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Ratio analysis of M&S and Sports Direct

357 Downloads1 I Published: 03 Jan ,2020

INTRODUCTION 

Financial statement analysis is the process which is undertaken by higher management for reviewing the monetary performance of firm that supports better economic decisions. Such analysis and its outcome provide Board of Directors with effectual framework for decision making. Hence, by considering the outcome of ratio analysis help managers in developing highly competent strategic and policy framework for the upcoming time period. The present report is based on Marks and Spencer M&S and its competitors such as Sports Direct. M&S is one of the leading retail business organizations of UK which places emphasis on offering high quality products to the customers at affordable prices. Besides this, Sports Direct is one of the leading sports retailers of UK. Hence, the present report will shed light on the extent to which profitability and liquidity position of M&S is sound in against to the rival firm. Besides this, it will shed light on how efficiently company made use of its assets from the period of 2014 ton 2016.

Ratio analysis of M&S and Sports Direct for the period of 3 years are as follows 

Profitability ratio analysis

M&S

Particulars

Formulas

Amount (In SGD Million)

2014

2015

2016

Net profits (NP)

 

506

481.7

404.4

Operating profit (OP)

 

694.5

701.3

584.1

Sales revenues

 

10309.7

10311.4

10555.4

Gross profit ratio (GPR)

(Gross profit / Total sales) * 100

37.5%

38.7%

39.1%

Net profit margin (NPR)

(Net profit / Total sales) * 100

4.91%

4.67%

3.83%

operating profit margin (OPR)

(operating profit / Total sales) * 100

6.74%

6.80%

5.53%

Sports Direct

Particulars

Formulas

Amount (In SGD Million)

2014

2015

2016

GP

 

1,154,922

1,240,812

1,284,644

NP

 

179,613

241,353

278,981

OP

 

249,131

295,581

223,178

Sales revenues

 

2705958

2,832,560

2904325

GPR

(GP / Total sales) * 100

43%

44%

44%

NPR

(NP / Total sales) * 100

7%

9%

10%

OPR

(OP / Total sales) * 100

9%

10%

8%


  • Gross profit ratio:
    Graphical presentation shows that GP ratio of Sports Direct is highly sound as compared to M&S.  Sales revenue and gross profit of both the organizations increased in each year. However, GP margin or ratio entails that M&S failed to generate higher sales and exert effective control on expenses over the rival firm.  Moreover, GP ratio of M&S was 37.5%, 38.7% & 39.1%, whereas the same of Sports Direct accounts for 43%, 44% and 44. Outcome of such margin is highly influenced from both internal and external factors.

Moreover, changes which take place in the customer’s needs, want and expectation has direct impact on the sales revenue of firm. In addition to this, price at which materials is supplied by the suppliers also have great impact on cost level (Perri and Shuli, 2016). By considering such fact it can be stated that large number of people prefer to purchase sportswear and other products from Sports Direct rather than M&S. It shows that Sports Direct attained success in satisfying the needs, wants and expectations of people to a great extent in comparison to rival firm. It is the main reasons due to which sales revenue generated by Sports Direct is lower. Further, high margin of Sports Direct shows that business unit has exerted effectual control on the level of direct expenses.  

  • Operating profit ratio: From financial statement analysis, it has been assessed that operating profit margin of M&S decreased from 6.74% to 5.53%. Further, by analyzing or evaluating income statement of Sports Direct through the means of ratio analysis it has been identified that its OPR accounts for 9%, 10% and 8% respectively. Hence, it can be stated that during the period of 2016 administration expenses of Sports Direct were inclined from £950526 to £ Further, expenditure in relation to the exceptional items also increased from £3050 to £50759. Due to such aspects operating margin of Sports Direct declined from 10% to 8%. Along with this, indirect expenditure of M&S also increased which in turn resulted into lower profit margin.
  • Net margin ratio: By doing ratio analysis, it has been assessed that NP margin of M&S decreased during the period of 2014 to 2016. During such accounting periods NP margin of M&S accounts for 4.91%, 4.67% & 3.83%. Hence, indirect expenses are the main internal causes due to which net margin of firm decreased. Further, net margin generated by M&S was highly lower in the period of 2016. In comparison to this, net profit ratio of Sports Direct was 7%, 9% and 10%.  It presents that NP ratio of Sports Direct was increased in 2016 as compared to 2014 and 2015. By considering this, it can be stated that policies and strategies employed by Sports Direct in relation to expenditure aspect is sound (Arif, Noor-E-Jannat and Anwar, 2016). Thus, net profit margin of Sports Direct is good over the rival firm.  

Liquidity Ratio analysis

M&S

Particulars

Formulas

2014

2015

2016

Current assets (CA)

 

1368.5

1455

1461.4

Current liabilities (CL)

 

2349.3

2111.6

2104.8

Inventory

 

845.5

797.8

799.9

Current ratio (CR)

(Current assets / Current liabilities)

0.58

0.69

0.69

Quick ratio/acid test ratio (QR)

(Current assets –stock ) / current liabilities

0.22

0.31

0.31

Sports Direct

Particulars

Formulas

2014

2015

2016

CA

 

843,872

878,297

1,311,437

CL

 

799,245

382,621

540,608

Stock

 

565,479

517,054

702,158

CR

(CA / CL)

1.1

2.3

2.4

QR

(CA – inventory) / CL

0.35

0.94

1.13

  • Current ratio: The above mentioned tabular presentation shows that current ratio of M&S was .58, .69 &  .69 times respectively from the period of 2014 to 2016. The main reason behind such lower current ratio is that M&S had invested money in intangible assets, derivative instruments and retirement benefits plans. Hence, due to all such internal and external activities business unit was not highly capable in relation to meeting the financial obligations (Dung, 2016). In contrast to this, current ratio of Sports Direct was 1.1, 2.3 and 2.4 significantly. It shows that level of current ratio increased significantly at the end of 2016 as compared to before years. Along with this, current ratio which is maintained by Sports Direct exceeded ideal ratio such as 2:1 in the year of 2015 & 2016. The main reason behind the differences in current ratio of both companies that, with the motive to generate higher benefits in the long run, M&S invested more money in derivative instruments. Hence, by considering the overall position and performance it can be said that liquidity position as well as performance of Sports Direct was sound as compared to M&S. It shows that Sports Direct had maintained enough assets for meeting the obligations.  
  • Quick ratio: Financial statement analysis presents that quick ratio of M&S inclined from .22 to .31 times at the end of accounting period 2016. On the other side, quick ratio performance of Sports Direct was .35, .94 and 1.13 times respectively. By considering the ideal ratio such as .5:1 it can be stated that business unit must have 1 current asset that can easily be convertible into cash when it has to meet 2 monetary obligations. On the basis of this aspect, quick ratio of Sports Direct was sound in comparison to Sports Direct. In the year of 2015 and 2016, quick ratio of Sports Direct was double of ideal ratio. Balance sheet of Sports Direct shows that in the period of 2015 amount of derivatives increased significantly from £4355 to £92199. Hence, it is one the main reasons due to which quick margin of Sports Direct inclined with the higher rate (Grimm and Blazovich, 2016). Thus, from the evaluation of balance sheet it has been assessed that liquidity position and performance of Sports Direct was sound from the period of 2014 to 2016 over others.  

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Efficiency ratio analysis

M&S

Particulars

Formulas

2014

2015

2016

Total assets (TA)

 

7903

8196.1

8476.4

Sales revenue

 

10309.7

10311.4

10555.4

Trade receivables

 

309.5

321.8

321.1

Debtors turnover ratio

Sales revenue / trade receivables * 365

33.31

32.04

32.87

Total  assets turnover ratio

Net sales / total assets

1.30

1.26

1.25

 

Sports Direct

Particulars

Formulas

2014

2015

2016

TA (Fixed + current assets)

 

1,700,739

1,773,683

2,359,856

Sales revenue

 

2705958

2,832,560

2904325

Trade receivables or debtors

 

123,014

190,726

292,589

Debtors turnover ratio

Sales revenue / trade receivables

22.00

14.85

9.93

Total  assets turnover ratio

Net sales / total assets

1.59

1.60

1.23

  • Total asset turnover ratio: Outcome of ratio analysis reveals that M&S failed to generate enough sales revenue or return by using both fixed and current assets. Moreover, total assets turnover ratio of M&S decreased from 1.30 to 1.25 times over the time frame. On the other hand, total assets turnover ratio of Sports direct fluctuated with the range of 1.23 to 1.60 times. In 2016, total assets turnover ratio was only 1.23 times which is highly lower. Hence, during such year, both the companies were failed to make optimum use of both current and non-current assets. Internal reasons such as ineffective machinery and equipments are the main causes due to which companies face difficulty in getting the desired level of output (Luypaert, Caneghem and Van Uytbergen, 2016). Along with this, strategies and policies farmed by business unit also have great impact on outcome. Thus, both these aspects are the main causes due to which assets turnover ratio of M&S and Sports Direct decreased.
  • Debtor’s turnover ratio: Assessment of financial statement reveals that in the year of 2014, debtor’s turnover ratio was 33.31 days. On the contrary to this, such ratio reached on 32.04 and 32.87 days during 2015 and 2016. Hence, it can be stated that as compared to 2014 M&S generated amount from debtors within the less time frame. Besides this, Sports direct also received amount from debtors earlier in comparison to the previous years. In 2016, debtor’s turnover ratio was only 10 days which is highly lower as compared to past years. It shows that during the period of 2016 working capital position of Sports Direct was sound. Hence, in 2016, Sports Direct met its day to day activities more effectively and efficiently. Debtor’s turnover ratio fluctuates because company offers high credit when demand level is low. Along with this, availability of competitors and their policies also closely influence the credit policies of firm (Arkan and et.al., 2016). Hence, by taking into account all such aspects it can be stated by considering the brand image and market trends credit is offered by both the companies to debtors for short time frame.  

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Investment ratio analysis

M&S

Particulars

2014

2015

2016

Earnings per share (EPS)

.33

.30

.25

Dividend per share (DPS)

.18

.17

.18


Sports Direct

Particulars

2014

2015

2016

EPS

.58

.78

.91

DPS

-

-

-

  • EPS: From ratio analysis, it has been identified that EPS offered by M&S to the shareholders decreased from .33 to .25 in 2016.  Hence, there are several factors that closely influence the earnings associated with per share. It includes inflation, availability of substitutes, demographic and market trend changes etc. Due to all such EPS of M&S declined, whereas in the case of Sports Direct earning per share inclined from .58 to .91. EPS is the main elements that closely influence the decision making aspect of investors. Moreover, earning high returns in against to the investment made is one of the main objectives of investors (Lakshmi, Martin and Venkatesan, 2016). Hence, from the perspective of investment investors or shareholders Sports Direct is highly good over others.
  • DPS: Graph entails that DPS offered by M&S to the shareholders during the period of 2014, 2015 and 2016 implies for .18, .17 & .18 respectively. This aspect shows that M&S is offering dividend to the shareholders regularly. Getting high dividend from the shares held is one of the main objectives of investors. Profit is one of the main factors which in turn closely affects the dividend policy or return of the firm. Moreover, company usually prefers to declare and offer high dividend only when it earns enough amount of profit margin (Wijesundera and et.al., 2016). Due to this aspect, fluctuation takes place in the dividend offered by M&S. Thus, business unit should focus on undertaking stable dividend policy which in turn helps in maintaining the faith of investors.

CONCLUSION 

By summing up this project report, it has been concluded that profitability aspect of Sports Direct was sound from 2014 to 2016 over the rival firm. It can be revealed from the report that due to having less control on direct and indirect expenses M&S failed to generate high profit margin. Besides this, it can be inferred that Sports Direct was highly capable in relation to financial terms as compared to M&S. Moreover, both current and quick ratio shows that Sports Direct maintained more current assets which in turn help them in meeting obligations on time. Further, it can be stated that Sports Direct has made optimum use of financial aspects and thereby generated high profit margin or returns. Earning which is offered by Sports Direct on per share is also higher as compared to M&S. Hence, to attract large number of investors M&S is required to make suitable changes in the strategic and policy framework.

RECOMMENDATIONS 

On the basis of the outcome of ratio analysis, it is recommended to M&S to make suitable changes or modifications in the existing framework:

 It is recommended to M&S to lay more emphasis on social media marketing which in turn helps company in building long-lasting relationship with the customers. Along with this, by using such tool business unit can develop awareness among the large number of people regarding the retail products or services offered by it.  In the present times, needs, wants and expectation level of customers are getting changed with the very high pace. Thus, by considering the feedback of customers business entity would become able to offer suitable products or services to the customers according to their requirements. Hence, by taking all such actions M&S can enhance its sales revenue to the significant level.

  • Further, to improve the profitability aspect business unity is required to undertake the system of budgeting. Hence, by making proper estimation of income and expenses business entity can prepare highly competent framework. Thus, by circulating such budget in the all respective departments business unit can provide direction to the personnel about the manner in which they need to spend money. By this, M&S would become able to reduce the level of expenses and thereby enhance profitability.
  • By considering the liquidity position, it is recommended to M&S to exert control on spending level. By doing this, business unit can maintain enough current assets and thereby become able to improve liquidity. At the time of making investment decisions, investor considers the extent to which firm is highly capable in relation to meeting the obligations.
  • Along with this, M&S should focus on the proper maintenance of fixed assets such as plant and machinery. Moreover, company can generate higher output only when it has effectual machineries. Further, to make optimum use of current assets business unit should take decision after making evaluation of both internal and external factors.

REFERENCES

  • Arif, T. M. H., Noor-E-Jannat, K. and Anwar, S. R., 2016. Financial Statement and Competitiveness Analysis: A Study on Tourism & Hospitality Industry in Bangladesh. International Journal of Financial Research. 7(4). p.p180.
  • Arkan, T. and et.al., 2016. The Importance of Financial Ratios in Predicting Stock Price Trends: A Case Study in Emerging Markets. Finanse. Rynki Finansowe. Ubezpieczenia, (1 (79) Rynek kapitałowy i zarządzanie wartością). pp.13-26.
  • Dung, N.V., 2016. Value-relevance of financial statement information: A flexible application of modern theories to the Vietnamese stock market. Quarterly Journal of Economics. 84. pp.488-500.
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