"Business generally exist with the primary purpose of creating wealth for their owners. Profitability ratios provide an insight to the degree of success in achieving this purpose. They express the profit made (or figures bearing on profit, such as sales revenue or particular expenses, like labour cost) in relation to other key figures in the financial statements or to some business resource." (Teoh 2010:181)
Return on Capital Employed (ROCE)
"The return on capital employed ratio is a fundamental measure of business performance. This ratio expresses the relationship between the operating profit generated during a period and the average long-term capital invested in the business during that period." (Toeh 2010:187)
ROCE of Marks&Spencer has declined from 14.44% in 2008 to 9.31% in 2009, because of the decreasing in operating profit before interest and tax (PBIT). PBIT has decreased from £ 1.129.000 million in 2008 to £ 706.200 in 2009, which is declined approximately 37.5%. Despite capital employed has increased from £ 7.817.500 million in 2008 to £ 7.581.600 milllion in 2009, by 3%. Actually, this amount of difference is caused by administration expenses of 2009 and 2008. While the gross profit of 2008 was £ 3.486.800 million, it had £ 2.447.200 million for administration expenses, but in 2009, the gross profit is £ 3.371.900 million and the administration expenses are £ 2.780.400 million. In spite of having less gross profit, the administration expenses are raised which caused this amount of difference in net profit. While other incomes are raised by 2009, Marks&Spencer paid more interest than the previous year. The difference between the revenues of 2008 and 2009 is not so much, they are almost at the same amount, but the difference is between the net income of 2008 and 2009. The net income of 2008 is £ 821.000 million and the net income of 2009 is £ 506.800 million, which refers to a 38.2% decrease in the net profit.
On the orher hand, ROCE of Debenhams has just decreased from 8.06% in 2008 to 7.92% in 2009. The increase in the net profit from £ 77.100 million in 2008 to £ 95.100 million in 2009 is 19%. The reason of this small decline in ROCE of Debenhams, while PBIT hass increased from £ 105.900 in 2008 to £ 120.800 in 2009, by 14%, capital employed has increased more than PBIT from £1.314.00 million in 2008 to £ 1.524.300 million in 2009, by 16%. Compared to Marks&Spencer's decrease, Debenhams have had a more successful year by keeping its ROCE almost at the same level.
Net Profit Margin
"Net profit margin relates the operating profit for the period to the sales revenue during that period." (Toeh 2010:189)
Marks&Spencer's net profit margin has decreased from 12.51% in 2008 to 7.79% in 2009. The reason of this decline is the decrease of Marks&Spencer's PBIT in this period.
The net profit margin of Debenhams has increased from 5.76% in 2008 to 6.31% in 2009. The incline in PBIT of Debenhams is greater than the incline of revenue for this period.
"It is vital to the survival of a business that there are sufficient liquid resources available to meet maturing obligations (that is, amounts owing that must be paid in the near future). Some liquidity ratios examine the relationship between liquid resources held and amounts due for payment in the near future." (Teoh 2010:181) "Liquidity ratios are concerned with the ability of the business to meet its short-term financial obligations." (Teoh 2010:200)
"The current ratio compares the 'liquid' assets (that is, cash and those assets held will soon be turned into cash) of the business with the current liabilities." (Teoh, 2009: 200) The retailers like Marks & Spencer and Debenhams have relatively low ratio, where 2:1 seems as 'ideal' current ratio, because their product range is so wide, as they have both fast-moving inventories of finished goods and the products like clothing, furniture, gifts.
While Marks & Spencer's current ratio have decresead, the current ratio of Debenhams have increased from 2008 to 2009 showing that the liquidity of Debenhams has improved in this period. The current ratio of Marks&Spencer has declined from 1.89:1 in 2008 to 1.74:1 in 2009 whereas Debenhams increased from 0.54:1 to 0.88:1.
The current assets and liabilities are going to be returned to cash in the following 12 month, so the current ratio measures short-term liquidity (Ross 2008). In 2008 Marks&Spencer has £1.89 in current assets for every £1 in current liabilities, and Debenhams has £0.54 in current assets for every £1 in current liabilities. If the current ratios of the companies checked while Marks&Spencer has £1.74 in current assets, Debenhams has £0.88 in currents assets for every £1 in their current liabilities.
- Toeh, L. K. (2010) M05EFA Financial Analysis and Decision Making. Pearson Education Limited
- Ross, S. A. , Westerfield, R. W. , Jaffe, J. , Jordan, B. D. (2008) Modern Financial Management. 8th edn. McGraw-Hill/Irwin