UKFINANCIAL REPORT AND ACCOUNTS
UK FINANCIAL REPORT AND ACCOUNTS 4
Next Plc 4
Debenhams Plc 5
Gross profit margin 6
Net profit margin 6
ROCE (Return on capital employed) 7
Current ratio 8
Working Capital 9
Stock Turnover 9
Debtors Collection Period 10
Creditors’ payment period 10
Financial Structure 11
Gross Profit margin 13
Next Plc 13
Debenhams Plc 13
Net Profit Margin 13
Next Plc 13
For Debenhams 14
For Next Plc 14
Debenhams Plc 14
Current ratio 15
Current ratio for Next Plc 15
For Debenhams Plc 15
Working Capital 15
Stock Turnover 15
Next Plc 15
Debenhams Plc 16
Debtors’ Collection Period 16
For Next Plc 16
Debenhams Plc 16
Creditors Payment Period 17
For Next Plc 17
For Debenhams Plc 17
For Next Plc 17
Debenhams Plc 17
Thefashion and apparel industry has been one of the most fundamentalsectors in the contemporary markets across the globe. Indeed, it iswell acknowledged that numerous companies have not only entered theindustry but also continued to expand and grow beyond the borders oftheir home countries. Of course, the rate of expansion and thepositions or competitiveness of the different business entities willalways be different. In the United Kingdom, two of the largest andmost well established clothing companies are Next Plc and Debenhams.
NextPlc is a British multinational retailer of clothing, home product andfootwear, whose headquarters are in Enderby, Leicestershire. Foundedin 1864 as Joseph Hepworth & Son in Leed, the company has grownto become United Kingdom’s largest clothing retailer by sales andowning more than 700 stores, a bulk of which are located in Irelandand the United Kingdom, while others are scattered across MiddleEast, Europe and Asia (Needles & Powers, 2012). Next Plcincorporates three fundamental channels including Next Internationalthat has more than 180 international stores, Next Retail, which is achain of more than 500 retail branches located in Ireland and theUnited Kingdom, as well as Next Directory, which is a home shoppingwebsite and catalogue that boasts over 3 million active customers(Needles & Powers, 2012). However, Next Plc has been facingimmense competition from other players in the industry particularlyMarks & Spencer, which it replaced as the largest clothingretailer by sales in the home country. On the same note, there arenumerous other players and new entrants into the industry, includingRiver Island and Topman among others. Given the outstanding feat thatthe company has accomplished in moving from being a small tailor shopto being part of the FTSE 100 index and having a profit of more than£550 million, it is imperative that one examines not only theenvironment within which it operates but also compares it with theother players in the industry. Scholars have underlined the fact thatthe company incorporates a distinctive collection of attribute thatdemonstrate a strong position in the current market and an optimisticfuture (Needles & Powers, 2012).
DebenhamsPlc also is a multinational British retailer whose operations areconducted in department store format. Like Next Plc, Debenhams has alarge number of its stores in Ireland and the United Kingdom, as wellas franchised operations in other countries (Stickney, 2010). Thecompany was established in 1778 in 44 Wigmore Street in London. Inspite of the humble beginnings as a drapers store in 18thcentury, the company has grown to incorporate 178 locations scatteredacross Denmark, United Kingdom and Ireland. It mainly sellsfurniture, household items and clothing and has gained immensepopularity since 1993 as a result of the “Designers at Debenhams”brand image (Stickney, 2010).
Analysisof financial reports
Everybusiness entity gets into a particular industry in an effort toincrease its profits and sustainability in the long-term andshort-term. There are numerous ways in which the profitability of acompany can be determined.
Gross profit margin
Inthe case of Next Plc, the gross profit margin has been on aconsistent upwards trend from 2012 to 2014 albeit by considerablysmall margins. This is indicative of the increasing financial healthof the company. In general, it is always imperative that the grossprofit margin of any business entity remains stable and not fluctuatemuch from a particular period to the other, of course, unless thereare drastic changes in the industry within which the company operatesthat would affect the pricing policies and the cost of goods sold. Inessence, the measured variation in the gross profit margin is prettymuch a good sign (Sutton, 2003).
However,it is worth noting that that the gross profit margin remains at the0.3 range. This implies that in all the years under consideration,the products that the company has been selling are marked up at 50%.Of course, the metric comes in handy in comparing a company withothers in the same industry (Maynard, 2013). Given that Debenhams Plcis one of the major competitors of Next Plc, an examination of itsgross profit margin would also be imperative. On the good side, anexamination of the gross profit margins for Debenhams Plc revealsthat there has been considerable stability, where the margin hasremained at 12%-13.5%. this shows that there has not been aconsiderable change in the prices of products. However, the Grossprofit margin for this company is way below that of Next Plc. It isworth noting that highly efficient companies have higher gross profitmargins, in which case Next Plc can be said to be more efficient thatDebenhams Plc.
Net profit margin
TheNet profit margin underlines the percentage or proportion of revenuethat remains after the deduction of all operating expenses, taxes,preferred stock dividends and interest from the total revenue. All inall, it is well acknowledged that the Net profit margin of anycompany is always examined since it demonstrates the performance of acompany in the conversion of the revenues to profits that can beavailed to the shareholders (Lewis & Pendrill, 2000). However, itis noteworthy that the net profit does not measure the amount ofmoney that a company has made within a particular period since theincome statement incorporates other non-cash expenses such asamortization and depreciation.
TheNet profit margin = (Total Revenue-Total expenses)/total profit= Netprofit/total revenue
Anexamination of the net profit margin of the two companies also showsthat Next Plc is considerably more efficient in its conversion ofsales into profits. This is because its NPM is way above that ofDebenhams Plc. The decline in the net profit margin of Debenhams Plcmay be attributed to varied problems ranging from a reduction insales to inefficient or poor customer experience and insufficientmanagement of expenses.
ROCE (Return on capital employed)
Thisfinancial ration measures the profitability of a company, as well asthe efficiency of the employment of capital/. Given that Next Plc hasa higher ROCE than Debenhams Plc, it is deducible that Next Plc ismore efficient in the manner in which it utilizes its capital. Due tothe enhanced profitability, there was an increase in the return oncapital employed from year 2012 to 2013. However, the same cannot besaid of year 2014 since the company experienced a slight reduction inits ROCE. Nevertheless, the low ROCE that is exhibited by DebenhamsPlc is indicative of the inefficient employment of capital, in whichcase it is not generating shareholder value. A higher value is alwaysmore preferable since it implies that a higher amount of dollarprofits have been generated by every dollar of capital that has beenutilized. In instances where companies borrow at a rate higher thantheir rate of return, they would be losing money. Nevertheless, theamount of assets that a company possesses may either hinder or assistit in achieving a high return. Indeed, companies that have minutesmall amounts of assets but enormous profits have higher return thattheir counterparts that have higher amounts of assets and similarprofits.
Liquidity Current ratio
Thecurrent ratio is a form of liquidity ratio that evaluates thecapacity of the company to pay or settle its short-term obligations(Rajasekaran, & Lalitha, 2011). For the two companies, it isevident that the trends of the current ratios have been quite varied.In the case of Next Plc, the current ratio has moved from 1.535 anddropped back to 1.4801 only to make a big leap to 2.56 in 2012, 2013and 2014 respectively. This is quite different from the case ofDebenhams Plc, whose current ratio has been stable at 0.63 in 2012and 2013, only making a slight increase to 0.64in 2014. Of course,this is indicative of the efficiency of the two companies’operating cycles, as well as their capacity to turn their products tocash. In general, companies strive to maintain current ratios of atleast 1so as to ensure that the current assets value cover at leastthe short-term obligations’ value. The increased current ratio inthe case of Next Plc is indicative of enhanced liquidity, although itmay also show that the company has adopted a more traditional orconservative approach to the management of working capital. Of coursea decreasing trend demonstrates that the company is experiencingdeteriorating liquidity position or even a leaner working capitalcycle via the adoption of highly efficient management practices(Rajasekaran, & Lalitha, 2011).
Working Capital Stock Turnover
Thisis also an efficiency ratio demonstrating the effectiveness of acompany in the management of inventory through a comparison of thecost of goods sold with the average inventory period. In instanceswhere larger amounts of inventory are bought in the course of theyear, the company must sell larger amounts of inventory so as toenhance the turnover, failure to which it would incur holding costs.
Formula=Costof goods sold/average inventory or sales over inventory
Thetwo companies have quite high stock turnover. Nevertheless, Next Plchas an increasing stock turnover while Debenhams has an erratic stockturnover. Given the higher stock turnover of Next Plc, investorswould deduce that the company is not overspending through purchasingtoo much inventory and wasting resources on the storage ofnon-salable inventory. On the same note, this may be indicative ofthe liquidity of the company’s inventory. In instances where thereis a reduction in the inventory turnover, the company would beholding higher amounts of non-salable stock, which would essentiallybe worthless to the company.
Debtors Collection Period
Thisunderlines the average number of days that a business takes beforereceiving the money that customers owe it. It is more preferable thatthe debtors pay back the company sooner rather than later, in whichcase a business with shorter debtors’ collection period arepreferred (Graham & Carmichael, 2012).
Thedebtors’ collection period= average accounts receivable/(annualsales/365 days).
Thenumber of days taken before the debtors pay their dues to the twocompanies is quite different. It is noted that in the case of NextPlc, the number of days have been increasing from 71 days to 73 and74 days in 2012, 2013 and 2014 respectively. This means that thecompany is becoming considerably inefficient in the collection of itsdebts. The same, however, cannot be said of Debenhams as its debtors’collection period has remained static at 12 days.
Creditors’ payment period
Thecreditors’ payment period, on the other hand, underlines the numberof days taken before a company can settle debts pertaining to itsinvoices from trade creditors like suppliers. This may be calculatedas ending accounts payable/ (cost of sales/number of days). Moreoften than not, it is deemed more desirable that companies have aconsiderably longer period before paying its creditors as this wouldmean that the company has much more money at hand (Tulsian, 2006). Inthis case, it would seem that Debenhams is operating at a morepreferable system compared to Next Plc. However, it is worth notingthat long repayment periods may also bring loses to companies as somecreditors have the tendency to offer discounts to clients who payfast (Tulsian, 2006).
Financial Structure Gearing
Thisunderlines the level of a business entity’s debt related to theequity capital. This measures the financial leverage of the businessentity and depicts the extent to which the operations are financed bylenders vs. the shareholders. It may be calculated by adding up thelong-term debt, short-term debt and bank overdrafts and dividing thesame by the shareholders equity (Elliott & Elliott, 2008).
Ofcourse, it is well acknowledged that an acceptable level of ratios isdetermined through comparing a company’s ratio with that of othersin the industry. Nevertheless, companies that have high gearing orleverage may be more vulnerable to downturns in the cycle of businesssince they have to persistently service their debts irrespective ofthe performance of their sales. In essence, it may be concluded thatNext Plc has considerably less risk compared to the Debenhams Plc.However, the low leverage may also be indicative of conservativefinancial management or may imply that companies are situated inhighly cyclical industries in which case they cannot afford to beover-extended as a result of inevitable downturns in profits andsales (Banerjee, 2005).
Banerjee,A. (2005). Financialaccounting: A mangerial emphasis.S.l.: Excel.
Elliott,B., & Elliott, J. (2008). Financialaccounting and reporting.Harlow: Financial Times Prentice Hall.
Graham,L., & Carmichael, D. R. (2012). Accountants`handbook.Hoboken, N.J: Wiley.
Lewis,R., & Pendrill, D. (2000). Advancedfinancial accounting.Harlow: Financial Times.
Maynard,J. (2013). Financialaccounting, reporting, and analysis.Oxford: Oxford Univ. Press.
Needles,B. E., & Powers, M. (2012). Financialaccounting.Mason, OH: South-Western Cengage Learning.
Rajasekaran,V., & Lalitha, R. (2011). Financialaccounting.New Delhi: Dorling Kindersley.
Stickney,C. P. (2010). Financialaccounting: An introduction to concepts, methods, and uses.Mason, OH: South-Western/Cengage Learning.
Sutton,T. (2003). Corporatefinancial accounting and reporting.Harlow: Financial Times Prentice Hall.
Tulsian,P. C. (2006). Financialaccounting. India : Dorling Kindersley
AppendicesProfitability Gross Profit marginNext Plc
Grossprofit margin= (revenue – Cost of Goods sold)/revenue
In2012, the gross profit margin for Next Plc= (3441.1- 2395.8)/3441=1045.3/3441.1= 0.3038
In2013 the Gross profit margin for the Next Plc =(3547.8-2431.1)/3547.8=1116.7/3547.8= 0.3148
In2014, the gross profit margin was = (3740-2499.9)/3740=1240.1/3740=0.3316
In2012= (2229.8-1927.5)/2229.8= 302.3/2229.8 = 0.1356
In2014= (2312.7-2033.4)/2312.7= 279.3/2312.7=0.1208
Net Profit MarginNext Plc
2012Net profit margin for Next Plc= 430/3441.1= 0.125
2013Net profit margin = 473.1/3547.8= 0.1334
2014net profit margin = 553.2/3740= 0.14
2012Net Profit Margin = 125.3/2229.8= 0.0562
2013Net profit margin = 127.9/2282.2=0.0560
2014net profit margin = 87.2/2312.7=0.0377
ROCEFor Next Plc
Year2012= 570.3/1111.8= 0.5129
Liquidity Current ratioCurrent ratio for Next Plc
Year2012= 1139.9/ 742.4 = 1.535
Year2013= 1207.8/816 = 1.4801
Year2014=2144.6/834.5 = 2.56
For Debenhams Plc
Year2012= 459.5/727= 0.632
Year2013= 470.5/741.9= 0.634
Working Capital Stock TurnoverNext Plc
Year2014= 2499/358.7 = 6.9668
Debtors’ Collection PeriodFor Next Plc
Year2013= 708.6/(3547.8/365)= 72.9
Year2012= 73.7/ (2229.8/365) =12
Year2013= 76.85/(2282.2/365)= 12
Year2014 = 76.5/(2312/365)= 12
Creditors Payment PeriodFor Next Plc
Year2012= 545/ (2395.5/365) = 83
Year2013= 537.2/(2431.1/365) = 80
Year2014= 594/(2499.9/365) = 86
For Debenhams Plc
Year2012= 525.4/(1927.5/365) =99
Year2013= 545.8/(2282.2/365) = 87
Year2014= 529.3/(2033.4/365) = 95
GearingFor Next Plc
Year2013= 5.4/285.6 = 0.019
Year2014= 2.6/286.6 = 0.009
Year2012 = 163.4+249.3)/661.0= 0.624
Year2013 = 163.1+235.9)/744.4 = 0.536
Year2014 = 202.1+223.8)/767.4 = 0.555