Financial Analysis of NEXT PLC

The assignment provided involves conducting a financial analysis of NEXT PLC, a limited liability company listed on the London Stock Exchange. The report includes ratio analysis and graphical representation to assess the company's financial performance. It also provides an analysis of the company's dividend per share and earnings per share, as well as its future prospects in the UK clothing retail industry.

Financial Accounting and
Reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
I. Evaluating limited liability company and its merits & demerits.............................................1
II) Analysis and interpretation of annual reports of NEXT PLC................................................3
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Financial accounting and reporting is a concept of developing financial accounts in order
to ascertain performance of a business organisation. Main aim of this project report is to build an
understanding about limited liability company and its financial reporting system. Scope of this
project report includes merits and demerits of limited liability company in order to compare it
from sole proprietorship and partnership. In order to better understand this concept annual
reports of NEXT Plc is analysed and interpreted which operates in clothing, footwear and
utility products. Technique of ratio analysis is used to analysis (Adams, 2015).
MAIN BODY
I. Evaluating limited liability company and its merits & demerits
Limited liability company is a corporate structure which allows its members to have a
limited liability to the extend of their share in the company. It is considered that under this
structure members are not personally liable for company's debts. This kind of company is known
as hybrid structure as it involves features of both a company and a sole proprietorship. LLC also
has few taxation features of partnership. There are various advantages and limitations of this
structure which are mentioned below in order to compare LLC with sole proprietorship and
partnership:
Difference between LLC and sole proprietorship:
LLC Sole proprietorship
Merits  Members of LLC has limited
liability to the extend of their
share in company's capital.
 LLC can enjoy all the
privileges of being a company
and sole proprietorship
(Edwards, 2013).
 Owner of sole proprietorship
has unlimited liability and
even their personal assets
can be used to pay off firm's
liability.
 This type of corporate
structure only has rights of
sole proprietorship.
Demerits  Being a company, LLC has to
pay maintenance fees and high
 Sole proprietorship does not
have any liability to get
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registration fee.
 There are several regulations
which has to be fulfilled by the
company. This type of
structure is subject to state
laws governing.
registered or pay any fees
regarding maintenance and
registration.
 Despite of business laws,
there are no additional
regulations applied on sole
proprietorship.
Difference between LLC and partnership:
LLC Partnership
Merits  This type of structure enables
members of LLC to separate
their personal assets from
company's assets. They have a
limited liability to the extend
of their share in company's
capital.
 Due to separate entity of
members and the company,
existence of LLC does not
effect with its members. Death
or insolvency of members
does nit influence firm's
existence.
 Members of a partnership
firm are referred as partners
which has unlimited liability
for firm's debts and
liabilities.
 Partnership firm can dissolve
with death or insolvency of
its partners.
Demerits  There are various regulations
which are required to be
fulfilled by the promoter of
limited liability company.
Registration of this type of
company requires a lot of
resources and funds.
 Partnership firm can be
formed when two or more
individuals decide to do a
business together. Partners
of this type of structure does
not have to fulfil any legal
requirements (Hoyle,
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 Formation and structure of
limited liability company is
more complex.
Schaefer and Doupnik,
2015).
 Due to no legal
requirements, formation of
this type of corporate is
easier and cost effective.
By comparing limited liability company with corporate structures of partnership and sole
proprietorship, it has been analysed that structure of LLC is way more effective and beneficial as
a firm can attain benefits of a company without facing any unlimited liability.
II) Analysis and interpretation of annual reports of NEXT PLC
In order to analyse and interpret annual reports of NEXT PLC, ratio analysis technique is
used. Ratio analysis helps an organisation to ascertain their financial position in terms of
liquidity, profitability and efficiency. Information for five years of NEXT PLC is used to
interpret firm's financial position.
Ratio analysis has few limitations also which are mentioned as follows:
 Results ascertained from ratios are not 100% reliable and accurate as there are various
non financial managerial factors.
 A ratio is relationship between two numbers and sometimes there are few managerial
issues in an organisation due to which ratios can be not relied by management.
 Ratios are based on historical data due to which they do not have a direct relevance with
company's performance.
 Ratio analysis can not be used for comparison when nature of both businesses is different
(Lima Crisóstomo, 2011).
Computation of various ratios and their understanding is provided below:
Working capital ratios:
These ratios are used to calculate relationship between money which is invested in
business operations like inventory and cost of sales. Two of these ratios for NEXT PLC for five
years are calculated below:
Working capital
ratios Formula 2014 2015 2016 2017
201
8
3

Inventory turnover
Cost of sales / closing
inventory
6.490909
0909
6.38461
53846
5.60493
82716
6.00886
91796
5.50
816
326
53
Receivable days
ratio
Trade receivables / sales *
365
78.85561
49733
77.0342
585646
93.5440
566268
100.225
774957
3
112.
335
388
409
4
Inventory turnover Receivable days ratio
0
20
40
60
80
100
120
6.491
78.856
6.385
77.034
5.605
93.544
6.009
100.226
5.508
112.335
2014
2015
2016
2017
2018
From the ratio analysis of working capital ratios it has been analysed that, receivable days
are increasing every year that is 78.85 in 2014, 93.54 in 2016 and so on. In the case of inventory
turnover, NEXT PLC is having decreasing trend that is 6.49 in 2014, 6.38 in 2015 and so on.
Reason behind increasing trend of receivable days is efficiency in trade receivables. Decreasing
trend inventory turnover is the result low inventories in terms of sales which can further effect
organisation's profitability (Annual reports of NEXT PLC, 2018).
Liquidity ratios:
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These ratios helps in ascertaining liquidity position of a company so that short term debt
paying ability of a firm can be ascertained. These ratios are used to determine whether a
company is fully utilising their funds in business operations or not, to attain operating benefits
(Lovell and MacKenzie, 2011). Two of these ratios are calculated below:
Liquidity ratios Formula 2014 2015 2016 2017 2018
Current ratio
Current assets / current
liabilities
1.760191
8465
1.49907
23562
1.40683
76068
1.42001
71086
1.96
6083
151
Quick ratio
Current assets –
inventories / current
liabilities
1.298561
1511
1.11317
25417
0.99145
29915
1.03421
72797
1.42
9978
1182
Current ratio Quick ratio
0
0.5
1
1.5
2
2.5
1.760
1.299
1.499
1.113
1.407
0.991
1.420
1.034
1.966
1.430 2014
2015
2016
2017
2018
From the above ascertained ratios and developed graph, it has been ascertained that there
is not suitable trend in both of the ratios. In the case of current ratio, year 2018 results to be
highest and year 2016 results to be lowest. This uneven current ratio of NEXT PLC shows that
this company does not have any uniformity in their current assets and current liabilities due to
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which they have to suffer excessive short term liability in most of their accounting periods. Ideal
current ratio is considered to be 2:1, but this company has low ratio in all the years.
Under the case of quick ratio, there is a same trend as current ratio, which shows that
there is less fluctuations in inventories. Ideal quick ratio is considered to be 1:1 and in every year
company is having ratio near to 1:1 which shows they are able to maintain their effective cash
position in the market.
Profitability ratios:
These ratios helps an organisation to ascertain whether or not company is earning reliable
and expected profits. Efficiency of earnings is ascertained by these ratios against incurred
expenses. By calculating these ratios, an individual can ascertain profit generating ability of a
company (Nobes, 2014). Two of these ratios are determined below:
Profitability ratios Formula 2014 2015 2016 2017 2018
Gross profit margin
Gross profit / revenue *
100
33.15508
02139
33.5833
95849
0.34770
11494
0.33829
63144
0.33
4401
9729
Net profit ratio Net profit / revenue * 100
0.147860
9626
0.15853
96349
0.15948
27586
0.15499
14572
0.14
5745
9926
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Gross profit margin Net profit ratio
0
5
10
15
20
25
30
35
40
33.155
14.786
33.583
15.854
34.770
15.948
33.830
15.499
33.440
14.575
2014
2015
2016
2017
2018
By calculating and developing above ratios and graph, it has ascertained that Gross profit
and net profit is showing similar type of trend. This trend shows that value of expenditures
incurred by NEXT PLC are mostly fixed. Under gross profit margin, ratios are almost similar in
every year that is 33.15 in 2014, 33.58 in 2015, 34.77 in 2016 and so on. The reason behind these
similar ratios is similarity in the value of expenditures which are incurred by NEXT PLC such as
rent, stock and many more.
In the case of net profit margin, this ratio of every year is less than gross profit which
shows that this company is in the state of continuous operations an incurs expenditure every
year. This ratio shows statistics as 14.78 in 2014, 15.85 in 2015 and so on.
Investor ratios:
These ratios are related with a company's stock price which affects its earnings and book
value per share. By ascertaining these ratios, market value for the shares and other securities of a
company can be ascertained. This ratios are most important for the investors as they can
determine possibility of their returns against their invested value (Weygandt, 2015). Two of
these investor ratios are calculated below which are earnings per share and dividend per share:
Investor ratios Formula 2014 2015 2016 2017 2018
Earnings per share Net income available to 0.102225 0.119091 4.15032 0 0
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common shareholders /
Number of common shares 0887 7516 67974
Dividend per share
Total dividend / number of
common shares
0.069816
1883
0.269230
7692
1.47058
82353
1.51006
71141
3.23
6486
4865
Earnings per share Dividend per share
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0.102 0.0700.119 0.269
4.150
1.471
0.000
1.510
0.000
3.236
2014
2015
2016
2017
2018
From the above ratio analysis and graphical representation, it has been ascertained that
both the ratios are showing different trends. In the case of earnings per share, it shows possibility
of earnings or returns that can be acquired from one share of the company. This ratio is reflecting
increasing trend till 2016 and in years of 2017 and 2018 there were no shares available to
common stock due to which EPS resultant to be 0 in these years.
Under the case of dividend per share, increasing trend is reflected. In the year of 2014,
this ratio is recorded as 0.070, 0.269 in 2015, 1.471 in 2016, 1.510 in 2017 and 3.2 in 2018. This
increasing trend is result of high dividend which is distributed to shareholders by NEXT PLC
every year.
Future of NEXT PLC in UK clothing retail industry:
From developing various graphs and calculating several ratios it has been predicted that
profitability and returns in coming years for this company will be improved. Brand image of this
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company is also forecasted to be enhanced because of high shareholder's satisfaction from
regular dividends. NEXT PLC should reconsider their operations to ensure better future for their
liquidity and working capital position.
CONCLUSION
From the above project report, it has been ascertained that limited liability company is a
better structure than partnership or sole proprietorship as it enables a business firm to take
benefits of being a company which any unlimited liability. By developing various graphs and
calculating several ratios, it has been ascertained that this technique can help any individual in
ascertaining financial position of a company but fails to re[present managerial position.
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REFERENCES
Books and Journals
Adams, C. A., 2015. The international integrated reporting council: a call to action. Critical
Perspectives on Accounting. 27. pp.23-28.
Lima Crisóstomo, J. R., 2011. A History of Financial Accounting (RLE Accounting). Routledge.
Hoyle, J. B., Schaefer and Doupnik T. T., 2015 . Advanced accounting. McGraw Hill.
Lima Crisóstomo, V., de Souza Freire, F. and Cortes de Vasconcellos, F., 2011. Corporate social
responsibility, firm value and financial performance in Brazil. Social Responsibility
Journal. 7(2). pp.295-309.
Lovell H. and MacKenzie,. aD., 2011. Accounting for carbon: the role of accounting
professional organisations in governing climate change. Antipode. 43(3). pp.704-730.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Kimmel, P. D. and Kieso, D. E., . Financial & managerial accounting. John Wiley & Sons.
Online
Annual reports of NEXT PLC. 2018. [Online]. Available through:
<https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2018/annual-
report-and-accounts-jan-2018.pdf>
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