Analysis Of Working Capital, Liquidity, Profitability And Investor Ratios Of Next Plc Through Ratio Analysis

Part 1: LLC Structures

The present report is developed for developing an understanding of the specific aspects of the operations of Limited Liability Company (LLC). In this context, it has discussed the merits and demerits of the LLC in comparison to the business structure of sole proprietorship and partnership. This is followed by demonstrating an understanding of the financial statements of a LLC, that is, Next Plc through the use of ratio analysis. The ratio analysis carries out an examination of the working capital, liquidity, profitability and investor ratios of the company. 

Limited Liability Company (LLC) can be regarded as a corporate structure in which the members of the company do not possess any personal liability for meeting its financial debts or liabilities. They can be regarded as hybrid entities that integrate the characteristics of both corporation and sole proprietorship. LLC possess the business structure of both partnership of sole proprietorship but a limited liability of a corporation. As such, in this type of businesses there is distinction between the business assets from the personal assets of the owners and as such they are not responsible for meeting their debt or liabilities. LLC is not regarded as a separate entity and as such the company is not required to pay any taxes or being responsible for any type of financial losses (Mancuso, 2016).

The major merit of the LCC in comparison to other business forms that are sole proprietorship and partnership can be stated as follows:

• It is not subjected to higher types of financial regulations in comparison to the sole proprietorship and partnership. As such, it facilitates the management for developing flexible organizational structure in comparison to other business forms.
• There is no requirement for filling a corporate tax return as the owners report their share of profit and losses on the tax returns that enables the firms to avoid double taxation.
• The ownership in the case of Limited Liability Company can be easily transferred to a third party without having any impact on the business operations. On the other hand, the ownership transfer in the case of sole proprietorship or partnership is a complex process that requires that each of its assets, licenses or permits need to be individually transferred.
• It is also attributed to be least expensive form of company structure to be established in comparison to other business firms
• Also, the business in the case of limited liability company can be easily dissolved in comparison to other types of business structure
• The owners are in complete control of the business and can take decisions that they think to be adequate (Cody, 2007)

The demerits of the LLC business structure are stated as follows:

• The major drawback of establishing a LLC in comparison to the business forms of sole proprietorship or partnership is that it incurs higher cost for its initial establishment. The cost is incurred in the form of initial formation fees and filling fees
• There is a lot of paperwork requires foe establishing a LLC in comparison to other types of business firms. The sole proprietorship or partnership can be established without having any formal organizing procedures.
• It is required for the owners of the LLC to maintain separate records for maintaining their liability protection. They are requires to keep personal affairs in distinction with the main business and this is often a very complex process requiring huge time and money
• The owners of a LLC does not possess any authority for issuing shares in order to realize funds from the investors (Martin, 2010)

In this section of the report, interpretation of financial statement of Next Plc has been done for last five years. In order to perform the interpretation of financial statement of Next plc, ratio analysis has been used and this analysis covers working capital ratios, liquidity ratios, profitability ratios and investor’s ratios.

For the purpose of calculation financial data has been collected from the annual reports of Next Plc for last five years and it has been presented in below table:

Financial Statement data of Next Plc
Financial Data	2014	2015	2016	2017	2018
Trade Receivables	£     808.00	£     844.30	£  1,050.50	£  1,125.80	£  1,248.20
Sales / Revenue	£  3,740.00	£  3,999.80	£  4,176.90	£  4,097.30	£  4,055.50
Inventory	£     385.60	£     416.80	£     486.50	£     451.10	£     490.10
Cost of Sales	£  2,499.90	£  2,656.40	£  2,724.20	£  2,710.70	£  2,699.30
Current Assets	£  1,468.10	£  1,616.00	£  1,642.20	£  1,660.60	£  1,797.50
Current Liabilities	£     834.50	£     886.60	£  1,170.60	£     725.00	£     914.80
Quick Assets	£  1,082.50	£  1,199.20	£  1,155.70	£  1,209.50	£  1,307.40
Net Profit	£     553.20	£     634.90	£     666.80	£     635.30	£     591.80
Profit before Interest and tax (EBIT)	£     722.80	£     812.10	£     867.20	£     827.70	£     759.90
Shareholders’ Equity	£     286.20	£     321.90	£     311.80	£     510.50	£     482.60
Non Current Liabilities	£  1,023.90	£  1,073.80	£     847.70	£  1,169.30	£  1,164.10
Net income available to common stockholders	£     553.20	£     634.90	£     666.80	£     635.30	£     591.80
No of common shares outstanding (in Millions)	151.10	148.30	148.00	144.00	142.00

(Annual Report: Next Plc, 2014), (Annual Report: Next Plc, 2015), (Annual Report: Next Plc, 2016), (Annual Report: Next Plc, 2017) and (Annual Report: Next Plc, 2018)

Working capital ratio is also known as efficiency ratios as these ratios measures efficiency of management to utilize the resources in optimum manner. Receivable days and inventory day’s ratios are calculated in this category of ratios.

Type of Ratios	Formula	2014	2015	2016	2017	2018
Working Capital Ratios
Receivable Days	(Trade receivables *365) / Sales	78.86	77.05	91.80	100.29	112.34
Inventory Days	(Inventory *365)/ Cost of sales	56.30	57.27	65.18	60.74	66.27

Note: Trends in the above ratios can be seen in appendix

• Receivable Days: This ratio provides information about the efficiency of management to collect the debts. It tells how quickly the company able to collect the debt as it fall dues. Most importantly this ratio helps in understanding credit policy of debtors as weak credit policy create a situation of shortage of cash fund within the company. There was increasing trend in this ratio that reflects poor management performance in collecting the debt on time. It reflects very weak credit policy of the company for collecting the debts (Brigham and Houston, 2012).
• Inventory Days: Inventory day’s ratio is very important ratio from the point of management performance as it provides number of days taken by the management to turn inventory into sales. It measures the number of times the inventory is sold or used in one year time period. This ratio is mainly used to evaluate management performance and also for inventory management. There was increasing trend in this ratio during the last five years that signifies very bad inventory management by the company and shows poor management performance as it fails to convert the maximum amount of inventory into sales in current year as compare to previous. Management now requires 67 days to convert average inventory into sales while in year 2014 it requires only 56 days to convert inventory into sales (Davies and Crawford, 2011).

Liquidity analysis measures the ability to pay the short term liabilities through using short term assets of the company. This ratio measures the times the current assets company keeps to pay the current liabilities. Current ratio and quick ratio are two main liquidity ratios that are calculated to perform the liquidity analysis.

Type of Ratios	Formula	2014	2015	2016	2017	2018
Liquidity Ratios
Current Ratio	Current assets/Current Liabilities	1.76	1.82	1.40	2.29	1.96
Quick (Acid Test) Ratio	Quick Assets/Current Liabilities	1.30	1.35	0.99	1.67	1.43

Note: Trends in the above ratios can be seen in appendix

• Current Ratio:The current ratio can be regarded as the liquidity ratio that measures the ability of a company to meet its short as well as long-term financial obligations. The current ratio for the company Next Plc has increased significantly from the year 2014-2018. Thus, it depicts that the company’s ability to meet the financial obligations from its asset base has increased and therefore has strong liquidity position. The ratio has experienced a downfall in the year 2016 indicating that its ability to meet the financial obligations ahs declined significantly.
• Quick Ratio:The quick ratio assesses the ability of a company to meet its short-term financial obligations by its most liquid asset base such as cash equivalents. As analyzed from the above depicted trend of this ratio, the quick ratio of the company has depicted an overall increasing trend form the year 2014-2018 with only slightly depicting a downfall in the year 2016 (Arnold, 2013).

Profitability analysis aims to evaluate the ability of company to make optimum use of resources to earn the maximum profits. The two profitability ratios that are calculated to analyse the profitability performance of Next Plc are net profit margin and return on capital employed.

Type of Ratios	Formula	2014	2015	2016	2017	2018
Profitability Ratios
Net Profit Margin	(Net Profit / Revenue) X100	14.79%	15.87%	15.96%	15.51%	14.59%
Return on Capital Employed	(Profit before Interest and tax x 100 ) / (Equity + Non Current Liabilities)	55.17%	58.19%	74.79%	49.27%	46.15%

Note: Trends in the above ratios can be seen in appendix

• Net Profit Margin:The ratio measures the net revenue realized by a company after meeting all the expenses and thereby depicts the exact amount of profit derived from its overall sales. The net profit margin of the company has depicted a fluctuating trend from the year 2014-2018. The ratio has increased from the year 2014-2016 but has depicted a declining trend them till the year 2018. However, the company is able to maintain a higher profit margin from the year 2014-2018 depicting that it is able to maintain higher profitability and thus is effectively managing its operational expenses.
• Return on Capital Employed: The return on capital employed ratio depicts the ability of a company to measure its efficiency with which the capital is employed. The ratio has depicted an overall declining trend from the year 2014-2018 thus indicating that it is not able to efficient utilizing its capital base for generating increasing profitability (Moles and Kidwekk, 2011).

This category of ratios is very important for potential and existing investor’s point of view as it provide market position of the company and also gives information on holding period return on the investment done by the investors. Earnings per share (EPS) and Dividend per share (DPS) ratios have been calculated to perform the investor’s analysis.

Type of Ratios	Formula	2014	2015	2016	2017	2018
Investors Ratios
Earnings per share	(Net income available to common stockholders/No of common shares outstanding)	£          3.66	£          4.28	£          4.51	£          4.41	£          4.17
Dividend per share (ordinary)	Total Dividend / No of common shares outstanding	£          1.29	£          1.50	£          1.58	£          1.58	£          1.58

Note: Trends in the above ratios can be seen in appendix

• Earnings per share (EPS): This ratio is very important from the investor’s point of view as it shows profit earned by the company during the year on one issued equity share. This ratio provides information on return that investors earned on their investment during the period. It is not the actual return they receive but return that is not distributed will be invested back in company to improve the market performance. So this ratio is also important to check the market performance of the company. There was decreasing trend in this ratio from year 2016 to 2018 but company has provided sufficient earnings per share to their shareholders.
• Dividend per share (DPS): Dividend per share provides information on amount of earnings distributed to the shareholder’s during the year. Next Plc has provided dividend same level of dividend during the last three years. Overall company has paid satisfactory dividend to their shareholder’s. It is expected from the company that it will provide more dividend to their shareholders (Brigham and Michael, 2013).

On the basis of analysis it has been found that Next Plc will be able to sustain in the market and will work more strongly as it was today. There is great potential in the company and it is highly expected from the management of Next Plc that it will improve their efficiency level to deliver improved performance.

Conclusion

It can be stated from the overall discussion held in the report that Limited Liability Company is different from sole proprietorship and partnership but includes the characteristics of both. The use of ratio analysis for measuring the financial performance of Next Plc has depicted that it is financially sound and has good chances of future growth and development. The company has higher profitability, liquidity, market performance and adequate working capital. It can be recommended to the company on the basis of overall discussion held that Next Plc should improvise over its ability to use the capital structure adequately for generating higher profits. Also, it should take measures for improving the efficiency position to maximize its operational profitability. The investors on the basis of good future growth potential of the company are recommend to invest within the company as it is expected to deliver higher returns in the future. 

References

Annual Report: Next Plc. 2014. [Online]. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2013/next-ar2014-web.pdf [Accessed on: 15 November, 2018].  

Annual Report: Next Plc. 2015. [Online]. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2014/next-annual-report-2015-final-web.pdf    [Accessed on: 15 November, 2018].  

Annual Report: Next Plc. 2016. [Online]. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2016/NEXT-Annual%20report%20Web%20FINAL.pdf  [Accessed on: 15 November, 2018].  

Annual Report: Next Plc. 2017. [Online]. Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2017/Copy%20of%20WEBSITE%20FINAL%20PDF.pdf [Accessed on: 15 November, 2018].  

Annual Report: Next Plc. 2018. [Online]. Available at:

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.

Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Cody, T. 2007. Guide to Limited Liability Companies. CCH.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

 https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2018/annual-report-and-accounts-jan-2018.pdf  [Accessed on: 15 November, 2018].  

Mancuso, A. 2016. Your Limited Liability Company: An Operating Manual. Nolo.

Martin, A. 2010. Limited Liability Company and Partnership Answer Book. Aspen Publishers.

Moles, P.  and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.