Managerial Finance: Analysis of Financial Ratios and Investment Appraisal Techniques

This document provides an analysis of financial ratios and investment appraisal techniques in managerial finance. It includes the calculation of financial ratios for two companies, the analysis of their performance and financial position, and recommendations. It also discusses the limitations of relying on financial ratios. The document is relevant for the subject of Managerial Finance.

Managerial Finance

Contents
TASK 1............................................................................................................................................3
a. Calculation of 10 financial ratios as given below for two years (2018 and 2019):.................3
b. Analyse performance, financial position and investment potential of both companies:.........5
c. Provide recommendations:.....................................................................................................11
d. Limitations of relying on financial ratios...............................................................................12
TASK 2..........................................................................................................................................13
a. Investment appraisal techniques:...........................................................................................13
b. Limitations of using investment appraisal techniques in long term decision making:..........15
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Management finance is mostly related to the measurement of financial processes rather than to
the financial methods itself. This differs from the realistic approach, which would be highly
concerned only with the assessment and whether money has been allocated to the related regions
(Dandapani, 2017). The aim of the organizational structure is to determine the relevance of
effects, projections, and figures. Management financing looks at how investment decisions
should be improved, where changes can be made to help prevent losses and boost the bottom
line. The report consists of two key sections of the leading UK companies' first component ratio
analysis: Tesco and Sainsbury were conducted to assess their results from an investor viewpoint.
Although the second section includes a realistic total of various methods of investment valuation
as well as their limits.
TASK 1
a. Calculation of 10 financial ratios as given below for two years (2018 and 2019):
Ratio calculation-
Particular Formula Sainsbury
2018 2019
Tesco
2018 2019
Current
ratio
7857/ 10302 =
0.76
7581 / 11417 =
0.66
13600/
19233
=0.71
12570/20980
=0.61
Quick ratio 6047/ 10302 =
0.59
5652/11417 =
0.50
11336/
19233 =
0.57
9953/ 20680 =
0.48
Net profit
ratio
1210/ 57493 =
2.10
1320/ 63911 =
2.07
309/ 28456
= 1.09
219/ 29007 =
0.75
Gross
profit ratio
1882/28456=
6.61
2007/ 29007 =
6.92
3352/
57493 =
5.83
4144/ 63911 =
6.48
Gearing
ratio
Total debt /
Capital
employed
14590/ 7411 =
1.97
15085/ 8456 =
1.78
34404/
10480 =
3.28
34213 / 14834
= 2.31
P/E ratio 264.9/ 2.49
=106.39
229.9 / 1.86 =
123.60
189.55/4.96
= 38.22
255.2/ 6.14 =
41.56

Earning
per share
ratio
309/ 65 = 4.75 219/ 54 = 4.06 1210/ 244 =
4.96
1320/ 215 =
6.14
Return on
capital
employed
518/ 11699 =
4.43
601/ 12097 = 4.97 1566 /
25502 =
6.14
2639 / 28269 =
9.34
Average
stock
turnover
Cost of goods
sold/ Average
stock
26574/ 1792.5
= 14.83
27000/ 1869.5 =
14.44
54141/
2282 =
23.73
59769/ 2440 =
24.50
Dividend
pay-out
ratio
Dividend per
share/ Earning
per share
235 / 309 =
76.05
247/ 219 = 112.79 82/ 1210 =
6.78
357/ 1320 =
27.05
Evaluation
Capital employed = TA - TCL
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: As seen in the aforementioned graph, Tesco Firm's current ratios are 0.61 and
0.71 over the cycles of 2019 and 2018, indicating improvements over the two years, although
Sainsbury's average figure is 0.66 and 0.76, respectively, around the same time span. While
Sainsbury's narrower flexibility performance with a higher current ratio is better compared to
Tesco, both companies showed better results in the proportion.
Quick Ratio: The Quick Proportions are 0.57 and.48 since year-2018 and year-2019 together, as
seen in the earlier in this thread chart, while the Quick Ratio of the Sainsbury group is about 0.59
and 0.50 over that same time period including both. There is also a growing change in
accelerated ratios, which reflects an improvement in all companies' cash liquidity scenarios.
Relatively, the fast ratios of the Tesco are marginally higher than that of the Sainsbury market.
Net Profit Margin: Using the net profit margin and gross profit margin, the output of both firms
can be calculated effectively. The net income proportions seen in the above-mentioned Sainsbury
map are 2.10 % and 2.07 percent in the years 2018 and 2019, with a growing increase; while
Tesco Plc's net income figures are 1.9 % and 0.75 percent in the years 2018 and 2019. Thus, all
such firms posted increased levels of future income, but compared to Sainsbury, Tesco Plc
generated better competitive advantage, which implies that the degree of profit margins is far
higher than those of Sainsbury (Singh, Joshi and Kansal, 2016).

Gross Profit Ratio: Tesco Plc's management efficiency levels are 5.83 percent in 2018 and 6.48
% in 2019, while the Sainsbury GP figures for 2018-2019 are 6.61 percent and 6.92 percent.
Data indicates that Tesco Plc, with a higher proportion of income, is more successful in
generating revenues from its core market operations than Sainsbury.
Gearing ratio- The Gearing Ratios displayed in the above graph represent the actual amount of
leverage of the firms. Tesco Plc registered a capital structure of 2.31 in year-2019 and 3.28 in
year-2018, while the financial leverage of Sainsbury Market in year-2018 and year-2019 were
1.97 percent and 1.78 percentage points. Tesco has posted a greater proportion than Sainsbury,
which implies that perhaps the corporate leverage cost is higher (Kumar and Pathak, 2016). As a
consequence, the financial condition of Sainsbury's group is higher than Tesco Plc.
PE ratio: The Tesco PE ratio is collectively 38.22 and 41.56for year-2018 as well as year-2019,
with such a declining trajectory, whereas the P / e ratio of Sainsbury Company is 106.39 and
123.60 for much the same cycles as a consequence of the decreasing PE ratio phenomenon. This
means that Sainsbury Company is more successful in supplying its owners with dividends for
any equity they have and the valuation of the shares of Sainsbury Business is higher.
EPS: As shown in Tesco Plc's EPS graph in 2019, Tesco Plc's EPS is about 4.96 and
approximately 6.14 in 2019, while the EPS of Sainsbury's business were about 4.75 and 4.06 in
2018 and 2019. Study reveals that EPS amount is reducing in both firms. The EPS of the
Sainsbury is larger than the Tesco group, which suggests that perhaps the Sainsbury business is
better at creating returns from each of its shares (Lassoued, Attia and Sassi, 2017).
ROCE: As seen in the table, Tesco records between 6.14 and 9.34 and Sainsbury's ROCE is 4.43
and 4.97 in 2018 and year-2019. In the situation of Tesco, there is an increase in percentage and
a fall in Sainsbury's ROCE. With such a greater ROCE, Tesco plc is far more able to ensure
returns on the overall financial resources used.

Average stock turnover period- Tesco Plc's corporate duration is between 23.73 to 24.50
whereas Sainsbury's duration is around 14.83 and 14.44 for the year-2018 and 2019. This means
that Sainsbury Firm, with a smaller ratio, is simpler for someone to transform its inventory into
sales. Although Tesco's operating times have been increased over the period, it means that the
company's competitiveness has declined in converting its stock to sales.
Dividend-pay-out: The dividend pay-out for Sainsbury is 76.05 and 112.79, while the dividends
pay-outs for Tesco were 6.78 and 27.05 during 2018-2019. This suggests that Sainsbury
Business is more valuable to the customer because, relative to Tesco Plc, the customer paid
higher amounts of returns on its shares to its owners (Abor, 2016).
The overall results analysis of Sainsbury shows that the narrower liquidity status of Sainsbury is
marginally higher than Tesco plc. While Tesco Plc's overall net and also net productivity rating
is much higher than Sainsbury's. There is a greater rate of Tesco loans than Sainsbury's. Current
developments in share price, the EPS and compensation of the Sainsbury Company are both
more desirable and profitable for customers/shareholders from the investor's viewpoint, as the
company has even more acceptable metrics than Tesco plc. In comparison to Tesco, Sainsbury's
ideal average stockpiles times find out that Sainsbury did better.
c. Provide recommendations:
Tesco Plc: It is strongly recommended that the firm should try and reduce its gross leverage and
improving its liquidity position in the near term. This organisation should change its loan
policies and decrease its dependency on debt funding (Jackowicz, Mielcarz and Wnucza, 2017).
In comparison, the company's stock valuation is smaller than Sainsbury's, so the firm can focus
on economic growth and raise its customer base in the marketplace to raise its stock price.
Sainsbury: It is primarily vital for the company to reflect on its gross productivity level and on
net productivity based exclusively on the above review. Via successful ads and business models,
the company should maximise its overall business costs and focus on boosting revenue.
d. Limitations of relying on financial ratios
Restricted use of the specific ratio: At any fixed ratio, no meaning can be expressed. As a result,
more ratios are measured in order to explain something through a single ratio. Maybe that the
estimation of many ratios adds to uncertainty rather than helping to get at the final extreme of the
researcher.

Total lack of appropriate standards: With various ratios, there are still no clear benchmarks or
requirements. Only contextual or rational conditions are accepted and implemented as the basis
with all proportions. There is also diversity in the interpretation of percentages (Lee, 2016).
Tampering of financial reporting-The company discloses particulars in financial documents with
respect to the analysis of the ratio. This experience can be used by business management to
achieve a better impact than their real results. An interpretation of the ratio will also not
adequately depict the true state of the product, as the consistency of the assessment does not
identify the inaccurate representation of the details. It is also important for observers to be aware
of certain potential methods of coercion at this period when decisions are made and thus to
comply with proper research.
Measurement and reporting time lag: balance sheets and statement of comprehensive income
shall only be accepted by the external investigator at the conclusion of the income statement.
These financial statements are to be released at the end of the quarterly debate. It takes around
six months and about 9 months to do this. Therefore the measurement and coordination within
the company about proportions.
No comparison between companies: if the scale and sophistication of the organisational
problems are not identical, there is any chance of any inter-company comparison using
accounting ratios.
Complex and completely false: In the face of market differences, ratios can make a closely
related analogy more troublesome and inconsistent.
Uniform Reporting Limits: The historical meaning of applicable knowledge gathered is
interpreted for the calculation of ratios. The reasoning is that the financial statements are created
on the basis of prior knowledge. In the risk assessment report, this is a basic constraint. Nor are
the proportions of practicable steps practically appropriate to opportunity.

TASK 2
a. Investment appraisal techniques:
The NPV analysis of both plans indicates that Plan A is much more realistic with a higher NPV
than Plan B.

Assessment of payback rates indicates that Project A promises a shorter payback time than
Project B, suggesting that Project A would recover cumulative net contributions easily.
ARR:

The above-calculated ARR for Plan A and Plan B suggests that Project A will yield greater
returns than Project B.
The overall study of all such capital investment strategies indicates that Project A is far more
viable for company than Project B.
b. Limitations of using investment appraisal techniques in long term decision making:
NPV: A business/venture net present-value illustrates the company's estimate of the future gains
or losses) from an investment projects. Companies must compare the benefits of adopting
projects versus the benefits of a different solution (Adzobu, Agbloyor and Aboagye, 2017). Since
before the value of assets changes over time periods, the net current value can compensate for
monetary time values, including current prices and potential advantages. NPV to include the
benefits and losses of each period under analysis. Here are some NPV drawbacks, as follows:
 No separate set or collection of guidelines for determining a realistic percentage/rate
profit: the average measurement of the NPV depends on the undervaluing of expected
cash flows through their prevailing rates using acceptable operating costs. And no
requirements exist for calculating this amount. At the preference of firms, this element
figure is provided, and there might well be times when NPV was incorrect, leading to any
erroneous downplaying rate.
 Not ideal for considering multiple project sizes and context: Another drawback of the
NPV may have been that tasks of varying scales may not have been compared. The
equity value is a statistic that is significant, not a portion. Thus the present profit of
broader measures will undoubtedly be far greater than that of easier things. While profits
on a larger enterprise could well be better, the NPV's outstanding result could be smaller.

 Prohibited costs: Existing values of capital inflows or cash outflows from a given venture
are actually taken into account by the NPV. No undisclosed damages, cash fines or even
other expected costs incurred in favour of a particular project shall be identified. In
addition, the entity's viability will not be necessarily reliable.
Payback Period- PBP helps businesses to recognise different investment rewards to determine
the product or service has been most anticipated to benefit in the shortest possible time. In every
case, rapid return may not have been a target for every organisation, and it is also a vital
consideration (Cormier, Demaria and Magnan, 2017). The payback time for this phase is
calculated by dividing the annual rate cash inflows which are expected to be generated by the
project or service from the original cost. The average method would provide a consistent
definition of payback time if money balances are anticipated to be steady. However if the
business is predicted to witness considerable success in the near future, the payback period will
be very broad. Here are a few key shortcomings, as defined here, of such a strategy:
 Disregards/not-considering the time value of future cash-flows: the major downside of
the system of redemption would be that the target variables of the funds are still not taken
into account. Cash flows obtained are more critical than cash/money flows produced later
in the early stages of the business. There may be 2 type of a comparable payback time,
but in a shorter span, one project generates better cash flow, whereas another project has
improved financial returns in subsequent years. The purchasing process in this situation
does not indicate the venture to be chosen.
 Cash flows created after the net income is not taken into account: some of the projects
that only see the highest cash balance after the net income also are finished. These
ventures would have better returns on capital than short payback situations would be
preferable.
 Ignore the proposal's feasibility, which does not suggest that it is only profitable when the
initiative has a short repayment time. The expenditure will not yield profits until cash
flows cease or decline significantly over the repayment method.
 Does not consider development return on the investment: certain companies expect
expenditures in construction infrastructure to overcome a certain returns obstacle; some
projects are refused. The payout system does not take into account project return costs.

ARR: This strategy is one of the non-discounted cash flow approaches used to determine the
financial management of money. ARR is the total (anticipated net project revenue determined by
the total operating expenses (Lee and Isa, 2017). In general, this is known as the yearly ratio.
ARR does not take into consideration the time value of money or cash balances that are an
integral part of a company's management. Any of the main ARR system drawbacks are as
continues to follow:
 ARR lacks resources and time worth. The biggest downside of the approach to market
results on selecting alternative uses of financing is that the target variable of the funds is
forgotten.
 ARR is based on profits rather than cash balances, unlike many other fund assessment
strategies. The cash flow of the investment lacks the ARR strategy. The corporation will
engage in more profitable projects if the project does not produce cash inflows
efficiently. The reporting rate return policy, though, focuses on the reporting of total
revenue rather than just the cash position. It is impacted by non-cash items that are
arbitrary, like the discount factor used to calculate earnings (Oz and Yelkenci, 2017).
 There are also several different approaches that may be used to calculate the ARR. The
terminal properties of the project are not taken into account in this method. Entities must
ensure that they measure ARR on a constant basis by using ARR to compare different
assets.
CONCLUSION
From the above research project, it was expressed that the field of managerial finance is a
combination of both corporate finance and financial management. This method is
multidisciplinary. That helps to implement market strategies and monitor their success in order to
successfully operate. Value is created when expenditures are properly managed, and the
organization's limited materials are effectively allocated.

REFERENCES
Dandapani, K., 2017. Electronic finance–recent developments. Managerial Finance.
Singh, S., Sidhu, J., Joshi, M. and Kansal, M., 2016. Measuring intellectual capital performance
of Indian banks. Managerial Finance.
Kumar, S. and Pathak, R., 2016. Do the calendar anomalies still exist? Evidence from Indian
currency market. Managerial Finance.
Lassoued, N., Attia, M.B.R. and Sassi, H., 2017. Earnings management and ownership structure
in emerging market. Managerial Finance.
Abor, J.Y., 2016. Entrepreneurial finance for MSMEs: A managerial approach for developing
markets. Springer.
Jackowicz, K., Mielcarz, P. and Wnuczak, P., 2017. Fair value, equity cash flow and project
finance valuation: ambiguities and a solution. Managerial Finance.
Lee, M.T., 2016. Corporate social responsibility and stock price crash risk. Managerial Finance.
Adzobu, L.D., Agbloyor, E.K. and Aboagye, A., 2017. The effect of loan portfolio
diversification on banks’ risks and return. Managerial Finance.
Cormier, D., Demaria, S. and Magnan, M., 2017. Beyond earnings: do EBITDA reporting and
governance matter for market participants?. Managerial Finance.
Lee, S.P. and Isa, M., 2017. Determinants of bank margins in a dual banking system. Managerial
Finance.
Oz, I.O. and Yelkenci, T., 2017. A theoretical approach to financial distress prediction
modeling. Managerial Finance.
Online:
About financial data of Tesco, 2019 [online] available
through:<https://www.tescoplc.com/media/476423/tesco_ar_2019.pdf>
About financial data of Sainsbury's, 2019 [online] available
through:<https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/
reports-and-presentations/annual-reports/sainsburys-ar2019.pdf>