Financial Performance Analysis of Retailers

This assignment presents a comparative financial performance analysis of two prominent retail companies: Next plc and H&M. The analysis delves into various financial ratios, such as the debt-to-equity ratio, to assess key aspects of each company's financial health. Trends in profitability, liquidity, and solvency are examined through graphical representations and interpretations, providing a comprehensive understanding of the financial performance landscape for both retailers.

Accounting & Finance
for managers

TABLE OF CONTENTS
Introduction......................................................................................................................................4
Task 1...............................................................................................................................................4
1. Analyze the performance and financial position and
investment potential of the two companies.................................................................................4
2. Chart formation........................................................................................................................7
3. Recommendations..................................................................................................................11
4. Limitation of relaying on financial ratios..............................................................................12
Task 2.............................................................................................................................................13
1. Use of Initial Investment Techniques....................................................................................13
Payback Period...........................................................................................................................14
Net present value........................................................................................................................15
Accounting rate of Return..........................................................................................................16
2. Limitations of Investment Appraisal techniques...................................................................17
Conclusion.....................................................................................................................................17
References......................................................................................................................................19
2

Index of Tables
Table 1: 10 financial ratios..............................................................................................................4
Table 2: SWOT analysis of Next plc...............................................................................................6
Table 3: SWOT analysis of H&M...................................................................................................7
Table 4: Ratios for Next plc.............................................................................................................8
Table 5: Ratios For H&M................................................................................................................8
Table 6: Ratios for Next plc............................................................................................................9
Table 7: Ratios For H&M..............................................................................................................10
Table 8: Depreciation for Project A...............................................................................................13
Table 9: Depreciation for Project B...............................................................................................13
Table 10: Cumulative Cash Flow..................................................................................................14
Table 11: Payback period...............................................................................................................15
Table 12: NPV ..............................................................................................................................15
Table 13: ARR...............................................................................................................................16
3

Illustration Index
Illustration 1: Graph for Next plc.....................................................................................................9
Illustration 2: Graph for H&M.......................................................................................................10
Illustration 3: Graph for Next plc...................................................................................................11
Illustration 4: Graph for H&M.......................................................................................................12
4

INTRODUCTION
Finance is the management of money by the large companies and accounting means the
process of recording these financial transaction in systematic and comprehensive manner. The
managers use accounting and finance to check the availability of the money and to allocated the
extra money (Anandarajan, Anandarajan and Srinivasan, 2012). The present report is based on
the Asol ltd. which is a large fashion retailer company. The company's CFO (Chief Financial
Officer) is planning to purchase the share either in Next Plc. or in Hennes & Mauritz
( H&M )company. These two are clothing retailer companies who are listed in the London Stock
Exchange.
The below mentioned report will help in recommending the CFO about the more vital
option among the two company where he can invest in. In addition it will help in analysis the
financial positions of the two companies. The importance and limitations for the investment
point of view are discussed below. Furthermore the report will also conclude the use of
investment appraisal techniques for making the decision of purchasing shares.
TASK 1
1. Analyze the performance and financial position and
investment potential of the two companies
On the basis of ratio analysis, Asol ltd. is comparing two companies Next plc. and H&M
by which company can make decision invest either of these two companies.
Table 1: 10 financial ratios
Ratios Next plc. (2015) H&M (2014)
Current ratio 1.82 2.11
Quick ratio 1.16 1.07
debt / equity 2.61 0
Assets turnover 1.81 2.14
Inventory turnover 6.62 3.46
Net profit Margin 15.87% 13.19%
Return on equity 208.75% 41.27%
Free cash flow / Share 4.14 0.76
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Market cap / Earnings 17.38 23.13
Enterprise value / EBITDA 12.74 14.41
The above table illustrate the 10 financial ratios of Next plc. and H&M over which the
current performance are compared.
 Current ratio: This ratio indicates that the company is able to balance their current
liabilities from the current assets (Droms and Wright, 2015). By analyzing the Next plc.
Ratio of previous five year is observed that company's ratio is continuously increasing i.e.
in 2011 it was 1.28 which profitable ratio but in 2015 it is 1.82 which is higher ratio.
Similarly in H&M the ratio is continuously decreasing as in 2010 it was 2.96 and in 2014,
2.11 which is a good sign for current ratio. But while comparing two companies current
ratio Next plc.'s ratio is beneficial then H&M as it is lesser then 0.29%.
 Quick ratio: The ideal quick ratio is 1:1 (Brief and Peasnell, 2013). While comparing the
ratio of previous years of H&M it is continuously decreasing with some units which is
not a good state as company will be relaying on its assets to meet the short term
liabilities. On the contrary, Next plc. is showing increment which depicts that company
can meet it present obligations with quick funds. In comparing two companies ratio's,
Next plc. Shows 1.16 which is higher then H&M which is 1.07, therefore Next's ratio is
profitable.
 Debt/Equity ratio: This ratio indicates that the company finance which comes from
creditors and investor. Higher ratio shows more creditors and lower ratio shows more
investors (Debt to Equity Ratio, 2015). While comparing the ratio of Next and H&M,
second company is showing consistency by maintaining the value of 0 where as first
company is showing a variation from 2011 till 2015. By analysis it can seen that to
invest in H&M would be more feasible.
 Asset turnover ratio: The first 3 years of Next plc. shows a constant result and in next 2
year it is seen decreasing which indicates the company's inefficiency in maintaining
assets and also have management problem. In comparison with H&M which is showing a
continuous increase till now that depicts company is efficiently using their assets for
generating sales (Gitman, Juchau and Flanagan, 2010). In current comparison also H&M
is showing higher ratio of 2.14.
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 Inventory turnover ratio: Next is showing higher ratio of 6.62 which is higher than
H&M's ratio of 3.46. The higher ratio of Next plc. shows the efficiency of the company
in converting inventory to sale which is a good sign.
 Net profit margin ratio: This ratio shows the profitability of the company (Simons,
2013). In present year Next plc. recorded the net profit ratio of 15.87% which is higher
than the 13.19% ratio of H&M. Next's higher ratio shows it more profitability then the
H&M.
 Return on Equity (ROE): The higher ROE indicates the company's maximum and
effective utilization of investor's funds which Next plc. is showing with the ratio of
208.75%. H&M's profitability is affected with the low ratio of 41.27 %. According to this
ratio Next plc. is earning higher return on equity.
 Free cash flow/Share: Company Next is showing the ratio of 4.14 which is higher then
0.76 ratio of H&M. The higher ratio indicates the high per share earnings of the
company.
 Market cap/Earnings: This ratio is the price to earning ratio which depicts the higher
ratio indicates the high performance and growth in future which H&M is showing by
23.13%. this company would perform good in future as compared to Next plc. which
recorded the ratio of 17.38%.
 Enterprise value/EBITDA: Next plc. is showing 12.74% which is a low ratio in
comparison to H&M's 14.41% ratio. The higher ratio indicates H&M company's high
growth.
Non financial comparison on the bases of SWOT analysis
SWOT analysis will help the Asol ltd. to analysis the non-financial aspects of the two
companies, Next plc. and H&M.
Table 2: SWOT analysis of Next plc.
Strengths
 Individual Style
 Good Quality
 Value for Money
Weaknesses
 Incomplete product range
 Competitor's effects
 Cost structure
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 Extensive market over-viewing
 Easy Adaptability
 High loan rates are possible
 Profitability in future
Opportunities
 Attentively observing social
rethinking
 Environment friendly raw material
 Individuality product
 Growing economy
 Increasing demand
Threats
 Guerrilla attack by other affecting
competitor
 Lack of control over unpredictable
events
 External business risk
 Increasing rate of return
Table 3: SWOT analysis of H&M
Strengths
 Largest global clothing retailer
 Designer cloths at affordable prices
 Associated with high profile people
 Controlling ability and flexibility
Weaknesses
 Changing micro and macro
environment
 Overstocking, affects affordable
prices
 Lot of capital investment and
maintenance fee
Opportunities
 Scope of online shopping
 Emerging economy
 Expansion opportunities
Threats
 High existing competitors
 Unemployment
 New business entries
2. Chart formation
The chart formation is construed to make the proper comparison between two different
companies (Collier, 2015). Here, ratios of 5 year of Next plc. and H&M has been taken into
account.
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Table 4: Ratios for Next plc.
Year Gross profit margin
ratio
Pay – out ratio
2011 29.27 35.84
2012 30.38 34.9
2013 31.48 32.8
2014 33.16 35.25
2015 33.59 35.04
The above table and graph shows the gross profit and pay-out ratio of Next plc. Which
shows the variation in the profit margin and also show that in the payback of initial investment.
Table 5: Ratios For H&M
Year Gross profit margin
ratio
Pay – out ratio
2010 62.93 42.08
2011 60.13 49.69
2012 59.5 93.22
2013 59.13 91.99
9
1 2 3 4 5
0
5
10
15
20
25
30
35
40
29.27 30.38 31.48 33.16 33.59
35.84 34.9 32.8
35.25 35.04
Gross profit margin ratio
Pay – out ratio
Illustration 1: Graph for Next plc.

2014 58.81 80.78
Here also the gross profit margin and payout ratios are given of H&M company which
also shows the variation in values previous 5 years.
The two of the graph, when compared shows that the gross profit margin of H&M in
2011 is 60.93% which is just double from the Next plc which is only 29.27%. In the same year
the payout ratio of Next was recorded as 35.84% which is also lower then that of H&M's payout
ratio which is recorded at 49.69%. In 2014, i.e. after 3 years the comparison states the same
situation. Under this year also the Next have recorded the gross profit margin of 33.16% and
payout ratio at 35.25% which in comparison with H&M is again low. As H&M have recorded
58.81% of gross profit ratio and 80.78% of pay out ratio in the same year of 2014.
Table 6: Ratios for Next plc.
Year Current ratio Quick ratio
2011 1.28 0.72
2012 1.54 0.91
2013 1.48 0.97
2014 1.76 1.18
2015 1.82 1.16
10
1 2 3 4 5
0
10
20
30
40
50
60
70
80
90
100
62.93 60.13 59.5 59.13 58.81
42.08
49.69
93.22 91.99
80.78
Gross profit margin ratio
Pay – out ratio
Illustration 2: Graph for H&M

Table 7: Ratios For H&M
Year Current ratio Quick ratio
2010 2.96 2.06
2011 2.71 1.69
2012 2.66 1.49
2013 2.25 1.22
2014 2.11 1.07
11
1 2 3 4 5
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1.28
1.54 1.48
1.76 1.82
0.72
0.91 0.97
1.18 1.16
Current ratio
Quick ratio
Illustration 3: Graph for Next plc.

The above two tables and graphs show the comparison of current and quick ratios of Next
plc and H&M company. While comparing two graphs, for the year 2012 H&M is showing a high
current ratio of 2.66% than Next's ratio of 1.54%. Similarly in the year 2014, the same situation
can be seen. The lesser or the ideal situation i.e. 1 is the current ratio the more profitable the
company will be. According to the comparison of quick ratio, in the year 2014 Next's ratio is
recorded to 1.18% and for H&M it is recoded as 1.07%. But in 2015, the Next's ratio can be
tracked to 1.16%.
3. Recommendations
The above analysis shows that the H&M company is the poorly performing company and
there are some recommendation for the company by which it can enhance its financial
performance in coming future. Company can initiate and motivate their employees and can also
organize training programs for them (Drury, 2013). These training session and motivation of
employees will help the company to increasing their productivity which will overall enhance the
profitability and productivity of the company. To enhance the performance H&M can introduce
some cost reducing techniques which can reduce the cost of production and hence increase the
profit margin. The marketing of the product and services also influence the financial
performance of the company (Raynor and et.al., 2016). For example the strong and ethical
marketing of any new or old product of H&M will affect the competitors. The more effective and
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1 2 3 4 5
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1.28
1.54 1.48
1.76 1.82
0.72
0.91 0.97
1.18 1.16
Current ratio
Quick ratio
Illustration 4: Graph for H&M

impressive marketing will help in creating a strong customer base for the company. This strong
customer base will increase the demand which automatically increase the productivity and sales
turnover of the company. The more is the demand of the product the more will be the
profitability of the company. These above illustrated factors will help the H&M company to
improve its poor financial performance.
4. Limitation of relaying on financial ratios
Financial ratio analysis would proven to be a useful tool for Asol ltd. in analyzing the
performance of the two companies individually. But company cannot just relay on the evaluation
formed by financial ratio (Ahmed and Duellman, 2011). Some of the drawback are as follows:
 Lack of comparability between companies: Ratio analysis is useful in comparing the
overall past and present year performance of an individual company (Bamber, Jiang and
Wang, 2010). It lacks the exact comparison between two different companies. It be
difficult for Asol ltd to make the decision on the basis of ratio analysis. As the accounting
policies used by two companies in their financial statements are different which shows
impacts on the ratio. Hence ratios cannot differentiate two companies.
 Lack Qualitative approach: Quality is also the prior most thing in the clothing sector
which ratio analysis cannot determine (Brown, Beekes, and Verhoeven, 2011). The ratio
only shows the differences by quantitative approach. Before making any decision, Asol
ltd. have to go through the quality being served by the two companies. As the success of
the company is determined by the quality of the product. By the ratio analysis, Asol ltd.
cannot compare the quality of the two companies.
 Based on Book values: The ratios presented are calculated by the financial statement of
the company. The statements are based on the book values which are the historical cost of
the company (Xiaofeng, Shinong and Fang, 2010). On the bases of book values the ratios
does not show the current and the basic position of the company. Relying only on
financial ratios, Asol ltd. can not identify the current situation of the other two companies
and can not make the decision of share purchasing.
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TASK 2
1. Use of Initial Investment Techniques
Net cash flow take in consideration all the cash related transactions and after making all
the required adjustments in the non-cash transaction (Cormier and et.al., 2010). Here, In the
below table the depreciation charged was on the basis of straight line method.
Table 8: Depreciation for Project A
Year Profits Depreciation
Cash inflows
through sales
Cash outflow
to purchase
new machine
Net Cash
inflow
2016 40 33 73
2017 40 33 73
2018 40 33 21 -50 44
2019 30 10 40
2020 30 10 40
2021 20 10 30
Total 200
Depreciation on sold out machinery = (Initial cost-residual value)/Useful life of machine
= (£120000-£21000)/3 = £33000
Depreciation on new purchased machinery = (Initial cost-residual value)/Useful life of machine
= (£50000-nil)/5 = £10000
Table 9: Depreciation for Project B
Year Profits Depreciation Net Cash inflow
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2016 10 20 30
2017 20 20 40
2018 30 20 50
2019 60 20 80
2020 70 20 90
2021 55 20 75
Total 245
Depreciation = (Initial cost-residual value)/Useful life of machine
= (£120000/6 years) = £20000
Payback Period
In general payback period is the used to calculate the time period in which the initially
invested capital can be recover back (Jones, 2010). Considering the present case, the machinery
which will that takes less time in comparison to other to recover its initial investment will be
recommended to Hilltop Ltd.
Table 10: Cumulative Cash Flow
Year Project A Cumulative
Cash Flow
(CCF)
Project B Cumulative
Cash Flow
(CCF)
2016 73 73 30 30
2017 73 146 40 70
2018 44 190 50 120
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2019 40 230 80 200
2020 40 270 90 290
2021 30 300 75 365
Table 11: Payback period
Payback period of project A Payback Period of project B
1.643 year 3 year
= 1+(£120-£73)/£73 (Because according to CCF initial
investment is been recovered in this
year)
According to the payback period it is been recommended for the Hilton ltd. To accept
Project A as it involves less time than Project B.
Net present value
NPV is considered as the most significant tool for evaluating the financial suitability an
profitability of the project. However, the main purpose behind using the technique is that to
make investment decisions by undertaking the time value of money which is considered as the
most important prospect (Keune and Johnstone, 2012). In the below table the NPV is calculated
by discounted rate of 20%.
Table 12: NPV
Year Project A
Discount
value of 1
@20%
Discounted
cash flows Project B
Discounted
cash flows
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2016 73 0.833 60.809 30 24.99
2017 73 0.694 50.662 40 27.76
2018 44 0.579 25.476 50 28.95
2019 40 0.482 19.28 80 38.56
2020 40 0.402 16.08 90 36.18
2021 30 0.335 10.05 75 25.125
Total 182.357 365 181.565
Less: Initial
project cost 120 120
Net
present
value 62.357 61.565
The Project A have higher Net present value then the Project B so Hilton limited can
accept the project A.
Accounting rate of Return
Through the means of this technique, the company can easily compute the expected
future profits that project will generate on the desired investment (Yang, 2012). Thus, higher
profit generating project will be more feasible proposal for the future investment of Hilton ltd.
Table 13: ARR
Project A Project B
Total profits £200 £244
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Project life 6 years 6 years
Average profit £33.33 £40.67
Initial investment £120 £120
ARR 27.78% 33.89%
The above table shows that the Project B should be accepted as it is showing the higher
profitable return.
2. Limitations of Investment Appraisal techniques
There are limitations to investment appraisal techniques which are to be evaluated for
long term decision-making. Each tool of investment appraisal techniques have their own
limitation. Different tools includes payback period, IRR (Internal Rate of Return). NPV (Net
Present Value). ARR (Accounting Rate of Return) and ROCE (Return on Capital Employed).
 Limitations to Payback period: The calculation of payback period does not consider the
time value of money (Oliveira, Rodrigues and Craig, 2011). This payback period ignore
the timing of cash flow statements. It do not indicate the profitability of the project.
 Limitation to ARR and ROCE: These techniques do not take into account the project
life and timing of cash flow statement. These does not present any definitive for
investment purpose. Its values depend upon the accounting policies of the business
(Chalmers, Godfrey and Webster, 2011).
 Limitation to NPV: Calculation of NPV also fails to consider the cash flow timing.
Through NPV it is difficult to obtain an appropriate cost of capital. This is an time
consuming techniques which is difficult to understand.
 Limitation to IRR: This technique fails to obtain the risky and uncertain factor in the
project of the business which will affect the long term decision-making of the companies.
CONCLUSION
The aforementioned report have taken two companies into account which are Asol ltd.
which is recommended to purchase the share of either Next plc. or H&M company. The second
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company is Hilton ltd. which is recommended to invest whether in Project A or Project B. in
addition, the report also contains the factors by which poorly financial performing company can
raise their level and reach to a beneficial position. Furthermore the ratio analysis and investment
appraisal techniques are used to investigate the companies present condition.
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