Management Finance: Performance Analysis of Tesco and Sainsbury

This report analyzes the performance, financial position, and investment potential of Tesco and Sainsbury in the field of management finance. It includes the calculation of various financial ratios, such as current ratio, quick ratio, net profit margin, gross profit margin, gearing ratio, price earnings ratio, earnings per share, return on capital employed, average inventories turnover ratio, and dividend payout ratio. The analysis shows that Sainsbury has a better short-term liquidity position and higher dividend payouts, while Tesco has higher profitability and return on capital employed.

Management Finance

Contents
TASK 1............................................................................................................................................3
a. Calculate 10 financial ratios as given below for two years (2018 and 2019):....................3
b. Analyse performance, financial position and investment potential of both companies:....4
c. Provide recommendations:.................................................................................................6
d. Limitations of relying on financial ratios...........................................................................6
TASK 2............................................................................................................................................8
a. Investment appraisal techniques:........................................................................................8
b. Limitations of using investment appraisal techniques in long term decision making:.....11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management finance is perceived as a subset of finance that administrators use to
accumulate and distribute strategically their fiscal funds for company procedures. This is
beneficial for producing demand for the business. This report was formulated to explain this
theory. It was broken into two sections. The very first part is compared to the financial success
calculation by financial ratios of Sainsbury Plc and Tesco Plc. In the retail industry, both Tesco
as well as Sainsbury conduct their businesses. This study determines which company is
favourable for investors. The significance and drawbacks of investment evaluation technologies
were systematically established in the second part.
TASK 1
a. Calculate 10 financial ratios as given below for two years (2018 and 2019):
Tesco PLC Sainsbury PLC
2018 2019 2018 2019
Current Ratio
Current Assets 13726000 12668000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Current Ratio = Current Assets / Current Liabilities 0.713484 0.612573 0.762667443 0.637185
Quick Ratio
Quick Asset 11463000 10051000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Quick Ratio = Quick Assets / Current Liabilities 0.595852 0.486025 0.762667443 0.637185
Net Profit Margin
Net Profit 1206000 1322000 291000 168000
Sales 57491000 63911000 28456000 29007000
Net Profit Margin = Net Profit / Sales *100 2.09772 2.068502 1.022631431 0.579171
Gross Profit Margin
Gross Profit 3350000 4144000 544000 620000

Sales 57491000 63911000 28456000 29007000
Gross Profit Margin = Gross Profit / Sales *100 5.826999 6.484017 1.911723362 2.137415
Gearing ratios
Long term Liabilities 15144000 13509000 2552000 7607000
Capital Employed 10480000 14858000 7411000 7782000
Gearing Ratio = Long term Liabilities / CE * 100 144.5038 90.92072 34.44 97.75
P/E ratio
Price 197.4 255.1 260 229.2
Earning per Share 0.44 0.39 12.54 6.79
PE Ratio = Price / EPS 448.6364 654.1026 20.73365231 33.75552
Earnings per share
Total net profit 1206000 1322000 291000 168000
Total no. of outstanding shares 2731000 3253000 243700 245700
EPS = Net Profit / Total no. outstanding shares 0.441596 0.406394 1.194091096 0.683761
Return on capital employed
EBIT 1564000 2077000 544000 620000
CE 10480000 14858000 7411000 7782000
ROCE = EBIT / CE 14.92366 13.979 7.340439887 7.967104
Average inventories turnover period
Net Sales 57491000 63911000 28456000 29007000
Average inventories 2282000 2440000 1792500 1869500
Average inventories turnover period = Net Sales /
Average Inventory
25.19325 26.19303 15.87503487 15.51591

Dividend pay-out ratio
DPS 0.03 0.11 9.7 10.2
EPS 0.44 0.39 12.54 6.79
Dividend pay-out ratio = DPS / EPS 0.068182 0.282051 0.773524721 1.502209
Capital employed = Total assets- Total current liabilities
Tesco
2018 2019
44735 – 19233 = 25502 48949 – 20680 = 28269
Sainsbury
2018 2019
22001 – 10302 = 11699 23514 – 11417 = 12097
b. Analyse performance, financial position and investment potential of both companies:
Current ratio of a firm measures the capability of a corporation to make payments for its current
assets in the shorter run. Current Ratio of Tesco Plc are 0.71 and 0.61 respectively during period
2018 and 2019 showing increase over the two period while Sainsbury’s current ratio 0.76 and
0.64 during the same periods respectively. Both companies have reported increase in ratio but
Tesco
Sainsbury
00.20.40.60.8 0.71 0.76
0.61 0.66
Current ratio
2018 2019

Sainsbury’s performance with higher current ratios in terms of short-term liquidity position is
quite good as compare to Tesco (Arkan, 2016).
Quick ratio tests an undertaking's liquidity by determining how well that is existing obligations
may be secured. Consequently, quick ratio is more restrictive liquidity formula since not all
of aspects included in current ratio are used. Quick Ratio reported by Tesco are .57 and .48
respectively during 2018 and 2019 while of Sainsbury quicks ratios during said period are 0.59
and 0.50 respectively. There is incremental trend in quick ratio which reflects that cash liquidity
position of both companies has been improved. Comparatively Sainsbury’s ratios are quite better
than Tesco.
The net profit percentage is relationship amongst net profit and total sales. This proportion is an
indicator of total performance, where the operational and non-operating elements of sales and
Tesco
Sainsbury
00.40.8 0.59 0.59
0.48 0.5
Quick Ratio
2018 2019
Tesco
Sainsbury
0123
2.1
1.09
2.07
0.75
Net profit margin
2018 2019

expenditures are taken into consideration. Profitability position of both the companies can be
effectively measured by Net profit and gross margin ratio. Net profit ratios of Sainsbury are
1.09% and 0.75% during 2018 and 2019 with incremental trend while Tesco’s net-profit ratios
are 2.10 % and 2.07% during 2018 and 2019. Both companies have increase in net profitability
level but Tesco has reported higher profit margins as compare to Sainsbury thus profitability-
wise performance of Tesco is much better than Sainsbury (AREAS, 2018).
Gross profit percentage is financial measurement that reveals how successful an organisation is
in handling its operational activities; is also defined as the gross margin. This is a percentage that
shows the effectiveness of production processes of a business 's revenue. Gross profit margins of
Tesco are 5.82% in year 2018 and 6.48% in year 2019 while Sainsbury’s GP margins are 6.61%
and 6.92% in year 2018-2019. Analysis shows that Sainsbury with higher gross-margin ratio is
more efficient to generate profits out of their core business operations as compare to Sainsbury
(Kraft, 2015).
Tesco
Sainsbury
55.566.577.5
5.83
6.616.48
6.92
Gross profit margin
2018 2019
Tesco
Sainsbury
01234 3.28
1.97
2.31 1.78
Gearing ratio
2018 2019

The gearing percentage calculates the share of borrowing funding of a firm to its stocks and
bonds. This ratio reveals a company's financial uncertainty, since unsustainable leverage will
result in financial hardship. Gearing ratio reflects actual liquidity ratio of company. As reported
by Tesco, company’s gearing ratio in 2019 is 2.31 and in 2018 is 3.28 while Sainsbury’s gearing
ratios are 1.97 and 1.78% respectively in year 2018 and 2019. Tesco has greater ratio as compare
to Sainsbury which implies that Tesco’s debt proportion is higher. Thus, Sainsbury’s liquidity
position is better than Tesco (Simó and Coenders, 2020).
P/E Ratio defined as the ratio of business's current share prices to per share’s earnings (EPS). PE
ratios of Tesco are 38.22 and 41.56 respectively during 2018 and 2019 showing decreasing trend
whereas Sainsbury’s PE ratios are 106.39 and 123.9 in 2018 and 2019 reflecting decreasing trend
in PE ratio. This shows that Sainsbury is comparatively more efficient to provide return to their
shareholders on each share they hold as well as value of shares of Sainsbury is higher.
Tesco
Sainsbury
0
40
80
120
38.22
106.39
41.56
123.6
Price earnings ratio
2018 2019

EPS could be interpreted as the proportion of income of a business allocated to share of the
inventory. Moreover, a big financial metric is called as it allows to assess the financial stability
of an organisation. EPS of Tesco in 2019 is 6.14 and in 2018 is 4.96 while Sainsbury’s EPS are
4.75 and 4.97 in year 2018 and 2019. There is decremental trend in EPS ratio of both
corporations. EPS of Tesco is greater than that of Sainsbury which shows that Sainsbury is more
efficient to provide profits to each shareholder (Dicle and Meyer, 2018).
Tesco
Sainsbury
01234567
4.96 4.75
6.14
4.06
Earnings per share
2018 2019
Tesco
Sainsbury
012345678910
6.14
4.43
9.34
4.97
Return on capital employed
2018 2019

ROCE is represented as a measurement of return/yield of a business, commonly presented in
percentage figures, on the invested capital. ROCE of Tesco are 6.14 and 9.34 and of Sainsbury
are 4.43 and 4.97 respectively during 2018 and 2019 respectively. There is decline in ROCE in
case of both companies. Tesco with higher ROCE is more capable to generate returns on its
overall capital-fund employed.
Stock turnover define as the quantity of times inventory/stock in a time frame like one year
is used. In relation with its volume of revenue, it is estimated that the company has an
unsustainable stock. Average inventories turnover period of Tesco is 23.73 and 24.50 and of
Sainsbury are 14.83 and 14.44 respectively during 2018 and 2019. This shows that Sainsbury
with lower ratio is quicker to convert their inventories into sales. While Tesco’s average days
have been decreased over the period shows that company’s efficiency to convert their stocks into
sales has been enhanced.
Tesco
Sainsbury
0102030 23.73
14.83
24.5
14.44
Average inventories turnover ratio
2018 2019
Tesco
Sainsbury
04080120
6.78
76.05
27.05
112.79
Dividend payout ratio
2018 2019

Dividend pay-out ratio was described as the percentage of gross payments for dividends
to dividend paid company's net profits. Dividend pay-outs ratio is the proportion of profits
distributed to investors by a corporation. Dividend pay-outs of Sainsbury are 76.05 and 112.79
while of Tesco are 6.78 and 27.05 during 2018 – 2019. This shows that Sainsbury is more
attractive for customer as company pay higher percentages of dividends to their shareholders as
compare to Tesco (Jayanti, 2019).
Overall performance analysis of Tesco and Sainsbury shows that Short term liquidity and
cash liquidity position of Sainsbury is better than Tesco plc. While overall net and gross
profitability position of Tesco is quite better than Sainsbury. Debts in Tesco is in greater
proportion as compare to Sainsbury. For investor’s point of view Historical trend in share price,
EPS and Pay-out of Sainsbury is more attractive as well as profitable for investors as company
has more favourable ratios than Tesco. Optimum average inventory days of Sainsbury as
compare to Tesco reflects that Sainsbury performed better in terms to convert their
stocks/inventories into sales (Sibaroni, Ekaputra and Prasetiyowati, 2020).
c. Provide recommendations:
Tesco Plc: It is strongly recommended to company that it should focus towards minimising their
overall debts as well as to improve its short-term liquidity position. For this company should
change their credit policies and decrease their dependence over debt funding.
Sainsbury: It is advisable to company that it should emphasise towards their net profitability
level and gross profitability level. For this company should minimise their overall business
expenditures and focus towards increase in sales by effective advertising and promotional
strategies.
d. Limitations of relying on financial ratios
1. Restricted usage of sole ratio
At all specific ratio cannot express any significance. As a consequence, any more ratios are
measured to recognize something through a specific ratio. Perhaps the estimation of multiple
ratios contributes to uncertainty rather than allowing the researcher to come to a proper
conclusion.

2. No comparison between companiesIf the scope and nature of market issues are not
comparable, there really is no chance of an inter-company comparison by way of ratio
review (Minnis and Sutherland, 2017).
3. Total absence of appropriate standards
There really is no norm for ratios. Just thumb guidelines for all proportions are approved and
practiced. The perception of ratio is also complicated.
4. Complex and Deceptive
Proportions can make the comparable analysis more difficult and deceptive in the light of
differences in prices levels.
5. Inherent Constraints of Accounting
The historical essence of the details is considered for the measurement of proportions. The
explanation would be that financial statements are compiled on the basis of historical
knowledge. This is an intrinsic weakness in the accounting process. The proportions are also
not inherently valid measurements of the prospects.
6. Computation and communication period lag
The balance sheet and income only after the conclusion of accounting period but are then
certified by a competent auditor. Such financial reports are issued at conclusion of annual
meeting. It takes between six months to around 9 months. So perhaps the measurement and
communication within an entity of ratios are not used (Williams and Dobelman, 2017).
7. Changes to the Accounting Process
A transition to accounting process applies to a modification in the value of inventory levels.
If, must first market concern uses the FIFO approach for measuring inventory value and then
it is referred to LIFO system. In a somewhat case, valuation of closing inventory is
decreased and the costs of revenue is raised. So then, gross profits and net profits would be
diminished to a degree. In this case, inventory turnover ratio, gross profitability ratio and net
profits ratio are three of the variations (Maina and Sakwa, 2017).
8. No Thorough Examination and Explanation Procedure
Ratio evaluation is not simply an examination and perception methodology. It is used
combined with other methods and strategies to draw some conclusions.
9. Window Dressing

The window-dressings in financial statements is rather straightforward. If this is the case, the
poor financial status of the company concern can be seen to be a good financial status. In
such a case, the observer can make an inappropriate inference and opinion on the basis of
the measured proportions. It is also very challenging for an observer to understand
concerning window dressing caused by company considerations.
10. Personal Biasness
Different stakeholders use the same proportions in an unique ways. It's contributing to
personal prejudice. No one is pressuring others to examine and view ratios.
TASK 2
a. Investment appraisal techniques:
Net Profits Project A
Project
B
Plant 1 Plant 2
2020 45000 10000
2021 45000 15000
2022 45000 25000
2023 35000 55000
2024 35000 65000
2025 25000 50000
Residual Value 0 8000
230000 228000
Net Investment 110000 110000
NPV:
Net Profits
Project
A
Plant 1 PV @ 1.16
PV of Cash
flows
2020 45000 0.8621 38793.1
2021 45000 0.7432 33442.33
2022 45000 0.6407 28829.6
2023 35000 0.5523 19330.19
2024 35000 0.4761 16663.96
2025 25000 0.4104 10261.06
Residual
Value 0 0.4104 0

147320.2
Initial Net-
investment 110000
NPV 37320.23
Net Profits
Project
B
Plant 2 PV @ 1.16
PV of Cash
flows
2020 10000 0.8621 8620.69
2021 15000 0.7432 11147.44
2022 25000 0.6407 16016.44
2023 55000 0.5523 30376.01
2024 65000 0.4761 30947.35
2025 50000 0.4104 20522.11
Residual
Value 8000 0.4104 3283.538
120913.6
Initial Net-
investment 110000
NPV 10913.58
Analysis of NPV of both project shows that Project A with
higher NPV is more viable as compare to Project B.
Payback Period:
Plant 1
Cumulative cash
flows
Investment
-
110000 -110000
2020 45000 -65000
2021 45000 -20000
2022 45000
2023 35000
2024 35000
2025 25000
Residual
Value 0
Payback
Period = 2 year + (20000/45000*12)
2 year and 5.33 months

Net Profits Project B
Plant 2
Investment -110000 -110000
2020 10000 -100000
2021 15000 -85000
2022 25000 -60000
2023 55000 -5000
2024 65000
2025 50000
Residual
Value 8000
Payback
Period =
4 year +
(5000/65000*12)
4 year and 1 month
Analysis of Payback
period shows that
Project A has lower
payback period as
compare to project B
which shows that
Project A will quickly
retrieve the net total
investment.
ARR:
Plant 1
2020 45000
2021 45000
2022 45000
2023 35000
2024 35000
2025 25000
Average Profit 38333.33
Investment = (110000 +
0)/2 55000
ARR =
38333.33 / 55000
*100
69.70%

Plant 2
2020 10000
2021 15000
2022 25000
2023 55000
2024 65000
2025 50000
Average Profit 36666.67
Average Investment (110000+8000)/2 59000
ARR =
36666.67 / 59000
*100
62.15%
Above computation of ARR of Project A and B shows that Project A will provide greater yield
as compare to Project B.
Overall analysis of all the investment appraisal techniques reflects that Project A is more
viable for business in comparison of Project B. .
b. Limitations of using investment appraisal techniques in long term decision making:
NPV:
No sperate set or collection of guidelines for determining the reasonable percentage of returns
The overall NPV approximation is based on discounting anticipated cash funds flows to their
prevailing values using the acceptable cost of capital. Though there is no parameters for the
calculation of this percentage. This factor figure is put at the option of the firms, and there might
be times where NPV was wrong leading to any incorrect costs of capital (Kengatharan and
Clamenthu, 2017).
Not ideal for comparing diverse scales of projects
A further downside to NPV would be that ventures of varying sizes could not be comparable.
Present value is an actual number, not a fraction. The Present value of broader projects will also
necessarily be significantly greater than smaller one. Although the yields on a bigger project
might well be greater, the cumulative output of NPV may be lesser.
Hidden Expenses

NPV simply takes into account the cash-funds inflows or outflows of a single project. This does
not identify any latent expenses, punitive damages, or other estimated costs accrued regarding
the particular project. Furthermore, profitability of a project could not be completely credible.
Payback Period:
Disregards time value of cash-flows: the significant limitation of repayment approach would be
that cash's time value also isn't taken into account. In the initial years of project, cash flows
obtained is more important than cash-fund flows obtained later. There may be two investments
with the same payback time, but one project produces greater cash-fund flow in early years while
another project throughout the subsequent periods has better financial performance. In this
case, payback protocol does not define project to be chosen.
Cash flows obtained during payback periods are neglected: some ventures which see the highest
cash balance just after a payback period is over. These ventures will see better expenditure yields
which would be preferred to shortened repayment periods.
Ignoring the viability of a venture, which does not suggest that it really is efficient simply
since project has a quick payback time. Should cash flows cease during payback cycle or decline
significantly, a project will not generate profits.
Does not recognize the returns on investments of project: certain businesses expect investment in
resources to surpass a certain return barrier; project is otherwise refused. The form of repayment
should not take into account the cost of returning of project (Нугуманова, 2016).
ARR:
In the evaluation of construction programmes, the returns rate utilises financial gains rather than
capital inflows. This lacks time-value of cash, a crucial consideration in decisions regarding
capital spending.
Accounting return rate strategy only takes into account return rate/yield and not the
lifetime of the venture. It lacks the likelihood of reinvesting dividends and generating profits
from such a capital expenditure, which would impact the rated of returns in return.
ARR does not specify the reasonable returns on investment level that is reserved at
manager's discretion. Arbitrarily defined returns will result in chosen infrastructure projects
being severely skewed. The return yield approach neglected the advantages that could
accumulate to the business when old machinery or plant is sold or abandoned. It takes only into

account net spending and not in incremental capital outflows, i.e. fresh investment less
(-) old/prior equipment's sales proceeds (Sarfo, 2019).
CONCLUSION
It has been inferred from the aforementioned study that management finance performs an
effective part in conducting company operations. This is used for corporate strategy and fund
raising. These helpful in the organised running of corporate practices. Executives employ ratio
evaluation to calculate their fiscal results to make decisions. Structured companies have to
employ an investment valuation methodology that specifies return rate and period needed for
initial capital recovery.

REFERENCES
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Economía y la Empresa, 29, pp.18-37.
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Nairobi stock exchange: A quantitative approach using the Z-score multi-discriminant
financial analysis model.
Kengatharan, L. and Clamenthu, D.P., 2017. Use of capital investment appraisal practices and
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