A Financial Analysis of Next

A Financial Analysis of NEXT By Tingyu WANG AC2407 Shakil Iqbal Patel Tuesday, 1st November, 2011 CONTENTS 1. Introduction3 2. Roles of Accounting and Finance3 3. Financial Analysis4 3. 1. Discussion of NEXT4 3. 2. Finance of NEXT5 3. 3. Ratio Analysis6 3. 4. Application of roles to NEXT9 4. Conclusion10 5. References10 6. Appendices11 1. Introduction ‘Accounting is the process of recording, classifying, and reporting and interpreting the financial data. ’ (Johal et al, 2010:2). Accounting provides a key source of information about a business to those who need it, such as managers or owners.The framework makes cash and profit can be monitored, planned and controlled. It is essential to the running of any business or organization. (Jones, 2006:3). ‘Finance exists to help users to make better decisions and is concerned with the financing and investing activities of the business. ’ (Eddie et al, 2005:21). This essay will discuss the roles of accounting and fina nce within an organization and include a financial analysis of NEXT, which through the following structure: the next section identifies the roles of accounting and finance to NEXT.Section three makes some financial analysis, including the discussion of NEXT, evaluation of its finance, and ratio analysis. The fourth section is to examine the application of roles to NEXT. The final section is to make conclusion. 2. Roles of Accounting and Finance There are three main roles of accounting and finance within an organization. * Financial Accounting: Deals with the mechanistic bookkeeping progress and the preparation and interpretation of the financial accounts. For companies, it also includes the preparation of the annual report.It concludes measuring and reporting financial position, financial performance and anlaysing and interpreting financial statements. (Jones, 2006:13). * Financial Management: It is about managing the sources of finance of an organization which involves ‘manag ing the working capital (that is, short-term assets and liabilities) of a company or finding the cheapest form of borrowing. ’ (Jones, 2006:14) * Management Accounting: Covers the internal accounting of an organization. It consists of costing, budgeting, standard costing, short-term decision making, strategic management accounting, capital investment appraisal and discounted cash flow. IBID). 3. Financial Analysis 4. 1. Discussion of NEXT NEXT plc is a UK based retailer offering exciting, beautifully designed, excellent quality fashion and accessories for men, women and children together with home products. The company was founded by Joseph Hepworth in Leeds in 1864. The first NEXT shop opened on 12 February 1982. In 1986, Davies moved the headquarters from Leeds to Leicester, to be closer to the main garment manufacturers. In autumn 2009, NEXT plc launched an online catalogue for the United States offering clothing, shoes and accessories.It distributes through three main cha nnels: Next Retail, a chain of more than 500 stores in the UK and Eire; NEXT Directory, a home shopping catalogue and website with nearly 3 million active customers; and NEXT International, with more than 180 stores around the world. NEXT also has a growing website capability in more than 30 countries worldwide. (Next Corporate, 2011). In UK, there are three analogous brand companies like Top shop, Monsoon, and Aquascutum. They all operate as similar home products as NEXT, like clothing, footwear, and accessories for men, women and children and have online services and various strategies.It is obvious to increase competition to NEXT. While for NEXT, they use their influence to promote good practice and raise awareness, believe working together in partnership is the best way they can make a positive difference. Using approach to improve energy efficiency and reduce energy use, minimize waste produced and increase the quality recycled, increase the efficiency of their delivery fleet h elp NEXT to increase revenues, profits, earnings per share and dividends per share from 2010 to 2011. It is believed that NEXT will have a brighter future. (IBID).According to the report in Financial Times (2011), FTSE 100 drops to fortnight-low, while NEXT was up 2. 9 percent to ? 26. 14, which plans to launch a fixed-odds sports book next year could boost group profit by 50 percent. The fact claims that NEXT have a specific operating strategy make brilliant finance performance. 4. 2. Finance of NEXT The sources of finance of NEXT were used include following: * Use of funds: According to NEXT report (2010), the company use funds for registered charities, groups or organizations and purchased a further ? 1. 4million shares at a cost of ? 28million. * Internal Sources of Finance: 1) Short-term: ? Delay payment to creditors: For NEXT, the business has more trade payables in 2011 than 2010, it delays payment to creditors can keep cash longer. ‘Suppliers are in effect offering a b usiness an interest-free loan, the period of the ‘loan’ is extended and funds can be retained within the business. ’ (Peter et al, 2008:395). ?Tighter credit control: ‘All customers who wish to trade on credit terms are subject to credit verification procedures. ’ (NEXT plc, report of 2010:79). It is possible for the business to reduce the proportion of assets held in this form and so release funds for other purposes. 2) Long-term: Retained profit: From 2009 to 2011, the profit earnings have been increasing from ? 1523. 2, ? 1615. 2, to ? 1782. 6. (NEXT, 2010: 46) The profits are retained within the business rather than being distributed to shareholders in the form of dividends, the funds of business are increased. * External Sources of Finance: (1) Long-term: ? Ordinary shares: For NEXT, the ordinary shares were changed several time at different time because of the high risks associated with this form of investment, the ordinary shareholders also re quired a comparatively high rate of return. Loans: The unsecured bank loans in 2010 is ? 75million and ? 115million in 2011. Their interest rate are ? 22. 7million and ? 24. 3million. (NEXT, 2010:47). ‘The company’s medium term borrowing facilities may be subject to early repayment if a majority of lending banks gave written to notice to the company within 30 days of the change of control. In addition, there are some security social costs. ’ (NEXT, 2010:24). This means interest will be paid only on amounts drawn and so the business will not have to pay interest on amounts borrowed that are temporarily surplus to requirements.Term loans tend to be cheap to set up and can be quite flexible as to conditions. Besides, corporate bonds are a type of long-term loans. In 2010, it is ? 520. 9million and ? 471. 2million in 2011. The decreased gearing ratio states the company has the lower risk to pay the interests on its loans. (Peter et al, 2008:399) (2) Short-term: ? Ban k overdrafts: The bank overdrafts in 2010 is ? 4. 7million and ? 10. 2 million in 2011. It represents a very flexible form of borrows and easy to arrange as the size of bank overdraft can be increased or decreased. Debt factoring: Take over NEXT’s debt collection agencies. ‘It can result in savings in credit management and create more certainty with the cash flows. It can also release the time of key personnel for more profitable activities. ’(IBID:425) 4. 3. Ratio Analysis Profitability | Year 2011| Year 2010| Gross Profit Margin| 29. 21%| 29. 26%| Net Profit Margin| 16. 67%| 15. 58%| Return on Capital Employed (ROCE)| 60. 01%| 56. 72%| Asset Turnover| 3. 60| 3. 64| The gross profit margin was decreased 0. 05% from 2010 to 2011. The lower the gross profit margin, the worse for the company.The decline in this ratio is because of the change in the cost of goods sold, the stock sell more expensive; this year more inventory wastage and fewer products selling than la st year. The net profit margin increased 1. 09% due to the expenses being controlled very well. The business can make more profit, means the bigger, the better. The ROCE ratio increased 3. 29%, which comes from the returns from the bank. It measures high efficiency the assets are used to generate profit, the bigger ratio, the better return. The asset turnover decreased 0. 04. This result is affected by the increased ROCE.The smaller, the worse for the company. Efficiency | Year 2011| Year 2010| Inventories Turnover| 55. 0 days| 46. 8 days| Trade Receivables Turnover| 56. 4 days| 55. 7 days| Trade Payables Turnover| 29. 2 days| 26. 5 days| The inventories turnover increased 8. 2 days. The more frequently stock is turned over the better. The reason of the improvement is the more inventories and lower cost of sales in 2011 than 2010. The trade receivables turnover has a slight increase as at 0. 7 days. It means more cash was tied up in trade receivables for each ? 1 of sales revenue in 2011 than in 2010.Therefore, it is bad for the company. It may because of incurring lower expenses, such as discounts allowed to customers who pay quickly in 2010. The trade payable turnover increased 2. 7 days, in the average length of time that elapsed between buying inventories and services and paying for them. This result depends on the length of credit period agreed with trade creditors. It is beneficial because the business is using free finance provided by suppliers. Liquidity | Year 2011| Year 2010| Current Ratio| 1. 28:1| 1. 37:1| Quick Assets Ratio| 0. 84:1| 0. 97:1| The two current ratios are between 1 and 2. A range from 1 to 2 is considered optimum. ’ (Patel, 2010:11). It decreased 0. 09 because of the type of the business of NEXT, the higher the ratio, the more liquid the business is considered to be, the decline is good for the company. The quick assets ratio decreased 0. 13 due to stocks removed from the numerator. ‘The optimum range is usually consider ed to be in the range 0. 75-1. 00. ’ (Patel, 2010:12). It is obvious to see that the ‘liquid’ current assets do not quite cover the current liabilities, so the business may be experiencing some liquidity problems.With the decline of the quick assets ratio, it is beneficial for the company. Capital Structure | Year 2011| Year 2010| Gearing| 49. 1%| 55. 7%| Interest Cover| 23. 7 times| 21. 0 times| ‘Broadly, the gearing range 30% – 60% is considered OK. ’ (Patel, 2010:2). The gearing decreased 6. 6%, because it has borrowed more in 2010 than 2011. ‘The higher the gearing, the higher the risk that the business will be unable to pay the interest on its loans or make repayments in times of economic recession. ’ (Jill et al, 2007:197) So, this is good for the company. The interest cover increased 2. times, because the decreasing long-term debts. ‘Generally, a figure over 2 is needed to be on the safe side. ’ (Patel, 2010:4) . It is positive for the company, the higher the level of operating profit coverage, the smaller the risk to the shareholders. Investor | Year 2011| Year 2010| Earnings per share (EPS)| 221. 9p| 188. 5p| Dividend Cover| 3. 1 times| 3. 4 times| Return on Equity (ROE)| 2. 7| 1. 7| The latest price earnings ratio (PE) is = 11. 44 (Financial Times @ 24/10/2011) The latest dividend yield is = 3. 32% (Financial Times @ 24/10/2011) The EPS increased 33. p because of particular business over time. The bigger, the better for the company. The dividend cover decreased 0. 3 times because of the proportion of earnings have been paid out as dividend is changed. ‘The more usual situation of a high value, greater than 1, shows only a proportion of the profits being paid out as dividend. The higher the figure the more profits have been retained in the business. ’ (Patel, 2010:7). The ROE was increased 1. 0. It is a very big improvement, because the company put much profit on equity hold ers than shareholders’ equity.For the company, the bigger, the better. 4. 4. Application of roles to NEXT Based on the annual report and accounts of NEXT in January 2011, it is one part of financial accounting. The financial statements such as Income Statement, Balance Sheet and Cash Flow Statement show evidence of financial accounting, because all of the finance information and financial ratios can help assessing the financial health of NEXT, and examine various aspects of financial position and performance. They are helpful to plan and control operating purposes for NEXT.By considering the main sources of finance of NEXT to examine various aspects of the capital markets and identifying the factors that must be taken into account when managing the working capital of NEXT, the business can make financing decisions on investment and new objectives and so on. These evidences can be the role of financial management. Because of the management accounting consists of costing, budge ting, standard costing, short-term decision making, strategic management accounting, capital investment appraisal and discounted cash flow. There is no evidence in this case, therefore, For NEXT, it has no management accounting. . Conclusion In order to make a financial analysis of NEXT plc, the essay was first to identify the three main roles of accounting and finance to an organization, they are financial accounting, financial management and management accounting. After that, it discussed some issues of NEXT, such as the history, size, future, economic climate and topical information and so on. Based on the NEXT annual report and accounts in January 2011, to understand how the company is financed, the report was listed some sources of finance which NEXT used, added the changes and the reasons as well.Following was the ratio analysis for NEXT, including profitability, efficiency, liquidity, capital structure and investment ratios. Through the results, it was clear to see the trend and effects on NEXT. Finally, by examining the annual report and accounts, it has applied the roles of accounting and finance to NEXT. In this case, NEXT plc applied the financial accounting and financial management. To sum up, financial analysis is the important basis for evaluating financial position and operating performance. It also realizes financial goals and the important steps to implement correct investment decisions. . References 1. Johal et al, (2010) in Patel, S. ,(2011), What is Accounting, University of Central Lancashire. 2. Jones, M. (2006), Accounting, John Wiley, Chichester. 3. Eddie McLaney, Peter Antrill (2005) Accounting: An Introduction, FT Prentice Hall. 4. Peter Atrill, Eddie McLaney, (2008), Accounting and Finance for Non-Specialists, FT Prentice Hall. 5. Jill Collis and Roger Hussey, (2007), Business Accounting, Palgrave Macmillan 6. Patel, S. , (2010), A Ratio Analysis Worksheet (Part 1and 2), University of Central Lancashire. 7.Financial Times, (2011), FT SE 100 Drops to Fortnight-low, p4, 20 October 2011. 8. Financial Times, (2011), Companies & Markets: Retailers: NEXT plc, 24th October 2011. 9. NEXT plc, (2010), Annual Report and Accounts. 10. Next Corporate, (2011), About Next. Available at: http://www. nextplc. co. uk/about-next. aspx. Accessed: 25th October 2011 6. Appendices 1) Profitability Ratios: Gross Profit Margin = Gross ProfitSales * 100% FY 2010: Gross Profit Margin = 996. 93406. 5 * 100% = 29. 26% 2011: Gross Profit Margin = 1008. 73453. 7 * 100% = 29. 21%Net Profit Margin = Profit before Taxation and InterestSales *100% FY 2010: Net Profit Margin = 505. 3+25. 33406. 5 * 100% = 15. 58% 2011: Net Profit Margin = 551. 4+24. 33453. 7 * 100% = 16. 67% Return on Capital Employed = Profit before Taxation and InterestTotal Assets less Current Liabilities * 100% FY 2010: ROCE = 505. 3+25. 31693. 5-758. 1 * 100% = 56. 72% 2011: ROCE = 551. 4+24. 31792. 3-832. 9 * 100% = 60. 01% Asset Turnover = SalesTotal Assest less Current Li abilities FY 2010: Asset Turnover = 3406. 51693. 5-758. 1 = 3. 64 2011: Asset Turnover = 3453. 71792. 3-832. = 3. 60 2) Efficiency Ratios: Inventories Turnover = InventoriesCost of Sales * 365 FY 2010: Inventories Turnover = 309. 02409. 6 * 365 = 46. 8 days 2011: Inventories Turnover = 368. 32445. 0 * 365 = 55. 0 days Trade Receivables Turnover = Trade ReceivableSales * 365 FY 2010: Trade Receivables Turnover = 520. 23406. 5 * 365 = 55. 7 days 2011: Trade Receivables Turnover = 533. 33453. 7 * 365 = 56. 4 days Trade Payables Turnover = Trade PayablesCost of Sales * 365 FY 2010: Trade Payables Turnover = 175. 02409. 6 * 365 = 26. 5 days 2011: Trade Payables Turnover = 195. 52445. * 365 = 29. 2 days 3) Liquidity Ratios: Current Ratio = Current AssetsCurrent Liabilities FY 2010: Current Ratio = 1041. 2758. 1 = 1. 37:1 2011: Current Ratio = 1067. 3832. 9 = 1. 28:1 Quick Assets Ratio = Current Assets-InventoriesCurrent Liabilities FY 2010: Quick Assets Ratio = 1041. 2-309. 0758. 1 = 0. 9 7:1 2011: Quick Assets Ratio = 1067. 3-368. 3832. 9 = 0. 84:1 4) Capital Structure: Gearing = Long-termnon-currentloansTotal Assets less Current Liabilities * 100% FY 2010: Gearing = 520. 91693. 5-758. 1 * 100% = 55. 7% 2011: Gearing = 471. 21792. 3-832. 9 * 100% = 49. % Interest Cover = Profit before Taxation and InterestInterest Payable FY 2010: Interest Cover = 505. 3 +25. 325. 3 = 21. 0 times 2011: Interest Cover = 551. 4+24. 324. 3 = 23. 7 times 5) Investment Ratios: Dividend Cover = Profit on ordinary activities after taxationOrdinary equitydividends FY 2010: Dividend Cover = 364. 1108. 5 = 3. 4 times 2011: Dividend Cover = 401. 1129. 6 = 3. 1 times Return on Equity (ROE) = Profit on ordinary activities after taxationEquity Shareholders'Funds * 100% FY 2010: ROE = 364. 1133. 6 * 100% = 2. 7 2011: ROE = 401. 1232. 3 * 100% = 1. 7