UNIVERSITY OF SOUTH WALES BUSINESS SCHOOL STRATEGIC FINANCIAL ANALYSIS (AF4S031) MBA LECTURER: Chris Benjamin
ASSESSMENT – 1 1
A Strategic Financial Analysis of the Marks and Spencer 2016 Annual Report and a Financial Ratio Analysis of Dorman Co.
Contents INTRODUCTION ......................................................................................................... 1
MARKS & SPENCER ANNUAL REPORT ANALYSIS .......................... ............ .......................... .................... ........ 1
M&S STAKEHOLDERS STAKEHOLDERS ........................................... ................................................................. ............................................ ................................... .............1 M&S CORPORATE AND SOCIAL RESPONSIBILITIES .................................. .............................................. ............ 2 FINANCIAL RATIO ANALYSIS: DORMAN CO. ........................... .............. ......................... .......................... ................. ... 5
ANALYSIS OF RATIOS – 20X0 TO 20X1........................................... .................................................................. ............................ ..... 6 PROFITABILITY RATIOS ........................................................... .............................................................................................................. ................................................... 6 USE OF RESOURCES ................................................................. ................................................................................................................... .................................................. 7 LIQUIDITY RATIOS .................................................................... ...................................................................................................................... .................................................. 8 GEARING RATIOS ......................................................................................................... ....................................................................................................................... .............. 8 INVESTOR RATIOS........................................................ ...................................................................................................................... .............................................................. 9
CRITICAL EVALUATION OF FINANCIAL RATIO ANALYSIS ............................... ............................... 11
INTRODUCTION
This document has been drafted to report on some important sections of the presentation of the 2016 Annual Report of Marks and Spencer (M&S). Conclusions will also be drawn from the same report concerning how well it fulfilled its Corporate and Social responsibilities. The next section of the report will provide an analysis of Dorman Co.’s financial status through the use of Financial Ratio
Analysis in order to provide guidance on the decision to engage them as a supplier. The report will cap off with a critical analysis of Financial Ratio Analysis in general.
MARKS & SPENCER ANNUAL REPORT ANALYSIS
M&S STAKEHOLDERS
A Stakeholder is defined by Grimsley (2017) as any person, social group, organisation, authority or collectivel y the society which has a stake or interests in a business. There are both internal
M&S CORPORATE AND SOCIAL RESPONSIBILITIES
In order to quantify the measure to which M&S has performed in its Corporate Social Responsibilities to relevant stakeholders, it is necessary to define Corporate Social Responsibility (CSR) and identify its main categories. Smith describes it as, “a business system that enables the production and distribution of wealth for the betterment of its stakeholders through the implementation and integration of ethical systems and sustainable management practices” (2011, p.10). According to Caramela (2016), (20 16), CSR is divided into 4 broad categories cat egories as follows:
i.
Environmental Efforts – R eduction eduction of the corporation’s “carbon footprint” in order to curb greenhouse gases thus benefitting both the company as well as the society as a whole.
ii.
Philanthropy – Donation Donation of resources to charities and local facilities such as local hospitals, schools and municipalities for the benefit of the relevant communities. The corporation thus “gives back” to the community in which it operates.
iii.
Ethical Labour Practices – Ensuring employees of the firm are treated fairly in terms of working conditions as well as remuneration.
iv.
Volunteering – Taking Taking part in activities which benefit the community without the expectation
form. For the 5th year in a row, no waste was sent to landfills throughout 2016 whilst the total amount of waste produced reduced by 9% compared to the year 2015. Clothes re-use and recycling schemes are in use in the UK, the Czech Republic and in Hong Kong with 2.7 million garments collected in 2016 from M&S customers. M&S also launched its Energy Community Energy Fund which is meant to support renewable energy projects in Great Britain. By the end of 2016, the fund had received up to 400,000 pounds.
b. M&S Philanthropy: The Environmental Efforts in the Energy Community Energy Fund is also a philanthropic effort. Aside from donations and crowd funding, the firm itself has injected funds into the program. The Plan A Report 2016 (2017, p.8) indicates that M&S managed to raise through various efforts up u p to 5.25 million pounds for health and well-being charities. char ities. M&S also supports causes under which the community stands to gain. Over the last two years, M&S has facilitated work placements for 5800 unemployed young people either itself or with its suppliers. M&S is under no obligation to undertake this endeavour.
The business model of M&S is aimed at creating value and ensuring that all stakeholders enjoy the firm’s success. The Creating Sustainable Value Report shows a good number of indicators that M&S
is tackling its Corporate Social Responsibilities head on and continues to make efforts to do so.
FINANCIAL RATIO ANALYSIS: DORMAN CO.
It is important to evaluate the financial performance of Dorman Co. in order to determine whether it would be a suitable and reliable supplier thus ensuring continuity in our own production line. Below is a ratio analysis for Dorman Co. between the years 20X0 and 20X1. The analysis will also include comparison between Dorman’s performance and that of other companies operating in the
same sector on some of the crucial ratios. ratios . As suggested by Kumar (2017), the ratios chosen and shown sh own in the analysis below are useful for the following stakeholders:
Table 1 Stakeholders and Relevant Ratios
GROUP
RATIO
REASONS FOR INTEREST
Customers
Profitability
Customers would want to know how well the
Liquidity
company is performing and whether they are possibly
Return on Capital Employed
going to be able to get any credit and payment terms.
Return on Capital Employed
These ratios show the investor how efficiently his
Investors
investment will generate returns, how much and how
ANALYSIS OF RATIOS – 20X0 TO 20X1
Below is an analysis of specific financial ratios for Dorman Co. All calculations and ratio values for Dorman Co. are shown in Appendix A.
PROFITABILITY RATIOS
a. Return on Capital Employed (ROCE) ROCE is a measure of how much profit is made by the company for the value of capital it employs. In the year 20X0, Dorman Co. made 26.98% profit on its capital employed, however performance lowered in 20X1 with the return dropping to 23.85%. Even though Operating Profit increases by b y $50,000 in 20X1, the Capital Employed increased b y a much higher margin. At 23.85%, the return is however still reasonable reaso nable and shows that the capital employed is being utilised fairly well.
b. Gross Margin Ratio This is a measure of how profitably a company can sell its stock. The higher the ratio, the higher the profit percentage therefore a higher ratio is favourable since any amount above
the company improved on its utilisation of capital in generating sales thus making it more profitable.
USE OF RESOURCES
a. Stock Days Stock Days are the “number of days’ worth” of stock left in th e inventory. Dorman Co.
had an increase in the number of stock days from 65 in 20X0 to 105 in 20X1. This is almost double the industry average of 55 days and is undesirable since inventory is expensive to keep and the company has to worry about storage and security. Higher Stock Days mean that cash flows are lower since cash which could be used for other operations is tied up in slow moving stock.
b. Debtor Days Debtor Days shows the number of days on average that debtors take to settle their debts or measures the efficiency of the creditor’s department of the firm . Dorman Co.’s Debtor
Days increased from 55 in 20X0 to 90 in 20X1 thus indicating a drop in collection of
more stock days and debtor days. This result shows that cash-flow was far lower in 20X1 thus possibly hindering certain operations due to longer periods with cash tied up in stock or with debtors.
LIQUIDITY RATIOS
a. Current Ratio The current ratio is a measure of the company’s ability to cover short term debts as they become due with current assets. Dorman Co.’s Current Ratio went down from 1.31 in 20X0 to 1.19 in 20X1. Although the current ratio does not measure cash-flow, the drop is likely as a result of a fall in liquidity liquidi ty over the period in question questi on which is concomitant with the increase in the cash conversion cycle time which is shown above. At above 1, the ratio is still acceptable although it is now far lower than the industry average of 1.5 and is close to the break-even point.
b. Quick Ratio
b. Debt/Equity Ratio This ratio indicates the company’s long term ability to cover debt as it becomes due in terms of shareholder’s equity and reserves. Dorman Co.’s Capital Debt/Equity Ratio also
rose from 30.65% in 20X0 to 39.29% in 20X1. This essentially means that the company’s dependence on creditors as opposed to investors for finance increased. The company is thus less stable than in the previous year.
c. Interest Cover Dorman Co.’s Interest Cover dropped significantly over the two years from 17.69 times
in 20X0 to only 7.62 in 20X1. This is due to the comparatively high interest in 20X1 likely emanating from the higher borrowings in that year. The drop is a little worrying in that it represents higher risk to financiers, nonetheless, nonetheles s, it is still far greater than 1 and will suffice depending on the risk cap of individual institutions.
INVESTOR RATIOS
a. Return on Equity
desirable, this one is insignificant and thus cannot influence items like share price in a major way.
d. Dividend Cover Dividend Cover is a measure of the company’s ability to pay off dividends. Dorman Co.
had cover of 1.93 times in 20X0 which reduced to 1.42 times in 20X1. The drop leaves it above 1 which means that it is still acceptable, nonetheless, nonethe less, the drop is significant and will need to be improved upon if the company is to stay afloat.
e. Pay-out Ratio This ratio is the inverse of dividend cover and shows how much of net income is distributed to shareholders through dividend payments. Dorman Co. had an increase from 0.05% in 20X0 to 0.07% in 20X1. The percentage is low for both years indicating that very little of the company’s profits is paid out as dividends to shareholders. The increase
is however encouraging and if sustained or even increased in coming years will give confidence to investors.
12.70% in 20X1 thus indicating a reduction in earnings overall. This drop is potentially unattractive to investors.
CRITICAL EVALUATION OF FINANCIAL RATIO ANALYSIS
Financial Ratio Analysis is extremely relevant to all concerned parties as it gives a reliable indication of the performance of the company. For the purposes of decision making, it is a great tool. Investors, managers, suppliers, lenders and customers alike require this information in order to make financial decisions which is easily obtainable. The information required to calculate these ratios can be found fo und on financial statements which are easy to t o find. find . Financial Ratio Analysis Anal ysis provides a firm’s recent and current financial position and can be used to extrapolate expected future performance. Financial Ratio Analysis is uncomplicated and therefore easy to use. It is useful in the comparison between one firm and another in the same industry or o r performance of the t he same firm over a period of time. According to Zion’s Business Resource Centre (2017, p.5) , financial analysis can also help in identifying problems before they cause serious issues. Financial Ratio Analysis is thus an important part of accounting and will wi ll continue to be useful for f or many years to come.
REFERENCES
Caramela, S. (2016). What is Corporate Social Responsibility?. [Online] Available at: http://www.businessnewsdaily.com/4679-corporate-social-responsibility.html.. [Accessed 14 Jan. http://www.businessnewsdaily.com/4679-corporate-social-responsibility.html 2017].
Grimsley, S. (2017). What Is a Stakeholder in Business? - Definition & Examples. [Online] Available at: http://study.com/academy/lesson/what-is-a-stakeholder-in-business-definitionexamples-quiz.html.. [Accessed 18 Jan. 2017]. examples-quiz.html
Kumar, M. (2017). Which Groups Are Interested In Which Types Of Ratio Analysis Of Any Firm?. [Online] Available at: https://www.academia.edu/1115788/Which_Groups_Are_Interested_In_Which_Types_Of_Ratio_A nalysis_Of_Any_Firm.. [Accessed 21 Jan, 2017] nalysis_Of_Any_Firm
Marksandspencer.com. (2016). Plan A Report 2016. [Online] Available at:
APPENDIX I: Dorman Co. Table of Financial Ratios
Ratio
Workings
Return on Capital Employed (ROCE) Gross Profit % Net Profit Margin Stock Days Debtor Days Creditor Days Net Asset Turnover Fixed Asset Turnover Cash Conversion Cycle Current Ratio Quick Ratio Capital Gearing Ratio Debt/Equity Ratio Interest Cover Return on Equity Dividend Per Share Earnings Per Share Dividend Cover Pay-out Ratio Price/Earnings Ratio Dividend Yield Earnings Yield
((4040+610)/(249005400))*100 (6400/15400)*100 ((4040+610)/15400)*100 (2600/9000)*365 (3800/15400)*365 (3400/9000)*365 15400/(24900-5400) 15400/18500 (105.44+90.06-137.89) 6400/5400 (6400-2600)/5400 5500/(24900-5400)*100 (5500/14000)*100 (4040+610)/610 (3200/14000)*100 2250/9000 3200/9000 0.36/0.25 (2250/3200)*100 2.80/0.36 (0.25/2.8)*100 (0.36/2.80)*100
14
20X1
23.85% 41.56% 30.19% 105d 90d 137d 0.79 0.83 57d 1.19 0.70 28.21% 39.29% 7.62 22.86% $0.25 $0.36 1.42 0.07% 7.88 8.93% 12.70%
Workings
((4340+260)/(195002450))*100 (5200/12450)*100 ((4340+260)/12450)*100 (1300/7250)*365 (1900/12450)*365 (2150/7250)*365 12450/(19500-2450) 12450/16300 (65.45+55.70-108.24) 3200/2450 (3200-1300)/2450 (4000/(19500-2450)*100 (4000/13050)*100 (4340+260)/260 (3470/13050)*100 1800/9000 3470/9000 0.39/0.20 (1800/3470)*100 1.80/0.39 (0.20/1.80)*100 (0.39/1.80)*100
20X0
26.98% 41.77% 36.95% 65d 55d 108d 0.73 0.76 12d 1.31 0.78 23.46% 30.65% 17.69 26.59% $0.20 $0.39 1.93 0.05% 4.67 11.11% 21.42%
Industry Ratios (Current)
55d 60d 85d
1.5 1.0
R1502D658467