FINANCIAL INFORMATION: COURSEWORK ASSIGNMENT
SEMESTER ONE – 2015/16excel
What is (are) the principal activity(ies) of this business?
Marks and Spencer is mainly focused on providing menswear, womenswear and lingerie to its customers. The organization has designed itself to fit in the retail industry and has several retail stores across the world (“M & S Today,” n.d.). Apart from the merchandise, the organization also has a food division, which has been documented to account for at least 57% of the organization’s total turnover. Marks and Spencer is considered to be among the leading multi-channel retailers (“M & S Today,” n.d.)
Comment on the outcome of the auditor’s report for Marks and Spencer plc. Briefly discuss the importance the auditor’s report with respect to financial information.
The auditor’s report reveals the importance that the organization has regarding the issue of auditing. It also puts the aspect of risk in reference to the organization’s financial position. As far as the concept of financial information is concerned, the element of credibility is very vital. Therefore, the idea of incorporating both internal and external auditors enhances the credibility of the financial information provided by the organization to different shareholders.
Compute the following ratios, using the table provided below as a template:
- Return on equity (ROE)= -21.56%
- Gross profit margin= 2.95%
- Net profit margin= -7.31%
- Current ratio= 18.29%
- Inventory (stock) turnover period= -3.95%
- Trade payables’ (creditors’) turnover period= -1.24%
- Gearing ratio= -13.95%
- Price earnings ratio= -14.14%
|Eg Trade receivables period||39 days||26 days||–|
|Net Income/Average shareholder’s equity||
|Gross profit margin
|Gross profit/Net sales||38.65%
|Net profit margin
|Net profits/Nets sales*100||4.72%
|Current assets/current liabilities||0.689
|Inventory turnover period
|Payables’ turnover period
|Cost of goods sold/Accounts payable||94.77
|Long-term liabilities/Capital employed *100||41.00%
|Current Stock Price/ Earnings per share||25.56
Calculate the yearly percentage change in the following items stating, in each case, whether the change is a rise or fall:
Sales (2014)= 10,309.70
Sales (2015)= 10,311.40
Percentage change= (10311.40-10309.70)/10309.70*100=0.016%
The percentage change in the sales can be identified to be an increase.
- Operating Profit
Operating profit (2014)= 694.5
Operating profit (2015)=701.3
Percentage change= (701.3-694.5)/694.5*100=0.98%
The percentage change in the operation profit increased in 2015 in reference to the operating profit used in 2014.
- Share Price
Share price (2014)= 7903
Share price (2015)= 8196.10
Percentage change= (8196.10-7903)/7903*100=3.71%
There is a 3.71% increase in the share price.
Comment and reflect upon the ratios and percentage changes in items computed in your answers to questions 3 and 4. 30 marks
ROE; Return in equity, also referred to as return on shareholder’s equity, is a rate that is used to determine the rate of return that investors get their returns on the investments that they have made in a particular business (“Return on Equity,” n.d.). In this particular case, ROE has been calculated to be -21.56%. This indicates that the management is not very effective when it comes to using equity to build the organization considering that the rate is very low. Interestingly, it is noted that the share price still increased over the subsequent year despite of this element. Gross Profit Margin; The gross margin for Marks and Spencer is at 2.95%. This is an important index since it is used by investors as a vital measure of profitability. In reference to the increase in sales that is noted in the above calculations, an increase in gross profit margin is also expected. It can be argued that Marks and Spencer has greatly focused on implementing Porter’s Five Forces considering that it has both gross profit margin and operating profit (“Gross Profit Margin,” n.d.). Net Profit Margin; the net profit margin is on the negative side, falling at -7.30%. This signifies a drop in the net profit that the organization accrued despite the increase in sales. The current ratio of the organization is quite satisfying considering that it is at 18.29%. A high current ratio shows that an organization is very liquid and it is able to pay its short-term debts easily (Biery, 2014). Despite the increase in sales, it can still be noted that the organization’s inventory and payables turnover period are still on the negative. This means that the rate at which inventory was sold and replaced within the stipulated period is quite low. In reference to the gearing ratio, the organization’s long-term debt compared to its equity capital can be argued to be quite alarming given that it is at -13.95%. An acceptable and ideal gearing ratio is expected to fall between 30% and 50% (“Understanding how gearing ratios works,” 2012). The price earnings ratio also falls on the negative side. The Price-earnings ratio is used as an earnings multiple and investors are often very keen on this particular index (Damodaran, 2012). If this ratio is lower than other market players, it is possible that investors can withdraw their investments.
Using the DuPont analysis technique, evaluate and comment on any changes in profitability (ROE) from 2014 to 2015. In particular, use the DuPont method to assess which aspects of the company’s performance have played a key role on the change in its profitability (if any). 20 Marks
The changes in profitability are not that significant, though they cannot as well be ignored from a general perspective. The decrease in profit is at a rate of 7.30% and this might have been caused by a number of factors. This is considering the fact that the organization recorded increase in sales but a slight drop in the profit margin which significantly affected the ROE. It is important to point out that there are several aspects of the company’s performance that have played a key role in this change in profitability. Using DuPont analysis, these aspects can be identified. The constructs incorporated in the DuPont analysis recorded a negative percentage change. These aspects include asset turnover, net profit margin and equity multiplier. All these contribute to the eventual ROE. Despite the fact that there was an increase in sales and an increase in assets, there was a -3.56% of the asset turnover. On the other hand, the net income also dropped, which might have been brought about by an increase in operating expenses. It can be argued that these aspects significantly affected the organization’s performance and eventual profit.
Biery, E.M. (2014). Can A Company Pay Its Bills? Which Industries Have Strong Liquidity Ratios? Forbes. Accessed on 11th January, 2016 from http://www.forbes.com/sites/sageworks/2014/12/07/can-a-company-pay-its- bills-which-industries-have-strong-liquidity-ratios/
Damodaran, A. (2012). Investment Valuation. John Wiley & Sons. University Edition
“Gross Profit Margin,” Investing Answers, n.d. Accessed on 11th January, 2016 from http://www.investinganswers.com/financial-dictionary/ratio-analysis/gross- profit-margin-2076
“M&S Today,” Marks and Spencer. N.d. Accessed on 11th January, 2016 from http://corporate.marksandspencer.com/aboutus/mands-today
“Return on Equity,” BDC, n.d. Accessed on 11th January, 2016 from https://www.bdc.ca/EN/articles-tools/entrepreneur-toolkit/ratio- calculators/Pages/return-on-shareholders-equity.aspx
“Understanding how gearing ratios works,” (2012). Standard Bank. Accessed on 11th January, 2016 from http://bizconnect.standardbank.co.za/grow/financial- growth-solutions/understanding-how-gearing-ratios-works.aspx
 The figures used in calculating the trade receivables period ratio are provided as an example and do not reflect items on Marks and Spencer’s annual reports. The industry figures are not real – use as provided.