Table of Content
1. Analysis of financial Performance of Marks & Spencer
Table 1; Marks and Spencer Financial Ratio for the year ending 2008 and 2009
Ratio | Calculations | Marks & Spencer (2009) | Marks & Spencer (2008) |
Liquidity Ratio | |||
Current Ratio | Current assets Current Liabilities | 0.60 | 0.59 |
Quick Ratio | Current – (Inventories) Current Liabilities | 0.37 | 0.35 |
Profitability Ratio | |||
Profit Margin | Net income Total revenue | 0.06 | 0.09 |
Return on assets | Net income Total asset | 0.07 | 0.11 |
ROCE | Net Income Capital employed | 0.10 | 0.16 |
Return on Equity (ROE) | Net Income Equity | 0.24 | 0.42 |
Debt Ratio | |||
Debt Ratio | Total liability Total Asset | 0.71 | 0.73 |
Debt to Equity Ratio | Long term debt Shareholders Equity | 1.02 | 0.99 |
Activity Ration | |||
Asset turn over | Net Sales Total asset | 1.25 | 1.26 |
Liquidity Ratio
Liquidity ratios shows how much of a company’s current assets are available to meet short-term debts. There are two types; Current ratio and Quick or acid-test ratio.
Current Ratio
This ratio is a prove of the ability for a company to pay its short term liabilities and is calculated by dividing current assets by current liabilities (Bragg, 2002)
Current Asset
Current Liabilities
From the calculations shown on table one, from every £1 of short term liability owed by Marks & Spencer, the company has £0.60 in 2009 to pay these liabilities back compared to £0.59 in 2008. This might be due to increase in short term investments from £67.2 million to £145.7 million.
Quick Ratio
This ratio measures the company’s short ability to generate liquid assets and cash as a whole in order to meet short term liabilities and pay their debts (Bragg, 2002). Quick ratio are very important to companies and unlike the current ratio, it does not include inventories especially in companies producing durable products and low inventory turnover. It is calculated by dividing the current assets(less inventories) by the current liabilities (Dyson, 2004)
Current assets-inventories
Current liabilities
After deducting inventories, the company still has £0.37 in 2009 compared to £0.35 in 2008 to pay for every pound of short term debts owed, despite the increase in inventories at the end of 2009. This increase in quick ratio may be due to an increase in current assets in relationship to liabilities. This information is very important for suppliers and banks providing short term loans because it shows the extent to which the company can pay for its short term loan even when sales are slow.
Liquidity Ratios
Profit Margin
Net profit margin is part of profitability ratios that shows the relationship that exists between net profits earned during a particular period and the total revenue generated during that same period (Glynn et al. 2008; Shim et al, 2008). It shows how much profits can be generated from a pound of revenue from all activities carried out by a company (Dyson, 2004). This is reached by dividing the net profit by the total revenue generated from all operating activities (Glynn et al, 2008)
Net Profits
Total Revenue
The profit margin for Marks & Spencer moved from £0.09 in 2008 to £0.06 in 2009. This is due to a fall in net profit caused by an increase in other expenses. The cost of goods sold increased from £5,535.20 million in 2008 to £5,690.20 million in 2009 due to the rise in prises caused by the economic crises. The company also experienced a fall in net profit of £313.70 between 2008 and 2009
Return on Assets
This ratio shows how much profits the company can generate by efficiently and effectively managing its business using its available resources (Shim et al, 2008). It shows the relationship that exists between net profits from all activities carried out by the company and total assets used by the company to generate this net profit (Glynn et al, 2008). It is calculated by dividing net profit by total assets (Glynn et al, 2008)
Net Income
Total Asset
The return on assets fell from £0.11 in 2008 to £0.07 in 2009. This means that the amount profit generated from making efficient use of the company’s total has fallen by £0.03. This is because the profits of the company also experienced a fall in net profit of £313.70 between 2008 and 2009, and also because the company might not be fully utilising its assets.
Return on Equity
This shows how much of total assets are being sponsored by equity (Dyson, 2004; Glynn et al, 2008). It is calculated by dividing the total liabilities by the total assets (Glynn et al, 2008)
Total liabilities
Total assets
Return on capital employed
This shows how much profit is made from capital employed in the company
Debt Ratios
Debt Ratio
This gives a relationship between total liability and total assets of a company indicating how much of total assets of the company are being financed by debts (Dyson, 2004; Glynn et al, 2008). It is calculated by dividing the total liabilities by the total assets
Total liabilities
Total asset
Debt to Equity Ratio
This ratio calculates how much net profit is earned from every pound of shareholder equity invested in the company (Shim et al, 2008). This is calculated by dividing net income by shareholder equity (Collier, 2003)
Net Income
Average shareholder Equity
Profits derived from every pound of shareholder equity dropped from £0.42 in 2008 to £0.24 in 2009. This is also due to the fall in net profits of the company.
2. Compare the financial performance of Marks and Spencer and Next Plc for the year ended 2009
Table 2; Financial Ratio of Marks and Spencer and Next Plc for the year ending 2009
Ratio | Calculations | Marks & Spencer (2009) (£) | Next Plc (2009) (£) |
Current Ratio | Current assets Current Liabilities | 0.60 | 1.54 |
Quick Ratio | Current – (Inventories) Current Liabilities | 0.37 | 1.09 |
Profit Margin | Net income Total revenue | 0.06 | 0.09 |
Return on assets | Net income Total asset | 0.07 | 0.17 |
ROCE | Net Income Capital employed | 0.10 | 0.28 |
Return on Equity (ROE) | Net Income Equity | 0.24 | 1.93 |
Debt Ratio | Total liability Total Asset | 0.71 | 0.91 |
Asset turn over | Net Sales Total asset | 1.25 | 1.84 |
Liquidity Ratio
Looking at the table and calculating the liquidity ratios of both companies, Next Plc has more ability to pay its short term liabilities than Marks & Spencer (M & S). Next Plc can pay its short tern liabilities and still be left with £0.54 for ever pound of liability the company had to pay. This puts the company in a better position than M & S in that they are more likely to get short term loans to finance short term investment than M & S. Even after deducting inventories, Next Plc is still able to meet its short term liabilities in full and still have £0.09 for every pound they had to pay. Next Plc has current liabilities of just £708.1 million compared to its £1,090.50 million current assets they own. This gives them more advantage over M & S whose current liabilities are almost twice the amount of current liabilities of £1,389.80 Million
Profitability Ratio
Profitability is very important to a company and helps it to stay in business. Net profit margin for Next Plc is far better than that of M & S with a difference of £0.03. This attracts more investors to the company and increases the prices of shares. Profits show how well a company is using its resources to generate income and attract investors. Next Plc also has a ROA of £0.17 compared to that of £0.07. This shows that Next Plc is maximising the use of its assets efficiently and effectively. This is due to the high net profits the company is making. Next Plc is well known for its high quality products at reasonable prices in the UK which gives the company a more positioning than M & S. ROCE and Return on Equity (ROE) are very important ratios in a company that shows how well the management is working to make use of the shareholder equity and the operating capital provided. A good management will maximise the use of these two capitals to make show that the company meets both short term and long term obligations. Next Plc has a return on equity of £1.98 meaning the company makes a profit of almost twice on what shareholders original invested in the company. This helps to attract more investors to the company because they know they investment will be in save hand and can trust the management of the company. This means the company does not need outside help in order to finance most of its activities. This is not the case with M & S; they do not generate up £0.30 from equity. This means most of their profit generated is from investment from outsiders. This puts the company in a position that is difficult for investors especially during economic crises.
Debt Ratio
The debt ratio which shows how much of assets is being financed by long term debts in more in Next Plc than in M & S. This means the company uses more than 75% of loan to finance its equity. This is not a good sign for investors and banks but is not always the case as long as the company can pay back its loan and maximise the use of the long term debts. This can be seen in the amount of profits the company generates from equity.
Asset turnover
This shows how much revenue is generated from assets (Shim et al, 2008). This is shows how well companies generates income from its assets including machineries and other current and non current assets. Next Plc generates more revenues from their assets. This includes the use of space in shops and the maximum use of machines. Most Next shops make use of their spaces than M & S shops
3. Analysing Intangible Assets
These are non monetary assets that are owned by a company which can not be seen or touched (Dyson, 2004; Glynn et al, 2008). Intangible assets are legal and can be measured to put a value on them. Intangible assets include; copyrights, trade marks, logos, goodwill and patents. From the balance sheet of both companies, it can be seen that a value has been put on the companies’ goodwill. Goodwill is the portion of the business that is not directly attributed to the company’s assets and liabilities (Dyson, 2004; Glynn et al, 2008).
According to the International Accounting standards board, companies should recognise intangible assets if they meet certain criteria and should be measured and disclosed meeting certain requirements as written on IAS 38 (IASplus.com, 2009). Intangible assets are controlled by the company due to past events and from which future economic benefits are expected to be generated (IASplus.com, 2009). There are three important aspects about intangible assets according to IAS 38. They should be; identifiable, controlled and should be able to reap economic benefits (IASplus.com, 2009). Identifying intangible assets should be separated from the other assets and can be purchased separately (IASplus.com, 2009). Companies have to identify if their intangible asset was acquired from some other source or generated by the company itself. If the company does not recognise the source of its intangible assets, the IAS 38 therefore requires it to put it as expenses on its balance sheet at the same value (IASplus.com, 2009). Therefore, information provided concerning intangible assets should be genuine and follow the required standards with all costs being stated and calculated. This includes research and development costs, advertising costs of the intangible asset, and computer and human resource costs used to analyse intangible assets (IASplus.com, 2009).
M & S values its total intangible assets to be more than £400 million while Next Plc values its intangible assets at £55.40 Million. These values include goodwill which is part of the reputation of the company. This is value from when the company was started and how much the companies have achieved over the years in terms of quality and brand name.
Goodwill = Purchase Price – Fair Market Value of Net Assets
This is the value that will be placed on the company if any other company have to buy it. It excludes the value of all other assets on the balance and has to be separated from other intangible assets as required by IAS 38 (IASplus.com, 2009). Internal goodwill is generated from training employees and applying high quality control on both the products and the employees. Goodwill is also valued at the price of the company in the stock market (IASplus.com, 2009). According to IAS 38 (IASplus.com, 2009) goodwill and other intangible assets should disclose
- useful life or amortisation rate
- gross carrying amount
- line items in the income statement in which amortisation is included
- reconciliation of the carrying amount at the beginning and the end of the period
- accumulated amortisation and impairment losses
- description and carrying amount of individually material intangible assets
- amortisation method
- information about intangible assets whose title is restricted
- basis for determining that an intangible has an indefinite life
- certain special disclosures about intangible assets acquired by way of government grants
- commitments to acquire intangible assets
These are very important aspects that need to be followed by companies in order to give a fair value of their companies.
Appendices
Income Statement for Marks & Spencer for the year ending 28/03/2009 | ||
(Values in Millions of pounds) | ||
Year | 2009 | 2008 |
Period Length | 52 Weeks | 52 Weeks |
Revenue | 9,062.10 | 9,022.00 |
Total Revenue | 9,062.10 | 9,022.00 |
Cost of Revenue, Total | 5,690.20 | 5,535.20 |
Gross Profit | 3,371.90 | 3,486.80 |
Selling/General/Administrative Expenses, Total | 2,644.50 | 2,447.20 |
Research & Development | 0 | 0 |
Depreciation/Amortization | 0 | 0 |
Interest Expense (Income), Net Operating | 0 | 0 |
Unusual Expense (Income) | -101.8 | -122 |
Other Operating Expenses, Total | -41.5 | -49.7 |
Operating Income | 870.7 | 1,211.30 |
Interest Income (Expense), Net Non-Operating | 0 | 0 |
Gain (Loss) on Sale of Assets | 0 | 0 |
Other, Net | -38 | -27.3 |
Income Before Tax | 706.2 | 1,129.10 |
Income Tax – Total | 199.4 | 308.1 |
Income After Tax | 506.8 | 821 |
Minority Interest | 1.2 | 0.7 |
Equity In Affiliates | 0 | 0 |
U.S. GAAP Adjustment | 0 | 0 |
Net Income Before Extra. Items | 508 | 821.7 |
Total Extraordinary Items | 0 | 0 |
Discontinued Operations | 0 | 0 |
Net Income | 508 | 821.7 |
Source; http://moneycentral.msn.com
Balance Sheet for Marks & Spencer for the year ending 28/03/2009 | ||
(Values in Millions of pounds) | ||
Year | 2009 | 2008 |
Period | 52 weeks | 52 Weeks |
Assets | ||
Cash and Short Term Investments | 568.6 | 385.2 |
Cash | 0 | 318 |
Cash & Equivalents | 422.9 | 0 |
Short Term Investments | 145.7 | 67.2 |
Total Receivables, Net | 120.5 | 117.5 |
Accounts Receivable – Trade, Net | 83.5 | 84.6 |
Accounts Receivable – Trade, Gross | 87.7 | 87.9 |
Provision for Doubtful Accounts | -4.2 | -3.3 |
Receivables – Other | 37 | 32.9 |
Total Inventory | 536 | 488.9 |
Prepaid Expenses | 164.7 | 190.1 |
Other Current Assets, Total | 0 | 0 |
Total Current Assets | 1,389.80 | 1,181.70 |
Property/Plant/Equipment, Total – Net | 4,834.00 | 4,704.00 |
Goodwill, Net | 119.2 | 117.9 |
Intangibles, Net | 281.1 | 187.6 |
Long Term Investments | 295.6 | 55.8 |
Note Receivable – Long Term | 336.8 | 410 |
Other Long Term Assets, Total | 1.6 | 504 |
Other Assets, Total | 0 | 0 |
Total Assets | 7,258.10 | 7,161.00 |
Liabilities and Shareholders’ Equity | ||
Accounts Payable | 357 | 226.9 |
Payable/Accrued | 0 | 0 |
Accrued Expenses | 249.5 | 268.1 |
Notes Payable/Short Term Debt | 857.4 | 650.1 |
Current Port. of LT Debt/Capital Leases | 161.6 | 263.6 |
Other Current Liabilities, Total | 681.4 | 580.2 |
Total Current Liabilities | 2,306.90 | 1,988.90 |
Total Long Term Debt | 2,120.90 | 1,936.50 |
Long Term Debt | 2,120.90 | 1,936.50 |
Capital Lease Obligations | 0 | 0 |
Deferred Income Tax | 225.5 | 372.1 |
Minority Interest | 18.9 | 7.3 |
Other Liabilities, Total | 504.2 | 899.5 |
Total Liabilities | 5,176.40 | 5,204.30 |
Redeemable Preferred Stock | 0 | 0 |
Preferred Stock – Non Redeemable, Net | 0 | 0 |
Common Stock | 394.4 | 396.6 |
Additional Paid-In Capital | 2,438.80 | 2,431.30 |
Retained Earnings (Accumulated Deficit) | -814.1 | -834.3 |
Other Equity, Total | 62.6 | -36.9 |
Total Equity | 2,081.70 | 1,956.70 |
Total Liabilities & Shareholders’ Equity | 7,258.10 | 7,161.00 |
Total Common Shares Outstanding | 1,577.79 | 1,586.48 |
Total Preferred Shares Outstanding | 0 | 0 |
Source; http://moneycentral.msn.com
Income Statement for Next for the year ending 24/01/1009 | |
(Values in Millions of pounds) | |
Year | 2009 |
Period Length | 12 Months |
Revenue | 3,271.50 |
Total Revenue | 3,271.50 |
Cost of Revenue, Total | 2,363.00 |
Gross Profit | 908.5 |
Selling/General/Administrative Expenses, Total | 427.3 |
Research & Development | 0 |
Depreciation/Amortization | 0 |
Interest Expense (Income), Net Operating | 0 |
Unusual Expense (Income) | 0 |
Other Operating Expenses, Total | 0 |
Operating Income | 478.3 |
Interest Income (Expense), Net Non-Operating | -1.7 |
Gain (Loss) on Sale of Assets | 0 |
Other, Net | 0 |
Income Before Tax | 428.8 |
Income Tax – Total | 126.5 |
Income After Tax | 302.3 |
Source; http://moneycentral.msn.com
Balance Sheet for Next for the year ending 24/01/1009 | |
(Values in Millions of pounds) | |
Year | 2009 |
Assets | |
Cash and Short Term Investments | 132.2 |
Cash | 45.7 |
Cash & Equivalents | 0 |
Short Term Investments | 86.5 |
Total Receivables, Net | 525.9 |
Accounts Receivable – Trade, Net | 494.2 |
Accounts Receivable – Trade, Gross | 609.9 |
Provision for Doubtful Accounts | -117.2 |
Receivables – Other | 31.7 |
Total Inventory | 318.7 |
Prepaid Expenses | 113.7 |
Other Current Assets, Total | 0 |
Total Current Assets | 1,090.50 |
Property/Plant/Equipment, Total – Net | 612.8 |
Goodwill, Net | 49.7 |
Intangibles, Net | 5.7 |
Long Term Investments | 18.6 |
Note Receivable – Long Term | 0 |
Other Long Term Assets, Total | 0 |
Other Assets, Total | 0 |
Total Assets | 1,777.30 |
Liabilities and Shareholders’ Equity | |
Accounts Payable | 204.8 |
Payable/Accrued | 0 |
Accrued Expenses | 43.6 |
Notes Payable/Short Term Debt | 121.3 |
Current Port. of LT Debt/Capital Leases | 16.2 |
Other Current Liabilities, Total | 322.2 |
Total Current Liabilities | 708.1 |
Total Long Term Debt | 570.2 |
Long Term Debt | 570.2 |
Deferred Income Tax | 34.2 |
Minority Interest | -0.1 |
Other Liabilities, Total | 308.2 |
Total Liabilities | 1,620.60 |
Redeemable Preferred Stock | 0 |
Preferred Stock – Non Redeemable, Net | 0 |
Common Stock | 19.7 |
Additional Paid-In Capital | 0.7 |
Retained Earnings (Accumulated Deficit) | 175.3 |
ESOP Debt Guarantee | -48.7 |
Other Equity, Total | 9.7 |
Total Equity | 156.7 |
Total Liabilities & Shareholders’ Equity | 1,777.30 |
Total Common Shares Outstanding | 197.1 |
Total Preferred Shares Outstanding | 0 |
Source; http://moneycentral.msn.com
References
- Bragg, S. M. (2002). Business ratios and formulas: a comprehensive guide. Wiley and Sons
- Collier, P. M. (2003). Accounting for Managers: Interpreting Accounting Information for Decision-making. Wiley
- Dyson, J. R. (2004). Accounting for Non-Accounting Students; Sixth Edition. Prentice Hall, Harlow
- Glynn, J. et al (2008). Accounting for Managers; Fourth Edition. Cengage Learning EMEA
- McLaney, E. J. and Atrill, P. (2007). Pearson Education; fourth Edition. Pearson Education
- IASplus.com (2009) http://www.iasplus.com/standard/ias38.htm date accessed 21/08/2009