The Analysis of NEXT Plc's Ratios - Case Study Example

EXECUTIVE SUMMARY NEXT Plc is a UK based retailer with wide offerings for quality clothing, footwear, accessories and home products (Nextplc.co.uk). The retailer is among the largest in UK with regards to sales volume of clothing and home products. It is also listed as a member of FTSE 100 index. NEXT Plc comprises of: NEXT retail which is a chain of stores with more than 500 stores across UK and Eire. The stores sell cloth, foot wear, accessories and home products; NEXT Directory, which is an online shopping business with above 4 million customers that shop regularly across over 70 countries embracing internet to provide excellent shopping experience (Nextplc.co.uk). NEXT Plc is made up of NEXT International retail, a franchise with approximately 200 stores across the world; NEXT Sourcing, with mandate to design and source the NEXT branded product which is based in Hong Kong acting as an agent enabling NEXT become competitive and lastly Lipsy that design and trade younger women stylish products. NEXT Plc. performance has been tremendous growing over the years indicating more potential for the firm (Nextplc.co.uk). The analysis of ratios is fulfilled by calculating several appropriate ratios based on balance sheet and profit and loss account. This will enhance decision making on whether to invest in NEXT Plc. with regard to ist profitability and adequacy profits in the firm, worth of the business to its owners/ equity holders, liquidity, financial strength and the survival ability of the firm, measure of productivity of its assets and how efficiently management is utilizing the economic resources available and the solvency of the business. Growth ratios Growth ratios enable comparison of company’s performance based on year by year basis. The table 1.1 below shows that NEXT Plc. operating profit and net profit grew from 2015 doubling the growth observed for its competitor Marks and Spencer Group Plc (Nextplc.co.uk). The picture is also depicts in its sales growth. However it’s worth noting that sales growth observed in 2016 for NEXT Plc. is still lower than that of the industry pointing out potential growth. Table 1.1: Growth Ratios Growth Ratios NEXT M&S Industry Sales growth 4.40% 2.40% 8.60% Gross profit growth 8.10% 3.60% Operating profit growth 6.80% 2.90% Net profit growth 5.00% 6.40% Profitability ratios Profitability ratios assess the general profitability of a business using different parameters. Table 1.2 outline some of these parameters. NEXT Plc. Profitability analysis indicates a tremendous growth from 2015 to 2016 with reference to Marks and Spencer Group Plc. and above industry performance. This has been attributed to revenue growth from £3999.8 2015 to £4176.9 2016 resulting to net profit of £666.8 in 2016. Table 1.2: Profitability ratios NEXT Plc. M&S Industry ROE 213.90% 16.60% 11.30% ROA 37.20% 9.30% 5.60% Gross Profit Margin 34.80% 39.10% 43.20% Net Profit Margin 16.00% 5.40% 1.60% Liquidity ratios Liquidity ratios measure the firm ability to pay its debts as they fall due net liquid assets (Khan, 1993). On average a liquidity ratio 1:1 is considered adequate however it may also depend on nature of business. Quick ratio for NEXT Plc. is 1 an indication of a firm that is able to pay its debts without substantial loss or inconvenience within the time allowed for payments of immediate liabilities. This is far much better with comparison to that of Marks and Spencer Group Plc. of 0.3. Current ratio indicates the ability of the firm paying its short term debts without necessarily selling its non-current assets. NEXT Plc. current ratio of 1.4 is adequate to paying its short-term liability and allow surplus to continue trading as a retail business which is higher than that of M&S and industry at large. Financial Efficiency Financial Efficiency NENXT Plc M&S Industry Inventory turnover period (days) 65.2 45.4 44.2 Asset turnover (times) 1.8 1.2 0.7 NEXT Plc. financial efficiency indicates a healthier collection period account than its peer, it indicate a management ability to control the investment in stock better than average industry ratings. The management has successfully utilized available resources to generate sales. Financing ratios Financing ratios enables to determine the extent to which shareholders or outsiders are financing the business and creditors confidence and firm’s survival position during hard economic time. Financing ratios NEXT Plc M&S Industry Gearing ratio 73.10% 46% Long term liability to equity 271.90% 85.00% 76.80% Interest cover 27.1 6.6 18.0 NEXT Plc. gearing ratio of 73.10% is high as total capital employed is made up of capital carrying a fixed rate of return. This can alter earning to nil on extreme unproductive years as compared to M&S Plc. which is lowly geared. Investing ratios The investing ratios assess the ability of the firm to pay back on investment. NEXT Plc. has higher earnings per share as compared to M&S Plc. which is an indication of higher amount of earnings applicable to a share of ordinary equity which is satisfactory. Investments Ratios NEXT Plc M&S Industry Earnings per share (p) 44.6 35.2 Price/earnings ratio 11.2 21.5 27.1 Dividend cover 1.2 1.9 With reference to price earnings ratio M&S outperforms NEXT Plc. indicating how realistic the market price of the business shares. The returns on shareholders investment based on current price of shares M&S outshines NEXT Plc. CONCLUSION Despite limitations of ratios they are extremely useful analytical tool as it gives insight of important relationships among various variables of financial statements. The investor might also need to consider the following when reviewing Next Plc. as a possible investment opportunity; NEXT earning per share was on rise by 5% and the firm proposes an increase in full year dividend. The sales for NEXT is on the rise attributed to NEXT Directory segment growth increase of 8% pushing group sales growth by 3% and future looks brighter as the growth has been on rise in the past five years. The share price has been all time above declared share buyback price promising better returns for shareholder. The company cash flow has been steady over time, the firm’s ambition to open new more stores based on profitability and success of stores coupled with able management with many years of experience. REFERENCES Khan, M.Y. 1993. Theory & Problems in Financial Management. Boston: McGraw Hill Higher Education.  NEXT Plc.co.uk. 2016. NEXT PLC. Available at http://www.nextplc.co.uk/ Read More