Provide a 6 pages analysis while answering the following question: Report on Marks and Spencer. Prepare this assignment according to the guidelines found in the APA Style Guide. An abstract is required. The current liabilities includes trade payables and other payables, borrowings and other financial liabilities, partnership liability to the pension scheme, derivative financial instruments, provisions and current tax liabilities. The company had Interest bearing debts from external sources of ?2,760.9 million and loans from partners to fund the pension scheme of ?71.9 million. Both consist of a mix of a long term portion and a short term portion which is due within the next 12 months. The table below provides that information for interest bearing or fixed interest debt.. Interest Bearing Debts Period Partnership loans ? Other Interest Bearing Loans ? Total Current 0 482.9 482.9 Non-current 71.9 2,278.0 2349.9 Total 71.9 2,760.9 2832.8 Marks and Spencer’s Financial Structure The following ratios in the table below will assist in the assessment of Marks and Spencer. Ratio Formulae 2010 2009 Debt Management Debt ratio (Total liabilities/Total assets) x 100% (4,967.3/7,153.2)x100% = 69.4% (5,157.5/7,258.1) x 100 = 71% Gearing Ratio Interest Bearing Debts (IBD)/Equity + IBD 2,832.8/5,018.7 = 56.4% 3,200.6/5,301.2 = 60.38% Interest Cover Profit Before Interest and Tax (PBIT)/Interest Expense 852/162.2 = 5 times 870.7/214.5 = 4 times Liquidity Ratio Current ratio Current assets/current liabilities 0.80 0.60 Acid Test Ratio Current assets – inventory)/current liabilities 0.47 0.37 Debt Management The debt management ratios indicate how the company’s management has managed the debts of the company. According to Brigham (2005) the extent to which debt financing, which is also referred to as financial leverage is used by a firm has three implications. Firstly, financing the business using debt will allow share holders to maintain control of the company without increasing their investment in it. Secondly, shareholders returns can be substantially increased if the company earns more on investments that are financed with borrowed funds. However, financial risk increases as debt increases. Thirdly, creditors depend on shareholders to provide a margin of safety. Therefore the more funds supplied by shareholders the more comfortable they are in doing business with the company. Additionally, the interest expense which relates to interest charged on borrowed funds is allowable as a deduction for tax purposes. Dividend is not so allowed and is a distribution after tax is deducted. The Debt Ratio The debt ratio is the ratio of total liabilities to total assets and provides information on how much of the funds are provided by sources other than equity. The company’s debt ratio is 69.4% for the year ended April 3, 2010. Although this is an improvement over the previous year’s figure of 71%,. the guideline indicates that a percentage over 50% percent does not augur well. Marks and Spencer’s debt ratio is unfavourable and indicate problems with its financial structure. However, a comparison with the average in the industry in which Marks and Spencer operates is important. The gearing ratio below will provide additional information. The Gearing Ratio The gearing ratio is the portion of interest bearing debts to equity and interest bearing debt. The gearing ratio of 56% suggests that the company has a significant amount of interest bearing debt in its capital structure. The normal threshold of 50% has been exceeded. However, whether the ratio is favourable or not depends on the industry.
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