Comparing Next Plc with Monsoon - Example

Business Report: Comparing Next Plc with Monsoon Introduction Need for comparing two organizations It’s indeed for decision making process of the particular company. When considering the mater of good decision making, it is an essential skill for career success generally, and effective leadership particularly. As a business manager, if it can learn to make timely and well-considered decisions, then one can often lead his team to spectacular and well-deserved success. However, if he makes poor decisions, his team risks failure and his time as a leader will, most likely, be brutally short.  The techniques in any organization are to help to make the best decisions possible with the information available. They help to map out the likely consequences of decisions, work out the importance of individual factors and choose the best course of action to take. Table of Contents Title of the study Objective of the study Rationale of the study Summary Business Report Conclusion Reference OBJECTIVE Prepare a Business Report on the following companies by comparing them. Comparison of two companies in clothing and home ware retail business, they are namely, Next plc and www.monsoon.co.uk Rationale of the study This comparison is for analyzing the following things: 1. show the knowledge and understanding of financial statements 2. analyse financial information and make judgements on the performance of two businesses 3. collate and summarise financial data 4. prepare a business report addressing the needs of a user of financial statements Summary It is to write a business report, to a potential investor, comparing the performance of the companies Next plc and www.monsoon.co.uk in the home ware retail and business clothing. Summary of the company‘s principal activities Next Plc The Next archive contains original clothing and marketing material from the first collection in 1982 through to the present day. Next is a UK based retailer offering stylish, good quality products in clothing, footwear, accessories and home products. Next distributes through three main channels: Next Retail, a chain of more than 480 stores in the UK and Eire; the Next Directory, a direct mail catalogue and transactional website with more than 2 million active customers; and Next International, with more than 140 stores overseas.(Next (2008) Financial Information [www] Available from: http://www.nextplc.co.uk/nextplc/financialinfo/ [Accessed: 08 February 2008) www.monsoon.co.uk Monsoon .co.uk is UK based an e-commerce retail company having all sorts of monsoon accessories, clothing, jewelleries etc. There have a variety of services from the company to offer. It has branches and franchisees across the country. It offers Online Customer Services. They will endeavour to reply within 48 hours of the demand put forward by the customer. It offers Home Delivery for their customers. The customer can use the number in order to place an order if they wish to order an item not advertised on the website or if the customer would prefer to place your order by telephone. To Find a Store, they have the remarkable feature to find retail stores. To find a UK, Ireland or International store the customer can use their store finder The company is accessible at any time for General Enquiries. The company offers a round the clock service for the general information. (www.monsoon.co.uk) Financial Ratio Analysis Ratio analysis is a quick and easy way to analyse different companies’ financial performance. Ratio analysis can be used to look into group performance and market trends. There are many users of financial statements and for each one of them there is a different area of performance in a company they are interested in. Some of these users include: Government, Managers, The public, Employees, Creditors/ Suppliers/ Lenders, Trade Unions, Shareholders, Board of Directors For Financial ratios to be effective and reliable to all the users, the financial statements have to be prepared with uniformity to enhance comparability. As this is not true in most cases, it is advisable to use financial ratios in conjunction with other alternative interpretative techniques available. After the study of published accounts, ideas can be immediately revealed about both the companies. These companies have been making profits for 2 years. This can lead us to a more detailed review, hence the need for financial ratios. Financial ratios help to direct the users’ attention to identify a number of areas e.g. the most/least performing areas, showing situations that require further investigation, showing the future and current profitability of a company, they may also outline the impact of different items in the financial statements have on each other. (Increased debtors could be directly affected by increased sales, relationship between assets and profits, etc) It is actually difficult to reach a conclusion about the performance of both these companies without more details of similar companies in the same industry. PROFITABILITY Return on capital employed is the standard measure of profitability in a company. The return on capital employed is directly affected by net profit margin and asset turnover. The Return on capital employed is around 62.10% in 2005 and has slightly increased to around 64.50% in 2006 as far as Next is concerned .But in Monsoon it was 69 and 74 respectively. This increase could be in the form of rise in selling prices or reduced manufacturing costs. The change in net profit shows how well the overhead expenses are being controlled in the company. There is a decrease in net profit margin from 15.48% in 2005 to 15.15% in 2006. This could be due to a number of reasons. (Next (2008) Financial Information [www] Available from: http://www.nextplc.co.uk/nextplc/financialinfo/ [Accessed: 08 February 2008) According to Financial report 2005 and 2006, we can observe that the administrative and distribution expenses have increased so it will cause the operating profit to fall. There is a fall in the gross profit percentage from 27.9% in 2005 to 27.8% in 2006 therefore there was an increase in costs of sales. As a result, it may mean a fall in operating profit. Moreover, we can see there was a slight increase in overheads in 2006 relative in 2005. The increase in overheads needs to be investigated further as it is slightly rising over the years. Return in capital employed measures management efficiency and it is affected by asset evaluations, depreciation, expenses and prices. This needs to be further explored to determine which factors are contributing to a lower return in capital employed. Figure1 PROFITABILITY LIQUIDITY Liquidity refers to the ability of the firm to meet its current liabilities. The liquidity ratios therefore are called ‘Short term solvency ratio’. These ratios are used to assess the short term financial position of the concern. They indicate the firm’s ability to meet its current obligations out of current resources. This ratio explains the relationship between current assets and current liabilities of a business. In 2006, the companies had more current assets and liabilities than last year. In which the balance sheet shows £911.6 million of current assets and £755.5 million current liabilities. This gives the working capital ratio of 1.21:1. Compare to 2005, which was 1.38:1, there has been decrease of 17 pence. Acid test ratio or quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. All current assets expect stock and prepaid expenses in liquid assets. The acid test ratio has decreased from 0.87:1 in 2005 to 0.78:1 in 2006, meaning that the companies may not have a stronger liquidity position that it had before. Figure 2 LIQUIDITY GEARING Gearing is the “Proportion of a company’s total capital that is provided by loan capital as opposed to equity”. As the gearing ratio is in relation to the financial position as well as the strength and long term financing of the 2 firms, we notice that the gearing has slightly increased from 61% in 2005 to 64.3% in 2006. Moreover, the long term financing of Next has increased by nearly 6% in 2005 and 2006 from £432.1 million to £462.2 million. Interest cover is both very high in 2005 and 2006. In 2005 the ratios shows the operating profit covered the interest 24.31 times and 21.8 times in 2006. As a result, they had no problems with its interest obligation since it was a net receiver of interest: the interest it earned was greater than the interest it might have to pay. However, we can see there was a slight decrease in interest cover ratio in 2005 and 2006, meaning that there would have to be a fall in profit in 2006 compared to 2005. EFFICIENCY Debtors’ days shows how long it takes for a debtor to pay back the company. From the 2 firms we see that it has increased from 56, 70 days in 2005 to 60, 78 days in 2006. This immediately has an advantage to the debtors, as it will give them an extra 4,8 days to pay back the company. (Biz/ed (2006), Financial Ratio Analysis [www] Available from: http://www.bized.co.uk/compfact/ratios/index.html [Accessed: 12th March 2008) However, this is a disadvantage for the company. The company will take longer in receiving their money from debtors. As a matter of fact it will take the next two months to receive it. Inventory turnover illustrates how long a company takes to sell their stock. From the 2 companies’ view point, it shows that there has been a decrease in the number of days. The decrease in stock may be an advantage for them, as lower inventory turnover usually indicates the business is more efficient; and that high level of stocks will typically result in liquidity problems. INVESTMENT The dividend yield for them has decreased by almost 2%. The dividend yield expresses the shareholder’s dividend as a percentage of the market value of a share. A low dividend yield might persuade investors to dispose of shares and invest the proceeds elsewhere. The dividend cover ratio indicates the proportion of available profit which is distributed by the organisation. As the dividend cover has increased, this shows that the company can easily afford to pay the dividend. The earnings per share are concerned with the profit available to ordinary shareholders after tax and extraordinary items. It tells an investor how much profit each share has earned during an accounting period. From this ratio, we see that there is an improvement in the profit performance in shareholders. (DRUCKER F. 2003. Management challenges for the 21st century. Oxford: Butterworth-Heinemann.) Performance of these 2 companies As far a the performance of the two companies are concerned, both of them show equal status and performance appraisal level regarding the sales, turn over, customer satisfaction. Chairman’s statement regarding the financial performance Weighing the Pros and CONS of the analysis, PMI method can be used very effectively. By this stage it may already be obvious whether or not should implement the decision. If it is not, consider each of the points written down and assign a positive or negative score to it appropriately. The scores assign may be quite subjective. It is being drawn up the PMI table below:  NEXT MONSOON REMARKS Financial Ratio Analysis high Financial Ratio Analysis high Both are of better financial positions. PROFITABILITY high PROFITABILITY high Both are of better profitability and financial positions. Desirable level of LIQUIDITY Desirable level of LIQUIDITY positive Efficiency is increasing marginally Efficiency is increasing marginally Both these companies have strong customer care. GEARING positively skewed GEARING positively skewed positive Chief Executive’s Report regarding sales According to the Chief Executive’s Report regarding sales, Growth firms provide value for money to their customers. They provide so much value to the customers compared to the cost involved that the customers are promoted to buy the product or service repeatedly and/or in larger quantities. For instance, here the 2 companies started and grew very fast to become the largest retailers in the city mainly because they always provided very high quality products to customers. They always wanted such products and were willing to pay a little more for better quality products. This new entrepreneurship was tried first to notice this as an opportunity and exploit it. What they did was to give value for money to his customers. It is not the absolute amount or money, but the value relation to the price they pay that matters. This is applicable both to manufacturing and service sectors. In UK, a significant number of the urban customers are not happy with many of the things they buy or the service they get. They are willing to pay a little more, if the product or service is worth it. Growth entrepreneurs keep exploiting such opportunities. Here we can see the sales of the two companies in the previous years. Year Sales in NEXT Sales in MONSOON Total Sales 1991 507 10156 10663 1992 1807 10741 12548 1993 2832 11715 14547 1994 4158 13271 17429 1995 5603 14031 19634 1996 6944 15052 21996 1997 7502 15355 22857 1998 9158 16727 25885 1999 10555 17169 27724 2000 11852 17610 29462 2001 11850 17479 29329 2002 14029 18718 32747 2003 15525 19136 34661 2004 16863 19425 36288 2005 16982 18253 35235 2006 19491 19160 38651 2007 20238 19182 39420 Growth of an entrepreneur depends on the satisfaction and growth of his customers. This is especially so in intermediate products or services. Similarly, here these textile processing entrepreneurs built up their customer base by giving useful suggestions to them on colour and shade combinations for fabrics. All these helped them to boost u other sales figures up. Directors’ Report Regarding Physical Performance As clear from the definition, both these firms mainly focused on the eight elements or variables. Here they have, the class of product clearly defined. Then there are various sizes and other features in each class. Opportunities available to the manufacturer differ according to the exact nature and specifications of the product. All these are well attracted to the customers. Total volume: Both these firms have the question of how total volume is measured. It can be measured in terms of physical volume (i.e. in terms of units sold), in monetary terms, or both. It can also be measured in terms of per cent of total market, i.e., in relative terms. As an illustration, a demand analysis for textiles may reveal that in one particular region, the number of clothes sold is 1000, valued at 50,000pounds. In another region, the number may be 750, valued at 150,000 pounds. It is evident that depending upon our requirement; the data on total volume must be in appropriate units. Bought: They have assessed the volume ordered or booked, despatched, paid for, received, or consumed. The figures may vary according to the basis used .Here the sales in the previous years were well structured and relatively very encouraging. (CUSUMANO MA & MARKIDES CC 2001. Strategic thinking for the next economy. San Francisco: Jossey-Bas) Audit Report As per the audit of the Profit and Loss Account and also the Cash Flow Statement for the year ended it is very crystal clear to analyses the performance level of both the companies. After evaluating the overall financial statement presentation, the audit includes assessing the accounting principles used and significant estimates made by management as well. The audit report says that it appears from examination of those books the companies are maintaining proper books of account as required by law. The auditors certify that the report is dealing with the Profit and Loss Account, Balance Sheet, and Cash Flow Statement are correct. The books dealt with by this report are in agreement with the books of account. CONCLUSION To summarise, there was slight decrease over the past two years in gross margin and net profit margin. This means that these 2 companies had competition with others retail sectors which affected their sales. Moreover, the return on capital employed and return on shareholders’ equity have been increased. This shows the success of the company in using the funds to provide new health by shareholders to generate profit. According to the financial annual report the administrative and distribution expenses have increased so it will cause the operating profit to fall. This is one of the problems that may affect their profit. Furthermore, the efficiency ratio reveals that there is a problem on the repayment of credits; the ratio should not be more than 30 days in both these firms.. This is again due to a heavy cost of goods in both years. As far as the debtors’ collection is concern, the ratio reveals that there was no improvement of control in their debtors. Therefore, the company will take longer in receiving their money from debtors. On the other hand, there was decrease in stock turnover; goods have been sold more quickly. As a result, it will help them to prevent liquidity problems. In the same way, Interest cover is both very high in 2005 and 2006. The operating profit covered the interest 24.31 times and 21.8 times in 2006. These figures mean that the company had no problems in paying the interest obligation. It is one of the advantages that helped these two companies to improve their profit. Last but not least, the investment ratio helps investors to look into the company’s performance via to look at the dividend, price earnings ratio and the earning per share. Therefore, this ratio is a main important ratio to help investor to decide on how to make an investment. There has been an increase in earnings per share. It is a great advantage for the company’s performance because it will tell us that the company has improved their profit, therefore investors can earn more money. RECOMMENDATIONS According to the details, we can see that these two firms had improved their performance over the period of ten years. We believe that they will get better in the future. For example, the revenue over the 10 year period shows that they have increased each year. This is an important factor, as it shows that they are making a profit. On the other hand, there is some disadvantage that we will recommend: As we analysed the liquidity ratio above, both have a problem with increasing their debtor over the two year previous. Therefore, they need to improve their liquidity position by controlling their debtor. The efficiency ratio reveals that there is a problem on the repayment of credits; the ratio should not be more than 30 days. This is again due to a heavy cost of goods in both years. There is an operating risk that exists, where there is factor which could cause sales to fluctuate. However, I think that both these companies do have a great performance that shows the profit increasing in year to year. This is a benefit which attracts more investors who decides to make an investment. References 1. AAKER DA. 2001. Developing business strategies. 6th edition. New York: Wiley. 2. ANSOFF HI. 1984. Implementing strategic management. New Jersey: Prentice. 3. Biz/ed (2006), Financial Ratio Analysis [www] Available from: http://www.bized.co.uk/compfact/ratios/index.html [Accessed: 12th March 2008] 4. CERTO SC & PETER JP. 1993. Strategic management – a focus on process. 2ndedition. Homewood: Irwin 5. Next (2008) Financial Information [www] Available from: http://www.nextplc.co.uk/nextplc/financialinfo/ [Accessed: 08 February 2008] 6. DRUCKER F. 2003. Management challenges for the 21st century. Oxford: Butterworth-Heinemann. 7. FERREIRA A. 2000. Business strategy: having to cope with waves of change. Management Today, 16(9):11. 8. CUSUMANO MA & MARKIDES CC. 2001. Strategic thinking for the next economy. San Francisco: Jossey-Bas 9. www.monsoon.co.uk APPENDIX Ten year History     1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Revenue £m 1,177 1,239 1,425 1,588 1,872 2,203 2,516 2,858 3,106 3,284 Profit before tax £m 184 167 195 218 266 301 358 424 449 478 Taxation £m (47) (43) (55) (61) (76) (91) (108) (119) (136) (147) Profit after tax £m 137 124 140 157 190 210 250 305 313 331 Shareholders’ funds £m 490 543 607 500 547 275 155 276 256 189 Earnings per share pence 36.9 33.9 38.4 46.8 58.1 68.7 93.9 120.2 127.4 146.1 Dividends pence 18.0 19.1 21.0 24.0 27.5 31.0 35.0 41.0 44.0 49.0 Share price pence 733 638 491 778 949 760 1,292 1,592 1,698 1,946 Shares in issue millions 374 374 374 337 331 287 265 261 246 227 Shares repurchased millions - - - (37) (6) (44) (22) (4) (15) (19) Cost of shares repurchased £m - - - (192) (54) (392) (209) (57) (218) (316) Market capitalisation £m 2,746 2,391 1,840 2,622 3,138 2,179 3,425 4,157 4,179 4,418 Read More