2, it will be again between 4th and 5th year.
Payback period= 800-670/380*12
= 4.11
= 4 years 4 months
The less the payback period the more beneficial for the company so on this basis project 1 shall
be selected.
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2.3. Advantages and disadvantages of the investment appraisal methods
Net present value- this method is used for comparison of present value of money with its
future value and make use of time value of money while comparison. This is one of the
discounted cash flow methods of judging a project. If the value of project is positive then it
should be accepted and rejected in case it comes out to be negative. In case of mutually exclusive
projects, the one with higher value is accepted (Arnold, 2005).
Advantages It takes into account the entire cash flows. Consider the time value of money Used for maximization of value of firm Used to focus on profitability as well as risk Beneficial for taking decision on mutually exclusive projects (Nicholson and Aman,
2012).
Disadvantages It is difficult to apply on projects which has different time of life period Sometimes difficult to implement (Drury, 2008).
Average rate of return method- this is one of the non discounted cash flow methods and
does not consider the time value of money. The more it is the more favorable a project can prove
to a company.
Advantages Since does not employ time value of money it is easy to understand and implement. Also, the calculations are made easy because of this. Helps in the identification of attractiveness of investment due to which it can be selected
(Bennouna, 2010).
Disadvantages Since does not uses time value of money so a less accurate and reliable approach
 It does not take into account of terminal value of project which should be done so.
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Internal rate of return method – It is the rate at which the net present value of a project is
zero as difference between inflow and outflow is zero and both the rates are equal. It is a
discounted cash flow technique (Mclaney, 2006).
Advantages
 It considers both outflow and inflow
 Make use of time value of money
 By applying this, it is not necessary to calculate any kind of rate of return
 It is more useful in making decision on individual projects
Disadvantages
 It is based on hit and trial method so not an accurate approach
 Not useful for making decision on mutually exclusive projects
 The method does not lay emphasis on economies of scale
 It becomes more complicated to calculate if cash flows are positive or negative (Sofat and
et. al., 2010).
Payback period – The method is used for calculating the time period in which the amount
of investment done in a particular project is retuned back. The one with less payback period is
considered to be more favorable. It is a non discounted cash flow method.
Advantages
 It is easy to understand and implement also
 It is used to focus on liquidity associated with the specific investment
 Moreover, also used to focus on risks which are linked to the investments on which
decisions are to be made (Brigham and Houston, 2009).
Disadvantages
 Does not make use of time value of money so cannot be considered as an appropriate
approach
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 Does not take into account the entire cash flow, that is, it consider cash flow of that time
period in which pay back is generated.
 It does not focus on profitability associated with the project but only the payback period
(Curry, 2013).
Among all the investment appraisal methods, net present value and internal rate of return
methods are the most widely used. They are used by most of the organizations and industries as
compared to other techniques. The reason behind this is that both of them make use of time value
of money which makes them superior over others. The value of money will be not remain same
as it is at present and definitely increase in future so to find that value time value of money is
considered. It is considered to be quite important by all financial advisors to use this concept
before making an investment into a new project proposal. By making use of this concept, both
the methods provide accurate results and can be relied upon (Hopwood . and McKeown, 2003).
While comparing the two methods, net present value will be considered to be the best.
The reason for this is that it is easier to calculate as compared to internal rate of return method.
Moreover, IRR is based on a hit and trial approach so its reliability decreases here. Also, NPV is
considered to be a better approach for projects which are mutually exclusive and can be
compared and evaluated easily for such projects. More reliable results come out of the NPV
method as compared to IRR. Therefore, though both net present and internal rate of return
method are good but among the two NPV is the best (Locander and Goebel, 1997).
2.4. Summarized Report
Project 1 Project 2
Net present value £22680 £-24530
Average rate of return 53.12% 51.36%
Internal rate of return 10.56% 9.14%
Payback period 4 Years and 2 months 4 years and 4 months
Conclusion
By making use of two different financial tools of financial management in the above two
cases the role of financial management becomes quite clear. Investment appraisal techniques and
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ratio analysis are one of the most important tools in this field and play a significant role in
evaluating the performance of the companies (Neale and McElroy, 2004).
8

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Mclaney, E.I., 2006. Business Finance Theory and Practice. 7th ed. Financial Times/Prentice
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APPENDIX
Financial statement of 2010
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12

Financial statement of 2011
13

14

Financial statement of 2012
15