Essay: Understanding LLC & Financial Statements Of Next Plc.

At the end of a module students will be expected to be able to:

1. Analyse and interpret financial statements.

Limited Liability Company presents a different set of propositions which distinguishes it from other forms of business. An understanding of specific aspects of their operations can help with the treatment of certain items on the financial statement. Also, a company’s financial statement will make more  sense to users through interpretation and analysis underpinned by use of relevant ratios.

REQUIRED

1. Appraise Limited Liability Company as a form of business by drawing on its merits and demerits in comparison to other business forms such as sole proprietorship and partnership. (30 marks)
2. Demonstrate your understanding of financial statements through analysis and interpretation of the latest set of annual reports in the past five years for Next PLC. Premise your analysis on working capital, liquidity, profitability and investor ratios (two for each class of ratio). Charts/graphs should be deployed in establishing trend for individual ratios and support analysis. Comment on the future of Next PLC in the UK clothing retail industry based on your analysis.

Use of report format with introduction covering scope of report and conclusion/recommendation that emerges from underlying discussion

Use of Harvard referencing for both in-text citation and bibliography

Carefully read the module handbook, the marking criteria and the grade descriptors.

Requirement 1

This report provides a clear understanding about the Limited Liability Company form of business and highlights the merits and demerits of the same. It discusses the facts which differentiates LLC from other form of business and provide insights about their operations. The report also outlines the importance of company’s financial statements by undertaking an analysis of the same with the help of relevant ratios. It highlights the financial position and performance of Next Plc by analyzing its annual reports of past five years. Graphical representation of the same has also been given, followed by a conclusion in the end.

A limited liability company is a kind of hybrid entity which encloses the features or characteristics of both the company and partnership. It is a corporate structure under which the members of the entity are not personally obliged or liable for the financial obligations and liabilities of the company. The fact that its feature is similar to corporation and availability of flow through taxation for the members is same as partnership; makes LLC a hybrid entity. The main motive of the owners to choose LLC as a form of business is to limit the personal liability of the principal. Moreover, it is much easier to establish as compare to other forms and it provides more flexibility and protection than the partnership or sole proprietorship (Cornwall, Vang, & Hartman, 2016).  

The ownership in Limited Liability Company works in many ways. The owners are called as members comprising of individuals, business entities or both. In order to form a LLC, an appropriate organizing document has been filed with the state agency that declares the number of issues which are discussed between the owners in respect of LLC membership. When establishing this kind of business, the members are required to decide about many things such as amount of capital contribution, manner in which the profits and losses will be allocated, voting rights of the owners and many more. Apart from this, there are many merits and demerits of LLC which make it different from other business types. They are as follows:

Merits of LLC

• As the name says, the liability of the members in relation to company’s debt and obligations is limited to their own capital contribution. It is considered to be a key advantage as the owners are not personally liable for corporation’s financial obligation. In simple words, if in case the entity become insolvent or get sued, the personal assets of the member like bank accounts are protected as they have limited liability (Cornwall, Vang, & Hartman, 2016).
• Another advantage is that the income from LLC is treated as the personal income of the members and because of that it is not subject to some federal taxes, for which many companies or corporations are liable. LLC allows the owners to pass through the taxation purposes.
• High flexibility is there as the amount invested by the individual does not need to be equal to the percentage of their ownership. At time of creating a LLC, an operating agreement is prepared in which allocation basis for profit and loss is decided irrespective of the investments made by the owners. So, flexibility is there in investing without concerning the ownership (Barr, & McClellan, 2018).
• In LLC, there is no need to have a board of directors, conduct annual meetings or comply with strict requirements. There is a freedom in management which save a lot of time and stress of the members (Cornwall, Vang, & Hartman, 2016).

Demerits of LLC

• It is very difficult to build capital for LLC due to lot of legal obligations and state filings associated with the addition of new member in the company (Burger, Kaufman, & Atkinson, 2015).
• High fees are required to be paid by LLCs to the states as compare to other form of business entities. Also, many states require the renewal fees on yearly or periodic basis.
• Not every business can become a limited liability company due to the protections offered to LLC by the government. Businesses like banks, insurance companies, and medical firms are prohibited to become a LLC (Cornwall, Vang, & Hartman, 2016).
• One of the disadvantages of LLC is that there is a lack of uniformity in the requirements of the state statues that regulates Limited Liability Company.

Next Plc is a UK based company operating in the retail sector. It is engaged in the business of clothing, accessories, footwear and retailing of home products in United Kingdom, the Middle East, Europe and Asia. The company has six segments through which it operates and also provides online service to its customers. Moreover, it has approximately 200 franchised stores functioning under the name Next International Retail on a global level (McKinney,  2015).

Requirement 2

Liquidity or working capital ratios

These ratios determine the financial health of the company by measuring its capabilities of paying its short term obligations with its current and most liquid assets. They reflect the overall liquidity position of the firm.

Current ratio: It is one of the liquidity ratios that measure the current assets of the firm against its current liabilities. The ideal ratio is 2:1 which means that every firm should have its CAs double of its CLs in order to facilitate smooth functioning of the business.

In case of Next Plc, the ratio has increased from 2014 to 2017. It was 1.76 in 2014 which rose to 2.29 in 2017 but recently it falls to 1.96, almost close to the industry benchmark. The upsurge was due to the fact that the liabilities of the company has reduced over the years. The ratio declined in 2018 due to the reduced cash balance of the company.

Quick ratio: it is another liquidity ratio which measure the capability of the company by evaluating its short term obligations against its most liquid assets. The standard ratio required is 1:1 (Matthew, 2017).

It can be observed that the ratio constantly reduced from 2014 to 2016 as it reached to 0.88 from 1.18. After that a reverse trend was there as the ratio increased to 1.49 in 2017 and again reduced to 1.32 in 2018 (Finkler, et al. 2016).

Profitability ratios

These are the other financial metrics which deals with the measurement of company’s overall profitability. They are very much useful for the investors as they reflect the competency of the firm in making high returns to the shareholders.

Net profit ratio: It determines the amount of profit and express the same as the percentage of sales revenue. The net margin of Next Plc has increased during the past five years from 14.81% to 15.53% in 2017 and 14.595 in 2018. This was due to the upsurge in company’s total revenue and the reduction in its expenses which boosted up its profits.

Return on equity: it measure the amount of return offered by the company to its shareholders out of the profits earned by it during the year. The ROE of Next PLc was 193.43% in 2014 which increased to 210.41% in 2016. However the same reduced in 2017 and 2018, reported at 154.52% and 119.18% respectively. This was due to the reduction in net profit during the years and increase in company’s shareholders’ equity.

Investors’ ratio

These are the market value ratios which reflect the stock performance of the company. They provide insights to the investors about the market performance of the company’s stock (Burger, Kaufman, & Atkinson,  2015). 

Earnings per share: it defines the portion of company’s profit allocated to each outstanding share. The EPS of Next Plc has increased over the years which reflected that the firm has performed well in its past years (Cornwall, Vang, & Hartman, 2016).

Dividend payout ratio: it is the measure of dividends which are been paid out to the shareholders. The company’s DPR has also shown an increasing trend which reflect the company has earned sufficient profits to declare high dividends to its shareholders. It also means that its market performance has enhanced during the past five years (Barr, & McClellan, 2018).

Conclusion

After assesing all the detais and information, it could be inferred that captial budgeting and ratio analysise are the best tool to evalute the fiinancial sustainbiltiy and perforamnce of comapn . However,  Next Plc has increased its overall earing and also strengthten its busienss performance throhgout the time. The profitability of company have changed increased by 20% which is good indicator for the investors to create valeu on their captial by investing in Next Company. Company needs to adjust its working captial and liquidity captial in its business if it wants to strengthen its business in lon run.

References

Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education. UK: John Wiley & Sons.

Burger, R. H., Kaufman, P. T., & Atkinson, A. L. (2015). Disturbingly weak: The current state of financial management education in library and information science curricula. Journal of Education for Library and Information Science, 56(3), 190-197.

Cornwall, J. R., Vang, D. O., & Hartman, J. M. (2016). Entrepreneurial financial management: An applied approach. Australia: Routledge.

Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial management for public, health, and not-for-profit organizations. UK, CQ Press.

Matthew, B. T. (2017). Financial management in the sport industry. Australia: Routledge.

McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies. Australia: ABC-CLIO.

Ward, A. M., & Forker, J. (2017). Financial management effectiveness and board gender diversity in member-governed, community financial institutions. Journal of business ethics, 141(2), 351-366.

Zietlow, J., Hankin, J. A., Seidner, A., & O'Brien, T. (2018). Financial management for nonprofit organizations: Policies and practices. Australia: John Wiley & Sons.