FINANCIAL ANALYSIS MARKS & SPENCER 1

Financial Analysis of Marks and Spencer

<<Name of the Student>>

<<Name of Institution>>

<<Course ID>>

<<Date>>
FINANCIAL ANALYSIS MARKS & SPENCER 2

Introduction

The purpose of this report is to highlight important financial facets of Marks and Spencer

Plc. (M&S) and will focus on analysing the operating as well as financial performance of the

company over a five year period. The report will provide an analysis of Marks and Spencer Plc.

(M&S) financial position and health using Financial Ratio Analysis. It will also highlight the

importance of each of the financial ratios and conclude with an in depth analysis of Financial

Ratio Analysis in general. Lastly it shall draw conclusions on the performance of the company

from these ratios in tandem with that of some of its competitors such as Tesco Plc that is equally

considered to be the retail giant in United Kingdom as well

Company Background

Marks and Spencer Plc. is a British organization that deals in home items, luxury food

consumables and products but mainly in clothing. Named after its founding members Michael

Marks and Thomas Spencer and is traded in the London Stock Exchange and is indeed a

multimillion-dollar business. In the United Kingdom alone they have over five hundred and

twenty stores, thirteen group stores in Republic of Ireland, eight group stores in Hong Kong

managed by in excess of 70,000 managers and twelve million customers a week.

Marks and Spencer Key Trends

Looking at business trends the most important trends to follow fall under what is known as

common analysis. This looks at the company’s turnover, Gross profit, Operating income, EBIT

and Net Income. It is useful to see how all the above compare to prior year for the period under

review. It is also a great guide to management at a glance on what facets of the business need the

most attention.
FINANCIAL ANALYSIS MARKS & SPENCER 3

Marks and Spencer Key Trends

12,000

10,000

8,000

6,000

4,000

2,000

0
2010 2011 2012 2013 2014 2015 2016

Turnover Profit (Loss) before Taxation Profit Margin

From the graphical trends we can see that year on year there has been a growth in the total

turnover at Marks and Spencer Plc for the period under review. This is indicative of a growing

business that has focus on the sales and driving the grown of the same. However when we look

at the EBIT and Net income the picture is somewhat different.

Marign Compression (Turnover vs EBIT & Net Income)

11,000

10,500
Moentary Value

10,000

9,500

9,000
2011 2012 2013 2014 2015
Year
Turnover Profit (Loss) before Taxation Profit Margin

From the graph above we can see that there has been significant margin compression over the 5

year period despite higher profits year on year. We can see that turnover grows from £9,740 M to

£10,311 but EBIT falls from £781 to £600 over the same period and in turn Net income from

£8.01 to £5.82. This is indicative of operational inefficiencies within the organisation.

FINANCIAL ANALYSIS MARKS & SPENCER 4

Profitability Margins
50.00

40.00

30.00

20.00

10.00

0.00
2011 2012 2013 2014 2015

Profit margin (%) Gross margin (%)

In conclusion while turnover is on an upwards trend the rest of the business indicators are on a

downward trend that does not bode well for the business.

Financial Ratio Analysis

Working Capital

Working Capital is the money required by a business or organisation required to support its short

term obligations and such its business continuity. As such is this the difference between the

company’s current assets and its current liabilities. The word "current" signifies or carries

credence to the fact that these items vary in the short term in tandem with operating activities.

Over the five year period there has been a 7.2% reduction in the level of working capital (or

current ratio) available to the business. Current ratios of above 1 show that a business is able to

fulfil its short term obligations in this case M&S are not in a position to do so. It drops from

7.4% in 201 to 6.9% in 2015 with a low of 5.8% in 2014.

Profitability ratios

Gross Margin Ratio (GMR)

FINANCIAL ANALYSIS MARKS & SPENCER 5

Gross profit margin is simply a yardstick to indicate of how profitably a business can sell its

stock. A higher the ratio, in turn signifies a higher profit and as such a higher ratio is always

preferred. It will also meant that any monies in excess of the cost of sales or inventory costs will

cover operating costs. M&S Plc has a fairly stable GMR that drops marginally between 2011 and

2014 but bounces back in 2015 (38.24% to 37.55%) to stand at 38.66%. Despite the 6% increase

in turnover.

Profit Margin

This ratio expressed as a percentage measures the profit that is left after deducting the operating

costs and the cost of inventory from the turn over. Here we see a significant drop of 2.2% the

question that remains is if the overall margin of 5.82% is enough to sustain the business

comfortably.

Net Asset Turnover

This ratio is used to gauge the extent of how well or badly a company applies its deployed capital

to generate sales. Fundamentally it is a ratio of Capital Employed to Turnover. A higher ratio,

indicates a greater effectiveness of conversion. M&S Plc net asset turn over has decreased over

the years 1.97 to 1.83 showing a decrease in the way that the company is using its capital to

generate sales making it less profitable.

Liquidity Ratios

Quick Ratio

Quick ratio that is in essence the same as working capital demonstrates the capability of a

company to pay off is debts with its current assets that are quickly convertible to cash otherwise
FINANCIAL ANALYSIS MARKS & SPENCER 6

known as cash and cash equivalents. As already seen the Quick ratio for M&S Plc is less than 1

indicating difficulty in meeting these obligations. The worrying trend here is that the value

continues to decrease year on year.

Current Ratio

A company’s current ratio measures its capability to pay short term debts as they fall due using

the current assets within their portfolio. The major difference between this and the quick ratio is

that when using the quick ratio you remove inventory from the list of current assets. What this

them means is that the remaining assets are more readily convertible to cash. Given that from the

M&S financials we do not have any items categorised as stocks we then find that the current

ratio and the quick ratio yield the same result.

M&S Pls current ratios dropped year on year though there was some resurgence in 2015 (2011 –

0.74, 2012 – 0.73, 2013 – 0.57, 2014 – 0.58 and 2015 – 0.69). This continuous drop in current,

and quick ratio as well as working capital means that progressively with the exception of 2015

M&S has been having less and less propensity to meet it short term obligations. Despite the fact

that the quick and current ratios do not measure Cashflow the reduction is probably as a result in

a fall in liquidity over the period especially given the constant year on year decline. This is

further exasperated by the increase in the debtor days that has an impact to M&S Plc cash

conversion cycle.

Gearing Ratios

Gearing ratios are a set of financial ratios used in comparing any of the various forms of owner's

capital or equity to the company’s debt (borrowed funds). The main aim of gearing ratios is to

measure what is known as an entity’s financial leverage. In lay man’s terms it establishes the
FINANCIAL ANALYSIS MARKS & SPENCER 7

extent to which the activities of a firm are funded by its shareholders as opposed to being funded

by its creditors.

Shareholders liquidity ratio

This ratio also expressed as a percentage, is computed by taking the total shareholders' equity

and dividing this by total assets of the company. It is representative of assets where the

shareholders still have a residual claim. When analysing the results of the ratio the lower the

result, the more assets have been acquired through debt. In the event of liquidation of the

organisation this ratio also shows what the shareholders will be entitles to receive.

Looking at the year on year progression of this ratio we can see that for the years 2011 to 2014

there was a decline from 1.17 to 1.02 almost to the point where shareholders would get nothing if

the company was liquidated. Bus like the majority of the other ratios we see a resurgence in 2015

with a ratio of 1.32 that bodes well for shareholder confidence.

Solvency Ratios

Solvency ratios, sometimes referred to as leverage ratios, show a firm's capacity to maintain

operations until further notice by comparing debt levels with earnings assets and equity.

Simply, these ratios recognise going concern issues and a firm's ability to pay its bills in the

foreseeable future long term. It is common for people to confuse solvency and liquidity ratios as

they both look at the ability of a firm or organisation to settle its responsibilities. However

solvency ratios unlike liquidity ratios look at, rather focus on the long term sustainability as

opposed to the current payments and obligations that arise.

FINANCIAL ANALYSIS MARKS & SPENCER 8

Over the five year period we can see that the solvency ratio based on the M&S Plc assets

improves however on the flip side we also see that eh solvency ratio based on liabilities also

increases. This indicates that M&S plc may have challenges meeting its long term obligations.

This once again is in line with a lot of the ratios that we have already reviewed so far.

From this we can see that solvency ratios demonstrate a firm’s capacity to make payments and

settle its “long-term” responsibilities to creditors, bondholders, and banks. Solvency ratios

differentiate creditworthy and financially sound companies in the long-term from those that are

not.

Conclusion

Financial Ratio Analysis is tremendously pertinent to all interested individuals as it sheds light

on critical information of the performance of the business for decision making. It forms that basis

of a useful tool to investors, managers, suppliers, lenders and customers alike who all require

information to make financial judgements. Information required to compute these ratios is

readily available and easy to find.

Conferring to Zion’s Business Resource Centre (2017, p.5), financial analysis can assit in

recognizing problems prior to their manifestation into serious problems to the organisation.

Financial Ratio Analysis is therefore a vital part of finance and accounting and as such will

endure for the foreseeable future.

FINANCIAL ANALYSIS MARKS & SPENCER 9

Marks & Spencer continue to show in their Annual Report a lot of diligence specifically geared

towards their stakeholders and have sculpted their business arrangement on ensuring that they

are satisfied. This has given rise to noteworthy growth and trust in the brand.

With all this being said and done, the financial accounts of Marks and Spencer Plc discloses that

the company has been stable and steadfast over the years. However, looking at the ratios both

current and long term the underlying business factors indicate and give the impression that M&S

Plc is an organisation past its glory days and its market have been infiltrated by competitors that

are more diverse and agile that have eaten into its market share. If the company does not change

tact quickly it will cease to be a going concern in the future.

FINANCIAL ANALYSIS MARKS & SPENCER 10

References:

Annualreports.com., 2018. Marks and Spencer Group PLC - AnnualReports.com. [online]

Available at: http://www.annualreports.com/Company/marks-and-spencer-group-plc [Accessed

23 Nov. 2018].

Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University

Press.

Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for

public, health, and not-for-profit organizations. CQ Press.

Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A

strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40.

McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-

CLIO.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial

management: Principles and applications. Pearson Higher Education AU.

Tesco plc., 2018. Reports archive. [online] Available at:

https://www.tescoplc.com/investors/reports-results-and-presentations/reports-archive/ [Accessed

23 Nov. 2018].

Zietlow, J., Hankin, J.A., Seidner, A. and O'Brien, T., 2018. Financial management for nonprofit

organizations: Policies and practices. John Wiley & Sons.