Ratio Analysis of Tesco and Sainsburry: Managerial Finance

This report provides a detailed analysis of the financial ratios of Tesco and Sainsburry, including current ratio, liquid ratio, gross profit ratio, P/E ratio, net profit ratio, earnings per share ratio, dividend payout ratio, inventory turnover ratio, and capital gearing ratio. The report also discusses the limitations of ratio analysis and investment appraisal techniques.

Managerial
Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
PORTFOLIO 1.................................................................................................................................3
Ratio calculation of Tesco and Sainsburry for the year 2018 and 2019:.....................................3
Ratio analysis and interpretation:.................................................................................................5
Limitations of ratio analysis:.....................................................................................................11
PORTFOLIO 2...............................................................................................................................11
Investment appraisal techniques:...............................................................................................11
Limitations of investment appraisal techniques:........................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Finance is the activity for arranging funds and acquiring funds for running business
activities. It helps in distributing funds into the business activities in other departments so that
they can work because every activities needed for money. So finance is all about fulfill the needs
of all other departments by providing money. Managerial finance is about planning, organising,
analysing, managing, controlling financial activiti8es within an organisation by better utilisation
of resources (Carbonell and Rodriguez Escudero 2016). Management is about to manage
activities so that firms can accomplish its business objectives. The company which is selected for
this report is Tesco and Sainsburry. Tesco is the British retail based company, it was founded in
year 1919, headquarter situated in UK. Sainsburry has large number of super market chain for
retail sector, it was founded in 1922, headquarter situated in London. This report covers topics
such as ratio calculation, ratio analysis of both companies, limitations of ratio analysis. Apart
from this its also covers topics such as investment appraisal techniques and limitations of
investment appraisal techniques (Cruz and Justo, 2017).
PORTFOLIO 1
Ratio calculation of Tesco and Sainsburry for the year 2018 and 2019:
Ratio analysis for the year 2018 and 2019:
In context to Tesco:
Basics Formulas Results for 2019 Results for 2018
Current ratio Current assets / current
liabilities
12668 / 20680
= 0.612
13,726 / 19,238
= 0.713
Liquid / quick ratio Quick assets / current
liabilities
3373 / 20680
= 0.163
4379 / 19238
= 0.227
Gross profit Ratio Gross profit / total
sales
(4144/63911)*100
= 6.48%
(3350 / 57491)*100
= 5.82%

P/E ratio Market value per
share/ Earnings per
share
213.6/13.65
= 16.97
229 / 9.35
=24.49
Net profit Ratio Net profit/ total sales (1322/63911)*100
= 2.07%
(1206 / 57491)*100
=2.097%
Earnings per share Income available /
total number of shares
outstanding
13.65 9.35
Dividend pay-out
ratio
Dividend paid / net
income
357/1322
= 0.27
82/1206
= 0.68
Average inventory
turnover period
Net sales / average
inventory
63911/2240.5
= 28.52 days
57491/2282.5
= 25.91 days
Capital gearing ratio Total debt / total
equity
49047 / 14858
= 3.301%
44862/10480
= 4.280%
Return on capital
employed
Operating profit/
capital employed
6.86 5.13
In context to Sainsburry:
Basic Formulas Results for 2019 Results for 2018
Current ratio Current assets / current
liabilities
7550 /11849
=0.63:1
7857/10302
=0.73:1
Liquid / quick ratio Quick assets / current
liabilities
1283 /11849
=0.19
1933/10302
=0.19
Gross profit Ratio Gross profit / total
sales
601 /29007
=0.02%
518/28456
=0.018%
P/E ratio Market value per share
/ Earnings per share
213.40/46
=4.64
238.80/0.22
=10.85
Net profit Ratio Net profit / total sales 186/29007 309/28456

=0.006%
=0.11%
Earnings per share Income available /
total number of shares
outstanding
46 22
Dividend pay-out
ratio
Dividend paid / net
income
247/186
=1.33
235/309
=0.76
Capital gearing ratio Total debt / total
equity
97.75 34.44
Average inventory
turnover period
Net sales / average
inventory
29007/1869.5
=15.51 days
28456/1792.5
=15.87 days
Return on capital
employed
Operating profit/
capital employed
3.84 4.65
Ratio analysis and interpretation:
 Current ratio: Current ratio refers to which indicates relation of current liabilities and
current assets. As working capital Is also considers current liabilities and current assets,
so that it also known as working capital ratio. The higher the current ratio shows firm has
higher liquidity in order to manage its activities and it shows better efficiency of the
company in order to managing its resources (Deng, 2016). The ideal current ratio known
as 2:1 which shows 2 assets over 1 liabilities. As per the data of Tesco and Sainsburry
Sainsburry has better performance than Tesco as it shows higher liquidity in both year 2-
18 and 2019.

 Liquid ratio: Liquid ratio also known as Acid ratio which shows cash and bank balance
of the company. It shows more liquidity than current ratio as it is calculated by dividing
liquid assets by current liabilities. Liquid assets refers to subtracting stock and prepaid
expenses by current liabilities. The higher the obliquity shows firms efficiency in order to
pay its short term debts (Ellina, Mascarenhas and Theodossiou, 2020). As per the above
data it shows Tesco and Sainsburry liquidity for the year 2018 and 2019. This data shows
in year 2018 Tesco has managed its liquidity higher than Sainsburry but for the both side
we can see Sainsbury has managed its assets equally while in 2019 Tesco declines its
liquid assets which shows it has not managed its resources efficiently.
10/07/1905
11/07/1905
0.550.60.650.70.75 0.713
0.612
0.73
0.63
Chart Title
Tesco Sainsburry

 Gross profit ratio: Gross profit ratio indicates relation of gross profits and net sales. The
term gross profit refers to sales minus cost of goods sold. And net sales shows total sales
minus sales returns. As it involves only material, labour and overheads it affects firms net
profits. Higher the gross profit means firms manages its resources efficiently and it is
better for the company. The ideal ratio in retail sector is 25% . as per the data of Tesco
Sainsburry it shows Tesco has higher profitability than Sainsburry. As in both year Tesco
has higher performance in its ratios (Han, Chen and Deng, 2018).
 Price earning ratio: As per the above data it shows value of the shares which market is
willing to pay. Higher the share price shows higher earnings of the company. As per the
above data it shows ratios for Tesco and Sainsburry, which shows Tesco has less price
than Sainsburry which means Sainsburry has higher market value. As per the data it
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11/07/1905
0
0.1
0.2
0.227
0.163
0.19 0.19
Chart Title
Tesco Sainsburry
5.82%
6.48%
0.018 0.02
Chart Title
Tesco Sainsburry

shows in context to Tesco, it shows 24.49 and 16.97 for the year 2018 and for the
Sainsburry it shows 10.85 and 4.64 for the year 2018 and the year 2019 (Kar and Swain,
2018).
 Net profit ratio: Net profit refers to the relation of net profit an net sales. The ideal ratio
shows 10% for the retail sector. Higher the net profit shows higher income of the
company which is positive sign for the business. As per the Tesco in year 2018 it shows
2.01 and in year 2019 it shows 2.07 which shows increase in profitability and firm
manages its resources effectively and efficiently. As per the Sainsburry, the net profit
ratio shows 0.11 and 0.01 in year 2019 which shows firm has increased its costs. From
this calculation it shows Tesco has higher performance than Sainsburry (Moeen, 2017).10/07/1905
11/07/1905
051015202530 24.49
16.97
10.85
4.64
Chart Title
Tesco Sainsburry

 Earning per share ratio: It shows how much firm earns for its each share. It refers to
amount earns by the company on its each shares. Higher the ratio shows higher value and
image of the company. Which helps firms for getting more investments from the
investors because it increases firms value. Higher the ratio shows better financial position
of the company. In context to Tesco and Sainsburry, it shows Sainsburry has higher
performance than Tesco as its share price are more than Tesco which shows firms higher
value in the market (Sawik, 2017).
 Dividend payout ratio: Dividend payout ratio is about firms efficiency to pay its
shareholders. How much amount company pays for its shareholders for their investments.
Higher the dividend shows higher profitability of the company so that company pays
10/07/1905
11/07/1905
00.511.522.5 2.097 2.07
0.11 0.006
Chart Title
Tesco Sainsburry
10/07/1905
11/07/1905
01020304050
9.35 13.65
22
46
Chart Title
Tesco Sainsburry

higher. It is the income earns by the shareholders for their money related to the profits of
the company. As per the above data it shows ratios of Tesco and Sainsburry for the year
2108 and 2019. for the year 2018, it shows 0.27 and 0.68 for the year 2019. as per the
Sainsburry data it shows 1.33% in year 2018 and 0.76 in year 2019. it shows Sainsburry
pays higher dividend than Tesco which shows higher profitability of the company.
 Inventory turnover ratio: It is about the how company manages its inventory and the
sales of the company. It is about how many times firms replace its inventory in the
specific period. This shows efficiency of the company for managing its sales. It is shows
in days which tells the inventory replacement time for the company. To keeping stock for
the shorter period shows higher the sales of the company. As per the above data it shows
Sainsburry has higher sales than Tesco which shows its efficiency in order to managing
its inventory.
10/07/1905
11/07/1905
00.511.5
0.68
0.27
0.76
1.33
Chart Title
Tesco Sainsburry

 Capital gearing ratio: It is about the amount of debts which is related to the equity. This
is using to measure financial risks and shows amount of debts for the equity. The ratio 2
means the debts are twice to its equity. It is calculated by dividing shareholders equity by
the interest amount. The ideal ratio shows between 25% to 50%. as per the data for Tesco
and Sainsburry it shows Tesco has less risks than Sainsburry in 2018 while Sainsburry
has doubled risks in year 2019.
 Return on capital employed ratio: Return on capital employed shows how much
company earns for its capital. It is about how company utilises its resources for getting
higher returns. Higher the ratios shows better utilisation of its resources. As per the data
10/07/1905
11/07/1905
051015202530 25.91 28.52
15.87 15.51
Chart Title
Tesco Sainsburry
10/07/1905
11/07/1905
04080120
4.28 3.301
34.44
97.75
Chart Title
Tesco Sainsburry

of Sainsburry and Tesco it shows Tesco has higher returns than Sainsburry by managing
its resources. As per the above data it shows, Tesco has 5.13 and 6.86 while Sainsburry
has 4.65 and 3.84 for the year 2018 and year 2019 (Symitsi and Chalvatzis, 2019).
Recommendation:
 As per the above calculation and analysis it shows liquidity and profits of the Tesco is
higher but the equity value of the Sainsburry is higher. Firms should use its resources
properly. Better utilisation of resources leads to higher the profitability.
 Tesco should use its resources efficiently because it has less liquidity for paying its short
term debts.
 For running daily activities firms should maintain cash and bank balances so that it can
pay its debts.
 Tesco should maintain its profits and sales because it can be reason of lower value of its
shares because if company wants to expand its business it should maintain its sales for
getting investments from investors.
 Firms should manage their gross profits because higher the gross profit leads to higher
net profits of the company.
 It is important to manage firms resources efficiently because it helps in giving costs
advantages which leads to achieve higher profitability for the company.
10/07/1905
11/07/1905
012345678
5.13
6.86
4.65 3.84
Chart Title
Tesco Sainsburry

Limitations of ratio analysis:
Ratio analysis helps firms to know liquidity, solvency and profitability for the company.
It helps company for comparing actual performance from its expected performance.
 The analysis done by the ratio analysis is on the basis of historic data not the current data
is used to determine the financial position of company.
 The external factors of the organisation are not taken into the account which do not give
the accurate information about the company.
 The ratio analysis does not considered the human element which is a negative issue for
the organisation and face many problems.
 The comparison done by the ratio analysis for the company having the same firm and of
same type and size the firm which are small and different would not be able to do the
comparison.
 The information shared by the other business of the different firm have difficulty in
comparing as it become difficult to compare with the other firm by doing the ratio
analysis which affect the business.
 Information that is utilised in analysis of ratio is based on results of past or prior periods
which is provided by company.
 Financial reports are periodically released and hence, time difference incorporates in it. If
situation of inflation arises in between than real price is not represented in financial
reports. Hence, data is not comparable until it is adjusted in accordance to inflation.
 Business may change or alter its operational structure in context to changes in supply
chain product selling strategies. Comparison of financial metric after such alterations may
present misleading results which may hinder effective decision making of company's
management.
 Seasonal factors also have implications on performance of company. Inability of financial
interpreters to adjust analysis of ratio in accordance to seasonal effects leads to wrong
interpretations.
 Basis of ratio analysis is that information which is reported in financial statements of an
organization. Such information can be manipulated by management of business for the
purpose of reporting better or enhanced result in comparison to actual performance.

Therefore, it may happen that ratio analysis does not reflect actual performance of an
enterprise due to misrepresentation of data or information.
 Business can make changes or alterations in year end in its financial statements with the
motive of improving ratio analysis, this ultimately makes ratio analysis nothing more
than window dressing.
 Changes in price level because of inflation is ignored while computing ratio analysis.
Computation of ratios is on the basis of historic costs and hence, price level changes are
overlooked, which restricts representation of actual financial situation of an enterprise.
 Qualitative aspects of business is completely ignored while calculation of accounting
ratios, as only monetary aspects are taken into consideration.
 Due to unavailability of standard definition of ratio analysis, different formulas are
utilised by organizations. For example, while computation of current ratio some
enterprise considers all current liabilities while others excludes bank overdrafts.
 Computation with application of ratio analysis between two organizations which
incorporates different strategies which results in providing inappropriate evolution.
 In relevance to accounting policies it can be noted that different organizations
incorporates different policies for recording same transaction of accounting. It indicates
that comparison of ratios of different entities may not provide appropriate results.
PORTFOLIO 2
Investment appraisal techniques:
For the project A:
Net Profit Value Discount factor Present value
45,000 0.862 38,790
45,000 0.743 33,435
45,000 0.641 28,845
35,000 0.552 19,320
35,000 0.476 16,660
25,000 0.41 10,250

1,47,300
Less: Initial investment 110000
Net present value 37300
For the project B:
Net Profit Value Discount factor Present value
10000 0.862 8620
15000 0.743 11145
25000 0.641 16025
55000 0.552 30360
65000 0.476 30940
58000 0.41 23780
120870
Less: Initial investment 110000
Net present value 10870
Investment appraisal techniques: It shows the ability to done profitability of an
investment over the period of time. It is about effectiveness of the investments which investment
option will give it higher returns (Sytnyk, Onyusheva and Holynskyy, 2019). It helps firm for
taking decisions regarding various options. Investment decisions are essential for the business
which defines the future survival for the company and growth of it. There are various investment
appraisal techniques which includes profitability index, payback period, average rate of return,
internal rate of return and net present value.
As per the above data it shows investment options for the project A and project B. as per
this data for both the proposals initial investments is 110000. for the project A net present value
shows 37300 and for the project B it shows 10870. as per this data the project A will be
beneficial for the company which gives higher returns to the company.

Limitations of investment appraisal techniques:
Limitations of investment appraisal techniques:
In some techniques of investment appraisal, such as while computation of pay back period, time
value of money is not taken into consideration. Hence, clear determination of future cash
generation cannot be determined.
Timings in relation to generation of cash flow in ignored during calculation of pay back period.
Calculation of average rate of return is not based on cash flows rather it is based on accounting
profit.
Comparison of average rate of return becomes difficult as it is depended on accounting policies.
Various techniques of investment appraisal, such as average rate of return is a absolute measure
instead of relative measure, hence, size of investment cannot be taken into account.
Process of investment appraisal is complex and hence, its planning and decision making
regarding it comes up as a critical or difficult task for managers.
High level of knowledge is required for the purpose of computing investment appraisal for
effective investment of funds of business (Tashjian, 2019).
It is a time consuming process or complicated process.
Investment appraisal techniques cannot provide accurate information as it is related to future
period which is unpredictable.
Profitability of project is ignored while computation of pay back period. Because pay back
period focuses on short duration of projects but it is not necessary that short term projects
come up as a profitable one.
It is possible that investment appraisal techniques comes up as a failure on evaluation of risk
factors or uncertainty factors.
CONCLUSION
From the above report it has been concluded that finance plays vital role in every
organisation, as it is about managing and acquiring funds for fulfill the needs of organisation.
Management of finance has such functions includes planning, organising, analysing, controlling,
managing financial activities for the business. Ratio analysis is about which shows liquidity,
solvency and profitability of the company. It helps firms for compare actual performance from
its expected performance. Capital budgeting is the process of known about the returns which
company gains against its investments. It helps firms in order to know which investment option

is better which gives higher returns to the company for its investments. There are various
investment appraisal techniques which includes profitability index, payback period, average rate
of return, internal rate of return and net present value.

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