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Marks & Spencer plc - Essay Example

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Marks & Spencer plc

The management of the company may want to contemplate a change of strategy, for example by reducing its current liabilities, to avoid landing into financial problems. The ratio has declined from 0.74 in 2011 to 0.73 in 2012, which could be attributable to leaner working capital cycle or deteriorating liquidity position (Bodie, Alex, and Alan, 2004; Damodaran, 2002). 2011 2012 Industry Current Asset 1,641.7 1,460.1 Current Liabilities 2,210.2 2,005.4 0.74 0.73 1.44 Quick ratio Quick ratio = [cash and equivalents + short-term investments + accounts receivable]/current liabilities 2011 2012 Industry Cash and equivalents 470.2 196.1 Short-term investments 18.4 67.0 Accounts receivable 250.3 253.0 Total Current liabilities 2,210.2 2,005.4 Quick ratio 0.334 0.257 0.82 Unlike the current ratio, this ratio is more conservative because it does not include inventory from the current assets. This ratio further shows that Mark & Spenser is likely to have problems meeting its short-term obligations with its most liquid assets, especially considering the ratio is significantly below the industry average (M&S, 2012; Weston, 1990; Houston and Brigham, 2009). Leverage against KPI As discussed, the company’s leverage is unfavourable, but with the continuing efforts to build the company to become more focussed, with the sales expected to increase by 5.8% by 2013, the increased revenue can be used to offset the excessive shot-term debt. This will lead into a more balanced liquidity position, hence freeing the company from the risk of bankruptcy (Weygandt et al., 1996; HayGroup, 2006). Solvency ratio Solvency Ratio = [After Tax Net Profit + Depreciation]/ [Long Term Labialise + Short-Term Liabilities] 2011 ?m 2012 ?m After Tax Net Profit 782.7 371.4 Depreciation 467.5 479.7 Total 1250.2 851.1 Long-Term Liabilities 2,456.5 2,489.1 Short-Term Liabilities 2,210.2 2,005.4 Total 4,666.70 4,494.50 Solvency Ratio 0.27 0.19 Solvency is used to measure the company’s ability to meet its long-term obligations. In other words, it measure’s the ability of the company to go on with meeting its debt requirements. The solvency ratio of 2011 was financially healthy, but that of 2013 was not healthy because as a general rule of thumb a ratio that is greater than 20% is considered financially healthy. It is discouraging to note that the company’s solvency ratio is dropping because this could expose the company to a situation of defaulting on its debt obligations (Gates, 2002). Debt to equity ratio Debt to equity ratio = Total debt/ [Owner’s Equity] 2012 2011 Industry Total debt 2,778.8 2,677.4 Owner’s equity 4,494.5 4,666.7 Debt to equity ratio 61.8 57.3 42.35 The debt-to-equity ratio indicates the degree of financial leverage that the company is using to improve its profitability. This ratio has increased to 61.8 from 57.3 in 2011, which may imply that the management should restrain use of additional increases in debt caused by purchases of fixed assets or inventory. The ...Show more


Contents Liquidity ratios 2 Current ratio 2 Quick ratio 2 Leverage against KPI 3 Solvency ratio 3 Debt to equity ratio 4 Solvency against KPI 5 Working capital management 5 Working capital turnover 5 Networking capital ratio 5 Working capital management against KPI 6 Profitability ratios 6 Gross profit ratio 6 Return on capital employed (ROCE) 6 Profitability against KPI 7 Asset efficiency ratios 8 Asset efficiency against KPI 9 Uses of KPIs in assessing organization performance 9 Advantages and limitations of the analysis techniques 9 Liquidity ratios Current ratio Current ratio = current assets/ current liabilities Current ratio is the simplest measure of a company’s liquidity…
Author : reubencasper
Marks & Spencer plc essay example
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