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Analysis of Next PLC
Next plc is a UK based retailer offering products in clothing, footwear, accessories and home
products” distributing its products through three main channels: Next Retail, a chain of more
than 500 stores; Next Directory, a home shopping catalogue and online Website with more
than 2 million active customers, and international arm, Next International with more than 180
stores (“Thomson Banker”, 2010).
2010 2009
Liquidity Ratio
Acid Test/Quick Ratio
Current Assets – Inventories
Current Liabilities
1,041.2 – 309
758.1
1,073.6– 318.7
713.5
Current Ratio
Total Current Assets
Total Current Liabilities
1,041.2
758.1
1,073.6
713.5
Cash Ratio
Cash and Cash Equivalents
Current Liabilities
107 +8.6
758.1
84.4+47.8
713.5
Gearing Ratios
Long Term Debt to Equity Ratio
Long term Loans
Total Equity
520.9
133.6
567.8
140.6
Interest Cover
Operating Profit + Finance Income
Finance Cost
529.8 + 0.8
25.3
478.3+1.3
50.8
Profitability Ratios
0.97 1.06
1.37 1.50
0.15 0.19
3.90 4.04
20.97 9.44
Gross Profit Margin
Gross Profit X 100%
Revenue
996.9
3406.5
908.5
3271.5
Operating Profit Margin
Operating Profit X 100%
Revenue
529.8
3406.5
478.3
3271.5
29 % 27.8%
15.6 % 14.6%
01/30/10 01/24/09
Trade receivables collection period 56.80 58.61 Inventory turnover 7.30 7.04 Current ratio 1.37 1.54 Acid test ratio 0.97 1.09 Cash Ratio 0.15 0.19 Non-current asset turnover 5.22 4.76 Trade payable payment period 27.88 33.28 Long-term debt to equity 390.34 362.99 Interest Coverage 18.76 9.71 Gross Profit Margin 29.13 27.77 Operating Profit Margin 16.04 15.64 ROCE 79.03 54.65 ROE 184.78 123.05
(
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msa
n B
anke
r", 2
010)
("Morning Star stock Report", 2010)
The above table shows selected ratios for Next Plc. Starting from liquidity ratios we find that
that Next plc is sufficiently poised to meet its financial obligations. Liquidity ratios are
indicators of whether a company’s current assets will be sufficient to meet the company’s
obligations when they become due. Current ratio is more than 1 showing that current assets
are more than current liabilities – while acid test ratio has decreased for 2010 it is still quite
close to 1 while for cash ratio although it is a very conservative way to look at the balance
sheet it simply shows if Next can repay its short term debt from its cash and cash equivalents
only.
We will look at profitability of the company to determine its investment worthiness. Gross
Profit and Operating profit margins have both improved from 2009 and considering that 2010
was not a particularly healthy year economically so Next’s performance is to be credited.
These measures show that Next has grown despite recession and economic slump and so
Next should continue to do well when economy recovers fully in 2011 and beyond. Further
looking at ROCE and ROE we see that these two indicators are particularly good for 2010.
ROCE reflects company’s ability to earn a return on its capital while ROE relates net income
to the amount invested by the shareholders. ROE indicates efficiency shareholders investment
has been utilized.
Efficiency ratios including Non-current asset turnover, Inventory turnover, Trade receivables
collection period and Trade payables payment period all show improvement over 2009. Trade
payable payment period has decreased showing reveals Next has improved its ability to pay
its bills and has reduced time period to pay its outstanding bills from 33 days to 27 days, also
there has been a small improvement in Next’s ability to receive payment basically signifying
Next’s effectiveness in extending credit as well as collecting debts. Improvement in non
current asset turnover also is a healthy sign showing improved ability in using the investment
in fixed assets to generate revenues. Inventory turnover’s small improvement shows faster
turnaround of inventory so better ability to generate revenues. Determining number of times
inventory is sold during the year provides some measure of its liquidity and ability of
company to convert inventories into cash quickly. If we were to distribute inventory turnover
into 365 days of the year we find that inventory turnaround has reduced to 50 days in 2010
from around 52 in 2009.
Gearing ratios Long-term debt to equity and Interest cover are both favorable. Long term debt
to equity ratio has increased showing decrease in long term debt and further Interest cover’s
increase shows improved ability of Next to meet its obligations.
(“London Stock Exchange”, 2010)
("Morning Star stock Report", 2010)
Finally looking at investment ratios P/E ratio, Dividend payout, Dividend cover, and
Dividend yield shows increasing EPS and dividends over 2009. P/E ratio has improved from
7 to 10.4 and revenue per share has also climbed up. Slight improvement in dividend cover
shows improved profits to be ploughed back into business. Also looking at EPS estimates for
the future Next shows a healthy outlook with an analyst green signal and go ahead and buy
rating. EPS estimates show EPS to grow from 177, currently to 248 by 2013, a more than
40% growth.
(“Thomson Banker”, 2010)
Having analyzed Next plc we need to cross check the company’s performance with Ted
Baker to see if Next is really viable for investment. “Ted Baker PLC (Ted Baker) is a United
Kingdom-based designer brand company with wholesale and retail sales of menswear,
women's wear, children wear and related accessories (“Thomson Banker”, 2010).
Company Next PLCTED Baker PLC
QuoteSymbol NXT-LN TBK-LN
Last Price Close 32.497 10.121
Price 52 Wk High 36.96 10.62
Price 52 Wk Low 28.43 6.87
Price Volatility 23.98 25.45
Current P/E Ratio 11.69 19.17
Last Yr. P/E Ratio 8.14 13.3
P/E High 5Yr Avg 13.24 18.33
P/E Low 5Yr Avg 8.53 12.57
P/E Frcst FYR1 9.73 15.5
Current Price/Book 15.11 3.87
Last Yr. Price/Book -34.87 3.62
Current Price/Cash 7.27 10.62
Last Yr Price/Cash 5.75 8.56
Price/Cash 5YR Avg 7.49 10.26
Div Yld 3.646 2.837
(“Thomson Banker”, 2010)
Next is performing well in almost all fronts with higher price, EPS and dividend yield. P/E
for Ted is higher but that ratio is overshadowed but better performance on almost all other
fronts by Next PLC. Comparison of ratios shows higher profitability margins on Next versus
Ted while Ted shows a major problem in turning its inventory. Next is also showing a higher
operating profit margin while gross profit margin is higher for Ted.
Company Next PLCTED Baker PLC
QuoteSymbol NXT-LN TBK-LN
Sales Per Share 24.34 5.17
Earnings Per Share 2.25 0.43
Dividends Per Share 0.79 0.24
Book Value Per Share 1.15 2.16
Cash Flow Per Share 3.17 0.72
COGS Per Share 16.71 1.94
Gross Income Per Share 7.63 3.23
Oper Exps Per Share 3.82 2.77
Oper Inc Per Share 3.81 0.46
EBIT Per Share 3.55 0.61
Int Exp Per Share 0.37 0.01
EBT Per Share 3.18 0.6
Taxes Per Share 0.93 0.17
Company Next PLCTED Baker PLC
QuoteSymbol NXT-LN TBK-LN
Last Fiscal Yr End Date 1/24/2009 1/31/2009Profitability Ratios
Return on Per Share 261.65 21.11
Return on Assets 19.78 14.46
Gross Profit Margin 27.77 58.54
Operating Profit Margin 15.64 8.86
Asset Utilization Ratios
Asset Turnover 1.84 1.6
Inventory Turnover 7.04 1.72
Leverage Ratios
Total Debt to Common Equity 440.65 0
Dividend Payout 35.22 55.45
Cash Dividend Coverage Ratio 4 3.05
Liquidity Ratios
Quick Ratio 0.93 0.7
Current Ratio 1.54 1.93
Accounts Receivable Days 56.77 32.22
Inventories Days Held 51.82 212.2
Gross Profit Margin 27.77 58.54
Operating Profit Margin 15.64 8.86
(“Thomson Banker”, 2010)
(“Thomson Banker”, 2010)
Similarly looking at analyst estimates standing alone Ted also has a positive outlook with
EPS forecasted to grow from 32.6 currently to 51.14 by 2013 (an extraordinary 57% growth).
Standing alone Ted would be a good buy, however in comparison with Next Ted would be a
secondary choice as Next promises better return because of its higher magnitude share price.
Next PLC Sales and Profitability
2,950
3,000
3,050
3,100
3,150
3,200
3,250
3,300
3,350
3,400
3,450
2006 2007 2008 2009 2010
0
50
100
150
200
250
300
350
400
Revenue £m Profit after tax £m
(“Next Plc corporate website”, 2010)
Next revenues have been consistently growing except for 2009 and similar growth can be
seen in the profitability.
Latest trading statement from Next PLC reiterates that profit forecasts for years ending
January 2011 would be met and further profit would range between £540m to £555m
representing a healthy more than 7% growth over last year and EPS is expected to increase by
around 15% over last year. This forecast further increases suitability of Next PLC as
investment option (“Next PLC Trading Statement”, 2011).
Looking at the financial ratios and company outlooks, Next Plc promises to be a better buy,
though possibly in coming years Ted Baker might also be growing significantly. The decision
in favour of Next is because of the base magnitude of share price so the growth would
increase the base line improving Next share price and EPS and thus a smaller percentage
increase than Ted would reflect in a larger magnitude result – hence Reiner should go for
Next PLC’s shares.
Which part(s) of questions did you find difficult to answer and which did you find easier? Why did you think that was?
Some ratios were straight forward while other like ROCE and ROE were trickier.
Analysis of ratio results was however the difficult part, as both of the companies
standing alone were good buys but it required more thorough analysis to separate one
more promising company for investment.
What are your strengths and/or weaknesses that you have identified? What have you learned from this work?
Strengths were ability to find sources for getting required information, however
finding the correct number for analysis through ratios was the tricky part. My learning
was that numbers alone do not mean anything in isolation. Number have to be
considered in accordance with base facts for good or bad number have to be
considered in relation with the respective environment for high percentage might not
be necessarily a healthy sign if the base magnitude is small compared to otherwise
smaller percentage increase if the base magnitude is higher.
How effectively did your group work together on this work? Would you prefer group or individual work? Why?
Group work has its definite advantage. Groups allow division of work and if the work
division can be made in accordance with the respective member’s strengths than the group
function can be synergized, however if the group member’s strengths are not fully exploited
than group work can actually lead to disjointed slowed down work with much duplication of
efforts.
Group work can be useful for some work if group member’s strengths can be appropriately
mapped on the work. It will also be useful if the work is divisible into appropriate pieces
matching group member’s forte and expertise.
References
Next Group plc 2011 [WWW] http://banker.thomsonib.com/ta/ (8th January, 2011)
(2011) Next Group PLC Website [www]
http://www.nextplc.co.uk/nextplc/financialinfo/reportsresults/2010/2011-01-05/2011-01-
05a.pdf (8th January, 2011)
(2011). Next Group PLC Website [www]
http://www.nextplc.co.uk/nextplc/financialinfo/financialsummary/ (8th January, 2011)
(2011) Next PLC Morning Star Stock Report [www]
http://tools.morningstar.co.uk/uk/stockreport/ (8th January, 2011)
(2011) Next PLC NEXT PLC ORD 10P - Fundamentals - London Stock Exchange [www]
http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?
fourWayKey=GB0032089863GBGBXSET1 (8th January, 2011)