To make a decision to invest into a company it is mandatory to know the financial status of the company, whether the company is growing in term of profits or is it falling in terms of profit. Here we would be analyzing the financial status of two companies: Debenhams PLC and Marks and Spencer's, to help our client to decide into investing his money into the correct company.
We will be analyzing the financial ratios of the two companies. This will tell us about the performance of the companies and will help us to determine which company would be a good investment. In addition we would also do an industrial analysis of the two companies to give the current situation and an idea of how the performance of the company would be in the future.
Ratio Analysis
It is a process to determine and interpret each item in balance sheet and profit and loss account to analyze and understand the financial position and performance of an organization.
Return of capital employed (ROCE)
The ROCE of M&S show a drastic fall in the year 2008 and a major drop in the year 2009 and Debenhams has not shown a lot of change in the after 2007, in 2008 ROCE has increased and there was a slight drop of a little more than 1%.
The performance of M&S can be assessed by looking at the gross profit and the Asset turnover of the two companies. The asset turnover of M&S goes through a continuous drop till 2008 after which there is a marginal increase of .9 in the year 2009. Now when we compare the gross profit, we find that there is a gradual but steady drop from 2007 till 2009. As we know that ROCE depends on both the gross profit and the asset turnover, the variations in gross profit and the asset turnover during the years can be calculated over the years starting from 2007.
Debenhams does not show a big change in the ROCE over the years but it does show that it is trying to improve and the chances of the ROCE improving in Debenhams is more. If we compare the year 2007, 2008 and 2009, we see that there is a slight increase in 2008 and then there is drop in 2009.
Compared to M&S's drastic fall there is a stable fluctuation in Debenhams.
Return on Equity
The above graph shows that the fluctuation of Debenhams has been more. In 2009 Debenhams has fallen to a very low percentage of 22.36%. This is because ROE is basically directly proportional to profit after tax and is inversely proportional to the total equity. So though there has been a major increase in the profit of Debenhams but still the total equity also has grown drastically.
M&S does not show a big difference in ROE and has been almost the same till 2008 with a sizable drop in the year 2009. Now this can be said because there has been a major drop in the profit in the year 2009 and a constant increase of total equity starting from 2006. So this is a proof of the not so favorable condition of M&S.
Return on Sales
ROS can be defines as the ratio of profit before tax to the sales. Here we see that the ROS of M&S has been on a constant increase till 2008 and then there was huge drop in 2009. This happened because the sales were constantly increasing but the profit saw a drop in 2009.
Debenhams on the other hand has been dropping ever since 2006 but in the year 2009 it has seen a marginal increase on .10%. This is be3cause after the drop in 2007 there has been a constant growth till 2009 in profit and there has been a constant growth in sales too.
Gross Profit Margin
The performance of both M&S and Debenhams has been the same over the last few years. The gross profit has dropped for both the companies. Still there is a very minute difference in the drop of the gross profit in the year 2009. If we consider the difference of the profit from 2008 M&S has had a drop of about 1.44% and Debenhams fell by 0.72%. So the gross profit loss of Debenhams is almost twice less as compared to M&S.
Now Gross profit Margin can be calculated by getting the percentage of the ratio of Gross Profit and Sales. Though M&S has showed a constant growth in sales and gross profit, except for the minor drop in 2009, the profit compared to the sales has been decreasing constantly. And in 2009 with the fall in profit the company has to look into its marketing strategies properly.
Debenhams on the other hand has got a fluctuating Gross profit in the past years. Though the sales of the company has increased through the years but the company has seen a drop of more than £50m in the year 2007 and then the profit increases and decreases marginally with the increase in sales being constant.
Asset Turnover
The Asset Turnover of both M&S and Debenhams has been performing differently over the years. The Asset Turnover depends on the capital employed mainly. If the capital employed reduces and the sale increases the Asset Turnover also increases and shows the good performance of the company.
Here M&S show a continuous drop till the year 2008 and then a slight increase in the year 2009. The drop is due to the growth in capital employed, in the year 2008 the CE grew more than £1000m which caused the drop of the asset turn over by 0.54 which then increased marginally in the year 2009.
Debenhams has been doing normally and also shows a prominent rise in the year 2008, but then it drops again the year 2009 which shows the weak performance of the company in the market. This performance of Debenhams has changed in this way because of the variation in the capital employed, the company sales have been increasing throughout the years and the capital employed decreased in 2008 by more than a £100m which gave a boost in the Asset Turnover.
Stock Turnover Period:
The stock turnover of both the companies has increased in 2009. Though there have been variations in the performance of M&S but Debenhams has been showing a constant increase its Stock turnover.
Debenhams closing inventory for every year has increased but growth has been very low so it resulted in a better increase in the stock turnover for all the years. The stock turnover changes with the change in the closing inventory for every day of the year for each year and if the cost of sales does not increase that year the stock turn over falls down.
M&S has been comparatively doing worse than Debenhams as there has been a varied change in the performance pattern every year, it is does not maintain stability. Though it has performed the best in 2009, it has borne a huge fall in 2008 of about 4.03days. Which can be dangerous when the considering the yearly performance.
Debtor Period
The debtor period of both Debenhams and M&S has not been constant; it has been showing drastic changes for a long time. Debenhams slowed down a bit in 2007 and then dipped in 2008 and then again rose in 2009. If the debtor period of the company is low it is good for the company but in this case Debenhams condition can be said that it would not be stable in the future too.
M&S did fall in 2007 but then shot up in the year 2008 and then again fell in the year 2009. So to tell that M&S would be performing better with low debtor period in the future would not be correct as the company has shown big changes and these changes if irreversible can prove positive for the company.
The changes in debtor period are mainly because of the changes in the Trade receivables. M&S has a drop in 2007 then again gained momentum in 2008 then again set back in 2009, which made the predictions questionable. Debenhams did not change much but did gain a little trade receivables in 2007 then dropped in 2008 and then shot back up in 2009.
Creditor Period
The lower the credit value in a company the better would be the performance of the company. Cause, if the credit of the company has increased then the company must have taken loan, now if the loan has a lower interest rate then the company should not have to payout less money but then if the interest is more then the company has to give more payouts.
M&S shows a fluctuating difference from 2006 to 2009. So in the year 2007 M&S did not perform well so they had to get some loans and thus they improved in 2008-2009. This is better in terms of days as they did the payouts quite frequently.
Debenhams had not taken any loans as such considering the graph, but it has been going down on the scale so it shows that the company has yet to give the payouts to its creditors and the number of days of payouts is also much more when compared to M&S.
Current Ratio
Current ratio informs the current financial capability to fulfil the current obligations. Both companies are having the current ratio less than 1 which is not adequate level of financial strength. In case of current obligations are concerned for immediate payment, both companies are in a lacking situation. So both companies financial position is below to the satisfactory level.
Debenhams has a linear decrease from 2006 to 2007. Whereas 2007 to 2008 there is a small dip, this is because of increase in financial liabilities through revolving credit policy which is for bank overdraft and borrowings from £144.5m to £104.8m. (Debenhams Annual Report 2008 notes 21). From 2008 to 2009, current liabilities have been decreased which in turn showed a drastic improvement in current financial capability. Decrease in liabilities are due to term loan facility which includes unamortized issue costs of £8.6 million from £9.7 million.
M&S current ratio has a proportionate change in their current assets and liabilities from 2006 to 2008 which caused a little fall in 2007 and raise in 2008. From 2009 onwards, M&S maintains a stable financial position.
As per current ratio, current financial position of Debenhams has slightly better than M&S.
Cash Ratio
Cash ratio represents how quickly the company can repay their short term liabilities. As part of company value, cash ratio is the crucial when compared to other liquid ratios. This ratio gives the cash ability to claim the current liabilities.
For Debenhams, 2006 is the year for company expansion and for market penetration. So company initiated to invest more and received loans in huge amount which was 50% more than the current debt of loans. Through cash from the loans, company strengthened in 2007. In 2008, Short-term bank deposits are fallen from 58.2m to 3.4m which is drastically decreased the company's liquidity position. Since short term liabilities are paid in 2008 to 2009, 20% of the amount decreased in current liabilities. In 2009, Company's banks and deposits rose from 3.4m to 157.6m, which is majorly increased the company's financial ability.
Cash ratio for M&S shows the retained stage from 2006 to 2009. There is a major fall in 2007 which was due to 50% decrease in cash from 362.6 to 180.1. However the company retain their cash position in 2008 to 318 and sustained at the level with a small change.
In 2009, Debenhams has the strong liquid position over the M&S. But it has the major dips where as M&S has the stable liquid position.
Quick(Acid) Ratio
Quick Ratio gives the information about liquidity of company without concerning the inventory. In Retail sector, inventory is not worthy in all the times since frequently occurring close-out sales with 50% to 70% markdowns and etc.
This ratio reacts as the same as cash ratio since cash is major contributor in current assets apart from inventory. At an average, Debenhams current assets are tied up with 45% of inventory where as M&S has only 35%. This informs that company has much of its liquid assets tied up in inventory. So Debenhams is very dependent on the sale of that inventory to finance operations.
Dividend Payout
For Marks and Spencer the dividend payout decreased from 2006 to 2007 and there is a slight rise in 2008 and a rapid increase in 2009 indicating a higher proportion of earnings paid out as dividends to the shareholders. This shows that the growth of the M&S is getting down with the increase in dividend payout. In Marks and Spencer, the dividend per share price has been decreased from 2008 to 2009 22.5% to 17.8% and also the EPS decreased from 2008 to 2009 for Marks and Spencer.
For Debenhams the dividend payout decreased gradually from 2006 to 2007 and a sudden change in 2008. It declined from 2008 to 2009 making a company grow. Compared to 2008, Debenhams did not offer any dividends in 2009.The EPS has increased from 2008 to 2009.
Comparing the present years, dividend paid out by Marks and Spencer is more than that of the Debenhams, this means M&S is giving out more shares now and investing 30% of its revenue back into the business where as Debenhams reinvests 98%.
If an investor wants to go with share price then he can invest in Debenhams though it's investing 98% into business and in future the share price may rise if it makes profit.
If an investor wants to go with dividend share then he can invest in Marks and Spencer, as it is provided with 70% dividends pay out (M&S , PLC 2008,M&S PLC 2009,Debenhams,PLC 2008,Debenhams,PLC 2009).
Dividend Yield
The Dividend Yield is healthily increasing from 2006 to 2009 for Marks and Spencer and for Debenhams it has an increase from 2006 to 2008 and thereafter a steep fall to 2009.
The reason for the increase in dividend yield for Marks and Spencer from 1.75% to 7.61% is that the dividend per share has increased from 2006 to 2009 i.e, from 12.24% to 22.54% and the share price dropped from 49.12% to 32.21% from 2008 to 2009.
Debenhams has dividend yield mounting up to 2008 and from there it had a rapid downfall from 10.56% to 0.32% to 2009 because the dividend per share has increased from 2006 to 2008 and later on decreased from 5.15% to 0.5%.
We derive that Marks and Spencer is going to make better cash return to its shareholders comparative to Debenhams.
Investors can put the cash into Marks and Spencer to get more returns on what is been invested (M&S, PLC 2008,M&S PLC 2009,Debenhams,PLC 2008,Debenhams,PLC 2009).
Dividend Cover
Marks and Spencer has a low cover indicating that it retains a lower percentage of earnings and re-invested in the business where as Debenhams has a higher percentage of earnings re-invested into the business.
Marks and Spencer has EPS rising from 2006 to 2008 from 31.23 pence to 49.12 pence and again decreasing to 32.21 pence in 2009.DPS is gradually decreasing from 12.24 pence to 22.54 pence.
Debenhams has its cover fluctuating from 2006 to 2007 with an increase of 80% and a decrease of 0.95% in 2008 compared to 2007.There is a sudden increase in 2009 of 41.19% compared to 2008.
Based on the dividend cover investors can invest in Marks and Spencer as they get larger returns and if invested in Debenhams large part of money will be re-invested(M&S PLC 2008,Debenhams PLC 2008).
Price/Earnings Ratio (P/E Ratio)
The P/E ratio of Marks and Spencer's decreases from 2006 to 2008 and increases from 2008 to 2009 on the other side Debenhams has rapid downfall from 2006 to 2007 and a decrease from 2007 to 2008, later on it increased to 7.23% in 2009.
The P/E ratio for Marks and Spencer's is high compared to Debenhams indicating less risk and a higher growth prospectus for earnings, the shares are traded at a much lower premium in 2009 compared to higher premium in 2006.
In comparison both companies have P/E ratios less in 2008 compared to 2009 due to recession. Marks and Spencer's has low market price and EPS in 2009 where as Debenhams has higher market price and higher EPS.
Investors can go with Marks and Spencer as it has higher P/E ratio compared to Debenhams. Though the market price of Marks and Spencer's is low in 2009 it is offering good premiums for the investors (M&S PLC 2008, M&S PLC 2009).
Gearing Ratios
The Gearing ratio of a company shows the finances the company is using, whether they are from loans or are from the profit. If the graph rises then it shows that the company has been taking loans for the company to run.
Here Debenhams has been decreasing the amount of loans over the years and the company; thought there has been a slight increase in 2008 there has also been an admirable drop in the year 2009. There can be two reasons for this, one that the company is performing well and the does not need any financial support and the other reason is that the company might not be doing any profit but due to its past delays in payouts it is not taking any more loans.
M&S on the other hand has increased in the year 2007-08 and then remained constant till 2009 this is can be again due to two reasons, one because the company has been doing well and s paying off its debtors on time and second that the company has been not doing well and does not want to take any more risks.
INDUSTRY SPECIFIC ANALYSIS
Retail industry has always been the boon to the economic and social environment, retail sector is intended to intervene between vast consumer needs and massive manufacturer and supply chain distribution. Marks & Spencer and Debenhams are two different retail stores that we are concerning to interpret and evaluate its financial structure on investors view. (Newman and Cullen 2002).
The retail industry plays a vital role in distribution of financial expedition and contributes greater value to the private UK economy (Euromonitor 2009).
The retail industry has suffered a hard grievance during the global recession which hit almost all the sectors amongst which European retail industries have been vastly admitted to this total mess-up, the retail industry now gradually looking to cuddle the leap of emerging markets. It was certainly a big deal for the retail industries like Marks and Spencer and Debenhams to get over from such a huge disorder, where the consumers tend to react heavily for the recession by holding back their heavy expenses; this led the retail industries to reduce the liquidity from the market and to advance their suppliers to increase more and more loan. (Euromonitor 2009).
Peer Group: Closest 10 companies based on turnover in the industry group
Marks & Spencer P.L.C:
Marks & Spencer group PLC is a retailer of clothing food and home products. The company is the holding company of the Marks and Spencer group of companies. The company holds overall revenue of 9.18bn and annual net income of 509.10m Marks & Spencer comprises of overall head count of 77,864 employees. (Marks and Spencer 2009)
Marks & Spencer is doing strong in clothing division when compared to other peer members and no longer underperforming in anyways as the gross margin of Marks and Spencer is forecasted to decline by 50 - 100 basis points when compared to last year's guidance of 125 - 175 basis points, this reflects marks & Spencer towards better stock control and greater success, However the like for like sales in UK food business is expected to decline sales which had lasted for almost two years. (September 30 2009 ft.com)
Summary 4 Marks & Spencer PLC: Competitive Position 2009
Channel
Value share
Convenience Stores
7.2%
Forecourt Retailers
11.1%
Department Stores
38.8%
Internet Retailing
2.2%
Source: Euromonitor International from trade press, company reports, trade interviews
Marks & Spencer expected a drop of between 1.25 percent and 1.75 percent in 2008's trading statement, which recently have been re-appealed that Marks & Spencer would fall between 0.5 percent and 1 percent in 13 weeks to September 26 trading statement cover. (September 30 2009 ft.com). It is also said that 2010 is still expected to be a tough year for M&S (Sir Stuart Rose, executive chairman-M&S)
Decline in Food sales M & SMarks and Spencer reported to halt decline in food sales despite the recent increase in sales of 13 weeks like for like sales of general merchandise performance were flat, for the first time in 2 years. The measure of Marks & Spencer common stock price volatility relative to the market, i.e. the sensitivity of the stock towards general market variations (Source: FT.Com) file.png
Period
2007
2008
2009
Gross Margin
38.9%
38.6%
37.2%
Food Value Market Share
4.3%
4.3%
3.9%
UK Food Sales
3.9bn
4.25bn
4.25bn
Marks and Spencer achieved the thirsted profit figures better-than its expected profit figures this lead the analysts of Marks and Spencer to raise the estimates for the whole year, The company felt hard relieved after the improvement in consumers prospects towards product purchase and its action on cost of its products. Marks & Spencer overall performance 2007 - 2009
"I think we've been through the worst of the downturn," (said Sir Stuart Rose, chief executive).
Debenhams P.L.C
Debenhams is a pleasant and omnipresent departmental store, Debenhams sells a range of products starting from clothing for the entire family to house hold needs. Apart from this the company also in joint venture with subsidiaries sells designer clothes, apparels and accessories along with their own branded products and third party brands.
MARKET CONDITIONS:
The market conditions for Debenhams and other retail sectors are not favorable on selling consumer prospects during the fiscal year 2008/2009; Debenhams delivered a robust financial performance in the first half.Though the trading conditions and consumers' interest towards buying, expensive clothes and other products were undoubtedly week and highly volatile. The unrecovered banking sector and fragile UK economy in general added extra cover to the prevailing deficiency on the economy.
Despite the conditions not being favorable to Debenhams, Debenhams business over Christmas and the winter sale considerably resulted in good profit. Debenhams' trade during the half broadly 2009 followed this pattern. Gross transaction value for the period grew by £3.6 million to £1,307.2 million. Like-for-like Sales decreased by 3.6%, excluding
VAT.debenhams.png
Debenhams performance 2007 - 2009 & 2010-03-31
The business was strongly cash generative in the half with cash inflow from operating activities of £120.8 million. Net debt at the end of the half on 28 February 2009 was £927.2 million. This was an improvement of £52.1 million over the position at the end of the first half of last year (1 March 2008) and £66.8 million better than at the end of the last financial year (30 august 2008). A £100 million amortisation payment is due in May 2009 under the terms of the main bank facility. This payment will be met out of cash flow and the funds are on deposit.
Debenhams performance 2007 - 2009 & 2010-03-31
As of last trade Debenhams Plc (DEB:LSE) traded at 75.30, 22.47% below its 52-week high of 97.12, set on May 13, 2009.
Conclusions
Marks and Spencer's overall position is good up to 2008 and in 2009 there is a decrease in gross profit due to increase in cost of sales because of recession, where as for Debenhams the gross profit is decreasing at a very slow rate from 2006 to 2009 with a rise in sales and cost of sales.
Profitability ratios show that M&S gross profit margin is more compared to Debenhams. But the returns to the shareholders and the profits are almost the same in both the cases. Efficiency ratios, Marks and Spencer is well utilizing of all its resources. Debenhams when considering a creditor period works very well but M&S does have everything sorted out very well except creditor period.
M&S has less stock turnover period which indicates fast moving of stock and fast sales. Thus the movement is more and the stock does not remain the same for a long time. Deben does not have the same so looses the product value in the market.
Efficiency ratios show that M&S is a better company to invest rather than Debenhams. The liquidity ratio shows that Debenhams has more cash over M&S. thus can pay for the current liabilities easily. Through investors perspective Debenhams has an edge through its dividend cover and TSR which are directly benefit to the investor. Gearing ratios concluded that Debenhams is more risky investment than M&S since high gearing.
RECOMMENDATION
If Investor is expecting a dividend form of returns, M&S is the good option to invest since high dividend payout.
If an investor is ready to take up the risk and expects high returns in the form of market price, then
If an investor is expecting returns in the form of market price with low risk, then
Invest all available capital in Marks and Spencer as it is providing with more dividend payout, if you want to go for dividend basis. If you want to go with share price then invest in Debenhams as the share prise is increasing from 2008 to 2009. For both the companies the share price decreased from 2006 to 2007 because of the recession. But for Marks and Spencer the share is decreasing in 2009 also.
REFERENCES
BBC News (2010) UK in recession as economy slides [online] available from <http://news.bbc.co.uk/> [15 Mar 2010]
Debenhams PLC (2006) Annual Report and financial statements [online] available from < http://www.debenhamsplc.com/deb/ir/report/2006re/> [20 Mar 2010]
Debenhams PLC (2007) Annual Report and financial statements [online] available from < http://www.debenhamsplc.com/deb/ir/report/2007re/> [20 Mar 2010]
Debenhams PLC (2008) Annual Report and financial statements [online] available from < http://www.debenhamsplc.com/deb/ir/report/2008re/> [20 Mar 2010]
Debenhams PLC (2009) Annual Report and financial statements [online] available from < http://www.debenhamsplc.com/deb/ir/report/2009re/> [20 Mar 2010]
Euromonitor (2009) Retailing - United Kingdom [online] available from <http://www.portal.euromonitor.com/PORTAL/ResultsList.aspx > [18 Mar 2010]
Euromonitor (2010) Supermarkets - United Kingdom [online] available from <http://www.portal.euromonitor.com/PORTAL/ResultsList.aspx > [18 Mar 2010]
FAME (2010) Peer Report [online] available from <https://fame.bvdep.com/version-20091031/cgi/template.dll?checkathens=1&kick=1&product=1&user=changl%40coventry.ac.uk&pw=fr%2fkTZJIDKcT1NvIC%2fAnjg%3d%3d> [18 Mar 2010]
Financial Times (2010) Markets data/Debenhams Plc [online] available from <http://markets.ft.com/tearsheets/performance.asp?s=DEB.GB:PLU> [20 Mar 2010]
Financial Times (2010) Markets data/Marks and Spencer Group PLC [online] available from <http://markets.ft.com/tearsheets/performance.asp?s=MKS:LSE&vsc_appId=ts&ftsite=FTCOM&searchtype=equity&searchOption=equity > [20 Mar 2010]
Pendlebury, M. and Groves, R. (1994) Company Accounts: Analysis, Interpretation and Understanding. 3rd Ed. London: Routledge
M&S PLC (2007) Annual Report and Financial Statements 2007 [online] available from <http://corporate.marksandspencer.com/investors/results_presentations/2007> [20 Mar 2010]
M&S PLC (2008) Annual Report and Financial Statements 2008 [online] available from <http://corporate.marksandspencer.com/investors/results_presentations/2008> [20 Mar 2010]
M&S PLC (2009) Annual Report and Financial Statements 2009 [online] available from <http://corporate.marksandspencer.com/investors/results_presentations/2009> [20 Mar 2010]
M&S PLC (2010) Annual Report and Financial Statements 2010 [online] available from <http://corporate.marksandspencer.com/investors/results_presentations/2010> [20 Mar 2010]
Wardell, J. (2009) 'British Bankers: I'm sorry for Financial Crisis' The Huffington Post [online] available from <http://www.huffingtonpost.com/> [18 Mar 2010]
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