Interpreting profitability and risk ratios. Marks \& Spencer operates a chain of department stories located primarily in the United Kingdom. Exhibit 5.27 presents financial statement ratios for Marks \& Spencer for Year 6, Year 7, and Year 8.

a. What are the likely reasons for the increase in the cost of goods sold to sales percentages during the three years?

b. What are the likely reasons for the increase in the selling and administrative expense to sales percentages during the three years?

c. What are the likely reasons for the decrease in the income tax expense (excluding tax effects of interest expense) to sales percentages during the three years?

d. What are the likely reasons for the decrease in the fixed asset turnover during the three years?

e. What are the likely reasons for the increase in interest expense (net of tax effects) to sales percentages during the three years?

f. Did financial leverage work to the advantage of the common shareholders in each year? Explain.

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EXHIBIT 5.27 MARKS & SPENCER Financial Ratios Problem 30) Year B Year 7 Year 8 Profit Margin for Rate of Return on Assets 10.8% 5.3% 4.2% Total Assets Turnover... 1.1 1.0 1.0 Rate of Return on Assets 12.0% 5.5% 4.2% Other Revenues/Sales 3.4% 3.9% 3.9% Cost of Goods Sold/Sales 65.6% 67.6% 68.0% Selling and Administrative Expenses/Sales 22.5% 28.3% 29.3% Income Tax Expense (excluding tax effects of Interest expense)/Sales.. 4.5% 2.5% 2.5% Interest Expense (net of tax savings)/Sales 0.5% 0.7% 1.0% Accounts Receivable Turnover. 13.1 12.2 12.0 Inventory Turnover 11.1 10.6 10.7 Fixed Asset Turnover 2.1 1.9 1.8 Profit Margin for Rate of Return on Common Shareholders' Equity 10.3% 4.7% Leverage Ratio 1.5 1.6 3.3% 1.6 Rate of Return on Common Shareholders' Equity 17.3% 7.5% 5.3% Current Ratio. 1.0 1.0 1.0 Quick Ratio 0.6 0.6 0.6 Days Accounts Payable 20 16 15 15 Cash Flow from Operations/Average Current Liabilities 32.6% 7.1% 24.4% Long-term Debt Ratio 2.1% 13.7% 14.1% Debt-Equity Ratio 33.8% 37.4% 38.8% Cash Flow from Operations/Average Total Liabilities 27.4% 5.6% 16.9% Interest Coverage Ratio 20.9 8.1 4.9 Sales (Year 5 -100). 104.7 103.7 103.1 Net Income (Year 5 = 100) 109.8 49.3 34.3 Assets (Year 5 = 100) 111.6 113.9 117.0 Capital Expenditures (Year 5 100) 165.6 145.7 98.4