In 2011, for every 100 of sales, Next Plc made a gross profit of 29. 20 compared to 29. 26 in 2011 showing a small decrease in profit. The gross profit percentage represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold – gross profit margin (Weetman, 2006). The higher the percentage, the more the company retains on each 100 of sales to utilise for its obligations.
Distribution Costs Percentage In 2011, for every 100 of sales, Next Plc spent 6. 46 in distribution costs compared to 6. 81 in 2010 again showing a small decrease which an investor may look upon as being beneficial as distribution costs come from revenue (Weetman, 2006). Administrative Costs Percentage In 2011, for every 100 of sales, Next Plc spent i?? 6. 21 on administration costs compared to 6. 94 in 2010. Again, as administrative costs are taken from revenue, an investor could view this as being beneficial (Weetman, 2006).
Operating Profit Percentage In 2011, for every 100 of sales Next Plc made operating profit of 16. 64 compared to 15. 55 in 2010. Return on Capital Employed In 2011, for every 100 of capital employed (being Next Plc’s assets that contribute to its ability to generate revenue) a return on profit of 59. 91 was made compared to 56. 63 in 2010.
The investor can gain a better understanding of Next Plc’s ability to generate returns from its available capital base (Weetman, 2006). Return on Equity Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.In 2011, Next Plc’s return on equity amounted to 172. 50 for every 100 compared to 272. 86 in 2010 which is a substantial decrease (Weetman, 2006). 7 Asset Turnover In 2011, for every 1 worth of assets, 3.
59 of income was being generated by Next Plc compared to 3. 64 in 2010. Asset turnover measures an organisation’s efficiency at using its assets in generating revenue (Weetman, 2006). The higher the number, the better an organization is at generating income from its assets 8 Current RatioCurrent ratio is a liquidity ratio that measures an organisation’s ability to pay short-term obligations such as supplier invoices (Weetman, 2006).
In 2011, Next Plc’s current ratio was 1. 28:1 meaning that, for every 1 owed by Next Plc there is 1. 28 to pay it compared to 2010 when the ratio was 1. 37:1 when they had 1. 37 to pay against every 1.
This shows that Next Plc has the ability to pay back its short term debts. Had the ratio been less than 1 . 00:1 then this would have suggested that Next Plc would not have been able to pay any obligations that would become due at that point.Acid Test Ratio The acid test is another liquidity ratio that determines whether an organisation has enough short-term assets to cover its immediate liabilities without selling any of its inventory.
The acid test is more accurate as it does not take into account current assets as with the above ratio. In 2011, the acid test ratio for Next Plc was 0. 83:1 showing that for every 1 of short term debt owed, they had 0. 83 to pay it compared to 0. 96:1 in 2010 when they had 0. 96 with which to pay it.
This tells the investor a different story than the results of the current ratio (Weetman, 2006). An investor may feel less comfortable about Next Plc’s liquidity as they may be worried about the organisation’s ability to meet its debts especially as their ability to pay seems to be declining. 10 Gearing Ratio In 2011, the gearing ratio for Next Plc was 75. 77% compared to 85. 73% in 2010. The gearing ratio measures capital against borrowed funds.
The higher a company’s degree of leverage, the more that company is considered risky.Companies with high gearing (high leverage) are more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are (Weetman, 2006). Investors comparing this figure to that of other companies within the same industry will determine whether Next Plc has high leverage. Part D – Investability For the purposes of this section, details of share prices for Next Plc were downloaded from shareprices. com (app. 4). This information was downloaded on 9th November 1011 and covers the period 10th October – 8th November 2011.