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Analysis of Financing - Sainsbury and Tesco

   

Added on  2020-01-07

20 Pages4362 Words182 Views
MANAGERIAL FINANCE

TABLE OF CONTENTSINTRODUCTION.....................................................................................................................................3Portfolio1...................................................................................................................................................3(a) Calculation of ratios..........................................................................................................................3(b) Way in which performance of poorly performing business can be improved.................................13© Limitation of relying on ratios to measure firm performance...........................................................14Portfolio 2................................................................................................................................................15(a)Project evaluation method...............................................................................................................15(b) Limitations of using investment appraisal techniques for long term decision making....................17CONCLUSION........................................................................................................................................18REFERENCES........................................................................................................................................19Figure 1Current ratio of Tesco and Sainsbury...........................................................................................3Figure 2 Quick ratio of Sainsbury and Tesco.............................................................................................4Figure 3 Net profit ratio of Sainsbury and Tesco.......................................................................................5Figure 4 Gross profit ratio of Sainsbury and Tesco....................................................................................6Figure 6 PE ratio of Sainsbury and Tesco..................................................................................................7Figure 7 ROCE of Sainsbury and Tesco....................................................................................................8Figure 8 Inventory turnover ratio of Sainsbury and Tesco.........................................................................9Figure 9 Dividend payout ratio of Tesco and Sainsbury............................................................................9Figure 10 Gearing ratio of Sainsbury and Tesco......................................................................................10YTable 1 Ratio analysis of Sainsbury...........................................................................................................4Table 2 Ratio analysis of Tesco.................................................................................................................5Table 3 Calculation of payback period.....................................................................................................16Table 4 Calculation of ARR....................................................................................................................16Table 5 Calculation of NPV.....................................................................................................................17Table 6 Calculation of IRR......................................................................................................................18

INTRODUCTIONMaking an investment in the business firm is a very tough task and lots of decisionsneed to be made in respect to making an investment in the shares. In the current report ratioanalysis is done and comments are made on the firm ratios. In this respect two firms are takenwhich are Sainsbury and Tesco. Comparison of both firms’ ratios is done and recommendationsare given in respect to improvements that can be done in specific area. In second part of thereport project evaluation is done and on that basis specific project is selected. Limitation ofproject evaluation methods are also explained briefly at end of the report.Portfolio1(a) Calculation of ratiosCurrent ratio: It is the ratio which reflects the liquidity position of the firm for a specific duration.2014201500.20.40.60.811.21.41.6Current ratioFigure Current ratio of Tesco and SainsburyIt can be seen from the table and image given above that current ratio of the Sainsbury is sameover a time period of FY 2014 and FY 2015. This reflects that liquidity position of the firm issame over a specific period of time. It can be said that on this front liquidity position of the firmis not good (Kumbirai. and Webb, 2010). On other hand, value of current ratio for Tescodecreases from 0.65 to 0.60 which is not good from business point of view. Current ratiobasically reflects the amount of current asset that is available on each unit of the current

liability. It can be said that for every one pound of current liability Sainsbury have 0.33 currentasset. This reflects that firm does not have sufficient amount of money to pay its current liabilityon time by using current asset.This happened because it failed to make and implement goodcash management strategy for the business. The availability of current asset in Tesco businessalso decline. In case of both firms insufficient cash is available which is matter of concern forthem in terms of timely payment of current liability. However, on comparison it can be said thatTesco liquidity position is better than Sainsbury. Due to decline in current ratio firm may faceshortage of cash in its business and may find it difficult to pay current liability on time. Quick ratio: This ratio give more accurate picture of the firm liquidity position. It can be seenfrom the diagram that on this front liquidity position of both firms is not good. Quick ratiovalue2014201500.10.20.30.40.50.60.7Quick ratioFigure Quick ratio of Sainsbury and Tescofor Sainsbury is 0.5 in the FY 2014 and same for the firm in the next financial year is 0.1. Onother hand, in case of Tesco value of this ratio in the FY 2014 is 0.47 and same in the FY 2015is 0.45. It can be said that on quick ratio performance of the Sainsbury is very poor and noincrease is observed in the value of ratio (Petzke, Fuller and Metges, 2010). On other hand, incase of Tesco performance to some extent is satisfactory because its quick ratio value is 0.45.However, its quick ratio also declined but by only some points which is not big matter ofconcern. Tesco is in better position in terms of payment of current liability using quick assets on

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