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UNIVERSITY OF SOUTH WALES

BUSINESS SCHOOL

STRATEGIC FINANCIAL ANALYSIS (AF4S031)

MBA

LECTURER: Chris Benjamin

ASSESSMENT – 1
A Strategic Financial Analysis of the Marks and Spencer 2016 Annual Report and a
Financial Ratio Analysis of Dorman Co.

ENROLLMENT NUMBER: R1502D658467


SUBMISSION DATE: 22 January 2017

WORD COUNT: 3295


Contents

INTRODUCTION ......................................................................................................... 1

MARKS & SPENCER ANNUAL REPORT ANALYSIS .............................................. 1


M&S 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

CONCLUSION .......................................................................................................... 11

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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 collectively the society which has a stake or interests in a business. There are both internal
and external stakeholders and they can either affect or be affected by the concerned company’s
policies or actions. Internal stakeholders include owners, investors, employees and management
whilst external stakeholders include suppliers, customers, creditors, society and government. The
stakes that stakeholders may have in the company may include ownership and property interests, legal
interests and obligations or moral rights.
Three types of Stakeholders identified by the M&S Annual Report and Financial Statements (2016)
are Investors, Consumers and Employees:
 Investors are internal stakeholders since they directly inject capital into the business and are
directly affected by its success of failure.
 Consumers are external stakeholders as they do not participate in the day to day running of
the business.
 Employees are internal stakeholders as they take part in the day to day running of the firm and
know the intricate details of how the firm operates.

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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), CSR is divided into 4 broad categories as follows:

i. Environmental Efforts – Reduction 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 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 part in activities which benefit the community without the expectation
of anything in return.

In its Strategic Report, under the section titled “Creating Sustainable Value” on page 10, M&S
presents its Business Model which shows how it attempts to create value for stakeholders in a
sustainable way. It is in value creation that it fulfils to large extent, its corporate social
responsibilities. The report makes reference to the firm’s Plan A 2020 which outlines its
sustainable value creation model. Below is a summary analysis of the firm’s performance in line
with the abovementioned definition and categories of CSR:

a. M&S Environmental Efforts:


In order to align itself with the global effort to go green, M&S has embarked on a drive to
utilise natural resources more efficiently. This involves the reduction or elimination of
processes which have an impact on the environment. According to the Plan A Report 2016
(2017, p.7), M&S will receive up to 172,000 Megawatt Hours of energy per year from
bio-methane suppliers as from 2016/17 thus reducing dependence on non-renewable
natural resources. 100% of waste produced in M&S operations is now recycled in some

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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 to 5.25 million pounds for health and well-being charities. 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.

c. M&S Ethical Labour Practices:


The Creating Sustainable Value Report in the M&S Annual Report and Financial
Statements (2016, p.11) states that M&S is currently cultivating home-grown talent and
utilising ideas from its own employees. 65% of the M&S clothes range is designed in-
house and this figure is set to rise to 70%. M&S ensures all of its food suppliers adhere to
Global Sourcing Principles which make provision for workers’ rights and working
conditions. Generally, M&S ensures employees are well trained to foster safety and
guarantee quality of products and services.

d. M&S Volunteering:
The company has also initiated what are termed the “Spark Something Good Community
Projects” in which employees as well as customers support 24 charities over 24 months in
24 towns and cities. In this initiative, volunteers undertake efforts that help the community.

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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.

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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. As suggested by Kumar (2017), the ratios chosen and shown
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.
Investors Return on Capital Employed These ratios show the investor how efficiently his
Earnings per Share investment will generate returns, how much and how
Dividend per Share frequently those returns will be paid out as dividends
Dividend Yield and how well paced the company is to sustain a good
Interest Cover return
Liquidity
Price/Earnings Ratio
Lenders Gearing Ratios The ratios stated show lenders how risky giving credit
Interest Cover to the firm would be. They show how efficient the
Dividend Pay-out Ratio company is in paying back what it owed. If they are
Dividend Cover unsatisfactory, a lender may choose not to advance
Dividend Yield credit.
Suppliers Profitability Suppliers are most concerned with credit lending and
Liquidity recovery on their investment. A firm which has poor
Creditors’ Turnover performance in these ratios will likely not be able to
Working Capital Management fulfil its obligations to suppliers.

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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 $50,000 in 20X1, the Capital Employed increased by a much
higher margin. At 23.85%, the return is however still reasonable 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
inventory costs can be used to pay for operating costs. Dorman Co. has a marginal drop
from 41.77% and 41.56% which implies that stock is being sold slightly less profitably in
20X1 even though the corresponding turnover has increased.

c. Net Profit Margin


This ratio measures what percentage of turnover is represented by operating profit (profit
after deduction of operating costs). It gives a measure of how much revenue is left over
after operating costs have been paid for. Dorman Co.’s Net Profit Margin fell from 36.95%
to 30.19% from 20X0 to 20X1. A drop of 6.76% is undoubtedly significant, however a
margin of 30.19% is still reasonable and will keep the company in comfortable operation.

d. Net Asset Turnover


The Net Asset Turnover Ratio is used to measure how well a company utilises its
employed capital to produce sales. It is essentially a ratio of Turnover to Capital
Employed. The higher the ratio, the higher the efficiency of conversion. The Net Asset
Turnover of Dorman Co. increased from 0.73 in 20X0 to 0.79 in 20X1 which shows that

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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 the 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
debts. This is 30 days longer than the industry average of 60 days and leaves the company
at higher risk of incurring bad debts. Money which could be utilised for other operations
is tied up with debtors.

c. Creditor Days
Creditor Days are the average number of days that the company takes to pay its creditors.
Dorman Co. has an increase from 108 days in 20X0 to 137 days in 20X1. This means that
it has been able to withhold cash for a longer period than in the previous year thus giving
it higher liquidity. It is however necessary for Dorman to ensure it does not abuse credit
lines which may be taken away by creditors in future especially with an industry average
of 85 days. A balance must therefore be struck.

d. Cash Conversion Cycle


This ratio gives the average time it takes the company to generate cash from its operations
starting from the initial outlay for stock. Dorman Co. has a relatively large increase in the
cycle from 12 days in 20X0 to 57 days in 20X1. This resulted from having comparatively

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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 over the period in question 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
The Quick Ratio shows the company’s ability to pay off debts with quick assets that are
easily convertible to cash as they become due. Dorman Co. also had a reduction in its
quick ratio from 0.78 in 20X0 to 0.70 in 20X1. The performance of Dorman Co. is poor
in this case as it would not be able to cover short term debt with its quick assets if ever
required. It also indicates that liquidity is lower year on year. 0.7 is also lower than the
industry average of 1. Investors and creditors would not be very impressed with this ratio.

GEARING RATIOS
a. Capital Gearing Ratio
This ratio indicates the company’s long term ability to cover debt as it becomes due in
terms of capital employed. Dorman Co.’s Capital Gearing Ratio rose from 23.46% in
20X0 to 28.21% in 20X1. This can be attributed to the increase in long term debt that the
company has accrued. The increase in gearing indicates that the company is becoming a
riskier prospect to investors and creditors alike as any increase in financial demands (such
as interest rates) may spell disaster.

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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, it is still far greater than 1 and will suffice
depending on the risk cap of individual institutions.

INVESTOR RATIOS
a. Return on Equity
This ratio is a measure of how much profit the company makes for the value of equity it
employs. It is an important measure for investors who would want to see how efficient the
company is in generating income. Year on year, the ratio reduced from 26.59% in 20X0
to 22.86% in 20X1 showing a lowering in profitability and a poorer performance. Equity
was increased whilst net income decreased. 22.86% is however still fair.

b. Dividend per Share (DPS)


The DPS for Dorman Co. increased from $0.20 in 20X0 to $0.25 in 20X1 thus implying
an improved performance. This resulted from an increase in the dividends paid out and
this normally has the effect of inducing an increase in share price. This is the case with
ordinary share price increasing from $1.80 to $2.80 in corresponding years.

c. Earnings per Share (EPS)


This ratio shows how profitable a company is in terms of shares. Dorman Co. had a slight
decrease from $0.39 per share to $0.36 per share. Even though a decrease in EPS is not

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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, 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.

f. Price/Earnings Ratio
This ratio is utilised by investors to determine what to pay for a stock based on current
earnings. This gives a fair assessment of a stock’s fair market value. Dorman Co. has an
increase in P/E ratio from 4.67 in 20X0 to 7.88 in 20X1 thus indicating growth in
confidence of the company’s present and future performance by investors.

g. Dividend Yield
This ratio shows how much a shareholder’s investment in stock is generating either as
dividends or as stock value increase. Dorman Co. has a reduction from 11.11% in 20X0
to 8.93% in 20X1 thus showing a reduction in the yield of investors. The ratio, at 8.93%,
is however reasonable.

h. Earnings Yield
This is the inverse of the P/E ratio and shows earnings per dollar invested in stock in
percentage terms. Dorman Co. had a fairly drastic reduction from 21.42% in 20X0 to

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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 on financial statements which are easy to find. Financial Ratio Analysis 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 performance of the 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 continue to be useful for many years to come.

CONCLUSION
Marks & Spencer have shown in their Annual Report that they care a great deal about their
stakeholders and have modelled their business planning on ensuring that they are satisfied. This has
resulted in significant growth and trust in the brand. They have also gone a step further by adopting
their Plan A which addresses many of their targets in terms of Corporate and Social Responsibility.
Many have benefitted from their programmes which has endeared them to the brand. Environmental
conservation efforts have also been key and the firm has managed to reach most of its major targets
in this regards.
The Financial Ratio Analysis carried out for Dorman Co. has shown that by and large, their
performance is on the wane. That being said, most ratios are within acceptable ranges and share prices
are on the rise. Proceeding with caution is necessary in doing business with Dorman Co., however
there is some indication that the future may be bright.

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REFERENCES

Caramela, S. (2016). What is Corporate Social Responsibility?. [Online] Available at:


http://www.businessnewsdaily.com/4679-corporate-social-responsibility.html. [Accessed 14 Jan.
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-definition-
examples-quiz.html. [Accessed 18 Jan. 2017].

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]

Marksandspencer.com. (2016). Plan A Report 2016. [Online] Available at:


http://planareport.marksandspencer.com/M&S_PlanA_Report_2016_Overview.pdf. [Accessed 17
Jan. 2017].

Marksandspencer.com. (2016). M&S Annual Report & Financial Statements 2016. [Online]
Available at: http://annualreport.marksandspencer.com/M&S_AnnualReport_2016.pdf. [Accessed
18 Jan 2017]

Smith, R. E. (2011). Defining Corporate Social Responsibility: A Systems Approach for Socially
Responsible Capitalism. [Online] Available at:
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1009&context=od_theses_mp. [Accessed
17 Jan. 2017].

Zion’s Business Resource Centre. (2017) How to Analyse Your Business Using Financial Ratios.
[Online] Available at: https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf. [Accessed 21
Jan. 2017]

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APPENDIX I: Dorman Co. Table of Financial Ratios

Industry
Ratios
Ratio Workings 20X1 Workings 20X0 (Current)
((4040+610)/(24900- ((4340+260)/(19500-
Return on Capital Employed (ROCE) 5400))*100 23.85% 2450))*100 26.98%
Gross Profit % (6400/15400)*100 41.56% (5200/12450)*100 41.77%
Net Profit Margin ((4040+610)/15400)*100 30.19% ((4340+260)/12450)*100 36.95%
Stock Days (2600/9000)*365 105d (1300/7250)*365 65d 55d
Debtor Days (3800/15400)*365 90d (1900/12450)*365 55d 60d
Creditor Days (3400/9000)*365 137d (2150/7250)*365 108d 85d
Net Asset Turnover 15400/(24900-5400) 0.79 12450/(19500-2450) 0.73
Fixed Asset Turnover 15400/18500 0.83 12450/16300 0.76
Cash Conversion Cycle (105.44+90.06-137.89) 57d (65.45+55.70-108.24) 12d
Current Ratio 6400/5400 1.19 3200/2450 1.31 1.5
Quick Ratio (6400-2600)/5400 0.70 (3200-1300)/2450 0.78 1.0
Capital Gearing Ratio 5500/(24900-5400)*100 28.21% (4000/(19500-2450)*100 23.46%
Debt/Equity Ratio (5500/14000)*100 39.29% (4000/13050)*100 30.65%
Interest Cover (4040+610)/610 7.62 (4340+260)/260 17.69
Return on Equity (3200/14000)*100 22.86% (3470/13050)*100 26.59%
Dividend Per Share 2250/9000 $0.25 1800/9000 $0.20
Earnings Per Share 3200/9000 $0.36 3470/9000 $0.39
Dividend Cover 0.36/0.25 1.42 0.39/0.20 1.93
Pay-out Ratio (2250/3200)*100 0.07% (1800/3470)*100 0.05%
Price/Earnings Ratio 2.80/0.36 7.88 1.80/0.39 4.67
Dividend Yield (0.25/2.8)*100 8.93% (0.20/1.80)*100 11.11%
Earnings Yield (0.36/2.80)*100 12.70% (0.39/1.80)*100 21.42%

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