A Financial Analysis of Next

A pecuniary Analysis of bordering By Tingyu WANG AC2407 Shakil Iqbal Patel Tuesday, 1st November, 2011 CONTENTS 1. Introduction3 2. Roles of Accounting and Finance3 3. Financial Analysis4 3. 1. Discussion of NEXT4 3. 2. Finance of NEXT5 3. 3. Ratio Analysis6 3. 4. Application of roles to NEXT9 4. Conclusion10 5. References10 6. Appendices11 1. Introduction Accounting is the process of recording, classifying, and circulateing and interpreting the monetary data. (Johal et al, 20102). Accounting provides a key source of discipline about a line of reasoning to those who need it, such as managers or owners.The framework makes currency and profit can be monitored, planned and controlled. It is essential to the rill of any melodic phrase or organization. (Jones, 20063). Finance exists to help users to make better decisions and is concerned with the financing and investing activities of the business. (Eddie et al, 200521). This act will discuss the roles of accounting and fall in within an organization and include a financial analysis of NEXT, which through the following structure the next section identifies the roles of accounting and finance to NEXT.Section lead makes rough financial analysis, including the discussion of NEXT, evaluation of its finance, and ratio analysis. The fourth section is to examine the application of roles to NEXT. The final section is to make conclusion. 2. Roles of Accounting and Finance There be three main roles of accounting and finance within an organization. * Financial Accounting Deals with the mechanistic bookkeeping progress and the preparation and interpretation of the financial accounts. For companies, it also includes the preparation of the annual report.It concludes measuring and reporting financial position, financial per mastermindance and anlaysing and interpreting financial statements. (Jones, 200613). * Financial Management It is about managing the sources of finance of an organization which involves managing the working gravid (that is, short-term assets and liabilities) of a connection or finding the cheapest make water of borrowing. (Jones, 200614) * Management Accounting showings the internal accounting of an organization. It consists of speak toing, budgeting, standard costing, short-term decision making, strategic circumspection accounting, capital investment appraisal and discounted cash flow. IBID). 3. Financial Analysis 4. 1. Discussion of NEXT NEXT plc is a UK based retailer offering exciting, beautifully designed, splendid quality fashion and accessories for men, women and children unneurotic with home products. The partnership was founded by Joseph Hepworth in Leeds in 1864. The first NEXT shop opened on 12 February 1982. In 1986, Davies moved the headquarters from Leeds to Leicester, to be closer to the main garment manufacturers. In autumn 2009, NEXT plc launched an online catalogue for the United States offering clothing, shoes and accessories.It distributes thr ough three main channels Next Retail, a chain of more than 500 stores in the UK and Eire NEXT Directory, a home shopping catalogue and website with nearly 3 zillion active customers and NEXT International, with more than 180 stores around the world. NEXT also has a growing website capability in more than 30 countries worldwide. (Next Corporate, 2011). In UK, there be three analogous brand companies like Top shop, Monsoon, and Aquascutum. They all operate as similar home products as NEXT, like clothing, footwear, and accessories for men, women and children and piss online serve and heterogeneous strategies.It is apparent to increase competition to NEXT. While for NEXT, they use their influence to promote good practice and raise aw areness, believe working together in partnership is the best way they can make a positive difference. Using approach to improve cypher efficiency and reduce energy use, minimize waste produced and increase the quality recycled, increase the efficien cy of their delivery fleet help NEXT to increase revenues, profits, earnings per share and dividends per share from 2010 to 2011. It is believed that NEXT will have a brighter future. (IBID).According to the report in Financial Times (2011), FTSE carbon drops to fortnight-low, while NEXT was up 2. 9 percent to ? 26. 14, which plans to launch a fixed-odds sports book next year could boost group profit by 50 percent. The fact claims that NEXT have a specific operating scheme make brilliant finance performance. 4. 2. Finance of NEXT The sources of finance of NEXT were used include following * Use of funds According to NEXT report (2010), the company use funds for registered charities, groups or organizations and purchased a further ? 1. 4million shares at a cost of ? 28million. * Internal Sources of Finance 1) Short-term ? Delay payment to creditors For NEXT, the business has more trade payables in 2011 than 2010, it delays payment to creditors can keep cash longer. Suppliers are in effect offering a business an interest-free contribute, the period of the loan is ex head for the hillsed and funds can be retained within the business. ( prick et al, 2008395). ?Tighter credit control All customers who wish to trade on credit terms are subject to credit verification procedures. (NEXT plc, report of 201079). It is possible for the business to reduce the proportion of assets held in this form and so release funds for other purposes. 2) long-run Retained profit From 2009 to 2011, the profit earnings have been increasing from ? 1523. 2, ? 1615. 2, to ? 1782. 6. (NEXT, 2010 46) The profits are retained within the business rather than being distributed to shareholders in the form of dividends, the funds of business are increased. * External Sources of Finance (1) Long-term ? Ordinary shares For NEXT, the ordinary shares were departd several time at different time because of the high lay on the lines associated with this form of investment, the ordinary shareholders also required a comparatively high rate of return. Loans The unsecured bank loans in 2010 is ? 75million and ? 115million in 2011. Their interest rate are ? 22. 7million and ? 24. 3million. (NEXT, 201047). The companys medium term borrowing facilities may be subject to early repayment if a majority of lending banks gave written to notice to the company within 30 age of the change of control. In addition, there are about security social costs. (NEXT, 201024). This means interest will be paid only on amounts drawn and so the business will not have to pay interest on amounts borrowed that are temporarily surplus to requirements.Term loans tend to be cheap to set up and can be quite flexible as to conditions. Besides, corporate bonds are a type of semipermanent loans. In 2010, it is ? 520. 9million and ? 471. 2million in 2011. The decreased gearing ratio states the company has the lower risk to pay the interests on its loans. (Peter et al, 2008399) (2) Short-term ? Bank overdrafts The bank overdrafts in 2010 is ? 4. 7million and ? 10. 2 million in 2011. It represents a very flexible form of borrows and easy to arrange as the size of bank overdraft can be increased or decreased. Debt factor out Take over NEXTs debt collection agencies. It can result in savings in credit management and create more proof with the cash flows. It can also release the time of key personnel for more profitable activities. (IBID425) 4. 3. Ratio Analysis kaleability twelvemonth 2011 Year 2010 common Profit adjustment 29. 21% 29. 26% profits Profit Margin 16. 67% 15. 58% Return on Capital Employed (ROCE) 60. 01% 56. 72% addition Turnover 3. 60 3. 64 The gross profit allowance was decreased 0. 05% from 2010 to 2011. The lower the gross profit margin, the worse for the company.The drop in this ratio is because of the change in the cost of goods sold, the stock sell more expensive this year more inventory wastage and fewer products selling than last year. The net profit margin in creased 1. 09% due to the expenses being controlled very well. The business can make more profit, means the bigger, the better. The ROCE ratio increased 3. 29%, which comes from the returns from the bank. It measures high efficiency the assets are used to generate profit, the bigger ratio, the better return. The asset turnover decreased 0. 04. This result is affected by the increased ROCE.The smaller, the worse for the company. Efficiency Year 2011 Year 2010 Inventories Turnover 55. 0 days 46. 8 days craftsmanship Receivables Turnover 56. 4 days 55. 7 days look at Payables Turnover 29. 2 days 26. 5 days The inventories turnover increased 8. 2 days. The more frequently stock is turned over the better. The reason of the improvement is the more inventories and lower cost of sales in 2011 than 2010. The trade receivables turnover has a slight increase as at 0. 7 days. It means more cash was tied up in trade receivables for each ? 1 of sales revenue in 2011 than in 2010.Therefore, it is bad for the company. It may because of incurring lower expenses, such as discounts allowed to customers who pay quickly in 2010. The trade payable turnover increased 2. 7 days, in the average length of time that elapsed between buying inventories and services and paying for them. This result depends on the length of credit period agreed with trade creditors. It is beneficial because the business is using free finance provided by suppliers. runniness Year 2011 Year 2010 current Ratio 1. 281 1. 371 Quick Assets Ratio 0. 841 0. 971 The ii current ratios are between 1 and 2. A range from 1 to 2 is considered optimum. (Patel, 201011). It decreased 0. 09 because of the type of the business of NEXT, the higher the ratio, the more liquid the business is considered to be, the decline is good for the company. The quick assets ratio decreased 0. 13 due to stocks removed from the numerator. The optimum range is usually considered to be in the range 0. 75-1. 00. (Patel, 201012). It is o bvious to see that the liquid current assets do not quite cover the current liabilities, so the business may be experiencing some liquidity problems.With the decline of the quick assets ratio, it is beneficial for the company. Capital Structure Year 2011 Year 2010 Gearing 49. 1% 55. 7% Interest Cover 23. 7 time 21. 0 times Broadly, the gearing range 30% 60% is considered OK. (Patel, 20102). The gearing decreased 6. 6%, because it has borrowed more in 2010 than 2011. The higher the gearing, the higher the risk that the business will be unable to pay the interest on its loans or make repayments in times of economic recession. (Jill et al, 2007197) So, this is good for the company. The interest cover increased 2. times, because the decreasing long-term debts. Generally, a count on over 2 is needed to be on the safe side. (Patel, 20104). It is positive for the company, the higher the level of operating profit coverage, the smaller the risk to the shareholders. Investor Year 2011 Year 2010 Earnings per share (EPS) 221. 9p 188. 5p Dividend Cover 3. 1 times 3. 4 times Return on Equity (ROE) 2. 7 1. 7 The latest price earnings ratio (PE) is = 11. 44 (Financial Times 24/10/2011) The latest dividend yield is = 3. 32% (Financial Times 24/10/2011) The EPS increased 33. p because of particular business over time. The bigger, the better for the company. The dividend cover decreased 0. 3 times because of the proportion of earnings have been paid out as dividend is changed. The more usual situation of a high value, greater than 1, shows only a proportion of the profits being paid out as dividend. The higher the figure the more profits have been retained in the business. (Patel, 20107). The ROE was increased 1. 0. It is a very big improvement, because the company put much profit on equity holders than shareholders equity.For the company, the bigger, the better. 4. 4. Application of roles to NEXT Based on the annual report and accounts of NEXT in January 2011, it is one part of financial accounting. The financial statements such as Income Statement, Balance Sheet and Cash Flow Statement show evidence of financial accounting, because all of the finance information and financial ratios can help assessing the financial health of NEXT, and examine various aspects of financial position and performance. They are helpful to plan and control operating purposes for NEXT.By considering the main sources of finance of NEXT to examine various aspects of the capital markets and identifying the factors that must be taken into account when managing the working capital of NEXT, the business can make financing decisions on investment and new objectives and so on. These evidences can be the role of financial management. Because of the management accounting consists of costing, budgeting, standard costing, short-term decision making, strategic management accounting, capital investment appraisal and discounted cash flow. There is no evidence in this case, therefor e, For NEXT, it has no management accounting. . Conclusion In order to make a financial analysis of NEXT plc, the essay was first to identify the three main roles of accounting and finance to an organization, they are financial accounting, financial management and management accounting. After that, it discussed some issues of NEXT, such as the history, size, future, economic climate and topical information and so on. Based on the NEXT annual report and accounts in January 2011, to understand how the company is financed, the report was listed some sources of finance which NEXT used, added the changes and the reasons as well.Following was the ratio analysis for NEXT, including profitability, efficiency, liquidity, capital structure and investment ratios. Through the results, it was clear to see the trend and effects on NEXT. Finally, by examining the annual report and accounts, it has applied the roles of accounting and finance to NEXT. In this case, NEXT plc applied the financial acc ounting and financial management. To sum up, financial analysis is the primal basis for evaluating financial position and operating performance. It also realizes financial goals and the important steps to implement correct investment decisions. . References 1. Johal et al, (2010) in Patel, S. ,(2011), What is Accounting, University of Central Lancashire. 2. Jones, M. (2006), Accounting, John Wiley, Chichester. 3. Eddie McLaney, Peter Antrill (2005) Accounting An Introduction, FT Prentice Hall. 4. Peter Atrill, Eddie McLaney, (2008), Accounting and Finance for Non-Specialists, FT Prentice Hall. 5. Jill Collis and Roger Hussey, (2007), Business Accounting, Palgrave Macmillan 6. Patel, S. , (2010), A Ratio Analysis Worksheet (Part 1and 2), University of Central Lancashire. 7.Financial Times, (2011), FTSE hundred Drops to Fortnight-low, p4, 20 October 2011. 8. Financial Times, (2011), Companies & Markets Retailers NEXT plc, 24th October 2011. 9. NEXT plc, (2010), Annual Report and Acc ounts. 10. Next Corporate, (2011), About Next. Available at http//www. nextplc. co. uk/about-next. aspx. Accessed 25th October 2011 6. Appendices 1) Profitability Ratios Gross Profit Margin = Gross ProfitSales * 100% FY 2010 Gross Profit Margin = 996. 93406. 5 * 100% = 29. 26% 2011 Gross Profit Margin = 1008. 73453. 7 * 100% = 29. 21%Net Profit Margin = Profit before Taxation and InterestSales *100% FY 2010 Net Profit Margin = 505. 3+25. 33406. 5 * 100% = 15. 58% 2011 Net Profit Margin = 551. 4+24. 33453. 7 * 100% = 16. 67% Return on Capital Employed = Profit before Taxation and InterestTotal Assets less Current Liabilities * 100% FY 2010 ROCE = 505. 3+25. 31693. 5-758. 1 * 100% = 56. 72% 2011 ROCE = 551. 4+24. 31792. 3-832. 9 * 100% = 60. 01% Asset Turnover = SalesTotal Assest less Current Liabilities FY 2010 Asset Turnover = 3406. 51693. 5-758. 1 = 3. 64 2011 Asset Turnover = 3453. 71792. 3-832. = 3. 60 2) Efficiency Ratios Inventories Turnover = InventoriesCost of Sales * 365 FY 2010 Inventories Turnover = 309. 02409. 6 * 365 = 46. 8 days 2011 Inventories Turnover = 368. 32445. 0 * 365 = 55. 0 days Trade Receivables Turnover = Trade ReceivableSales * 365 FY 2010 Trade Receivables Turnover = 520. 23406. 5 * 365 = 55. 7 days 2011 Trade Receivables Turnover = 533. 33453. 7 * 365 = 56. 4 days Trade Payables Turnover = Trade PayablesCost of Sales * 365 FY 2010 Trade Payables Turnover = 175. 02409. 6 * 365 = 26. 5 days 2011 Trade Payables Turnover = 195. 52445. * 365 = 29. 2 days 3) Liquidity Ratios Current Ratio = Current AssetsCurrent Liabilities FY 2010 Current Ratio = 1041. 2758. 1 = 1. 371 2011 Current Ratio = 1067. 3832. 9 = 1. 281 Quick Assets Ratio = Current Assets-InventoriesCurrent Liabilities FY 2010 Quick Assets Ratio = 1041. 2-309. 0758. 1 = 0. 971 2011 Quick Assets Ratio = 1067. 3-368. 3832. 9 = 0. 841 4) Capital Structure Gearing = Long-termnon-currentloansTotal Assets less Current Liabilities * 100% FY 2010 Gearing = 520. 91693. 5-758. 1 * 100% = 55. 7% 2011 Gearing = 471. 21792. 3-832. 9 * 100% = 49. % Interest Cover = Profit before Taxation and InterestInterest Payable FY 2010 Interest Cover = 505. 3 +25. 325. 3 = 21. 0 times 2011 Interest Cover = 551. 4+24. 324. 3 = 23. 7 times 5) Investment Ratios Dividend Cover = Profit on ordinary activities after taxationOrdinary equitydividends FY 2010 Dividend Cover = 364. 1108. 5 = 3. 4 times 2011 Dividend Cover = 401. 1129. 6 = 3. 1 times Return on Equity (ROE) = Profit on ordinary activities after taxationEquity ShareholdersFunds * 100% FY 2010 ROE = 364. 1133. 6 * 100% = 2. 7 2011 ROE = 401. 1232. 3 * 100% = 1. 7