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Running head: FINANCIAL REPORTS ANALYSIS 2

FINANCIAL REPORTS ANALYSIS 2

Financial Reports Analysis

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Introduction

This paper will analyze financial reports of the leading giants in the fashion industry located in Europe that are Next PLC, and H&M. The analysis will capture the backgrounds of the two companies and evaluate their financial positions as of 2018. The report will tackle both horizontal and vertical reviews of the company with the inclusion of financial ratios. The companies’ profits will also be given importance in the analysis. Liquidation is an issue of concern to big companies included. The investment and efficiency in both Next PLC and H&M looked at to bring out the strengths and weaknesses of each company in the process of data interpretation. To finish the paper by analysis and review of the limitations to conclude the financial records of the companies presented.

Company Background

Next PLC

Next plc is a company that specializes in clothes and shoe fashion mostly — the company founded in 1864 in Leeds, England. The company has a financial target that aims at generating profits and achieving sustainability in the industry. It has over seven hundred stores, with 500 of them located in the United Kingdom and 200 distributed among European countries, the Middle East, and the continent of Asia. By 2018 statistics the company had about 43, 970 employees with a revenue of $4,055 million (Sabanoglu 2019).

H&M

H&M is a Swedish cloth retailer that focuses on fast-fashion designs for all members of society and ranked second in the industry. Erling Persson founded this company in 1947 in Sweden with women as the only customers. The company by 2015 had already acquired over 4500 stores globally, with about 132,000 individuals employed and income generated by 2016 totaling to $25.191 billion. To date, the company offers internet shopping in 33 countries (O'Connell 2019).

HORIZONTAL AND VERTICAL ANALYSIS

Parallel Analysis 

In conducting a horizontal analysis of the companies in the report, their financial statements used by focusing on a specific time frame. In this report, the focus put on the information obtained as of the 2017-2018 fiscal year. Taking a look at Next PLC’s economic data as of 2017 $4097.3 million, and in 2018 the data indicates a drop in the revenues to $4055.5 million that represented a 1.02% decline in revenues. Next, PLC experienced a decrease in revenues, something opposite to their organizational objectives, something attributed to the volatile nature of U.K markets resulting in a high risk of sale (Singh 2018).

Focusing on H&M in 2017, their income was $27696.63 million, considered an increase from the previous years. In 2018 the revenues obtained by H&M totaled up to $23232.37 million a decrease in income compared to the last year by 16.1% in sales revenues. In this regard, found that H&M had the most substantial reduction in sales revenues from 2017 to 2018 by about 16.1%. The amount of money generated by both companies in 2018 was a decline compared to 2017, but looking at the differences in incomes, Next PLC suffered a minimal decrease in revenue compared to H&M. $4464.25million was the amount of decline in revenues that H&M incurred in 2018 due to a racist scandal that attributed to the company making it lose collaborators.

 

Vertical Analysis 

Basing analysis on total sales, Next PLC experienced a 1.02% decrease in revenues in 2017-2018. The gross profit of the company in 2018 also declined by 8.11% from 2017, in comparison to 2016- 2017, where the decrease in gross profit was 3.8%. From this analogy, it is easier to see that for each $100 made by Next PLC, the company loses $8.11. The operating profit of the company, therefore, undergoes a decrease of 4.3% for every $100 of sales. The retail sales of Next PLC as of 2018 reduced by 7.9% from 2017 while the retail operating profit was at a 24% decrease. A decrease in retail net margin of 2.6 occurred between 2017 and 2018. The online sales grew from 2017 to 2018 by 9.2%. The online customer base that the company obtained was about 4%. 

Taking a look at H&M’s data, the company experiences a 16.1% decrease in revenues at the end of the 2017-2018 financial year. Given the gross profit by H&M in 2016-2017 of there was an 8.6% rise in comparison to 2017-2018, where a decrease in gross profit experienced by 3%. The administrative expenses incurred by H&M in 2018 increased by 9%, while in 2017, by 14%. The administrative costs by the company in 2018, therefore, had experienced a 5% decrease in comparison to 2017. The profits in 2018, in contrast to 2017, underwent a 25% decrease. During the first quarter of 2019, the company already had an adverse change in profits compared to the previous year by 11%. Taking a look at H&M’s stock in trade as of 2018, a change occurred by 12% as an increase compared to 2017. 

H&M generates profit in comparison to Next PLC even though they have to incur many expenses due to the company’s high number of employees. The profitability issue, though, is something that the company links closely to workers they have, administrative costs, and quantity of stock.

Ratio Analysis

Profit 

The essential purpose of most organizations is to maximize profit by targeting revenues and costs associated. The critical issue is to increase revenues while minimizing on costs the company uses in the process of marketing to administration and other expenses that come with doing the business. To determine the value of assets utilized in the industry is something that requires an analysis of the capital that H&M and Next PLC to figure out how efficiently the allocation of money to their activities undertaken. 

In 2017 Next PLC’s return on capital employed was 60.76% in 2017 with a decrease to 50.22% in 2018.With this situation, where a continuous decrease observed from 2017 to 2019. H&M, on the other hand, had a reduction in return on capital employed from 31% to 21.2%. On the gross profit of margin, H&M is impacted by numerous reasons, both internally and externally, that is influenced directly by the strategies the company employs. In 2018 the revenues and profit margins of H&M and Next PLC decreased drastically compared to 2017. H&M being with the highest decrease in revenues of 16.1% while Next PLC decreased by 1.03% in 2018 compared to 2017. The gross profit margin also drops for both companies from 2017 to 2018 financial years due to a decrease in revenues and an increase in costs per sale. The case of Next PLC of sales dropping by 2.9% due to failure to restock, something that lowered the net profit by 5.5% as of 2018. 

For the two companies, there exists a correlation when the gross profit margins put into consideration. When looking at the operating profit of H&M and Next PLC, there seem to exist variations with that of H&M being higher while Next PLC has minor reduction as changes. The operating profit for H&M in 2017 was 10.3%, then decreased to 7.4%.

Liquidity Position 

The most efficient way to evaluate the nature of H&M and Next PLC’s financial stability on debts and in most times, takes up the role of an indicator. The company’s assets can be sold or take up roles as capital, and only two of the ratios can be assigned this responsibility. Band Having the data of Next PLC and H&M offers a platform where comparison of the coefficients is from that data. The current rates are low than an equal resource indicating a short-term loan repayment difficulty. H&M’s ratio significantly outweighs that of Next PLC from 2017 to 2018. The situation suggests that the stock present in the companies might take a long period to sell out on inventory.

Efficiency

      

The data on investment points out towards H&M has a higher turnover per dollar in investment. In 2017 for every dollar invested by H&M, an estimated $1.54 attained, something that in 2018 decreased to $1.21in in the previous years. H&M managed to come up with a proper strategy that lowers the time required to liquidate assets in the company. The time frame for liquidation of inventory reduced to about 13 days in comparison to the average value of the United Kingdom. It is an indication of consumer willingness to spend even on credit to obtain the products from the company.

Gearing 

 

From data obtained in 2018, with regards to H&M, there was $33.7 considered the long-term debt. The 2017 ratios indicated better prospects for figures giving H&M with a gearing ratio of 32.2%. Where the best in comparison to 2018. In the event where the gearing ratio exceeds 50%, then the profit obtained from the company might be incapable of paying off the debt. To be safe, then the gearing ratio has to be in a range less than 50%, an indication that the current trend indicated by H&M is favorable for the company when dealing with the debt concerned.  

From the results obtained in the financial reports, Next PLC also had a gearing ratio that reached 51.3% that left the impression that for every $100, $54.3 was the long-term debt while the financing from the company stakeholders was about $45.7. In comparison to the 2017 figures on the gearing ratios. 

Investment 

The most attractive aspect of investment to the shareholders and investors is the returns gained once profits generated. The shareholders, for instance, get to enjoy earnings per share, which indicates the more one owns, the higher the payout they receive. Based on statistical data obtained, H&M in 2017 received a payout of 9.78 per share. The case for 2018 became difficult, considering the price per share drop to 7.64 per share. The change in price per share between Next PLC’s stock in 2017 and 2018 occurs due to a reduction in price. The situation made it very hard to come up with a way to calculate the exact values from 2017. The dividend cover of the company has been steady for some time at 110 and 105.

Limitations 

Different scenarios occur that bring about complications for the companies involved in the fashion industry. To demonstrate how the financial ratios utilized in the analysis of financial reports of the two companies in the fashion industry, namely, Next PLC and H&M, focused. The companies analyzed by using the financial ratios; however, in some cases, the data obtained have deficiencies due to the manipulated figures that, in the end, offer unrealistic conclusions. 

The other issue that comes about with using financial ratios for Next PLC and H&M analysis is an incompatibility. The accounting techniques used by the company vary from each other, making it difficult to compare the rates between H&M and Next PLC, bringing about complications in figuring out the relations (Wallstreet Journals 2019). 

Accounting ratios applied in the financial statements lack practicality in the market due to little focus on the current economic situations surrounding the firm. In the financial recording processes, uniformity issues arise that make the financial reports from different companies practically different, making information obtained, especially on ratios unreliable to generate conclusions. 

Conclusions 

The report generated has the focus set purely on analysis of financial statements of Next PLC and H&M that are significant retailers in the fashion industry of Europe. The study conducted in this report concludes that H&M generates more revenue than Next PLC. The operating profit of both Next PLC and H&M faced a decrease from 2017 to 2018 due to a reduction in taxes. The companies dominate the market in Europe’s fashion industry 

Appendix

Profitability ratios:

Return on capital employed (%) = (profit /capital) 100

Gross profit of margin (%) = (G.P/Sales revenue)100

Operating profit (%) = (profit/sales) 100

	Next PLC 2017	Next PLC 2018	H&M 2017	H&M 2018
Return on capital employed	60.76%	50.22%	31%	21.2%
Gross profit margin
Operating profit margin	1452/3630 = 2.5%	1158/6369 = 5.5%	4250/43775 = 10.3%	3747/27728= 7.4%

Efficiency ratios:

Asset turnover = (sales income/capital used) 100

Average inventory days= (A.I/C.O. S) 365

Average receivables period= (Average trade receivables/credit sales) 365

Average payable period=(Average trade payables /credit purchases) 365

	Next PLC 2017	H&M 2017
Asset turnover
Average inventory period	1652/21476 = 13 days	1875/33750 =18 days
Average receivables period	(3854/23650)365 =59 days	(421424580)365 =63 days

Gearing Ratios

Gearing ratio = (non-current liabilities/non-current liabilities + Equity) 100

Investment ratio

Earnings per share = profit after tax/number of ordinary shares

Ordinary dividend =profit after tax /ordinary dividend

	H&M 2017	H&M 2017
EPS	7.64p	9.78p
Ordinary dividend cover	334/245=1.36	435/312=1.39

References

O'Connell, L. (2019). Gross sales of the H&M Group worldwide 2007-2018 | Statista. Retrieved 4 November 2019, from https://www.statista.com/statistics/252190/gross-sales-of-the-h-und-m-group-worldwide/

Sabanoglu, T. (2019). Next plc profit before tax 2011-2018 | Statista. Retrieved 4 November 2019, from https://www.statista.com/statistics/462375/next-profits-before-tax-united-kingdom-uk/

Singh, P. (2018). H&M continues to struggle, profit and sales drop in Q4. Retrieved 4 November 2019, from https://fashionunited.uk/news/business/h-m-continues-to-struggle-profit-and-sales-drop-in-q4/2018013127921