Financial Ratio Analysis of Next Plc: A Comprehensive Report

Desklib provides past papers and solved assignments for students. This report analyzes Next Plc's financial health using ratio analysis.

PRINCIPLE OF FINANCIAL ACCOUNTING
1

Table of Contents
Introduction......................................................................................................................................3
Ten ratios to be chosen for the analysis...........................................................................................4
Commentary on the rationale...........................................................................................................6
Conclusion.....................................................................................................................................13
Reference List................................................................................................................................14
2

Introduction
The term “Financial Accounting” helps the business entities to perform the necessary activities
that help them to analyse the “statement of financial position”. These are significant for the
business entities to perform those activities. “Ratio analysis” is done by the business entities to
analyse the “statement of financial position” for them. This helps the business entities to check
the position they are in. These are significant for them to work on the things so that they improve
the negative aspects. The assignment will consist of the “analysis of the financial statement” by
means of performing the “ratio analysis”. The explanation of “those ratios” will also be provided
for the business entity to understand.
Company Overview
The business entity that is chosen for the research is Next Plc. This business entity is into the
domain of retail of clothing, products of the home and footwear. This multinational company is a
British entity. The headquarters of the business entity is located in Enderby, London, United
Kingdom. They are now at the top of the market in selling clothing products in the market of
United Kingdom. They have registered their name in the FTSE 100 under the London Stock
Exchange. According to the reports of 2018, about eight hundred stores of Next Plc are present
in the world. The chairperson of Next Plc is Michael Roney. According to the reports of 2018,
the revenue that is earned by the company is £ 4,055.5 million; “the operating income” of the
business entity is “£759.9 million”; “the net income” of the business entity is “£591.8 million”.
There are 43970 people working for the business entity next plc.
3

Ten ratios to be chosen for the analysis
Ratio Analysis Formulae
201
7
201
8
“Efficiency”
“Accounts Receivable
Turnover” = “Sales/ Average Accounts Receivable”
3.8
3
3.5
0
“Asset Turnover Ratio” = “Net Sales/ Average Total Assets”
1.7
3
1.6
3
“Investment”
“P/E Ratio” = “Share Price/ Earnings Per Share”
4.3
8
4.1
6
“Earnings Per Share”
= “Net Income- Preferred Dividends/ Weighted Average
Share Outstanding”
9.7
5
5.9
3
“Financing”
“Debt Ratio” = “Total Liabilities/ Total Assets”
1.7
9
1.8
8
“Liquidity”
“Current Ratio” = “Current Assets/ Current Liabilities”
2.2
9
1.9
7
“Quick Ratio”
= “(Current Assets-Inventories-prepaid Expenses)/ Current
Liabilities”
1.5
4
1.3
3
“Profitability”
“Gross Profit Margin” = “(Gross Profit/ Revenue)*100” 34 33
4

% %
“Net Profit Margin” = “(Net Profit/ Revenue)*100”
16
%
15
%
“Operating Profit
Margin” = “(Operating Profit/ Revenue)* 100”
20
%
19
%
Table 1: Ratio Analysis of Next Plc
(Source: Created by the learner)
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Commentary on the rationale
There are a number of ratios that are performed by the business entity Next Plc. This makes the
people and the management of the business entity to understand about different types of aspects
that are found from the “analysis of financial statements”. These help the business entity to
improve from the past by performing and taking the right activities that are present in the
business. The explanation of all the ratios will be provided below for all the necessary
information of the business.
“Accounts Receivable Turnover”
2017 2018
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Revenue
Average Accounts
Receivable
Figure 1: Graphical Representation of Accounts Receivable Turnover
(Source: Created by the Learner)
This very significant thing needs to be performed to check the amount of accounts payable is due
for the debtors of the business firm. The less is the ratio the better it is for the business firm. This
is very vital for the business entity Next Plc. From table 1, it can be observed that there is a
reduction in the accounts receivable turnover from 3.83 in the year of 2017 to 3.50 in the year of
2018. Thus, it can be commented that there is a reduction of “the accounts receivable” and as
well as increase in the sales of the business firm. These are very important for the business entity
Next Plc.
6

“Asset Turnover Ratio”
2017 2018
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Revenue
Total assets
Figure 2: Graphical Representation of Asset Turnover Ratio
(Source: Created by the Learner)
This is another vital ratio that is followed by the business entity Next Plc. The reason behind this
is that it helps the business firm to understand about the turnover of the assets in its relation to
sales of the business. From table 1, it can be observed that there is a decrease in the trend of
“asset turnover ratio”. The ratio fell from 1.73 in 2017 to 1.63 in 2018. This information provides
that the business is growing positively and there are no problems in the business in relation to the
assets of the business. This is another significant result for the business entity Next Plc.
“Price to Earnings Ratio”
This is another vital ratio that is performed by the business entities. This is done to check the
relation of price of the share with the earnings that are received by the business entities per share.
It can be observed from table 1, that there has been a reduction in the ratio from 4.38 in 2017 to
4.16 in 2018. This suggests that the business entity Next Plc is falling backward and they need to
improve from the situation as soon as possible. There is a rise in “the price of the shares” but the
earnings have not increased in the same rate. There is a necessity for Next Plc to improve from
the situation they are in.
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“Earnings per Share”
This is another vital ratio that is being performed by the business entities. This helps the business
entities to check the per share earnings on the shares sold by them. It can be seen from table 1,
that there is a huge reduction in the per share earnings of Next Plc. The reason behind this is that
there has been an increase in the price of the shares but there has not been increase in the
earnings to that level. This is not an impressive result for the business firm Next Plc. They need
to improve their situation in the future to provide better service to the people.
“Debt Ratio”
2017 2018
0
500
1000
1500
2000
2500
3000
Total liabilities
Total assets
Figure 3: Graphical Representation of Debt Ratio
(Source: Created by the Learner)
This is a vital thing for the business firm Next Plc. The increase or decrease in the debt can be
checked. From table 1, it can be observed that there has been an increase in the “debt ratio”.
There is a rise from 1.79 in 2017 to 1.88 in 2018. It shows that there has been a rise in “the total
liabilities” but for “the total assets”, the rate is not increasing in the same speed. This is a concern
for the business entity and they should look into the matter and solve them by controlling the
liabilities of Next Plc.
“Current Ratio”
8

2017 2018
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Total current liabilities
Total current assets
Figure 4: Graphical Representation of the Current Ratio
(Source: Created by the Learner)
“Current Ratio” is another “significant ratio” that is being performed by the business entities to
ensure the condition of “the current assets” and “the current liabilities” of the business. From
table 1, it can be observed that there is a reduction in “the current ratio”. The reason behind this
is that there has been an increase in both the aspects but the increase in “the current asset” is
happening in a much lower rate than that of the increase of “current liabilities”. This needs to be
checked by the business firm.
“Quick Ratio”
This is another significant ratio that is being followed by the business entities to exclude the
prepaid expenses and the inventories from “the current assets” to calculate the capability. From
the above table it can be observed that there has been a decrease in the quick ratio. This is a very
big concern for the business and they need to rectify.
“Gross Profit Margin”
9

2017 2018
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Revenue
Gross profit
Figure 5: Graphical Representation of the Gross Profit Margin
(Source: Created by the Learner)
The “margin of gross profit” is a significant ratio that needs to be performed by the business
entities to check for the percentage of gross profit that has been earned after deducting the gross
exoenses of Next Plc. It can be observed from table 1, that there has been a decrease in the
margin of gross profit from 34% in 2017 to 33% in 2018. The main reason for this is that there
has been a decrease in the revenue of the business and as well as increase in the expenses.
“Net Profit Margin”
10

2017 2018
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Revenue
Net income
Figure 6: Graphical Representation of Net Profit Margin
(Source: Created by the Learner)
“The margin of net profit” is another vital aspect of the business. It can be observed from table 1
that there has been a decrease in the margin of net profit for the business entity Next Plc. This
needs to be checked by the business firm so that they can decrease the expenses of the business.
“Operating Profit Margin”
2017 2018
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Revenue
Operating income
Figure 7: Graphical Representation of Operating Profit Margin
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(Source: Created by the Learner)
“The margin of operating profit” is another important ratio for the business firm to look at. From
table 1, it can be observed that there has been a reduction in “the operating profit” and increase
in the expenses. This is another area of concern for the business entity Next Plc.
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