Financial Performance Analysis: Next plc and H&M Comparison Report

This report provides a detailed financial analysis of Next plc and Hennes & Mauritz (H&M), comparing their financial performance using various financial and non-financial ratios over a five-year period. The analysis includes profitability, liquidity, and efficiency ratios, presented graphically for easy comparison. The report also evaluates the companies' performance using non-financial metrics like EBITDA/employee and revenue/employee. Based on the analysis, the report recommends strategies for H&M to improve its financial position and suggests an investment decision for a CFO. Furthermore, it assesses the viability of two capital investment projects using investment appraisal techniques, including Net Cash Flow and depreciation calculations, and discusses the limitations of these techniques. Finally, the report provides a comprehensive overview of financial accounting and its role in understanding a business's position.

ACCOUNTING AND FINANCE

Table of Contents
ACCOUNTING AND FINANCE..................................................................................................1
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1) Justification of the financial position and performance of the both the companies by using
various financial and non financial ratios...................................................................................1
2) Graphical presentation of ratios in the form of charts...........................................................3
3) Recommendation to H&M to improve financial performance and position..........................7
4) Limitation and drawbacks of using ratio analysis..................................................................8
TASK 2 Capital Investment Appraisal ...........................................................................................8
1) Analysing the viability of the project by using investment appraisal techniques...................8
Accounting rate of return (ARR)..............................................................................................11
2) Limitation of investment appraisals techniques...................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial accounting is the procedure of recording, analysis and summarising all the
transaction that take place within an organisation in order to find out the exert position of the
business (Ahmed and Duellman, 2011). In the project report financial and non financial ratio of
Next plc and Hennes & Mauritz has been analyses to interpret which company financial position
is good. In regard to which charts have been prepared with an aim to compare the actual
performance of both the companies. In this report recommendation has been discussed in order
to improve the poor performance of the business. Besides this, limitation of completely
depending on the financial ratio for examine the financial position and performance is
mentioned. At last in this report investment techniques are used in order to decide which project
is best out of the given two projects. Along with this limitation of using this technique in long
run decision making is also depicted.
TASK 1
1) Justification of the financial position and performance of the both the companies by using
various financial and non financial ratios.
Financial ratios
Gross profit ratio:- On the basis of the given data it can be interpreted that gross profit
margin of Next plc is continuously growing. It gross ratio increase from 29.27% to 33.59%
within a period of five years, while that of H & M ratio declines from 62.93% to 58.81%. This
indicates that H&M is not able to serve its best. The reason behind this could be increase in the
COGS/revenue ratio from 37.07% to 41.19%, whereas on Next plc it decreases from 70.73% to
66.41% (Anandarajan, Anandarajan and Srinivasan, 2012).
Net profit ratio:- Net profit ratio of Next plc. grows from 11.93% to 15.87% which is a
good sign, but on the other hand NP of H&M reduces from 17.22% to 13.19% which indicates
financial performance of the company is not good. This situation has been occur due to the
increase in operating expenses.
Operating cash flow/share:- It has been seen that operating cash flow/share of Next plc
has improved from 2.49 to 4 .86. On the other hand H&M ratio also increase but at a
diminishing rate as compared to Next plc. H&M ratio increase from 1.20 to 1.25. High increase
in share rate indicates that company is highly able to satisfy its shareholders.
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Current ratio:- Current ratio of N. plc increase from 1.28 to 1.82 whereas of H&M
decrease from 2.96 to 2.11. Low current ratio indicates that company is not having enough
working capital to run its business. On the hand high current ratio of N. plc enhance that
enough amount of working capital is available with the company to meet its daily requirements
(Baum and Crosby, 2014).
Quick ratio :- According to the given calculation it can be concluded that quick ratio of
Next plc has improved from 0.72 to 1.16 while on the other hand H&M quick ratio declines from
2.06 to 1.07 . Increased ratio indicates that company liquidity position is good and is easily able
to cope with the sudden uncertainties.
Assets turnover ratio:- This ratio of Plc. has been declining from 1.89 to 1.81 whereas of
H&M is growing from 1.91 to 2.14. This in turn indicates that H&M is effectively utilizing its
available assets . On the other hand diminishing ratio of N.plc betoken that they are not able to
properly utilize its available assets (Brown, Beekes and Verhoeven, 2011).
Inventory turnover ratio:- Inventory ratio of H&M has been reduced from 3.70 to 3.46,
and that of Next plc. also reduces from 6.89 to 6.62. difference between the ratio of Next is less,
this in turn betoken that they are using its available inventory in a proper manner.
Return on assets:- Return on asset ratio of H&M has been weakened by 32.91% to
28.28% which indicates that company is not able to manage all the operations of the
organization in an effective manner. Thus, on the other hand ROA of Next plc. increases from
22.55% to 28.68%. proper management of the operating lead the company towards the
achievement of long rum goals.
Return on equity:- ROE of Next has reduced from 214.98% to 208.75% and on the other
hand ROA of H&M also declines from 44.07% to 41.27%. Low ratio indicates that company is
only using equity its capital structure. Low business profit can be another cause for decrease in
ROE (Chan and Liano, 2009).
Non financial ratio
EBITDA/Employees:- In Next plc number of employees is increasing from 23869 to
31864 within a period of five year while on contrary it is seen that number of employees has
reduce at a high rate from 42580 to 28008. this in turn indicates that non financial position of
the company Next plc is better as compared to H&M. The reason behind this be could be that
company has been making a great efforts to encourage and motivate its employees.
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Revenue/employee:-In H&M revenue/ employee ratio has been decling from 166639 to
138467 and on the other hand this ratio of Next plc has been increasing from 114727 to 135729.
Higher ratio indicates that company is perform much better and all its employees are highly
satisfied (Götze, Northcott and Schuster, 2008).
Thus , at last it can be interpreted that financial position and performance of Next plc is
much better as compared to H&M. Therefore, in respect to this it is suggested that CFO of Asol
Ltd. Should purchase the shares of Next plc. in order to gain high rate of return. The main cause
for suggesting this company is its better operational performance as compared to H&M.
Company liquidity position is also good and will be able to meet its short term and long term
requirements. Moreover, increase ROE and ROA point out that company is earning better
profitability. In addition to this NEP of Next plc is highly better due to higher revenue/employee
and EBITDA/employee.
2) Graphical presentation of ratios in the form of charts
Profitability ratio
GROSS PROFIT
Next plc H&M
2010 - 62.93%
2011 29.27% 60.13%
2012 30.38% 59.50%
2013 31.48% 59.13%
2014 33.16% 58.81%
2015 33.59% -
3

NET PROFIT
Next plc H&M
2010 - 17.22%
2011 11.93% 14.38%
2012 12.62% 13.96%
2013 14.34% 13.30%
2014 14.79% 13.19%
2015 15.87% -
4
1 2 3 4 5 6
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
0.29 0.3 0.31 0.33 0.34
62.93% 60.13% 59.50% 59.13% 58.81%
Next plc
H&M
Illustration 1: GROSS PROFIT

CURRENT RATIO
Next plc H&M
2010 - 2.96
2011 1.28 2.71
2012 1.54 2.66
2013 1.48 2.25
2014 1.76 2.11
2015 1.82 -
5
1 2 3 4 5 6
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0
0.12 0.13
0.14 0.15
0.16
17.22%
14.38% 13.96% 13.30% 13.19%
Next plc
H&M
Illustration 2: NET PROFIT

QUICIK RATIO
Next plc H&M
2010 - 2. 06
2011 0.72 1.69
2012 0.91 1.49
2013 0.97 1.22
2014 1.18 1.07
2015 1.16 -
6
1 2 3 4 5 6
0
0.5
1
1.5
2
2.5
3
3.5
0
1.28
1.54 1.48
1.76 1.82
2.96
2.71 2.66
2.25 2.11
Next plc
H&M
Illustration 3: CURRENT RATIO

3) Recommendation to H&M to improve financial performance and position
On the basis of the above calculation it can be interpreted that financial position of H&M
is declining. Therefore, it respect to which it is suggested that company should develop various
strategies in order to improve its sales revenue. They should also try to fulfil the demand of the
customers by providing better quality products at low and affordable price. This in turn will
increase the sales of the company. Furthermore, manager should start keeping a constant look on
the operations of the organization with an aim to reduce the expenses of the company (Haka,
2006). In lieu of which company will be able to increase its profitability.
High operating expenses of the company will result in the reducing the operational
performance of the company. In addition to this H&M should make an efforts to control its
overheads which in turn will increase the net margin of the company. If profit of the company
will increase than ROA and ROE will also increase. This in turn will improve the operational
performance of the company.
Current and Quick ratio of the company indicates that they are financial sound in order
to meet up its short term requirement or any sudden uncertainties. Thus, in order to overcome
7
1 2 3 4 5 6
0
0.5
1
1.5
2
2.5
0
0.72
0.91 0.97
1.18 1.16
2.06
1.69
1.49
1.22
1.07 Next plc
H&M
Illustration 4: QUICK RATIO

this problem company should start collecting earlier payment from its receivables and should
start negotiating the payment of the creditors. This in turn will improve the liquid assets of the
company. Furthermore, speedy movement of inventory will improve the liquid assets of the
company. This in turn will help the company will further start its operating functions in a speedy
manner without facing any difficulties (Atrill and McLaney, 2006)..
Besides this, it is also recommend that should consider both debt and equity in order to
fulfil its capital requirement. This in turn will help the company to avail benefits on equity and
will increase the shareholders return. And will maintain the financial risk of the company at a
minimum level.
4) Limitation and drawbacks of using ratio analysis
There are certain types of drawbacks in making comparative logical thinking through
ratio analysis. Ratio analysis is done on the historical data basis but the investors prefer to
analysis the performance of the company by predicting future data. By using the concept of ratio
analysis investors are not able to determine the future performance of the company. Furthermore
, performance of the company cannot be compared properly because different companies use
different accounting standards, policies and methods to record its day to day transaction
(Karande and Chakraborty, 2012). In addition to this market condition highly affects the
performance of the business and this concept is not used at the time of doing ratio analysis.
Thus, comparison with different companies on the basis of ratio may prove to be hazardous for
the company. Besides this interpretation on the basis of ratio is very difficulty. Along with all
this different accounting principles and standards used for recording the day to day activities can
lead to inefficient an incorrect decisions. Thus completely rely on ratio analysis for comparing
and calculating the financial position of the company is not correct.
TASK 2 Capital Investment Appraisal
1) Analysing the viability of the project by using investment appraisal techniques
Investment appraisal techniques will assist the Hilltop to analyse the viability of the
company (Kavanagh and Drennan, 2008). By using this company will be able to analyse whether
they incur profit and will suffer the loss if they move on with a particular project. Thus, in regard
to this viability of both the given project for Hilltop is examined by using investment appraisal
techniques.
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Calculation of Net cash inflow
Machine 1
Year 2016 2017 2018 2019 2020 2021 Total
Net profit 40000 40000 40000 30000 30000 20000 200000
Depreciation 33000 33000* 33000 10000 10000* 10000
Machine
sold
21000
Machine
purchase
-50000
NCF 73000 73000 44000 40000 40000 30000 200000
Depreciation on Machine 1(A) = (120000-21000/3) = 33000
Depreciation on Machine 1(B) = (50000/5) = 10000
Machine 2
Year 2016 2017 2018 2019 2020 2021 Total
Net profit 10000 20000 30000 60000 70000 55000 245000
Depreciati
on
20000 20000 20000 20000 20000 20000 120000
NCF 30000 40000 50000 80000 90000 75000
Depreciation = 120000/6 = 20000
Pay back period
This method is used by the company to examine the time period after which they will be
able to recover the amount of money invested by them at the end of a specific time period. This
can be considered as one of the best method for Hilltop to analyses the viability of the project.
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Calculation of Pay back period
(Initial investment is £120000)
Year Project A CCF Project B CCF
0 (120000) (120000) (120000) (120000)
2016 73000 (47000) 30000 (90000)
2017 73000 26000 40000 (50000)
2018 44000 70000 50000 0
2019 40000 110000 80000 80000
2020 40000 150000 90000 170000
2021 30000 180000 75000 245000
Project A = 1 year + (47000£/73000£) = 1.64 years
Project B = 3 year
According to the above calculation it can be summarising that Pay back period of project
A is less as compared to project B. Pay Back Period as project A is 1.64years whereas of project
B is 3 years which is almost double of machine 1st. Thus, it is suggested that Hilltop should go
with project A.
Net present value
This method is used by company to analysis the present value of the project. This is used
by taking into consideration the time value of capital invested and the discounting rate of return.
By using this method company is able to compute the future value of all the cash flow by
discounting them (Taylor, 2007). Besides this , difference between total future value of cash flow
and the initial investment is known as Net present value.
Year
Cash inflow
(Project A)
PV of 1£
@20%
Discounted
Cash Flow
Cash inflow
(Project B)
Discounted
Cash Flow
0 -120000 1 -120000 -120000 -120000
2016 73000 0.833 60809 30000 24990
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2017 73000 0.694 50662 40000 27760
2018 44000 0.579 25476 50000 28950
2019 40000 0.482 19280 80000 38560
2020 40000 0.402 16080 90000 36180
2021 30000 0.335 10050 75000 25125
Net present
value 62357 61565
As per the above calculation it can be concluded that Hilltop should move on with project
A as compared to project B, because project A will provide £62357 amount of rate of return to
Hilltop as compared to project B which will provide only £61565 return. Higher NPV is good
for the company.
Accounting rate of return (ARR)
Average rate of return calculates the net profit percentage on average project investment.
Hilltop should select the project which has high average rate of return.
ARR = (Annual profit/Average investment)*100
Project A = (2000000/6)/120000 *100 = 27.78%
Project B = (245000/6)/ (120000)*100 = 34.03%
On the basis of the above calculation it is interpreted that ARR of Project B is more as
compared to project A. Hence, Hilltop should move on with Project B in order to incur more
benefits.
Thus, at last it is conclude that Hilltop should move on with Project A to avail much
benefits as compared to Project B.
2) Limitation of investment appraisals techniques
Pay back period:- This method only focus on getting fast recovery of money. This
method avoid the post pay back profitability and time value of the money. Thus, it can be said
that completely rely on this methods for making long run decision is not a better option.
Net present value:- It is somewhat better method as compared to PBP. Selection of
appropriate discounting rate is not a easily task for a company (Ratio analysis: application,
11

Limitations and Dangers-A perspective, n.d.). Besides this, change in the inflation and tax rates
can also affects the decision of the company.
Average rate of return:-This method also avoids the time value of money. In addition to
this it consider the projected profit not the real cash flows. Moving on with this method will
create a problem for a company in long run.
CONCLUSION
In accordance to the above report it can be concluded that CFO of Asol Ltd. should
purchase the share of Next plc in order to get higher returns, because financial position of Next
plc is much favourable as compared to H&M. Thus, on the basis of the investment appraisals
techniques it is suggested that Hilltop should go on with project A and purchase machine 1 in
order to yield high rate of return at the end of the five years time period.
REFERENCES
Books and Journals
Ahmed, A.S. and Duellman, S., 2011. Evidence on the role of accounting conservatism in
monitoring managers’ investment decisions. Accounting & Finance, 51(3), pp.609-633.
Anandarajan, M., Anandarajan, A. and Srinivasan, C.A. eds., 2012. Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Atrill, P. and McLaney, E.J., 2006. Accounting and Finance for Non-specialists. Pearson
Education.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Brown, P., Beekes, W. and Verhoeven, P., 2011. Corporate governance, accounting and finance:
A review. Accounting & finance, 51(1), pp.96-172.
Chan, K.C. and Liano, K., 2009. Threshold citation analysis of influential articles, journals,
institutions and researchers in accounting. Accounting & Finance, 49(1), pp.59-74.
Götze, U., Northcott, D. and Schuster, P., 2008. Investment appraisal. Methods and Models,
Berlin, Heidelberg 2008.
Haka, S.F., 2006. A review of the literature on capital budgeting and investment appraisal: Past,
present, and future musings. Handbooks of Management Accounting Research, 2, pp.697-
728.
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Karande, P. and Chakraborty, S., 2012. Application of multi-objective optimization on the basis
of ratio analysis (MOORA) method for materials selection. Materials & Design, 37,
pp.317-324.
Kavanagh, M.H. and Drennan, L., 2008. What skills and attributes does an accounting graduate
need? Evidence from student perceptions and employer expectations. Accounting &
Finance, 48(2), pp.279-300.
Taylor, S.J., 2007. Modelling financial time series.
Online
Ratio analysis: application, Limitations and Dangers-A perspective, n.d. [Pdf]. Available
through: <https://www.finsia.com/docs/default-source/jassa-new/jassa-1976/ratio-analysis-
applications-limitations-and-dangers-a-perspective.pdf?sfvrsn=2>. [Accessed on 26th
February, 2016].
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