Financial Analysis & Capital Investment Appraisal - Desklib

This project compares the financial performance of two UK retailers, B&M and Morrison, through the calculation of 10 financial ratios. It provides recommendations to improve the performance of Morrison and discusses the limitations of relying on financial ratios for interpreting company performance. Additionally, it covers capital investment appraisal techniques and compares two projects, Alpha and Beta. The subject, course code, course name, and college/university are not mentioned.

Financial Analysis & Capital
investment appraisal

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
A. Calculating the 10 financial ratios .........................................................................................3
B. Analysing the performance of both the companies.................................................................5
C. Providing recommendation to the company whose financial performance was poor.............8
D. Discussing the limitation of relying over the financial ratios for interpreting the
performance of the company.......................................................................................................8
TASK- Capital Investment Appraisal..............................................................................................9
Comparison between two projects through investment appraisal techniques.............................9
Limitation of investment appraisal techniques..........................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial analysis is the process which is used for the evaluation of the business, projects,
budgets and other financial transactions that are helpful for the determination of the
organizations performance. Capital investment is the acquisition of the physical assets by a
company which helps in the management of the long-term business goals and objectives. In this
project there has been comparison between the financial performance of two retailers of UK
B&M and Morrison’s. Different financial ratios are compared for these organizations in order to
understand the difference in the financial performances. This project also provides
recommendations to the financial performance of the organization. In this project two projects
Alpha and Beta are compared for analysing the differences between the
TASK 1
A. Calculating the 10 financial ratios
Profitability ratio
analysis B&M Morrison
2020 2021 2020 2021
Gross Profit
128280
8
176997
0 629 388
Operating profit 332812 613414 521 254
Sales revenue
381338
7
480142
5
1753
6
1759
8
Capital employed 260499 262732 7524 8055

5 5
GP ratio Gross profit / sales * 100 34% 37% 4% 2%
OP ratio
operating profit / sales *
100 9% 13% 3% 1%
Return on capital
employed EBIT / capital employed 13% 23% 7% 3%
Liquidity
ratio
analysis B&M Morrison
2020 2021
202
0
202
1
Current assets
109349
5
86873
5
131
9
143
0
Current
liabilities 965128
73112
9
339
6
298
1
Inventory 588000
60512
6 660 814
Current ratio Current assets / current liabilities 1.13 1.19 0.39 0.48
Quick ratio
Current assets - (stock + prepaid
expenses) 0.52 0.36 0.19 0.21
Efficiency ratio analysis B&M Morrison
2020 2021 2020 2021
Cost of goods sold
25305
79
30314
55
1690
7
1721
0
Average Inventory
58800
0
60512
6 660 814
Turnover or sales revenue
38133
87
48014
25
1753
6
1759
8
Receivables or debtors 60588 42160 353 336
Creditors or payables
41999
9
52426
0 2837 3051
Average inventories turnover
period 4 5 26 21
Debtor days
(Debtors * 365) / Credit
sales 6 3 7 7
Creditors days
(Creditors * 365) /
COGS 61 63 61 65

Gearing ratio B&M Morrison
2020 2021 2020 2021
Total debt 2702724 2625486 6379 6820
Total equity 867399 732968 4541 4216
Net income 89812 428104
348 96
Outstanding share
3155 3866 3373 2821
Gearing ratio Total Debt/ Total Equity 3.12 3.58 1.40 1.62
Earnings per share 28.46 110.73 0.13 0.03
B. Analysing the performance of both the companies
Gross profit ratio
It is basically concerned with possessing information regarding ability to generate the
profitability of the organization by declining cost of goods sold (Marsha and Murtaqi, 2017).
From the evaluation of two years performance of mentioned organization such as B&M and
Morrison it can be specified that in the year 2020 performance is 34 and 4 % respectively. In the
year 2021, B&M and Morrison's outcome is 37 and 2% respectively. On the basis of the
computed figures it can be articulated that B&M is having more effectual performance than
Morrison in the both mentioned year. This shows performance in terms of investing is good in
B&M than Morrison.
Operating ratio
It is related with ascertaining performance of enterprise by evaluating profitability of the
company by declining the cot of production (Zarei, Yazdifar and Ghaleno, 2020). This is largely
taken into consideration by stakeholders so that significant processing decision can be made.
Both are successful organization whose performance can be compared on the basis of these
criteria. B&M operating profit for the two continuous years such as 2020 and 2021 is 9 & 13%
respectively. In case of Morrison the specified profitability is 3 and 1%. There is inclining trend
in B&M as compared to Morrison which show favorable sign of growth. On the basis of this it
can be articulated that B&M has good condition of generating revenue by declining cost which
can accomplish purpose of investing.
Return on capital employed

It is associated with showing how much return is generated by organization by using available
capital. This is helpful in showing how effectively an organization uses particular capital to meet
objectives of investment. This is basically viewed by stakeholder like investors, lenders,
financial institutions, etc. On the basis of the provided information it can be specified that B&M
is providing return of 13 & 23% receptively for the year 2020 to 2021. In addition to this,
Morrison pay attention on return on capital employed which is 7 & 3% for the previous and
current year. On the basis of this, it can be interpreted that B&M is having higher ability to
generate revenue on capital employed.
Liquidity ratio
Current ratio is concerned with assessing the capability of the enterprise to ascertain how
effectively an organization can effectively use resources for overcoming short term liabilities
(Tarmidi, Pramukty and Akbar, 2020). In the year 2020 current ratio of B&M possessing 1.13
and 1.19 times outcome for the year2020 and 2021 respectively. On the other side, Morrison's
performance is 0.39 & 0.48 times for the mentioned duration. From the evaluation it can be
compared that Morrison's performance is less than the ideal ratio which is .2-1.5 tines. It
indicates that Morrison performance is not effective as compared to B&M.
Quick ratio
It is related with assessing how defectively an organization can overcome current liabilities
with help of cash & equivalent resources. In addition to this, it is basically taken into
consideration by investor, suppliers, competitors, financial institutions, etc so that significant
ability to make accurate & fair decision. From the assessment of the two years performance for
the year 2020 and 2021 such as of 0.52 & 0.36 B&M and 0.19 and 0.21 of Morrison. The
performance of B&M is greater than Morrison. On the basis of this, it can be specified that
B&M is having higher effectiveness is using cash & equivalent resources to handle the
obligation. Morrison needs few changes in its processing so that modified level of performance
can be derived.
Efficiency ratio
Average inventories turnover period
It is useful in n calculating the average number of days taken by firm for replacing its
inventory (Tran, Nguyen And To, 2020). It is taken into evaluation of the company that how
effectively enterprise can meet market forces so that significant level of growth and development

can be derived. The outcome derived from the computation it can be articulated that B&M and
Morrison has performance of 4 & 5 times and 6 & 21 times respectively. On the basis of this it
can be interpreted that Morrison is having good inventory turnover ratio is good as it has highly
effectively performance which is capable in meeting market forces. In addition to this, it can be
compared that Morrison is having good average inventory than B&M which shows firm has
good amount of ability to accomplish the purpose of investment.
Debtor Days
There are different kinds of objectives which can be accomplished by business
through assessing its liquidity position. On the basis of the provided information it can be
articulated that it helps in understanding that how business is getting liquidity by collecting
payments from customer. B&M is having 6 and 3 days respectively for the year 2020 & 2021
and Morrison has outcome of 7 days for the respective two years. On the basis of the given
information regarding the debtors' day B&M has good performance as continuous. There is no
change in the Morrison performance which need to be overcome by specified firm through
applying relevant course of action. It includes analyzing credit policy, evaluating relationship
with debtor sending reminders, etc.
Creditors days
It is helpful in showing how effectively an organization is paying off debt with current
assets. In addition to this, for paying off payment to creditors for meeting market forces
effectively. From the evaluation of the determined ratio it can be specified that creditors days of
B&M and Morrison for the year 2020 is 61 & 61 days respectively. In addition to this, B&M and
Morrison has 63 and 65 days respectively. On the basis of the provided information it can be said
that in the current year B&M takes less period to overcome obligation as compared to Morrison.
There should be declining trend in order to maintain the credibility of the enterprise. B&M is
having good credibility as compared to Morrison so h that significant outcome can be derived.
Gearing ratio
It is helpful in assessing financial leverage so that demonstrating degree to which
operations are funded equity capital versus debt financing (Amrutha, Selvam and Kathiravan,
2019). This is one of the factor that contribute in ascertaining financial performance so that
proper sound decision can be made. This can be said that gearing ratio of the B&M and Morrison
for the year 2020 and 2021 is 3.12, 3.58 and 1.40 & 1.62% respectively. Less gearing ratio

indicate that company has good amount of profitability and sustainability to meet objectives.
Morrison as compared to B&M as it has lower leverage which shows less risk to invest. On the
basis of thee provided information it can be interpreted that B&M m has higher risk as compared
to Morrison so that significant level of profitability can be achieved by business.
Earning per share
On the basis of calculation it can be specified that organization should have higher
earning per share so that profitability can sustainability can be derived (Pattiasina and et.al.,
2018). There are two companies whose EPS are evaluated on the basis of the presented
information it can be specified that B&M has higher EPS as compared to Morrison. On the basis
of the provided information it can be specified that investing in B&M is more profitable.
Morison need to make changes for having providing effective EPS so that larger number of
investors can be attracted.
C. Providing recommendation to the company whose financial performance was poor
With the above analysis of the ratios and the comparative discussion it was evaluated that
the performance of Morrison is poor. This is pertaining to the fact that on the basis of the
profitability and the liquidity it was analysed that the performance was not good. Hence, it is
necessary for Morrison to improve the working efficiency of the company so that it can increase
its profitability. Some of the recommendation for improving the performance of Morrison are as
follows-
 The first and foremost recommendation to the Morrison is that they must try to improve
its liquidity. Hence, for this, it is necessary that they must try to improve the current ratio.
Hence, for this it is essential that they must try to increase the current asset. This is
necessary because when the current asset will be more than the company will be in
position to pay off the current liabilities easily.
 Along with this another suggestion to Morrison to improve its performance is that they
must clear all their payment to the creditors in less time. This is pertaining to the fact that
the creditor period has increased which is not good for the company. Thus, it is advisable
to the company that they must try to reduce the time the company take in making
payment to the creditors.

D. Discussing the limitation of relying over the financial ratios for interpreting the performance
of the company
The use of ratio analysis is very important for the company in order to evaluate its
performance on the basis of the past year and also with other competitors. The reason pertaining
to the fact is that in case the ratios will not be evaluated in proper manner then this will result in
ineffective analysis of performance of company. Although there are many different types of
limitation as well which can affect the performance of the company and its proper analysis. The
major limitation involving the use of ratio for interpreting the performance of the company.
 The main limitation which affects the interpretation of the performance of the company is
that the size of the company matters. The reason pertaining to the fact is that it is not
necessary that all the companies have same size. Hence, the comparison done of
companies belonging to different sizes will not provide a clear picture of financial
performance of the company.
 Moreover, another limitation which the company faces at time of using the ratio analysis
is that this method ignores the price level changes which are being caused by the
inflation. This is pertaining to the fact that the use of ratio is based on the book value data
only and not the current prices changes.
TASK- Capital Investment Appraisal
Comparison between two projects through investment appraisal techniques
In order to compare the viability of the two projects it is important to analyse the
following investment techniques,
NPV:
Net present value is the difference between the present value of cash inflow and the
present value of cash outflow which is present over a certain time in the organization. This
method is for capital budgeting and investment planning for the analysation of the profitability of
the project investment (Lawal and et.al., 2021). For the project alpha(A) the total NPV which is
calculated is 11476 however for the project beta the calculated NPV is 8277. Thus, it can be said
that the Project A is more viable for the company as it has a higher Net present value.
Computation of NPV
Year Project Project PV Discounted Discounted

Alpha(A) Beta(B)
factor @
16% cash inflows A cash inflows B
2021 35000 12000 0.862 30172 10345
2022 36000 16000 0.743 26754 11891
2023 38000 21000 0.641 24345 13454
2024 29000 35000 0.552 16016 19330
2025 28000 46000 0.476 13331 21901
2026 22000 48000 0.410 9030 19701
Total cash
inflow 188000 178000
Total
discounted
cash inflow 89476 86277
Initial
investment 78000 78000 78000 78000
NPV (Total
discounted
cash inflows -
initial
investment) 11476 8277
Residual
Value 0 10000
IRR :
The internal rate of return is a metric which is used for the financial analysis which is
helpful for the estimation of the profitability of the organization investments. This method is
used for calculating the discount rate which makes the net present value of all cash flow equal to
zero in the discounted cash flow analysis. In the comparison of the two investments the IRR for
project B is lower suggesting that the project A is much more viable with an IRR of 46.74%.
Computation of IRR
Year Project Alpha(A) Project Beta(B)
0 -78000 -78000
1 35000 12000
2 36000 16000
3 38000 21000
4 29000 35000
5 28000 46000
6 22000 48000
Total cash inflow 188000 178000

Internal rate of return (IRR) 46.74% 34.50%
ARR :
Average Rate of Return is the average amount which explains the amount of cash flow
generate throughout the life of the investment. It is calculated with the help of aggregate
expected cash flow which is divided with the total number of years for the investment. For this
project the Average rate of return for project B is lower than the project A. Therefore suggesting
that the project Beta is more viable if considering ARR investment appraisal technique. This is
due to the scrap value which is present for the investment of Beta.
Computation of Average rate of return
Year Project Alpha(A) Project Beta(B)
1 35000 12000
2 36000 16000
3 38000 21000
4 29000 35000
5 28000 46000
6 22000 48000
Total cash inflow 188000 178000
Average profit or cash inflow 31333.33 29666.67
initial investment 78000 78000
average initial investment
[(initial investment + scrap
value) / 2] 39000 44000
ARR 0.40 38%
Payback period :
Payback period is the time which is taken by an investment for gaining back the initial
investment which was made at the start of the investment also said as the break even point
(Ogunbayo and et.al.,2019). The calculation of the payback period is done though the division of
the amount of investment with the annual cash flow. It is important for the investment to take the
least time as possible for recovering the investment amount. For project Alpha the payback
period is 2 years and 1 month which is lower than that of project Beta which is 3 years and 4
months.

Computation of Payback period
Year
Project
Alpha(A)
Cumulative cash
inflows
Project
Beta(B)
Cumulative cash
inflows
1 35000 35000 12000 12000
2 36000 71000 16000 28000
3 38000 109000 21000 49000
4 29000 138000 35000 84000
5 28000 166000 46000 130000
6 22000 188000 48000 178000
Initial investment 78000 78000 78000 78000
Payback period 2 3
0.1 0.4
Payback period
2 year and 1
month 3 year and 4 months
Limitation of investment appraisal techniques
The limitations of the different types of investment appraisal techniques are,
Payback period Limitation
 This method ignore all the cash flows which happens after the payback period.
 It also ignores the timings of the cash flows within the payback period.
 This method does not consider the time value of money.
Average rate of return :
 Does not consider the time value of money.
 As it considers average of the cash inflow it take no account of the profit timings.
 It also does not take account of the differences between the project procedure (Warren
and Seal, 2018).
Net Present Value :
 The accuracy of this calculation depends a lot upon the quality of the input that is
provided.
 It is not so useful for the comparison of project which are of different sizes as larger
project can general higher returns.

 The concept of this investment appraisal is very difficult for being understood.
IRR :
 It generally provides an incomplete picture of the future of investment.
 This method also ignores the size and scope of the project.
 This method does not consider the future costs within its calculations.
CONCLUSION
From the above report it can be concluded that financial analysis is helpful in assessing
significant information so that proper decision can be made. In the current report significant
evaluation has been done by conducting financial ratio and interpreting them. It has helped in
evaluating that B&M has good financial health. Present report has involved recommendation and
e limitation to interpret financial performance. This has given emphasis on calculating
investment appraisal techniques which says that project A is good option which should be
selected. The limitation includes in completed picture, non involvement of time value of money,
etc.

REFERENCES
Books and Journals
Amrutha, P., Selvam, M. and Kathiravan, C., 2019. Impact of Converging to IFRS on Key
Financial Ratios with Reference to BSE Listed Firms. International Journal of
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Lawal, Y.S., and et.al., 2021. A simulation-based binomial model for building development
appraisal. Journal of Engineering, Design and Technology.
Marsha, N. and Murtaqi, I., 2017. The effect of financial ratios on firm value in the food and
beverage sector of the IDX. Journal of Business and Management. 6(2). pp.214-226.
Ogunbayo, O.T., and et.al.,2019. The significance of real estate development process analysis to
residential property investment appraisal in Abuja, Nigeria. International Journal of
Construction Management. 19(3). pp.270-279.
Pattiasina, V., and et.al., 2018. The impact of financial ratios towards profit changes.
International Research Journal of Management, IT and Social Sciences. 5(5). pp.1-16.
Tarmidi, D., Pramukty, R. and Akbar, T., 2020. Fundamental Analysis of Financial Ratios on
Stock Prices. Saudi Journal of Economics and Finance. 4(5). pp.176-180.
Tran, Q.T., Nguyen, N.K.D. And To, P.Q.A., 2020. Financial Ratios Affecting Disclosure Level
in Interim Report of Vietnamese Listed Enterprises. The Journal of Asian Finance,
Economics, and Business. 7(10). pp.43-50.
Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: The
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Society. 70. pp.16-32.
Zarei, H., Yazdifar, H. and Ghaleno, M.D., 2020. Predicting auditors' opinions using financial
ratios and non-financial metrics: evidence from Iran. Journal of Accounting in Emerging
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