Marks & Spencer plc Essay Example | Topics and Well Written Essays - 2000 words

Marks & Spencer plc - Essay Example The management of the company may want to contemplate a change of strategy, for example by reducing its current liabilities, to avoid landing into financial problems. The ratio has declined from 0.74 in 2011 to 0.73 in 2012, which could be attributable to leaner working capital cycle or deteriorating liquidity position (Bodie, Alex, and Alan, 2004; Damodaran, 2002). 2011 2012 Industry Current Asset 1,641.7 1,460.1 Current Liabilities 2,210.2 2,005.4 0.74 0.73 1.44 Quick ratio Quick ratio = [cash and equivalents + short-term investments + accounts receivable]/current liabilities 2011 2012 Industry Cash and equivalents 470.2 196.1 Short-term investments 18.4 67.0 Accounts receivable 250.3 253.0 Total Current liabilities 2,210.2 2,005.4 Quick ratio 0.334 0.257 0.82 Unlike the current ratio, this ratio is more conservative because it does not include inventory from the current assets. This ratio further shows that Mark & Spenser is likely to have problems meeting its short-term obligatio ns with its most liquid assets, especially considering the ratio is significantly below the industry average (M&S, 2012; Weston, 1990; Houston and Brigham, 2009). Leverage against KPI As discussed, the company’s leverage is unfavourable, but with the continuing efforts to build the company to become more international.ly focussed, with the sales expected to increase by 5.8% by 2013, the increased revenue can be used to offset the excessive shot-term debt. This will lead into a more balanced liquidity position, hence freeing the company from the risk of bankruptcy (Weygandt et al., 1996; HayGroup, 2006). Solvency ratio Solvency Ratio = [After Tax Net Profit + Depreciation]/ [Long Term Labialise + Short-Term Liabilities] 2011 ?m 2012 ?m After Tax Net Profit 782.7 371.4 Depreciation 467.5 479.7 Total 1250.2 851.1 Long-Term Liabilities 2,456.5 2,489.1 Short-Term Liabilities 2,210.2 2,005.4 Total 4,666.70 4,494.50 Solvency Ratio 0.27 0.19 Solvency is used to measure the companyâ⠂¬â„¢s ability to meet its long-term obligations. In other words, it measure’s the ability of the company to go on with meeting its debt requirements. The solvency ratio of 2011 was financially healthy, but that of 2013 was not healthy because as a general rule of thumb a ratio that is greater than 20% is considered financially healthy. It is discouraging to note that the company’s solvency ratio is dropping because this could expose the company to a situation of defaulting on its debt obligations (Gates, 2002). Debt to equity ratio Debt to equity ratio = Total debt/ [Owner’s Equity] 2012 2011 Industry Total debt 2,778.8 2,677.4 Owner’s equity 4,494.5 4,666.7 Debt to equity ratio 61.8 57.3 42.35 The debt-to-equity ratio indicates the degree of financial leverage that the company is using to improve its profitability. This ratio has increased to 61.8 from 57.3 in 2011, which may imply that the management should restrain use of additional increases in debt caused by purchases of fixed assets or inventory. The