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Calculation of Ratios 2 1.1: Calculation of Ratios 2 1.2: INVESTMENT APPRAISAL FOR TESCO

   

Added on  2019-12-03

24 Pages4852 Words496 Views
Financial Management

Table of ContentsINTRODUCTION...........................................................................................................................1PART 1: RATIO ANALYSIS OF TESCO.....................................................................................21.1: Calculation of Ratios............................................................................................................21.2: Ratio Analysis.......................................................................................................................61.3: Summarized Report..............................................................................................................9PART 2: INVESTMENT APPRAISAL FOR PLC Plc................................................................102.1: Project Appraisal................................................................................................................102.2: Payback Period Method......................................................................................................132.3: Advantages and disadvantages of the investment appraisal methods................................142.4: Summarized Report............................................................................................................16CONCLUSION..............................................................................................................................17REFERENCES..............................................................................................................................18APPENDIX....................................................................................................................................19Financial Statements of TESCO................................................................................................19

List of TablesTable 1: Ratios of Tesco..................................................................................................................5Table 2: Summarized Report...........................................................................................................9Table 3: Cash Flow for Two Projects............................................................................................10Table 4: NPV at 10%.....................................................................................................................10Table 5: NPV of Project 1 at 11%.................................................................................................11Table 6: NPV of Project 2 at 9%...................................................................................................12Table 7: Payback Period of Project 1............................................................................................13Table 8: Payback Period of Project 2............................................................................................14Table 9: Summarized Report.........................................................................................................16

INTRODUCTIONFinancial management is a very important tool for the managers. Earlier this subject waslimited to raising funds for the companies, but later on its scope widened up and is used by theorganizations for procuring funds and to analyze the effectiveness of resources employed by thefirm. The modern concept of financial management focuses on analytical and conceptualstructure for decision making. Some of the major concerning areas of this subject are: volume offunds an organization must have, type of assets the company must have, sources of raising fundsetc. Thus, it plays significant role in decision pertaining to investment, dividend policy andfinancing (Dittenhofer, 2001).Financing decision of the company involves analyzing different ratios of the firm. Ratioanalysis helps in evaluating the financial performance and standing of the company. It evaluatesorganization’s profitability, liquidity, solvency and efficiency. On the basis of these four kinds ofratios, performance of any firm can be judged. It not only helps in comparing the currentperformance of the company with its past, but also aids in comparing the performance of twoorganizations operating in the same sector or industry (Arnold, 2005).On the other hand, investment appraisal in any business is done by using some of thecapital budgeting methods such as net present value, internal rate of return, profitability index,average rate of return etc. While net present value and internal rate of return methods follow theconcept of time value of money, average rate of return is not based on it. These methods help inanalyzing any investment made by the company. Through these appraisal methods, organizationcan decide whether they should invest in a particular project or not. It helps in determining theprofitability of the project. Simultaneously, these methods also assist investors in deciding inwhich project they should invest so as to make maximum profits (Fairchild, 2002).In the following study, performance of TESCO will be analyzed by determining themajor ratios of the company and comparing them with its past performance. In the second part,two projects will be appraised by applying capital budgeting tools, so as to identify in whichproject the company PLC should invest.PART 1: RATIO ANALYSIS OF TESCO1.1: Calculation of RatiosSolution:1 | P a g e

Profitability Ratios: Profitability of any firm can be determined by calculating differentprofitability ratios. These can be categorized in two forms: profitability related to sales andinvestment.Gross Profit Margin: It determines the gross profitability by comparing gross profit of thecompany with its sales.GrossProfitMargin=GrossProfitNetSales∗100Net Profit Margin: It tells about the net profitability of the organization by drawing relationshipbetween net profit and sales (Atrill and McLaney, 2008).NetProfitMargin=NetProfitNetSales∗100Performance Ratios: Performance of the company can be determined by calculating some of therelated ratios such as:Return on Assets: It exhibits the relationship between net profit and assets of the company. It canbe determined as follows:ReturnonAssets=NetProfitafterTaxAverageTotalAssets∗100Return on Capital Employed: It draws the relationship between net profit and average capitalemployed by the company. It can be computed as:ReturnonCapitalEmployed=NetProfitafterTaxTotalcapitalemployed∗100Return on Equity: It tells how much returns the firm is making on the equity capital. It iscalculated as follows:ReturnonEquity=NetProfitafterTaxTotalShareholder'sEquity∗100Earnings per Share: It determines the profit that is available to the shareholders at the end of theyear. It is computed as follows:2 | P a g e

EarningsPerShare=NetProfitavailable¿Shareholders¿NumberofordinaryoutstandingsharesLiquidity Ratio: These ratios tell about the liquidity position of the company. Through theseratios, it is identified whether a company will be able to fulfill its short term obligations or not.Or in other words reveals about short term solvency of the firm (Collier, 2012).Current Ratio: It is the ratio of the firm’s current assets to the firm’s current liabilities andcalculates company’s short term solvency. It draws relationship between organization’s assetsand liabilities. It is calculated as follows:CurrentRatio=CurrentAssetsCurrentLiabilitiesQuick Ratio: It is very important ratio in determining the liquidity of the company. Quick assetsinclude those assets which can be easily and anytime converted into cash. It is calculated asfollows:QuickRatio=QuickAssetsCurrentLiabilitiesEfficiency Ratio:Efficiency ratios are also known as turnover ratios and tell how an efficient afirm is in managing. It helps in judging the effective use of assets. Different efficiency ratios areas follows:Debtors Turnover Ratio: It tells how many times or how quickly in a year the company canconvert his debtor into cash. It can be calculated as:DebtorsTurnoverRatio=TotalSalesAccountsReceivablesAverage Collection Period: It tells in how many days or months the company is able to collectits cash from his debtors. It can be calculated as:AveragecollectionPeriod=365DebtorsTurnoverRatioAssets Turnover Ratio: As there are many financial resources employed by the company, so thisratio tells the firm’s ability to produce sales from it resources. It is determined as:3 | P a g e

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