Accounting management on: Financial performance of company
Introduction
A proper analysis of the financial performance of company is essential in order to undertake any decisions with respect to investment in that particular company. There are various kinds of financial tools that are available in order to effectively perform the financial analysis and one such financial tool is the ratio analysis. Ratio analysis not only helps in examining the performance of a company but also enables the comparison of performance with other companies in the same industry as well as other industry, so that effective investment decisions can be possible on the part of investors. With the application of ratio analysis, it can be possible to evaluate all the major areas of the company, as there are various kinds of ratios that help in identifying the performance in a particular area of the company. For instance, the profitability ratios can be utilised to identify the performance of the company in terms of profit earned by it whereas liquidity ratio can help in the evaluation of financing short term requirements of the company. The efficiency ratios are effective enough in identifying the operational efficiency of the company whereas the market based ratios can be utilised to identify the market performance of the company in terms of its share price performance etc.
This report includes a critical analysis of Marks and Spencer Plc in terms of ratio analysis of the company so that an effective conclusion can be reached about the decision of investment in the particular company. Apart from ratio analysis, in order to have a detailed understanding of the overall performance of the company, the news and press releases about the company’s performance will also be assessed in the literature and better decision making can ultimately become possible. Finally, on the basis of evaluation of the performance of the company, there will be recommendations regarding whether to invest in the company or not to achieve better returns over the investment.
Analysis of Marks and Spencer’s Performance
Analysis through Annual Report Assessment: The analysis of Marks and Spencer’s financial performance can be possible through the evaluation of information contained in the annual reports of the company and also through a critical assessment of its financial statements. For instance, a preliminary analysis of the 2011 annual report of the company indicates that the company deals in high quality clothing and home products including outstanding quality of foods. An overview of the financial performance of the company as indicated in its annual report implies that the revenue of the group in financial year 2011 has amounted to £9.7 billion whereas its operating profit stood at £824.9 million. The group’s profit before tax was £780.6 million and earnings per share were 34.8 pence. The group has also declared an interim plus final dividend of 17 pence per share.
The company has a huge database of customers as indicated by the fact that company has experienced 21 million customer’s visit to its stores each week and it has around 78000 employees serving the needs of such a huge database of customers. In terms of financial insights, the annual report indicates an improved overall performance of the company in terms of growth being achieved in the total revenue of the company, its level of underlying profit and returns to shareholders. In addition top this, the annual report assessment leads to the identification that there are large number of areas where the company has achieved significant excellence in 2011 as compared to previous years.
For instance, the group has been able to improve its carbon efficiency by around 25% in 2011 and with respect to energy efficiency; there has been a rise by 23% in 2011. The annual report also indicates that company has achieved efficiency with respect to all the major sections including women’s wear, men’s wear, kid’s wear etc in terms of growth in sales. Overall, the annual report assessment leads to the identification that the company has achieved significant growth in the financial year 2011 in all its major segments as compared to its performance in previous years.
Financial Statement Analysis of the Group: The financial statement analysis implies the assessment of financial performance of the company on the basis of statements such as income statement, balance sheet and cash flows of the company. These statements include the detailed financial performance of the company. In case of the assessment of performance of Marks and Spencer, all these financial statements have been assessed in order to reach a particular conclusion about the decision for investment in the particular company. The financial statement analysis has been performed through the calculation of various kinds of ratios of the company including profitability ratios, liquidity ratios and important investors’ ratios. A detailed analysis of the performance of the company is performed as follows:
Profitability Ratios: Profitability ratios are the important indicators of the performance of the company in terms of profit earned by it from its operations. A higher profitability ratio is an indicator of better overall performance of the company. An organisation should seek to the attainment of higher profitability so that the main purpose of the organisation can be achieved. The profitability ratios include a number of indicators such as gross profit margin, net profit margin, operating margin, return on capital employed etc. An evaluation of all these ratios for Marks and Spencer are performed in order to reach a conclusion for investment in the Marks and Spencer.
The gross profit margin is an important indicator of the operational performance, as it expresses the relationship of gross profit on sales to net sales in percentage terms. A higher gross profit is highly desirable and in case of Marks and Spencer, the gross profit percentage for the period of five years shows an average of 38%. The trend in the gross profit is declining in the first three years, as it declined from 38.90% in 2007 to 37.20% in 2009 but thereafter, it increases slightly to 38.24% in 2011. With respect to operating profit margin, it has continuously shown a declining trend since 2007, as it declined from 12.17% in 2007 to 8.93% and 8.59% in 2010 and 2011 respectively. The operating profit margin indicates about the relationship between operating profits and net margin and it indicates the net profitability of the firm. As a result, a higher operating profit implies better operational efficiency of the firm. But in case of Marks and Spencer, the operating profit margin is declining over the years.
Apart from this, the net profit ratio which implies the relationship between net profit and sales has also been calculated for Marks and Spencer and it has been identified that the net profit has declined for the first four years since 2007 and thereafter indicates a marginal improvement in the financial year 2011. For instance, it stood at 6.97% in 2007, and declined to 5.79%, 5.59% and 5.48% in 2008, 2009 and 2010 respectively, but increases slightly in 2011 to 6.14%. Similar is the trend with respect to return on capital employed by the firm, as it has also declined in the first four years since 2007 and thereby indicates a hint of improvement in 2011. The return on capital employed indicates about the profitability of the company in relation to long term funds and as a result, a higher ROCE implies the efficient utilisation of long term capital of the company. However, in case of Marks and Spencer, the ROCE has shown an improvement in 2011 as compared to 2010 as it increased to 15.20% from 13.35% in 2010.
Overall, the assessment of profitability ratios of Marks and Spencer indicates that the performance of company has improved in 2011 as compared to 2010, but the trend since 2007 shows a declining trend for all the majority of profitability ratios. The declining trend since 2007 may be because of the impact of global financial crisis as experienced in late 2008 and the sign of improvement in 2011 is positive for the overall performance of the company.
Liquidity Ratios: Liquidity ratios are the measure of debt paying ability of the firm and as a result, it is also known as quick ratio. The liquidity ratios implies the short term cash efficiency of the organisation, as it provides details about the ability of the organisation to meet out its short term obligations out of its current assets. Usually, a firm is regarded as efficient if it has sufficient ability to meet out its current liabilities out of its current assets. The important ratios included in case of liquidity ratios are current ratio and quick ratio. The calculation of both these ratios in case of Marks and Spencer has resulted into the identification of liquid position of the firm.
For instance, the current ratio indicates about the ability of the company to meet its current obligation out of its current assets. As a result, a higher current ratio is considered as effective as it implies that the firm can effectively meet its current obligations out of its current assets. However, an excessive current ratio is also not a positive sign as indicates about the idle funds available with the company and unnecessarily incurs interest cost to the company. In case of Marks and Spencer, the current ratio indicates an increasing trend over the years, but it is still below the level of 1:1 which indicates that the firm does not have enough liquidity to meet its short term obligations out of its current assets. For instance, the current ratio is .52 in 2007 and increased to .80 in 2010 and .74 in 2011. In addition to this, the quick ratio is a higher liquidity assessment of the firm, as it excludes stock from calculation. In case of Marks and Spencer, the quick ratio is also increasing over the year which is a positive sign for the company, but there is a need for further improvement, as it is still below the standard level of 1:1, as it accounts for .26 in 2007 and .43 in 2011.
Overall, the liquidity position as assessed for Marks and Spencer implies that it is not highly effective, even though the performance of the company shows an improving trend over the years. The liquidity level is much below the standard requirement and as a result, there is a need for further improvement in its liquidity position.
Efficiency Ratios: Apart from profitability ratio, the efficiency ratio is also an important indicator of the performance of the company as the efficiency ratios indicates about the operational efficiency of the organization. The funds as provided by creditors and investors are utilized in the assets of the company in order to generate sufficient sales and profits. The improvement in the sales and ultimately the profit can be achieved by way of effective management of assets. With the help of efficiency ratios, it becomes possible to identify the level of efficiency in assets deployment of the firm. The important efficiency ratios for Marks and Spencer as calculated includes inventory turnover ratio, debtors turnover ratio, payable turnover ratio, average collection period and payment period.
The inventory turnover ratio is an important indicator of investment made in inventory as it highlights whether the investment is within proper limit or not. The inventory turnover indicates about the number of times, the finished stock is turned over in a given accounting period in relation to sales. A higher inventory turnover ratio is an indicator of better performance and also implies the underinvestment in the inventory and a lower ratio indicates a dull performance. In case of Marks and Spencer, the inventory turnover ratio is declining over the years as it declined from 13.27 times in 2007 to 12.22, 11.10, 10.29 and 9.26 times in 2008, 09, 10 and 2011 respectively. The declining inventory turnover indicates a negative performance of the company over the years. With respect to debtors’ turnover ratio, it indicates about the number of times the receivables are turned over in a year in relation to sales. The implication of debtors’ turnover ratio is that it suggests how quickly the debtors are converted into cash. Usually, a higher debtor’s turnover implies efficiency with respect to collection from debtors but in case of Marks and Spencer, it has also decline heavily from 42.18 times in 2007 to 33.66 times in 2010 but in 2011, it shows a marginal improvement as it increased to 36.64 times.
In addition to this, the payables turnover ratio has also been calculated for Marks and Spencer and this indicates about the number of times, the creditors are turned over in relation to purchases. A higher turnover implies that the payment period to creditors is shorter and results into less availability of credit and vice versa. In case of Marks and Spencer, the payable turnover ratio shows an increasing trend in the first three years since 2007 and thereafter in 2010 and 2011, it declines significantly. For instance, it is 5.53 times in 2007 and declined to 4.89 times in 2011. The average collection period has also been calculated which is an indicator of the number of days debtors remain uncollected and a shorter collection period implies efficiency with respect to collection from debtors whereas a longer collection period indicates delay by the debtors in making payment. The collection period in case of Marks and Spencer is usually shorter, but it shows an increasing trend over the years. With respect to payment period, it indicates about the period enjoyed by the firm in making payments to creditors. In case of Marks and Spencer, it average payment period is significant higher, as it is at an average of 65 days and it also shows an increasing trend over the years. This implies that the company delays in making payment to the creditors for all the purchases made by it.
Overall, the efficiency evaluation of Marks and Spencer indicates a declining performance of the company as the inventory turnover ratio, debtors turnover ratio etc shows a declining trend over the years.
Key Investors Ratio: There are certain key investment ratios that are also calculated in case of Marks and Spencer and the investors’ ratio are helpful to the shareholders in performing an analysis of their present and perspective investment. The shareholders can also perform the comparison of the value of their investment in relation to dividend, earnings and market price. The important investors’ ratios calculated in case of Marks and Spencer includes earnings per share, price earning ratio and dividend yield.
Earning per share is an important measure in measuring the profitability of the firm from owner’s standpoint. The profit of the firm that is available after making the adjustment for expenses and preference dividend belongs to shareholders. This profit is distributed to shareholders on the basis of their holding in the company and usually, a higher EPS implies a better position, as it indicates a greater market price of company’s shares. In case of Marks and Spencer, the EPS has increased initially from 39.1 per share to 49.2 per share in 2008, but there after it declines to 34.8 per share in 2011. In addition to this, the price earning ratio has also been calculated which is an indicator of over valuation of shares and vice-versa. By the application of this ratio, it can be possible to identify whether the shares of the company is over valued or under valued. In case of Marks and Spencer, the P/E ratio shows a declining trend over the years. Finally, the dividend yield has been calculated for the company which indicates the relationship between dividend per share and market value per share. Dividend yield indicates about the rate of return available to shareholders on the basis of market price of the share. Its adequacy can be measured by performing a comparison with the ratio of similar firms or industry average. In case of Marks and Spencer, the dividend yield has increased in the initial years since 2007 till 2009, but thereafter declined significantly.
Overall, the assessment of investors’ ratio indicates that the performance of Marks and Spencer is not highly effective, as there has been a decline being evident in the EPS of the company which is a major indicator of the performance of the company towards its shareholders.
Comments on Unaudited Financial Results
The unaudited financial results of Marks and Spencer as indicated in the press release implies about the performance of the company in the financial year 2011-2012. For instance, the half year results as at 1st October 2011 indicates that the company performs well in a challenging environment. The profit before tax of the company has amounted to £315.2 million for the half year ended 2011-12 whereas the profit for the last entire year was £348.6 million. This indicates that the company has achieved significant improvement in the financial year 2011-12 in terms of profitability from its operations. The EPS for the half year ended as per the unaudited results was 16 pence per share which was 16.6 pence for the last year. In terms of operational performance, the unaudited results for the half year ended indicate that the company offered more choices in stores through innovations. It has also shown strong performance in its food and international businesses with sales rising by 2.4% during the half year ended. However, at the same time, the operating cost has also increased in comparison to the previous year, and the underlying operating profit was £369.3m which was £409.2 million in the last half year. This indicates a declining operating performance in terms of profitability of the company in 2011-12 financial years. Overall, the assessment of the press release for performance of the company after April 2011 indicates that certain areas have shown improvement while the others have declined heavily. The operational efficiency of the company has also declined as compared to previous year.
Self Assessment and Reflection on Learning and Recommendations
The conduct of this financial analysis of Marks and Spencer has resulted into significant learning among the team members including my own learning as well. For instance, before the conduct of this financial analysis, I had a belief that the financial analysis is an extremely difficult task and it can only be performed by the financial experts only, but the conduct of this analysis has resulted into identification that the basic concept should be cleared in order to perform the analysis of a company. In performing the team work, there have been significant findings being gained about the team. For instance, I have noticed that the major strength point of the team is that all the members were actively involved in performing the financial analysis of Marks and Spencer and they all have contributed significantly towards attaining the main goals of performing the financial assessment of the company. In addition to this, another major strength point was that all the team members are from financial background and it has contributed significantly towards the attainment of main goal of performing the analysis. However, in addition to the strength point, the team is also encompassed with certain weak point which includes the findings of unaudited results of the company. It was very difficult for the team members to ascertain the exact unaudited financial results of the company that could have been compared with the financial analysis as performed.
In conducting this financial analysis, the team has learnt about the need to pay importance to ratio analysis and also the significance of each and every ratio in evaluating different business areas of the company. The team has also learned about using excel sheet in calculating ratios and also the meaning of each particular ratios as well. For instance, I was quite confused about the indication provided by different kinds of ratios and the conduct of this analysis has resulted into my learning about ratios and I can easily identify the meaning of each particular ratio easily after conducting this financial analysis of Marks and Spencer. After the completion of this analysis, I have recognised that we could have included other financial and non financial results of the company in order to reach a more valid conclusion about investment in this particular company. Finally, the conduct of this financial analysis leads to identification that the areas that need further improvement to perform the financial analysis of the company is to effectively trace the financial and non financial results of the company so that a better overall analysis can become possible.
Recommendations
On the basis of performance of financial analysis of Marks and Spencer, there are certain recommendations that are considered for existing investors as well as new investors. These recommendations are presented below:
Existing Investors: The existing investors should continue with their existing investment in the company, as the ratio analysis indicates that the performance of the company is improving in 2011 as compared to 2010. So, they should continue with their existing investments in the company and try to increase the level as the performance seems to be improving in the years to come.
After conducting the financial analysis, it is advisable to the team to learn about the significance to the ratio analysis and give consideration to each and every ratio in evaluating different business areas of the company.
It has been examined from the report that it was very difficult for the team members to ascertain the exact unaudited financial results of the company that could have been compared with the financial analysis as performed. It is advisable to the team members to audit the financial results well so the financial outcomes of the Company would have been matched with the analysis of the financial statements.
New Investors: The new investors should also consider investing in the company but on a marginal basis, as the ratio analysis indicates that the performance of company since 2007 has been declining and it shows a marginal improvement in 2011. As a result, the chances of improvement in the years to come are effective and as a result, the new investors should initially make smaller investment in the company.
In case of Marks and Spencer, the dividend yield has increased in the initial years since 2007 till 2009, but thereafter declined significantly. It is advisable to the potential investor to invest in the Company after complete analysis of financial statements and its components because dividend is the income which the investors receive on shares.
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