Next Plc Financial Performance - Case Study Example

Next Plc Financial Performance xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Next plc is a UK based international retailer provider of exciting, excellent and designed quality products such as footwear, clothing, accessories and home products. Next plc first started its operation in UK but with time extended to other countries through its three main distributing channels. Currently Next plc active home costumers are over three million and websites costumers in more than sixty countries across the world. The future success of the company depends on sustainable provision of quality products to changing preferences and taste of its customers. The company depends on its three main supply chains to distribute products to its market on time and in required standard. The channels are; Next Retail with stores not less than 500 in both UK and Eire; Next Directory with home shopping active costumer over 3million and over 60 countries website users; and Next International with around 200 mostly franchised stores across the world. PLC constantly seeks on how to create its supply chain to avoid over-reliance on other suppliers. This will also enhance the competitive ability of its products in market by receiving direct feedback from costumers. Main financial strategy is to deliver sustainable earnings per share in long term growth. In the annual report January 2013 the company registered yet another success for the fourth consecutive years. Earnings per share have grown by 16.6 per cent to 297.7p and per dividend were over 15 per cent and the company considers raising its full year dividend to 105p. It happened at a time of continuous struggle in UK economy growth. Moreover, its websites catalogue business increased its sale growth by 9.5 per cent. The differential growth between Next Retail and Next Directory sale were narrowed and leveled. The two businesses went ahead to corporate and sustain each other for the success of Next plc. As a result the underlying profit of two businesses without tax increased by 9 Per cent up to £622 million. Over the year shareholders got £390 million returned from the company by share buybacks and dividends. Key financial data Current Year(2013) Previous Year(2012)   % Movement Revenue £3562.8m £3441.1m =(3562.8-3441.1)/3562.8*100 3.42 Operating profit / loss £695.1m £601.8m =(695.1-601.8)/601.8*100 15.50 Capital employed* £285.6m £222.7m =(285.6-222.7)/ 222.7*100 28.24 Total assets £1893.6m £1854.2m =(1893.6-1854.2)/ 1854.2*100 2.12 Net cash generated / used in operating activities £659.0m £525.9m =(659-525.9)/525.9*100 25.31 Number of employees 54,507 53848 =(54507-53848)/53848*100 1.22 Earnings per share £320.1 £282.0 =(320.1-282)/282*100 13.51 Final proposed dividend per share 147.7 135.1 =(147.7-135.1)/135.1*100 9.33 Year end share price £5470 £5108 =(5470-5108)/5108*100 7.09 Year end market capitalisation £8.52 billion 8.64billion = (8.52-8.64)/8.64*100 -1.39 Definitions Revenue = this is the income that is generated from the sale of services and goods, sale of assets and use of capital. Operating profit / loss = the surplus remains after the deduction of total costs from total revenue, it is the basis on which tax is calculated and dividends paid. It is the measure of success for businesses as (Hill et al. 2011) explain. Capital employed = has various definitions, total amount of capital used for generating income/profit, value of net assets and working capital. Total assets = the whole worth of a business. They are the driving force of a company's activities, without employees, a firm cannot generate revenues. Hence, they are an important core of a business, (Weygandt et al. (2010). Net cash generated / used in operating activities = amount of finances left after subtracting finance and tax expenses from the operating income. This represents the amount of finances that a company uses to generate income or revenue. Number of employees = the workforce working for a business. Earnings per share = this is the amount that each share of is entitled to. It is the total net earnings divided by the number total number of shares. Final proposed dividend per share = these are the dividends that the company directors propose to pay the company shareholders. Year-end share price = This is the value of business shares as trading in the stock exchange as at the end of the year. Year-end market capitalization = this is the total value of a business at the end of the year. It uses the prices of the stocks to determine a company's value. It as well determines how companies will growth in future. It is the total value of firms’ outstanding shares in the market. It increases or decreases by the fluctuations of a firm’s market price of its shares. Key financial ratios Ratio Formulae NEXT PLC     2013 2012 Gross profit margin (Gross profit/revenue) x 100 (1125.8/3562.8)*100 31.60 (1045.3/3441.1)*100 30.38 ROCE EBIT/net assets (695.1/285.6) 2.43 601.8/222.7 2.70 Return on net assets Profit/net assets 508.6/285.6 1.78 474.8/222.7 2.13 Current ratio Current assets/current liabilities 1207.8/816.0 1.48 1139.9/742.4 1.54 Total assets turnover total assets/total revenue 1,893.6/3562.8 0.53 1854.2/3441.1 0.54 Gross profit margin is a financial metric that is used to draw a firm’s financial performance and health. It indicates proportion of revenues left after subtraction of costs of goods sold from the total revenue. It serves as source of paying extra expenses in savings made in future, (Wild 2010) Return on capital employed is the ratio that measures a firm’s efficiency and profitability as (Wallace & Grandy 2013) asserts. Return on net assets is the measure of the amount of income that the net assets of the company generate. Current ratio is the working capital of the company. It is the difference between current assets and current liabilities. Total assets turnover is the extent to which the total assets are used to generate income. Analysis of performance The company’s net profit for the year increased from £474.8 million to £508.6 million. This is positive for the shareholders of the company. This is attributed to the decrease in running expenses or costs. Revenues were generated at reduced costs as compared to the previous financial period. The improved efficiency contributed considerably to the increase in net profit of the company for the period. The increase will translate to increased returns to the shareholders and earnings per share as indicated in the EPS and increase in dividends, (Marques 2010). The basic earnings per share increased from £282 to £320.1. This is reflected in the increase in earnings, which increased from 474.8 million to 508.6 million. The shareholders earnings increased, this is a good sign that the company is in good financial health. The investor’s funds are growing at an increasing rate. Net assets increased from £222.7 million to £285.6 million. It indicates that the company acquired some assets. This increased capital of the company. This does not only indicate growth of the company but also increase value of the company. The company was able to pay all its financial liabilities; it cleared all its financial obligations totaling to £4.4 million. As such, the company was able to make good investments. Given the market conditions, the company is in a good position to extend its market share, (Linsmeier 2011). The closing cash and equivalents increased from £48.8 million to £130.9 million. This indicates the company management increased its cash management over the year. This is in addition to clearing all its financial obligations. The total assets of the company moved up by 2.12 per cent, this means that the company increased its investments as pointed out by Barnea & Rubin (2010) and that the company is growing and is ready to continue in operation since the value of the company has gone up. The company also increased its operating profits by 15.5 per cent which means that the company reduced its operating expenses and thus has become efficient in its operation (Koller et al 2010). The shareholders can therefore have confidence in the company since it is efficient in its operations. The market price of the company shares decreased resulting to decrease in the market capitalization on Next plc. This means that the company’s is not performing well and thus experienced a decline in its value which may reduce it may reduce its competitiveness in the market (Adrian & Shin 2010). The company’s revenue increased by 3.42 per cent, the company thus increased its sales resulting to a larger market for its products. The increase in revenue may also mean that the company explored new markets, increased their marketing campaign or is approaching maturity stage in its growth as suggested by Luca (2011). The number of employees increased by 1.22 per cent, this means that there was growth in the company which increased employment opportunities. The earnings per share of Next plc also increased which indicates an increase in the earnings attributable to shareholders. This translates to increase in dividends available for the shareholders. The share price for the company also increased by 7.09 per cent resulting to increased value of the company this translates to growth in the company. The capital employed in Next plc also increased by 28.24 per cent this means that the company registered growth since it increased the value assets used in generating profits. The final proposed dividends per share in the company increased by 9.33 per cent this indicates that the shareholders value has increased. Generally the movement in the key financial analysis indicates that the company experienced growth in value, has become more efficient in management of its resources making the performance of the company better (Zéghal & Maaloul 2010). References Adrian, T, & Shin, H. S. 2010. Liquidity and leverage. Journal of financial intermediation, 19(3), 418-437. Barnea, A, & Rubin, A. 2010. Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics Hill, T, Perry, S. E., & Andes, S, 2011, evaluating firms in financial distress: an event history analysis, Journal of Applied Business Research (JABR), 12(3), 60-71. http://www.netxtplc.co.uk/-/media/Files/N/Next-PLC/pdfs/latest/2013/ar2013.pdf Koller, T, Goedhart, M, & Wessels, D. 2010. Valuation: measuring and managing the value of companies Linsmeier, T, 2011, financial reporting and financial crises: the case for measuring financial instruments at fair value in the financial statements, Accounting horizons, 25(2), 409-417. Luca, M. 2011. Reviews, reputation, and revenue: The case of Yelp. Com (No. 12-016). Harvard Business School. Marques, A, 2010, Disclosure strategies among S&P 500 firms: Evidence on the disclosure of non-GAAP financial measures and financial statements in earnings press releases. The British Accounting Review, 42(2), 119-131 Wallace, D, & Grandy, L, 2013, Return on capital employed, In Finance: The Magazine for Finsia Members, 127(3), 42. Weygandt, J, Kimmel, D, KIESO, D, & Elias, Z, 2010, Accounting principles: Issues in Accounting Education, 25(1), 179-180. Wild, J, 2010, financial accounting: McGraw-Hill/Irwin. Zéghal, D, & Maaloul, A. (2010). 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