Accounting and Finance Assignment : Next PLC
Added on 2020-02-03
13 Pages3607 Words773 Views
ACCOUNTING ANDFINANCE1 | P a g e
Table of ContentsINTRODUCTION .....................................................................................................................1TASK 1 .....................................................................................................................................1Financial performance analysis.............................................................................................1Non-financial performance analysis......................................................................................3Graphical presentation through charts...................................................................................3Recommendation to H & M for improving their performance.............................................6Limitations or drawbacks of ratio analysis............................................................................7TASK 2 Capital investment appraisal .......................................................................................7Calculation of Net cash flow (NCF)......................................................................................8Payback period......................................................................................................................8Project Net present value (NPV)...........................................................................................9Project Accounting rate of return (ARR)..............................................................................9Limitations of capital investment appraisal techniques.......................................................10CONCLUSION........................................................................................................................10REFERENCES.........................................................................................................................122 | P a g e
INTRODUCTIONFinancial and management accounting are different from each other. Financialaccounting is the process of recording, summarizing, analysing and interpreting the businessaffairs. However, under the management accounting, managers use this information to takestrategic and qualified managerial decisions. The present project report will make financial aswell as non financial performance analysis of Next Plc and Hennes and Mautriz. It will alsohelp in taking effective investment decisions by the CFO of Asol Ltd who is considered forpurchasing shares in either of two cloth retailer companies, next plc and H & M. In additionto it, various capital investment appraisal tools have been used to select most viable projectfor Hilltop Limited. TASK 1 Financial performance analysisGross margin (GM): Next plc GM has been improved from 29.27% to 33.59% in2015, whilst GM of H & M Company got reduced from 62.93% to 58.81% in 2014, which isbad. Thus, increasing trend of GM for Next plc indicate that the company is improving theirperformance continuously. However, GM of H & M Company shows that although it isearning higher profit margin but declining trend is a negative sign and indicate pooroperational performance. The reason for this is its COGS to revenue ratio got improved from37.07% to 41.19% while in Next Plc; it got dropped from 70.73% to 66.41%. Net margin (NM): Next plc net margin got increased from 11.93% to 15.87% in theyear 2015 whereas in H & M business, it got dropped from 17.22% to 13.19% in 2014. Highratio of Next Plc implies that it is performing better than H & M business. However,declining trend of H & M's NM arisen because of high operating expenses. Return on assets (ROA): H & M Company’s ROA ratio fell from 32.91% to 28.28%in 2014 however; Next Plc ROA got increased from 22.55% to 28.68% in 2015. It is higherin Next plc which indicates that its mangers are efficient and manage company's operationseffectively as compared to H & M. Increase in company's profits is the reason for higherROA for Next Plc. Return on equity (ROE): Next plc ROE ratio fell from 214.98% to 208.75% while inH & M; it got decreased to 41.27% in 2014. It is higher in Next Plc Company which impliesthat it is earning greater amount of profitability on total equity funds. However, the reason forlower ratio in H & M is that it is using only the equity in its capital structure. Decreasedbusiness profits are another reason for lowering ROE. 3 | P a g e
Current ratio: CR of Next plc was 1.28 in 2011 which went up to 1.82 in 2015 whileH & M CR got dropped from 2.96 to 2.11 in 2014. Decreasing trend of H & M Companyimplies that it has lower availability of working capital to run its daily functions. (Ding,Booth and Roscoe, 2016) On contrary, high CR for Next Plc indicate better availability ofWC as it got improved from 234400 to 729400 in 2015. Thus, it can be said that Next Plc ismuch able to pay off its short term obligations effectively. However, lower WC in H & Mbusiness affects company's operations adversely.Quick ratio: QR of H & M business got reduced from 2.06 to 1.07 in 2014 whereas inNext Plc the ratio got improved from 0.72 to 1.16. Thus, higher ratio of Next Plc shows thatNext plc is able to discharge its short-term liabilities effectively. Therefore, it can be said thatliquidity position of Next plc is quite good as compared to H & M.Long term debt/Equity: Next Plc D/E ratio got increased from 2.03 to 2.60 in 2015whereas in H & M business, the ratio is nil. It is because; company is not using long termdebt in its capital structure. Thus, using excessive equity in the business will greatly diversifyits control to the shareholders which is not good. Therefore, it can be said that Next plc’sfinancial health is good comparatively than H & M as it uses both the equity and debt capitalin business (Sauaia, 2014). Assets turnover ratio: H & M assets turnover ratio got improved from 1.91 to 2.14 in2014 however; Next plc ratio got decreased from 1.89 to 1.81. Decreasing ratio of Next plcindicates that the managers are not using its assets in an efficient manner and affects theperformance of the company adversely. On contrary, H & M managers are utilizing businessassets more efficiently as compare to Next Plc. Thus, it can be said that H & M business isimproving its efficiency to strengthen its financial position. Inventory turnover ratio: H & M company ratio got reduced from 3.70 to 3.46 and onthe other hand, Next Plc ratio got reduced from 6.89 to 6.62. The ratio is higher in Next Plcwhich indicates that it is using its inventory in an efficient manner as compare to H & M. Dueto this, the inventory days in Next plc got increased from 52.99 to 55.13 while in H & M itgot improved from 98.60 to 105.63 in 2014. Thus, it can be said that Next Plc is convertingits inventory into cash earlier than H & M (Uechi and et.al, 2015). It did not stick its cashsources in its inventory for a longer time period. Therefore, Next plc is able to generatequicker cash sources from its inventory. Thus, company will be able to operate efficiently inthe market. 4 | P a g e
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