Essay: Marks and spencer

Corporate Financial Reporting Summative

Marks & Spencer PLC

Marks & Spencer is a major British retailer, with over 840 stores in more than 30 countries worldwide. M&S was founded by Michael Marks, a Belarusian immigrant, in 1884. It was inaugurated as a ‘penny bazaar stall’ in Leeds. Marks was a highly ambitious man who was always looking for new avenues for expansion. In 1894, Thomas Spencer, a former cashier worked in conjunction with Marks to open a shop in Manchester. Soon after they launched their first shop they moved to acquire a larger shop in Leeds. This enabled M&S to make the transition from small market stall to wealthy business. In 1903, M&S Ltd was ‘registered as a firm with a capital of 30,000 shares worth one pound each.’ These shares were split between the two founders. Both founders died soon after the turn of the century which led to William Chapman, the executor of the Spencer estate, taking chairmanship until 1916. Simon Marks, the son of the founder Michael Marks took the helm from 1916 and he remained in charge until 1964. ‘Under the stewardship of Marks the company acquired other of penny bazaars and introduced many of the lines still associated with the company.’ By the 1930’s, M&S had become a retail empire selling textiles, and canned foods. During this period M&S had developed an image of being a particularly innovative company who embraced many of the new advancements of the time.

Financial Statements for M&S for 2006 and 2007

Cash Flow Statement as at 29 March 2007

Balance Sheet as at 29 March 2007

Average Share Price M&S from 2004-2007

Chart 1

Industry Average Financial Ratios In For 2005-2007

Table 2

Analysis of M&S’s Financial Ratios

The current ratio is considered to be an important calculation because it provides analysts with an indication of how able a firm is to meet short term cash needs i.e. the more liquid the company is. The lower the value of the current ratio the more difficult it is for a company to adequately meet their short term cash requirements. Companies usually view a current ratio of 2:1 to be safe and any ratio lower than 1:1 is considered too low. By this methodisation all the values obtained by M&S over the three years (0.51:1, 0.54:1, 0.57:1) are far too low because for every 1 pound of current liabilities they only have, in the case of 2007, 51 pence to pay for these. The figures obtained by M&S imply that their ability to meet short-term needs is lowering every. Considering the state of the market and the fact that consumers on the whole are spending less the decreasing trend of this value is to be expected. A low value for the current ratio is undesirable but not fatal if the firm has good long term prospects. If this is true then the firm can borrow with regard to the future prospects to meet the current obligation. In essence if the firm is forecasted to perform well enough in the long term then leverage can be used to finance the firm in the short term. ‘The quick ratio is another measure of liquidity but the difference between this ratio and the current ratio is that inventory is eliminated from the equation. The exclusion of inventory means that the quick ratio can be considered a more conservative equation than the current ratio and in some ways it can actually be thought of an improvement of the current ratio. The quick ratio can be considered as an improvement over the current ratio because M&S may subject to business cycle fluctuations and in times such as these the level of inventory would be higher than usual which would imply a higher value for the current liabilities. The results obtained by M&S were 0.35:1, 0.27:1 and 0.25. These results imply that M&S uses a fair amount of leverage to meet its short term needs but analysis of the stability would need to be completed to confirm this.

The stability ratios provide analysts with an indication of whether a firm will survive over a long period time. The debt ratio is an important figure because it considers the proportion of assets financed by debt.’ A debt ratio greater than 1 indicates that a firm has more debts than assets. The figures obtained by M&S for the years 2005, 2007 and 2007 are 0.64:1, 0.69:1 and 0.73:1 respectively. Therefore the value of debt ratio has risen throughout the three years. A reason for this could be the fact that M&S is using more debt to finance itself but this may not be true. ‘Assets and equity are usually measured in terms of carrying value in the firm’s financial statement, but in actuality, these figures have very little association with the market value of the firm. These values also have little to do with the amount that creditors would receive if the firm were to be liquidated.

Although the main objective of any firm is to maximise its shareholders’ wealth, the profitability of firm is a very important way of gauging how successful a firm is.

‘Generally the higher the profitability ratio compared to the same ratio for a previous period the better the firm’s performance.’ The gross profit ratio indicates how efficiently a firm is using its materials and labour in the production process. A high gross profit margin shows that a firm can expect to make a reasonable profit on sales. The industry average

Arguably the most important figures for a potential investor are the investment ratios. Ultimately the reason why an investor puts in their own capital into a firm is to make a profitable return. The EPS in 2005 and 2007 were: 31.4p and 51.8p this is a significant increase. EPS is not considered the most effective way of gauging corporate value because the element of risk is eliminated, and dividends are not considered. The P/E ratio provides a ‘current valuation of the company’s share price compared to its per- share earnings. When P/E ratio is higher than the market average it is likely that will experience returns that are higher than the market average. In this case the P/E ratio is significantly higher than the average in 2007 (market average being 0.63 and M&S coming with a ratio of 5.97). On the basis of the P/E ratio M&S would make a good investment because of the possible future returns available to the investor.

The beta is an important measure of volatility of a stock. A value of beta greater than 1 implies that a stock will be more than the market. M&S has a beta value of 0.73 which indicates that it is a safe stock to invest in. The beta of M&S stayed very steady over the two years which is what one would expect from a safe stock.

M&S is a giant in British market that has become synonymous with high street. Looking at the beta coefficient value, dividends per share and its results in the profitability ratio I would be led to believe that M&S would be a reasonably safe stock to invest in. It may not offer explosive profits but in the present day not many firms are. I believe that it would a safe stock to purchase now as potential investors are not likely to lose much of their money and there is a distinct possibility of the retail market to experiencing a boom.

Financial Ratios Over the last few years for Next plc

Table 3

Average Share Price for Next Plc

Chart 2

For my comparison of Next and M&S I decided to cut out some of the ratios that I deemed flawed and unnecessary. The average dividends per share for Next was 55p which was significantly greater than the highest value that M&S had to offer. But on the average it was almost three times more expensive to buy a share in Next than in M&S. In that respect the M&S share price is more cost effective than the Next plc.

The beta coefficient of Next with a value of 0.72 is almost identical to that of M&S so they are both as a safe a stock as each other. The quick and current ratios are also significantly higher at Next indicating that they are better equipped to deal with short-term demands than M&S.

The gearing ratio over the two years is lower meaning that Next uses less debt to finance itself. As a general the less debt a company uses to finance the more financially stable the firm is. Therefore by this logic I believe it would be a fair assumption to think that Next Plc is more stable than M&S as a stock.

Overall, from the analysis of the data I believe it would be a fair deduction to say that to invest Next would be a more lucrative if an investor already had a share. But a prospective investor would get more bang for their buck if they were to invest in M&S because there is a potential for the M&S stock to jump from below 440 to the 639.00 mark as its average was in 2005. I believe the potential dividends would be proportionately better especially considering the prices offered.

Marks & Spencer Future Prospects and Recommendations

Between the years 2004 and 2007 M&S experienced increasing share price every month but the emergence of the credit crunch has resulted in the share price plummeting. I believe that this could be a blessing for new investors because they would now have the possibility of purchasing a shares in M&S at really low price and selling them for a significant profit. When compared to a share in the same industry M&S does have a particularly low share price coupled with its reasonable dividends per share ratio I believe M&S would be an extremely useful stock for a prospective investor. Looking at the company continued high profits and its inherently innovative nature I have no doubts that it will emerge from the current economic situation in good shape. The notes of concern I have regarding the performance of M&S are its low liquidity and its high leverage. Generally, if a firm was to have these particular characteristics it should be regarded as high risk. But M&S is just any firm. M&S is firm that has become synonymous with British culture as one can be found on every high street. Although it would be imprudent to suggest that M&S is exempt from the fate of Woolworths I believe the sheer the healthy profitability ratios indicate that the high leverage and the low liquidity has been used to M&S’ advantage. So if I were to make a protestation to a prospective investor it would be to buy shares in M&S as significant profits are available in the future.

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