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Marks & Spencer has shown a significant recovery and improvement in its financial performance over the past five years, particularly after facing challenges in 2021.

1. Return on Capital Employed (ROCE):

ROCE has improved notably. Starting at 1.70% in 2019, it dropped to 0.81% in 2020 and even reached a negative -3.30% in 2021. However, the company rebounded in 2022 and 2023, with ROCE increasing to 5.54% and 7.44%, respectively. This indicates that Marks & Spencer has become more efficient in utilizing its capital, especially following the difficulties of 2021.

2. Gross Profit (GP) Margin:

While the GP margin has remained relatively stable, there has been a slight downward trend. It peaked at 36.91% in 2019, dropped in 2020, and hit a low of 31.80% in 2021. However, it began to recover in 2022 (34.49%) and 2023 (34.74%), demonstrating that M&S has managed its cost structure well despite fluctuations.

3. Operating Profit (OP) Margin:

The OP margin has been more volatile. Starting at 1.56% in 2019, it increased to 2.50% in 2020 but turned negative in 2021 (-0.34%), likely due to the pandemic. Since then, M&S has made a strong comeback, with margins rising to 5.26% in 2022 and 4.32% in 2023, indicating improved cost control and operational efficiency.

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1. Current Ratio:

M&S improved its current ratio from 0.67 in 2019 to 0.80 in 2023, reflecting better coverage of short-term liabilities with short-term assets. However, the drop from 0.92 in 2022 to 0.80 in 2023 suggests a tightening liquidity position, raising concerns about the company's ability to meet obligations without relying heavily on future sales or asset liquidation. With a current ratio below 1.0, M&S still lacks sufficient assets to fully cover liabilities.

2. Quick Ratio:

The quick ratio saw improvement, rising from 0.35 in 2019 to 0.51 in 2023, indicating better capacity to cover liabilities without relying on inventory. A sharp rise from 0.35 in 2020 to 0.62 in 2022 demonstrates enhanced liquidity management. However, the dip to 0.51 in 2023 highlights a potential vulnerability in meeting short-term obligations, as a quick ratio below 0.5 indicates limited ability to do so without selling inventory.

Summary of Liquidity Trends:

General Improvement: From 2019 to 2022, M&S showed notable progress in its liquidity. However, the slight decline in both ratios in 2023 suggests emerging concerns.

Inadequate Ratios: Despite improvements, both ratios remain below 1.0, signalling that M&S still struggles to fully cover its short-term obligations, which could affect investor confidence and operational flexibility.

While Marks & Spencer has made significant strides in improving its liquidity, recent declines in the current and quick ratios indicate that the company needs to address potential issues. Continued focus on effective cash management and operational strategies will be crucial for maintaining financial stability and meeting short-term obligations moving forward.

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1. Debtor Days (Trade Receivable Days):

Trend: Decreased from 4.17 days in 2019 to 3.76 days in 2023.

Interpretation: The decline in debtor days shows that M&S has become more efficient in collecting payments from customers, indicating better credit management. The drop from 5.26 days in 2020 reflects improved collections during the post-pandemic recovery, suggesting stronger customer payment behavior.

2. Creditors Days (Payable Days):

Trend: Remained relatively stable at around 37-38 days, with a slight increase from 37.51 days in 2022 to 37.58 days in 2023.

Interpretation: The stability in creditors days shows that M&S has maintained consistent payment terms with suppliers. The increase to 52.24 days in 2020 likely reflects the need for better cash flow management during the pandemic. The stability in recent years suggests solid supplier relationships and efficient management of cash flow.

3. Inventory Days:

Trend: Fluctuated, but decreased slightly to 35.83 days in 2023 from 36.14 days in 2022.

Interpretation: The decline in inventory days shows that M&S is turning over its inventory faster, reflecting more efficient inventory management. While inventory days peaked at 39.04 in 2019, the subsequent reduction demonstrates that M&S has improved its inventory practices, particularly after the disruptions caused by the pandemic.

4. Cash Conversion Cycle (CCC):

Trend: Increased slightly to 2.01 days in 2023 from 1.92 days in 2022, but significantly improved from negative values in 2020 (-15.74 days) and 2019 (-7.59 days).

Interpretation: The positive CCC of 2.01 days in 2023 shows that M&S is managing its cash flows effectively. The negative CCC values in 2019 and 2020 suggest liquidity challenges during those years, likely due to the pandemic's impact on sales. The improvement in recent years indicates better cash flow management and recovery from previous disruptions.

5. Overall Improvement: Marks & Spencer has shown improvements in efficiency, particularly in receivables and inventory management. The company has streamlined its collection processes and improved its ability to turn over inventory, while also maintaining stable payment terms with suppliers.

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Marks & Spencer's Gearing Ratios Analysis

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Marks & Spencer's Gearing Ratios Analysis

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1. Interest Cover:

Interpretation: The interest cover ratio, which shows how well a company can cover its interest payments, experienced significant fluctuations. It dropped to a low of 0.11 in 2021, indicating difficulty in covering interest expenses. However, by 2023, M&S had made a strong recovery with an interest cover ratio of 3.31, suggesting that the company is now comfortably managing its interest obligations. A ratio above 3 is a healthy sign, reflecting improved profitability and cash flow, which is positive for investors.

2. Gearing Ratio:

Interpretation: The gearing ratio, which indicates the reliance on debt compared to equity, peaked at 196.73% in 2021, highlighting a heavy reliance on debt and raising concerns about financial stability. By 2023, the ratio had improved to 143.21%, showing that M&S has reduced its debt relative to equity. However, with the ratio still above 100%, the company remains more debt-reliant than equity, posing potential risks during economic downturns.

Summary of Gearing Trends:

Overall Improvement: Marks & Spencer has significantly improved its interest cover ratio, rising from 0.11 in 2021 to 3.31 in 2023, reflecting stronger profitability and better cash flow management. Additionally, the company has reduced its gearing ratio from its 2021 peak, indicating a more balanced capital structure.

Conclusion:

Marks & Spencer has made notable progress in improving its gearing ratios, particularly its interest cover, demonstrating a stronger ability to meet interest obligations. However, the still-high gearing ratio suggests financial risk, requiring continued attention and management to ensure long-term financial stability and resilience.

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The ROCE for Next Plc fluctuated between 2019 and 2023 due to various factors:

2019: ROCE was high at 42.55%, likely indicating strong profitability and efficient use of capital.

2020: The ratio dropped significantly due to reduced operational efficiency and profitability, largely impacted by the pandemic.

2021: ROCE fell further to 13.37%, as COVID-19 and Brexit negotiations continued to affect the retail industry.

2022 & 2023: The company saw a recovery, with ROCE improving to 29.68% in 2022 and 30.07% in 2023, suggesting economic factors had stabilized compared to prior years.

Gross Profit Margin (GP Margin):

2019: GP margin stood at 35.37%, reflecting effective cost control and profitability.

2020: It improved to 38.45%, demonstrating resilience despite pandemic challenges.

2021: The margin dropped slightly to 35.31%, showing the continued impact of external factors.

2022: A strong recovery occurred with GP margin reaching 42.63%.

2023: The GP margin further increased to 43.21%, reflecting consistent cost management and profitability.

Operating Profit Margin (OP Margin):

2019: The OP margin was 18.28%, indicating strong operational efficiency.

2020: It rose to 20.02%, showing resilience during the pandemic.

2021: The OP margin fell to 12.58%, reflecting significant operational challenges.

2022: It rebounded to 19.57%, showing recovery.

2023: The OP margin slightly decreased to 18.70%, still reflecting strong operational performance in a recovering economic environment.

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Current Ratio:

2019: The Current Ratio was 1.83, indicating a strong liquidity position.

2020: It slightly increased to 2.06, reflecting improved short-term financial stability.

2021: The ratio declined to 1.91, suggesting a tightening liquidity position.

2022: A further decrease to 1.99 indicated ongoing management of short-term liabilities.

2023: The Current Ratio improved to 2.04, showing the company's strengthened liquidity position and ability to meet short-term obligations effectively.

Quick Ratio:

2019: The Quick Ratio was 1.37, reflecting a solid short-term liquidity position excluding inventory.

2020: It improved to 1.50, indicating better liquidity management.

2021: The ratio slightly decreased to 1.46, suggesting stability in liquidity despite market challenges.

2022: It rose to 1.47, demonstrating continued attention to liquidity management.

2023: The Quick Ratio slightly decreased to 1.44, but the company remains in a strong position to cover its short-term liabilities without depending on inventory.

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Debtor Collection (Days):

2019: The Debtor Days stood at 107.77 days, indicating slow payment collection from customers.

2020: This slightly increased to 107.80 days, suggesting persistent collection challenges.

2021: The ratio rose further to 114.43 days, reflecting delays in receivables collection amid market disruptions.

2022: The company improved its efficiency, reducing Debtor Days to 93.67 days.

2023: The ratio improved slightly to 94.06 days, indicating better management of receivables and quicker payment collection from customers.

Creditors Payment (Days):

2019: Creditors Payment was 29.70 days, indicating moderate time taken to pay suppliers.

2020: This increased to 38.38 days, likely due to cash flow pressures during the pandemic.

2021: The ratio decreased to 28.22 days, showing improved efficiency in paying suppliers.

2022: It rose slightly to 30.05 days, suggesting balanced payment practices while managing cash flow.

2023: The ratio increased slightly to 30.24 days, reflecting continued timely payments to creditors while managing liquidity effectively.

Inventory Days:

2019: Inventory Days were 69.50 days, showing efficient inventory management.

2020: This rose to 74.52 days, indicating slower inventory turnover due to pandemic disruptions.

2021: The ratio further increased to 87.81 days, reflecting challenges in managing stock levels and sales.

2022: Inventory Days slightly decreased to 88.01 days, showing some improvement.

2023: The ratio improved to 85.48 days, indicating better inventory management and more optimised stock turnover.

Cash Conversion Cycle (CCC):

A decreasing CCC in 2023 shows improved operational efficiency and liquidity, as the company is converting investments into cash more quickly. Conversely, an increasing CCC suggests that the company is taking longer to turn inventory and receivables into cash, potentially affecting cash flow negatively.

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Interest Cover Ratio:

2019: The Interest Cover Ratio was 19.30, showing a very strong ability to meet interest expenses with operating profits.

2020: It declined to 12.16, indicating a slight drop in operating income but still reflecting good coverage of interest obligations.

2021: The ratio fell significantly to 4.33, showing increased pressure on earnings, likely due to market challenges affecting revenues.

2022: The ratio improved to 8.09, indicating stabilizing earnings and better ability to manage interest payments.

2023: It further increased to 10.52, reflecting continued recovery in operating income and strengthened capacity to cover interest expenses.

Gearing Ratio:

2019: The Gearing Ratio was 274.88%, indicating a high reliance on debt, which posed financial risk.

2020: It rose sharply to 572.59%, reflecting significant borrowing, likely due to the pandemic's impact on cash flow.

2021: The ratio remained high at 376.73%, showing continued financial leverage.

2022: The Gearing Ratio improved to 213.85%, signaling reduced debt levels as the company began managing its liabilities more effectively.

2023: It further decreased to 170.67%, suggesting a healthier balance between debt and equity, leading to improved financial stability.

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Marks and Spencer encountered considerable difficulties in 2021, primarily due to inadequate cost management, poor capital allocation, and a slow response to market changes. In comparison, Next Plc demonstrated superior operational control and capital efficiency, highlighting more effective strategic decisions and stronger financial stability.