Financial Performance And Position Of Next Plc: Analysis And Ratios

Financial Performance

Describe about financial performance, financial Position and limitation of financial statements and ratio.

The retail chain of Next was launched in the year 1982 and the initial store was opened that contained stylish clothes, shoes, as well as accessories for females. Soon after that, the collection for men and children followed. Next clothes are provided unique style by the design team that is present inn house and provide value for money. In the current scenario, there are more than 500 stores present in the UK and Eire. Furthermore, more than 200 stores are present in more than 40 countries. Several landmarks were made by Next in a sequence. In 2011, it opened the merged fashion and garden store at Shoreham-by-sea. In 2014, two more stores were added and in 2015, it opened High Wycombe store (Next Plc, 2015). Next strives to enhance the customer base by introduction of new and varied techniques like next day delivery that appeals the customers to a considerable extent.

Significant achievements were made by Next in the year 2015 that boasts about its strong financial performance. The increment in the EPS and paying dividend to shareholders indicates that the company has made adequate profit and has solidity. The EPS and the ordinary dividend has been a consistent achievement of the company and it has done it for the straight sixth consecutive year. Moreover, the sales, as well as revenue is a classic indication that the company has performed in a strong manner (Investors Chronicle, 2015). The retail sales increased by 5% while the online business saw a jump of 12%. The sales of the entire group went up by 7% and reached a strong figure of £4 billion for the first time. The share prices also indicates that the company performed in a strong manner because the investors vouch for those shares that are fundamentally strong and have a potential to deliver returns consistently (Investors Chronicle, 2015). The share price went up by £62.80 to £71.50 indicating the strong financial performance. There was not buying back of the shares rather surplus cash was returned through the way of dividend. A huge sum of £572 million was returned to the shareholders through the scheme of buybacks and dividends. Moreover, the company did not use the investment to return cash to the shareholders and neither by increasing the debt (Northington, 2011). This indicates that the company performed at a true potential that helped it to provide benefits to the shareholders without any compromise. Moreover, next continued the manner of investing in new, as well as larger stores. With the enhancement in the base of the customer, it has now spread to more than 71 countries in total and enhancing the image. The distribution, as well as warehouse capacity is enhanced that enables the company to provide better facilities. There has been a strong change in the administrative, selling expenses that contributed to a strong financial performance.

Financial Position

The financial position is mainly expressed through availability of funds and the manner in which the company is able to meet the exchanges in foreign exchange rate and the interest rates. Moreover, compliances with the regulation also play an important role in shedding light on the financial position. Next follows a policy of returning cash to shareholders that is in surplus through buyback, as well as special dividend. Moreover, the company is able to maintain a proper structure of debt that goes in favour of the company. It has an appropriate balance of equity plus debt. Adequate finance is needed that is procured through the operational activities. Next is also prone to credit risk and mainly in the form of Directory customer receivables that stands at £712m that projects the biggest item on the balance sheet. Moreover, next performs through a centralized treasury function that is entrusted with the task of meeting the risk that arises from liquidity, interest and currency risks. The treasury operates through an approved policy of the board. Next has appropriate medium, as well as long term financing that support the operations of the business and even the cash position that is reported to the Board. Therefore, Next Plc financial performance in the year 2015 has been entirely due to the presence of strong policies and financial management. The annual report clearly shows that the progress made by Next Plc has been considerable as compared to the year 2014.

The financial performance of the company was strong and has been clearly depicted with the help of income statement, balance sheet, and cash flows. The financial performance of the company is signifies through the income statement, balance sheet (Albrecht et. al, 2011). Moreover, appropriate ratios help in the telling about the financial performance of the company. The sales enhanced in the year 2015 to reach £4 billion and the underlying profit got a good boast reaching a high of £782 million. The financial position was strong because the company paid dividend and without any compromise on the profits. Ordinary, as well as special dividend was paid providing benefits to the shareholders. Buy back of the shares was also done that was of £138 m (Next Plc, 2015). The financial position of the company was done by way of equity, reserves, and investments. No over-dependence was present on debt. Hence, it can be said that the policy stressed entirely on equity and derived strong profitability. The share price also received a great boost and increased by 4.8% displaying solidity. A better projection of the financial position is done with the help of ratios. The following are the ratios that are computed:

Ratios

Current Ratio

The current ratio is major ratio when it comes to the ability of the company is meeting the obligations. One of the major ratios that indicates the liquidity of the company (Melville, 2013). The current ratio of Next Plc has increased and is heading towards the standard ratio of 2:1 indicating that the company is in a strong financial position to discharge the obligations and there will be no errors in that.

Gross profit Ratio

One of the strongest profitability indicators that helps to assess the financial position. The GP ratio has increased marginally that indicates the company is able to manage the cost of goods sold in a proper manner (Melville, 2013). Further enhancement can be seen when there is a further control on the cost of goods sold.

Net Profit Ratio

The Net profit margin of the company has increased in 2015 and has surpassed the percentage of 2014 indicating a strong sales and generation of strong profit numbers. The operating expenses have been in a strong control and hence a ratio has shown an immense change (Horngren, 2013).

Operating profit ratio

This ratio is termed as ratio of operating profit to sales. In 2015, the operating profit ratio stands at 20.30% as compared to 19.62% in 2014. The progress in this ratio is entirely by dint of a strong control over the operating expenses (Horngren, 2013).

Proprietary Ratio

A higher proprietary ratio is always needed because it sheds light on the finance that is done by the shareholders (Christensen, 2011). However, there is a decline in the ratio and the company needs to rectify it in the coming year.

Return on Equity

Return on equity indicates the profit generated by the company by using the funds of tee shareholders (Christensen, 2011). The ratio has shown a marginal increase that indicates the financial position of the company strong and hence able to use the funds of the shareholders in an effective manner.

Receivables collection Period

The collection period has enhanced in a marginal manner indicating that the management has used the policies in an effective manner. Hence, efficiency of the management is strong.

Payables payment period

This ratio indicates the payment made to the suppliers. The average payment period has declined indicating that the company will be able to pay the suppliers in a quick span of time (Merchant, 2012).

Price / Earnings Ratio

Current Ratio

The price earnings ratio of Next Plc is a little lower in 2015, it is 17.05 as compared to 17.15 seen in the year 2015. A slight decline is not of a much concern as going by the other ratio the company has a strong stability.

Dividend Cover Ratio

This ratio states the number of times the shareholder will receive dividend (Lapsley, 2012). However, the ratio has fallen marginally, but going by the historic performance and the current number it is still strong and will continue to provide dividend.

Going by the above discussion and the ratio analysis it can be stated that Next Plc’s financial position is strong and is bound to continue a strong run in the near future.

Ratio analysis fails to consider the intangible factors like brand, skills, labour organization, culture, etc. These are considered important and vital in the long run. However, ignorance of all factors leads to problem.

The ratio analysis is done considering the accounting data that is present in the financial statements. However, the financial statements are not free from error and mismanagement. Therefore, simply relying on such data will not project a clear view and may prove to be wrong (Graham & Smart, 2012).

Different companies use different method of computation and hence comparison of two different companies from different sector cannot be apt. It is because the ratios can be derived from various methods and there is no standard applicability (Davies & Crawford, 2012). Hence, in this scenario it becomes difficult to compare and know the result. The computation depends on the data that is available and one company may give greater emphasis to one set of data as compared to other.

Financial statements also suffer from deficiency. They cannot be said as the best tool for evaluation because it is prepared considering the historical data. The historical data is not of much relevance when it comes to the [resent scenario. Planning should not be done considering it because it has flaws in it (Davies & Crawford, 2012).

Conclusion           

Going by the ratio analysis and view of the annual report it can be said that the company had a strong year where the entire unit performed in a strong manner and reached great height. The profit was strongly supported by the turnover and the resources were used in an efficient manner. Going by the solvency and liquidity it can be said that the company is a good bargain for the long term and one can strive for outer performance (Brealey et. al, 2011). The company has a strong asset base and the cash flow shows that the company has met the situation with great ease. Moreover, the company is strong when it comes to principle of ethics and corporate governance. It has adhered by all the principles and therefore the progress is fast as compared to the peers. Moreover, the shareholders are also provided benefits in the form of dividend that is a major advantage of the company. This is one of the reasons why the investors have invested in this stock. Year by year the company has achieved significant feat that implies Next Plc is adapted to the internal and external environment. The company strives to perform by providing unique design to the customers and the same can be seen in the coming scenario. At current, the company has 4 million customers and with the strong development and line-up, Next Plc is destined to make further advancements and hence is a strong recommendation.

Current Ratio

CURRENT RATIO
	2014	2015
Current assets	1,468.10	1,616.00
Current liabilities	886.6	834.5
Current Ratio	1.655876	1.936489
Working Capital	581.5	781.5

GP Ratio

GP RATIO
	2014	2015
gross profit	1240.1	1343.4
Sales	3,740.00	3,999.80
GP ratio	33.15775	33.58668

 Net profit Ratio

NP ratio
	2014	2015
Net profit	553.2	634.9
sales	3,740.00	3,999.80
NP ratio	14.79144	15.87329

Operating profit ratio

operating profit ratio
	2014	2015
operating profit	722.8	812.1
sales	3,740.00	3,999.80
Operating P ratio	19.3262	20.30352

Proprietary Ratio

Proprietary Ratio
	2014	2015
Share capital	1,55,032	1,52,874
Reserves	2,84,154	2,88,528
Shareholders fund	1,677	1,608
Total assets	2,709	2,709
Proprietary Ratio	0.619158	0.593444

Return on Equity

	2014	2014
Net profit	553.2	634.9
Shareholders fund	286.20	321.90
Return on equity (%)	1.932914	1.972352

	Ratios	Formula	Computation
			2015	2014
7	Receivables  collection Period	365 / Debtor’s Turnover Ratio	11.69	11.48
8	Payables Payment Period	365/ Creditor’s Turnover Ratio	37.06	40.20
9	Price / Earnings Ratio	Market price per share / Earnings per share	17.03	17.15
10	Dividend Cover Ratio	(Profit After Tax – Preference Dividend) / Dividend paid to Equity Shareholders	2.94	3.33

 

References

Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.

Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance,  New York: McGraw-Hill/Irwin.

Christensen, J 2011, ‘Good analytical research’, European Accounting Review’, vol. 20, no. 1, pp. 41-51

Davies, T. and Crawford, I 2012,  Financial accounting,  Harlow, England: Pearson.

Investors Chronicle 2015, Next Plc Financial, viewed 3 February 2016, https://markets.investorschronicle.co.uk/research/Markets/Companies/Financials?s=NXT:LSE&subview=Overview.

Graham, J. and Smart, S 2012,  Introduction to corporate finance, Australia: South-Western Cengage Learning.

Lapsley, I. 2012, ‘Commentary: Financial Accountability & Management’, Qualitative Research in Accounting & Management, vol. 9, no.3, pp. 291-292.

Libby, R., Libby, P. and Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.

Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.

Melville, A 2013, International Financial Reporting – A Practical Guide, 4th edition, Pearson, Education Limited, UK

Merchant, K. A 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no.3, pp. 1-34.

Northington, S 2011,  Finance. New York, NY: Ferguson’s.

Next Plc Ltd 2015, Next Plc Ltd. Annual Report and accounts 2015., viewed 3 February 2015, https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2014/next-annual-report-2015-final-web.pdf.