Describe about the Next PLC. is in the business of clothing, home furnishing and accessories business?
Next PLC. is in the business of clothing, home furnishing and accessories business. Next has more than 500 stores in the UK and Eire and more. The company also has more than 200 stores in more than 40 countries (NextPLC.co.uk, 2016).
Financial position of Next PLC. has been analyzed in following two sections. Financial statements of the last two years have been considered to understand the change in financial structure, net income and cash flow movement. Ratio analysis of the last two years includes analysis of liquidity ratio, solvency ratio, coverage ratio and efficiency ratio. Further, a section discusses limitations of financial statement analysis and ratio analysis (NextPLC.co.uk, 2016).
Trend Analysis
Sales:
Next PLC. has three business lines. Next Retail manages the business in the United Kingdom and Eire through more than 500 stores. Next Directory which is a home shopping division and Next International Retail which manages business overseas (Robinson, 2009).
Next Retail and Next Directory contribute more than 95% of sales since last 10 years, so profitability depends on these two business lines majorly. Though primary business line of the company is a clothing; we observe that Next Directory is the growth driver for Next PLC. The reason is revenue from Next Retail has shown sluggish growth over last 10 years. Revenue from retail in 2015 is 2,348 million GPB vs. 2,217 million GBP in 2006, which is hardly 6% growth.
Revenue from Next Directory grew more than twofold over last 10 years. Next Directory had revenue of 685 million GBP in 2006 and the business reported revenue of 1,541 million GBP in 2015, which is 125% of the increase. Next Retail which contributed over 70% of revenue in 2006, contributes 58.3% in 2015 while Next Directory which contributed 22.1% in 2006, now contributes 38.3% in revenue (Stickney, 1990).
Revenue from Next International Retail is 139 million GBP in 2015 which accounts for only 3.5% of revenue. Also, revenue from Next International Retail is declining over the long-term so for analysis purpose the business line is not much significant (Muro, 1998).
Profit:
Historical data show that underlying group profits improved by 6.36% and 7.93%; before taxes and after taxes respectively over last ten years. As a revenue of Next Directory has shown impressive growth; profit from the business line improved by 16.28% on an average year on year from 2006 to 2015. However, profit from Next Retail improved by 1.73% on an average.
The Performance of financial year 2015 compared to 2014
Income statement:
In 2015 the company reported growth of 7.2% in Total group sales, growth of 12.5% in group profit and 14.7% of growth in Earnings per share. The effect of good result also reflected in the share price. Share price increased by 13.9% in a year as on 24th January, 2015.
The number of retail stores declined by 0.4%, while retail square foot space increased by 4.7%. Revenue per retail store improved from 4.14 million GBP in 2014 to 4.35 million GBP in 2015. Similarly, profit per retail store improved from 0.64 million GBP to 0.71 million GBP in 2015 (Green, n.d.).
Balance Sheet:
Total asset improved by 6.4% in 2015. The net increase in Total asset is 137 million GBP. The net growth in current asset is 10.1% which is equivalent to 148 million GBP. Property, Plant and Equipment witnessed marginal decline of 1.2%, which means the company has not added floor place in 2015. Long-term debt increased by 4.6%, which is equivalent to 37 million GBP. Though common stock declined by 6.43%, total equity improved by 12.6% (Gibson and Frishkoff, 1986).
Cash flow Statement:
Net cash flow from operating activities is most important in the cash flow statement as it indicates cash generated from operating activities. Other two activities are supported to the business operations.
Net cash flow from operating activities improved by 20.8%, which is a positive indicator of growth. Cash used in capital expenditure increased by 2.9%, which was not very significant. Net cash used in financing activities increased by 71% due to buy back of stock worth about 173 million GBP (Fridson and Alvarez, 2002).
Liquidity Ratios
Current Ratio:
Current ratio shows the company’s ability to pay short-term liabilities. Basically, it shows the company’s ability to pay its due to cash level and other liquid assets. The current ratio of the firm is 1.82 and 1.76 in 2015 and 2014 respectively. It’s desirable that the current ratio is higher than 1 to meet short term obligations without raising debt. Current ratio increased from 1.76 to 1.82 which shows a firm’s ability to pay its due improved in one year (Bull, 2008).
Quick Ratio:
Quick ratio is same as current ratio except it doesn’t consider inventory as the most liquid asset. Quick ratio of the firm is 1.35 and 1.30 in 2015 and 2014 respectively. It shows that firm is highly capable to meet short term liabilities with cash and other liquid assets. Also, increase in quick ratio indicates that the company’s ability to meet short-term obligations improved in 2015.
Solvency Ratio
Solvency ratios measure the company’s ability to meet long-term debt (Dake, 1972).
Debt to Equity:
Debt to equity ratio indicates proportion of long-term debt to total equity. If the ratio is higher than 1, it shows the major portion of the financing comes through the long-term debt. If ratio is lower than 1, it shows equity financing forms a major portion of the capital structure. Debt to equity ratio is 2.60 and 2.80 in 2015 and 2014. It shows for every pound contribution from equity long term debt is about 2.60 GBP. Decline in ratio shows financing from the long-term debt decreased in 2015.
Debt ratio:
Debt ratio shows financing of total assets through short term and long term debt. Higher debt ratio increases default risk and is considered as risky. A debt ratio of the company is 0.37 in 2015 and 2014 as well. There is no change is in proportion of financing through debt instrument.
Profitability ratios
Gross Margin:
Gross margin shows the company’s profitability after covering costs of goods sold. The company has maintained steady gross margin in both the years. Gross margin has been 33.16% and 33.59% in 2014 and 2015 respectively (Gupta, 1983).
Operating margin shows the company’s profitability after covering operating expenses and cost of goods sold. The operating margin is 19.33% and 20.30% in 2014 and 2015 respectively. The company has maintained steady operating margin and gross margin over two years with marginal improvement in both the margins (Ketz, Doogar and Jensen, 1990).
Net Margin:
Net margin shows the company’s overall profitability. Net margin is the ratio of net profit to net revenue. The company has a net margin of 14.79% in 2014 which increased to 15.87% in 2015. Next PLC. had exceptional gain (other than core business activities) of 12.6 million GBP in 2015 which contributed to higher net margin in 2015. Broadly, net profit margin of 15% is very healthy and if the company can maintain such margin the growth will be very fast.
Coverage Ratio:
Interest coverage ratio:
Interest time coverage ratio shows the company’s ability to pay interest obligation with earnings before tax and interest. The higher ratio indicates the company is better off to meet interest obligation and can raise further debt if required. Interest coverage ratio is 25.57 in 2015 and 26.48 in 2016; it shows Next PLC. has earned (before tax and interest) almost 25 times of interest obligation (Rist and Pizzica, n.d.). Based on the interest coverage ratio, it’s evident that the company is highly solvent to pay interest obligation.
Efficiency Ratios:
Efficiency ratios show how efficiently the company uses its resources. Asset Turnover ratio and Inventory Turnover ratio measure the efficiency of the company (Tamari, 1978).
Asset Turnover Ratio:
Asset turnover ratio indicates how many times revenue generated over the total assets. The higher asset turnover ratio shows the ability to use resources more efficiently. Asset turnover ratio is 1.75 in 2015 and 1.74 in 2014. Trend of Asset turnover ratio shows the company has maintained the efficiency in last two years.
Inventory Turnover Ratio:
Inventory turnover ratio shows revenue generated over the inventory level. Higher inventory turnover ratio is desirable as it requires less inventory on hand to generate same revenue levels. The ratio has been 9.59 and 9.69 in 2015 and 2014 respectively. Though trend shows marginal decline, but it’s not significant to draw any conclusion. Moreover, the ratio of 9.59 and 9.69 is very healthy.
Limitation of financial statement analysis
We have seen growth in sales and net income of Next PLC. over the years and last two years as well. The historical performance of the company doesn’t guarantee the performance of future.
Though financials of the company improve over the years, it doesn’t reveal information about the quality of management and quality of customers.
Financial statements don’t give information regarding customer churn rate and customer retention ratio over the years (Coveringcredit.com, 2016).
Financial statements don’t give any information regarding the position of the company. From financial statement, we can’t estimate the market share of the Next PLC. in operating industry. It also doesn’t reveal any information regarding the company’s competitive strategy, new product development, marketing strategy, research and development, pricing strategy and future prospects (Coveringcredit.com, 2016).
Financial statements are easy to manipulate and without reading the footnotes, it’s very difficult to understand the underlying risk of the company.
Financial statements may be audited or unaudited. The unaudited financial statement may not follow the General Accepted Accounting Standards, which may lead to serious problems in evaluation.
Financial statements can be altered by certain provision in reserves and other accounting standards.
It’s possible that the company may curb short term expenses at the cost of long-term expenditure in order to boost up the profits for the short term results.
Unaudited results may be misleading, erroneous or inaccurate, which may be deliberate too. So, it’s completely unreliable to rely to unaudited result to analyze the company’s financial health.
When unaudited results are not reliable, audited results are also not reliable due to possibility of manipulation at a certain degree.
Limitation of financial ratios analysis
Large companies operate businesses in different sectors and also in different geographies. It’s difficult to interpret the common ratio for a group of business operating in different industries and geographies.
Inflation may hit the company differently. In such cases, the balance sheet may distort at larger extent. It’s difficult to compare ratios of companies of different ages.
Seasonal factors may affect the ratio analysis. Understanding the seasonal factors may help to find a meaningful interpretation from ratios. For example, sales of clothes remain high in discount period or the end of the year (Investopedia, 2008).
Different accounting standards may affect the financial statements differently. Hence, comparison of financial rations between two years or between companies become irrelevant.
It’s difficult to generalize the interpretation. For example, a high cash ratio indicates higher liquidity, but it also shows the company which has been in higher growth historically and has higher cash level may command a lower valuation (Investopedia, 2008).
Generally, the company has some good and some bad ratios. Based on that it’s difficult to judge whether the company is in good or weak condition.
|
|
2015 |
2014 |
|
Current Ratio |
= 1,616/887 |
= 1,468/835 |
|
Current Ratio |
1.82 |
1.76 |
|
Quick Ratio |
= 1,199/887 |
= 1,082/835 |
|
Quick Ratio |
1.35 |
1.30 |
|
Debt to Equity |
= 838/322 |
= 801/286 |
|
Debt to Equity |
2.60 |
2.80 |
|
Debt ratio |
= 841/2,282 |
= 804/2,145 |
|
Debt ratio |
0.37 |
0.37 |
|
Gross Margin |
= 1,343/4,000 |
= 1,240/3,740 |
|
Gross Margin |
33.59% |
33.16% |
|
Operating Margin |
= 812/4,000 |
= 723/3,740 |
|
Operating Margin |
20.30% |
19.33% |
|
Net Margin |
= 635/4,000 |
= 553/3,740 |
|
Net Margin |
15.87% |
14.79% |
|
Interest Coverage |
= 813/31 |
= 724/28 |
|
Interest Coverage |
26.48 |
25.57 |
|
Asset Turnover |
= 4,000/2,282 |
= 3,740/2,145 |
|
Asset Turnover |
1.75 |
1.74 |
|
Inventory Turnover |
= 4,000/417 |
= 3,740/386 |
|
Inventory Turnover |
9.59 |
9.69 |
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