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Executive Summary

This report compares the quantitative and qualitative data over 2 years

between 2 major retailers in UK which are Mark and Spencer and NEXT. It

assesses companies financial position, profit growth and other performance

variations by using varies financial ratios. M&S is currently listed on the

London Stick Exchange and appears in FTSE 100 index. Compared to year

16/17 in 17/18 group revenue has been increased by only + 0.7% while Profit

Before Tax has been reduced by 5.4%. Besides that total assets have also

been reduced by 9% while total liabilities have been reduced by 10.6%. M&S

financial ratios are well below industry averages yet they understand that they

need tom change fast and currently in transforming everything to restores

basics where they will be able to deliver sustainable, profitable growth to

investors, colleagues and to the community.

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Table of Contents

1. Introduction 4

2. Financial performance analysis of using financial ratios of M&S 5


and NEXT.
2.1. Liquidity Ratios 5
10
2.2. Profitability Ratios
17
2.3. Working Capital Ratios

23
2.4. Capital Structure Ratios

25
2.5. Stock market performance ratio

29
3. Conclusion

29
3.1. Limitations of Financial Ratios

30
3.2. Key Findings of Financial Ratio Analysis

31
3.3. Recommendations for Better Financial Performance

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1. Introduction

1.1. Company Background of Mark & Spencer (M& S)

M&S has founded in 1884 in Leeds as a small stall where all products were

sold for a penny (Burt, 2002). Since its establishment M&S has become the

UK’s most thriving brand in clothing, home-ware and food. Michael Marks

and Thomas Spencer founded M&S and currently it is listed on the London

Stick Exchange and appears in FTSE 100 index. Regardless of fierce

financial conditions, M&S recorded huge achievement and is the most

favoured brand by purchasers. This has been accomplished by reliable

spotlight on item quality, value for cash and customer services (M&S, 2008).

As indicated by a report by Mintel, M&S represents 10.5% of absolute apparel

spending by shoppers and 43% of the complete purchasers, shop at M&S

outlets (Mintel, 2008). Amid late 90's and mid 2000's, M&S experienced falling

apart budgetary execution because of furious challenge; poor inventory

network the executives, substandard items and insufficient cost the board.

Currently M&S is in a transition period of closing down physical stores across

UK and moving to more online based retail stores. Compared to year 16/17 in

17/18 group revenue has been increased by only + 0.7% while Profit Before

Tax has been reduced by 5.4%. Besides that total assets have also been

reduced by 9% while total liabilities have been reduced by 10.6%.

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1.2. Company Background of NEXT

NEXT is UK's second, most favoured apparel retailer, after M&S and has

differentiated itself from contenders by represent considerable authority in

designing outfits with a contemporary look, offering a decent value for money

to clients (Mintel, 2008). It began its retail business amid 1982; transcendently

having some expertise in ladies attire and adornments, it immediately

extended its diversity by providing clothes for men and kids. NEXT has lost

impressive piece of the overall industry since late 90's, because of poor cost

control and forceful evaluating procedure that limited shopper spending (Next,

2006). Consequently, it reported £635m profit for 2017, which decreased to

£592m in 2018 (Next, 2018).

2. Financial performance analysis of using financial ratios of M&S and

NEXT.

2.1. Liquidity Ratios

Liquidity ratios are estimations used to examine the capacity of an

organization to pay off its short-term debts. Forthcoming creditors and lenders

to decide whether to provide further credits, commonly utilize these ratios.

These ratios compare relatively liquid assets to the amount of current

liabilities stated in company’s most recent balance sheet. When the ratio is

high it shows the ability of the company to pay off its obligations or creditors in

a timely manner. There are 2 main ratios, which are Current Ratio, and Quick

Assets Ratio.

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2.1.1. Current Ratio

“The current ratio measures a company's ability to pay off its current liabilities

(payable within one year) with its current assets such as cash, accounts

receivable and inventories. The higher the ratio, the better the company's

liquidity position” (Kenton and Hayes, 2019).

Current Assets
Current Ratio = Current Laibilities

2.1.2. Quick Assets Ratio

“The quick ratio measures a company's ability to meet its short-term

obligations with its most liquid assets and therefore excludes inventories from

its current assets” (Kenton and Hayes, 2019).

Current Assets – Inventories


Quick Assets Ratio = Current Liabilities

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2.1.3. Current Ratio of Mark & Spencer and NEXT

Figure 1 Current Ratio of M&S and NEXT

Figure 2 Bar Chart of Current Ratio M&S and NEXT

M&S Current Ratio (CR) has not changed though Next CR has been reduced

to 1.96 from 2.29. Yet compared to NEXT M&S CR is very low and this is due

to the loosing cash and cash equivalents, which lead to creating a gap in

current assets compared to 2017. Ideal CR should be minimum 2:1. Thus only

NEXT was able to achieved ideal CR value in 2017 though 2018 it is reduced

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by 14.4%. Higher value of current ratio indicates more liquid of the firm’s

ability to pay its current debts in timely manner. In M&S CR value has been

stable for those 2 years yet it clearly shows its decline in both Current assets

and liabilities. This may be able to happen due to closure of physical stores

across UK.

Figure 3 Line Chart of Current ratio M&S and NEXT

2.1.4. Quick Assets Ratio of Mark & Spencer and NEXT

Figure 4 Line Chart of Current Ratio M&S and NEXT

In 2017 and 2018 M&S Quick Assets Ratio (QAR) has been further declined

by whooping 29.26% where NEXT’s QAR is declined by 13.8% yet they

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managed to keep the QAR above 1. The ideal QAR is 1:1 and M&S was not

able to reach those ideal levels in both 2017 and 2018. There is no huge

difference in Inventories compared in both years of M&S yet data shows

current liabilities has gone down by 22.88% while Current assets also gone

down by 23.56%.

Figure 5 QAR Bar Chart of M&S and NEXT

Nirosh
Figure Amadoruge
6 QAR Line Chart of M&S and Student ID – 1927488
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2.2. Profitability Ratios

Profitability ratios are a class of financial metrics that are used to assess a

business's ability to generate earnings relative to its revenue, operating costs,

balance sheet assets, and shareholders' equity over time, using data from a

specific point in time. Profitability ratios also show how well companies use

their existing assets to generate profit and value for shareholders. Higher ratio

results are often more favourable, but ratios provide much more information

when compared to results from other, similar companies, the company's own

historical performance, or the industry average.

Profitability Ratios are;

• Gross Profit Margin

• Operational Margin Ratio

• ROCE (Return on Capital Employed)

• ROI (Return on Investment)

2. 2. 1. Gross Profit Margin (GPM)

Gross profit margin is calculated by subtracting cost of goods sold

(COGS) from total revenue and dividing that number by total revenue. Direct

costs (COGS) do not include operating expenses, interest payments

and taxes, among other things.

Gross Profit Margin = (Revenue – Cost of Goods Sold) X 100

Revenue

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2. 2. 2. GPM of M&S and NEXT

Compared to 2017 M&S Gross Profit margin in 2018 has slightly decreased.

Even though revenue has slightly increased gross profit was decreased. So

this happens when the cost of sales is increased. Compared to M&S NEXT

has a consistent GP Margin.

Figure 7 GP Margin of M&S and NEXT

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Figure 8 Line Chart of GP margin of M&S and NEXT

3. 2. 3. Operational Profit Margin (OPM)

The operating profit margin ratio indicates how much profit a company makes

after paying for variable costs of production such as wages, raw materials,

etc. It is also expressed as a percentage of sales and then shows

the efficiency of a company controlling the costs and expenses associated

with business operations.

Operational Profit Margin = Operating Profit x 100

Sales Revenue

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2. 2. 4. OPM of M&S and NEXT

This is a profitability ratio used to calculate the percentage of profit a company

produces from its operations before interest and tax charges. It is calculated

by dividing operating profit by revenue. M&S OP margin has decreased from

2.38% to 1.46%. Though revenue has slight drop could see huge loss in

operating profit in 2018. In November 2016 M&S group has announced 5-year

strategic programme to transform UK store estate. This involved growing the

online share of sales yet attract some initial heavy expenses including the

impairment of assets, accelerated depreciation of buildings, fixtures etc.

Figure 9 OPM of M&S and NEXT

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Figure 10 OPM of M&S and NEXT Line graph

2. 2. 5. Return on Capital Employed (ROCE)

ROCE Profit/ Capital Employed x 100


Mark & Spencer (M&S) NEXT
Company £m £m
Years 2018 2017 2018 2017
PBIT 156.5 253.20 759.90 827.70

Capital

Employed 4624.8 4862.1 1,646.70 1,679.80


ROCE % 3.38 5.2 46.15 49.27

ROCE reflects ability to earn a return on all of the capital it employs. M&S

ROCE ahs decreased from 5.2% to 3.38% by 2018 while NEXT ROCE has

also decreased by 3% in 2018. M&S PBIT has declined by 39.31% and

mainly due to less revenue and increased cost of sales. M&S equity

decreased due to store closures and it also affects ROCE.

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Figure 11 ROCE

Declined equity has occurred due to declined cash and cash equivalents in

net assets while non current/ long term liabilities remain the same.

2. 2. 6. Return on Investment (ROI)

ROI Profit After tax/ Equity x 100


Mark & Spencer (M&S) NEXT
Company £m £m
Years 2018 2017 2018 2017
Profit after Tax 29.1 115.70 591.80 635.30


Equity 2954.2 3150.4 482.6 510.5


RI % 0.98 3.67 122.63 124.44

ROI of M&S has further declined in 2018 and NEXT ROI is looking very

attractive in both years. ROI is mainly decreased due to declined profit after

tax where it was affected by PBIT due to low operating profit.

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Figure 12 ROI

Another factor is higher selling administrative expenses thus M&S is slowly

raising difficulties to gain profit with capital invested by shareholders. NEXT

will attract more and more shareholders due to its higher ROI, as investors will

find their investment return faster.

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2. 3. Working Capital Ratios

Working capital ratio is used to measure liquidity of a company. Thus it

indicates the capability of a company to meet its current financial obligations

and it measures company it’s basic financial solvency. The working capital

ratio can be calculated by dividing current assets by current liabilities and 1.5

to 2 is interpreted as company is on solid financial ground in terms of liquidity.

WCM ratios are:

1. Inventory turnover days

2. Receivable collection days

3. Payable payment days

4. Cash conversion cycle

2.3.1. Inventory Turnover days

Inventory Turnover Days Ave; Inventory/ Cost of Sales x 365


Mark & Spencer (M&S) NEXT
Company £m £m
Years 2018 2017 2018 2017
486.5
Open Inventory 758.5 799.9 451.10 0
Close Inventory 781 758.5 490.1 451.1

Divided by 2 2 2 2
Ave Inventory 769.75 779.2 470.6 468.8
2710.
Cost of Sales 6650.9 6534.2 2699.3 7
Inventory Turnover Days 42.24 43.52 63.63 63.12


Inventory turn over days shows a how many times a company has sold and

replaced it’s inventory during a given period. This is usually compared to

industry averages and low turnover implies weak sales or over stocking while

high ratio implies strong sales or insufficient inventory.

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Inventory Turnover Days = Average Inventory x 365

Cost of Sales

M&S took 43 days in 2017 and 42 days in 2018 in overall to sell out all

it’s inventory while NEXT shows 63 days in both years, which is higher than

M&S. M&S is selling more variety of products than NEXT which includes

clothing and home supplies hence those items require longer period to be

sold. NEXT turnover days are consistent and managing its inventory quiet

well.

Figure 13 Inventory Turn Over Days

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2.3.2. Receivable Collection days

Receivable Collection Days Average Receivable/ Revenue x 365


Mark & Spencer (M&S) NEXT
Company £m £m
Years 2018 2017 2018 2017
Op; Receivables 109.3 115.80 1,025.10 954.10
Clos; Receivables 113.9 109.3 1138.5 1025.1


Divided by 2 2 2 2
Ave; Receivables 111.6 112.5 1081.8 989.6
Revenue 10,698.20 10622 4055.5 4097.3
Receivable Days 3.81 3.86 97.36 88.16

Figure 14 Receivable Collection Days

This represents the time lag between a credit sale and receiving

payment from a customer. Shorter collection period is usually preferred as it

plays a vital role when it comes to liquidity. M&S shows very low receivable

turnover days showing the quality of trade receivables.

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2.3.3. Payable payment days

Payable Payment Days Average Payable/ Cost of Sales x 365


Mark & Spencer (M&S) NEXT
Company £m £m
Years 2018 2017 2018 2017
Op; Payables 1553.8 1,617.70 615.80 673.50
Clo; Payables 1405.9 1553.8 580.2 615.8


Divided by 2 2 2 2
Ave; Payables 1479.85 1585.75 598 644.65
Cost of Sales 6650.9 6534.2 2699.3 2710.7
Receivable Days 81.21 88.57 80.86 86.8

Payable payment days (PPD) are an essential financial ratio that financial

specialists take a gander at to check the operational efficiency of a company.

A higher PPD implies that the company is taking more time to pay its sellers

and providers than company with a littler PPD. Companies with high PPDs

have points of interest since they are more fluid than Companies with littler

PPDs and can utilize their money for momentary speculations. M&S PPD has

been reduced to 88 days in 2017 to 81 days in 2018.

Figure 15 Payable Payment Days

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2.3.4. Cash conversion Cycle (CCC)

Mark & Spencer


Cash Coonversion Cycle = (Inven: Days+ Recei: Days) - Payable Days

Payable
Year Inven: Days Recei: Days Days CCC
2017 43.52 3.86 88.57 (-41.19)
2018 42.24 3.81 81.21 (-35.16)




NEXT
Cash Coonversion Cycle = (Inven: Days+ Recei: Days) - Payable Days

Payable
Year Inven: Days Recei: Days Days CCC
2017 63.12 88.16 86.8 64.48
2018 63.63 97.36 80.86 80.13

The Cash Conversion Cycle (CCC) is a metric that demonstrates the measure

of time it takes a company to convert its inventory into cash. M&S has a

negative CCC, which means it generates revenue before pays off suppliers

and creditors.

Figure 16 Cash Conversion Cycle Days

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2.3.5. Asset Turnover ratio

Asset Turnover Revenue/Net Assets(Total Assets-Cur Liabilities)


Mark & Spencer (M&S)
Company £m NEXT £m
Years 2018 2017 2018 2017
Revenue 10,698.20 10622 4055.5 4097.3
Assets less Current Liabilities
Assets 7,550.20 8292.5 2561.5 2404.8
Current
Liabilities 1,826.00 2368 914.8 725
Net Asset 5724.2 5924.5 1646.7 1679.8
Asset Turnover 1.87 1.79 2.46 2.44

Asset Turnover ratio is an efficiency ratio which measures company’s ability to

generate sales from it assets by comparing net sales with average total

assets. M&S has a ratio of 1.87 in 2018 compared to its 2017 1.79 ratio it’s a

slight increment. M&S has lower ratio compared to NEXT and this due to the

nature of M&S business model and it’s net assets.

Figure 17 Asset Turnover Ratio

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2.4. Capital Structure Ratios

It is also known as leverage ratios, which measures the long-term stability

and structure of the firm. These ratios help to identify financing techniques

used by the business and focus on solvency position. Equity ratio, debt

ratio, debt to equity ratio, interest cover ratio is the main capital structure

ratios.

2.4.1. Debt to Equity

Debts to Equity Ratio Net Debt/ Equity x 100


Mark & Spencer (M&S) NEXT
Company £m £m
Years 2018 2017 2018 2017
Long term Liabilities 1670.6 1,711.70 1,164.10 1,169.30
(- Cash) 207.7 468.6 53.5 49.7
Net Debt 1,462.90 1243.1 1110.6 1119.6
Equity 2954.2 3150.4 482.6 510.5
Debts to Equity Ratio % 49.52 39.46 230.1 219.3

Figure 18 Debt to Equity

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M&S has increased debt to equity ratio by 25.45% compared to 2017. This is

mainly due to decreased cash and increased Net debt. Although NEXT has

much higher ratio than M&S it can be more risky for ordinary shareholders yet

quicker profitability.

2.4.2. Interest Cover Ratio

PBIT/
Interest Cover Interest
NEXT
Company Mark & Spencer (M&S) £m £m
Years 2018 2017 2018 2017
PBIT 156.5 253.20 759.90 827.70
Interest 113.8 113 35.1 37.8
Int; Cover Ratio 1.38 2.24 21.65 21.9

Figure 19 Interest Cover Ratio

M&S Interest Cover ratio has further gone down due to downfall of PBIT.

NEXT has a higher ratio and proves its financial position. Since M&S ratio is

below 1.5 it’s ability to meet interest expenses may be questionable. The ratio

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measures how many times over a company could pay its outstanding debts

using its earnings.

2.5. Stock market performance ratio

Stock market performance ratios are vital as they use to explore how

investors can assess a company by analysing its past execution and its

wellbeing—that is, its capacity to continue performance as time goes on.

In a perfect world, we would require just to analyse a company's stock

market performance to perceive how well it was doing.

2.5.1. Earning Per Share (EPS)

EPS Earnings Per Share (EPS)


Mark & Spencer
Company (M&S) NEXT
Years 2018 2017 2018 2017

EPS in Pence (p) 1.6 7.20 416.70 441.30

Figure 20 EPS

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An earnings per share (EPS) is the portion of company’s allocated profit to

each share of common stock. Higher the value investors will pay more for firm

expecting higher profits. M&S EPS has reduced heavily and this is due to

higher selling and administrative expenses. NEXT shows a higher EPS yet it’s

price went down slightly compared to M&S.

2.5.2. PE Ratio

P/E Ratio Market Price Per Share/Earnings Per Share (EPS)


Mark & Spencer
Company (M&S) NEXT
Years 2018 2017 2018 2017
Market Price PS
(p) 270.2 337 4759 4320
EPS in Pence (p) 1.6 7.20 416.70 441.30
P/E Ratio 168.88 46.81 11.42 9.79

Figure 21 PE Ratio

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In 2018 M&S PE ratio has increased by 400% compared to 2017. This

indicates that investors paid 168.88p for very penny earned by the company.

The higher PE ratio of M&S reflects that investors paid more money for the

company that earned less. NEXT will be the company to invest as its

attractive low PE ratios in 2017 and 2018 respectively 9.79p and 11.42p with

an aim of faster return. Higher PE ratio of M&S means that investors are

anticipating higher growth in the future.

2.5.3. Share Price Fluctuations in a Graph

Figure 22 Share price Fluctuation

In the graph X- Axis presents the period and Y- Axis shows the Share price.

According to the graph in 2014 M&S gained a higher share price and from

2014 to 2015 has a huge downfall in the price. In 2016, 2017 and 2018

average share prices are 333.30p, 295.10p and 270.30p respectively. Once

reason for this decline is the heavy selling of shares by hedge funds, which

are sold short.

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Summary of Financial Ratio Analysis

Change in
Mark & Spencer %
Company & Year M&S 2018 M&S 2017
Revenue 10,698.20 10622
(+ 0.71%)
Cost of Sales -6650.9 -6534.2 (+1.78%)
Gross Profit 4047.3 4,087.80 (- 0.00%)
Selling & Admin Expenses -3426.2 -3460.4 (- 0.98%)
Other operating Income 49.5 63.2 (- 21.67%)
Underlying Operating Profit 670.6 690.6 (- 2.89%)
Non Underlying Items -514.1 -437.4 (+ 17.53%)
Operating Profit 156.5 253.20 (- 38.19%)

Summary of Financial Ratio Analysis


Mark & Spencer
Company (M&S) NEXT
Years 2018 2017 2018 2017
Current Ratio 0.72 0.72 1.96 2.29
Quick Assets Ratio 0.29 0.41 1.43 1.66
GP Margin 37.83 38.48 33.44 33.84
OP Margin 1.46 2.38 18.73 20.2
ROCE % 3.38 5.2 46.15 49.27
RI % 0.98 3.67 122.63 124.44
Inventory Turnover
Days 42.24 43.52 63.63 63.12
Receivable Days 3.81 3.86 97.36 88.16
Asset Turnover 1.87 1.79 2.46 2.44
Receivable Days 81.21 88.57 80.86 86.8
Debts to Equity Ratio % 49.52 39.46 230.1 219.3
Int; Cover Ratio 1.38 2.24 21.65 21.9
EPS in Pence (p) 1.6 7.20 416.70 441.30
P/E Ratio 168.88 46.81 11.42 9.79

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3. Conclusion

3.1. Limitations of Financial Ratios

Historical Data- the majority of the data utilised in ratio analysis is

derived from historical results. This does not imply that similar

outcomes will convey forward into what's to come. Be that as it may,

you can utilise ratio analysis on pro forma data and contrast it with

recorded outcomes for consistency.

Historical versus Current Cost- the data on the income statement is

expressed in current expenses (or near it), though a few components

of the accounting report might be expressed at verifiable cost (which

could shift considerably from current expenses). This dissimilarity can

result in bizarre proportion results.

Inflation - On the off chance that the rate of inflation has changed in

any of the periods under audit, this can imply that the numbers are not

similar across periods. For instance, if the inflation rate were 100% in

one year, deals would seem to have multiplied over the preceding year,

when in actuality deals did not change by any means.

Apart from above mentioned points operational changes, company

strategies, business conditions and accounting policies can also make

limitations in financial ratios.

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3.2. Key Findings of Financial Ratio Analysis

When the 2018 financial ratios of M&S are compared with 2017 ratios Quick

Assets Ratio (QAR), OP margin, ROCE and RI has significantly declined.

QAR is declined due to less cash or cash equivalent in current assets, which

also have an impact on ROI. Since 2016 M&S group commenced 5-year

strategic programme to transform UK store estate which involved growing the

online share of sales yet attract some initial heavy expenses including the

impairment of assets, accelerated depreciation of buildings, fixtures etc. That

affected M&S operating profit resulting lower OP margin. Gross margin,

Operating margin, ROCE, ROI, Current Ratio, QAR, Interest cover ratio all are

well below industry averages. While PE ratio and Debt to equity ratios are

way over industry averages. M&S Assets Turn Over ratio is 1.87 while it’s

above industry averages. M&S has lower ratio compared to NEXT and this

due to the nature of M&S business model and it’s net assets. Generally M&S

has less revenue and increased cost of sales, which started affecting most of

financial ratios negatively. Therefore M&S has deteriorated profit, which is

derived from the decreased ROI and ROCE.

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3.3. Recommendations for Better Financial Performance

1. Liquidity Ratios: Paying off liabilities as quickly as possible while

cutting back short term over head expenses. Rather using short-

term financing its better using long term financing to acquire

inventory or finance projects. And quickest way to improve the

ratios is transferring funds to higher interest rate accounts and

transfer back to readily accessible accounts when needed.

2. Profitability Ratios: By building brand a value through compelling

showcasing so as to persuade clients to pay more for items, even

while procurement costs remain the equivalent, can be a fruitful

approach. The advancement of a progressively proficient deals

process and a higher-quality deals power can enable companies to

expand by and large deals effectiveness. Companies hoping to

increment operating margins should concentrate on discovering

approaches to either spend less cash by lessening working costs,

or acquire more cash by expanding deals. Owning equipment as

opposed to renting or leasing, removing superfluous costs.

3. Working Capital Ratios: Incentivize receivables for instance

provides incentives to customers who pay on time while meeting

debt obligations on time. Beyond that M&S can seek for vendors

and suppliers who provide discounts thus saving finance costs.

Managing inventory and utilizing tax benefits will help to improve

working capital ratios.

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4. Capital Structure Ratios: Among the techniques that can be utilised

are expanding profitability, better administration of stock, and

rebuilding obligation. The most intelligent stage a company can take

to pay off its debts to-capital proportion is that of expanding deals

incomes and ideally benefits. Raising costs, expanding deals, or

lessening costs can accomplish this. The additional money

produced would then be able to be utilised to settle existing debt.

The organisation can sell its assets and after that rent them back.

This will actuate an income that can be utilised to satisfy a few debt

obligations.

5. Investor’s Return: Reduce overhead costs for instance shutting

down stores will help M&S to gain higher profits leading to

increased ROI for their shareholders in coming years while increase

sales and revenues without increasing your costs, or only increase

your costs enough to still provide a net gain in profits, you’ve

improved your return. Selling unprofitable assets, paying off debts

to reduce liabilities and improved inventory management will help to

improve ROI and ROCE.

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Working -1 For Capital Employed



Capital
Employed Equity + Long term Liabilities
Mark & Spencer (M&S)
Company £m NEXT £m
Years 2018 2017 2018 2017
Equity 2954.2 3150.4 482.6 510.5
Long Term
Liabilities 1670.6 1711.7 1,164.10 1,169.30
Capital
Employed 4624.8 4862.1 1,646.70 1,679.80

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Nirosh Amadoruge Student ID – 1927488