Sample Report On Company Analysis: Marks AND Spencer

Answer 1)

Marks and Spencer PLC, popularly known as M&S, is a UK-based multi-channel retailer. While the company is largely known for its clothing business as part of which it caters Womenswear, Menswear and Kidswear market, it also offers home necessities and luxury food products such as, cooking and dining products, flowers, and wine, et cetera. Rated as one of the leading retailers in the UK, the company offers its products through 852 stores in the United Kingdom and 480 stores in Europe, Asia and the Middle East.

Answer 2)

Outcome of Auditors’ Report:
The independent external audit of the company has been conducted by Deloitte LLP and the audit report was submitted on 19th May,2015 as part of which, the auditors confirmed that the annual report and its components such as the financial statements and director’s reports is fair, balanced, understandable and free from any inconsistencies or misstatements. Additionally, the auditors also opined that the Directors’ Remuneration Report has been prepared in accordance with the Companies Act, 2006 and the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Importance of Auditors’ Report:

Shareholders of the company are only provided with the financial statements and the accompanying notes, on the basis of which, interested investors take investment related decisions. However, the credibility of the financial statements is only confirmed by the external auditors. Important to note, it is the external auditor, who do not share any sort of the conflicting relationship with the company, ensures that the financial reports are prepared in accordance to relevant accounting standards and are free from any sort of material misstatements or inconsistencies. Therefore, it is the credibility and reasonable assurance provided by the auditors that safeguard the investor’s interest and guides them to make prudent investment decisions.

Answer 3)

Answer 4)
Answer 5)
A) Ratio Analysis
In order to evaluate the financial performance of the company over the year and to see how well it stands relative to the industry averages, we performed a comprehensive ratio analysis in Section 3 of this paper. Below we have discussed the outcome of each ratio section:

Profitability:

Profitability ratios are the most sought after ratio multiples by the investors as it indicates the profit margins earned by the entity using the available resources.
As for Marks and Spencer, during 2015, the company earned a gross margin of 38.65%, a hike of 1.11% over the previous year. In addition, the gross margins of the company well exceed the industry average of 10%. This can be largely attributed to the positive brand equity established over more than 100 years that results in higher sales volume and controlled cost of sales, which fuels the gross margin.
While gross margin of the company indicated positive trend, the trend in net profit margin and ROE were not praiseworthy. As for net profit margins, although the current year multiple of 4.72% exceeds the industrial average of 3%, but the decline in net margins from 5.09% to 4.7%, may not be welcomed by the investors. Similarly, the downward trend in ROE from 18.70% to 15.05%, that sits well below the industry average of 19%, raise a concern over the ability of the management to generate a sustainable or even at-par return for the equity-holders.

Liquidity:

Liquidity ratios accesses the short-term financial position of the company and if it is capable to honor short-term obligations. For the purpose of evaluating the liquidity position, we calculated the current ratio and found a marginal improvement from 0.58 to 0.68 over the year. It is considerable that even though during 2015,the company managed to improve its working capital position,but the current ratio still falls short of the industry average of 1.70. This confirms low liquidity standing of the entity relative to the industry peers on an average and a need to revive its working capital position.

Solvency:

Solvency ratios allow the analysts and the investor to have an in-depth insight into the capital structure of the company. For this purpose, we calculated the gearing ratio of the company and found that the ratio multiple decreased from 2.71%to 0.62%. This confirms that the entity now prefers to operate under a low debt and consequently, a low-risk environment while the industrial average stands at 4%.

Efficiency:

These ratios indicate the efficiency of the management and how well it is managing the asset base of the company. As for the inventory turnover period, the multiple decreased from 47 days to 46 days, indicating that this year it took one day less for the company to sell its inventory, a significantly better performance compared to the industry average of 50 days.

PE Ratio

PE Ratio is one of the widely used market ratios by the analyst and is considered to be a great tool for picking the right stocks. Referring to our calculation above, we witness that over the year, the PE ratio of M& surged from 14.21 to 18.65, while the industry average is mere 9.0. This confirms that relative to the previous year and also in comparison to the industry average, investors are more optimistic for the future earnings growth potential of the company.

B) Percentage Change

In addition to the ratio analysis, we also calculated the percentage change for revenue, operating income and stock price of the company. Our calculation revealed that while the entity witnessed a marginal improvement of 0.02% and 0.98% in revenue and operating figures, respectively, the stock price of the company took a noteworthy leap of 19.93% during the year, thus providing high amount of capital gain for the investors.

Answer 6)

ROE: (Net Profit/ Sales) * (Sales/ Total Assets)* (Assets/ Total Equity)
2014: (506/10309.7)* (10309.7/7903)* (7903/2706.7)
= 4.90* 1.30* 2.91
= 18.59%
2015: (481.7/10311.4)* (10311.4/8196.1)* (8196.1/3198.8)
=4.67* 1.25* 2.56
= 14.94%
Return on Equity is a closely watched multiple amongst the investors as it indicates the ability of the company’s management to generate value on equity investment it received. However, ROE multiple is vulnerable to manipulation that can eventually dupe the investors. Therefore, DuPont analysis is one effective way to break down the ROE components and see the trends that are driving the ROE.
Stated comprehensively, DuPont Ratio is a financial ratio that is used to decode the ROE multiple of the company and to evaluate the trends that caused changes in the ROE of the company. While we had already calculated ROE multiple in Part 3 of this report and had cited a downward trend, the purpose of conducting DuPont calculation here is to unearth the trends that pushed the multiple downwards.
As noted, during 2015, net profit margin, asset turnover and equity multiplier witnessed a declining trend that eventually resulted in plunging ROE. Beginning with the net profit margin, the multiple fell from 4.90% to 4.67% amid 0.02% surge in the revenue figures while the proportion of cost of sales and operations relative to the revenue figures was on the higher side. On the other hand, asset turnover ratio also decreased from 1.30 to 1.25 amid higher proportionate increase in total assets by 3.70% relative to 0.05% increase in the revenue figures. Finally, the equity multiplier which indicates the impact of financial leverage on the profitability number, decreased from 2.91 to 2.56, indicating towards the preference of the company to operate under low debt environment during 2015.
Overall, it was the decline in the three ratio multiples that pushed the ROE multiple downwards. However, what was relieving to witness and what may also uphold the investor confidence is that a significant proportion of the ROE was sourced from net profit margin rather than the equity multiplier. This confirms that the company is generating its profitability through sustainable sources, but considering the present scenario, it should work on improving its net margin and asset turnover.

Bibliography

Marks and Spencer PLC. (2015). Annual Report 2015. Marks and Spencer PLC.
Ori, J. (n.d.). Importance of an External Audit. Retrieved January 4, 2015, from http://smallbusiness.chron.com/importance-external-audit-17630.html
Profile: Marks and Spencer PLC. (n.d.). Retrieved January 9, 2015, from Yahoo Finance: https://in.finance.yahoo.com/q/pr?s=MKS.L