Next PLC Case Study

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Normally, current ratio should produce a figure of at least two for safety according to “two-to-one” guideline and the quick ratio should not less than unity. However, these ratios should not be applied too rigidly because difference industries have difference natures. It is common that retailing business has a quick ratio less than one (Peter Walton and Walter Aerts 2013). The trend of these ratios and the comparison with the rival are more valuable to judge the adequacy of liquidity and risk of insolvency. Short-term working capital management is essential for retail firms (Kaya, H. D.; Banerjee, G. 2012). Whether the current ratio or quick ratio, Next PLC’s were higher than M&S’s and experienced a steady increase, which would attract more…show more content…
Investors should note that the price of Next PLC is very high which means high risk. The earning per share of Next PLC experienced six consecutive years of growth at a double-digit pace. Next PLC returned cash to shareholders by special dividend instead of purchase back its own share because it thinks the share price is too high. Next PLC is a fashion and accessories retailer. The success of Next PLC is due to low cost and differentiated brand. If Next PLC cannot catch up the fast pace of fashion, the sales will decrease immediately. Next PLC has high gearing and cash cycle, it will have a problem in repaying the enormous interest of the debt. The business has the possibility of collapse. Investors should realize the limitation of tradition ratio analysis. In practice, the standard of judgment is not clear, and the different ratios are indications of various impending problems. It is tough to judge profitability, liquidity and solvency depending on only ratio analysis. The judgment should combine industry date, cash flow, and economic factors. Most importantly, the ratio analysis presented the past financial performance of Next PLC, and it is not a prediction. The judgment on investment should not be made merely on the financial ratio

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