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    Financial Analysis for Next Plc and Marks & Spencer

    University: University of Sydney

    • Unit No: 3
    • Level: Undergraduate/College
    • Pages: 28 / Words 7047
    • Paper Type: Assignment
    • Course Code: FIN 601
    • Downloads: 399
    Question :

    This assessment will cover following questions :

    • Prepare a trend analysis with a commentary indicating the dynamics in the financial performance of the business over the past four financial years.
    • Compare the financial performance of Marks and Spencer's company over the past four financial years.
    • Explain limitations of your analysis and any reservations in the context of Next Plc.
    Answer :

    INTRODUCTION

    The businesses are required to communicate the financial information of company. Financial Accounting refers to specialized accounting  branch keeping track of the financial transactions of company. Companies using standards and guidelines record transaction, summarize and present the information in financial statements or the financial reports. These reports include profit or loss statements, balance sheet  and cash flow statements. Companies are required to make proper reports for enabling the users of financial information to make decisions.  The investment is made by the investors if the financial position and performance of the company is strong. This is analysed using ratio analysis of the financial statements of company. The Report will include the analysis of Next Plc and Marks and Spencer about its profitability, liquidity and solvency ratios. It will also be covering the trend analysis and the comments over the performance of business from view point of investor. This will also be covering the conclusions and recommendations over the financial position of company. Report will give understanding about the ratios and measures that compnay can take for their improvements.

    Next plc

    Marks and Spencer

    2018

    2017

    2016

    2015

    2019-18

    2018-17

    2017-16

    2016-15

    Liquidity ratio

    Current assets

    2032

    1797

    1660

    1642

    1490

    1317

    1723

    1461

    Current liability

    1112

    914

    725

    1170

    2228

    1826

    2368

    2104

    Current ratio

    1.83

    1.97

    2.29

    1.40

    0.67

    0.72

    0.73

    0.69

    Current assets

    2032

    1797

    1660

    1642

    1490

    1317

    1723

    1461

    Inventory

    502.8

    466.7

    451

    486

    700

    781

    758

    799

    Current liability

    1112

    914

    725

    1170

    2228

    1826

    2368

    2104

    Liquid ratio

    1.38

    1.46

    1.67

    0.99

    0.35

    0.29

    0.41

    0.31

    Activity ratio

    Net credit sales

    4167

    4090

    4097

    4176

    10377

    10698

    10622

    10554

    Average account receivable

    1339

    1248

    1125

    1050

    322

    308

    318

    321

    Account receivable turnover ratio

    3.11

    3.28

    3.64

    3.98

    32.23

    34.73

    33.40

    32.88

    Net sales

    4167

    4090

    4097

    4176

    10377

    10698

    10622

    10554

    Average total assets

    2811

    2561

    2404

    2330

    7200

    7550

    8292

    8476

    Asset turnover ratio

    1.48

    1.60

    1.70

    1.79

    1.44

    1.42

    1.28

    1.25

    Profitability ratio

    Operating profit

    762

    759

    827

    866

    162

    156

    253

    584

    Sales

    4167

    4090

    4097

    4176

    10377

    10698

    10622

    10554

    Operating profit ratio

    18%

    19%

    20%

    21%

    2%

    1%

    2%

    6%

    Net profit

    590.4

    591.8

    635

    666

    37

    29

    115

    404

    Sales

    4167

    4090

    4097

    4176

    10377

    10698

    10622

    10554

    Net profit ratio

    14%

    14%

    15%

    16%

    0%

    0%

    1%

    4%

    Debt

    Debt

    905

    908

    913

    615

    1279

    1670

    17117

    17747

    Equity

    553

    482

    510

    311

    2680

    2954

    3150

    3443

    Debt equity ratio

    1.64

    1.88

    1.79

    1.98

    0.48

    0.57

    5.43

    5.15

    EBIT

    762

    759

    827

    866

    162

    156

    253

    584

    Interest expense

    39

    35

    37

    31

    111

    113

    113

    116

    Interest coverage ratio

    19.54

    21.69

    22.35

    27.94

    1.46

    1.38

    2.24

    5.03

    Market ratio

    Net profit

    590.4

    591.8

    635

    666

    37

    29

    115

    404

    Shares outstanding

    14

    14

    15

    15

    406

    406

    405

    412

    EPS

    42.17

    42.27

    42.33

    44.40

    0.09

    0.07

    0.28

    0.98

    Market price

    4478

    5218

    4099

    7180

    277

    301

    319

    411

    EPS

    42.17

    42.27

    42.33

    44.40

    0.09

    0.07

    0.28

    0.98

    PE ratio

    106

    123

    97

    162

    3040

    4214

    1123

    419

     

    Ratio Analysis

    Liquidity Ratios

    Current ratio: It is the ratio that indicate liquidity position of the company (Liang and et.al., 2016). It can be observed that current ratio of Next Plc increased from 1.40 to 1.83 from year 2015 to 2018. Thus, it can be said that on this front Next Plc perform moderate because in year 2017 and 2016 current ratio declined. Still current ratio is 1.83 nearby to 2 which means that Next Plc have current assets nearby to double value of current liability. This may because firm is not using its current assets to finance its business operations. Hence, liquidity position of the company is good. In all four years M&S current ratio value was very lower then Next Plc. Thus, it can be said in terms of performance that Next Plc performs better than M&S.

    Liquid ratio: Liquid ratio is similar to the current ratio but in its calculation inventory value is deducted from the current assets. Liquid assets include those assets that can be converted in to cash at fast pace (KanapickienÄ— and GrundienÄ—, 2015). Liquid ratio of Next Plc increase from the year 2015 to 2016 from 0.99 to 1.67. However, in year 2017 it declines to 1.46 and then in year 2018 to 1.38. Ideal ratio value is 1 and, in all years, Next Plc on this front surpass determined standard. Hence, on this front firm in in good position. M&S observe fluctuation on this front and in year 2016 elevation was observed but then ratio declined in year 2017 and rose to 0.35 from 0.29 in year 2018. Overall, Next Plc perform better than M&S.

    Activity ratio

    Account receivable turnover ratio: This ratio indicates number of times Next Plc convert receivables in to cash in a year (Elhaj,  Muhamed and Ramli., 2015). Receivable ratio of the Next Plc declines consistently from 3.98 to 3.11. Decline is not substantial and it can be said that each year three times firm convert its receivables into sales. On other hand, this ratio value increased from 32.88 to 34.73 in year 2017 but then decline slightly to 32.33. It can be said that M&S on an average quickly convert receivable in to cash then Next Plc and perform better then it on this front.

    Assets turnover ratio: This ratio reflects firm capability to make use of asset to generate sales in the business (Arkan, 2016). Asset turnover ratio of Next plc declined consistently from 1.79 to 1.48 in year 2018. This indicate that firm failed to make effective use of asset in its business. On this front M&S perform better and ratio value elevate from 1.25 to 1.44. Thus, on this front on all four years M&S perform better then Next Plc.

    Profitability ratio

    Operating profit ratio: Operating profit ratio indicate portion of sales that is covered by the operating profit (Morales-Díaz and Zamora-Ramírez, 2018). Percentage dip from 21% to 18% from 2015 to 2018. Thus, decline in percentage reflect that firm failed to maintain control on its direct expenses in the business. On other hand, operating profit ratio of M&S is very low and decline from 6% to 2%. On comparison of ratio it can be said that both firm’s management failed to control operating expense but Next Plc management do better than M&S.

    Net profit ratio: Net profit ratio reflect the portion of sales that is covered by the net profit amount (Shaverdi and et.al., 2016). In case of Next PLC net profit ratio declined from the 16% to 14%. Slight decline is seen in the net profit which happen due to elevation in expenses or mismanagement in the business. In case of M&S pressure is seen on this front and ratio value tumbled from 4% to 0.36%. Thus, M&S failed to curb its indirect expenses. Next PLC performs better than M&S.  

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    Debt ratio

    Debt equity ratio: Debt equity ratio reflect the capital structure of the business firm. Ideal ratio of debt and equity is 50:50. In case of Next PLC it is observed that value of the ratio is fluctuating consistently. In year 2015 it was 1.98 and decrease to 1.79, then it again rose to 1.88 and further decreased to 1.64 in the year 2018. Debt is going to be double then equity which is matter of concern. This may happen because firm is consistently expanding its business. On time debt need to be reduced otherwise in case of economic turmoil its burden may be unbearable for the firm. M&S pay due attention on its capital structure as it can be seen that ratio value was 5.15 and 5.43 in the year 2015 and 2016 but not it now stands at 0.48 in the year 2018. Company do capital restructuring due to unbearable overburden of debt on the business. On this front, M&S is in better position then Next PLC.

    Interest coverage ratio: Interest coverage ratio indicate number of times firm can cover interest payment liability with its operating profit (Misund,  2017). In present case interest coverage ratio of the Next PLC is 19.54 which declined from 27.94 which was in the year 2015. Perform decline but can be considered good because Next PLC can pay 19 times its interest payment liability by using operating profit. In case of M&S ratio declined from 5 to 1.46 in the year 2019. Thus, M&S can only pay interest amount one time by using its operating profit. On this front, Next PLC is in better position than M&S.

    Market ratio

    EPS: EPS stands for earning per share as this ratio reflect the earning that shareholder receive on each unit of equity (Nuryani,  Heng. and Juliesta, 2015). EPS of the Next PLC decrease from 44.40 which was in the year 2015 to 42.17. In all four years this ratio value decline regularly. However, it can be said that there is almost stability in the ratio value. In case of M&S situation is worse and EPS is only 0.09 which is nothing. This reflect that shareholders of M&S are not earning any amount on equity. Next PLC perform better than M&S.

    PE ratio: PE ratio is also known as price earning ratio. This ratio is used for equity valuation. PE ratio of Next PLC was 162 in the year 2015 and it decreased to 97 in the year 2016. Thereafter ratio value elevates to 123 in the year 2017 but again decline to 106 in the year 2018. Overall, it can be said that firm equity valuation is changing consistently. PE ratio of industry is 24.36 which is lower the firm ratio and it can be said that Next PLC shares are overvalued. M&S PE ratio is 3040 which is high and equity is overvalued as EPS is almost zero. Next PLC shares are more fairly valued then M&S PE.

    Trend Analysis

    Last four year trends are indicating that net profit of the business firm is declining consistently by 1% or 2% each year. If this trend remain continue then in that case profitability in the business may shrink. Thus, management need to pay attention on cost control.

    Like net profit operating profit ratio also declined by 1% or 2% each year. This trend is consistent and likely may be observed in the next financial years. Thus, plan must be prepared to control operating expenses in the business.

    Trend is indicating that current ratio is declining but it is already much above standard value. Hence, there is no matter of concern. This ratio may further dips but it will be considered good for the firm because it will mean that Next PLC is making more best use of current assets in its business.

    There is stability in the debt equity ratio from the last four years and in specific range value is moving. Higher debt equity ratio is one of the area which can create big problem for the Next PLC in the upcoming years.

    Business from Investor's point of view

    The investors are very important for company when company is in requirement of funds. It is essential for the businesses to attract the investors to raise the funds. Investors invest in any company for mainly two reasons first for earning returns and for maximising their wealth. The returns should be as per the per the industry trend for attracting the investors or the growth should be higher maximising their wealth over specified. Investors will not be investing in companies whose performance is not strong in the market. The profitability is of major concern for investors. Since the profitability of the company over years has declining trend both in net profit and operating profits. It reduces the return of investors. Debt equity ratio is analysed by investors for assessing the financial risk associated and it has high debt. Investors have to sacrifice their returns due to the finance cost involved in debts. P/E ratio of company is increased to keep the returns constant for the investors. This avoid withdrawal of funds from the equity. The financial position of company is not strong therefore the investments should not be made by investors in such company. 

    Limitation of analysis

    Limitation of analysis is that industry analysis is not undertaken. Many times, performance seems poor but from industry perspective and its current situation same performance may be considered satisfactory. Thus, if there will be industry analysis then in that case analysis can be done in better way. 

    CONCLUSION

    From the research it could be concluded that financial performance of the company is to be analysed before investments are made by investors. The companies and management have to ensure that corrective measures are required to be taken for improving the financial ratios. Profitability ratios should be minimised by adopting the effective cost accounting techniques that helps in keeping the cost within he budgeted level. Resources should be properly allocated where best utilisation can be made. The adoption of new marketing strategies for increasing the sales of company. For raising the results of profitability revenues have to be increased. Liquidity positions can be improved using less of short term debts and effectively using the cash flows of company. They have to ensure that cash is disposed only over the productive areas. Debt ratio of company can be strengthened by raising funds by share capital. Higher debts will increase the risks for company. Market ratios are improved wit the improvement in financial performance fo company.

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