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The gearing ratio reflects the proportion of a company's debt to its equity, providing insights into its financial leverage and how much it relies on debt for financing. A high gearing ratio indicates more reliance on debt, while a lower ratio implies more equity financing or a reduction in debt.

Both companies show a trend of reducing their gearing ratios in recent years, but Next PLC had significantly higher leverage, particularly in 2020. Its efforts to reduce debt have been substantial, but it still maintains higher financial risk compared to Marks & Spencer.

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Marks & Spencer:

M&S's profitability improved in 2023, with a 3.99% operating margin. However, high operating costs continue to limit performance, despite stable gross profit margins around 34-35%.

We can also see that they suffered a lot in 2021 due to Covid-19 but after the pandemic period we can see that the company learnt from it because it shows better results than the years before it.

Next Plc:

Next Plc's profitability remained relatively stable before and after the pandemic, with gross profit margins hovering around 40% and operating profit margins staying above 17%. Despite a temporary dip in 2021 due to the pandemic, the company quickly recovered, indicating strong operational resilience and effective cost control. This consistency highlights their ability to maintain steady performance despite external challenges.

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Marks & Spencer:

During the years we can see that the cash conversion cycle went from positive to negative (from +3 days in average to -12 days) which is really good.

It means that Marks & Spencer is able to receive payments from its customers before it has to pay its suppliers.

The company is able to finance its business with its customers' money, without having to use its own cash.

Next Plc:

We can see on both graph and datas that the Next Plc conversion cycle is not really good, it takes on average 150 days to convert into cash.

However it doesn't seem like an issue for the company because it's been like that for more than 5 years now.

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Next Plc consistently maintains a much higher current ratio compared to M&S, indicating stronger liquidity and financial health. M&S has struggled to keep its current ratio above 1.0, while Next Plc consistently hovers around 2.0, showing that Next Plc is in a better position to cover short-term liabilities.

Regarding the quick ratio, similarly, Next Plc has a much stronger quick ratio, consistently above 1.3, compared to M&S, which fluctuates between 0.35 and 0.62. This shows that Next Plc has more liquid assets, while M&S has had difficulties maintaining adequate liquidity.

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Marks & Spencer Critique:

Marks & Spencer’s poor liquidity ratios and declining profitability indicate challenges in managing cash flow and operational efficiency. The low quick and current ratios suggest that the company has struggled with short-term financial obligations, and the high inventory levels reflect inefficiencies in stock management, leading to poor cash conversion.

Next Plc Critique:

Next Plc shows consistently strong profitability, but its high gearing ratios from 2019 to 2021 indicate over-reliance on debt financing. This increased financial risk during a period of uncertainty. Additionally, their relatively high inventory days compared to creditor days point to less efficient working capital management.