Professional Documents
Culture Documents
BUSINESS SCHOOL
MBA
ASSESSMENT – 1
A Strategic Financial Analysis of the Marks and Spencer 2016 Annual Report and a
Financial Ratio Analysis of Dorman Co.
INTRODUCTION ......................................................................................................... 1
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.
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:
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:
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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.
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.
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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.
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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.
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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.
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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.
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
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). 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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