FINANCIAL RATIO ANALYSIS

Financial Ratio Analysis of NEXT Plc

Financial Ratio Analysis of NEXT Plc

Introduction

The NEXT plc is an industry player which is present in retailing, customer services management and home shopping. The group primarily operates through more than 450 stores in the Great Britain and has a global presence in other European countries, Asia, and the Middle East. The industry player functions through 5 reportable business divisions namely: NEXT retail, Ventura, NEXT sourcing, NEXT directory and other.

Financial Ratio Analysis

Liquidity Analysis

When it comes to evaluation of any business, it is necessary to review the performance of the company from view of suppliers and other sources of short term finances which required liquidity analysis of the business. Even the company is making substantial profits; it still gets insolvent if it does not have appropriate liquidity management. So it is necessary for suppliers to analyze the capability of the company to meet all its debt. Liquidity of the NEXT Plc has declined over the last two years. Current ratio has witnessed a decline of 6.7% from 1.37 in 2010 to 1.28 in 2011. On the other hand, keeping in view the prevailing conditions in a consumer economy, the company has reviewed its inventory position, and increased it by 19.2%. The significant increase of investment in inventory has further deteriorated the liquidity position when analyzed through acid test, which analyzes, the liquidity after ruling out the inventory from current assets. The acid test ratio has declined from 0.96 in 2010 to 0.83 in 2011 which is a negative growth of 13.1%. When compared with the rest of the companies, NEXT plc liquidity position is above the industrial average (www.investing.businessweek.com).

Efficiency Analysis

When it comes to measurement of management's performance, efficacy analysis plays a crucial role because it is the management which decides upon policies on how to settle down various accounts. The goal is to gauge how well the firm is running its assets. Working capital ratios are calculated to determine if the total quantity of all types of asset seem reasonable as shown on the balance sheet, too low or too high, keeping in view of existing and anticipated sales levels. If the firm has too many assets, its cost of capital will be too high hence its profit depressed. On the other hand, if asset are too low, profitable sales will be lost. NEXT Plc management has taken various measures to sustain the current recession affecting the industry. This is an important ratio of its efficiency. If the firm is having more receivable, it may run the risk of bad debts. At the same time, if it is too strict in debt collection, it may result in loss of profitable customers. Receivables turnover of the company has increased by 1.2%, which is showing that the company is using credit facility to keep up the sales level in the business. In 2010, the company receivables in days were 56.8 days, which increased, to 57.5 days in 2011. In absolute terms, account receivables have increased from 520 ...