Performance of Next PLC in Changing Business Environment

The report analyzed the financial performance of Next PLC using ratio analysis, concluding that the company has been controlling its expenses and giving a good performance despite changes in the business environment. The study highlighted the importance of considering exceptional items when measuring profitability, as significant amounts can impact a company's P&L statement. To improve its operating and net profit, the company needs to focus on controlling indirect expenses. Overall, Next PLC has shown good performance on various financial ratios, but needs to make more efforts in expense control to elevate its profitability level.

FINANCIAL REPORTING

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Ratio analysis..............................................................................................................................3
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
INDEX OF TABLES
Table 1: Ratio analysis of Next PLC...............................................................................................3
Table 2: Operating and net profit before and after extraordinary items..........................................7

Introduction
Next PLC is the UK largest retail store that sells cloths footwear and house items. In
order to analyze company various ratios are used namely profitability, efficiency, gearing and
investment ratios. In this report an attempt is made for understanding company performance and
its efficiency level. Company annual report is also considered for understanding reasons for
change in Next PLC ratios in FY 2015 relative to FY 2014. After calculation of ratios and
reading annual report comments are done of performance of the company on various ratios.
Ratio analysis
Table 1: Ratio analysis of Next PLC
Ratios Formula 2014 2015
Operating profit 729 803
Net profit 553 635
Net Sales 3740 4000
Operating Profit Ratio (Operating Profit/ Net Sales) *100 19.49 20.08
Net Profit Ratio (Net Profit/ Net Sales) *100 14.79 15.88
Current Assets 1468 1616
Current Liabilities 835 887
Closing Stock 386 417
Current Ratio
Current Assets / current
Liabilities 1.76 1.82
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 1.30 1.35
Net Sales 3740 4000
Total Assets 2145 2282
Total Assets Turnover Ratio Net Sales/ Total Assets 1.74 1.75
Interest coverage Ratio
EBIT 729 803
Annual Interest Expense 25 31
Interest coverage Ratio EBIT/ Interest expense 29.16 25.90
Dividend coverage ratio
Profit after tax 553.00 635.00
Dividend paid on irredeemable
preference share 78.00 77.50
Dividend paid to ordinary 145.08 77.50

shareholders
Profit after tax-Dividend paid on
irredeemable preference
share/Dividend paid to ordinary
shareholders 552.46 634.00
ROCE
Net profit 553 635
Capital employed Net profit/capital emp[loyed *100 1087 1160
0.51% 0.55%
Debtors 808 844
Net Sales 935 1000
Debtor turnover ratio Debtor/ net sales 0.86 0.84
Receivable collection period
Number of days in a year/ debtor
turnover ratio 422 432
Creditors 594 636
Net purchase 625 664
Creditor turnover ratio Creditors/ net purchase 0.95 0.96
Payables payment period
Number of days in a year/ creditor
turnover ratio 384 381
EPS 366.1 428.3
Basic 355.6 417.9
Diluted
PE ratio
Current market price 6445 7918
EPS 366.1 428.3
PE ratio Current market price/EPS 17.6 18.48
Interpretation Operating profit ratio- Operating profit ratio of the firm gets increased. But it does not
increased at a rapid pace. In FY 2013 it was 19.49% and in FY 2014 it becomes 20.08%.
Hence, a big increase is not seen in case of this ratio. However, decline in net profit is not
observed in FY 2014. This happen because sales increase in FY 2014 but expenses also
increase at same pace. Due to this reason, any big traction in operating profit is not
observed even sales get increased (Cheung, Evans and Wright, 2010). In order to increase
this ratio firm is required to control its office and sales expenses. However, it already
takes many measures to control its expenses, but it needs to put some extra efforts to

reduce its operating expenses. If Next PLC does this successfully then elevation in this
ratio can be seen. Net profit ratio- Whatever trend we observed in case of operating ratio same trend is seen
in case of net profit. Here also, performance changed only by 1%. In FY 2013 this ratio
was 14.79% and in FY 2015 it becomes 15.88%. In annual report, it is mentioned that it
offset impact of increase in cost by doing savings. Even though small percentage change
is observed in case of net profit ratio. This gives a signal to management of Next PLC
that it needs to identify some new ways for generating economies of scale in its
operations (Jara, Ebrero and Zapata, 2011). By identifying new domains for cost savings
company can make its position strong and can increase value of this ratio in next fiscal
year. In comparison to FY 2014 in 2015 its segment profit also gets increased. Retail
segment of business book good profit in comparison to previous year followed by
directory and sourcing business. However, international retail business slips by some
points. Hence, overall profitability of all business segments gets increased in FY 2015. Current ratio- Performance of current ratio indicates that company has sufficient amount
of current assets to pay its current liabilities. However, its ratio is below standard value 2.
But it can be said that performance of Next PLC on this ratio is satisfactory. Strong
performance on this ratio is result of firm cost saving efforts. It gives special emphasis on
its inventory and it makes sure that large amount does not get blocked on inventory
(Barker, 2003). Company inventory management is very strong and according to demand
it maintains a minimum level of inventory in its go down. As a result, few amounts of
cash is blocked in stock. Due to this reason it has sufficient amount of current assets to
pay current liability and this ratio is increasing consistently. Quick ratio- Quick ratio indicates a same thing whatever revealed by the current ratio.
The main difference is that this ratio gives more clear picture then current ratio because
in case of this ratio stock and prepaid expenses are not considered for computing
company liquidity position (Nor, Ahmad and Saleh, 2010). Due to this reason, quick
ratio is also showing an uptrend and its results depicts that company has substantial
amount of quick assets to meet its current liabilities on time. Assets turnover ratio- This ratio reflects the extent to which company is utilizing its
assets to generate sales. Assets turnover ratio of the Next PLC is increasing consistently

and in FY 2013 it was 1.74, while in next fiscal year it becomes 1.75. So, in this ratio any
big change is not observed. But stability in this ratio is positive form company point of
view. This ratio can be considered better because in retail industry product quality and
communication with customer plays a key role in sales. As per annual report, Next PLC
is giving due attention on this and in respect to this it is providing training to its
employees (Koh and Lee , 2015). Moreover, while selecting new employees it is not
considering their experience rather then it is putting stress on their attitude towards
specific thing. Hence, on the basis of efforts and strategy to increase sales it can be said
that company performing well on this ratio. Interest coverage ratio- This ratio indicates the extent to which proportion of EBIT
covered by the interest expense as finance cost ( Haslam and Chow, 2012). From ratio
analysis it can be seen that this ratio declines and this happens because growth rate of
traction in finance cost was much lower than elevation in EBIT. This indicates that
company performs well on this front. Dividend coverage ratio- This ratio indicates the number of times the company can pay
dividends to its shareholders. This ratio is increasing and it reflects that company ability
to pay dividend to its shareholders get increased in FY 2015 relative to FY 2014. This is a
good symbol from investors point of view (Morgan and et.al. 2013). This is because
enhancement in capability indicates that company financial becomes stronger in FY 2015
in comparison to FY 2014. Hence, those who are looking for investment in Next PLC can
invest in mentioned firm. ROCE- This ratio is also known as return on capital employed. This ratio indicates the
return that a company earns on the invested corpus. Capital employed value is computed
by adding shareholder equity to long term debt. Figures show that company ROCE is
increasing and in FY 2014 it was 0.51%, whereas in FY 2015 it becomes 0.55%. This is
positive result form company point of view (Gibson, 2013). This also reflects that a time
when demand is uncertain and people prefer online shopping then also Next PLC is
earning positive return on the invested capital. Debtor turnover ratio- This ratio indicates the number of times amount received from
debtors in a year. More the times shown in ratio is beneficial from company point of
view. This reflects that company is receiving debt amount form its debtors quickly.

Debtor turnover ratio declines slightly and this reflects that frequency of receipt of debt
amount from debtors declines to some extent (Elliott and Elliott, 2013). However, this is
not a matter of concern because decline in debtor turnover ratio is very small. In FY 2014
it was 0.86 and in FY 2015 it becomes 0.84. So, ratio changes by just 2 points. Due to
this reason company performance cannot be considered poor. Receivable collection period- Due to decline in debtor turnover ratio receivable
collection period get increased. In FY 2014 Next PLC collects debt amount from its
debtors on 422 days. But in FY 2015 it receive debt amount from debtors in 433 days. So,
gap of only days is observed and it is normal in retail business (Alexander and Britton,
2004). Such a big negative gap is not observed in this ratio and due to this reason
company performance on this ratio cannot be considered poor. Times Company pays a debt amount to its creditors. In FY 2014 this ratio was 0.95 and
in FY 2015 this ratio becomes 0.96 (Gibson, 2010). This is a negative symbol from
company and positive from creditors’ point of view. This indicates that company is
paying debt to its creditor very quickly in comparison to FY 2014. Payable payment period- This ratio indicates the number of days in which Next PLC is
paying debt amount to its creditors. In FY 2014 it pays debt to its creditors in 384 days.
But in FY 2015 it pay its debt in 381 days. So, any big change is not observed. Thus,
negative change in this ratio does not put negative impact on the mentioned firm cash
management strategy. Earnings per share – Earning per share of the company is increasing in FY 2015 relative
to FY 2014 and this is positive sign from company point of view (Next corporate. 2015).
Both basic diluted EPS of the company are increasing and this reflects that company per
share receives more proportion in revenue then in FY 2014.
 PE ratio- PE ratio of the Next PLC gets increased and this reflects that in FY 2015
company shares get overvalued in comparison to FY 2014. This evident from increase in
company share price in current fiscal year relative to previous year.
Table 2: Operating and net profit before and after extraordinary items
2014 2015
Operating profit before exceptional items 722 812.1
Operating profit after exceptional items 722 824.7

Sales 3740 4000
Operating margin before exceptional items 0.19 0.20
Operating margin after exceptional items 0.19 0.21
Net profit before exceptional items 695.2 782.2
Net profit after exceptional items 695.2 794.8
Sales 3740 4000
Net profit margin before exceptional items 0.19 0.20
Net profit margin after exceptional items 0.19 0.20
Interpretation
In case of operating and net profit before exceptional items increasing trend is observed.
However, for FY 2014 there is no exceptional items and due to this reason there is no difference
operating and net profit in before and exceptional items both in terms of percentage and
numbers. After exceptional items also there is a minor change in ratios and figures. Hence, there
is minor and negligible difference in operating and net profit before and after exceptional items.
In order to analyses financial statements in proper manner it is necessary to use relevant
information for understanding changes in values of the ratio in current year relative to previous
year. Merely calculation of ratios is not sufficient analyst must also know reasons behind change
in values of the ratio in order to decide that company gives good or poor performance on relation
to change ion business environment (Wahlen, Baginski and Brandshaw, 2014 ). Hence, in this
report, details form Next PLC is used for comprehending changes in values of various ratios.
Exceptional items must be considered while measuring company profitability. It must be used in
assessing a company profitability specially when amount of exceptional items in company P&L
statement is big.
CONCLUSION
On the basis of ratio analysis it is concluded that Next PLC gives a good performance and
it by controlling its expenses running its business smoothly even business environment is not
entirely favorable to business. Even though it is controlling its expenses, it needs to make some
more efforts for controlling its indirect expenses. By doing this company can increase it’s
operating and net profit. Hence, performance of operating and net profit can be increased by the

firm in next fiscal year. On other ratios, company gives good performance. It only needs to focus
on controlling its expenses for elevating its profitability level.