Introduction
Next plc is UK retail company that was launched in 1982. The company has more than 500 stores in UK and operates in more than 30 countries. it also has online stores where it sells clothes for women, shoes and related accessories. Online stores helped the company to reach more customers that make orders anywhere and goods are delivered at their convenient locations. NEXT has other brands such as Lipsy that are sold to all of their clients.
Analysis of financial position
ROCE = Net Operating Profit/Capital Employed
The figure for the company for the 2013 and 2012 was 61.1% and 47.3% respectively. It is a figure that is used to explain the how efficient capital is being used to achieve the goal of a firm in generation of profit. This figure is useful in comparing different organisations or just different departments in an organisation. Hence, it is one of the common financial ratios that is used by investors and business managers to compare performance of firms as well individualdivisions within an organisation. Often, the higher the value, the better the efficiency in terms of what is achieved(Mohana & Rao, 2011). Investors are interested on seeing higher returns for the capital that they invest in a business and like any rational investor, they will need more returns to the invested capital.
In this case, there was an improvement in capital that was employed, which implies the company used better the resources they had to achieve more profits for the stakeholders. It can be said that investors were satisfied with the rate that increased by 13.8%. While there is no standard value that is recommended for this ratio, it is recommended that high values be obtained, which means that more money that is invested should generate more returns in terms of operating profit.
Operating profit margin
Operating profit margin = Operating earnings / Sales
The figure for 2013 was 18.5% while that for 2012 was 15.3%, indicating an improvement t in the value of the figure. The aim of this ratio is to inform how much a business is affected in profitability in light of sales that they make (Mayo, 2010). This is the value that is left and is accounted for by sales after an organisation has paid al its expenses excluding interest and taxes. Like the case of ROCE, the higher the value, the desirable it is. The ratio is used to tell how a business is doing in terms of profitability before any deductions are made. Thus a company can tell how good or bad its situation is before making mandatory deduction such as taxes and interest(Megginson & Smart, 2010).
The business that analysed in this case, Next plc.has a ratio that implies that for every dollar of sales, 18% goes towards profit of a company. There is no recommended figure for this ration but generally, it is preferred when it is higher. A lower figure would mean the company would not have enough funds to meet its expenses other than the profit that it attains at the end of the trading year. The implication of this is that a business should try as much as possible to attain a level of profit before getting into any of the expenses. Next seems to be doing well in this area given that they had minimal expenses of interest and tax but the company should increase the level of profitability to increase their chances of making significant returns after they pay all their dues.
Next is a profitable company and these have been increasing over the years. A company that makes significant net profit means it has made all its expenses and has some that is left for the shareholders. Next made £473.1 million, up from £427 million the previous year. This cannot be said to be good or bad since it is only one company that is considered in this case. Given that there are figures that compare multiple years, performance of the company cannot only be compared to itself in these years. That is the function of ratios and Next can be said to be doing good given the fact that it is increasing in profitability.
Profitability of the company goes alongside with how much the company pays its shareholders. Indeed the goal why company manager are appointed is to use their expertise and integrity to increase profits of a company, which is also one of the main goals of stakeholders (shareholders). Wealth is created by increasing returns of a company. This is measured in how much the company pays its shareholders for every pound that that they have invested in terms of shares. Next paid its shareholders 282.0p in 2012 and later in 2013, this increased to 320.1p. This is a measure of how profitable a company but again, this depends on other similar businesses in the industry. On its own, the company can be said to be profitable and equally, a single figure cannot be used to attribute to profitability of a company.
The value that shareholders are paid can be used to allude to how profitable a company is and investors will make decisions basing on this. According toSinha(2009), most investors have no time to read all financial statements that a company has and often, they are making comparisons with other companies in the same industry or even other outside the industry. As such, most potential investors would rather read summary and earnings per share (EPS) is one the most sought after ratio due to its far reaching implications on performance of a company. People associate EPS with the volume of net profit that a company makes because its calculations is based on this. The trend that is shown by the company indicated its movement on the positive trend where it increases year after year. This is a positive indication the company is doing well in profitability. EPS is used indicate ability of a company to pay its shareholders dividends in future and this is a goal of shareholding in public company(Bragg, 2011). According to the financial report of Next, it was noted that EPS has been used consistently over the years to measure overall performance because of its strength and reliability.
Asset turnover ratio is an efficiency ratio that was calculated to assess performance of the company in terms of utilising assets in has at its disposal to generate sales. It is a measure between the sales that a company makes and its fixed assets. According to Weil (2012), this terms is confusing a turnover is expected for inventory unlike fixed assets which are not expected to be traded to generate returns. However, the meaning of this the ratio is taken to mean productivity of fixed assets. The ratio means how well a company uses its fixed assets to generate profits for the shareholders. The ratio was 2.19 in 2012 but increased to 2.27 in 2013. The implication of the ratio for example in 2012 is that a single pound yielded 2.13 towards of the sales but this increased to 2.23 pounds the following year.
Fixed assets are used to generate goods and companies could be using these new assets to plan for newer production facilities which would be more efficient and could generate better returns. Hence, it may not be used always to imply a company is not using its fixed assets to generate efficiently. This calls for wider analysis before making any conclusion and this would include assessing other ratios or checking what activities did the company in that particular year. The ratio for Next did not change significantly meaning that the fixed assets produced more or less similar products in that particular year.
Current ratio is a profitability ratio that is common and one also very informative in terms of informing investors ability of a company to pay its dues in time without resorting to other sources. Weil (2012) noted that it is a ratio that represents what cash a company can generate from its assets in a period of one year. It is a profitability ratio that indicates how liquid a company is because for it to be able to pay its dues in the short run (one year), then it should have sufficient liquid assets to meet its short term dues. The company’s ratio was negative, (-1.3). This figure is below 1, which implies the company has issues with its liquidity that needs to be looked into or investigated. It also means the company has net working capital and cannot work with what is has to meet its daily needs sufficiently.
Acidtest ratio is the same as current ratio except that inventory is eliminated from the current assets to get how true a company is liquid. The aim of this is to provide a true position of a company in terms of liquidity. It is the same figure for this ratio given there was no data for inventory given in the statement. There was no data for inventory in the records of the company. Other rations that use inventory in their calculation but were nit used include inventory holding period or inventory period and receivables collection period.
Gearing is the ratio to debt to equity. It can be said to be the same as current ratio only that it is used to assess ability of a company to meet its long term dues, which means non-current liabilities. It is often used to indicate leverage of a company where it uses its debts wisely to generate desired returns(Gruen & Howarth, 2005). Debt is necessary but needs to be used cautiously as long term finance that is associated with a company may mean its inability to pay them. The company’s EBIT for two relevant periods considered was negative, implying the gearing would still be negative as it was (-73% and -80% respectively for 2013 and 2012). It means the company cannot be able meet is long term dues since it did not make any profit after paying its interest and taxes. Besides, interest cover ratio is also a negative figure for 2012 and 2013, where it was -0.03 and .0.04 respectively.
However, despite these, the company still has maintained a positive trend of increasing its earnings per share for the past four years where since 2009, the company’s EPS increased between 1705p and 4059 currently (2013). Price per earnings ratiomeasures a company’s possibilities of generating income. It was 13.63 in 2012 and 8.86 for 2013. It is increasing, hence showing that Next is in a position to make profits in future.
References
Bragg, S. M., 2011. Wiley GAAP 2012: Interpretation and Application of Generally Accepted. New York: John Wiley & Sons.
Gruen, R. & Howarth, A., 2005. Financial Management in Health Services. New York: McGraw-Hill Education.
Mayo, H. B., 2010. Investments: An Introduction (with Thomson ONE - Business School. 6th ed. New York: Cengage Learning.
Megginson, W. L. & Smart, S. B., 2010. Introduction to Corporate Finance. New York: Cengage Learning.
Mohana, R. P. & Rao, R. M., 2011. Financial Statement Analysis and Reporting. New Delhi: PHI Learning Pvt.
Sinha, G., 2009. Financial Statement Analysis. New Delhi: PHI Learning.
Weil, R. L., 2012. Financial Accounting: An Introduction to Concepts, Methods and Uses. 14th ed. New York: Cengage Learning.
