Financial Analysis Management and Valuation

Financial Analysis Management and Valuation

Part one

Introduction

Financial statements analysis is a process of reviewing and analyzation of a company’s financial statements to construct better income economic decisions for the anticipated earn income in the future. The financial statements are analysed in a way that the expenses and the revenues are taken into account for the evaluation of the liquid financial position of a company, the analysis showing how a company is planning and coordinating its cash position. Comparing of past data and expected values shows a lot of difference in financial activity making the company take the necessary precautions for future financial obligations, the suggestion on how a company's current liabilities are being paid, how the repayment of the loan is designed, fixed assets replacement and making the relevant capital budgeting’s decision (Palepu at el.,2020).

Financial ratios evaluate a company’s information regarding finance and use to compare its operations. Parties such as consumers, lenders, shareholders, government, employees and their various competitors use financial ratios to compare their power with others. However, the analysis has some gap that hinders its effectiveness. This gap includes financial statements that are mostly analysed in aggregate forms, based on personal estimations, different procedures and techniques for analysis and reliance on the recorded historical data to project the future of the firm’s value (Easton at el., 2018). This report will consider two companies.

The Next Plc retail chain founded in 1982 in Leicestershire is a British store focused on producing fashionable clothes, footwear and later on targeted home commodities. Next Plc is currently one of the best stores that have an excess of 500 stores in the UK and Eire and almost 200 stores in different nations. In addition, it was capable to make £100 million in 1998 throughout its Next credit financing.

Marks and Spencer, established in 1884 is one of the leading retail chains of Britain and is the competitor of Next Plc. It is one of the oldest brands of England, which does not focus upon the clothing for people but also provides a wide variety of food items along with home products e.g. furniture, which has helped them to grasp a larger market share. M&S has approximately 450 stores in 30 countries.

Report Objective

The choices regarding investment and financial decisions of a business are key for the managers to run the activities and achieve a definitive objective of managing a business. With a specific end goal to emphasise and comprehend monetary administration. This report assesses the money related execution and position of Next Plc which is recorded under FTSE 350. Financial management is of significance to business because it helps the managers to make better decisions and to evaluate the current and future performance of a business by using financial tools. Therefore, it is important to understand the financial tools to demonstrate the profitability of Next Plc compared to Marks and Spencer (M&S). 

Methodology

Financial ratios are the tools used by the managers that help in decision making in evaluating the company’s performance and making comparisons within an industry. Once these ratios have been calculated, managers can further use them to highlight the strengths and weaknesses of the company and therefore form objectives that will be used to develop strategies to run the company efficiently and effectively. Thus for this purpose, to understand the performance of Next Plc, financial ratios for the year 2019 and 2020 are calculated. These ratios amongst these two different years are computed to see whether the company was able to improve its performance as compared to the previous year, 2019. Similarly, Marks and Spencer are chosen as the competitors for Next Plc and ratios for the same two years 2019 and 2020 for this company are computed. The major aspect is to compare which company performed better by analysing these ratios.

It is important to determine the value of the firm, valuation assumes a critical part in deciding whether the company is making profit or loss, which is a key segment of a speculation's aggregate return. For this purpose, Gordon’s Dividend growth valuation model is chosen for the valuation of Next Plc (Brennan, 1971). 

To calculate this dividend growth valuation model, we take the dividend for the next year, dividend growth rate and cost of equity. To calculate the dividend growth model, we will be using the earnings retention model to find the dividend growth rate and similarly, we will be using the capital asset pricing model to obtain the cost of equity.

Analysis and Discussion

The table above presents the profitability ratios, the gross profit ratio for M&S has been more than Next Plc in the year 2020. This means that M&S has been purchasing goods at cheaper prices from suppliers or sells at higher prices as compare to Next Plc.

Net profit for Next Plc is higher than that of M&S in the year 2020, it seems as if Next Plc cut down on its expenses hence they make more profit. The trend for net profit for M&S shows that they incurred more expenses in 2020 as compared to 2019. The same is the case with the operating profit, Next Plc has slightly more operating profit in the year 2020, while M&S seems to lack behind in 2020.

Talking about the overall profitability ratio, the ROA ratio for Next Plc is higher than M&S, which shows that the management of Next Plc is effectively managing all of its assets in the optimum manner possible as compared to M&S in the year 2020. Similarly, ROE for Next Plc is high as compare to M&S in 2020; meaning that Next Plc shareholders invested a lot of capital into the business and are getting a greater return and efficiently making use of the funds. M&S has fallen behind in all the profitability ratios except for the gross profit margin. 

Efficiency ratios are calculated to help the businesses to know their ability to manage their assets and liabilities to generate sales (Atrill, 2014). It is important to have a high working capital turn over which would mean that management is highly efficient in using its short term fixed assets and liabilities. Next Plc was doing better than M&S in 2020, while M&S was unable to improve its working capital turnover.

The average turnover period depicted that M&S was able to sell its stock more quickly in 2019 as compared to 2020.  Also Next Plc lacked behind in 2020 in selling its stock compared to M&S. This means that Next Plc will have to bear the cost of keeping the stock affecting the firm’s profitability.

The average settlement period shows that both the companies have improved over the year to pay the money back. However, Next Plc is doing better than M&S, as it will take only 27 days to pay off all its creditors.

The average trade receivables have shown that Next Plc has given many goods to its credit customers, which will take 81 days to pay them off and in the case of M&S, they are doing better because their credit customers will pay them back within 4 days.

Shareholders’ investment ratios are shown in the table above to see the return to the shareholders from the money they have invested in the business. In 2020, Next Plc had a decline in its dividends as compared to M&S who have an ideal dividend pay-out ratio. However, this means that for M&S there would be less retained earnings available. Next Plc has a higher dividend cover ratio as compared to M&S, this means that they are using their profits to meet their financial requirements and M&S does not seem to do well. The dividend yield ratio helps the investors to forecast the cash return they will get from the investment; M&S is doing better than Next Plc that shows that M&S will be distributing more dividend income to its investors.

The price-earnings ratio reveals that both the companies have a decrease in their price-earnings ratio; this is because the stock price in the market in 2020 dropped. M&S seems to have a better price-earnings ratio in 2020 as compare to Next Plc. From the investor’s perspective, M&S seems to do well when it comes to returning to the shareholders.