Marks and Spencer, a partnership formed by Michael Marks and Tom Spencer in 1884. At present it is one of the UK’s leading retailers of clothes, food, home ware and financial services. Serving 10 million customers a week in over 300 UK stores with 4 holding warehouses in the UK, the company also trades in 38 countries worldwide, and has a group turnover in excess of i?? 8 billion. Marks and Spencer’s own brand St Michael, which produces all of its food products is its major strength.
Through this brand it has created its brand loyalty, customers return to the stores knowing that the product will be of good quality and they will receive the best service whilst in the store. This has helped them thought hard time, such as when in 1998 they reported a 43% decrease in sales. Many customers still carried on shopping at Marks and Spencer. Also another strength of Marks & Spencer is they are always reinvesting into their company to improve the service and product range, we saw in 2000 they introduced their ‘Count On Us’ and ‘Vegetarian’ range.
Providing a more healthy range of products, this has played a major part in improving sales. As a potential investor in the company, a further analysing of the financial statements has to be done. This allowing us to find if the company is worth investing in or not, is the company over or under value. Currently the share price of the company sit at 275. 75p per share, but this only tell us the currently value of the company per share, it don’t tell use if the company is a good investment or being running in the best way.
The company financial statement can tell you a lot about the company and its strategy, if they have been compiled accurately and according to accounting standards. After analysing Mark ; Spencer financial statements it has come to attention that, as at 29th March 2003 they consisted of equal amounts of fixed ( 3,466. 6 million) and current assets ( 3,289. 1 million), these relative high compared to competition. Fixed assets are long term assets owned by the company which does not change according to sales level, where current asset are short term and changes more.
With regards to the fixed assets, the majority of the companies’ assets are tangible with a small proportion being in investments. This reason for this is that Marks & Spencer have different strategies compared to competition, unlike the competitors Marks & Spencer own majority of their stores and warehouse freehold. Marks & Spencer do not show any intangible assets on their balance sheet, you would expect them to but a value on the brand ‘St Michael’ on the balance sheet but it has not been done. The land is not depreciated but freehold and leasehold are depreciated over 50 years.
Depreciated to their estimated residual value, over the remaining expected life of the asset or lease. Depreciation is there to remove a value of the asset which has been loss due to market demand, the ware and tear of the asset and the usefulness of the asset. This will then give you an estimated figure on what the asset is worth if sold in the current market and what people are willing to pay for it The Land and Property stated on the balance sheet was last re-valued in 1988, these assets are valued on the basis of the open market value.
Therefore this has affected the increase in fixed assets, but in recent year the company have decided to sell some property to free capital, then leasing back those properties. This will have an affect on the profit and loss account of the company and expenses will increase. The company fixtures and fitting are depreciated, during 3-15year depending on the estimated life of the asset. The same is done with the fit outs, but over a 10-25 year period. With regards to their stock, it is valued at the lower of cost using the retail method.
At 29 March 2003 it is valued at i?? 361.8 million, there will be a major difference from its competitors like Tesco. The reason for this is that Marks & Spencer only sells their own brand, therefore they only require to stock one brand of each item they sell. With in comparison with Tesco and ASDA, who stock their own brands as well as the well know brands (e. g. Tesco own brand cola, Coco Cola and Pepsi). This will all make a large different in to stock value between M&S and other competition. Net asset value can be used to give an indication of the value of the business, more people would see that the higher the asset, the more the company is worth.
But this do not tell you what the companies is worth tomorrow or how much return will u get from your investment. The company at present has 2,291,438,000 ordinary shares and they are currently valued at 275. 75p each, making a company market value of 6,318,640,285. 00. At the end of the financial year, the net assets were valued at 3,038,400,000. Net asset value is produced by calculating the company’s total asset value (Fixed and Current assets), from this you remove the liabilities of the company falling due within the year and after (Short term and Long term).
If we look at the above graph, which shows the different values of the shares at different periods. The share price multiplied by the number of ordinary shares in allocation will give you the market value of the company, but you have to consider that is this the real value of the business. Just because the company made the higher sales one day compared to another can make a difference in the price, doesn’t make it the best business to invest in. The net asset value include the stock value, depending on the valuation methods can be inaccurate.
Marks & Spencer values its stock at the lower of cost or net realisable value, like suggested in the Generally Accepted Accounting Practise (GAAP). This can be an unrealisable method if your assets do not depreciate according to time, assets like raw material and fuel where prices are also rising. But for companies like Marks and Spencer, which has a high and constant stock turnover will not expect the value to increase. But NAV is not the best way to value a company as it is based on historical cost which can be un-accurate.
Take in consideration the fixed assets of the balance sheet, the tangle asset like property and land might have not been re-valued for a long period of time. Also with the depreciation of the assets, you can not predict or put a value on how long the asset will last, the asset may be scraped due to a problem with it. M&S showed an unexpected increase in depreciation of 113million, for an investor who did know about it, this would affect the calculation on the company value. This problem can only be solved, if Marks & Spencer revalue there assets each year.
This will give a reliable figure to make a decision on, but the cost of revaluing each year will be relevantly high. The company could adopt the current cost accounting (CCA) method, were assets are valued at their replacement cost, as in how much will it cost to get the similar asset to replace it. But even this method has its disadvantages; it will be difficult and require good knowledge on identical assets, changing technology and the inflation rates they are increasing at. This will overall increase the expenses in the profit and lost account.