Financial Statement for Investors - Assignment Example

Next Plc Executive Summary The Next multinational company history can be trace back to 1864 when Joseph Hepworth started J Hepworth & Son a tailoring company in Leeds. The company started off as making ready to wear suits until its acquisition of Kendall an sons that expanded its outlets in British in 1981. It was this acquisition that states the first line of chains of NEXT (Next Plc). The chains later expanded to womenswear in 1982, concentrating on the sale of clothes, shoes and accessories, and menswear in 1984 with the renaming of the company to NEXT in 1986. A year later, the company began the children wear chains. The company has changed its brand several times and expounds its products and services to Wedding list service (Next Plc. our History). Presently, the company has expanded into other line of business and other regions. The main business for NEXT is the sale of clothes both in house designed and outsources through their channels: NEXT Retail chain within United Kingdom and Eire; Next International, outlet chains outside the UK; Next directory where the company sells their products online. Moreover, the company engages in the sale of third party goods through their NEXT Sourcing channel. Among the subscribe brands are Lipsy. These operations extend beyond the borders of UK to include 200 stores in 40 other countries (NEXT Plc Business Overview). Their line of products includes clothing, home products, accessories and footwear as well (Annual Report 2016). However, the main headquarters for the company’s operations is in Enderby, Leicester. The company is a member of the London Stock exchange and has been trading since 1948 in the main market and the category Premium Equity Commercial Companies (London Stock Exchange). The financial statements of the company are prepared in accordance to the international financial reporting standards and as per the requirements of the Company Act 2006. The consolidated annual reports are the company’s operations for the financial year ending in each calendar year. The reports are therefore audited by Ernst and Young. The annual reports for the 53 weeks ending on 30th January 2016 show that the total sales for the group increase by 3% while the EBIT rose by more than 5% from the previous year. The company declared a final dividend of 105p on the ordinary share for the year ended January 30th 2016. Financial Ratio Analysis The financial ratio analysis is one of the ways of measuring the performance of a company in respect of the economic events an in reference to previous performance. The performance measurement includes the liquidity aspect, the efficiency of the company, the leverage a capital structure policy of the company, the profitability and the investor capability of the company. The ratio analysis will be in comparison with the performance of Marks and Spencer Group financial performance in the same year. Liquidity The liquidity of a company is measured use the current ratio and the acid test ratio. The current ratio for NEXT stands at 1.4 for the year 2016, an improvement of o.4 from the previous year. This means that NEXT Company can only be able to fulfill its current obligations 1.4 times within the year; out differently, the current bassets of the company are 1.4 times the current liabilities of the company in the same period. A better measure of liquidity, the acid test ratio reveals that NEXT can cover its current obligations 0.9 times in a year. On the other hand, Mark and Spencer (M&K) has a current ratio of 0.69 and an acid test ratio of 0.31. On both measurements, NEXT appears to have a greater ability to pay its current obligations than does M&K. the Investor Chronicles Financials (2016) reported a current ratio of 1.66 a quick ratio of 1.20 for NEXT for the 2015/2016 period. Efficiency The activity ratios of the company measure the efficiency with which the company converts their accounts into liquid cash or cash equivalents. This is also an indication of the liquidity status of the company. In order capture the efficiency of the inventory account, NEXT showed an inventory turnover of 5.6, a slight reduction from the previous year. This means that NEXT coverts its inventories to cash 5.6 times a year. The company’s total asset turnover stood at 1.79, translated to mean that NEXT turns over its assets 1.79 times a year. Meanwhile, the total asset turnover of M&K in the same year was at 1.25. NEXT is therefore more efficient in using its assets to generate sales compared to M&K. In terms of the efficiency of the firm to turn accounts into cash inflows, the average collection and average payment period are calculated. On average, NEXT takes 90 days to collect its receivables while M&K takes 18 days for the same. The payment period for NEXT is 58 days while M&K takes 67 days. In comparison to M&K, NEXT is not efficient is collecting its debt but it pays its debts faster. Leverage The leverage of a company is the extent to which a company uses debt securities to finance its operations. The financial leverage is also an indication of the risk factor facing the firm. The debt ratio show that NEXT has a debt ratio of 1.15 compare to M&K’s ratio of 0.59. NEXT has twice the amount of debt as M&K: translate to mean that while for M&K only 59% of their capital structure is made up of debt, NEXT has more than 100% of their capital structure in terms of debt instruments. Furthermore, Reuters (UK Edition) calculates the Long Term debt to equity ratio vs the sector value at 33.93 while a comparison of debt ratio to sector value at 63.74. An analysis by Investor Chronicles Financials (2016) report that the total debt to equity ratio for NEXT at 6.31. Profitability For most investors, the profit levels of the company are an indication of its performance. The profitability levels of NEXT as seen by its gross profit, operating profit and net profit margins stand at 0.35, 0.21 and 0.16 respectively. In comparison, M&K recorded an operating margin of 0.06 and a net profit margin 0.04. NEXT showed better profit levels than M&K, which was 4% improvement from the previous year. This is consistent with the annual reports that estimate the profitability growth at 5%. The return on assets for NEXT for the financial year 2016 was at 0.29: for each British pound of asset the company had, it earned 0.29p. The return on asset for M&K was 0.04: 0.25 lower than the amount earned on NEXT’s assets. Similarly NEXT recorded a higher return on equity at 2.2, more than ten times that of M&K. In comparison to the sector data, the company had very low profitability: the sector ROE is at 12.60 (Reuters UK Edition 2016) Market Ratios The market ratios are a reflection of the value of the firms share value as seen by the investors. They indicate an investor’s willingness to invest in that company. NEXT Plc recorded a price to earnings ratio of 11.15, consistent with the Investors Chronicles (2016) findings of PE ratio of 11.06. This shows that investors are willing to pay 11.15Bp for each 1Bp in earnings. Investor Consideration The financial ratios and the financial statements provide a foundation for analyzing the investment potential of the firm but they are insufficient. The ratios, in themselves have limitations: the ratios do not provide underlying fundamentals for the firm performance; they can only be use in comparison with other firms in the same industry/ sector; they are subject to manipulations since they depend on the financial data prepare by management for analysis. Due to these limitations then other factors ought to be put into consideration before investing in the company. In particular should be the events that have taken place within the company in the recent past, the corporate governance strategy of the company and the policy that guide the groups such as sustainability. The core business of the company and its major revenue sources, retail business, is vulnerable to the changes of the economy. The company had therefore felt the impact of the landmark Brexit voting earlier in the year: The result was the plunging in the exchange rates (Russell 2016). This is precisely because the company relies heavily on its domestic market despite its presence on the online platform. The third quarter released show an increase in sales but analysts think it is still insufficient to offset the damage done (Russell 2016). The economic situation uncertainty was further aggravated by the US elections in which major foreign exchange rates were affected. The recovery of the British pound has had a positive outlook, given the recent re-evaluation of the company’s profit range after the company had predicted a difficult last quarter (Monaghan 2016) from the range 775-845 to the range 785-825 pretax range. There is also the new trend that consumers are increasingly spending less on clothing (Motley Fool 2016) which forms the backbone for NEXT’s business. Consumers are spending more on entertainment and leisure than they are on clothing (Farrell 2016) due to the increased tendency to spend on experience than material goods. This trend will potentially impact on the earnings of the firms and possibly the financial performance in the last quarter of the financial year. However the company has prospective to focus more on the investing on the online directory, which will probably shield the company from possible uncertainty in the domestic market. There are also concerns that the weather could be unfavorable to the high street fashion: the uncertainty of the weather could affect the sale of the retail chains (Wood 2016). The unseasonal weather also impacts on the shopping patterns of consumers (Farrell 2016). The financial ratio for the company shows a stable investment option within NEXT. The company proved to be sufficiently liquid, efficient and the investor perception on the shares is correctly valued. Of major concern to investors is the profitability level of the company. The profit ratios show that in the last 53 weeks and the half year results, the company has been increasing its sales volume and profit levels. However the uncertainty of the market reduces the attractiveness of the company as an investment hub. Therefore it would be prudent for an investor already holing share to NEXT to hold to the shares. However, selling the shares would do not be prudent given that the market dynamics cam go either way. References Annual report and accounts Next January 2016 Next Plc Farrell S September 2016 Next Retail profits slide as consumers shun full price clothes The Guardian [online] available from: https://www.theguardian.com/business/2016/sep/15/next-retail-profits-slide-as-consumers-shun-full-price-clothes accessed 30/11/2016 Investor Chronicles Financials Next Plc [online] available from: markets.investorchronicle.co.uk/research//Markets/Companies/Financials?s=NXT:LSE accessed 30/11/2016 Investor Chronicles Next Plc Summary [online] available from: markets.investorschronicles.co.uk/research/Markets/Companies/Summary?s=NXT:LSE accessed 30/11/2016 Next Plc Our History [online] available from: www.nextplc.co.uk/about-next/our-history accessed 30/11/2016 Next Plc Business Overview [online] available from: www.nextplc.co.uk/about-next/at-a-glance# accessed 30/11/2016 Monaghan A November 2016 Next cuts sales forecast after tough third quarter The Guardian [online] available from: https://www.theguardian.com/business/2016/nov/02/next-cuts-sales-forecast-after-tough-third-quater accessed 30/11/2016 The Motley Fool November 2016 the bear case for Next plc [online] available from: mponey.aol.co.uk/2016/11/02/the-bear-case-for-next-plc/ accessed 30/11/2016 Woo Zoe September 2016 Weather uncertainty is freezing high-street fashion’s fortunes the Guardian [Online] available from: https://www.theguardian.com/business/2016/sep/24/weather-uncertainity-freeze-high-sreet-fashion-fortunes accessed 30/11/2016 Read More