Table of Contents
INTRODUCTION TO REPORT 3
EXECUTIVE SUMMARY 3
INFORMATION ABOUT BURBERRY PLC. 3
INFORMATION ABOUT MARKS & SPENCER PLC. 3
RATIO ANALYSIS 4
PROFITABILITY RATIOS 4
LIQUIDITY RATIOS 5
FINANCIAL EFFICIENCY RATIOS 5
CONCLUSION 6
APPENDIX 7
APPENDIX A 7
BIBLIOGRAPHY 9
Introduction
This report will compare the financial position of Burberry plc and M&S through the use of the financial statements of both companies. The Liquidity, Profitability and Financial Efficiency ratios have been used to analyse their financial positions and ultimately to conclude which company is performing better.
Ratio analysis is a quantitative evaluation of various financial variables that are obtained from a company’s financial accounts. It can be used to explore a particular company’s performance year on year or to compare a company with its competitors. In this case we will be looking at Liquidity, Profitability and Financial Efficiency ratios of both Burberry and M&S.
Executive Summary
Burberry plc and Marks and Spencer plc (M&S) are iconic British companies. Burberry is a luxury global fashion brand. M&S is a multi-national retailer and a giant of the British high street. Both companies have been featured negatively in the news recently for different reasons. Burberry shares have fallen following an announcement that they will be moving up-market to become a super-luxury brand like Dior. M&S profits have fallen following excessive restructuring costs.
Burberry is a global brand that specialises in luxury Men and Women’s clothing and accessories. It was founded in 1856 and continues to grow with their revenues increasing from £1,999m in 2013 to £2,766 in 2017 (Burberrys annual report 2016/17).
M&S, on the other hand, aims much more at day to day purchases and has a much larger market. They have various different revenue streams such as the Food Hall that they have in most of their stores, their cafes, menswear, womenswear, kids wear and home along with many more aspects, including service stations. This size is reflected in much higher revenue. In 2017 the revenue of the M&S increased by 2.2% from its previous year to a total of £10.6bn (M&S annual report 2016/17).
Ratio analysis is most effective when comparing similar companies; however, when it comes to looking at Burberry against M&S, it is quite clear from pricing that they are providing a much higher quality of product aimed at a different market. So it is important to not only look at the general financial position but also to compare like with like revenue streams such as comparing the Clothing side of M&S with Burberry instead of comparing M%S Food with Burberry as this is not really a justified comparison as they are offering different products.
Food 5.6 billion (Increase 4.2% from last year)
Clothing and Home 3.8 billion (Decrease 2.8% from last year)
International Food, Clothing and Home 1.2 billion (Increase 10.7% from last year)
Table 1: A table to show the revenue streams for Marks and Spencer Plc. for the year 2017
Ratio Analysis
Please refer to the Appendix A to find full workings for the Ratios for Both Burberry. and M&S.
Profitability Ratios
2017 2016
Marks and Spencer’s Plc. 253.2 584.1
Burberry Plc. 394.3 402.9
Table 2: A Table to show the Operating Profit for the years 2016 and 2017
Return on Stakeholder Funds
Return on Stakeholder Funds (ROSF) measures how well a company’s resources are being managed to determine how well the stakeholders are being treated. It will influence how much the stakeholders will receive in dividends. In this case both companies are performing satisfactorily. Burberry’s situation shows a slight fall (19.41 in 2016 to 16.91 in 2017). M&S has fallen more sharply (29.20 to 23.58) but the ratio is more favourable than for Burberry.
Return on Capital Employed
Return on Capital Employed (ROCE) is an important ratio to look at in the long run as it looks at gross profit after all operating expenses have been deducted (before the taxes are deducted). This is a really useful tool as It can be used to determine how well a company has used its long-term finance and also how well they have managed expenses. Burberry had a ROCE 22.7% in 2016 and now one of 21.3%. M&S ROCE has decreased from 15.77% in 2016 to 12.71%. This declining ROCE for both companies could be down to various factors. The most significant factor for both declines is a decrease in Operating Profit. This is most visible for M&S whose operating profit has almost halved from 2016 to 2017. One reason for this was the announcement in May 2016 to launch “a more consistent approach to pay and premier as well as proposals to close the UK Defined Benefit pension scheme” (M&S Financial accounts). This saw a adjustment figures doubling year on year causing a decrease in ROCE. For Burberry, their share capital remained the same over the two years, so it is down to the slight decrease in operating profit due to the increase in net operating expenses due in part to a new deal between Burberry and Coty Geneva SARL Versoix.
Operating Profit Margin
The Operating Profit Margin (OPM) determines how well expenses been controlled. Table 2 shows both companies have had a decrease in operating profit, especially for M&S. This is most likely down to an increase in operating expenses. Burberry’s operating profit margins are much higher than M&S. Burberry had 14.26% in 2017 compared to M&S’s 1.66% showing that, as a percentage of revenue, Burberry is much more profitable than M&S. This could be due to fundamental differences between the two companies. M&S has more expenses due to their relative scale. Due to the size and number of M&S stores it is inevitable that overheads are going to be much higher than those for Burberry.
Liquidity Ratios
Current Ratio
The Current Ratio (CR) looks at current assets and liabilities to determine whether the short-term assets are able to cover short-term liabilities. The CR for Burberry has improved from 2.77:1 (in 2016) to 2.9:1 (in 2017). Although this increase is modest it does show that Burberry is able to cover their current liabilities with current assets. This could be to an increase in the trade and other payables leading to an overall increase in current assets and current liabilities. However, the current liabilities have increased less than the current assets meaning overall the ratio has improved. For every £1 in current liabilities there is £2.90 of current assets to cover this. M&S has a CR of 0.73:1 in 2017 (an increase since 2016). This shows that current liabilities are outweighing current assets so in terms of short term liquidity Burberry are in a stronger position.
Acid Test Ratio
The Acid Test Ratio (ATR) is similar to the current ratio however inventories are subtracted from current assets. The reason for this is, if either company was to shut down, then the inventory would be almost worthless so these are removed for ATR. For Burberry, ATR improved from 1.87:1 (2016) to 2:1 ratio (2017), a strong position in terms of liquidity. M&S, on the other hand, have had a significant decrease in ATR falling from 3.43:1 in 2016 to 0.39:1 in 2017. This is a drastic fall and suggests increased holding of inventory. M&S now has a concerning low figure of 39p for everyone £1 of current liabilities.
Financial Efficiency Ratios
Inventory Turnover Period
The Inventory Turnover Period (ITP) states how long inventories are held before they are sold to the customer. M&S has managed a decrease from 45 days to 42 which is much better to that of Burberry which holds inventory for up to 223 days, suggesting that the supply is outweighing the demand. It is not good for companies to hold stock for such a long time as fashions and trends may change over time. So Burberry, it could be argued, is not very market responsive. M&S, on the other hand, are more agile and appear to be able to react to changes in fashion quickly.
Trade Payables Settlement Period
The Trade Payables Settlement (TPS) measures how long it takes for businesses to settle debts with their suppliers. M&S are much quicker at settling debts (36 days in 2017) and this could be related to the ITP. They are selling stock faster so they have more cash faster to settle with suppliers. This leads to more supplies being delivered sooner. Burberry on the other hand take much longer to pay back their suppliers (up to 76 days in 2017). This could be because they do not receive cash for a much longer period while holding stock.
Trade Receivables Settlement Period
The Trade Receivables Settlement Period (TRSP) measures how long it takes trade receivables to settle their debt. M&S only allows 4 days in 2017 for customers to settle credit payments. However, having looked at the previous year it is clear that they are trying to move in the right direction in allowing customers longer to pay them back. On the other hand, Burberry allowed 27 days in 2017 which is decreased from its previous years. They are obviously trying to reduce it in order to improve cash flow.
Conclusion
The analysis of various ratios suggests that Burberry is in a better overall financial position than M&S. In the time period considered, the profits of Burberry were fairly stable but M&S profits fell significantly by over 50%. This is reflected in the various profitability ratios calculated. Two of the three profitability ratios show Burberry stronger than M&S, and this is especially apparent for the OPM. Burberry also scores better in terms of liquidity ratios. The biggest difference is the ATR where Burberry now has an (increased) £2 for every £1 of current liability yet the equivalent figure for M&S is just 39p. In contrast M&S is superior in all 3 Financial Efficiency Ratios suggesting that it is managing its assets better than Burberry. Although ratio analysis is a really effective method in order to discuss or compare company finances, it is not always the right method or one that can be entirely relied on. In this case we have to take into consideration that M&S is a much larger company with more diverse revenue streams. It is important to bear this in mind that we are not comparing like with like in the base of M&S and Burberry.
Appendix A
Bibliography
1. Investopedia – Ratio Analysis Available at http://www.investopedia.com/terms/r/ratioanalysis.asp (Tuesday 7thNovermber 2017 at 11:07 )
2. Oglesby, D.W. (2007) Concise Encyclopedia of Investing. Abingdon: Taylor and Frances Ltd.
3. BBC news – Business http://www.bbc.co.uk/news/business-41926521 (Thursday 9th November 2017 at 2345)
4. The Independent – Business http://www.independent.co.uk/news/business/news/marks-and-spencer-latest-results-profit-fall-chief-financial-officer-step-down-a8043171.html( Thursday 9th November 2017 at 2300)
5. Burberry Website (2017) https://www.burberryplc.com/en/index.html (throughout report)
6. Marks & Spencer (2017) http://www.marksandspencer.com (throughout report)
7. Financial Accounts Burberry 2017
8. Financial Accounts Marks & Spencer 2017
My partner for the ratio analysis Quiz was 16104936
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