Financial ratios analysis for Next plc
Written by: Anna Janicka
To: John Ogden
Date of report: 16th February 2018
Table of contents:
? 1 Title page
? 2 Table of contents
? 3 Introduction
? 3 Profitability Ratios
? 4 Liquidity Ratios
? 5 Efficiency Ratios
? 6 Capital Structure
? 7 Investment or Shareholders Ratios
? 8 Debentures
? 9 Ordinary share capitals
? 10 Conclusion
? 10 Recommendations
? 10 References
? 11 Appendix A
? 12 Appendix B
? 13 Appendix C
? 14 Appendix D
? 15 Appendix E
This report was requested by John Ogden and must be submitted by 9th February 2018.
The purpose of this report was to compare a chosen company Next plc on their performances of profitability, liquidity, efficiency and capital structure ratios over two consecutive years.
II. Profitability ratio:
Gross Profit Ratio:
For the Gross Profit and Revenue, see Appendix A. Gross Profit Ratio decreased from 34.78% to 33.84% over the year, it tells how the company performance of trading went slightly down. A decrease could be due to a rise in the purchase price with sales prices upheld constant or a decrease in the sales price with purchase costs held constant in the theft/waster of inventory or a combination of all these factors. Based on above calculations, the company should seriously consider raising the selling price and seek to find a cheaper supplier to prevent their trading performance from deterioration.
Operating Profit Ratio:
For the Operating Profit before interest and tax and Revenue, see Appendix A. Operating Profit Ratio has slightly declined from 20.76% to 20.20% over the year. It is in effect a combination of GPR plus the basic ability of the business to control overheads. Here the OPR has decreased, by the loss of control of administrative expenses and distribution costs. The OPR focuses on core business activity and therefore it can be more revealing than NPR. The company would be recommended to be more prudent on over spending their expenses and distribution costs. If their actual profits would have kept pace with the capital invested in the company then the profitability of the company might improve.
III. Liquidity Ratio:
The Current Ratio:
For the Current Assets and The Current Liabilities, see Appendix B. The current ratio has raised from 1.40 : 1 to 2.29 : 1 over the year. An increase in the CR may have been brought by improving time credit control to reduce the time allowed of debtors to pay their debts, this would improve cash flow within CA : acceleration the payment of payables could improve the CR but would not improve cash resources. The company should monitor on a monthly basis and if it does need to be reduced in the CR then needs to be explained and corrected if needed. From only the current assets that current liabilities are paid. The company would be recommended to regular checking its liquidity position to be sure whether or not it does keep the correct balance between having adequate liquidity to meet diligent debts as they fall due, but not tying up overmuch amounts of money in working capital.
The Acid Test Ratio:
For the Current Assets less Stock and the Current liabilities, see Appendix B. The Acid Test Ratio has increased from 0.99 : 1 to 1.67 : 1 over the year. “An increase in the time given by the company’s suppliers or a decrease in the time allowed to trade customers to pay their debts or it can be a combination of both” . Like the CR the ATR has improved over the year. However, stock has slightly fallen with a higher volume of sales activities, it might be due to a fast market. This could indicate that money it is not tied up in the inventory. The ATR assumes that the business is able to pay its CL from CA.
IV. Efficiency Ratios:
Rate of Inventory Turn:
For the Cost of Sales and Stock, see Appendix B. Stock turnover has declined from 64 days to 60 days. This would indicate an improvement in the inventory control procedures within company resulting in the inventory levels failing relative to sales. “The quicker we shift stock the better. The less inventory should be kept and this inventory should be sold as soon as possible” . The longer inventory takes to shift, the greater the storage costs, the more likely working capital is tied up, the greater the chance of inventory write downs through obsolescence/damage. The company should examine the inventory buying policy – perhaps there is a reason for this bulk discount may have been offered. Otherwise smaller and less frequent inventory purchases should be made.
Trade Receivables Collection Period:
For the Credit sales and the Receivables, see Appendices A and B. Trade Receivable Collection Period increased from 91 days to 99 days. This indicates that the company’s time allowed to collect money in from their trade receivables is longer than before. Trade receivables should be encouraged to pay as quickly as possible. “Ideally for the company would be a diversity of customers with not excessive credit limits could be the best option” . Good credit controllers will have different approaches to different customers. Prompt payment discount may be one way of reducing trade receivable days.
Trade Payables Payment Period:
For the Cost of Sales and The Creditors, see Appendices A and B. Trade Payables Payment Period has decreased from 89 days to 82 days. This shows that the company is paying quicker its payables than before. On the other hand, we should pay our payables as late as possible without damaging our relationship with supplies. From all accounts, 82 days seems too long to pay their payables, but this could mean that the company is taking advantage of free sources of credit. This may indicate that the company is in good relations with its suppliers or might be a symptom of financial distress.
V. Capital Structure Ratios:
For the Total Liabilities and the Total Assets, see Appendix B. The debt Ratio has decreased from 86.62% to 78.77% over the year. The company has almost as many assets as they have liabilities. This is a high ratio and the business would have problems getting approved for its loans. The business would be better off looking to equity financing to expand their operations.
For the Profit before interest and tax and interest charges, see Appendix A. Interest Cover declined from 27,44 times to 21,90 times over the year. This indicates that the company has earned enough profit to meet their interest due payments. We see that debt is easily covered from profits, but a decrease has appeared and this must be controlled. The business should be seeking a source of finance to generate profits and be able to pay its interest and that debt.
VI. Investment or Shareholder Ratios:
For the Ordinary Dividends, see Appendix E. The Dividend Yield has marginally declined from 3.17% to 3.13% over the year. This ratio compares the dividend share of the accounting year ended and the current market price of one share. This company could be able to pay its investors a large dividend compared to fair value of their stock. “This would mean that those investors are highly compensated for their investments compare with a lower level of yielding dividend stock” . A company with high yielding shares can attract investors with interest in a stable cash income from their investments.
For the Net profit before tax and Dividends paid and proposes on ordinary shares, see Appendices A and C. The Dividend Cover increased from 1.15 times to 2.81 times over the year. This ratio shows that the company is able to pay the dividend from their available profits. A high cover indicates that the business can more comfortably afford the dividend. The dividend cover raised here, although profits have slightly decreased. Dividends are well covered over the amount retained and reinvested profits of the company. “However, companies are allowed to dip into revenue reserves to pay dividends, even if no profits are made, but this can be done to the shareholders, who relied on a high dividend yield previously” .
Earnings Per Share:
For the Net Profit after tax and The Number of ordinary shares in issue, see Appendices A and D. The Earnings Per Share has slightly declined from 450.5 pence per share to 441.2 pence per share over the year. Companies over the long term look to improve their EPS year on year. A higher EPS indicates higher earnings, strong financial position and an adequate company to invest money in. Companies that want to increase their EPS figure they should consistently year by year compare with a similar size of other companies.
Price Earnings Ratio:
For the Market Price per Ordinary share and the EPS, see Appendix A. The PE Ratio has slightly increased from 11.08 times to 11.42 times over the year. The PE Ratio tells us that it takes 11 years payback period. A company with a high PE Ratio indicates positive future financial performance and investors want to pay more for this company shares. This ratio is useful only if compares with companies the same industry. Companies that expect a great future profits can be in high interest and thus this would rise the market price. If a company’s the PE Ratio rapidly falls then a market price will go down too and investors could leave and this situation will drag the PE Ratio downwards.
Next plc as a large company is liable to use debentures, they rate of interest is fixed. Terminology of debenture nowadays is used as bond, loan stock or note. A debenture is a kind of certificate of lending money or a lend bond proving that a company is liable to repay certain amount plus interest on top of that, the money increased by the debentures or bond and this automatically has been absorbed by the company’s capital structure. If it does not is a case, the mature debentures must be paid before subordinate debentures.
Debentures are held by debentures holders and they are free of charge to be transferred. “Debentures holders they have no rights to vote in the company general meetings or votes” . Debentures are a transferred property, they can be yielded by the company in a kind of “a certificate of indebtedness” , the most important are dates of repayment and payment of interest, there may appear as a charge on the assets.
There also, the risk can be minimised by debtor paying some of the value of the bond after some period of time. This would decrease risk for payables, against inflation, bankruptcy, or other risk. Often companies wish to call their bond sooner that their maturity date. If a bond is called, the company pays out less interest. If a company fails to pay a bond effectively equals bankruptcy. In the UK, debentures are usually secured.
Debentures are divided into two types:
1. “Convertible debentures” , they can be converted into equity shares of the company after a specified period of time. Convertible bonds have lower interest rates than non-convertible bonds.
2. “Non – convertible debentures” , they are regular debentures, company cannot it convert into equity shares. They have usually higher interest rates than convertible debentures.
From the Statement of Financial Position for Next plc, is known that, the company has already used that form of borrowing money, in terms of long – term loan, that is an attractive source of cash inflow and paying fewer interest rate for it, but bearing in mind, it must be repaid effectively.
VIII. Ordinary Share Capital:
Ordinary shares are popular among large companies. “They carry one vote per share, are entitled to participate equally in dividends” .
Some companies have different groups of ordinary shares, i.e. “A – ordinary shares, B – ordinary shares, etc” . This must be done to distinguish a difference between the shares, so different prices may be applied, directors may pay different dividends to its holders. In one company can be ordinary shares of different values, i.e. “£2 ordinary shares and 30p ordinary shares” , when one share has one vote, then the holder of the 30p shares gets 30 votes for each £2 paid.
There are also non – voting shares, with no rights to vote and automatically no right to be a part of general meetings. Those shares are commonly used to be paid to employees, so some of their salaries could be paid in as dividends, that form would be more tax – efficient for a company and employees.
In a case of bankruptcy investors are paid as the latest, as a first are bondholders, payables (including employees), and preferred stock holders. Often happens that, stock investors get nothing.
At the stage of the increased risk, ordinary shares perform better than bonds or preferred shares.
As stated above in my calculations, Next plc has used that source of finance. This finance form performed better than any other way to pay their investors and shareholders and guarantees continuously cash inflows for the company. This attracts more investors and rises share prices up.
In conclusion, Investment Ratio proved that, the company is able to pay its investors a large dividend compared to a fair value of its stock and dividends are well covered over the amount retained and reinvested profits of the company. The EPS shows a high figure compared to their competitors and it can pay higher earnings, this means that, investors are willing to pay more for shares. Overall, this company has strong financial position on the market among their competitors, especially Investment Ratio indicates that Next attracts investors with deep pockets and shows that it is a company reliable to invest money in.
As stated, in category of profitability Next should consider some improvements that need to be made on the GPR i.e. to raise a selling price and seek a cheaper supplier, on the OPR better control on over spending money on expenses and distribution costs.
In category of liquidity the company went quite well, they are able to pay CL from its CA and stock decreased over the year this means that, they do not have money tied up in working capital.
Efficiency Ratios tells us that, in the Inventory Turnover they have declined stock turnover over the year, The TR Ratio shows that, the company should consider a payment discount to reduce trade receivable days.
Next in Capital Structure ratios should be looking to equity financing to growth their operations and seeking a source of finance to generate a higher profit.
HND – MAPC/study notes
HND – Financial Reporting/study notes
HNC – Financial Accounts/study notes
Ex-Divi Date Pay Date Type Dividend Curr. Total
2017-12-07 2018-01-02 H1 dividend (interim) 53 GBX
2017-10-05 2017-11-01 Special Dividend 45 GBX
2017-07-06 2017-08-01 H2 dividend (final) 105 GBX 158
2017-07-06 2017-08-01 Special Dividend 45 GBX
2017-04-06 2017-05-02 Special Dividend 45 GBX
2016-12-08 2017-01-03 H1 dividend (interim) 53 GBX
2016-07-07 2016-08-01 H2 dividend (final) 105 GBX 158