Financial Report Next Plc

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FinancialReport: Next Plc

FinancialReport: Next Plc

NextPlc is a UK based retailfirm with its headquartersin Enderby. NextPlc wasfoundedin theyear1864 in Yorkshire by Hepworth Joseph, butithas diversifiedits geographicalcoverage over theyears(Next Plc, 2015, p. 1). Currently, Next Plc has about700 storesthat arelocatedin Ireland, UK, Asia, andMiddle East. Thecompanydealswith stylishclothes,women`saccessories,andshoesas wellas somecollectionsforchildandmen.NextPlc usesthree majorchannelsto distributeits products,which includetheNext Directory, Next Retail, andNext International (Financial Times, 2015, p. 1). Thecompanyis a FTSE constitute with its sharebeinglistedon theLondon Stock Exchange. Thispaperwill providetheanalysisthefinancialstatementsof Next Plc, with a focuson thefinancialratiosandtrendsin themonthlychangein its shareprices.

Financialanalysis:Financial Ratios

Liquidityratios

NextPlc hadsafecurrentratiosof 1.5 and1.4 for2012 and2013 financialperiodsrespectively(Appendix 1).Theseratiosare withintherecommendedrangeof between 1 and2, which meansthatNext Plc hasthecapacitytomeetits short-term obligations(Goyal, 2012, p. 529).

Inaddition,thequickacidtestratiosof 1.03 and1.07 for2012 and2013 respectivelyindicatethatNext Plc can payits currentliabilitiesusingtheavailablequickassets andstillremainwith somequickassets (Appendix1).Thetwo ratiossuggestthatNext Plc has a strongcashflowthat,which indicatesthatthecompany’sgoingconcern,is secure.Inaddition,thefactthatliquidity ratiosaremaintainedwithin therequiredrangeof between 1 and2 indicatesthatNext Plc doesnot keepunnecessarylargesumsof money,butfocuson investingitin orderto increasetheshareholderwealth.

Gearingratios

Thedebtratiomeasuresthefinancialleverageof thecompanyby showingtheamountof assets thatthecompanyshould sellto payoff its liabilities.Althoughdifferentindustrieshavevaryingoptimal debtratio,a ratioof 0.5 (50 %) is consideredto be reasonable(Goyal, 2012, p. 533). Inthecaseof Next Plc, thedebtratiosof 59 % and52 % for2012 and2013 respectively,wereabove theoptimumratio,which meansthatthecompanycan be consideredrisky,especiallyby lenders(Appendix 1).However,itis clearthattheratiowas decliningsignificantly.

Thedebt-equityratiosof 2.95 and1.99 for2012 and2013 respectively,are alsoabove therequiredlevel of 1 (orat most100 %) (Appendix1).ThismeansthatNext Plc wasfinancedby creditorsthan theowners,which is an undesirablegestureto potentialinvestors. However,theratioreducedsignificantly from 2012 and2013, which meansthattheproportionof investor fundsincreasedin relationto non-owners funds.

Profitabilityratio

ROCEestimatestheefficiencywith which a firm managedto utilizeits long-term fundsto increaseshareholderreturns.In thecaseof Next Plc, ROCE increasedfrom 0.54 in 2012 to 0.61 in 2013, which showsthatthecompany’sprofitability increasedwith time(Appendix 1).Thisincreasein profitability has beenattributedto theincreasein online sales,newspaces,franchising andtheintroductionof greatproducts(Next Plc, 2013, p. 10).

Thereturnon equityratiosof 2.13 and1.78 for2012 and2013 respectivelycan be consideredto be reasonable,buttheyare below theindustryoptimumratio(Appendix1).AROE ratioof between 5 and10 is a moreappropriateindicatorof thecompany’sgrowthin termsof profit-generatingcapacity(Goyal, 2012, p. 529).

Theratioof returnon investmentindicatestherateat which Next Plc usedallavailablefundsto generatereturnsto owners.TrendsindicatethatNext Plc increasedits efficiencyin utilizingtheavailablefundsas indicatedby theROI ratiosof 26.67 % and47.51 % in 2012 and2013 respectively(Appendix 1).Thisindicatesthatthemanagementof thecompanyhas identifiedviable investmentopportunitiesthat havealloweditto increasetheowners’income(Next Plc, 2013, p. 5).

Activityratios

Theratioof fixedasset turnover indicatestheefficiencywith which a givenfirm isabletoutilizethefixedassetsto generatemorerevenue.TheFATR ratioincreasedfrom 4.82 in 2012 to 5.2 in 2013, which indicatesthatthemanagementof Next Plc increasedits efficiencyin utilizingthefixedassets (Appendix1).Thisin turnresultedin theincreasein revenuegeneratedper unitof fixedassets.

NextPlc operatedin theretailindustry,which meansthatthenumberof daysthatittakesto convertits stockinto salesis a criticalmeasureof its efficiency.Theinventoryconversionratioreducedfrom 56.36 daysto 52.85 days,which wasan indicationof an increasein efficiencyin 2013 comparedto 2012 (Appendix1).

Theratioof inventoryturnover indicatesthefirm’s efficiencyin sellingtheproductswith theobjectiveof generatingmoresales.In thecaseof Next Plc, inventoryturnover ratioincreasedfrom 6.4 in 2012 to 6.91 in 2013, which indicatesthatthere wasa significantincreasein efficiency(Appendix 1).Thisefficiencycan be attributedto theincreasein thecostof goodssoldcoupledto thedeclineinthenumberof daysthatthe management requiredtosellthegreateramountof inventory(Next Plc, 2013, p. 58).Thisis reasonablebecauseitindicatesthatthemanagementof Next Plc will be ableto reducetheholding costinspiteofan increasein thevolumeof stock.

Equityratios

Earningper sharerepresentstheamountthat theshareholdersshould expectto getfrom thecompany’searningsforeverysharetheyhaveinvestedin thatcompany.Thisratioincreasedfrom 2.75 in 2012 to 3.06 in 2013 (Appendix1).Thischangewasattributedto a 3.1 % increasein thecompany’srevenue,which madeitpossibleforthecompanyto buyback4.5 % of theoutstandingshares(Next Plc, 2013, p. 4).Thisincreasedtheamountthat eachof theremainingsharescould get.

Thedividendpayout ratioindicatestheproportionof netincomethat is distributedto shareholdersas dividendsin a givenfinancialperiod.Investors are moreinterestedin a consistencyof theDPR than a lowora highratio(Goyal, 2012, p. 533). Therefore,a DPR that increasedfrom 31.9 % in 2012 to 33.45 in 2013 is attractiveto investors (Appendix1) (NextPlc, 2013, p. 7).

Leverageratios

Thedebtto equityratiois computedto determinethelevel of financialleveragethatthefirm is using.Thedebtto equityratiosof 7.32 in 2012 and5.62 in 2013 indicatesthatthecapitalstructureof Next Plc has moredebtthan thestockholder funds(Appendix 1).Thisimpliesthatthecompanyhas beenusingmoreof loansto financeits investmentprojects(YahooFinance, 2015, p. 1).

Thedebtto assets ratiois computedto indicatetheproportionof assets that are financedusingdebt.Ratiosshowthat0.88 (88 %) and0.85 (85 %) of Next Plc assets werefinancedusingdebtin 2012 and2013 respectively(Appendix 1).Thisproportionexceedstheoptimumpercentageof about50 %, which meansthata furtherincreasemight subjectNext Plc to theriskof bankruptcyKeythman,2014, p. 1).

Trendsin sharepriceforfinancialperiods2012 and2013

Appendix3showsthatthemonthlysharepriceincreasedsteadily,exemptfrom a fewmonths(includingApril andSeptember 2012 andApril, August, andDecember 2013) that experienceda slightdeclinecomparedto thepreviousmonth.However,theovertrendindicatesthatincreasedcontinuously. Thecontinuousincreasein themonthlypricesis attributedto theincreasein EPS, which increasedtheattractiveness of Next Plc sharesin themarket(Next Plc, 2013, p. 11). NextPlc has a policyof usingexcess cashto buyback someof its commonshares.Thisreducesthenumberof shares,thusincreasingtheamountthat profitthatisattributedto eachof theremainingshares.Otherfactorsthat might havecontributedtowards thesteadyincreasein themonthlysharepricesincludetheconsistentdividendpayout ratioandthehighprofitability of Next Plc. Moreover,Next Plc cameup with a widerangeof investmentprogramsthat might haveincreasedits competitiveness in themarket,which in turnmight haveenhancedtheattractiveness of its share.Forexample,thecompanyintroducedgreatproductsthat focusedon thequality,design(Next Plc, 2013, p. 5) andawiderange(Next Plc, 2012, p. 2).

Conclusionandcomments

NextPlc is among themostcompetitiveretailchainsfirms that providebusinesspeoplewith viable investmentopportunities.Thecompanyhas a strongcashflow,indicatingthathasthecapacityto meetits obligationsas theyarise.In addition,profitability ratios(suchas ROCE) showthatNext Plc has establisheda trendof continuousincreasein profitability. Moreover,allactivityratios(includingFATR, ICP, andinventoryturnover) showsthatthemanagementof Next Plc increasedits efficiencyinutilizingthefirmassets to generatemorerevenueforthecompanyowners.Additionally, thesignificantimprovementin EPS andDPR in 2013 comparedto 2012 is one of thefactorsthat might havecontributedtowards theoverall attractiveness andthepriceof Next Plc shares.Internet salesareone of theinvestmentprogramsthat Next Plc should continuepursuingsince ithasprovento be themostattractiveprofitableventurein thetwo years,2012 and2013. Inspiteofthehighprofitability andstrongcashflow,Next Plc should changeits capitalstructureandensurethatassets andinvestmentsare financedusingmorefundsfrom theshareholders.Thismeansthattheproportionof debtshould bereducedfrom its positionas at theendof financialperiod2013.

Summary

NextPlc is a retailfirm that has storesin UK, Middle East, andAsian. Thecompany dealswith clothesandshoes,as wellas otherwomen,children,andmen`scollections.Liquidity ratiosindicatethatNext Plc hasthecapacitytopayits obligations.Thecompanyhas a strongcashflow.Gearing ratiosindicatethatNext Plc has a higherthan theoptimumproportionof debtin its capitalstructure,which is a riskthat needsto beaddressed.

Inaddition,profitability ratiosindicatethatNext’s profitability increasedin 2013 comparedto 2012. Forexample,ROCE increasedfrom 0.54 in 2012 to 0.61 in 2013 indicatingthatNext Plc could generatemorerevenuefrom thecapitalemployedin 2013 than in 2012.

Activityratiosindicatethatthemanagementof Next Plc increasedits efficacyin generatingmorerevenuefortheshareholders.Forexample,thecompanymanagedto reducetheinventoryconversionratefrom 56.36 daysin 2012 to 52.85 daysin 2013.

EquityratiosindicatethatNext Plc has a suitabledividendpolicythat allowsitto distributea reasonableproportionof its annualincomeandretaintherestto financeits investments.Asteadyincreasein thepayout ratiofrom 31.9 % to 33.45 % can impressinvestors whoare moreinterestedin theconsistencyof thepayout ratioas opposedto thesizeof theratio.

LeverageratiosindicatethatNext Plc has beenusinga highproportionof debtto financeits investmentprojectsandassets. Thisis riskyandcould contributetowards theliquidation of thecompanyifthecapitalstructureisnot reviewedin time.

Trendsshowthatthemonthlypricesof Next Plc sharesincreasedsteadilyfora periodof 24 monthsin thefinancialperiodsof 2012 and2013. Someof theelementsthat might havecontributedtowards thistrendincludetheincreasein EPS, announcementof viable investmentplan,andtheintroductionof greatproducts.

Listof references

FinancialTimes, 2015. Next Plc: About the company. FinancialTimes.[Online]. Available at: &lthttp://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=NXT:LSE&gt[Accessed 6 March 2015].

Goyal,V. and Goyal, R., 2012. Corporateaccounting.New Delhi: PHI Learning Pvt Ltd.

Keythman,B., 2014. Debt-to-totalassets ratio.Santa Monica: Demand Media.

NextPlc, 2012. NextAnnual Report and Accounts 2012.Enderby: Next Plc.

NextPlc, 2013. NextAnnual Report and Accounts 2013.Enderby: Next Plc.

NextPlc, 2015. Next Corporation. NextPlc.[Online] Available at: &lt http://www.nextplc.co.uk/&gt[Accessed 6 March 2015].

YahooFinance, 2015. Next Plc: Historical prices. YahooFinance.[Online]. Available at: &lthttps://uk.finance.yahoo.com/q/hp?s=NXT.L&ampb=1&ampa=00&ampc=2012&ampe=1&ampd=00&ampf=2014&ampg=m&gt[Accessed 6 March 2015].

Appendices

Appendix 1: Computation of financial ratios

Ratio

Financial period 2012

Financial period 2013

Liquidity ratios

Current ratio = Current assets / current liabilities

= 1,140,000 / 742,000

= 1.5

= 1,208,000 / 816,000

= 1.4

Acid test ratio = (Current assets – stock) / current liabilities

= (1,140,000 – 372,000) / 742,000

= 1.03

= (1,208,000 – 332,000) / 816,000

= 1.07

Gearing ratios

Debt ratio = (Total long-term debt / capital employed) * 100 %

= (657,000 / 1,112,000) * 100

= 59 %

= (567,000 / 1,077,800) * 100

= 0.52

Debt equity ratio = Long-term debt / equity

= 657,000 / 222,700

= 2.95

=567,000 / 285,600

= 1.99

Profitability ratios

Return on capital employed (ROCE) = Profit before interest and tax / total capital employed

= 598,000 / 1,112,000

= 0.54

= 661,000 / 1,077,800

= 0.61

Return on equity = Net income / Equity

= 475,000 / 222,700

=2.13

= 509,000 / 285,600

= 1.78

Return on investment = (Net profit after tax / capital employed) * 100 %

= (475,000 / 1,781,000) * 100

= 26.67 %

= (509,000 / 1,077,800) * 100 %

= 47.22 %

Activity ratio

Fixed assets turnover = Sales / total fixed assets

= 3,441,000 / 714,000

= 4.82

= 3,563,000 / 685,800

= 5.20

Inventory conversion period = (Average stock / cost of sales) * Number of days in a year

= Average stock = (372,000 + 368,000) / 2

= 370,000

= (370,000 / 2,396,000) * 365

= 56.36 days

= Average stock = (332,000 + 372,000) / 2

= 352,000

= (352,000 / 2,431,000) * 365

= 52.85 days

Inventory turnover = Cost of sales / Average stock

= 2,396,000 / 370,000

= 6.48

= 2,431,000 / 352,000

= 6.91

Equity ratios

Earning per share = Earnings attributable to equity shareholders / number of ordinary shares

= 463,000,000 / 168,147,532

= 2.75

= 492,700,000 / 161,234,237

= 3.06

Dividend payout ratio = (Total common dividends / Earnings attributed to equity shareholders) * 100

= (147,700 / 463,000) * 100

= 31.9 %

= (164,800 / 492,700) * 100 %

=33.45 %

Leverage ratios

Debt to equity = Total debt / total equity

= 1,631,500 / 222,700

= 7.32

= 1,608,000 / 285,600

= 5.62

Debt to asset = Total debt / total assets

= 1,631,500 / 1,854,200

= 0.88

= 1,608,000 / 1,894,000

= 0.85

Appendix2: Monthly share prices for 2012 and 2013 financialperiods

Period (month)

2012

2013

Jan

2,422.07

3,869.57

February

2,562.64

4,004.02

March

2,758.70

4,163.26

April

2,708.76

4,156.59

May

2,801.24

4,404.51

June

3,024.19

4,426.82

July

3,034.09

4,846.39

August

3,379.64

4,753.15

September

3,261.47

5,011.50

October

3,371.13

5,288.29

November

3,491.00

5,376.17

December

3,536.77

5,332.14

Appendix3: Trends in share prices