Over the past 30 days, shares of NEXT (LON:NXT) have risen by 2.6%.
We chose to take a look at the company's main financial indicators today to see whether they play a part in the recent price change since, as most would know, long-term fundamentals have a high association with market price fluctuations. To understand this activity, Return on Equity (ROE) for NEXT is of particular interest.
What is Next Plc’s Standing in the Retail Market?
With headquarters in England, Next plc (stylized as NEXT) is a global British footwear, clothes, and home goods store. Approximately 500 of its stores are located in the United Kingdom, with the remaining 200 located throughout Europe, Asia, and the Middle East.
After passing Marks & Spencer in 2012 and again in 2014, Next is now the biggest UK clothes shop in terms of sales. It trades on the NYSE and is included in the FTSE 100 Index.
NEXT Online, NEXT Retail, NEXT Finance, Joules, Total Platform, International Retail, Sourcing, Property Management, and others are the Company's business segments. The Property Management division manages real estate and rents such buildings to other divisions and outside parties for a fee.
Its offerings cover the gamut, from apparel for ladies to home furnishings. Its brick-and-mortar locations help its online consumers by accepting and processing returns and collecting items. MADE.com, JoJo Maman Bebe, and Joules are just a few of the companies that make up its Total Platform. Next3step credit accounts provided by the business helps clients pay for their products over time.
Return On Investment Insights…
If a shareholder wants to know how well their money is being put to use, they should look at the return on equity (ROE).
In other words, it shows how well the firm has been able to generate returns for its investors. The Return on Equity Formula is:
- Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) Shareholder Equity = Return on
- Therefore, using the above calculation, NEXT's ROE is:
- Based on the previous twelve months through January 2023, 61% = £711m £1.2b.
The term “return” refers to the money made by the company in the last year. This indicates that the corporation is able to turn over £0.61 for every £1 invested by its shareholders.
Why Does Return On Equity Matter for Profit Expansion?
As we have seen, return on equity is a key indicator of a company's financial health. We can estimate a company's future earnings growth by looking at how much of its profits it “retains” and how efficiently it spends those funds.
If everything else is equal, a firm with a greater return on equity (ROE) and greater retention of profit will outperform competitors who lack these features.
Increased Profits Expected… And a ROE of 61% for NEXT
First and foremost, we find NEXT's ROE to be rather satisfactory.
Second, we must not overlook the fact that this ROE is lower than the 21% stated by the industry as a whole. Despite this, NEXT's net income growth over the past five years has averaged just 2.8%. That seems unusual for a prosperous business like that. Possible causes include an excessive payout ratio or inefficient capital allocation on the part of the company.
Next, we compared NEXT's stated increase to the net income growth of its industry and discovered that it was lower than the industry growth of 4.4% during the same time, which is concerning.
Stock prices are heavily influenced by the rate of earnings growth. The investor has to figure out whether the anticipated profits increase or drop is already included into the stock's current valuation. This will allow them to determine whether or not the stock's future is bright. The P/E ratio, which measures the price the market is ready to pay for a company in relation to its earnings potential, is a useful indication of future profit growth. Considering this, you may want to research if NEXT is trading at a high or low P/E in comparison to its peers.
Is NEXT Putting Its Money to Good Use?
The profits growth of NEXT was fairly modest, despite the fact that its payout ratio was reasonable during the last three years, averaging 27%. Therefore, the lack in that regard may have other explanations. The company may, for instance, be experiencing a downturn.
Furthermore, NEXT has paid ten years of dividends or more, indicating that management likely believes dividends are more highly valued by shareholders than earnings growth. According to the most recent expert consensus statistics, the company's payout ratio is forecast to increase to 39% during the next three years. As a result, the anticipated fall in ROE to 45% over the same time may be attributed to the anticipated increase in the payout ratio.
Takeaway
Overall, it appears that NEXT's business model has some promising features. Despite the high ROE and reinvestment rate, we are dissatisfied with the lack of earnings growth. We suspect that the company's recent struggles are due in part to events outside its control.
We also looked at the most recent estimates from Wall Street analysts, and they predict the same pace of expansion for the company's bottom line that it has seen so far.
