International Finance Assignment Analyzing Business Environment Of Marks And Spencer

Question

Task:
You are required to prepare/submit an individual international finance assignmentdiscussing the following: Choose a Multinational Enterprise (MNE) listed on an internationally recognised Stock Exchange (including for example, London, Dublin, New York or Paris).

It should be different than the company you have used previously for the first sit. You are required to:
a. Critically discuss two recent developments in the international financial environment which appear to have impacted on your chosen company’s recent performance and development. Analyse how these two developments are likely to impact on the company in the near future.
b. Discuss the following key elements of the MNE’s international financial and/or risk management strategy (and how they appear to have affected the financial performance of your chosen company):

• Sources of finance
• Dividend policy
c. With reference to your chosen Multinational Enterprise (and using the most recent annual report published), analyse the financial performance (in terms of profitability, liquidity, efficiency and investment) of the company in the two most recent consecutive financial periods( e.g. 2018/19 or 2019/20, ) using 8 different accounting ratios (prior year comparative figures will be available in the annual report).

Answer

Introduction
According to the research on international finance assignment, the concept of international finance refers to the study of monetary exchange that occurs between two or more countries. It largely focuses on critical areas like FDI and currency exchange rates, and the importance of international finance has increased as a result of globalization and an open economy (Evanset al., 2020). In this report, a popular listed MNE is selected, which is Marks and Spencer's based in the UK. Within this report, two recent developments within the international business environment that have impacted the recent performance, as well as the near future of the company, has been discussed. It also includes the risk management strategies in terms of sources of finance and dividend policy. In order to judge the financial performance of the company, ratio analysis for 2020 and 2021 FYs have been computed for the company.

Marks and Spencer is one of the largest retail company in the UK that is related to food, clothing and other household things. This company-owned business markets throughout the UK and Asia. It has a good market position in Europe, Asia and Arabian countries of the world. M&S was founded in 1884 with the opening of a small market in Leeds, Yorkshire. M&S's business collection includes photographs, garments, staff publications, beauty products, advertising and designing material and many more things. Over 76,000 people and 2000 suppliers across the world work under this company. It is one of the richest retail companies (Nayaket al., 2019). The company's objective is to give customers great quality, value and service. It obtained 33% of the market share of the UK (Corporate.marksandspencer.com, 2021). It earned 50.5% of total profit through online sales 75% increase in international sales during the year 2020-2021 (Corporate.marksandspencer.com, 2021). Its revenue is approximately 9.17 billion British pounds both in the UK and internationally. Though the annual report of this company shows that M&S is losing its profit and market share, it is still trying to regain its position.

Section 1: Recent developments impact on the company
Covid-19 pandemic
The total sales of M&S have declined during the period covid-19 pandemic, and it struck down the UK's economy. Its losses extended to 48%, and share prices were reduced to 2.8% during 2020-2021. The company's sales were down 19.2% during two years which is the included part of Britain's lockdown period, and Its clothing and household sales were down 49.1% and food sales down 1.1% during that time (Corporate.marksandspencer.com, 2021). Apart from that, Store sales were reduced to 47.9%, and online sales were above 39.2%. Clothing and household sales were reduced to 29.9% within the eight weeks since the store reopened (Nyame-AsiamahandGhulam, 2019). Over the half-year, its grocery market has performed strongly, and its sales are rising by 2.7% to maintain the substantial growth. For the last six months, the retailer made a loss of £87.6 million as compared to profits of £158.8 million in the last year (Corporate.marksandspencer.com, 2021). This half-year loss included £92 exceptional cost reflecting. This is an overall decrease of around 11.9% compared with the previous year. The reduction represents about 9% of the company's workforce. Its revenue came down 13.2% during this period (LeBaronet al., 2018). The total income of this company is around £9.0 million during the year 2019-2020, whereas it reduced to £7.9million in the year 2020-2021. Total revenue decreased by 11.8% as compared to the previous year (Corporate.marksandspencer.com, 2021). In the covid-19 scenario, 70% decline in revenue in M&S's clothing and home and 20% decline in revenue from food is only a gradual return, and it is impacting the company's annual revenue that shows the variance to the original budget. It has completely distorted the trading operation and business of this company. Post Covid-19 M&S reduced its clothing supply over 100 million pounds. It cancelled discretionary expenses and all pay increases. Pre-tax profit decreased below 460 million pounds which shows a depressed trading in home and clothing. Surplus ofunsold seasonal stockdeferred supply chain. Sales decreased 6.2%. There was 31.5% collapse in cloth sales and 110 stores closed.

Brexit impact
M&S has suffered a great loss under the Brexit impact. All items are affected, which consist of various ingredients. Pre-tax profit was 4.6 %, and share price was down to 1.6% (Corporate.marksandspencer.com, 2021). In 2016-17 company's pre-tax profit was around 622 million pounds as compared to the previous year 2015-16 when it was near 690 million. According to the report, during 13 weeks, sales of clothing and home products come down 8.9% (Corporate.marksandspencer.com, 2021). It was M&S' worst performance since the year 2005-06. The firm is nearly 90% hedged during 2016-17 and 80% hedged during 2017-18. Total sales reduced to 3.6% in December 2016 and came down 8.2% after six months. The company's clothing sales slumped by 25% during 2016 (Vosset al., 2019). UK wide lockdown hit sales and the business and also its share price, which rose 2.3% in the previous year (Jinet al., 2018). Its policy hedged currency requirements 18 months ahead. M&S is badly affected as it has more supply chains than its competitors. Since Brexit, it was problematic to maintain supply chain standards. It is also impossible to supply fresh products to the customers due to high standards, and it resulted in an ongoing impact on the business performance. Another problem was that due to hold-up caused; it was impossible to give the products to shops. M&S was faced with a costs problem as it had to pay for warehouses in EU countries if products with a short life were held up at borders due to supply chain problems (Casado-Arandaet al., 2020). For this reason, M&S planned to close Paris stores by the end of that year, removing the sale of all fresh products from stores. Thus, it was forced to shut more than half of its stores.M&S upgraded its profit after a long break in demand of food and online cloth sales. It shows their new plan has started to develop. As Britain left EU, it impacts product availability in stores. It restricted in Czech business. Administration cost would be increased. Retain price will also rise. Clothing, home and food retailer faced a pretax loss of 17.4 million pounds.

Section 2: Risk management strategy
Source of finance
M&S is one of the largest retail companies in the UK. It provides quality clothing, household products, and food and beauty products all over the world. Its 49% sales are made by clothing, and 51% is made by food products (Corporate.marksandspencer.com, 2021). This company's 90% business comes from sales in the UK, and the rests part comes from sales in other countries. Trade credit finance is collected from suppliers of goods and services by delivering goods and the provision of the account getting by the recipient (Esoimeme, 2020). The length of trade credit depends on the industry, bargaining power, custom and practice and quality of products. M&S's short-term loans come from bank loans which are £147.9 million (Corporate.marksandspencer.com, 2021). Its lease liability is £13.7 million. Bank loans are nearly £11.2 million. Its total ordinary share capital was $15864 million in FY 2019.

The company generated overall £9062.1 million revenue; £ 652.8 million was generated from its business in the UK and £116.1 million from business in other countries (Corporate.marksandspencer.com, 2021). Its ploughed back profits are also used to grow its marketing. Mark and Spencer's sources of finance are both external and internal. The company mainly focused on buying and selling products as it has a range all over the world (VerhoefandBijmolt, 2019). During the past 5 years, the company's retail gearing level was around 44.7% which is an internal source of finance. A 10-year public bond valued at £400 million was sold in 2014 at a fixed rate of 5.625% (Corporate.marksandspencer.com, 2021). These raising funds are used as a cash contribution to the company.

Dividend policy
M&S' current dividend amount is £0.039. In 2020 its growth rate was -0.38%. During FY 2018, it was rising at 7.56%, but from FY 2019, it was declining and reached 5.15%. It is one of the largest dividend-paying stocks in the UK market (Corporate.marksandspencer.com, 2021). During the last 15 years, investors have been buying its share when its price is under 300p. After 2010 its dividend is increasing. The dividend was over 6% for that time. At the present ten-year, average incomes are 35.8 paise, and its dividend is 18.7p (Corporate.marksandspencer.com, 2021). M&S maintained an overall growth rate of around 0.3% per year. M&S' market share was dropped in 2004 to 11% from 0.2% (According to annual report, 2004).

It has the capacity to cover its loss by capital investment. The food business of this company is continually growing at around 5% per year. For many reasons, M&S had chosen to take a huge debt load relative to many other retailers. M&S always offered a Dividend Reinvestment plan that was used for the cash dividend to buy additional shares. It is expected that M&S' group dividend can increase (Upadhyayet al., 2021). The previous dividend of this company was 3.9p. As pre-tax profits were down 15% to 16% per year, so, it was decided that £130 million was kept to pay shareholders as a final dividend for the year 2022, which was a 40% cut to that of the previous year. It is already troubling with a £350 million bond issue, a right policy and cut have to make its dividend. At present, it has £1.34 billion in liquidity, a £1.1 billion credit facility and £185 million in cash (Corporate.marksandspencer.com, 2021). It includes its capital expenditure in the FY 2021 from £400 million to £80 million. M&S' dividend plunged 46% since the beginning of 2020, and it reinstated its dividend in November 2021.

Section 3: Calculation of ratios
Profitability ratios
The profitability ratio computed for a company depicts the overall profitability strength in terms of its balance sheet assets, net revenue and shareholders’ equity. As opined by De NeveandGerds(2020), the profitability ratio indicates how efficiently the company is able to generate profits and value to its shareholders. A higher profitability ratio is favorable to the business; however, these ratios provide more information in comparison to the results of the other companies, their historical performance and industrial average.

Return on Equity
ROE is termed as one of the important ratios for the shareholders, which measures the potential; the ability of the company to earn the return on their investments (Beyne, 2020). The ratio can improve due to higher net profit, which can be generated from a larger asset that is funded with the debt capital.

M&S computed its ROE for the recent two years, which are 2020 and 2021, as 2% and -9%, respectively. This shows that there has been a steady decline in the ROE of the business from a positive 2% return to a negative 9% return made from the equity investment of the business (Corporate.marksandspencer.com, 2021). Hence, the profitability of M&S in terms of generating a return for the equity investors has declined significantly, resulting in dissatisfaction among the investors.

Return on Assets
ROA is a profitability ratio that offers information about how much the profit of the business is generated from its assets (Razzaqet al., 2021). It is through ROA that the business measures how efficient the management of the company is in earning a profit from its assets on the balance sheet.

The ROA of M&S is reported to be 1% for 2020 and -2% for 2021 (Corporate.marksandspencer.com, 2021). This clearly shows a decline in the returns generated by M&S from its assets from 2020 to 2021. It is due to the reason of a loss incurring situation held by M&S during 2021 as a result of the Covid-19 pandemic. This shows that in both years, the balance sheet of the company failed to generate handsome profits from the utilization of assets resulting in a decline in the overall profitability of the retail business.

Liquidity ratios
The liquidity ratio is an important category of financial ratio that is computed to determine the current debt obligation of the business without the need of raising the external capital. The liquidity ratio is used that affects the credibility of the company and the credit rating of the entity within the given industry and therefore plays a strong role in maintaining financial stability (Liet al., 2022).

Current Ratio
The current ratio is a very liquidity ratio that equates the current assets against the current liabilities (Bragg, 2018). It indicates the financial health of the business and how it can maximize the liquidity performance of the current assets to meet the debt and short-term payables.

The current ratio for M&S for the years 2020 and 2021 was 0.65 and 0.69, respectively (Corporate.marksandspencer.com, 2021). Ideally, the current ratio for the business must be 2 to call the company financially healthy in terms of liquidity. However, M&S failed to achieve the optimal CR in both years depicting a poor liquidity performance for the entity. However, the value has increased by 0.04 from 2020 and 2021; it needs to optimize its current assets to make more payments of its current liabilities effectively.

Quick Ratio
The quick ratio or acid-test compares the most liquid assets to the current liabilities of the company to verify where the company has adequate cash in making immediate payment to the short-term debt. The acid test ratio does not consider all the current assets as, for instance, inventories and prepaid expenses cannot be converted into cash easily and therefore not treated as quick assets.

The quick ratio of the company calculated for the years 2020 and 2021 for M&S shows the value as 0.35 and 0.42, respectively (Corporate.marksandspencer.com, 2021). There has been an increase in the quick ratio performance for the business suggesting better liquidity performance for the entity. However, the optimal acid test ratio must be 1, which M&S has failed to derive for both years. This suggests that the company does not have adequate quick assets to fulfil the debt that are due for the short term.

Efficiency ratios
The efficiency ratio of a company measures the potential ability to use the assets in order to generate income for its usage (ErfaniandVasigh, 2018). It assesses the usefulness of the assets as well as managing the liabilities for the business effectively for the current period in the short term.

Inventory Turnover
The stock turnover ratio shows how quickly the business can readily sell off its goods and replace the inventories within the given time. A higher stock turnover ratio suggests that the company is selling off its goods quickly due to high demand in the market.

The inventory turnover ratio for the company during 2020 and 2021 was 0.02 times and 0.10 times (Corporate.marksandspencer.com, 2021). As a retail business, it is extremely low for M&S to have a slow stock turnover ratio. This suggests that the company is failing to replace its old stock due to poor demand in the market for its goods.

Fixed Asset Turnover
The fixed asset turnover ratio is a kind of efficiency ratio that measures how the company’s return on its investments in PPE is compared with net sales and fixed assets (BANSAL and KUKKAR, 2019). It calculates the effectiveness of the business in generating sales with the help of non-current assets of the business.

The fixed asset turnover ratio for M&S is calculated as 1.13 times in 2020 and 1.30 times in 2021 (Corporate.marksandspencer.com, 2021). There has been a slight increase in the turnover ratio suggesting better effectiveness and efficiency of the fixed assets in generating income for M&S. However, as a turnover ratio, the values are very low means there is a very small contribution made by the fixed assets on the sales of M&S.

Investment ratios
The investment ratio is a kind of ratio that provides an overview to the company about the overall financial performance as well as the potential return capacity from the business or the investment (Eastonet al., 2018). The investment ratio is helpful for prospective and existing investors to make investment decisions for the business.

EPS
The EPS talks about how much return does the company make from a share of the stock invested in the market. A higher return suggests that the company is doing well in the stock market.

The EPS of M&S for 2020 was 1.3p, whereas, for 2021, it was -10.1p due to a loss made during the year (Corporate.marksandspencer.com, 2021). The EPS or the return from the ordinary stock for M&S is said to be poor; as a result, it offers a low return to the investors as well.

P/E
The P/E is the ratiothat values the company by measuring the current share prices in relation to its EPS. The P/E ratio is also known as price multiple or earnings multiple.

The P/E ratio for the years 2020 and 2021 is 4.03 times and 131.53 times, respectively (Corporate.marksandspencer.com, 2021). This shows there has been an increase in the P/E ratio for the company, which shows that the current share price has been increasing for the business drastically, indicating better future prospects for the business.

Conclusion
It has been concluded that M&S has formed business partnerships all over the world. This company has extended its market for the past 136 years. It has transformed its business from a number of outdoor stalls in various markets in the UK. This company made its retail partnership with many markets over the years. It has the reputation to provide good products. According to UK statistics, M&S is the second most popular market in the UK. Its online store and offline outlets helped the company to spread its market globally. With all this, the brand made a friendly relationship with its employees. When this company brought many brands under its root, it has made M&S stronger. Due to the Covid pandemic and Brexit impact company's sales declined at the end of 2019. It happened as it had poor supply chain products and non-availability of products. After doing a comparison with other companies, we come to see that the loss of this company is slightly less than other companies. It can be recovered by creating a proper supply chain and product availability. Besides this, the company needs to focus on the increase of online stores. As well as, M&S needs to improve its customer segmentation policy by decreasing rental cost, maintenance and management cost and increasing its profit percentage. Hence, it will be very competitive as it was before.

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