Managerial Finance: Analysis of Financial Ratios for Tesco and Sainsbury

This report provides a detailed analysis of financial ratios for Tesco and Sainsbury, including current ratio, net profit margin, gross profit margin, gearing ratio, PE ratio, EPS, return on capital employed, average stock turnover period, and dividend pay-out ratio. Recommendations for both companies are also provided.

Managerial finance

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Calculation as well as examination of the ratios that are related with financial aspect of the
firm that are mentioned above for two years that are 2018 and 2019.........................................1
B. Detailed examination and analysis of the ratios that are calculated above so that a clearer
picture of the positioning of both the firms can be analysed in an impactful manner.................3
C. Appropriate recommendations with the help of facts and figures that are calculated above in
a systematic way........................................................................................................................10
D. Detailed examination and evaluation of the limitations of the above calculated ratios........10
TASK 2..........................................................................................................................................11
A. Calculation and examination of investment appraisal techniques........................................11
B. Detailed examination, analysis, and evaluation of the limitations that techniques of
investment appraisal carriers that are long tern in nature as well..............................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management of finances is one of the most important as well as essential aspect for each and
every firm that is operational in the market irrespective of the industry in which it is working as
it helps in appropriate allocation and allotment of finances so that it can help in improvement of
the performance of the company so that it can help it in increasing its value in the long run
(Bristy, How and Verhoeven, 2020). Both Sainsbury and Tesco that are taken and elaborated in
this report are operating in the UK and have captured a larger proportion of market as compared
to other firms that are competing with them in the industry which is highly competitive and
dynamic in nature and both the companies are working mainly in a sector of grocery and its
related aspects. In this report there is a detailed discussion on various ratios that are financially
important for the firms mentioned above and its analysis and evaluation are also done in a
sequential and systematic manner. Apart from this the report also covers limitations of relying on
the calculated ratios and elaboration of various techniques of investment decisions like net
present value, payback period which carriers a lot of value in the current scenario. Further
limitations of using investment appraisal techniques are also examined and explained in this
report.
TASK 1
A. Calculation as well as examination of the ratios that are related with financial aspect of the
firm that are mentioned above for two years that are 2018 and 2019
(Amounts are in GBP thousand except
ratios)
Tesco PLC Sainsbury PLC
Year 2018 Year 2019 Year 2018 Year 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
Earnings 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 0.441596 0.406394 1.194091096 0.683761

shares
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
B. Detailed examination and analysis of the ratios that are calculated above so that a clearer
picture of the positioning of both the firms can be analysed in an impactful manner

Current Ratio- It is a ratio that is very useful and important for every company that is
operating in the market as it helps in determining the liquidity of the company that is the short
term paying capacity of the organisation so as to analyse that it is able to pay off its liabilities
that are of current nature in an appropriate manner or not. From the above it can be seen that both
the enterprises are operating on almost a similar scale but it can be said that Sainsbury is an edge
ahead over Tesco as in both the years the ratio of the earlier is more as in 2018 it was 0.76 as
compared to 0.71 and in 2019 it was 0.64 as compared with 0.61 (Cabello, Gaio and Watrin,
2019).
Quick Ratio- It is a ratio in which short term repaying capacity of the firm is analysed
and evaluated so that it can help the company to take necessary decisions which can help it to
grow and prosper in the long run. As it can be seen from the above that Tesco is performing a
little better than Sainsbury in this aspect as this ratio of it is little more than that of the latter firm
as in 2018 it was 0.60 as compared to that of 0.59 of Sainsbury and in 2019 it was 0.49 as
compared with 0.47 of Sainsbury and thus Tesco is well placed in the market (Cardoso, Peixoto
and Barboza, 2019).

Net Profit Margin- This ratio helps to measure the profit margin of the firm so as to
evaluate that the firm is operating in profitability or not so that appropriate measures can be
further taken in this respect. From the above it can be clearly seen that Tesco is performing
exceptionally well in this aspect as compared with Sainsbury as the profit margin of Tesco was
2.10 and 2.07 for 2018 and 2019 while it was 1.02 and 0.58 for Sainsbury in 2018 and 2019
respectively (Chaiyo and SUKSONGHONG, 2019).

Gross Profit Ratio- In this ratio gross profit margins are evaluated so that overall
performance of the company can be analysed in an impactful way so as to cater the needs,
requirements, and demands of all the prospective stakeholder of the enterprise. In this aspect too
Tesco is performing brilliantly as it has substantially increased its gross profit for the year 2018
in 2019 as compared to Sainsbury as it was 5.83 and 6.48 in 2018 and 2019 for Tesco whereas it
was 1.91 and 2.14 in 2018 and 2019 for Sainsbury (Chen and Lin, 2018).
Gearing ratio- It is a ratio that evaluated the liabilities of the company taking capital that
has been employed in the business as its base so as to analyse the true picture regarding the
performance of the capital of the company. Tesco has done commendably well in 2018 as its
gearing ratio was 144.50 as compared with 34.44 of Sainsbury for the similar year but in 2019
Sainsbury overtook Tesco and managed to perform much better than that while Tesco was not
performed well as the ratio was 97.75 and 90.92 of Sainsbury and Tesco respectively and thus
the latter has to do a detailed study so that all the loop holes in the business can be find out and
rectified as soon as possible (Gupta, Mahakud and Verma, 2020).

PE ratio- This ratio helps in determining the price that is prevailing in the current market
scenario and the earnings that the company is generating at a given period of time and it is very
important as it helps in increasing the value of the firm in the industry in which it is performing.
As it can be seen that Sainsbury is performing well in this aspect too as the ratio for it in 2018
was 20.73 as compared with Tesco’s 448.64 for the same period while it was 33.76 and 654.10
for Sainsbury and Tesco respectively in 2019 (Hu and Xue, 2018).

EPS- It is a very important as well as crucial and critical factor since it helps in attracting
stakeholders that are interested in the company’s shares as it determines the earnings that the
firm gives to its shareholders from the profits that it generated at a given time period. Since it can
be clearly seen from the above that Sainsbury is performing exceptionally well in this too as
earnings per share for it in 2018 was 1.1941 while it was 0.4416 for Tesco, whereas in 2019 it
was 0.6838 and 0.4064 for Sainsbury and Tesco respectively and can be analysed that the earlier
enterprise gives regular and higher returns to its shareholders as compared with the latter
(Hussain, Salia and Karim, 2018).
Return on Capital Employed- It is a ratio that evaluates the return capital employed of a
company is generating so that the rate can be analysed appropriately. Tesco is performing well in
this regard as its capital is getting higher return as compared with that of Sainsbury as in 2018
and 2019 it was 14.92, 7.34 and 13.98, 7.97 respectively and Tesco is much profitable as
compared to the latter in this aspect (Magerakis and Tzelepis, 2019).

Average stock turnover period- It is a period that is related with the debtors of the
company as in it number of days are analysed as well as evaluated for which the funds of the
organisation is struck with its debtors and it is preferable to keep it low as possible because the
amount can be used to keep the supply chain intact. Sainsbury is performing well in this as in
2018 and 2019 it was 15.88 and 15.52 as compared with 25.19 and 26.19 for the same period for
Tesco (Nikravesh, 2019).

Dividend-pay-out ratio- It is a ratio that evaluates the amount that company gives as
dividend to its shareholders from the profits of the firm so that to increase its value in the market
as compared to other rivals that are operational in the similar market situation. From the above it
can be seen that Sainsbury is giving higher returns as compared with Tesco as in 2018 this ratio
was 0.774 as compared with Tesco’s 0.068, whereas in 2019 it was 1.502 and 0.282 for
Sainsbury and Tesco respectively (Rahman and Mustafa, 2018).
From the calculations that have been done above it can be analysed that Sainsbury is
placed well ahead of Tesco and the latter has to identify problems and act accordingly so that it
can surpass its competitors in the long run which is very crucial in the current scenario.
C. Appropriate recommendations with the help of facts and figures that are calculated above in a
systematic way
Tesco- It has done well in some factors but there are many aspects that it lacks in and thus
needs an urgent implication of measures so as to improve all those otherwise it can lead in
decrease value of the firm in the industry.
Sainsbury- It is performing very well in majority of the aspects but still there is a scope of
improvement that can help the company to become more compatible in the market which can
further prove beneficial for it in the long run.
D. Detailed examination and evaluation of the limitations of the above calculated ratios
 Limited use of the specific ratio- There are limitations of the ratios and cannot go
beyond a specific area which acts as a barrier for firms that are operational in the market
and wants to grow and expand.
 Absolute lack of acceptable standards- There are no set standards formulate for the
ratios which makes it more difficult to evaluate and interpret in an appropriate manner.
 Tampering in the financial statements- It is very easy to fluctuate the facts and figures
and thus possesses danger for the companies that are using it in their operation.
 Measurement and communications time lag- There is a time gap between both the
activities that are measurement and communication which further differentiates the value
of the two (Safarzadeh Bandari and Jafarimanesh, 2019).
 Universal Accounting Limits- Since all the ratios are formulated earlier and carriers
some or the other limitations for the newly formed companies that wants to grow and

prosper by using innovative tools and techniques which acts as a burden for the firms
nowadays.
TASK 2
A. Calculation and examination of investment appraisal techniques
Net Present Value-
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
The NPV review of both proposals reveals that the Project A with greater NPV is more feasible
than the Project B.
Payback Period:
Plant 1
Particulars Amount
Amount
(Cumulative
Cash Flow)
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
Particulars Amount
Amount
(Cumulative
Cash Flow)
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
Evaluation of payback periods reveals that the Project A provides lower
payback period than the Project B, this reveals that the Project A will
rapidly recover net total investments.
ARR:
Plant 1
Particulars Amount
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
Particulars
2020 Amount
2021 10000
2022 15000
2023 25000
2024 55000
2025 65000
Average Profit 50000
Average Investment (110000+8000)/2 36666.67
ARR = 59000
36666.67
/ 59000
*100
ARR computed above of the Project A and Project B suggests that Project A would
produce better yields than Project B.
The aggregate review of all such investment assessment techniques reveals that the Project
A is much more feasible for business than Project B.
B. Detailed examination, analysis, and evaluation of the limitations that techniques of investment
appraisal carriers that are long tern in nature as well
Net Present Value- This technique is one of the most important as well as crucial one as it
helps in determining the present value of the investment so that all the factors can be taken into
consideration which can further help the business to grow and prosper in the industry by
adopting projects that are useful for it in the long run (Sheikh, 2020). There are some limitations
of it as well and all of them are described below in detail-
 It only considers present value and does not take various other aspects that are equally
important from the firm’s point of view and thus is regarded as a burden by different
companies in the market because of it.
 Each and every project has its own value and thus comparison between two cannot be
done on this basis which it ignores and thus acts as a limitation of this technique.

 There are a number of costs included in it and mostly hidden in nature which makes it
difficult to analyse the actual cost of the technique.
Payback Period- It is a technique which helps in analysing and evaluating the time period
that is taken by the investment to cover its cost so that profits can be made thereafter (Weigand
and Schulte, 2020). There are many limitations of this technique too which are explained in a
sequential manner below-
 It ignores the most important as well as essential aspect that is value of money on time
basis and thus it is the major limitations of this technique and thus majority of the firms
does not opt for this technique due to this factor only (Shiah-Hou, 2016).
 Apart from this payback period also ignores the cash inflow that is generated after the
cost of the investment is recovered and thus acts as a barrier in the working and also
becomes difficult to analyse the true inflow of cash that a particular project generates.
 It also works on short run concept and the companies that are operational in the market
for return in longer time frame so they do not find it compatible with their goals and
objectives and thus does not use this technique.
Accounting Rate of Return- This technique helps in analysing the rate of return that a
particular investment that is done by the company is fetching so that appropriate and necessary
measures can be further taken in that regard which can help the firm to grow and prosper in the
market which has highly dynamic environment. There are various limitations of it as well and all
of them are explained below in detail-
 Similarly as the previous technique it also ignores the time value of money which is
highly important for all the firms that are operational in the currents scenario.
 Also it remains constant for many a years and thus it is not even possible for an
investment to generate constant returns which hampers the performance of the companies
that use this technique in their operations (Ulita, Hiktaop and Hayon, 2020).
CONCLUSION
Financial management is very crucial for all firms as it helps in identifying the loop holes in
the business so that each and every aspect can be rectified and that too well within a limited time
frame so that it can help the business to survive in the market for a much longer time period.
From the above it can be concluded that both the firms that is Tesco and Sainsbury are very well
placed in the market, though Sainsbury has performed better than Tesco in some of the aspects.

Apart from that it can be concluded that there are a number of techniques of investment appraisal
that can help a company to grow in the market. Further it can also be concluded that both rations
and investment appraisal techniques have limitations and a company must choose according to
the needs of the firm and that too in an accurate manner.

REFERENCES
Books and journals
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evidence from Brazil. International Journal of Managerial Finance.
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Chaiyo, K. and SUKSONGHONG, K., 2019. BOARD COMPOSITION MANAGERIAL
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sensitivity: an empirical investigation. International Journal of Managerial Finance.
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Model of Iranian Banks from Managerial Discretion Perspective. Journal of Money And
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