A Financial Analysis of Next

A Financial synopsis of following(a) By Tingyu WANG AC2407 Shakil Iqbal Patel Tuesday, 1st November, 2011 CONTENTS 1. Introduction3 2. Roles of Accounting and stomach3 3. Financial Analysis4 3. 1. Discussion of close4 3. 2. pay of nigh5 3. 3. balance Analysis6 3. 4. Application of cases to nigh9 4. Conclusion10 5. References10 6. Appendices11 1. Introduction Accounting is the process of recording, classifying, and covering and interpreting the fiscal data. (Johal et al, 20102). Accounting provides a key source of information roughly a occupancy to those who need it, such(prenominal) as managers or owners.The framework gets money and hit pile be monitored, planned and controlled. It is essential to the running of either business or organization. (Jones, 20063). Finance exists to help users to make better decisions and is refer with the pecuniary support and investing activities of the business. (Eddie et al, 200521). This essay will discuss the roles of method of accounting and finance inside an organization and include a pecuniary analysis of NEXT, which by the following structure the next fraction identifies the roles of accounting and finance to NEXT.Section tether makes some financial analysis, including the discussion of NEXT, evaluation of its finance, and balance 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 are three main roles of accounting and finance within an organization. * Financial Accounting Deals with the mechanistic bookkeeping progress and the preparation and commentary of the financial accounts. For companies, it also includes the preparation of the annual cut through.It concludes measuring and reporting financial scene, financial performance and anlaysing and interpreting financial statements. (Jones, 200613). * Financial Management It is about managing the sources of finance of an organization whic h involves managing the working uppercase (that is, short-term assets and liabilities) of a gild or finding the cheapest form of borrow. (Jones, 200614) * Management Accounting guarantees the internal accounting of an organization. It consists of costing, budgeting, standard costing, short-term decision making, strategical solicitude accounting, capital investing 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 pure tone fashion and accessories for men, women and children together with home products. The company was founded by Joseph Hepworth in Leeds in 1864. The prime(prenominal) 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 launchinged an online roll for the United States offering clothing, shoes and accessories.It distr ibutes by three main channels Next Retail, a chain of more(prenominal) than(prenominal) than 500 stores in the UK and Eire NEXT Directory, a home shopping catalogue and website with nearly 3 million active customers and NEXT International, with more than clxxx stores around the world. NEXT also has a growing website capability in more than 30 countries worldwide. (Next Corporate, 2011). In UK, there are three standardized 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 have online go and various strategies.It is limpid to increase competition to NEXT. While for NEXT, they use their influence to promote advantageously practice and raise awareness, believe working together in federation is the best way they can make a positive difference. use approach to improve energy skill and reduce energy use, sully waste produced and increase the qualit y recycled, increase the efficiency of their delivery egest help NEXT to increase revenues, pay, requital 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 multiplication (2011), FTSE cytosine 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 meshing by 50 percent. The fact claims that NEXT have a particularised operational strategy make brilliant finance performance. 4. 2. Finance of NEXT The sources of finance of NEXT were used include following * Use of notes According to NEXT report (2010), the company use bills 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 parcel out payables in 2011 than 2010, it del ays payment to creditors can keep cash longer. Suppliers are in force out offering a business an wager-free loan, the period of the loan is extended and funds can be retained within the business. (Peter et al, 2008395). ?Tighter credit control every(prenominal) customers who wish to mass on credit terms are sphere to credit verification procedures. (NEXT plc, report of 201079). It is possible for the business to reduce the dimension of assets held in this form and so deform funds for other purposes. 2) semipermanent Retained profit From 2009 to 2011, the profit earnings have been increasing from ? 1523. 2, ? 1615. 2, to ? 1782. 6. (NEXT, 2010 46) The mesh are retained within the business rather than being distributed to shareholders in the form of dividends, the funds of business are increase. * External Sources of Finance (1) semipermanent ? Ordinary shares For NEXT, the ordinary shares were changed several clock time at different time because of the high lay on the lin es associated with this form of enthronisation, 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 legal age of lending banks gave written to notice to the company within 30 age of the change of control. In addition, there are some security complaisant 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 ductile 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 decreased power train 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 cushy to arrange as the size of bank overdraft can be increase or decreased. Debt factoring Take over NEXTs debt compendium agencies. It can result in savings in credit management and create more certainty with the cash flows. It can also release the time of key personnel for more profitable activities. (IBID425) 4. 3. proportionality Analysis utilityability Year 2011 Year 2010 crude Profit Margin 29. 21% 29. 26% winnings Profit Margin 16. 67% 15. 58% subject on Capital Employed (ROCE) 60. 01% 56. 72% summation disorder 3. 60 3. 64 The raw profit gross profit margin was decreased 0. 05% from 2010 to 2011. The lower the gross profit margin, the worse for the company.The decline in this ratio is because of the change in the cost of goods sold, the stock sell more expensiv e this year more inventory wastage and fewer products selling than last year. The net profit margin increased 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 derangement decreased 0. 04. This result is affected by the increased ROCE.The smaller, the worse for the company. competency Year 2011 Year 2010 Inventories Turnover 55. 0 years 46. 8 days concern Receivables Turnover 56. 4 days 55. 7 days exchange 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 mor e 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 right away 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 concur 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 Quick 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 high 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 Structure Year 2011 Year 2010 geared wheel 49. 1% 55. 7% recreate get over 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 change magnitude long-term debts. Generally, a figure over 2 is needed to be on the safe side. (Patel, 20104). It is positive f or 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 viewing 3. 1 times 3. 4 times reelect on fair-mindedness (ROE) 2. 7 1. 7 The latest price earnings ratio (PE) is = 11. 44 (Financial quantify 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 accompaniment of a high value, greater than 1, takes 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 e quity.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 interpreted 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, s hort-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 found 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. Fi nally, 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 accounting and financial management. To sexual union up, financial analysis is the important 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 learner 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 100 Drops t o 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. lendable 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% send away Profit Margin = Profit before Taxation and InterestSales *100% FY 2010 internet 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 slight 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) force 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 disdain 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