Module Name: Financial Statement Analysis

Module Code: 6AG512

Trimester: T1 2023
Student ID : (Please mention here)

Introduction:

Marks & Spencer is a leading British retailer that offers a range of products, including clothing,
home, and food, to its customers in the UK and internationally. The company operates through
various channels, such as stores, online, and franchise partners. The company has a long history
of innovation, quality, and social responsibility, but it has also faced challenges in recent years
due to changing consumer preferences, increased competition, and the impact of the Covid-19
pandemic. Marks & Spencer has been implementing a transformation plan to improve its
performance and profitability, focusing on digital growth, product innovation, and cost
efficiency.

The analysis of the company's three financial statements, namely the income statement, the
statement of financial position, and the statement of changes in equity, is important for
understanding the company's financial situation, performance, and prospects. The analysis can
help to evaluate the company's revenue, profit, assets, liabilities, equity, cash flow, and
dividends, as well as the key financial ratios that measure the company's profitability, efficiency,
liquidity, solvency, leverage, and growth. The analysis can also help to identify the strengths,
weaknesses, opportunities, and threats of the company, as well as the risks and uncertainties that
may affect its future performance. The analysis can provide valuable insights and
recommendations for the company's management, shareholders, investors, creditors, and other
stakeholders.

Financial Statements Analysis

Turnover: This ratio measures how efficiently the company uses its assets to generate revenue. The
turnover of the business increased by 7.5% in 2022, indicating a growth in sales and market share. This
could be due to an increase in demand, market share, prices, or a combination of these factors.

Ratios/Analysis 2022 2021

Turnover ratio £8,951.8m £8,324.5m

Gross Profit Margin: This is the percentage representation of the gross profit to revenue ratio. It
calculates the percentage of revenue that remains after subtracting the cost of the products sold. The gross
profit ratio of the business improved slightly by 0.3 percentage points in 2022, indicating a better control
over the cost of goods sold or a higher selling price. This could be due to higher input costs, lower selling
prices, or lower sales mix.

Ratios/Analysis 2022 2021

Gross Profit Margin (%) 35.9% 35.6%
Return on Equity: The return on equity ratio of the business improved significantly from -8.8% in
2021 to 10.6% in 2022, indicating a recovery from the loss and a higher return for the shareholders. This
means that the company became more profitable and efficient in using its equity to generate income for
its shareholders. A higher ROE is generally preferred, as it implies a higher return on investment for the
shareholders.

Ratios/Analysis 2022 2021

Return on Equity (%) 10.6% -8.8%

Profitability Ratio: The profitability ratio of the business also improved significantly from -2.4% in
2021 to 3.5% in 2022, indicating a recovery from the loss and a higher margin on the revenue. This
means that the company became more profitable and efficient in generating income from its sales. A
higher profitability ratio is generally preferred, as it implies a higher margin of safety and a lower break-
even point for the company.

202 Chang
Ratios/Analysis 2022
1 e
Profitability Ratio (%) 3.5% -2.4 5.9%

Return On Capital Employed: This is the ratio of operating income to capital employed, expressed
as a percentage. It measures how well a company uses its capital to generate income. The return on
capital employed of the business also improved significantly from -3.3% in 2021 to 5.0% in 2022,
indicating a better utilization of the capital invested in the business.

Ratios/Analysis 2022 2021

Return On Capital Employed (%) 5.0% -3.3%

Long-Term Liabilities: The long-term liabilities of the business increased slightly by 2.4% in 2022,
indicating a higher level of borrowing or obligations. This could improve the solvency and leverage of the
company, as it reduces the interest expense and the risk of default.

Ratios/Analysis 2022 2021

Long-Term Liabilities £4,154.7m £4,055.8m

Current Asset: The current assets of Marks & Spencer have increased by 40% from 2021 to 2022,
indicating that the company has increased its liquidity and working capital. This could improve the ability
of the company to pay off its current liabilities and fund its operations.

Ratios/Analysis 2022 2021

Current Asset £2,121.1m £1,508.6m

Current Liabilities: The current liabilities of Marks & Spencer have increased by 5.5% from 2021 to
2022, indicating that the company has increased its short-term obligations. This could reduce the liquidity
and working capital of the company, as it increases the pressure to pay off its current liabilities.

Ratios/Analysis 2022 2021

Current Liabilities £2,296.7m £2,175.8m
Current Ratio: The current ratio of the business improved from 0.69 in 2021 to 0.92 in 2022,
indicating a better ability to meet its short-term obligations with its current assets. However, the current
ratio is still below 1, which means that the current assets are not sufficient to cover the current liabilities.

Ratios/Analysis 2022 2021

Current Ratio 0.92 0.69

Gearing Ratio: The gearing ratio of the business decreased by 5.1 percentage points in 2022, indicating
a lower level of financial leverage and risk. However, the gearing ratio is still high, which means that the
business is still heavily reliant on external borrowings and may face higher interest costs and financial
distress.

Ratios/Analysis 2022 2021

58.8
Gearing Ratio (%) % 63.9%

Earnings per Share: The earnings per share of the business improved from -12.4p in 2021 to 18.5p in
2022, indicating a recovery from the loss and a higher profitability per share. This means that the
company became more profitable and distributed more income to its common shareholders. A higher EPS
is generally preferred, as it implies a higher value for each share of the company.

Ratios/Analysis 2022 2021

Earnings Per Share (€) 18.5p 12.4p

Cash Dividend & Dividend Payout Ratio: The cash dividend of the business was zero in both 2021
and 2022, indicating that the business did not distribute any cash to the shareholders as a reward for their
investment. This may be due to the loss in 2021 or the need to retain cash for future growth in 2022.

The dividend payout ratio of the business was also zero in both 2021 and 2022, indicating that the
business did not distribute any profit as cash dividend. This may be due to the loss in 2021 or the decision
to reinvest most of the profit for future growth in 2022.

Ratios/Analysis 2022 2021

Cash Dividend; Dividend Payout Ratio €0.00 and 0% €0.00 and 0%
Further Analysis & Recommendations:

 The company has recovered from the loss in 2021 and achieved a positive growth in
revenue, profit, and equity in 2022. This indicates that the company has overcome the
challenges posed by the COVID-19 pandemic and improved its sales and market share.
 The company has improved its profitability and efficiency ratios, such as gross profit
margin, return on equity, profitability ratio, and return on capital employed. This
indicates that the company has managed its costs and capital better and increased its
margins and returns.
 The company has reduced its leverage and risk ratios, such as long-term liabilities,
gearing ratio, and current ratio. This indicates that the company has reduced its debt
obligations and increased its liquidity and solvency.
 The company has not distributed any dividend to its shareholders in both 2021 and 2022.
This indicates that the company has retained its earnings for future growth or that the
company has a conservative dividend policy.

Some of the recommendations are:

 The company should continue to focus on its core business segments and markets and
expand its online and international presence. This would help the company to increase its
customer base and revenue streams and diversify its risks.
 The company should invest in innovation and differentiation and enhance its product
quality and customer service. This would help the company to gain a competitive edge
and increase its customer loyalty and satisfaction.
 The company should maintain a balance between growth and profitability and between
debt and equity. This would help the company to optimize its capital structure and cost of
capital and maximize its shareholder value.
 The company should consider paying a dividend to its shareholders or implementing a
share buyback program. This would help the company to signal its confidence and
performance and reward its shareholders for their investment.
Appendix.

Statement of Comprehensive Income:

Statement of Financial Position
Consolidated Statement of Changes in Equity:

References:

Spencer, M., & Spencer, M. (2022, June 7). Annual Report 2022. Marks & Spencer.
https://corporate.marksandspencer.com/node/1957