Formal Financial Statement Analysis

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timer Asked: Nov 17th, 2016

Question description

Please follow teacher's coursework outline(a word document below)

The picture of notes is showing what our group initially want to involved in our essay, it night not be enough information, please modify it as close to teacher's requirement as possible. maybe more information and calculation or analysis are needed.

other files are other part from my group mate. should be 4 people no including me, 1 person's work is still missing, i will sen it to you as soon as i get it.

Formal Financial Statement Analysis
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MN20501 Intermediate Accounting The Coursework The requirement is to produce a report on the financial position of a Listed Company of your choice using ratio analysis and any other analytical techniques you feel are appropriate. By “Listed” I mean listed on a stock exchange and so able to sell shares to the public. The rules are: The report is to analyse the financial situation of your chosen company. Does it look financially sound, are there areas that can be improved and if there are areas of concern (if possible) can you suggest what needs to be done to improve things. Report length between 2,000 – 2,500 words excluding appendices The completed essay must be submitted via the Assignment Tool on Moodle in Microsoft Word (or Word compatible format) by 23:55 on Sunday 20th November 2016. The essay will contribute 25% of the total module mark. You will need to obtain the annual reports of a company. This can be done either from reports in the Library, through probably best by downloading reports from the Internet. Quite a lot of companies recently have taken to having only reports you can view as an online book or they can be downloaded in PDF format. You need to keep the report relevant and should also use ratios and analyses from another company in the same sector as a comparator for the results you have calculated. Do make sure you get the full annual report – not an interim report. As a guide I have provided some ideas on writing the report. These are suggestions but are not prescriptive. 1|P age WRITING REPORTS You may not have prepared a ‘professional’ style report before, so here are a few pointers. The report should contain the following: 1. Title page (title of report, date, possibly the author) 2. Contents page (headings of the following sections, with page references) 3. Executive summary (brief summary of scope of report and main findings, imagine you are writing for a busy chief executive so make it no more than 200 words). The executive summary is NOT included in word count. 4. Introduction (could contain background information on the company analysed, and anything that you think is relevant to an understanding of the analysis e.g. the company makes copper cables and the price of copper has risen dramatically recently) 5. Several separate sections for e.g. overview of financial performance and position (e.g. the company’s profits have grown at a rate of 5% over the past 5 years but the company has been losing cash, 50% of sales are made in Europe, etc.), discussion of profitability, working capital, etc. ratios. Refer to calculated ratio figures where appropriate, BUT DO NOT INCLUDE ACTUAL CALCULATIONS HERE. 6. Conclusion (of main findings - do NOT put anything new in your conclusion) 7. Appendices (containing your ratio - and any other - calculations) You should aim to calculate a couple of ratios in each category, but you need not be limited to this. ALWAYS CALCULATE RATIOS OR ANY OTHER ANALYSES FOR MORE THAN ONE YEAR (ideally at least 3 years to get a trend) - it is important to be able to compare ratios against something! Do not be afraid of using sources like the Financial Times or the internet to find out background information on the company to include in your report. Make sure you have a good read of the whole set of financial statements provided for you including the directors’ report which often gives you useful background information. Use CONSOLIDATED figures where applicable - these are for the whole group of companies not just the individual parent holding company. Based on past experience I have put a list of FAQs on the next page: 2|P age FAQs What do you want me to do????? Choose a company and, applying some of the techniques we have covered, give your opinion on the financial health of the company. What I want are your opinions supported by some evidence using some analytical techniques. I am comparing 2 companies and they have different year end dates – does this matter? No. Year end dates vary so it is unlikely that you will find a comparator company with a similar year end date. If there are a few months difference it does not matter – this is just an exercise. Apart from ratios what other analytical techniques do I need to use? Anything you think is relevant. Horizontal and vertical analyses, Z scores, EVA, MVA, TSR, segmental analysis – any of these things. If I don’t do ALL the above will I lose marks? No. These are just suggestions. You have limited space so pick a few things and analyse the companies using the methods you choose. It is for you to identify what is (and also what is not) important. Is there a “right answer” for an analysis? No. I’m looking for your ideas and how you review how the company is doing. You might care to suggest an opinion on how the company might do in the future, but this is not strictly required. Are there any companies I should avoid? Stay away from banks, investment companies (investment trusts & pension funds) and financial services companies. Their rules vary somewhat and can be difficult to call. Can I go over the word limit? By 10% only – otherwise your report will may have marks deducted. How many marks? Only the ducks of fate can decide. Do they have to be UK companies? No, but as long as they are listed on a stock exchange somewhere that is OK. I can’t find a comparator company that does exactly what my chosen company does – what can I do? Choose a company in the same industry sector. You won’t find companies that do exactly the same thing. The companies in the same sector will be pretty varied but this is a “broad brush” activity. 3|P age
Comparison of profitability ratios: ● In the last financial year, both Next and Marks & Spencer had similar gross profit percentages, although Next’s has been increasing for the last few of years whereas M&S’s has remained stagnant. This implies they must have a similar mark up margin on their products, which makes sense as they both are aimed at selling to the middle class ● However, M&S’s operating profit percentages are dramatically lower than Next’s and has been decreasing over the last few years compared to an increase in Next’s. This tells us that M&S spends more (compaitively) on operating expenses (ie. Rent & utility costs, advertising, dirct labour,…) ● Because of this, it also means that that the return on assets % and return on equity are much lower for M&S than they are for Next, which shows that Next is much more effective in developing assets to generate its sales and profits and its shareholders have a greater ability of earning a return on their investment Comparison of Efficeincy ratios: ● ● ● Next has a higher number of collection days than payable days, meaning that it often has to pay its suppliers before it has received payment from its customers. This implies that it needs to have a decent cash reserve to be able to operate in this way Compare this to M & S and we see that this is reversed, it has a smaller number of collection days than payables days, so has to be able to hold onto this cash before paying its suppliers This means that Next has a great operating cycle, so is not too efficient at converting its good into cash and profit. M&S is much more efficient and actually has a negative operating cycle, so has cash spare for other things Ratios Next: Profitability Ratios Gross profit % Operating profit % Profit before tax % Profit for the year % Return on assets % Return on capital employed % Return on equity Next: Efficiency Ratios Collection days Payables days Inventories days Inventories weeks Operating cycle (days) Operating cycle % Asset turnover Marks & Spencer: Profitability Ratios Gross profit % Operating profit % Profit before tax % Profit for the year % Return on assets % Return on capital employed % Return on equity Marks & Spencer: Efficiency Ratios Collection days Payables days Inventories days Inventories weeks Operating cycle (days) Operating cycle % Accounting Year Ending (January) 2014 2013 2012 33.16 31.6 30.38 19.33 19.51 17.49 18.59 18.71 16.84 14.79 14.28 13.8 33.51 36.46 31.86 56.07 65.86 53.82 2.43 2.33 2.6 2016 34.78 20.76 20.02 15.96 36.61 75.09 2.68 2015 33.59 20.3 19.87 15.87 35.41 58.54 2.47 2011 29.21 16.64 15.97 11.61 31.75 61.02 2.37 2010 29.26 15.55 14.83 10.69 29.84 54.02 3.78 2016 81 29 65 9 117 28.71 1.83 Accounting Year Ending (January) 2015 2014 2013 2012 2011 65 69 62 63 56 31 28 28 29 29 57 56 50 57 55 8 8 7 8 8 91 97 83 91 82 22.61 23.91 20.88 22.55 20.44 1.78 1.8 1.95 1.89 1.99 2010 56 27 47 7 76 19.2 2.01 2016 39.11 5.53 4.63 3.84 6.41 8.86 0.14 2015 38.66 6.8 5.82 4.67 7.76 10.67 0.19 Accounting Year Ending (March) 2014 2013 2012 37.55 37.87 37.8 6.74 7.54 7.51 5.63 5.62 6.62 4.91 4.57 4.93 7.53 7.66 9.16 10.83 11.01 12.71 0.21 0.23 0.24 2011 38.24 8.59 8.01 6.15 10.9 15.77 0.29 2010 37.94 8.93 7.37 5.48 9.82 13.35 0.32 2015 4 56 46 7 -5 -0.45 Accounting Year Ending (March) 2014 2013 2012 4 4 4 65 57 58 48 45 40 7 6 6 -12 -8 -14 -1.66 -0.98 -1.93 2011 4 56 42 6 -11 -1.39 2010 3 49 38 5 -8 -0.95 2016 4 58 45 6 -9 -1 Asset turnover 1.38 1.33 1.34 1.36 1.38 1.36 Profitability Ratios Graphical Comparison 1.33
Internal and External Risks - Fall in the pound so imported textiles are more expensive, increase in production costs. - Underlying fall in demand in the clothing sector, which NEXT is based on. - Possibility of high inflation next year because of Brexit and uncertainty in the market, rise in interest rates. Would be more expensive to buy materials in the UK and would be more expensive for customers. Sectoral Analysis Segment Profit 2016 NEXT Retail - £408.1m, 45.5% of segmental profit NEXT Directory - £413.3m, 46.1% of segmental profit NEXT International - £10.4m, 1.2% of segmental profit NEXT Sourcing - £51.1m, 5.7% of segmental profit Lipsy - £5.7m, 0.6% of segmental profit Property Management - £7.5m, 0.8% of segmental profit Total Segment Profit - £896.1m 2015 NEXT Retail - £383.8m, 46.5% of segmental profit NEXT Directory - £376.8m, 45.6% of segmental profit NEXT International - £11.7m, 1.4% of segmental profit NEXT Sourcing - £41.4m, 5.0% of segmental profit Lipsy - £5.1m, 0.6% of segmental profit Property Management - £6.9m, 0.8% of segmental profit Total Segment Profit - £825.7m 2014 NEXT Retail - £347.7m, 48.1% of segmental profit NEXT Directory - £358.5m, 50.0% of segmental profit NEXT International - £12.1m, 1.7% of segmental profit NEXT Sourcing - £34.1m, 4.7% of segmental profit Lipsy - £2.7m, 0.4% of segmental profit Property Management - £1.8m, 0.2% of segmental profit Total Segment Profit - £722.8m 2013 NEXT Retail - £331.1m, 51% of segmental profit NEXT Directory - £302.1m, 46.5% of segmental profit NEXT International - £8.4m, 1.3% of segmental profit NEXT Sourcing - £30.8m, 4.7% of segmental profit Lipsy - £2.0m, 0.3% of segmental profit Property Management - £3.5m, 0.5% of segmental profit Total Segment Profit - £650.2m 2012 NEXT Retail - £323.7m, 53.8% of segmental profit NEXT Directory - £262.6m, 43.6% of segmental profit NEXT International - £7.9m, 1.3% of segmental profit NEXT Sourcing - £21.1m, 3.5% of segmental profit Lipsy - £1.3m, 0.2% of segmental profit Property Management - £5.6m, 0.9% of segmental profit Total Segment Profit - £601.8m Operating profit. NEXT Retail, a chain of more than 500 stores in the UK and Eire. NEXT Directory, an online and catalogue shopping business with over 4 million active customers and international websites serving approximately 70 countries. NEXT International Retail, with around 200 mainly franchised stores across the world. NEXT Sourcing, which designs and sources NEXT branded products. Lipsy, which designs and sells Lipsy and other branded younger women’s fashion products. -Continuing fall in percentage of profit made by NEXT in the retail segment. Fallen by 8.3% over the last 5 years. -NEXT Directory percentage of segment profit fell in 2015 but has increased since. -NEXT International Retail percentage of segment profit has been relatively stable, falling by 0.1% from 2012 to 2016. - Large increase in NEXT Sourcing percentage of segment profit, from 3.5% in 2012 to 5.7% in 2016. - Steady increase in Lipsy percentage of segment profit, from 0.2% to 0.6%. - Property management percentage of segment profit similar in 2016 (0.8%) to 2012 (0.9%). - Maybe increase Lipsy side of business as that had been rising and NEXT directory has been doing well so keep growing online business as free next day delivery to stores and cheap next day delivery has helped. Underlying fall in demand in clothing sector so maybe focus on home section. M&S 2016 Clothing & Home Gross Profit - £2,180.7m (54.7% of gross profit). Food Gross Profit - £1,806.2m (45.3% of gross profit). UK Gross Profit - £3,986.9m UK Operating Costs - (£3,320.1m) M&S Bank - £59.9m UK Operating Profit - £726.7m International Operating Profit/(Loss) - £58.2m Group Operating Profit - £784.9m External Revenue by Geographical Location 2016 United Kingdom - £3,781.9m, 91% of total external revenue Rest of Europe - £238.2m, 5.7% of total external revenue Middle East - £75.7m, 1.8% of total external revenue Asia - £52.8m, 1.3% of total external revenue Rest of World - £28.3m, 0.7% of total external revenue Total External Revenue by Geographical Location - £4,176.9m 2015 United Kingdom - £3,648.0m, 91.2% of total external revenue Rest of Europe - £225.6m, 5.6% of total external revenue Middle East - £60.4m, 1.5% of total external revenue Asia - £37.5m, 0.9% of total external revenue Rest of World - £28.3m, 0.7% of total revenue Total External Revenue by Geographical Location - £3,999.8m 2014 United Kingdom - £3,447.0m, 92.1% of total external revenue Rest of Europe - £197.7m, 5.3% of total external revenue Middle East - £46.5m, 1.2% of total external revenue Asia - £19.6m, 0.5% of total external revenue Rest of World - £29.2m, 0.8% of total external revenue Total External Revenue by Geographical Location - £3740.0m 2013 United Kingdom - £3,319.3m, 93.2% of total external revenue Rest of Europe - £171.1m, 4.8% of total external revenue Middle East - £34.2m, 1% of total external revenue Asia - £13.9m, 0.4% of total external revenue Rest of World - £24.3m, 0.7% of total external revenue Total External Revenue by Geographical Location - £3,562.8m 2012 United Kingdom - £3,245.7m, 94.3% of total external revenue Rest of Europe - £148.1m, 4.3% of total external revenue Middle East - £28.0m, 0.8% of total external revenue Asia - £11.2m, 0.3% of total external revenue Rest of World - £8.1m, 0.2% of total external revenue Total External Revenue by Geographical Location - £3,441.1m Continuing profit. M&S 2016 UK Revenue - £9,470.8m (89.7% of total revenue). International Revenue - £1,084.6m (10.3% of total revenue). Group Revenue - £10,555.4m - Could continue to grow business abroad as have been doing, total external revenue created abroad has slowly increased. Could follow Marks and Spencer’s lead who had an international revenue of over 10% over 2015. Marks and Spencer have had a drop in profit recently though so maybe don’t follow. Pound has fallen against the Euro so less expensive to export things so maybe better to open business internationally and it opens products to a greater audience if sells things abroad.
Financial Ratios The financial ratios used were gearing ratio, debt-to-equity ratio, interest cover, dividend cover, working capital. An attempt to find the Z-Score was also made. Since 2013, Next has relied more on borrowing rather than shareholders for finances, as seen from their gearing ratio that ranges from 73.1% to 78.2%. Their D/E ratio also shows this, with values higher than 270% in the past four years. In addition, looking at their interest cover that has never gone over 1.06, Next's PBIT can just about cover its interest payments. In 2014 and 2015, their interest cover fell to 0.9 and 0.97 times respectively, which meant their PBIT were unable to afford the interest they will have to pay. On the other hand, their dividend cover has been high, with a maximum of 4.33. With both the interest and dividend covers combined, Next has been consistently lacking in its ability to pay interest and has, possibly, an excess amount of retained earnings. It would make more sense for Next to borrow less and rely more on shareholders to finance its activities. However, when compared with Marks & Spencers (M&S), Next is in a better position. M&S has more equity than debt, with a gearing ratio of 46% and a D/E ratio of 85% in 2016. Even with a lower proportion of debt, M&S is also struggling with paying its interest, where their interest cover is only 0.338 times in 2016 and has been less than 1 since 2013. Their dividend cover does not seem to be in much excess, with 2.15 times in 2016. Therefore, M&S cannot borrow more in order to increase its retained earnings. This could indicate that M&S will not be able to maintain their dividend of 11.6p per share. Still, if the working capital and working capital ratio is also taken into consideration, Next is performing much better than M&S, with their current assets being 1.4 times of their current liability, while M&S has lower current assets than liabilities. Unfortunately, Next's annual reports have failed to show their retained earnings, with no breakdown of their total equity. Consequently, the Z-Score cannot be obtained. M&S scored 2.98, putting it in the upper "grey" zone. In conclusion, although Next's inability to pay future interest is not a major problem in their accounts, it still show signs of vulnerability if there were to be a fluctuation in its profits.
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