José and María - Compare Two Compaines

1. Introduction

This report is mainly focusing on giving advice and suggestions for José and María of which the company they would select to invest in. One of the two companies is belong to FTSE 100 and another one suitable company that could be compared to the FTSE 100. And it’s necessary to analysis the two companies’ financial statements and compares them to find out which one is beneficial to do investment. Financial statements are for stockholders, tax consultants or other similar momentous spouses who really compel economic material (Financial statements: The four components, 2014). In addition, financial statements of the two companies include income statement, balance sheet, cash flow and some financial ratio analysis. It could obviously show the good or bad financial condition of the two companies. In addition, ratio analysis combines the financial gearing, liquidity, and financial leverage (Stickney & Brown, 1998). What’s more, recommendation and limitations would provide the basic suggestions that choosing the two companies.

1. Financial Performance

1.  Vertical analysis of income statement

Figure 1 shows that the vertical analysis of net income of these two enterprises-MUJI and Next since 2013-2016. Vertical analysis of financial declarations is an approach in that the associations among the substances those are from the same financial declarations are celebrated by articulating all the numbers as proportions an aggregate expanse (Vertical Analysis of Financial Statement, n.d). Next displays 14.28% in 2013, and it arrives at 15.96% in the year 2016. On the contrast, MUJI expresses lower rate of the percentage. It demonstrates 5.85% in the 2013 and then expands to 7.77% in the next year. To sum up, Next is doing better than MUJI based on this figure.

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Figure 1: Vertical Analysis of Net Income for the Over Years (Refer to Appendices income statement for data and definition)

1.  Horizontal analysis of income statement

Figure 2 illustrates that the horizontal analysis of income statement since 2013-2016. Horizontal analysis mainly focuses on the totality in the past few years (What is the difference between vertical analysis and horizontal analysis?, n.d). It perceptibly indicates the trend of the few years. MUJI has decreased a lot in the first three years. It started from 100% and then fell down to -2.77%. It may explain that MUJI has some problems in financial condition and lose amount of funds. But in 2016, MUJI earned a lot and it reflected a positive and active condition in it’s net income. In addition, Next obtained 14.77% in 2015 but decreased to 5.02% in 2016. To sum up, both of the two enterprises had some problems in earnings these years but MUJI is better than Next.

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Figure 2: Horizontal Analysis of Income Statement for the Over Years (Refer to Appendices income statement for data and definition)

1.  Vertical analysis of equity

Figure 3 predominantly determines that the vertical analysis of the equity of Next and MUJI from 2013-2016. Equity exemplifies the objective of the possessions that belong to a company that after all the financial payments have been remunerated (Kennon, 2016). In this figure, it apparently shows that MUJI always shows a high data of equity of this company. MUJI gained 80.47% in the year of 2013 but Next only achieved 15.08% in the same year. And in the year of 2016, MUJI diminished a little, it arrived at 71.26% and Next obtained 13.38%. In a word, Next is doing better than MUJI according to figure 3.

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Figure 3: Vertical Analysis of Equity for the Over Years (Refer to Appendices balance sheet for data and definition)

1.  Horizontal analysis of equity

Figure 4 reflects that the horizontal analysis of equity of the two enterprises. Equity belongs to shareholders in one company. In addition, the high index of equity is not the good symbol of an enterprise. Next fell down to 0.00% at the year of 2014 but increased a little to arrive at 12.71% in the next year. On the contrast, MUJI got 15.58% in the year of 2014 and 15.90% in 2015. In the year of 2016, Next decreased at -3.14% and MUJI got 11.27%. In general, Next is better than MUJI based on the figure.

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Figure 4: Vertical Analysis of Equity for the Over Years (Refer to Appendices Balance Sheet for data and definition)

1.  Vertical analysis of closing cash and cash equivalents

Figure 5 mainly demonstrates that the vertical analysis of closing cash and cash equivalents of MUJI and Next. In 2013, MUJI obtained 552.38% but Next only got 159.25%. However, Next arrived at 24790.91% at the year of 2015 and it was the highest point that Next got in the last four years. On the contrast, MUJI obtained 892.06% in the year of 2015 and it is much lower than Next. According to this saying: Using vertical analysis of rereading the financial proclamations is useful for financial decision-making of a company (Anastasia, 2015). So in this figure, Next is doing better than MUJI.

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Figure 5: Vertical Analysis of Closing Cash and Cash Equivalents for the Over Years (Refer to Appendices cash flow statement for data and definition)

1.  Horizontal analysis of closing cash and cash equivalents

Figure 6 presents that the horizontal analysis of closing cash and cash equivalents since 2013-2016 of Next and MUJI. Horizontal analysis could find that the whole condition of changes of change in the last few years. As for Next, it fell down to -18.87% at the year of 2014 but increased to 156.78% in the next year. MUJI also decreased to -20.37% in 2014.On the contrast, it increased a little to 21.85% and it continued increasing to 34.75% in the year of 2016. Nevertheless, Next decreased a lot to -80.67%. In accord with this figure, Next is doing better than MUJI.

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Figure 6: Horizontal Analysis of Closing Cash and Cash Equivalents for the Over Years (Refer to Appendices cash flow statement for data and definition)

1. Profitability

As for this part, profitability generally consists of revenue, earnings, return on equity and return on capital employed. It could be obviously showed that the difference between two varieties of enterprises. In addition, it could be visually the standard of making the comparisons of different companies.

1.  Return on equity

Return on equity (ROE) is the total quantity of the net revenue returned as a proportion of stockholders equity (Peter, 2004). For instance, in the Next company，it always showed over 200 percentages of return on equity. Especially in the year of 2016, Next got 267.99% but MUJI only obtained 23.40% at the same year (see Appendix A). With the higher ROE in one company, this particular enterprise is more strong and powerful. On the contrast, sometimes higher percentage of ROE could not completely stand for one enterprise’s ability. To sum up, Next sometimes have more risks than MUJI.