Financial Analysis of Next Plc

This assignment conducts a comprehensive financial analysis of Next Plc, focusing on its profitability, liquidity, and solvency during the period 2015-2016. The analysis compares Next Plc's performance to a rival firm (Morrison Plc) and identifies areas where Next Plc can enhance its financial position. Recommendations are provided to improve profitability, liquidity, and solvency through strategies such as inventory control, offering discounts, issuing shares, and maintaining an optimal debt-equity ratio.

Business Research and Decision Making

Table of Contents
Business Research and Decision Making........................................................................................1
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Analyzing the ratios of Next plc in against to competitors such as Morrison.............................3
Discussing the limitations of ratio analysis...............................................................................10
RECOMMENDATIONS...............................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
In the present times, each business organization prepares financial statement for getting
information about the extent to which financial strategies prove to be successful. Hence,
financial statement analysis tool helps company in making highly effectual business decisions
which in turn aid in growth, development and profit margin of firm. The present report is based
on Next Plc which is one of the leading retail business organizations of UK. In this, report will
shed light on the profitability, liquidity and solvency aspect of Next Plc over the years and in
comparison to Morrison.
TASK
Analyzing the ratios of Next plc in against to competitors such as Morrison
Ratio analysis may be defined as a form of financial statement analysis which in turn
helps in getting quick indication about the monetary health and performance of company. It is
highly significant which in turn helps company in evaluating its financial position in against to
competitors (Financial Ratio Analysis, 2016). Hence, by considering the outcome of ratio
analysis business unit can develop strategic framework for the near future.
Ratio analysis of Next Plc and Morrison for the year of 2015 and 2016 is enumerated below:
Particulars Formulas
Next Plc Morriso
n’s
2015
201
6
20
15
20
16
Profitability ratios
Gross profit
(GP) 1343
145
3
76
1
61
7

Net profits (NP) 635 667
-
76
1
22
2
Operating profit
(OP) 803 873
-
90
9
24
2
Sales revenues 4000
417
7
16
81
6
16
12
2
Gross profit
margin (GP / Total sales) * 100 33.58%
34.
79
%
4.5
%
3.8
%
Net profit
margin (NP) (NP / Total sales) * 100 15.88%
15.
97
%
-
4.5
3%
1.3
8%
operating profit
margin (OP) (OP / Total sales) * 100 20.08%
20.
90
%
-
4.1
%
1.9
%
Liquidity ratios
Current assets
(CA) 1616
164
2
14
44
13
08
current
liabilities (CL) 887
117
1
22
73
27
47
Inventory 417 487
65
8
61
6

Prepaid
expenses 90 86
88 82
Current ratio (CA / CL) 1.82
1.4
0
.50 .48
Quick ratio/acid
test ratio
(Current assets – (stock +
prepaid expenses) / CL 1.25
0.9
1
.18 .22
Efficiency ratios
Sales 4000
417
7
16
81
6
16
12
2
Total assets 2282
233
0
91
71
92
99
Creditors 225 219
13
97
17
75
COGS 2656
272
4
16
05
5
15
50
5
Inventory 417 487
65
8
61
6
Payable days
(average payables / cost of
sales)*365
Inventory
turnover ratio (COGS / Inventory) 6.37
5.5
9
24.
40
25.
17
Creditors
turnover ratio
(Net credit purchase / Average
creditors) 11.80
12.
44
11.
49
8.7
4

Assets turnover
ratio (Revenue / average total assets 1.75
1.7
9
1.8
3
1.7
3
Return on
shareholders’
equity Net sales / shareholders equity 12.42%
13.
39
%
4.6
8%
4.2
9%
Solvency/leverage ratios
Long-term
debts 838 615
25
08
20
03
Shareholders’
equity 322 312
35
94
37
56
Debt to equity
ratios
Long term debt / shareholders
equity 2.60
1.9
7
.70 .53
Dividend ratios
EPS
(Total net profit available for
shareholders/Number of shares)
2.09 (Financial
statements of Next Plc,
2017)
2.2
1
- .10
Profitability ratio:
Next Plc

GP ratio NP ratio Operating profit
ratio
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2015
2016
Morrison
GP margin NP margin op margin
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
2015
2016
The above mentioned table presents that in 2015 and 2016 gross profit margin of Next
Plc was 33.5% & 34.79%. On the other side, GP ratio of Morrison PLc declined from 4.5% to
3.8%. In addition to this, NP margin of Morrison moved from -4.53% to 1.38% at the end of
accounting year 2016. On the contrary to it, net profit ratio increased from 15.8% to 15.9%.
Hence, by taking into consideration such aspect it can be said that profitability aspect of Next Plc
is sound as compared to Morrison Plc. Further, profitability aspect of Next Plc was improved in
2016 as compared to 2015.

Liquidity ratio:
Next Plc
2015 2016
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Current ratio
quick ratio
Morrison
2015 2106
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
current ratio
quick ratio
In the accounting year 2016, current ratio of Next Plc declined from 1.82 to 1.40. Besides
this, current ratio of Morrison Plc was .50 and .48 in the year of 2015 & 2016 which shows
declining trend in the liquidity aspect of firm. Quick ratio of Next Plc also decreased from 1.25

and .91 in the financial year 2016. On the other side, quick ratio of Morrison Plc inclined
from .18 to .22 in 2016. All these aspects show that liquidity position of Next Plc is good in
against to Morrison Plc. However, current ratio of firm still very far from ideal ratio such as 2:1
which entails that Next Plc has requirement to make improvement in liquidity aspect (Zack,
2013).
Solvency ratio:
Next Plc
2015 2016
0
0.5
1
1.5
2
2.5
3
Debt-equity ratio
Debt-equity ratio
Morrison

2015 2016
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Debt-equity ratio
Debt-equity ratio
By doing ratio analysis, it has been assessed that debt-equity ratio of Next Plc was 2.60 in
2015, whereas the same of Morrison Plc during such period is .70. On the other hand, in 2016
debt-equity ratio of Next Plc and Morrison Plc was 1.97 & .53 respectively. Hence, in the year of
2016, solvency position of Morrison Plc was sound as compared to Next Plc.
Efficiency ratio: Financial statement analysis shows that inventory turnover ratio of Next
and Morrison Plc was 6.37 & 24.4 times respectively in the year of 2015. On the other side, in
the year of 2016, stock turnover ratio of both such organizations was 5.59 & 25.17 times. Hence,
inventory of Morrison was sold and replaced more quickly as compared to Next Plc. This
measure shows that customers prefer to purchase the retail products and services which are
offered by Morrison. Further, creditor’s turnover ratio of Next Plc was 11.8 and 12.4 times.
On the contrary to it, the same of Morrison Plc was 11.4 and 8.74 times. Hence, such
aspect shows that more credit period had been provided by the supplier to Next Plc to Morrison
Plc. This aspect helps company in making improvement in its working capital aspect to the
significant level. On the other side, asset turnover ratio of Next Plc was 1.75 and 1.79 during the
period of 2015 & 2016. During the similar period sales revenue generated by Morrison Plc from
its total assets are 1.83 and 1.73. it shows that Next Plc has made optimum use of its assets in
against to competitor firm (Healy and Palepu, 2012).

Cash flow statement analysis: From the evaluation of cash flow statement it has been
assessed that amount of cash flow earned by Next Plc was 15.74% & 11.03%. On the other side,
free cash flow ratio of Morrison Plc during such period was 2.11% & 3.23% respectively. Hence,
by keeping such factor in mind it can be stated that cash position and performance level of Next
Plc was sound. Hence, WM Morrison needs to make modifications in the existing framework for
enhancing cash position.
Discussing the limitations of ratio analysis
There are several aspects which closely influence the significance of ratio analysis is
enumerated below:
 Different types of business organization undertake varied accounting principle and
conventions while preparing final accounts. This aspect creates difficulty in front of
higher management and their stakeholders in making comparison of financial
performance and position in comparison to others (Hu and et.al., 2012). For instance:
Next Plc places emphasis on undertaking IFRS, whereas Morrison considers both IAS &
UK GAAP for the preparation of financial statements.
 Along with this, ratio analysis tool provides deeper insight to investors about past
financial trends and performance of an organization (Drivelos and Georgiou, 2012). On
the hand, investors are highly concerned towards the future financial growth and
performance of firm. In this way, such aspect also limits the significance of such method.
RECOMMENDATIONS
 It is recommended to Next Plc to lay emphasis on promotional aspects. Thus, by placing
advertisement on social media and newspaper Next Plc can provide information to both
existing and potential customers about discounts offered by it (Pettke and et.al., 2012).
Further, Morrison needs to exert control on the level of expenses which in turn helps it in
making improvement in both GP and NP margin.
 Further, according to the outcome of ratio analysis it is suggested to Next and Morrison
Plc to make focus on the maintenance of current assets rather by reducing the level of

expenses. Through this, company can make improvement in its liquidity position the
great extent (Tosun, 2013).
 It is suggested to Next Plc to employ inventory control tools and techniques which in turn
helps it managing the stock level more effectually. Further, Next Plc is required to offer
more discounts to customers which in turn helps in enticing the decision making aspect of
customers and thereby sales revenue.
 Next Plc should issue share in the new future for meeting the financial needs and
requirements. Company needs to consider .5:1 ideal ratio which in turn ensures effectual
financial structure. Moreover, debt instruments have fixed periodical cost for company in
terms of interest (Sinha, 2012). In this way, by maintaining such ratio Next Plc can
improve its solvency aspect to a great extent.
Hence, by taking into account all such aspects Next and Morrison Plc can ensure significant
improvement in the profitability, liquidity and solvency aspect.
CONCLUSION
From the above report, it has been concluded that profitability aspect of Next Plc was
good in 2015 & 2016 as compared to rival firm. However, Next Plc does not have enough
amounts of current assets to meet the financial obligations. Besides this, it can be inferred that
solvency position of Next Plc was not sound in 2016. It can be revealed from the report that
payable day and asset turnover ratio of Next Plc was sound in 2016 in comparison to rival firm.

REFERENCES
Books and Journals
Drivelos, S. A. and Georgiou, C. A., 2012. Multi-element and multi-isotope-ratio analysis to
determine the geographical origin of foods in the European Union. TrAC Trends in Analytical
Chemistry. 40. pp.38-51.
Healy, P. M. and Palepu, K. G., 2012. Business analysis valuation: Using financial statements.
Cengage Learning.
Hu, Z. and et.al., 2012. Improved in situ Hf isotope ratio analysis of zircon using newly designed
X skimmer cone and jet sample cone in combination with the addition of nitrogen by laser
ablation multiple collector ICP-MS. Journal of Analytical Atomic Spectrometry, 27(9),
pp.1391-1399.
Pettke, T. and et.al., 2012. Recent developments in element concentration and isotope ratio
analysis of individual fluid inclusions by laser ablation single and multiple collector ICP-
MS. Ore Geology Reviews. 44. pp.10-38.
Sinha, G., 2012. Financial statement analysis. PHI Learning Pvt. Ltd..
Tosun, M., 2013. Detection of adulteration in honey samples added various sugar syrups with 13
C/12 C isotope ratio analysis method. Food chemistry. 138(2). pp.1629-1632.
Zack, G. M., 2013. Financial Statement Analysis. Financial Statement Fraud: Strategies for
Detection and Investigation. pp.209-213.
Online
Financial Ratio Analysis. 2016. Online. Available through:
<http://www.myaccountingcourse.com/financial-ratios/>. [Accessed on 24rd January 2017].
Financial statements of Next Plc. 2017. Online. Available through: <
http://nextplc.annualreport2015.com/>. [Accessed on 24rd January 2017].