Financial Statement Analysis Of Marks And Spencers

This report will analyze Marks and Spencer’s financial statements for 2008 and 2009 using ratio analysis. Findings show that Marks and Spencer have not had a very good profitable year in comparison with 2008. The purpose of this report is to analyze the figures and to point out some of the reasons for the deprived performance.

Table of Contents

Aim of report 1

Ratio Analysis 1

Profitability ratios 1

Liquidity ratio 2

Performance ratio 3

Evaluation on profitability 5

Evaluation of the liquidity position 6

Information provided for the user groups 7

Conclusion 11

Recommendations 12

Bibliography 13

Evaluation of the assignment 14

Aim of Report

This report will analyze Marks and Spencer’s financial statements for 2008 and 2009 using ratio analysis, explanations will be given on why the changes have occurred in the companies’ profitability, liquidity and what impact the changes have caused on the company. The companies’ annual report will be examined from the point of view of each set of its potential users.

Ratio analysis

An accounting ratio as suggested by Melville (1999) is the evaluation of a relationship which exists between two figures shown in a set of financial statements. In the following report mainly the profitability, liquidity and performance ratio will be discussed.

Profitability Ratios

The profitability ratios are used to evaluate whether the business was able to produce an acceptable level of profit.

Gross profit % ratio

This ratio shows the gross profit in comparison to sales. The higher the ratio percentage the better it is for the company.

Gross profit/ sales x 100

2008 (£M) 2009 (£M)

£1,211.3/£9,022.0×100 =13.43% £870.7/£9,062.1×100 =9.61%

The gross profit margin has decreased from 2008 to 2009 by 3.82%.

Pretax profit % ratio

This ratio shows the net profit before tax in comparison to sales. The higher the ratio percentage the better it is for the company.

Profit before taxation/ sales x 100

2008 (£M) 2009 (£M)

£1,129.1/£9,022.0×100 =12.51% £706.2/£9,062.1×100 =7.79%

The net profit before tax margin has decreased from 2008 to 2009 by 4.72%.

After tax profit % ratio

This ratio shows the net profit after tax in comparison to sales. The higher the ratio percentage the better it is for the company.

Profit after tax/ sales x 100

2008 (£M) 2009 (£M)

£821.0/£9,022.0×100 =9.10% £506.8/£9,062.1×100 =5.59%

The net profit after tax margin has decreased from 2008 to 2009 by 3.51%.

Liquidity ratios

The liquidity ratios are an assessment so as to ensure whether the business is able to pay of its debts as they fall due.

Current ratio

This ratio shows how well the company can meet its short-term financial obligations from its current assets. Usually the optimum result is 1:1 or more, but this will vary with each company.

Current assets/current liabilities

2008 (£M) 2009 (£M)

£1,181.7/£1,988.9=0.594:1 £1,389.8/£2,306.9=0.602:1

The current ratio has increased from 2008 to 2009 by 0.008.

Quick ratio

This ratio shows how well the company can meet its short-term financial obligations from its current assets, removing stock from the calculation. The ratio removes stock because it is the least liquid current asset. Usually the optimum result is 1:1 or more, but this will vary with each company.

Quick Ratio = (Current assets- inventory)/current liabilities

2008 (£M) 2009 (£M)

(£1,181.7 – £488.9)/ £1,988.9=0.348:1 (£1,389.8 – £536.0)/ £2,306.9=0.370:1

The quick ratio has increased from 2008 to 2009 by 0.022.

Gearing ratio

This ratio shows how much of the company’s long-term funds are supported by lenders. Below 50% is seen as low geared and good. Above 50% is seen as a cause of concern.

Gearing ratio = Total borrowings / equity * 100

2008 (£M) 2009 (£M)

£2815.1/£1964.0 * 100 =143% £3060.7/£2,100.6 * 100 =146%

The gearing ratio has increased from 143% to 146%.

Debt ratio (Ward, 2010)

This ratio shows how much the company is in debt. Usually the optimum result is 1:1 or less, but this will vary with each company.

Debt ratio = Total liabilities / total assets

2008 (£M) 2009 (£M)

£5,197.0/£7,161.0=0.726:1 £5,157.5/£7,258.1=0.711:1

The debt ratio has decreased from 2008 to 2009 by 0.015.

Performance Ratio

This ratio helps in calculating the efficiency in the operation of the business through effective utilisation of its resources.

After Tax Profit as % of Noncurrent Assets

This ratio helps as to analyze the percentage of profit the business has made by utilising its noncurrent assets.

After Tax Profit as % of Noncurrent Assets = Profit after tax / Noncurrent Assets

2009 (£M) 2008 (£M)

£506.8 / £5868.3 = 8.63% £821.0 / £5979.3 = 13.73%

From this ratio it is clear that M and S was not able to make much profit in 2009 as compared to 2008. In 2008 M and S was able to produce a profit of 13.73% by the utilization of its fixed assets but by reaching 2009 the profit made has decreased to 8.63% thus there was a decline in the profit by 5.1%.

After Tax Profit as a % of shareholders Fund

This ratio helps to analyze the amount of profit which the business was able to generate from the utilization of the shareholders fund.

After Tax Profit as a % of shareholders Fund = Profit after tax / Total Equity

2009 (£M) 2008 (£M)

£506.8 /£ 2100.6 = 24.10% £821.0 / £1964.0 = 41.8%

From the ratio it is again clear that the utilization of the shareholders fund so as to generate profit has also decreased in 2009 by 17.7%, i.e., in 2008 M and S was able to generate a profit of 41.8% which has reduced to 24.10% in 2009. Even though the company was not able to generate adequate profit from the shareholders fund, the company was able to increase the dividend of the shareholders from 20.3p to 22.5p (Pg: 78).

Earnings per Share

As suggested by McLaney and Atrill (1999), earnings per share is the amount of profit that has been earned from each ordinary share.

2009 (£M) 2008 (£M)

32.3 (Pg: 78) 49.2 (Pg: 78)

From the figures listed above it is clear that the shares for 2009 where only providing an earning of 32.3p as compared to last year which was 49.2p thereby creating a difference of 16.9p.

Dividend per Share

As suggested by Melville (1999), dividend per share is the amount of dividend allotted for each share for the stock held by the shareholder.

2009 (£M) 2008 (£M)

22.5p (Pg: 90) 20.3p (Pg: 90)

Even though the earnings per share and the after tax profit as a percentage of shareholders fund where all less M and S was able to provide a decent standard of dividend 22.5p to its shareholders as compared to 2008 which was only 20.3p. This shows that M and S are taking proper steps so as to keep their shareholders happy.

Return on Capital Employed

As suggested by Weaver and Lunt (2003), this ratio helps those who have invested in the business to analyze the amount of profit the business is making from the utilization of this capital.

Return on capital employed = Profit after Tax/ (Total Assets – Current Liabilities) * 100

2009 (£M) 2008 (£M)

[£506.8 / (£7258.1 – £2306.9)] * 100 [£821 / (£7161- £1988.9)] * 100

= 10.24% =15.87%

From this ratio it is obvious that M and S was not able to utilize its capital to the maximum level. In 2008 the company was able to provide a return on capital of 15.87% which reduced to 10.24% as it reached 2009.

Evaluation of the profitability of Marks and Spencer’s

Examining the results from the ratio results show each ratio has decreased in 2009 in comparison with 2008.

The reasons behind the gross profit ratio decreasing were because the gross profit had decreased by £340.6m in 2009 (p78). The gross profit had decreased because of the increase of the cost of sales by £155m (p87). The increase in cost of sales maybe due to the increase in purchases over the year as M&S increased their buying by 10 times a year (p28).

The reasons behind the pretax profit ratio decreasing were because the pretax profit had decreased by £422.9m in 2009 (p78). The pretax profit had decreased because of the increase in finance costs by £67.9m (p78). The increase in the finance costs is due to the increase in interest payable and the increase in the unwinding on the discount of partnership liability to the M&S UK pension scheme (p89).

The reasons behind the after tax profit ratio decreasing were because the after tax profit had decreased by £314.2m in 2009 (p78). The after tax profit had decreased because of the exceptional costs being stated (p78). The exceptional costs have occurred were not regular running costs and were due to property related costs, rationalisation of IT and logistic networks and redundancy costs (p88). Income tax was not a problem has it had decreased in 2009 (p78).

Internal factors which had an impact on the profitability of M&S were:

Despite the economic recession sales revenue figures had gone up from the previous year (p78), giving a positive impact on the profitability.

The finance costs of interest payable had increased to the previous year (p89), giving a negative impact on profitability.

Exceptional costs and the exceptional pension credit during 2009 gave a negative impact on the profitability, as the Group had decided to make changes to the pension scheme (p88).

Selling and marketing expenses had been decreased in 2009 (p87) to keep up with a tight budget (p14), this gave a positive impact on the profitability.

Income tax paid this year was less compared to last year (p78), but as this was due to a lower pretax profit (p78), it still played a positive impact on the profitability.

Finance income had decreased in comparison to 2008 (p78), this was due to the exceptional costs of £135.9m and the decrease in franchised stores (p86).

Profit before property disposals and exceptional items had decreased over the year (p78) and this created a negative impact on the profitability.

External factors which had an impact on the profitability of M&S were:

The economic recession which M&S along with other high street retailers had to face (p14), impacted the profitability of M&S. Customers were not spending as freely as they would normally, resulting in lower sales figures in some areas and therefore lower profit levels. The pace of growth of M&S and its services was slow due to the recession (p5). Due to the recession costs had to be lowered to lure customers (p14) this in result had a negative result on the profitability.

The sterling currency rate had decreased in 2009 compared to 2008 (p104). Therefore any foreign business would have been affected by this change, resulting in a negative impact on the profitability.

Evaluation of the liquidity position of Marks and Spencer’s

Liquidity ratios are used to show the ability of the company to turn its assets into cash as quickly as possible and to measure the ability of the company to pay of its short-term debts and expenses within the expected time. One of the two main liquidity ratios are Current ratio and Quick ratio. It is always good to have a high liquidity ratio as it show the ability of the business to pay of its debt within the expected time. However if these ratios are too high this means that the business is having too much of current assets which are not used nor utilized as efficiently as required in order to deal with the day to day activities.

Retail sector of M and S involves purchasing goods and trading cash on credit from its suppliers and for this reason cash flow statements are included. A cash flow statement is used in order to show the cash inflows and outflows of the business thereby providing a better liquidity assessment for M and S. This in fact helps outsiders to analyze the whether M and S is able to generate adequate cash from its day to day operations.

The closing net cash has increased to a great extend from £117.9m in 2008 to £298.3m in 2009. Even though during these recession period M and S was able to show a good closing cash figure this in fact shows their ability to manage cash.

Decrease in net cash outflow from operating activities from £966.2m in 2008 to £596.9m in 2009. (p80) This cash generated from the operating activities enabled them to spent on financial activities.

Increase in net cash inflow from operation activities from £1069.8m in 2008 to £1290.6m in 2009. (p80)

The main reason for such a good cash flow in 2009 as compared to 2008 is because of the cost reduction where ever possible(p1).

By analyzing the liquidity ratios of M and S the following findings were found out:

The current ratio of M and S operating in retail sector was 0.59: 1 in 2008 and 0.60:1 in 2009. This shows that M and S had 59p in current assets so as to pay of every £1 worth of current liabilities in 2008 and 60p of current assets so as to pay of every £1 current liability in 2009

The quick ratio in fact showed that the company had 37p worth of current assets to pay off every £1 worth of current liability after deducting closing stock for 2009 and 35p for 2008. This in fact shows that the firm is under liquidity due to the fact that the company has fewer assets than liabilities.

As already explained above the debt ratio shows how much the company is in liability over its assets. By looking at debt ratio for M and S it has decreased from 0.73:1 in 2008 to 71:1 in 2009 which is good as it suggests that the company was able to pay of its debts within the due date.

The gearing ratio in fact measures the proportion of M and S’s long – term funds provided by the lenders. By comparing the gearing ratio in 2009 which was 146% to the gearing ratio in 2008 which was 143%, it shows that M and S was able to increase their credit worthiness. Thus by increasing their credit worthiness they are able to gain further loans in ease.

Information provided in the report for its users (Nyarko, 2009)

Employees

Employees provide labor for the company; they need financial information to ensure they have a secure job and are being made correctly. The report has the following information useful for employees:

Closure of 26 mostly Simply food stores (p6)

Reduce roles across head office by 15% (p15)

Cap level of pay increase (p6)

Early retirement reductions given (p6)

Legal and safety performance improved from 80% to 92% (p14)

Opened 75 stores (p15)

Plan to open 10-15 stores within two years in the Indian subcontinent (p39)

Introduced new development programs tailor made for growing tomorrow’s leaders (p46)

Reinforced lines of communication between management and colleagues at every level (p46)

One of the lowest UK turnover rates (p46)

Training given across each field (p44)

Communication improved using tools like “In store listening groups” (p47)

44 employees celebrated 40 years working for M&S (p47)

40,000 great service awards for staff who have excelled in their role (p47)

Over 3,500 elected employee representatives from every part of the business in the M&S business involvement groups (BIG) (p47)

Decrease of 83.3% on bonuses (p48)

Pay for performance to be central for decisions (p62)

Employees with disabilities given a full and fair consideration for all vacancies (p75)

Increase in wage and salary cost by £48m (p91)

Shareholders

Shareholders provide equity for the company; they need financial information to make economic decisions. The report has the following information useful for shareholders:

Dividends cut by 20.9% (p1)

Adjusted profits down 40% (p2)

Largest clothes market share (p2)

Clothes value market share decreased by 0.3% (p2)

M& S direct sales up 19.0% (p19)

International growth up by 25.9% (p38)

Growth by 15% of the Italian range in the food sector (p7)

Kids wear increased market share by 0.6%pts and putting M&S fourth in the market (p8)

Earnings per share 28.0p down by 35.8% (p14)

UK gross margin down 1.7% pts (p14)

UK market share clothing and footwear down by 0.5% (p18)

Carbon emission down by 18% (p19)

Reduction in dividends payout by 33.3% (p49)

After tax profit down by 314.2m (p78)

Increase in retained earnings by £20.2m (p79)

Management

The management is the executive and non executive directors of the company, they need financial information to determine if the company is making good progress or not and to make claims for performance related bonus issues. The report has the following information useful for management:

Adjusted group profit before tax down by 40% (p2)

39 out of 100 rigorous commitments as part of plan A achieved (p9)

New and old members in management team (p10)

Group revenue up by 0.4% (p14)

Group capital expenditure down by 38.2% (p15)

UK sales down by 1.7% (p14)

Operating cost up by 4.9% (p14)

Adjusted operating profit down by 29.4% (p14)

Profit before tax down by 40.0% (p14)

80% of portfolio into modernized format (p15)

UK footfall down from £21.8m to £21.6m (p18)

UKs fourth largest coffee shop chain (p25)

Women’s wear value market share down by 0.6%pts (p26)

Women’s wear volume market share down by 0.8%pts (p26)

Lingerie value market share up by 0.4%pts (p29)

Lingerie volume market share up by 1.2%pts (p29)

Menswear value market share down by 0.4%pts (p30)

Menswear volume marker share down by 0.2%pts (p30)

Kids wear value market share up by 0.6%pts (p31)

Kids wear volume market share up by 0.7%pts (p31)

Food value market share down by 0.4%pts (p32)

UK home sales up by 1.1% (p35)

Customers

Customers are those who buy from the company, they need financial information to compare financial information and product quality with other companies. The report has the following information useful for customers:

New products and services introduced (p1)

Building international portfolio (p1)

Improve value without compromising quality (p57)

Enticed an additional 200,000 under 35s into store for women’s wear (p3)

Four menswear brands ranging from £4 to £499 (p4)

New promotions introduced e.g. “dress for less” (p6)

Marketing cost 8.6% lower (p15)

Opened 75 stores (p15)

Women’s wear and menswear divided up into different brands aimed at different customers (p26-30)

Style magazine’s “best shop for lingerie 2008” (p29)

Top quality food by watchdog survey (p32)

Added new products and ranges to home products (p35)

“Best new skincare product” award (p35)

Food to order catering service launched (p36)

Remodeled 24 stores (p40)

Leeds and Liverpool stores modernized upcoming year (p40)

Reduced food carrier bag use by 83% (p43)

Meet over 67% of the FSA’s salt targets for 2010 (p44)

The board supported by different committees to help its governance accountabilities (p50)

M&S core focus on quality, value, service, innovation and trust (p32-34)

Suppliers

Suppliers are those who sell to the company, they need financial information to check for credit worthiness of the company against others. The report has the following information useful for suppliers:

Net debt down to £2.5bn from £3.1bn (p16)

Increased buying from suppliers to 10 times a year (p28)

Trained 1000 suppliers on ethical standards (p34)

“2008 compassion in world farming compassionate supermarket of the year award” (p34)

Paying farmers a fixed and industry leading price for their milk (p34)

Engaged in profitable partnerships (p51)

Increase in cash flow levels by £180.4m (p80)

Improved net debt by £586.9m (p80)

Increase in current liabilities of trade by £96.9m (p79)

Continue as going concern (p76)

Banks and other lenders

Usually banks (or other lenders) provide financial help to businesses by providing money. The main concern of these banks and lenders when deciding to provide money to a business is to make sure the business is capable to keep up interest payments during the course of the loan and eventually repay the loan at the due date. Thus the banks require this financial information so as to analyze the financial position and prospects of the business in order to provide them their loans. The bankers and other lenders require the following information from the report:

M and S creditor’s payment policies. (p75)

The profit which has decreased by £314.2m by comparing 2008 an 2009. This might increase the pressure among the lenders to make the company to return their money. (p78)

Decreased noncurrent assets by £111m, so as to seize the assets in case of non return of the loans. (p79)

Current assets and Current liability which have both increased by £208.1m and £318m respectively. This would enable the lenders and banks to determine liquidity position of the company. (p79)

Consolidated cash flow information, repayment of syndicate banks which has reduced to £108.1m in 2009. This shows the company was able to deal in 2009 with fewer loans. (p80)

The Governments

The main reason for the governments to use the financial information of the company is to ensure whether the business is keeping up with their tax payments. The other reasons are to regulate the business and to provide national economic statistics. They are also responsible for preventing the business from any fraudulent acts. The report has the following information important for the government.

External auditors report (p77) this enables the government to look at the fairness in the operation of M and S.

Deferred tax decreased from £372.1m to £225.5m.(p79)

Tax Authorities

The taxation authorities are responsible for calculating the taxation liability from the accounting report provided by the company.

Competitors

Competitors may use the accounting information provided by their rivals so as to find ways to improve their own financial position. Due to this reason, usually businesses are keen in keeping their accounting information as private as possible.

The General Public

The businesses which are big and powerful are of interest to the general public. They usually require the policies of the organization so as to know how these policies would impact the community. The public would also want to know whether the business is running in profit or not.

The general public would use the accounting information for the following reasons:

Old people would like to know about the pension schemes. (p102)

Whether the business operations are affecting climate change. (42)

Conclusion

Concluding the report the findings show Marks and Spencer have not had very good profitable year in comparison with 2008, with a deduction of after tax profit by 3.51%. This is vastly due to the economic recession which has been an external negative factor for all the High Street shops. Another reason for the deduction in profit levels was due to exceptional costs which incurred during the year. However M&S have managed to increase their sales by £40.1M by investing in their costs. They were able to gain growth in certain market sectors and make 80% of its portfolio into a modernized format. M&S achieved several awards for their products and the services they provided during the year, which improved their brand image. M&S were able to achieve 39 out of 100 of its commitments made to Plan A, which is a long term project to create an eco-friendly business. Examples of these are the reduction of carbon emissions by 18% and reducing food carrier bag usage by 83%.While M&S closed down 26 underperforming stores, they managed to open 75 new stores. M&S has one of UKs lowest turnover rates, as they were able to celebrate 40 years of working for M&S by 44 of its employees. The employees wage and salary costs had been raised by £48M in comparison with 2008, this shows M&S was employing more people and paying their employees fairly. Although there had been a dividends cut of 20.9%, there had been an increase of retained earnings by £20.2M; this maybe to due to M&S retaining income for a rainy day, in the present times of the economic recession, or for further future investment.

Recommendations

To improve Marks and Spencer’s overall performance and to create a sustainable going concern business, it should:

Continue to treat its employees well and award them for their performance to avoid losing any trained staff and maintain its good employer record.

Increase its costs on selling and marketing to make customers aware of new products and services M&S has to offer. This is return should compensate for the decrease in this year’s market share decreases.

Research past data along with any future investment plans, to try to predict any exceptional costs which may occur. These can then be prepared for so the profit levels are not damaged to vastly.

Continue to create innovative products and services which help to win awards for M&S, as they will improve the brand image of the company as well as generate more sales.

Think of ways to compensate the losses the shareholders have incurred this say year otherwise they may decide to sell them back.

Continue to achieve more of Plan A commitments to try to help the society M&S operates in, this in return will also create a stronger brand image for the company.

Continue to improve on their cash flow levels, so they always have enough to counter any recession associated problems and do not run into liquidation.

Look for niches in each of the market sectors by carrying out market research and create products and services in tune with the market needs, to attract more customers, generate more sales and improve the company’s overall profit levels.