Next PLC’s Financial Statements and its Pledges and Foreign Exchange
The word count:
- The word limit for the case study/report is 1,800 words. However, a +10% range is permitted, i.e., a maximum 1,980 words. You will be penalized if your work is less than the minimum word-length and above the maximum word-length specified. There will be a penalty of a deduction of 10% of the mark for work exceeding the word limit by 10% or more.
- The word limit includes tables, figures, quotations and citations, but excludes the references list. Appendices should NOT be used, i.e. please include all relevant data in the main part of the case study/report.
- You should state the word count on the front page of your report.
The Case Study/Report
You should write answers to each of (a), (b) and (c) as three parts of the main body of a single case study/report to the non-financial directors of Next plc, using the 2021/2022 Annual Report (see copy of full report in the Assessment folder on the module Blackboard site):
(a) Analyse and discuss the 2021/2022 Next plc’s financial statements considering the company’s profitability, efficiency and liquidity. You must also compare the results with 2020/2021 (two ratios for each area) – (see copy of full annual report for year 2020/2021 in the Assessment folder on the module Blackboard site). (Marks: 35%)
(b) In its 2021/2022 annual report (page 89), Next plc pledged:
“Our stakeholder relationships are key to our success and inform our decision making on Environmental, Social and Governance (ESG)matters, now a widely recognised term for what we have always valued – doing the right thing. We have made good progress on setting our near term and longer-term aspirations but we realise there is still more to do… In July 2021, our targets to reduce our Scope 1 and 2 carbon emissions were approved by the Science Based Target Initiative (SBTi). We also signed up to the EV100, committing to switching our car and van fleets to electric vehicles by 2030.”
Now, and also considering Next plc’s 2020/2021 annual report, compare and discuss briefly the pledges Next plc made in respect of corporate social reporting. You need to illustrate your discussion with relevant examples. (Marks: 25%)
(c) Explain what you understand by the term ‘foreign exchange’ and ‘foreign exchange market’. As a British multinational clothing, footwear and home products retailer, discuss briefly how does foreign exchange market affect the international businesses of Next plc.
(Marks: 25%)
NEXT PLC’S FINANCIAL STATEMENTS AND ITS PLEDGES, AND FOREIGN EXCHANGE
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Total word count: 1901 words
Next Plc’s Financial Statements and its Pledges, and Foreign Exchange
Introduction
The commitments made by Next plc in its yearly reports demonstrate its commitment to corporate social reporting and carbon reductions. They actively publish their greenhouse gas emissions, energy usage, and environmental measures (Next PLC., 2022). Next plc must account for foreign currency transactions and manage currency risks in its financial reporting. The company must comply with accounting standards and regulations related to foreign exchange, including translating financial statements into its reporting currency (Amizan, 2022). Additionally, Next plc may actively monitor and manage foreign exchange risks through risk management practices and policies.
Word count: 92 words
Analysis and Discussion of the Next Plc’s 2021/2022 and 2020/2021 Financial Statements
Analysis and Discussion of the Next Plc’s 2021/2022 Profitability, Efficiency, and Liquidity
Profitability Ratios
Managers use profitability ratios to evaluate their companies' capabilities in generating incomes relative to their operating expenses, revenues, assets, and stockholders' equity. Jihadi (2021, pp. 425) assert that "a profitability ratio shows how well a company utilizes its assets to produce profit and value to shareholders." Profitability ratios include return on investment (ROI), gross profit, operating profit, and net profit ratios.
Gross profit ratio = (gross profit/net sales) X 100
= (£1,972,000,000/£4,625,900,000) X 100 = 42.63%.
Net profit ratio = (net profit/net sales) x 100
= (£677,500,000/£4,625,900,000) X 100 = 14.65%.
A firm with a gross profit of over 20% performs above average (Haralayya, 2021). Moreover, Haralayya posits that the ideal net profit ratio should be above 10%. Therefore, Next Plc was financially healthy in the year 2021/2022.
Efficiency Ratios
Administrators use efficiency ratios to measure how well their corporations utilize resources. According to Irman and Purwati (2020), the ratios measure firms’ effectiveness in using their resources to generate income and whether they can manage the assets efficiently. These ratios comprise receivables turnover, asset turnover, and inventory turnover ratios.
Asset turnover = net sales / average total assets
= £4,625,900,000/ [(£3,981,800,000 + £3,758,000,000)/2]
= £4,625,900,000/ £3,869,900,000 = 1.20:1
Inventory turnover ratio = cost of goods sold /average inventory
= £2,625,300,000/ [(£633,000,000 + £536,900,000)/2]
= £2,625,300,000/ £584,950,000 = 4.49:1
A retailer with an asset turnover ratio of 1:1 and above is good, and its inventory turnover ratio should be more than 2:1 (Haralayya, 2021). This performance shows that, in 2021/2022, Next Plc’s inventory vending rate was reasonable, and it efficiently managed the inventory and other assets to produce revenue.
Liquidity Ratios
Liquidity ratios include the current ratio, quick / acid test ratio, and net working capital ratio.
Current ratio = current assets / current liabilities
= £2,407,200,000/ £1,208,100,000 = 1.99:1
Acid test ratio = (current assets – inventory) / current liabilities
= (£2,407,200,000 - £633,000,000)/ £1,208,100,000
= £1,774,200,000 / £1,208,100,000 = 1.47:1
A current and acid test ratios of more than 1:1 are promising, indicating that the firm has fewer short-term liabilities than current assets to pay its debts (Haralayya, 2021). Therefore, the above results show that, in 2021/2022, Next Plc was in a healthy financial position.
Comparison of the Next Plc’s 2021/2022 and 2020/2021 Profitability, Efficiency, and Liquidity
Profitability Ratios
Gross profit ratio
From the above calculation, gross profit ratio for 2021/2022 is 42.63%. The gross profit ratio for 2020/2021 = (£1,247,900,000/£3,534,400,000) X 100 = 35.31%
Net profit ratio
Net profit ratio for 2021/2022 is 14.65% as calculated above. The net profit ratio for 2020/2021 = (£286,700,000/£3,534,400,000) X 100 = 8.11%.
In 2020/2021, Next Plc was less financially healthy than in 2021/2022. The reason is that in the former year, the company’s gross profit ratio and net profit ratio were 35.31% and 8.11%, respectively, lower than the latter year’s 42.63% and 14.65%, respectively.
Efficiency Ratios
Asset turnover ratio
Asset turnover ratio for 2021/2022 is 1.20:1 as calculated above. The asset turnover ratio for 2020/2021 = net sales / average total assets
= £3,534,400,000/ [(£3,758,000,000 + £3,673,300,000)/2]
= £3,534,400,000/ £3,715,650,000 = 0.95:1
Inventory turnover ratio
From the above calculation, inventory turnover ratio for 2021/2022 is 4.49:1. The inventory turnover ratio for 2020/2021 = cost of goods sold /average inventory
= £2,231,700,000/ [(£536,900,000 + £527,600,000)/2]
= £2,231,700,000/ £532,250,000 = 4.20:1
In 2020/2021, Next Plc did not manage its resources as efficiently as in 2021/2022. The company’s 2020/2021 asset and inventory turnover ratios were 0.95:1 and 4.20:1 respectively, lower than 2021/2022’s 1.20:1 and 4.49:1 respectively. In 2020/2021, Next Plc’s asset turnover ratio was lower than the ideal ratio of 1:1. However, its inventory’s selling rate was reasonable in both years as it had an inventory turnover ratio of more than 2 in 2020/2021 and 2021/2022.
Liquidity Ratios
Current ratio
From the above calculation, current ratio for 2021/2022 is 1.99:1. The current ratio for 2020/2021 = current assets / current liabilities
= £2,288,600,000/ £1,196,800,000 = 1.91:1
Acid test ratio
Acid test ratio for 2021/2022 is 1.47:1 as calculated above. The acid test ratio for 2020/2021 = (current assets – inventory) / current liabilities
= (£1,955,400,000 - £536,900,000)/ £1,196,800,000
= £1,418,500,000 / £1,196,800,000 = 1.19:1
In 2020/2021, Next Plc was less financially healthy than in 2021/2022. The reason is that the company’s current and acid test ratios in the former year were 1.91:1 and 1.19:1, respectively, lower than the latter year’s 1.99:1 and 1.47:1, respectively. However, both years’ results showed promising signs that the firm was in a healthy financial position since they were above 1:1.
Word count: 776 words
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