This report focuses on financial analysis of Next plc. Next plc's principle activities are high street retailing, home shopping and customer services management. This report has been prepared on the basis of year 2002 and year 2001's annual report of Next plc. As following, the report analyses Next plc's financial position based on the financial statements and its notes to accounts by using concerned ratios and specific points, such as taxation, trends, and future perspectives. Financial status, cash flow and liquidity
Cash generated during 2002 is great. Clearly, from the cash flow, in year 2002, we can see the company has ability to deposited large amount of cash. (annual report pp23) And growth rate of its gross profit margin are around 30% for last three years. (appendix) Therefore in the future, there will be s substantial improvement in both current ratio and the acid ratio if the Next plc didn't buy back shares for the long term growth in earnings per share and did not purchase the fixed assets for the expansion. So I think that the liquidity position will be extremely strong in the future.
Gearing Gearing is relevant to an appraisal of the long-term financial stability of the business. The gearing of NEXT rose steadily from 5. 28%in 2001, 6. 68% in 2002 to 16. 98% in 2003(appendix ) as we might expect as a result of the expansion of stores and branches and the purchases of fixed assets and his own shares. The gearing of New look plc dropped down from 37. 97% in 2001, 21. 92% in 2002 to 12. 53% in2003 During last three years, Next plc keep expanding its trading space. And that might be a reason, which increased the long-term liability.
At the meanwhile, Shareholders' funds over capital employed decrease from 0. 95:1 to 0. 83:1 in last three years due to the purchase of his own shares. This increased the gearing ratio. The gearing ratio of the Next plc has continued to rise in the future due to its strategy of share buyback program and trading space expansion. However the New look has got the same trading space expansion strategy. During these years, the cash that New look deposited keep going up. That might decrease the trading space expansion 's reliability for the liabilities.
In this way, long-term liabilities dropped during last three years! From the point of view of creditors', the higher the level of gearing the higher the level of risk. So if Next plc can't control it properly, the steady increase in total long-term liability as a proportion of total funds is likely to make it restricted for the company to raise new loans in the future, a particularly worrying point when there are indications of potential liquidity problem. Therefore the company must keep a well balance. However the new look is in a quite position and don't need to worry about the future potential liquidity risk.
But if it wants to keep the gearing further decrease, the stable increase in cash is a necessary condition. Performance The Return on Capital Employed has a sharp increase almost 10. 6% in 2001 and remains stably in 2002. The increase in profitability of the business partly is due to the increased investment from nil in 2001 to 200,000 in 2002. This increased 2,200,000 of the interest receivable. Another two reasons are the profit margin and the asset turnover ratios which we can see from the appendix 1, rose steadily during the past three years.
The rising of the profit margin indicated benefits gained from control of expenses or increased sales price. We can see this point from the total expenses. The distribution has slightly increased during the past three year because Next plc emphasized on the qualified customer services such as the better delivery services and the expansion of the product offer. On the contrary, the administrative expenses steadily fell in relation to sales and this is not surprising, since it would expect a part of these costs to be fixed while sales have increased by an average of about 14% each year.
From the whole view, the proportion of the increased percentage of the distribution costs is smaller than the decreased percentage of the administrative expenses, therefore, the total expenses ratio consequently decreased from 19. 33% in 2000 to16. 80% in 2001 and remain stable in 2002. This indicated Next plc has a better control over expenses and it is a sign of good management. It induced the increase of the net profit margin. The increase in asset turnover is attributable both to the tightness of working capital control and an increase in sales in relation to the large expansion of selling spaces during the past three years.