Managerial Finance: Analysis and Recommendations for Improving Financial Performance

Managerial finance
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Table of Contents
Introduction......................................................................................................................................3
Portfolio 1........................................................................................................................................3
Ratio analysis..............................................................................................................................3
Analysis of financial performance, position and investment potential of both companies.........5
Recommendations on improving financial performance of poorly performing business.........13
Limitations of relying on financial ratios..................................................................................14
Portfolio 2......................................................................................................................................15
Investment Appraisal techniques..............................................................................................15
Limitations of using investment appraisal techniques in long term decision making..............16
Conclusion.....................................................................................................................................18
References......................................................................................................................................19
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Introduction
Financial decision making is critical for a business as finance provides backbone to sound
operations, success and growth of the business. It includes taking responsible decisions for
financial performance and position of the business (Chandra, 2017). This report is aimed at
evaluating financial decision making of two companies from investors' point of view and
investment appraisal techniques from management point of view. It is divided in two portfolios.
First portfolio is aimed at analysing financial performance, position and investment potential of
Sainsbury PLC and Tesco PLC through ratio analysis. Sainsbury PLC i Limitations of ratio
analysis in interpreting company's performance is also discussed. Further recommendations are
provided for improving financial performance of poorly performing businesses. Second portfolio
is aimed at analysing capital investment appraisal techniques and their limitations in long term
decision making for a company.
Portfolio 1
Ratio analysis
Ratio 2018 2019
Tesco Plc Sainsbury Tesco Plc Sainsbury
Current Ratio
= Current Assets/ Current
Liabilities
= 13749/
19233)
= 0.71
= 7866/
10302)
= 0.76
= 12668/
20680
= 0.61
= 7589/ 11417
= 0.66
Quick Ratio
= Quick Assets/ Current
Liabilities
Here, Quick Assets = Current
Asset- Inventories
= 9752/
19233)
= 0.51
= 6136/
10302)
= 0.60
= 9690/
20680)
= 0.47
= 6486/
11417)
= 0.56
Net Profit Margin Ratio
= Net Profit/ Revenue
= 1210/
63911
= 0.019
= 309/ 28456
= 0.01
= 1320/
57493
= 0.023
= 219/ 29007
= 0.008
Gross Profit Margin Ratio = 3352/ = 1882/ 28456 = 4144/ = 2007/ 29007
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=Gross Profit/ Revenue 63911
= 0.052
= 0.066 57493
= 0.072
= 0.069
Gearing Ratio
= Long Term Liabilities/ Capital
Employed
= 31135/
10480
= 2.97
= 4288/ 7411
= 0.58
= 36379/
14834
= 2.45
= 3668/ 8456
= 0.44
P/E Ratio
= Market Value Per Share/
Earning Per Share
= 229/9.35
=24.49
= 238.80/0.22
=10.85
=213.6/13.65
=16.97
= 213.40/46
=4.64
Earning Per Share
= Net Profit after Preference Share
Dividend/ No. of Outstanding
Shares
= 1210/
10480
= 0.12
= 309/ 7411
= 0.042
= 1320/
14834
= 0.089
= 219/ 8456
= 0.026
Return on Capital Employed
= Earning before Interest and Tax/
Capital Employed
= 1300/
10480
= 0.12
= 409/ 7411
= 0.055
= 1674/
14834
= 0.11
= 239/ 8456
= 0.028
Average Inventory Turnover
Period
= Net Sales or COGS/ Average
Inventory
Here, Average Inventory
= (Opening Inventory + Closing
Inventory)/ 2
= 57493/
2958.4
= 19.43
= 28456/
1598.7
= 17.80
= 63911/
2440.5
= 26.19
= 29007/
1869.5
= 15.52
Dividend Payout Ratio
= Dividend Paid/ Net Income
= 82/ 1210
= 0.068
= 212/ 309
= 0.69
= 357/ 1320
= 0.27
= 224/ 219
= 1.02
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