Accounting and Finance: Investment Analysis and Recommendation Report

This report provides a comprehensive financial analysis of two companies, Next PLC and Hennes & Mauritz, to aid Asol Ltd. in making investment decisions. The analysis includes a detailed examination of financial ratios such as gross profit margin, net profit margin, current ratio, and return on equity, comparing their performance over several years. The report also includes non-financial ratio analysis, charts and recommendations for Hennes & Mauritz to improve its financial performance. Furthermore, the report applies capital investment appraisal techniques, including payback period and cash flow analysis, to evaluate potential investments for Hilltop Limited. The conclusion emphasizes the importance of financial analysis in making informed investment choices and highlights the limitations of ratio analysis.

ACCOUNTING AND
FINANCE
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Table of Contents
INTRODUCTION......................................................................................................................1
Financial performance analysis..................................................................................................1
Analyse the performance and financial position...................................................................1
Preparation of Charts.............................................................................................................3
Recommendation to Hennes & Mauritz................................................................................6
Limitation of ratio analysis....................................................................................................7
CAPITAL INVESTMENT APPRAISAL TECHNIQUES........................................................7
Cash inflow............................................................................................................................7
Payback period......................................................................................................................8
Net present value...................................................................................................................9
Accounting rate of return (ARR).........................................................................................10
Limitations of investment appraisal techniques..................................................................10
CONCLUSION........................................................................................................................10
REFERENCES.........................................................................................................................12
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Illustration Index
Illustration 1: Gross profit ratio of Next PLC............................................................................3
Illustration 2: Gross profit ratio of H & M business..................................................................4
Illustration 3: Net profit of Next PLC........................................................................................4
Illustration 4: Net profit margin Of H & M................................................................................5
Illustration 5: Current ratio and quick ratio of Next PLC..........................................................5
Illustration 6: Current ratio and quick ratio of H & M...............................................................6
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INTRODUCTION
Accounting and finance plays a significant role in every organization to take qualified
decisions. Asol Ltd. is a large fashion retailer company considering to purchase shares in
either Next PLC or Hennes & Maurtiz Company. In this report, financial analysis has been
done for both theses two cloth retailing company that are listed on London Stock Exchange.
Through making financial as well as non financial analysis, the CFO of Asol Ltd. will be able
to take appropriate investment decisions. In addition to it, capital budgeting tools also will be
applied to take long term investment decisions for Hilltop Limited.
FINANCIAL PERFORMANCE ANALYSIS
Analyse the performance and financial position
Analysing the business performance through financial ratios is explained here:
Gross profit ratio: The excess of total business revenues over the total cost of goods
sold is known as gross profit margin (Kaplan and Atkinson, 2015). The gross profit ratio of
Next PLC business shows an increasing trend. In the year 2011, the gross margin was 29.27%
get increased to 33.59% in the year 2015. However, the gross profit ratio of H & M business
shows an declining trend as it get decreased from 62.93% to 58.81% respectively. The ratio
indicates that Next PLC is generating greater gross profitability for the business implies that
the business is performing better as compare to the H & M.
Net profit ratio: Net profit is the difference between gross margin and total of indirect
business expenses. It represents the net operational results of the business operations (Ward,
2012). The net profit margin of H & M business shows a decreasing trend. In the year 2010,
the net profit margin was 17.22% get decreased to 13.19% in the year 2014. However, the net
profit margin of Next PLC business gets increase from 11.93% to 15.87% in the year 2015. It
implies that Next PLC is earning higher net profits indicate better business performance.
Operating profit ratio: In H & M Company, the operating margin gets declined from
22.73% to 16.90% in the year 2014. However, in Next PLC the ratio get increased from
17.19% to 20.62%. Thus, it can be said that Next PLC Company is generating higher the
operating profit from its operating functions.
Return on equity: Hennes and Mauritz business is earning return on equity of 41.27%
while return on equity for Next PLC business is 208.75%. It indicates that Next PLC business
is getting larger amount of profitability on its equity. Thus, the performance of Next PLC
Company is quite better than Hennes and Mauritz (Gadoiu, n.d).
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Current ratio: Financial strength can be analysing by comparing the financial ratios.
Current ratios are a measurement of business liquidity and measure business ability to
discharge short term business obligations (Erasmus and et. al., 2016). H & M current ratio get
declined from 2.96 to 2.11 in the year 2014. However, current ratio of Next PLC business
gets increase from 1.28 to 1.82 in the year 2015. It indicates that Next PLC business is
improving its liquidity position to meet its short term liabilities in an effective manner.
Quick ratio: It represents the relationship between quick assets and current liabilities
of the business. The quick ratio of Next PLC business tends to incline from 0.72 to 1.16 in
the year 2015. However, the quick ratio of H & M business gets decreased from 2.06 to 1.07
in the year 2014. It implies that in Next PLC business, the amount of liquid assets get
increase over the period. However, H & M business liquidity position is declining over the
period.
Assets turnover ratio: It measure the business ability to use business assets effectively
and efficiently (Rahman and Ramli, 2016). In Next PLC business, the assets turnover ratio
get decrease from 1.89 to 1.81 while H & M business assets turnover ratio get increase from
1.91 to 2.14 in the year 2014. It represent that H & M business is using its business assets
effectively and efficiently.
Inventory turnover ratio: Next PLC business inventory turnover ratio is 6.62 in the
year 2015 while in H & M business the inventory turnover ratio is 3.46 indicate that Next
PLC is using its inventory efficiently.
Return on assets: H & M Company’s return on assets gets declined from 32.91% to
28.28% in the year 2014. However, in Next PLC business return on assets get increased from
22.55% to 28.68% in the year 2015. It indicates that Next PLC is getting larger the return on
its total assets.
Operating cash flow/Share: In H & M business, the ratio gets declined from 1.20 to
1.25 in the year 2014. However, in case of Next PLC business the ratio tends to increase from
2.49 to 4.86 respectively. It is higher in Next PLC business implies that Asol Ltd. should
invest in Next PLC Company.
Analysing the performance through non financial ratios is explained as under:
Revenue/Employee: It got increased from 114727 to 135729 in next PLC Company.
However, In H & M, the ratio get decreased from 166639 to 138467 respectively.
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EBITDA/Employee: In Hennes & Mauritz company, the ratio was 42580 tends to
declined to 28008 in the year 2014. On contrary, in Next PLC Company, the ratio tends to
increase from 23869 to 31864 respectively.
Thus, on the basis of above comparison, it can be recommended to the CFO that the
firm should make investment in Next Plc business. The reason for this decision is that the
company is growing in the market due to increasing the profitability. Moreover, the company
is strengthening its financial position as its liquidity ratio gets increased. Therefore, company
is more able to pay its short term obligations. Further, the business is earning good rate of
return on equity (Otley and Emmanuel, 2013). Another, both the non financial ratios are
increasing in Next PLC business. Thus, it can be said that investing in Next Plc business will
be more beneficial for Asol ltd.
Preparation of Charts
Charts are prepared here as under
Gross profit Next PLC
2011 29.27
2012 30.38
2013 31.48
2014 33.16
2015 33.59
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1 2 3 4 5
27
28
29
30
31
32
33
34
29.27
30.38
31.48
33.16
33.59
Illustration 1: Gross profit ratio of Next PLC

Gross profit H & M
2010 62.93
2011 60.13
2012 59.5
2013 59.13
2014 58.81
Net profit Next PLC
2011 11.93
2012 12.62
2013 14.34
2014 14.79
2015 15.87
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1 2 3 4 5
56
57
58
59
60
61
62
63
64
62.93
60.13
59.5 59.13 58.81
Illustration 2: Gross profit ratio of H & M business

Net profit H & M
2010 17.22
2011 14.38
2012 13.96
2013 13.3
2014 13.19
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1 2 3 4 5
0
2
4
6
8
10
12
14
16
18
11.93 12.62
14.34 14.79
15.87
Illustration 3: Net profit of Next PLC

Next PLC Current ratio Quick ratio
2011 1.28 0.72
2012 1.54 0.91
2013 1.48 0.97
2014 1.76 1.18
2015 1.82 1.16
H & M Current ratio Quick ratio
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1 2 3 4 5
0
2
4
6
8
10
12
14
16
18
20
17.22
14.38 13.96 13.3 13.19
Illustration 4: Net profit margin Of H & M
1 2 3 4 5
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1.28
1.54 1.48
1.76 1.82
0.72
0.91 0.97
1.18 1.16
Illustration 5: Current ratio and quick ratio of Next PLC

2010 2.96 2.06
2011 2.71 1.69
2012 2.66 1.49
2013 2.25 1.22
2014 2.11 1.07
Recommendation to Hennes & Mauritz
The financial analysis of H & M business indicates that its performance tends to
declining over the period. The profitability ratio shows that it is generating good margin but
shows a downward trend. Thus, for improving the business performance, company should
increase its revenues and decrease its cost through regular monitoring (Ding, Booth and
Roscoe, 2016). Increasing the business profits lead to increase the business return on equity
and return on assets. Furthermore, business will be able to increase gross margin, net margin
and operating profit margin. This in turn, Hennes and Mauritz business can improve its
operational performance.
Another, liquidity ratio of the company gets decreased hence, it should be advised that
business has to improve its current assets and decrease current liability. By doing this, H & M
business will be able to pay off its short term obligations more frequently (Dehnavi and et.
al., 2015). Moreover, using the company's inventory in an efficient manner, H & M business
can improve its liquidity and the business revenue to a great extent. Company should make
strategic and competitive policies so as to improve their financial strength.
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1 2 3 4 5
0
0.5
1
1.5
2
2.5
3
3.5
2.96
2.71 2.66
2.25 2.112.06
1.69
1.49
1.22 1.07
Illustration 6: Current ratio and quick ratio of H & M

Furthermore, company should increase its non financial ratio through providing better
quality of services to the customers. It helps to increase customer satisfaction level.
Furthermore, providing good monetary benefits and working environment, business will be
able to enhance its employee turnover ratio. This in turn, business can achieve higher the
success and survive for a longer time period.
Limitation of ratio analysis
Although ratio analysis is a best way of analysing the financial performance but still it
has certain limitations. One of the most important limitations is that it analyse the historical
performance of the business hence, cannot be used to measure future business performance.
Another, different business organization use distinct accounting standard and policies to
record business transactions (Ratio analysis: application, Limitations and Dangers-A
perspective, n.d.). Thus, it impairs the comparability between the companies. Furthermore,
some elements of balance sheet recorded at historical cost while income statement elements
are recorded at current cost. In that case, ratio analysis does not provide significant and
meaningful results. In addition to it, different organizations operate with distinct market
environment which is not considered by ratio analysis method. Moreover, in context to
profitability analysis, the inflation rate also impacts business profits which are not considered
by profitability ratios.
CAPITAL INVESTMENT APPRAISAL TECHNIQUES
Hilltop Limited is a medium sized manufacturing company. As per the scenario, there
are two potential and mutually exclusive projects available for the Hilltop Ltd. Each project
consists of purchasing machines with amounted to 120000£. Investment appraisal techniques
help to identify the potential of each investment project so as to select appropriate investment
proposal (Upton and et. al., 2015). The scenario indicates the net profits from both the
projects for upcoming 6 years from 2016 to 2021.
Cash inflow
Cash inflows from both the projects are calculated here as under:
Table 1: Cash inflow from project A
Machine 1 (net
profit) Depreciation Sale of machine
Machine
purchase Cash inflow
40000 33000 73000
40000 33000 73000
40000 33000 21000 -50000 44000
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30000 10000 40000
30000 10000 40000
20000 10000 30000
Total = 200000
Table 2: Cash inflow from project B
Year Machine 2 ( net profits) Depreciation Cash inflow
2016 10000 20000 30000
2017 20000 20000 40000
2018 30000 20000 50000
2019 60000 20000 80000
2020 70000 20000 90000
2021 55000 20000 75000
Total 245000
Payback period
The time period required to get back the initial cash outflow of 120000£ will be
known as payback period. The selection criteria on the basis of this method is that the
investment project that has lower the payback period should be prefer by Hilltop Limited
(Götze, Northcott and Schuster, 2015).
Table 3: Payback period of project A
Year Cash inflow Cumulative cash inflow
0 -120000 -120000
2016 73000 -47000
2017 73000 26000
2018 44000 70000
2019 40000 110000
2020 40000 150000
2021 30000 180000
Payback period = 1 year + (47000£/73000£ * 12)
= 1 year + 7.72 months
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