Key Points From The Income Statement Accounting Essay

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Next PLC is a retailer based in and around the UK. It has franchises in 180 stores in Asia, Europe, Middle east, Russia, Turkey and various other over sea countries. They also have over 500 stores in the UK. When NEXT opened their initial market was women for which they sold clothes, shoes and other accessories. They offer style and quality in their products at affordable prices. This is accomplished by NEXT's in-house design team. Today Next has expanded its range of products and target markets to men and children for which they have an impressive catalogue of products with over 1300 pages in the autumn winter book, which could be obtained via mail orders(Business overview, NEXT PLC,2010).

Online shopping was introduced in 1999 where the book catalogue was also available to order as well as having the option to order products for next day delivery if the order is made before 6pm. This was an innovative scheme which aided in the boosting of sales. This is enhanced by the use of another website nextdirect.com which issues products to 35 countries. Because of this next has over 2000000 active customers.(CORPORATE INFORMATION).

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Throughout the rest of the report I will be talking about the following aspects of NEXT PLC. I will note key points from the income statement and comment on the amount available for distribution. For statements of financial position I will also note key points and mention their policies on dividends, distribution and the impact of historic cost convention on fixed asset valuation. The Earnings per share and diluted earnings per share will be noted and analysed with the prior 2 periods to see the trend arising. Finally I will comment on Key ratios using trend analysis and comparatives to the industry standard, then finally comment on other relevant aspects from a financial accounting perspective.

Key points from the income statement:

Revenue in £millions from the income statement fo r the past 5 years are as follows ((NXT.L) NEXT PLC, 2010)

2005 - 2858.50

2006 - 3106.20

2007 - 3283.80

2008 - 3329.10

2009 - 3271.50

As you can see from the figures revenue has been gradually increasing over the years and is set to do so for forthcoming year. This also shows a strengthening market position. This correlation of increasing revenue is linked with the profit for the period which stretches from 305.40 mil in 2005 to 302.30 in 2009. Because of the increase in revenue and profit for the period, more money can be reinvested back in to the business, therefore the amount given to the equity holders of the parent company has increased over the years. The following data shows this. ((NXT.L) NEXT PLC, 2010).

2005 - 305.40 mil

2006 - 313.50 mil

2007 - 354.10 mil

2008 - 302.40 mil

2009 - 364.10 mil

EPS AND DILUTED EPS

Earnings Per Share (EPS)

EPS

2005 - 120.20P

2006 - 127.40P

2007 - 146.10P

2008 - 168.70P

2009 - 156.00P

The increasing earnings per share are a good sign, but have a small decrease between 2008 and 2009. This is because of lower profit margins during the same period. Earnings per share will rise 6% faster than profits this year due to the result of NEXTS policy of their surplus being invested in to the business for buy back shares(NEXT PLC CHAIRMANS STATEMENT, 2010).

Diluted EPS

2005 - 118.40p

2006 - 125.90p

2007 - 144.30

2008 - 166.60p

2009 - 155.70p

The diluted earnings per follows the same trend as earnings per share but is increased by the dilutive effect of potential ordinary shares from employees and various share option schemes. The total number of share options outstanding at 30 January 2010 was 13.1m (2009: 12.9m), the increase in dilutive shares is a consequence of the higher average share price during the year ended 30 January 2010 compared to the previous year ((NXT.L) NEXT PLC,2010).

Distribution costs for Next Plc for the years 2010, 2009 were 232.1 and 232.4 million respectively. Distribution cost saving improved margin by 0.5 percent. Lower charges for processing sale stock with the balance achieved through various other efficiency programmes was the reason for the largest cost reduction (Regulatory news NEXT PLC, 2010).

NEXT have proposed raising their final dividend to 47p this year (2010), which would take the total dividend for the year to 66p, which was higher than the previous two years where the total dividend for the year was 55p. This is an increase of 20% and is in line with growth in EPS. Dividend cover remains a decent 2.8 times compared to the sector average of 2.4.Dividend policy is progressive and NEXT's intention is to increase annual dividend by at least 10 percent in the current year. Only when the needs of the business investment and dividend policy have been satisfied can NEXT apply their surplus in to cash for buybacks. (NEXT PLC, financial times, 2010)

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Depreciation is provided to write down the cost of property, plant and equipment to their estimated residual values based on current prices on the balance sheet date, over their equal remaining lives by equal annual instalments. Their useful lives are also reviewed annually.(Accounting policies, Next PLC).Inventories are valued at the lowest net realisable value which is based on selling prices less further costs to be incurred to disposal. Capital expenditure for the year amounted to £99m and NEXT are planning for £121m in the current year, broadly in line with underlying depreciation((Nxt.L) NEXT PLC.)

The following explains some of NEXT'S accounting policies such as the impact NEXT historic cost convention on fixed asset valuation and other noteworthy items from Next's financial statements.

Assets used by the Group which have been funded through finance leases are capitalised in fixed assets and the resulting lease obligations are included in creditors. The assets are depreciated over their useful lives and the interest element of the rental obligations is charged to the income statement over the period of the lease and represents a constant proportion of the balance of capital repayments outstanding.( Property, plant & equipment (IAS 16) (Next Plc, accounting policies),2010).

IAS 16 requires residual values to be based on prices current at the balance sheet date, whereas under UK GAAP residual values are based on prices prevailing at the date of acquisition. In the case of the Group's freehold and long leasehold property, the majority of which are recorded at historical cost, residual values assessed under IFRS are greater than the corresponding book values. Consequently, the depreciation charged on these properties after transition to IFRS will be zero, subject to an annual review of residual values. This increases reported profit for the year ended January 2005 by £1.9m (next plc 4.4, Accounting policies 2010).

FINANCIAL PERFORMANCE

I will now evaluating the performance of the Next, by comparing it with some of the company's past figures and its industry competitors. I will also my note of key points from financial statements. The 2 competitors I am using will be Marks and Spencer and Debenhams. These are similar market retailers to NEXT. They have both expanded into the international market, whilst Debenhams have also acquired different brands within their products as Next have.

Ratio analysis will be used to identify key points of NEXT's strengths and weaknesses, and aid in evaluating its financial position.

Profitability Ratios:

• Gross Profit Margin (%)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |27.77% |28.51% |27.76% |27.85% |31.36% |

|M&S |37.21% |38.65% |38.90% |38.29% |35.49% |

|Debenhams |14.32% |14.76% |16.93% |18.66% |18.43% |

NEXT's GP Margin has very little fluctuation and so maintains quite a constant value over the years, which shows that the NEXT have the ability to render sales directly into profit effectively. When looking at competitors, I feel NEXT needs to be able to obtain lower product cost or secure premium prices in its market to boost the GPM to be at a more competitive level to Marks and Spencer who are currently achieving a higher GPM. This could also be due to Marks and Spencer offering more products such as food which aid in them achieving their GPM.

• Return on Equity (%) (ROE)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |193.10% |-447.10% |175.12% |122.37% |110.38% |

|M&S |24.40% |41.99% |40.07% |45.28% |n/a |

|Debenhams |28.40% |84.52% |69.45% |116.51% |-31.31%

This shows that NEXT's preference shareholders earnings point to a very profitable return on their funds invested, even though there was a poor performance in 2008, but this could be due to the effects of the recession scaring investors away. For both preference shares and dividends Next's performance shows better return for preference shares compared with their competitors.

• Return on Capital Employed (%) (ROCE)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |40.10% |84.73% |57.47% |62.51% |65.54% |

|M&S |9.31% |14.44% |15.98% |14.09% |24.88% |

|Debenhams |26.88% |29.66% |33.62% |40.26% |35.09%

The ROCE for next fluctuates over the years with its lowest in the previous year 2009, which could be due to decrease in sales over the recessionary period, however compared to competitors the return ratio is higher every year even in 2009 when they were at their lowest. The ROCE can also be used to show how capable management were in earning profits from the capital employed of the group.

Efficiency and Effectiveness:

• Net Asset Turnover

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |1.84 |2.04 |2.09 |2.11 |2.26 |

|M&S |1.20 |1.15 |1.46 |1.47 |2.65 |

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|Debenhams |2.37 |2.31 |2.44 |2.33 |2.56 |

This shows NEXT's performance in assets turnover over the years has been declining and shows expansion of the company during recession period as they used their capital employed more effectively whilst trying to generate sales. There is a similar trend when looking at their competitors.

• Debtor Collection Period (days)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |54.97 |52.50 |52.07 |48.81 |44.56 |

|M&S |3.36 |3.42 |2.89 |1.97 |1.28 |

|Debenhams |4.21 |2.75 |5.55 |4.59 |2.47 |

The debtor collection period over the years illustrates low efficiency of debtor management, which is a similar situation when compared with competitors i.e poor management for accounts receivable in NEXT.

• Creditor Payment Period (days)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |22.85 |19.19 |19.37 |20.38 |20.01 |

|M&S |14.38 |9.18 |11.04 |11.36 |8.98 |

|Debenhams |52.15 |51.03 |52.70 |42.66 |44.43 |

This shows that NEXT' is very able to pay suppliers as the figures are very stable over the years showing efficiency of management for accounts payable to creditors. When compared to competitors Next has a shorter period of repayment, which gives them a good reputation as far as repayments go as well as aiding in relationships with their suppliers, therefore they could be eligible to receive discounts.

Liquidity:

• Current Ratio

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |2.51 |1.56 |2.13 |1.95 |2.04 |

|M&S |1.74 |1.89 |1.81 |1.63 |0.65 |

|Debenhams |1.37 |1.34 |1.24 |1.27 |1.15 |

The figures shows the time NEXT takes to convert short term assets into cash to pay outstanding dept is at a good which shows the company's ability to meet debt obligations and so is useful when showing creditors. When compared to competitors NEXT's figures are higher which shows a lower efficiency of working capital, which they could put to better use putting it in to various areas of their business e.g. research and development centres.

• Quick (Acid Test)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |0.93 |0.54 |0.82 |0.66 |1.05 |

|M&S |0.37 |0.35 |0.27 |0.38 |n/a |

|Debenhams |0.36 |0.1 |0.18 |0.12 |n/a |

NEXT's performance shows inability to settle liabilities especially in 2006 and 2008. This is an issue that needs to be improved as it can scare off potential investors, unless Next have a sufficient overdraft then there is less of an issue. Compared to competitors they are doing well in this area exceeding them in every year.

• Earnings per Share (EPS)

| |2009 |2008 |2007 |2006 |2005 |

|NEXT plc |1.53 |1.76 |1.45 |1.22 |1.15 |

|M&S |0.32 |0.49 |0.39 |0.31 |0.34 |

The figures represented show increasing earnings per share are generally good sign, with the exception 2009 because of lower profit margins during the same period. Next has the highest performance in earnings per share over the years which is attractive for shareholders and investors.

The above figures come from the Fame website (FAME and London Stock Exchange database).

Summary

NEXT's competency to transfer sales in to profit is very efficient which is shown by their GP margin which remains quite stable over the 5 year period. They need to find a way to achieve lower product cost to compete with competitors. They need to be able to control their overheads to obtain maximum efficiency even though there performance is higher than their competitors.

Profitable returns on funds invested by shareholders are indicated when looking at NEXT's preference shareholder earnings which are immaculate when compared with their competitors. Due to the recession the ROCE for NEXT shows the return on capital employed by NEXT demonstrates wavering stability through the years especially in 2009, largely due to the recession. However their figures are again higher than their competitors.

NEXT's assets turnover over the years decreased and so they demonstrated expansion of the company even during recession and their ability to utilise their capital employed to generate sales to compete with their rivals, therefore illustrating the difficulty to match sales.

The debtor receivable period increase as the years progress which show inability of managers in this area. The situation is reflected when looking at competitors but with next it is on a larger scale. Management in this department needs to improve. On the flip side Next show efficiency in paying their creditors, showing effective management and also displaying a good reputation towards creditors.

Shows that time to convert short term assets to cash to pay creditors is ok but compared to the recession they could use their working capital more efficiently by reinvesting it in to various areas of the business. Their efficiency to pay immediate liabilities is low and needs to be enhanced unless they have a capable overdraft facility.

The figures represented show increasing earnings per share are generally good sign, with the exception 2009 because of lower profit margins during the same period. Next has the highest performance in earnings per share over the years which are attractive for shareholders and investors. Overall NEXT's performance is very attractive in terms of shareholders and investors and ability to pay creditors, their use of capital to generate sales even though it could be enhanced. They need to focus on paying immediate liabilities and management issues in debt receivables. Overall they are in very good position in the market and are very competitive in terms of their rivals.

Stock Performance Chart for NEXT PLC

(CORPORATE INFORMATION SNAPSHOTS, 2010)

Other relevant information from an accounting perspective.

From the table above it can be seen that the price has fluctuated over the past 5 years, increasing from 2005 until midway through 2007 where it reaches its peak. Then the price drops due to recession in 2008 and 2009 while the earnings per share (EPS) gradually increase and continue increasing through to 2010 as the price slowly starts to increase again in correlation with the recession residing. From the forecast it can also be seen that the EPS and price will increase as next go in to 2011 financial period.

References

.. (2010). accounting policies. Available: http://ir2.flife.de/data/next/igb_html/index.php?bericht_id=1000003&index=〈=ENG. Last accessed 19 august 2010.

.. (2010). Business Overview. Available: http://www.nextplc.co.uk/nextplc/aboutnext/businessoverview/. Last accessed 18 august 2010.

.. (2010). Annual Report. Available: http://ir2.flife.de/data/next/igb_html/index.php?bericht_id=1000003&index=〈=ENG. Last accessed 17 august 2010.

.. (2010). NEXT PLC. Available: http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C826BS070. Last accessed 18 august 2010.

.. (2010). Next Report. Available: http://fame.bvdep.com/version20091130/cgi/template.dll?checkathens=1&kick=1&product=1&user=bousinmarktuck&pw=spqMZm6g0f169FHCaAoIsA%3d%3d . Last accessed 19 august 2010.

.. (2010). Next Plc ordinary 10 shares. Available: http://www.h-l.co.uk/shares/shares-search-results/n/next-plc--ordinary-10p-shares/financials. Last accessed 20 august 2010.

.. (2010). (NXT.L) NEXT PLC. Available: http://www.iii.co.uk/investment/detail/?display=news&code=cotn:NXT.L&action=article&articleid=7810179. Last accessed 18 august 2010.

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