FAAR5019 - Financial Ratio Analysis of Next PLC: Autumn 2018

This report provides a comprehensive financial analysis of Next PLC using various financial ratios calculated from the company's financial statements between 2014 and 2018. The analysis covers profitability ratios (Gross Profit Ratio and Return on Capital Employed), liquidity ratios (Current Ratio and Quick Ratio), investors’ ratios (Earnings Per Share and Book Value Per Share), and working capital ratios (Inventory Turnover Ratio and Accounts Receivable Turnover Ratio). The report identifies decreasing trends in profitability and working capital efficiency, along with fluctuations in liquidity and investor ratios. Based on these findings, the report recommends strategies to improve profitability by reducing expenses and efficiently managing labor and materials. It suggests negotiating with creditors for extended repayment times and using long-term debts to stabilize liquidity. To enhance investor ratios, the report advises increasing equity shares and pursuing mergers and acquisitions to boost intangible assets. Finally, it recommends speedy inventory clearance and efficient collection of accounts receivable to improve the company’s working capital position. The analysis concludes that addressing these financial issues is crucial for Next PLC to sustain its position in the competitive UK retail clothing industry. Desklib provides access to similar reports and solved assignments for students.

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial Accounting and Reporting
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING AND REPORTING
Analysis of Ratios
Profitability Ratios
Table 1: Profitability Ratios of Next PLC
(Source: as created by author)
2014 2015 2016 2017 2018
32.00%
32.50%
33.00%
33.50%
34.00%
34.50%
35.00%
33.16%
33.59%
34.78%
33.84%
33.44%
Gross Profit Ratio
Figure 1: Change in Gross Profit Ratio
(Source: as created by author)

2FINANCIAL ACCOUNTING AND REPORTING
The above graph indicates decreasing trend in gross profit ratio from the year 2016 to
2018; and it is a major indicator of the decrease in profitability of Next PLC. Based on the above
information, it can be said that the company has not been able in using their labor and materials
effectively for generating sales (nextplc.co.uk 2018).
2014 2015 2016 2017 2018
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
42.23% 45.49%
57.51%
37.82% 35.94%
Return on Capital Employed
(ROCE)
Figure 2: Change in ROCE
(Source: as created by author)
According to the above graph, decrease in ROC can be seen in 2017 and 2018 from the
year 2016 (nextplc.co.uk 2018). This aspect indicates towards the decrease in the ability of the
company to use their capital employed with the aim to generate profit and this is not a good sign
for the company.

3FINANCIAL ACCOUNTING AND REPORTING
Liquidity Ratios
Table 2: Liquidity Ratios of Next PLC
(Source: as created by author)
2014 2015 2016 2017 2018
0.00
0.50
1.00
1.50
2.00
2.50
1.76 1.82
1.40
2.29
1.96
Current Ratio
Figure 3: Change in Current Ratio
(Source: as created by author)
According to the above graph, it can be seen that the current ratio of Next PLC is full of
fluctuations over the years as it lacks steadiness. In spite of that fact, the individual ratios show
that the company has adequate current assets to pay their current business obligations (Katchova
and Enlow 2013).

4FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
1.30 1.35
0.99
1.67
1.43
Quick Ratio
Figure 4: Change in Quick Ratio
(Source: as created by author)
The analysis of liquidity ratios shows that there has been a high fluctuation in the quick
ratios. It indicates towards the fluctuations in the ability of the company to pay their current
obligation quick assets like cash. It is expected to have steadiness in the liquidity position of the
companies (Katchova and Enlow 2013).
Investors Ratios
Table 3: Investors Ratios of Next PLC

5FINANCIAL ACCOUNTING AND REPORTING
(Source: as created by author)
2014 2015 2016 2017 2018
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
366.10
428.30 450.50 441.30 416.70
Earnings Per Share (EPS)
Figure 5: Change in EPS
(Source: as created by author)
As per the investors’ ratios, increase in EPS can be seen till 2017 from 2014, but 2018
has witnessed decrease in EPS (nextplc.co.uk 2018). One major reason for this fluctuation can be
the fluctuation in the profitability of the company as EPS is related to the profitability positions
of the companies.

6FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00 1.89
1.33 1.44
0.86 0.86
Book Value Per Share
Book Value Per Share
(B/C)
Figure 6: Change in Book Value per Share
(Source: as created by author)
It can be observed from the above graph that there have been some major fluctuations in
the book value per share of Next PLC (nextplc.co.uk 2018). However, in the recent two years,
there has not been any change in the book value per share of the company.
Working Capital Ratios
Table 4: Working Capital Ratios of Next PLC
(Source: as created by author)

7FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
6.97 6.62
6.03 5.78 5.74
Inventory Turnover Ratio
Figure 7: Change in Inventory Turnover Ratio
(Source: as created by author)
According to the above graph, it can be observed that there has been decrease in the
inventory turnover ratio from the year 2014 to 2018. It indicates towards the decreased ability of
the company in selling their inventory in a year. It needs to be mentioned that this is not the ideal
situation for the company as it can lead to the lack of efficiency of the company in the day-to-day
operation.

8FINANCIAL ACCOUNTING AND REPORTING
2014 2015 2016 2017 2018
0.00
1.00
2.00
3.00
4.00
5.00
6.00
4.90 4.84 4.41
3.77 3.42
Accounts Receivable Turnover
Ratio
Figure 8: Change in Accounts Receivable Ratio
(Source: as created by author)
The above graph indicates towards the same situation of accounts receivable turnover as
per the inventory turnover ratio. As per the above graph, a decreasing trend can be seen in the
accounts receivable turnover from the year 2014 to 2018. This particular ratio helps the
companies in assessing how many times in a year they become able in converting their accounts
receivable in cash (nextplc.co.uk 2018). Thus, decrease in this ratio indicates towards the
decreased capacity of Next PLC in converting their accounts receivable in cash in a specific
financial year.
It can be seen from the above discussion that Next PLC has certain issues in the areas of
profitability, liquidity, working capital and investors’ ratios. In order to sustain in the retail
clothing industry of United Kingdom (UK), it is required for Next PLC to resolve these issues in
the above-mentioned aspects. Thus, in the presence of these major financial issues, it will be

9FINANCIAL ACCOUNTING AND REPORTING
difficult for the company to sustain in the competitive clothing retail industry of UK (Liang et al.
2016).
Recommendations
Based on the above discussion about Next PLC, some recommendations are provide
below:
1. In order to improve the profitability position, the suggestion for Next PLC is to reduce
the direct expenses of business in order to boost the gross profit margin. In addition, the
requirement for the company is to develop mechanism to use their labor and direct
materials in more efficient manner so that their gross profit margin can be improved. At
the same time, another suggestion for Next PLC is the elimination of the unprofitable
assets as it will lead to the increase in ROCE of the business of Next PLC.
2. The suggestion for Next PLC is to involve in the negotiation process with their
creditors for extended repayment time. In addition, they are encouraged to use long-
term debts in order to raise fund for the business. These will help in the elimination of
the fluctuations in their liquidity position.
3. In order to improve the EPS, Next PLC is suggested to increase their equity shares in
the market. At the same time, with the aim to improve the book value per share of the
company, the need for the company is to involve in more mergers, acquisitions of the
new businesses so that more intangible assets can be acquired. It will help the company
in improving their book value per share.
4. The suggested ways to improve the working capital position of Next PLC are the
speedy clearance of business inventory and to collect the accounts receivable on speedy

10FINANCIAL ACCOUNTING AND REPORTING
basis. Apart from this, with the aim to improve the accounts receivable turnover, it is
suggested for Next PLC to ensure speedy collection of their due amount from the
debtors.

11FINANCIAL ACCOUNTING AND REPORTING
References
Katchova, A.L. and Enlow, S.J., 2013. Financial performance of publicly-traded
agribusinesses. Agricultural Finance Review, 73(1), pp.58-73.
Lee, T.A. and Parker, R.H. eds., 2014. Evolution of Corporate Financial Reporting (RLE
Accounting). Routledge.
Liang, D., Lu, C.C., Tsai, C.F. and Shih, G.A., 2016. Financial ratios and corporate governance
indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational
Research, 252(2), pp.561-572.
Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2018.
Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2018/annual-
report-and-accounts-jan-2018.pdf [Accessed 13 Nov. 2018].
Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2017.
Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2017/Copy
%20of%20WEBSITE%20FINAL%20PDF.pdf [Accessed 13 Nov. 2018].
Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2016.
Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-
presentations/2016/NEXT-Annual%20report%20Web%20FINAL.pdf [Accessed 13 Nov. 2018].
Nextplc.co.uk., 2018. [online] .Annual Report and Accounts JANUARY 2015. Available at:
https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-
presentations/2014/next-annual-report-2015-final-web.pdf [Accessed 13 Nov. 2018].

12FINANCIAL ACCOUNTING AND REPORTING
Nextplc.co.uk., 2018. [online] .ANNUAL REPORT AND ACCOUNTS JANUARY 2014.
Available at: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-
presentations/2013/next-ar2014-web.pdf [Accessed 13 Nov. 2018].