Financial Reporting: Ratio Analysis, Trend Analysis, Business from Investor's point of view

This report provides an analysis of Next Plc and Marks and Spencer's financial position and performance using ratio analysis. It also covers trend analysis and comments from an investor's point of view. Recommendations for improvement are included.

Financial Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Ratio Analysis..................................................................................................................................3
Trend analysis..................................................................................................................................6
Business from Investor's point of view............................................................................................8
Limitation of analysis......................................................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
The businesses are required to communicate the financial information of company. Financial Accounting refers to specialized
accounting branch keeping track of the financial transactions of company. Companies using standards and guidelines record
transaction, summarize and present the information in financial statements or the financial reports. These reports include profit or loss
statements, balance sheet and cash flow statements. Companies are required to make proper reports for enabling the users of financial
information to make decisions. The investment is made by the investors if the financial position and performance of the company is
strong. This is analysed using ratio analysis of the financial statements of company. The Report will include the analysis of Next Plc
and Marks and Spencer about its profitability, liquidity and solvency ratios. It will also be covering the trend analysis and the
comments over the performance of business from view point of investor. This will also be covering the conclusions and
recommendations over the financial position of company. Report will give understanding about the ratios and measures that compnay
can take for their improvements.
Next plc Marks and Spencer
2018 2017 2016 2015
2019-
18
2018-
17
2017-
16
2016-
15
Liquidity ratio
Current assets 2032 1797 1660 1642 1490 1317 1723 1461
Current liability 1112 914 725 1170 2228 1826 2368 2104
Current ratio 1.83 1.97 2.29 1.40 0.67 0.72 0.73 0.69
Current assets 2032 1797 1660 1642 1490 1317 1723 1461
Inventory 502.8 466.7 451 486 700 781 758 799
Current liability 1112 914 725 1170 2228 1826 2368 2104
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Liquid ratio 1.38 1.46 1.67 0.99 0.35 0.29 0.41 0.31
Activity ratio
Net credit sales 4167 4090 4097 4176 10377 10698 10622 10554
Average account receivable 1339 1248 1125 1050 322 308 318 321
Account receivable turnover
ratio 3.11 3.28 3.64 3.98 32.23 34.73 33.40 32.88
Net sales 4167 4090 4097 4176 10377 10698 10622 10554
Average total assets 2811 2561 2404 2330 7200 7550 8292 8476
Asset turnover ratio 1.48 1.60 1.70 1.79 1.44 1.42 1.28 1.25
Profitability ratio
Operating profit 762 759 827 866 162 156 253 584
Sales 4167 4090 4097 4176 10377 10698 10622 10554
Operating profit ratio 18% 19% 20% 21% 2% 1% 2% 6%
Net profit 590.4 591.8 635 666 37 29 115 404
Sales 4167 4090 4097 4176 10377 10698 10622 10554
Net profit ratio 14% 14% 15% 16% 0% 0% 1% 4%
2

Debt
Debt 905 908 913 615 1279 1670 17117 17747
Equity 553 482 510 311 2680 2954 3150 3443
Debt equity ratio 1.64 1.88 1.79 1.98 0.48 0.57 5.43 5.15
EBIT 762 759 827 866 162 156 253 584
Interest expense 39 35 37 31 111 113 113 116
Interest coverage ratio 19.54 21.69 22.35 27.94 1.46 1.38 2.24 5.03
Market ratio
Net profit 590.4 591.8 635 666 37 29 115 404
Shares outstanding 14 14 15 15 406 406 405 412
EPS 42.17 42.27 42.33 44.40 0.09 0.07 0.28 0.98
Market price 4478 5218 4099 7180 277 301 319 411
EPS 42.17 42.27 42.33 44.40 0.09 0.07 0.28 0.98
PE ratio 106 123 97 162 3040 4214 1123 419
Ratio Analysis
Liquidity Ratios
Current ratio: It is the ratio that indicate liquidity position of the company (Liang and et.al., 2016). It can be observed that current
ratio of Next Plc increased from 1.40 to 1.83 from year 2015 to 2018. Thus, it can be said that on this front Next Plc perform moderate
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because in year 2017 and 2016 current ratio declined. Still current ratio is 1.83 nearby to 2 which means that Next Plc have current
assets nearby to double value of current liability. This may because firm is not using its current assets to finance its business
operations. Hence, liquidity position of the company is good. In all four years M&S current ratio value was very lower then Next Plc.
Thus, it can be said in terms of performance that Next Plc performs better than M&S.
Liquid ratio: Liquid ratio is similar to the current ratio but in its calculation inventory value is deducted from the current assets.
Liquid assets include those assets that can be converted in to cash at fast pace (Kanapickienė and Grundienė, 2015). Liquid ratio of
Next Plc increase from the year 2015 to 2016 from 0.99 to 1.67. However, in year 2017 it declines to 1.46 and then in year 2018 to
1.38. Ideal ratio value is 1 and, in all years, Next Plc on this front surpass determined standard. Hence, on this front firm in in good
position. M&S observe fluctuation on this front and in year 2016 elevation was observed but then ratio declined in year 2017 and rose
to 0.35 from 0.29 in year 2018. Overall, Next Plc perform better than M&S.
Activity ratio
Account receivable turnover ratio: This ratio indicates number of times Next Plc convert receivables in to cash in a year (Elhaj,
Muhamed and Ramli., 2015). Receivable ratio of the Next Plc declines consistently from 3.98 to 3.11. Decline is not substantial and it
can be said that each year three times firm convert its receivables into sales. On other hand, this ratio value increased from 32.88 to
34.73 in year 2017 but then decline slightly to 32.33. It can be said that M&S on an average quickly convert receivable in to cash then
Next Plc and perform better then it on this front.
Assets turnover ratio: This ratio reflects firm capability to make use of asset to generate sales in the business (Arkan, 2016). Asset
turnover ratio of Next plc declined consistently from 1.79 to 1.48 in year 2018. This indicate that firm failed to make effective use of
asset in its business. On this front M&S perform better and ratio value elevate from 1.25 to 1.44. Thus, on this front on all four years
M&S perform better then Next Plc.
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Profitability ratio
Operating profit ratio: Operating profit ratio indicate portion of sales that is covered by the operating profit (Morales-Díaz and
Zamora-Ramírez, 2018). Percentage dip from 21% to 18% from 2015 to 2018. Thus, decline in percentage reflect that firm failed to
maintain control on its direct expenses in the business. On other hand, operating profit ratio of M&S is very low and decline from 6%
to 2%. On comparison of ratio it can be said that both firm’s management failed to control operating expense but Next Plc
management do better than M&S.
Net profit ratio: Net profit ratio reflect the portion of sales that is covered by the net profit amount (Shaverdi and et.al., 2016). In case
of Next PLC net profit ratio declined from the 16% to 14%. Slight decline is seen in the net profit which happen due to elevation in
expenses or mismanagement in the business. In case of M&S pressure is seen on this front and ratio value tumbled from 4% to 0.36%.
Thus, M&S failed to curb its indirect expenses. Next PLC performs better than M&S.
Debt ratio
Debt equity ratio: Debt equity ratio reflect the capital structure of the business firm. Ideal ratio of debt and equity is 50:50. In case of
Next PLC it is observed that value of the ratio is fluctuating consistently. In year 2015 it was 1.98 and decrease to 1.79, then it again
rose to 1.88 and further decreased to 1.64 in the year 2018. Debt is going to be double then equity which is matter of concern. This
may happen because firm is consistently expanding its business. On time debt need to be reduced otherwise in case of economic
turmoil its burden may be unbearable for the firm. M&S pay due attention on its capital structure as it can be seen that ratio value was
5.15 and 5.43 in the year 2015 and 2016 but not it now stands at 0.48 in the year 2018. Company do capital restructuring due to
unbearable overburden of debt on the business. On this front, M&S is in better position then Next PLC.
Interest coverage ratio: Interest coverage ratio indicate number of times firm can cover interest payment liability with its operating
profit (Misund, 2017). In present case interest coverage ratio of the Next PLC is 19.54 which declined from 27.94 which was in the
year 2015. Perform decline but can be considered good because Next PLC can pay 19 times its interest payment liability by using
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operating profit. In case of M&S ratio declined from 5 to 1.46 in the year 2019. Thus, M&S can only pay interest amount one time by
using its operating profit. On this front, Next PLC is in better position than M&S.
Market ratio
EPS: EPS stands for earning per share as this ratio reflect the earning that shareholder receive on each unit of equity (Nuryani, Heng.
and Juliesta, 2015). EPS of the Next PLC decrease from 44.40 which was in the year 2015 to 42.17. In all four years this ratio value
decline regularly. However, it can be said that there is almost stability in the ratio value. In case of M&S situation is worse and EPS is
only 0.09 which is nothing. This reflect that shareholders of M&S are not earning any amount on equity. Next PLC perform better
than M&S.
PE ratio: PE ratio is also known as price earning ratio. This ratio is used for equity valuation. PE ratio of Next PLC was 162 in the
year 2015 and it decreased to 97 in the year 2016. Thereafter ratio value elevates to 123 in the year 2017 but again decline to 106 in
the year 2018. Overall, it can be said that firm equity valuation is changing consistently. PE ratio of industry is 24.36 which is lower
the firm ratio and it can be said that Next PLC shares are overvalued. M&S PE ratio is 3040 which is high and equity is overvalued as
EPS is almost zero. Next PLC shares are more fairly valued then M&S PE.
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Trend analysis
Figure 1Net profit ratio
Last four year trends are indicating that net profit of the business firm is declining consistently by 1% or 2% each year. If this trend
remain continue then in that case profitability in the business may shrink. Thus, management need to pay attention on cost control.
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Figure 2Operating profit ratio
Like net profit operating profit ratio also declined by 1% or 2% each year. This trend is consistent and likely may be observed in the
next financial years. Thus, plan must be prepared to control operating expenses in the business.
Figure 3Current ratio of Next PLC
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Trend is indicating that current ratio is declining but it is already much above standard value. Hence, there is no matter of concern.
This ratio may further dips but it will be considered good for the firm because it will mean that Next PLC is making more best use of
current assets in its business.
Figure 4Debt equity ratio of Next PLC
There is stability in the debt equity ratio from the last four years and in specific range value is moving. Higher debt equity ratio is one
of the area which can create big problem for the Next PLC in the upcoming years.
Business from Investor's point of view.
The investors are very important for company when company is in requirement of funds. It is essential for the businesses to
attract the investors to raise the funds. Investors invest in any company for mainly two reasons first for earning returns and for
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maximising their wealth. The returns should be as per the per the industry trend for attracting the investors or the growth should be
higher maximising their wealth over specified. Investors will not be investing in companies whose performance is not strong in the
market. The profitability is of major concern for investors. Since the profitability of the company over years has declining trend both
in net profit and operating profits. It reduces the return of investors. Debt equity ratio is analysed by investors for assessing the
financial risk associated and it has high debt. Investors have to sacrifice their returns due to the finance cost involved in debts. P/E
ratio of company is increased to keep the returns constant for the investors. This avoid withdrawal of funds from the equity. The
financial position of company is not strong therefore the investments should not be made by investors in such company.
Limitation of analysis
Limitation of analysis is that industry analysis is not undertaken. Many times, performance seems poor but from industry
perspective and its current situation same performance may be considered satisfactory. Thus, if there will be industry analysis then in
that case analysis can be done in better way.
CONCLUSION
From the research it could be concluded that financial performance of the company is to be analysed before investments are
made by investors. The companies and management have to ensure that corrective measures are required to be taken for improving the
financial ratios. Profitability ratios should be minimised by adopting the effective cost accounting techniques that helps in keeping the
cost within he budgeted level. Resources should be properly allocated where best utilisation can be made. The adoption of new
marketing strategies for increasing the sales of company. For raising the results of profitability revenues have to be increased.
Liquidity positions can be improved using less of short term debts and effectively using the cash flows of company. They have to
ensure that cash is disposed only over the productive areas. Debt ratio of company can be strengthened by raising funds by share
capital. Higher debts will increase the risks for company. Market ratios are improved wit the improvement in financial performance fo
company.
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REFERENCES
Books and Journals
Liang, D. and et.al., 2016. Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive
study. European Journal of Operational Research. 252(2). pp.561-572.
Kanapickienė, R. and Grundienė, Ž., 2015. The model of fraud detection in financial statements by means of financial
ratios. Procedia-Social and Behavioral Sciences. 213. pp.321-327.
Elhaj, M.A.A., Muhamed, N.A. and Ramli, N.M., 2015. The influence of corporate governance, financial ratios, and Sukuk structure
on Sukuk rating. Procedia Economics and Finance. 31. pp.62-74.
Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse, Rynki
Finansowe, Ubezpieczenia. 79(1). pp.13-26.
Morales-Díaz, J. and Zamora-Ramírez, C., 2018. The impact of IFRS 16 on key financial ratios: a new methodological
approach. Accounting in Europe. 15(1). pp.105-133.
Shaverdi, M. and et.al., 2016. Combining fuzzy AHP and fuzzy TOPSIS with financial ratios to design a novel performance
evaluation model. International Journal of Fuzzy Systems. 18(2). pp.248-262.
Misund, B., 2017. Financial ratios and prediction on corporate bankruptcy in the Atlantic salmon industry. Aquaculture economics &
management. 21(2). pp.241-260.
Nuryani, N., Heng, T.T. and Juliesta, N., 2015. Capitalization of Operating Lease and Its Impact on Firm's Financial Ratios. Procedia-
Social and Behavioral Sciences. 211. pp.268-276.
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