Financial Management Acquisition Of Mackay -Myassignmenthelp.Com

Question: Discuss About The Financial Management Acquisition Of Mackay? Answer: Introducation Financial analysis helps in the evaluation of the performance of the company with the help of its financial statements. It allows the management to make changes in their plans to ensure that the business grows consistently. The entire process is carried out by a financial analyst who uses different methods to assess the viability, profitability, solvency, liquidity and future potential. These methods include ratio analysis, cost of capital, comparative statements and share price movements (Brigham and Ehrhardt, 2013). It provides information about the past performance of the company to the stakeholders. They can use financial ratios and mathematical techniques to predict the future of the business. The management has to make sure that they increase the profitability of the business to make their shareholders satisfied. This objective can only be accomplished if they review the performance at regular intervals and make changes in it as per requirement (Grinblatt and Titman, 2016). The main stakeholders who are associated with the company are employees, investors, shareholders, creditors, government, suppliers and customers. The aim of this paper is to compare and contrast the performance and operations of Next and Mackay Stores Limited. Both the firms are related to clothing industry and they have been providing tough competition to each other. The annual reports of 2015 and 2016 have been taken into consideration for better evaluation and assessment. Furthermore, the report has been divided in different sections: introduction, financial analysis, cost of capital, calculation of price per share, impact of financial statements, share price movements and conclusion. It will help the management of Next to take decisions form strategies for the future of the company. Introduction and financial analysis of Next Plc Next is a multinational retailer which is based in England, UK. It has more than 700 stores which include Europe, Ireland, Asia and Middle East. The company was established in 1864 by Joseph Hepworth Son. But in 2014, Next became the largest retailer in clothing in UK due to its high sales and revenues. The company has been growing at a good pace but the level of competition has been rising in the industry which has affected its business to some extent (Next (2017a)). It is essential for the management to increase the productivity and efficiency of their operations to make it more competitive in the market. It will increase the brand imaged as well as profitability of the organization (Brooks, 2015). The Financial ratio classification for Next has been given below: Financial ratio classifications (Next) 2016 2015 Profitability Ratios Gross Profit Margin 34.78% 33.59% Net Profit Margin 15.96% 15.87% EBITDA Margin 23.59% 23.17% EBIT Margin 20.76% 20.30% Assets Management Ratios Assets Turnover 3.60 2.87 Return on Capital Employed (ROCE) 74.79% 58.19% Days of Sales Outstanding (DSO) 92 77 Days on Hand (DHO) 65 57 Creditors in Days 29 31 Liquidity Ratios Gearing 73% 76.9% Interest Cover Ratio 27.44 26.45 Current Ratio 1.40 1.82 Quick Ratio 0.99 1.35 Investors Relation Ratios Return on Equity (ROE) 2.781 2.523 Earnings per Share (EPS) 4.53 4.15 Dividend per Share (DPS) 1.51 1.38 Dividend Cover Ratio 1.17 1.46 P/E Ratio 8.568 Analysis of Next Plc Profitability Ratios: It can be seen from the Profitability Ratios that the profits of Next plc have increased from 2015. Their Gross profit, net profits, EBITDA and EBIT has increased to some extent which is a positive sign (Grinblatt and Titman, 2016). It shows that the company has reduced their cost and the demand of the products has increased. But they have to make sure that the rate of growth is high because as compared to last year the growth has been slow. It has been due to increased competition and changing market conditions. The trend shows that the profitability of the company will increase but slowly which has to be taken into consideration by the management. Assets Management Ratios: The Assets Management Ratios of Next has improved in 2016 as compared to 2015. It shows that their efficiency has increased and their overall cost has reduced. Their ROCE has increased from 58.1% to 74.7% in 2015 and 2016 respectively (Jordan, 2014). It means that the business has been using their capital efficiently. Their productivity has increased. Similarly, their asset turnover has improved to 3.6% from 2.8% in 2015. Apart from this, their activity ratio is only 29 days as compared to their days of outstanding sales and days on hand. It means that the company has been paying to their creditors in fewer days while they have been receiving money from their debtors in more days. It can affect their liquidity which can result in shortage of cash in near future. It can be seen in Appendix 1 and 2 that their liquidity ratios have declined from 2015. The profitability and investors relation ratio can be evaluated by Assets Management Ratios (Greenbaum, Thakor and Boot, 2015). Liquidity Ratios: The liquidity ratio of Next has declined in 2016 which is a concern for the management. Both current and quick ratio has reduced which means that the business may find difficulties in paying off their short term debts. But their interest coverage has improved from 26.45% in 2015 to 27.44% in 2016. Next Plc will have no problems in paying their interest on long term borrowings as they have ample of funds for it. But they have to focus on their short term payment obligations (Buchman, Harris and Liu, 2016). Investors Relation Ratios: The Investors Relation Ratios have also shown positive trend and slow growth which is beneficial for the investors and shareholders. The return on equity has improved from 2.5% in 2015 to 2.78% in 2016. The wealth of the shareholders has increased. The EPS as well as dividend per share has risen (Brooks, 2015). It has made the company more attractive for future investments. The PE ratio of the organization is 8.5 in 2016. The management should focus on increasing the PE ratio of the company. Introduction and financial analysis of Mackay Stores Limited Mackay Stores Limited was formed by McGeoch brothers in 1834. The company was initially started as a pawnshop but in 1953 it was changed to clothing stores. The headquarters of the company is in Inchinnan, Scotland. The management has been focusing on long term value creation and they have made changes in the organization accordingly (Bodie, 2013). The culture of the company is positive and they have been benefitted by the long staff residency and employee engagements. In 2005, it was also named as one of the best companies to work in due to its pay grades and healthy working environment. Mackay Stores Limited has more than 300 which include online stores as well. They have employed more than 3000 employees which consist of part timers. They are nearly up to 75% of the total workforce (Mackey (2017b)). Apart from this, most of their sales assistants are females. The company ensured that they clearly define their job gratification which has increased the satisfaction level of the work ers. 655 have given a positive score as they have not been spending too much of their personal time at work. The policies of the company have been successful which has helped them to increase their overall productivity and efficiency. They also have more than 2 million customers who possess loyalty cards of the company (Debenhams (2017a)). Both the firms Next and Mackay Stores Limited have been compared using similar ratio to find the difference between the operations and performance of both the companies. Financial ratio classifications (Mackey S. L.) 2016 2015 Profitability Ratios Gross Profit Margin 15.45% 13.91% Net Profit Margin -0.42% -2.11% EBITDA Margin 3.02% 1.60% EBIT Margin 0.44% -1.29% Assets Management Ratios Assets Turnover 3.21 2.99 Return on Capital Employed (ROCE) 1.42% -3.85% Days of Sales Outstanding (DSO) 2 3 Days on Hand (DHO) 60 62 Creditors in Days 15 14 Liquidity Ratios Gearing 37.6% 47.8% Interest Cover Ratio 0.67 -1.46 Current Ratio 3.01 2.95 Quick Ratio 1.44 1.43 Investors Relation Ratios Return on Equity (ROE) 0.023 -0.074 Earnings per Share (EPS) -1.39 -6.84 Dividend per Share (DPS) Dividend Cover Ratio P/E Ratio Analysis of Mackay Stores Limited Profitability Ratios: The gross profit ratio of Mackay Stores Limited has increased from 13.91% in 2015 to 15.4% in 2016. Similarly, their EBITDA and EBIT margin has also improved. It is a good sign that the revenues as well as profits of the firm has been improving. But their net profits are still negative which has been a major problem for the management (Bodie, 2013). Even though they have reduced their expenditures but still it requires more attention. They have been spending more on administration, selling, distribution, promotion and advertisements. It has to be controlled and changes have to be made in it for better performance of the firm in the future. Assets Management Ratios: The Assets Management Ratios of Mackay Stores Limited has shown slight growth. Their efficiency has increased which can be seen from the rise of Return on Capital Employed and Assets Turnover. It has helped them to become more profitable in 2016 as compared to 2015. But they have increased their debtors collection days while their creditors payment days have been reduced. It can have negative impacts on their liquidity and cash. The management should reduce their debtor collection period and the payment term period should be extended. It will provide better results to the organization in the long term (Gunawardena, 2015). In 2016, their Creditors in Days are 15 days and their Days of Sales Outstanding is 2 days. Liquidity Ratios: The Liquidity Ratios of Mackay Stores Limited was increasing, but their gearing ratio has decreased from 4.8% in 2015 to 37.6% in 2016. Apart from this, in 2016 their interest cover was negative but they have made significant improvements in it which has made it positive to 0.67%. It is still low as compared to other peers but they have been working on it. Both current and quick ratio is high which a good sign (Hoskin, Fizzell and Cherry, 2014). Mackay Stores Limited will not have any problems in paying off their short term liabilities and it will improve their solvency potion also in the long term. Low liquidity can create hurdles for the business because it does not allow them to take advantage of the opportunities in the market. Investors Relation Ratios: Mackay Stores Limited has been facing difficulties with their Investors Relation Ratio which has been very low. Their Return on Equity (ROE) was -0.074 in 2015 and it is 0.023 in 2016. Even though it is positive but it is very low which is a concern for the company. Similarly, their Earnings per Share (EPS) are -1.39. The other ratios such as Dividend per Share (DPS), Dividend Cover Ratio and P/E Ratio have not been calculated because of negative EPS in both the years i.e. 2015 and 2016. Financial ratio comparison with Competitors Financial ratios are useful for assessing the performance of the company as well as intra firm comparison. The ratios can be compared with other companys ratios as well as the industry average to find out where the firm stands (Grinblatt and Titman, 2016). It will allow Next Plc to discover their strengths and weaknesses. They can make changes to adapt to the chaining business environment and customers. The table below illustrates the comparison of Next with the other competitors in the market. The data for 2016 has been taken for all the companies. Companies ROE (In %) GP Margin (In %) NP Margin (In %) Quick Ratio Current Ratio ROCE (In %) M C 2.3% 15.45% -0.42% 1.44 3.01 1.42% Next 278.1% 34.78% 15.96% 0.99 1.40 74.79% Debenhams 9.89% 12.53% 3.67% 0.26 0.73 8% Marks Spencer 12.25% 39.11% 3.83% 0.28 0.69 9.04% The companies with the highest ratios have been highlighted in the table above. But it can be seen that Next is the most profitable business as compared to all other rivals. IT is because the ROE of Next Plc is 278.1 % which is highest. Apart from this, the company has been performing satisfactory but the management has to make changes in the liquidity of the firm as it is below average. Cost of Capital The Next Company has been using around 12 to 15% of discount which is given by the rule for the purpose of their budgeting and investment appraisals. The rebate rate for WACC is used for the calculation and valuation of future projects (Jordan, 2014). It includes both equity and debt funds. The assumption of this method is that risk is associated with all the projects which is evaluated on the basis of the activities performed by the organization. It is important to use higher discount rates for the projects which are more risky than others. According to the Dividend Yield Model the rate is 11.79% for the company. It has used due to the aggressive dividend policy followed by the Next. They have been using high WACC as per their DYM. Apart from this, in future their rate for minimum development and dividend payment is 10%. Therefore, the cost of equity is high for the firm because the investors have high expectations of dividend from the organization. The Ke for Next is 13.07% and WAC C should consider the discount rates as well as future cash flows in the calculation (Grinblatt and Titman, 2016). The lower yield of the company has put recourses on its share prices. It has significant impact on the share market price of the stock. As per the CAPM, the rate is very high i.e. 13.14% which indicates high risk in the firm. Furthermore, the policy of uncertain dividend has been adopted by the management. It has increased the payment of dividend to the shareholders in the last few years. This is the main reason why the DGMs WACC is lower than Next Companys CAPM. For both DGM and CAPM, Next Plc has been following conservative gearing policy. It has helped them to make use of low cost borrowings and in the management of cost of debts. They have been using bond markets to gather the funds for the development. Therefore, Next plc is recommended to use 13% discount rate for their investments. It has been deducted on the basis of their Cost of equity, Beta and WACC level (Ap pendix 3). Calculation of price per share payable by Next for purchase of Mackey The fundamental ways to calculate the value of the organization has been given below: Market multiples method can be used as it takes into account the cost of the organization (Brigham and Ehrhardt, 2013). Price sales ratio method can be used for the comparison of two different variables i.e. revenue and stock price. Discounted cash flow method computes the value on the basis of cash inflows and outflows in the future (Grinblatt and Titman, 2016). Asset based method compares the assets with the long term obligations of the organization for the purpose of computing the value of the firm. Price sales ratio method states that the price per share = Net assets/ Total no. of shares = 303754 / 495 = 61364 GBP Discounted cash flow method for the price per share will use discount rate of 2 and 7%. For 2% = 7783 / 495 = 1572 GBP For 7% = 15451 / 495 = 3121 GBP Asset based method for the price per share will be = Net assets/ Total no. of shares = 31682 / 495 = 64 GBP (Appendix 4) Impact of financial statements of Next the purchase of Mackey The purchase of Mackay Stores Limited will have minimal impact on the financial statements of Next Company (Appendix5). It can be seen that the size and market share of Next Company is much higher as compared to Mackay Stores Limited. It is highly depend on the size of the business obtained. But there will be few impacts on financial statement of the company which has been given below: ROCE and Assets Turnover will reduce due to the increase in long-term debts and leverage. It will be caused because of the by loan for which will be taken by them for obtaining it. The Gearing will also have impact due to the rise of long term borrowings and debts. Interest cover ratio will tend to decrease (Gamble and Thompson Jr, 2014). It is because the finance cost will get expended due to new borrowings. The goodwill of the company will increase significantly which will help the firm to improve their brand image in the market. Share price movements The share price of the firm can get affected due to many events which can be seen from the movement of the graph. Usually, more than 5 years are taken into account to understand the pattern of growth and for predicting future changes. But there are certain events which has caused some problems such as the incident of January where the share market dropped. Similarly, news can also have impacts of the share prices movements (Delen, Kuzey and Uyar, 2013). It can create problems in the entire stock market. But these crashes may not affect the long term value of the organization. The share of the Next Plc has dropped in 2016 due to problems in the economy of many countries. The expectations of the inventors have also increased. But Next has performed well in the recent few years which has helped the company to grow. Apart from this, the ratios of the company are far better than other rivals operating in the industry. Figure 1: Next plc share price movement Conclusion It can be concluded from the above report that Next Plc has been performing well in their business and they have been showing positive trend in the future also. But they have to make sure that the rate of growth is high because as compared to last year the growth has been slow. It has been due to increased competition and changing market conditions. The trend shows that the profitability of the company will increase but slowly which has to be taken into consideration by the management. References Bodie, Z., 2013. Investments. McGraw-Hill. Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory practice. Cengage Learning. Brooks, R., 2015. Financial management: core concepts. Pearson. Buchman, T.A., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios. Debenhams (2017a) Statement of Debenhams. Available at: https://www.google.com/finance?q=LON%3ADEBei=5QGWWLmNLcWCswHOr4No (Accessed 20 February 2017) Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983. Gamble, J.E. and Thompson Jr, A.A., 2014. Essentials of strategic management. Irwin Mcgraw-Hill. Greenbaum, S.I., Thakor, A.V. and Boot, A. eds., 2015. Contemporary financial intermediation. Academic Press. Grinblatt, M. and Titman, S., 2016. Financial markets corporate strategy. Grinblatt, M. and Titman, S., 2016. Financial markets corporate strategy. Gunawardena, M.M.D., Peiris, H.R.I., Wijesundera, A.A.V.I., Weerasinghe, D.A.S. and Krishna, T.P.C.R., 2015. Predictability of Stock Returns Using Financial Ratios Empirical Evidence from Colombo Stock Exchange. Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education. Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education. Mackey (2017a) History of MCo. Available at: https://www.mandco.com/corporate/our-history/our-history/our-history.html (Accessed 09 February 2017) Mackey (2017b) Best companies journal. Available at:https://www.b.co.uk/Company/Profile/343383/ (Accessed 12 February 2017) Marks Spencer (2017a) Statement of Marks Spencer. Available at: https://www.google.com/finance?q=LON%3AMKSei=agWWWPCoAoPKsQH_7qPoCw (Accessed 23 February 2017) Next (2017a) History of Next. Available at:https://www.nextplc.co.uk/about-next/our-history (Accessed 08 February 2017) Appendix 1. Financial statements of the companies