Ratio Analysis of Next Plc

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Business Accounts – Assignment I

Introduction

Next plc is a retailer founded 1864 in the United Kingdom, that not only sells men’s, women’s and children’s wear but also has a home ware department. Their clothes wear are stylish but affordable. Throughout the United Kingdom and Ireland there are over 550 Next stores plus 50 franchises operating in Asia, Europe and The Middle East. This report will analyse and outline the company’s profitability, liquidity, solvency and investment potentials based on 15 ratios. All information is taken from the Next plc 2011 statement.

Profitability and Performance
The gross profit ratio indicates that Next plc was able to maintain their gross profit. It has decreased insignificantly by 0.05%. In 2011 the revenue has increased by roughly 47 Million, hence the sales of costs increased proportionally to this. The reason for the increase could be either an introduction of a higher priced product line or merely a purchase of more goods. One reason could be that due to higher demands they had to stock up their inventories. This ratio indicates that the company was able to sustain the same level of costs in year 2011, but also that the trading department successfully negotiated better prices with suppliers. The operating margin has experienced an increase in numbers from 15.55% to 16.64%. It seems that Next plc found a way to control their costs more efficiently. On the income statement one can see that the administration costs and distribution costs have reduced. This could be due to cuts in wages or rent. In general, however, it can be said that Next plc improved their cost accounting. This could be an explanation for the increase in the operating margin ratio. The asset turnover ratio has fallen slightly by 0.05. A reason for this could be slightly higher investments in fixed assets like plant or equipment. All in all though, they have managed to maintain leveraging their assets, but in future they should try to use their existing assets more effectively. One can see that the return on capital employed ratio has experienced a growth of 3.28%. Just as for the operating margin, a possible reason for this could be major cuts in administration expenses and distribution costs. This ratio indicates that the company has increased its efficiency at creating profits out of the money they have invested in and basically proves that Next plc knows how to use their funds successfully and control their costs effectively. In general, these ratios indicate that the profitability and performance of Next plc is very positive.

Liquidity and Efficiency
Liquidity ratios indicate how efficiently a company can pay off its short-term and long-term obligations. The inventory days have increased by 8 days. This shows that they keep hold of their stock for a longer period of time. It seems that the demand for their products has decreased. Trade receivables have increased by 2 days, which means that Next plc receives money from their customers slightly later than in year 2010. A possible reason for this is a general rise in unemployment and hence “limited growths of consumer credit” (Next Plc, 2011). However, receiving money from their customers later than before, the company has managed to pay back their creditors faster in 2011 than in 2010 (trade payable days have decreased by 2 days). This is likely to prove a higher efficiency of balancing costs and revenues on the company’s part. In a wider context approximately 80 days are a relatively long time to repay credits. This could on the one hand demonstrate the creditors’ trust in Next plc and their ability to pay back, but it is also possible that the company simply struggles to pay back credits any earlier. In this case though the trade payable days are probably high due to good negotiations of the purchase department with their suppliers. This assumption is based on the fact that Next Plc has a high amount of cash. The current and quick...
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