A Financial Analysis of Next

A fiscal Analysis of coterminous By Tingyu WANG AC2407 Shakil Iqbal Patel Tuesday, 1st November, 2011 CONTENTS 1. Introduction3 2. Roles of be system and pay3 3. Financial Analysis4 3. 1. Discussion of following(a)4 3. 2. finance of coterminous5 3. 3. Ratio Analysis6 3. 4. Application of roles to following9 4. Conclusion10 5. References10 6. Appendices11 1. Introduction constitution is the process of recording, classifying, and hatching and interpreting the financial data. (Johal et al, 20102). Accounting provides a signalise source of in stampation ab turn turn up a byplay to those who need it, such as managers or owners.The framework accommodates change and scratch pile be monitored, planned and controlled. It is essential to the running of any melody or organization. (J anes, 20063). Finance exists to help users to make better stopping points and is concerned with the financing and investing activities of the wrinkle sector. (Eddie et al, 200521). This seek willing discuss the roles of accounting and finance inside an organization and admit a financial analysis of bordering, which through the following structure the conterminous section identifies the roles of accounting and finance to NEXT.Section lead makes some(a) financial analysis, including the word of NEXT, evaluation of its finance, and ratio analysis. The fourth section is to examine the application of roles to NEXT. The final exam section is to make conclusion. 2. Roles of Accounting and Finance There be three briny roles of accounting and finance within an organization. * Financial Accounting Deals with the mechanistic book animationing progress and the training and interpretation of the financial accounts. For companies, it similarly includes the preparation of the yearbook subject.It concludes measuring and reporting financial position, financial performance 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 running(a) majuscule (that is, short-term assets and liabilities) of a association or finding the cheapest form of borrowing. (Jones, 200614) * Management Accounting Covers the internal accounting of an organization. It consists of costing, budgeting, standard costing, short-term decision making, strategic instruction accounting, capital investment funds 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, excellent role fashion and accessories for men, women and children together with c all in alling firm products. The corporation was founded by Joseph Hepworth in Leeds in 1864. The first NEXT shop class opened on 12 February 1982. In 1986, Davies moved the headquarters from Leeds to Leicester, to be closer to the main garment manu detailurers. In autumn 2009, NEXT plc launched an online catalogue for the United States offering clothing, shoes and accessories.It distributes through three main transmit 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 cardinal 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, at that place atomic number 18 three analogous brand companies desire crystalise shop, Monsoon, and Aquascutum. They all operate as similar home products as NEXT, like clothing, footwear, and accessories for men, women and children and have online services and mixed strategies.It is obvious to adjoin competition to NEXT. duration for NEXT, they use their influence to promote expert practice and raise awareness, conceptualise working together in partnership is the best way they can make a arrogant difference. Using appr oach to improve strength efficiency and reduce energy use, minimize waste produced and increase the quality recycled, increase the efficiency of their delivery fleet help NEXT to increase revenues, wampums, 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 atomic number 6 drops to fortnight-low, while NEXT was up 2. 9 percent to ? 26. 14, which plans to launch a fixed-odds sports book adjoining year could boost group profit by 50 percent. The fact claims that NEXT have a specific operating strategy make brilliant finance performance. 4. 2. Finance of NEXT The sources of finance of NEXT were apply 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 ? Dela y defrayal 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 please-free loan, the period of the loan is extended and funds can be well-kept within the business. (Peter et al, 2008395). ?Tighter credit control All customers who wish to trade on credit terms are issuance 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-term 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 cosmos distributed to shareholders in the form of dividends, the funds of business are change magnitude. * External Sources of Finance (1) Long-term ? Ordinary shares For NEXT, the general shar es were changed several(prenominal) fourth dimension at different time because of the high risks associated with this form of investment, the workaday shareholders also required a comparatively high rate of return. Loans The unbarred 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 old age of the change of control. In addition, there are some 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 rather flexible as to conditions. Besides, corporate bonds are a type of long-term loans. In 2010, it is ? 520. 9million and ? 471. 2million in 2011. The decrease adapt ratio states the company has the deject 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 ar spew as the size of bank overdraft can be increased or decreased. Debt factoring inject over NEXTs debt collection agencies. It can result in savings in credit management and create more conclusion with the cash flows. It can also release the time of key force-out for more profitable activities. (IBID425) 4. 3. Ratio Analysis wampumability class 2011 family 2010 flagrant meshwork gross profit margin 29. 21% 29. 26% Net good tolerance 16. 67% 15. 58% Return on jacket engaged (ROCE) 60. 01% 56. 72% Asset dollar volume 3. 60 3. 64 The gross profit margin was decreased 0. 05% from 2010 to 2011. The spurn the gross profit margin, the worse for the company.The even out in this ratio is because of the change in the cost of goods sold, the stock take more expensive this year more inventory wastage and fewer products selling than last year. The net profit margin increased 1. 09% receivable 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 make profit, the bigger ratio, the better return. The asset turnover decreased 0. 04. This result is stirred by the increased ROCE.The smaller, the worse for the company. Efficiency course 2011 twelvemonth 2010 Inventories Turnover 55. 0 age 46. 8 days Trade Receivables Turnover 56. 4 days 55. 7 days Trade Payables Turnover 29. 2 days 26. 5 days The inventories turnover increased 8. 2 days. The more much stock is turned over the better. The reason of the improvement is the more inventories and lower cost of gross sales in 2011 tha n 2010. The trade receivables turnover has a dainty 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. liquidity Year 2011 Year 2010 Current Ratio 1. 281 1. 371 lively Assets Ratio 0. 841 0. 971 The two veritable 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(prenominal) 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 obvious 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 social organisation Year 2011 Year 2010 Gearing 49. 1% 55. 7% Interest Cover 23. 7 times 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. Ge nerally, a foresee 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 in style(p) 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, great 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 plane 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 bare-assed 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, therefore, 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 local 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. finished the results, it was clear to see the trend and effects on NEXT. Finally, by examining the annual report and accounts, it has utilize the roles of accounting and finance to NEXT. In this case, NEXT plc applied the financial accounting and financial management. To sum up, financial analysis is the master(prenominal) basis for evaluating financial position and operating performance. It also realizes financial goals and the Copernican steps to implement correct investment decisions. . References 1. Johal et al, (2010) in Patel, S. ,(2011), What is Accounting, University of profound Lancashire. 2. Jones, M. (2006), Accounting, bottom 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 1 and 2), University of Central Lancashire. 7.Financial Times, (2011), FTSE degree centigrade 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 Accounts. 10. Next Corporate, (2011), About Next. Available at http//www. nextplc. co. uk/about-next. aspx. Accessed twenty-fifth October 2011 6. Appendices 1) Profitability Ratios Gross Profit perimeter = Gross Profit gross sales * century% 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 R OCE = 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 busy Assets Ratio = Current Assets-In ventoriesCurrent 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(prenominal) 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