Financial Statement Analysis Assignment Sample 1

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Introduction

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Marks & Spencer is a member of the FTSE 250 index and has previously been a member of the FTSE 100 index since its establishment in 2019. With more than 1380 outlets across the globe, Marks & Spencer Group plc (M&S) is a distributor in the UK. The business is the holder of the Marks & Spencer Group. It functions in three market segments (revised): UK Clothing & Home, UK Food and International. The International sector comprises the European, Asian and foreign franchise companies owned by Marks and Spencer (Anon., 2020).

The International Division is composed of companies possessed by Marks & Spencer and foreign markets companies in the Republic of Ireland, Asia and Europe. The business is dedicated both in the UK and globally to providing its brand food, apparel and home goods. It has about 910 UK outlets, about 220 owned and about 350 licensed Simply Food retail and provides its consumers with a range of services comprising woman's clothing, innerwear and men's apparel, kid's clothing and organic products through around 300 proper shops and website, M&S.com (Anon., 2020).

Debenhams, Macy's, Aldi UK, John Lewis Partnership, Asda, Next, Tesco, and Waitrose & Partners are the top rivals of Marks & Spencer. The current (27 November 2020) market share price of the business is 127.10 p. The group has reported a revenue of 10.2 billion in the recent annual report of the year 2020 (Anon., 2020).

India has grown for M&S as the second biggest after the United Kingdom, and the UK distributor expects the double rise in the next financial year a major corporation executive confirmed. In each Chennai and Hyderabad, M&S has launched one retail outlet. M&S now looks at the increasingly major towns of Tier II & III as a result of the growth and aims to extend the range with even more regional interest. M&S has concentrated on developing its business online in past years and has streamlined its property as a result of its revival campaign.

The report is carried with a detailed financial analysis of two years with the help of important ratio calculations and a less detailed analysis of the company's performance of the past five years. A comparative evaluation of the business with its competitor Macy's quality evaluation of the group's reporting and earnings are also conducted. The report also consists of suggestions for the entity and a self-reflection report on the analysis.

Financial Analysis

Ratios and Interpretation

The important financial ratios are calculated for the analysis of Marks & Spencer. These ratios help to understand the earnings, efficiency, structure of finance in the company. The calculated ratios for the company are presented in the table below.

RATIO

FORMULA

2020

2019

Liquidity Ratio:

     

Current Ratio

Current assets/ current liabilities

0.66

0.62

       

Profitability Ratio:

     

Return on Equity

EBIT/ Shareholder's fund

6.87%

12.07%

Gross profit ratio

Gross profit/ Sales

35.28%

36.80%

Net Profit Ratio

Net Profit/ Sales

0.27%

0.44%

Return on Assets

EBIT/ Assets

2.50%

2.87%

       

Solvency Ratio:

     

Debt Equity Ratio

Non-current debts/ Shareholder's fund

1.25

1.64

Interest Coverage Ratio

EBIT/ Interest expense

1.09

1.20

       

Operating Efficiency Ratio:

     

Inventory Turnover Ratio

COGS/ Avg. Inventory

10.42

8.85

Receivable Turnover Ratio

Sales/ Avg. Inventory

16.10

14.01

       

Market Performance Ratio:

     

Dividend per share (p)

Dividend paid/ No. of shares

3.90

13.30

Earnings per share (p)

Earnings/ No. of shares

1.30

2.50

Liquidity ratio: This help in understanding the financial liquidity of the business to meet its present liabilities with its current assets (Bragg, 2020). The current ratio of the entity shows that at the liquidity of the business has improved from the year 2019 to 2020 as it raised from 0.62 to 0.66.

Profitability ratio: These measures help in understanding the return and profit earned by the company (Black, 2020). Return on equity is an indicator of earnings earned by the company in proportion to its shareholders capital. This ratio has declined in the present year from 12.07% to 6.87% which is not a favourable situation for the company or its investors. The return on assets has also reduced from 2.87 per cent to 2.50% which is also unfavourable for the company as its returns based on its assets has declined (KENTON, 2020). There is a reduction in the gross margin and net profit earning after the company in the year 2020 as compared to the previous year 2019. This reduction in the overall profitability of the business shows the impact of covid-19 on the business of the group (Anon., 2020).

Solvency ratio: These ratios provide the idea about long-term liquidity of the business against its owned capital. Debt to equity ratio is an indicator of the proportion of debt in relation to the equity capital of the business. It has been decreased in the current year from 1.64 to 1.25 (Anon., 2020). It shows that the company has a reduction in debt funds against its equity capital. It is favourable for the company as the reduction in that capital would mean deduction in interest expenses and it supports the long-term solvency of the business. The interest coverage ratio has decreased in the current year which is a result of reduced profits due to the impact of coronavirus pandemic (Anon., 2020).

Operating efficiency ratio: These ratios are used to determine the operating efficiency of a business (Gartenstein, 2019). In the year 2020, there is an improvement in the inventory turnover ratio and receivable turnover ratio of the company from the past year. The improvement in the efficiency ratio is an indicator of the increasing efficiency of the company in executing the functions of the group. The company has in post certain operating efficiency measures in the time of global pandemic which has shown positive results on the ratios of the business (MURPHY, 2020).

Market performance ratio: These ratios are an indicator of a company's performance in relation to the other companies operating in the same industry. For M&S analysis, the dividend per share and earning per share of the company has been derived from its annual report to analyse and compare the earnings and dividend of the current year with the last year. Earnings per share of the company have reduced from 2.50 to 1.30p as an impact of reduced profits whereas dividend per share has reduced from 13.30 to 3.90p as a result of non-declaration of a final dividend in the current year (Anon., 2020).

The overall ratio analysis provides a view that the company's profitability has been affected by the global pandemic however its efficiency and liquidity has raised in the current year in relation to the previous year 2019. Also, the capital structure of the company has been improved in terms of increasing equity capital.

Information extraction from annual report used for ratio calculation:

Particulars

2020 (m)

2019 (m)

Current assets

1215

1435.1

Current liabilities

1849.4

2324.9

Gross profit

3592.4

3819.1

Net Profit

27.4

45.3

EBIT

254.8

298.1

Shareholder's fund

3708.5

2469.2

Sales/ Revenue

10181.9

10377.3

Assets

10183.9

8851

Debt

4626

4056.9

Interest expense

234.5

248.7

COGS

6589.5

6558.2

Inventory

564.1

700.4

Dividend per share (p)

3.9

13.3

Earnings per share

1.3

2.5

Inventory at the end of the year 2018 was at 781 m.

Segment breakdown and Before v/s after exceptional comparison for two years

The segmental breakdown of the two years is carried out with the comparison of M&S revenue and profit in each segment of the company for the year 2019 and 2020. The company was reporting its business in two segments that are UK and International. But in the recent year, it has divided its business segment into three segments to bring better presentation and understandability of the operations. The revenue of the company in UK clothing and the home segment has been reduced in the year 2020 e at 3209.1 m from 3499.8 m in 2019 (Anon., 2020). However, the UK food segment revenue has shown an increase in the year 2020 in comparison to the previous year 2019 and derived the revenue of 6028.2 million pounds. The international segment also showed a reduction in the revenues in the current year 2020. Operating profit of each segment is in alignment with the changes in the revenue from the year 2019 to 2020. Profit before tax in the year 2020 from UK clothing and the home segment was reported at 223.9 million pounds which is the downfall from 355.2 million pounds in the year 2019. There is a rise in the profit from UK food segment in the year 2020 and it was reported at 236.7 million pounds. The international segment of the company is also shown a reduction in the profits and reported at 110.7 million pounds for the year 2020 whereas it was reported at 130.5 million pounds in the year 2019 (Sabanoglu, 2020).

Comparison with competitor

Macy's is a worldwide distributor of clothes, shoes, beauty, home products and other consumer items. It is also one of the top competitors of Marks and Spencers. Both the companies are operating as part of the retail industry sector and offering consumer goods, clothing and household items to their customers. Macy's employee's strength is about 123000 employees whereas Marks and Spencer provide employment to around 84621 people. The market capitalization of Marks and Spencer is 2.49 billion pounds & the valuation of Macy's is reported at 2.8 billion dollars (Anon., 2020).

M&S had reported revenue was 10.4 billion in the financial year 2019 whereas Macy's revenue for the year 2019 was $ 4.6 billion. The gross profit of M&S was 3.8 billion in the year 2019 and for the same period, Macy's reported a gross profit of $9.4 billion. The net profit was reported at 58.1 m and $564 m for the FY 2019 for M&S and Macy's respectively (Anon., 2020).

Marks & Spencer is working to develop a competitive advantage in the business by improving quality and lowering the prices of its products and also by developing online infrastructure for its online customers.

Five-year trend analysis

Trend Analysis (amounts in m)

 

FY 15

FY16

FY17

FY18

FY19

FY20

Revenue

10311.4

10555.4

10622.0

10698.2

10377.3

10181.9

 - Change

 

244.0

66.6

76.2

-320.9

-195.4

 - % Change

 

2.37%

0.63%

0.72%

-3.00%

-1.88%

             

Operating Profit

701.3

584.1

253.2

156.5

298.1

254.8

 - Change

 

-117.2

-330.9

-96.7

141.6

-43.3

 - % Change

 

-16.71%

-56.65%

-38.19%

90.48%

-14.53%

             

Profit after tax

481.7

404.4

115.7

29.1

45.3

27.4

 - Change

 

-77.3

-288.7

-86.6

16.2

-17.9

 - % Change

 

-16.05%

-71.39%

-74.85%

55.67%

-39.51%

A five-year trend analysis of the company's revenue, operating profit and profit after tax has been performed to understand the trend of revenues and profit in the business over the past 5 years (HAYES, 2019). M&S has shown a decreasing trend in revenue and profit over five years. In the financial year 2019, the company has reported a 3% decrease in the revenues still it manages to improve the operating profits by 90.48% and what profit by 55.67% (Anon., 2018). It is the only year in the past 5 years where the company has reported a positive trend in profits. The business of the company has been affected by a large number of competitors and changing preferences of the customers on a continuous basis. The company is trying to cope with the changes and generate earnings in the business (Anon., 2020).

Quality Assessment

Earning's Quality: Any irregularities or accounting practices or unique incidents that might degrade the output of the actual results are exposed to the consistency of a corporation's earnings. The earnings resulting from higher revenue or lower costs can be easily visible until these are erased (TUOVILA, 2020). Also, external factors may influence the assessment of earnings output. In times of high inflation, for example, earnings efficiency for many or most firms are considered low. They are also inflating their sales figures. After all, conservatively measured earnings are more accurate than those estimated by aggressive accounting methods. Efficient accounts that conceal weak sales or increasing economic risks can undermine the quality of incomes (TUOVILA, 2020).

The quality assessment of the earnings of M&S depicts that the company has reported its earnings in a clear and efficient manner. The revenues of the company and its earnings have been divided into three segments revised from two segments used in the prior years. The company has also provided revised revenue and earnings for the past two years in the annual report of 2020 so that the users may get a clear picture of the actual performance and earnings of the company (Anon., 2020). The earning of the year 2020 are impacted by the global pandemic and it has been taken into account.

Financial Reporting Quality: The ability to determine the accuracy of financial reports released can be important. The appraisal based on such financial statements and on corresponding investment decisions can be made by an analyst or investor who can identify high-grade financial reports (Anon., 2020). Appreciation of the company's activities and of the market, comparison of the financial reports in the current report period and the previous reporting period to identify the substantial difference in-line items, evaluation of business accounting methods, particularly any unusual revenues and expenditures, is a common element in the assessment of financial reporting quality.

The high-quality earnings imply that the business is reporting quality financials. M&S has an audit committee to regulate the policies followed by the organization is in alignment with the true and fair presentation of the company's report. The company has constantly followed similar policies making financial reports comparable. It has formed mitigating strategies for Covid-19 and reported them in the annual report to provide full disclosure to its users (Anon., 2020).

Conclusion and Recommendation

A financial analysis of the company, Marks and Spencer Group Plc has been performed in the report. The report has identified sectors, segments, products, competitors and recent news of business to understand the analysis effectively. The ratio analysis and its interpretations have provided a major understanding of the annual report of the company and a comparative analysis of the current year 2020 with the past year 2019. The business has improved current liquidity and its operating efficiency in the recent year with comparison to the last year. The profitability of the business has been impacted by the global pandemic breakout and it has reduced the revenue and earnings in the year 2020 with comparison to the past year.

An evaluation has been performed to understand the changes in profit and revenues from the year 2019 to the year 2020 with the understanding of rearranged business reporting segments. Company has revised its business segments from two to three segments by dividing the UK segment into UK clothing and home segment and UK food segment. The business of the company has been examined with comparison to one of its competitors named Macy's. The revenues, earnings and valuation of the business are compared with its competitor to understand the position of the company in the market. 5-year trend analysis has also been undertaken to observe the changes in revenue, operating profit and the after-tax profit of the entity. The year 2019 has emerged as a profitable year in the trend analysis. Quality assessment of the company's earnings and financial reporting has also been drawn to evaluate the accuracy and efficiency of the performed analysis based on the reported information of the company. The quality assessment has provided a positive outcome for the companies reported statements.

Marks & Spencer has been provided with a recommendation to expand its online platform for increasing the business revenue as in the crucial time of coronavirus the online platform will provide the company stability in its revenues and profits. It will also have the company to improve its profitability ratios and increase its market value in the industry. It should also focus on adjusting the capital structure of its business to improve its capital gearing. The company should grab the existing market opportunities such as online market demand in the times of covid-19, to improve the earnings of the group. Higher profits along with the high efficiency will help the company to achieve its missions and objectives efficiently and effectively.

Self-reflection on the strength and weakness of the analysis

The report has been initiated with an introduction containing the information about Marks and Spencer Group PLC. Included the information about the company's existing segments, its operations, the products offered by the company and statistics about the stores operated by the company. The information of the company's major competitors and the recent news of the company has also been incorporated. The background will help in understanding the financial analysis carried by me in the report. I have selected the major financial ratios which are used by the analysts for understanding and comparing the company's financial statements in reference to its liquidity, profitability, efficiency and others.

The selection of the ratios has been made on my personal understanding and review of certain academic sources regarding the ratios and their interpretation. Ratio analysis of the report is based on the data provided by the company in its annual report and therefore a quality assessment has also been undertaken to ensure the quality of the performed analysis. The comparison of business outcomes of the current year 2020 with the previous year 2019, helps in understanding the changes in the company's financials over the past year. The impact of coronavirus on the financial statements of the company has also affected the comparison of the present year with the last performance. It is because the current year performance is a result of the global pandemic and the comparison of this year with the last year is not ideal as there are certain factors that have affected the performance of the company in the present year 2020.

An evaluation of the selected company with its competitor Macy's has been carried out which helps in understanding the position of the company in the retail industry in a more detailed manner by comparing the revenues and earnings of both the businesses. The weakness is that the financials of Marks & Spencer are provided in the currency of pound whereas Macy's financial statistics are provided in the dollar currency. The difference in the currency of presentation also affects the comparison and understanding of the businesses. The five-year trend analysis is beneficial for the company to understand the direction of its revenues and profit but the company has recently redefined its business segments for the presentation. The restated financial statistics of the company for the year 2015 to 2018 are not available according to the redefined segments. However, the quality assessment shows that the analysis is effective and will have the users to understand the financial position of the company.

References

Anon., 2018. M&S. [Online]
Available at: https://corporate.marksandspencer.com/investors/key-facts/five-year-record
[Accessed 28 November 2020].

Anon., 2020. CFA Institute. [Online]
Available at: https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/2020/evaluating-quality-financial-reports#:~:text=Typical%20steps%20involved%20in%20evaluating,line%20items%3B%20an%20evaluation%20of
[Accessed 28 November 2020].

Anon., 2020. M&S. [Online]
Available at: https://corporate.marksandspencer.com/aboutus
[Accessed 28 November 2020].

Anon., 2020. Marks & Spencer. [Online]
Available at: https://corporate.marksandspencer.com/documents/msar2020/m-and-s_ar20_full_200528.pdf
[Accessed 28 November 2020].

Black, M., 2020. Profitability Ratios and Why they Matter. [Online]
Available at: https://www.nav.com/blog/profitability-ratios-types-of-profitability-ratios-444161/
[Accessed 28 November 2020].

Bragg, S., 2020. Liquid ratio analysis. [Online]
Available at: https://www.accountingtools.com/articles/liquidity-ratio-analysis.html#:~:text=Liquidity%20ratio%20analysis%20is%20the,customer%20before%20granting%20them%20credit.
[Accessed 28 November 2020].

Gartenstein, D., 2019. Which Financial Ratio Is the Best Measure of Operating Efficiency?. [Online]
Available at: https://smallbusiness.chron.com/financial-ratio-measure-operating-efficiency-81024.html
[Accessed 28 November 2020].

HAYES, A., 2019. Trend Analysis. [Online]
Available at: https://www.investopedia.com/terms/t/trendanalysis.asp#:~:text=Trend%20analysis%20is%20a%20technique,will%20happen%20in%20the%20future.
[Accessed 28 November 2020].

KENTON, W., 2020. Profitability Ratios. [Online]
Available at: https://www.investopedia.com/terms/p/profitabilityratios.asp
[Accessed 28 November 2020].

MURPHY, C. B., 2020. Operating Ratio. [Online]
Available at: https://www.investopedia.com/terms/o/operatingratio.asp#:~:text=The%20operating%20ratio%20shows%20the,a%20company%20to%20net%20sales.&text=The%20smaller%20the%20ratio%2C%20the,generating%20revenue%20vs.%20total%20expenses.
[Accessed 28 November 2020].

Sabanoglu, T., 2020. Revenue of Marks & Spencer worldwide in the financial year ending March 28, 2020, by segment. [Online]
Available at: https://www.statista.com/statistics/413352/group-revenue-marks-and-spencer-mands-by-segment/
[Accessed 28 November 2020].

TUOVILA, A., 2020. Quality of Earnings. [Online]
Available at: https://www.investopedia.com/terms/q/qualityofearnings.asp#:~:text=A%20company's%20quality%20of%20earnings,costs%20can%20be%20seen%20clearly.
[Accessed 28 November 2020].

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