Practices of Marks and Spencer plc
Using Hermes principles, this paper attempts to critically evaluate the financial management policies and practices of Marks and Spencer plc for the last five years with the latest year ending 2007 by naming the areas that could be investigated properly. This will be followed by an evaluation of the usefulness of the Hermes principles for the purpose of determining whether there is ground to improve on these principles.
The financial statements will be downloaded from the website of Marks and Spencer for the last five years and financial ratios will be extracted as basis for deeper investigation for the purpose of identifying areas for exploration on a more detailed basis. Insights that will be gained in this research is expected to be added to the existing body of knowledge in finance which could either modify or improve any existing theory on the matter. 2. Discussion with Analysis 2. A. 1 Part A – Critical evaluation of the Financial and Management policies and practices of Marks and Spencer plc over the last five years using the Hermes Principles.
The financial Hermes principles applicable The finance principles which are the subject of this paper are just part of the ten complete Hermes principles (Hermes, 2008). What are covered here therefore are the second, third, fourth, fifth and six principles among the ten. Under the second principle Hermes (2008) requires firms to have appropriate measures and systems in place to ensure that they know which activities and competencies contribute most to maximizing shareholder value.
Under the third principle, it is required that firms ensure all investment plans have been honestly and critically tested in terms of their ability to deliver long-term shareholder value. Measures and systems under second principle and test of investment plans under the third principle are complemented by fourth principle on the need to allocate capital investments by seeking fully and creatively to exploit opportunities for growth within the firm’s core business rather than resorting to unrelated diversification.
This is particularly true when considering acquisitive growth. The fifth principle further adds the requirement to have performance evaluation and incentive systems that are cost effectively designed to motivate to action managers in bringing in long-term shareholder value for the firm. The sixth principle comes prescribing the need for companies to have an efficient capital structure which will minimize the long term cost of capital.
Base on the presentations made there is need to establish internal consistency with each other, which at this point, this researchers finds them as complementary principles as each is talking to related things with one another. As to whether there is a inconsistency of the Hermes principles will be best appreciated in the second part of the paper after using the case of Marks Spencer to test its application. How the could the Hermes principles be applied with Marks and Spencer?
The activities and competencies that Marks and Spencer are required to under the Hermes principle requires measures and systems in relation to knowing what will deliver the maximum shareholder value. From the company’s financial statement, certain ratios could be extracted to match these requirements for measuring those that would have direct relation with shareholders’ value. These ratios may include the profitability ratios and the gearing ratios. The first could ratio assumes that the greater the earning, the greater should be the value of the stock price.
To know the investment plans to be tested, there is a need to look at company strategies of the company on whether these are attaining corporate objectives particularly the financial ones since these are related to generating shareholder value. This paper is of course referring also to the further use of profitability and gearing ratios whether targeted rates are being attained by the company. This will in effect critically test the firm’s ability to deliver long-term shareholder value under the third principle.
The fourth principle could only operate if this paper could have access to capital investments made by the Marks and Spencer for the past five years to find out if the actions match the requirement to explore opportunities by earning higher than the firm’s cost of capital. The company’s having crafted performance evaluation and incentives programs must also be look into in such a way that it is cost effective and could move managers into action without being caught under situations where conflict of interest could come into the picture.
It should be pointed out the application of the fourth principle will involve looking also into the company financial statements via the financial ratios that would provide the lead. Incidentally measures, like return on assets and net profit margin under the profitability ratios could be ways of measuring managers’ performance, hence it appear that a financial analysis would ensure the application of the Hermes principles in evaluation the financial management performance of Marks and Spencer.
To get the financial ratios of Marks and Spencer will lead this researcher to have the needed measures and systems as required in the principles. Profitability, liquidity and gearing ratios will be applied to know the competencies and activities, investment plans, capital investments, performance incentive programs and capital structure requirement for the Marks and Spencer. . 2. 2 Analysis of Profitability Ratios Profitability may be viewed using return on equity (ROE), return on Assets (ROA) , net operating margin and net profit margin.
The returns on equity of Marks and Spenser PLC, are found to delivering the beyond expectation. The past performances of the firm over the last five years showed a low of 23% and a highest of 43% which could only speak of really remarkable performance. The last recent three years must have been really great for investors as they seem to have earned more than other investors would normally get. A little variability noted did not destroy the trend of continued increase in share prices over the years under review.
See Table I below in relations to Figure 3 at the later part of this paper. A return of equity of 20% is already high but doubling it to more than 40% as in the case of Marks, it would be hard to convince anyone that such things could come but it was true of Marks and Spencer. The best reference point if conservatism is the basis is the Bank of England base rate at 5. 25% (Housepricecrash,co. uk, 2008). Imagine earning more than six times a risk free rate and one could just imagine the joy that would be there among investors.
By looking at the company’s net profit margin and net operating margin, a validation could be made as to profitability as determined using the return on equity earlier. The net margins of the company for the years 2003, 2004, 2005, 2006 and 2007 average at 5%. The operating margins on the other hand, were computed at 9%, 10%, 9%, 11%, 12% for years 2003, 2004, 2005, 2006 and 2007 respectively from 2003 to 2007, or an average of 8%. See Table I below: