Managerial Finance Portfolio: Financial Ratio Analysis and Investment Appraisal

This portfolio provides a comprehensive analysis of financial ratios of Tesco and Sainsbury, along with an assessment of their financial performance, investment portfolio, and financial position. It also discusses the limitations of financial ratio analysis and investment appraisal techniques.

MANAGERIAL FINANCE
PORTFOLIO

Table of Contents
INTRODUCTION...........................................................................................................................3
PORTFOLIO 1.................................................................................................................................3
a) Computation of financial ratio of Tesco & Sainsbury.............................................................3
b) Assessment of financial performance, investment portfolio and financial position of
company.......................................................................................................................................7
c) Recommendation regarding with main cause of poor performance of business entity.........10
d) Limitation of financial ratio...................................................................................................10
PORTFOLIO 2...............................................................................................................................11
a)Calculation of capital investment appraisal method...............................................................11
b)Limitations of investment appraisal techniques.....................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
INTRODUCTION...........................................................................................................................1

INTRODUCTION
Managerial finance this term define as the tool of managerial application of finance. The
main purpose of using his tool for take decision and run financial business activities in effective
manner. To understand managerial finance, this report has been formulated. It divide into two
portfolio, the first one describe us of ratio for measuring performance of Tesco and its rival
organization Sainsbury. It also describe limitation of ratio analysing and reason of poor
performance of particular business organization. The second portfolio describe how manager
took decision for their future business project by using investment appraisal technique and its
limitation. All these information has been describe in systematic manner.
PORTFOLIO 1
a) Computation of financial ratio of Tesco & Sainsbury.
Ratio: In mathematical terms ratio is the tool of understanding the relation between two
items. In terms of finance, ratio analysis a tool use to measure or compare items of two lines.
Ratio analysis useful to identify the position of organization for particular time period. Most of
business corporation use this tool to recognize or measure their performance with their rival
industries (Alderighi, Cleary and Varanasi, 2019).
Tesco & Sainsbury both run their business in merchandise retail sector. They are
multinational organization which represent UK at international level and help in contributes
towards their rate of GDP. Both are rival industries, by using ration analysis manager could
found which one is beneficial for investment purpose and gives future portfolio profits.
Following are some example of ratio which help in analysing,
Current ratio = Current asset / Current liabilities
Tesco = 2018 = 13600/ 19233 = 0.71
2019 = 1250 / 20980 = 0.61
Sainsbury
2018 = 7857 / 10302 = 0.76
2019 = 7581 / 11417 = 0.66
 Quick ratio
Quick assets/ Current liabilities
Tesco
2018 = 11336/ 19233 = 0.57

2019 =9953/ 20680 = 0.48
Sainsbury
2018 = 6047/ 10302 = 0.59
2019 =5652/11417 = 0.50
 Net profit
Tesco
2018 = 309/ 28456 = 1.09
2019 =219/ 29007 = 0.75
Sainsbury
2018 = 1210/ 57493 = 2.10
2019 = 1320/ 63911 = 2.07
 Gross profit
Tesco
2018 = 3352/ 57493 = 5.83
2019 = 4144/ 63911 = 6.48
Sainsbury
2018 = 1882/28456= 6.61
2019 =2007/ 29007 = 6.92
 Gearing ratio
Tesco
2018 = 34404/ 10480 = 3.28
2019 =34213 / 14834 = 2.31
Sainsbury
2018 = 14590/ 7411 = 1.97
2019 =15085/ 8456 = 1.78
 Price / Earning ratio
Tesco
2018 = 189.55/4.96 = 38.22
2019 = 255.2/ 6.14 = 41.56
Sainsbury
2018 = 264.9/ 2.49 =106.39

2019 = 229.9 / 1.86 = 123.60
 Earning per share
Tesco
2018 = 1210/ 244 = 4.96
2019 = 1320/ 215 = 6.14
Sainsbury
2018 = 309/ 65 = 4.75
2019 = 219/ 54 = 4.06
 Return on capital employed
Tesco
2018 = 1566 / 25502 = 6.14
2019 = 2639 / 28269 = 9.34
Sainsbury
2018 = 518/ 11699 = 4.43
2019 = 601/ 12097 = 4.97
 Average stock turnover
Tesco
2018 = 54141/ 2282 = 23.73
2019 = 59769/ 2440 = 24.50
Sainsbury
2018 = 26574/ 1792.5 = 14.83
2019 = 27000/ 1869.5 = 14.44
 Dividend payout ratio
Tesco
2018 = 82/ 1210 = 6.78
2019 = 357/ 1320 = 27.05
Sainsbury
2018 = 235 / 309 = 76.05
2019 = 247/ 219 = 112.79
Capital employed = Total assets- Total current liabilities

Tesco =
2018 = 44735 – 19233 = 25502
2019 = 48949 – 20680 = 28269
Sainsbury =
2018 = 22001 – 10302 = 11699
2019 = 23514 – 11417 = 12097
Current ratio
Particular 2018 2019
Tesco 0.71 0.61
Sainsbury 0.76 0.66
Quick ratio
Tesco 0.57 0.48
Sainsbury 0.59 0.5
Net profit
Tesco 1.09 0.75
Sainsbury 2.1 2.07
Gross profit
Tesco 5.83 6.48
Sainsbury 6.61 6.92
Gearing ratio
Tesco 3.28 2.31

Current ratio
Sainsbury 1.97 1.78
Price / Earning ratio
Tesco 38.22 41.56
Sainsbury 106.39 123.6
Earning per share
Tesco 4.06 4.96
Sainsbury 4.75 4.06
Return on capital employed
Tesco 6.14 9.34
Sainsbury 4.43 4.97
Average stock turnover
Tesco 23.73 24.5
Sainsbury 14.83 14.44
Dividend payout ratio
Tesco 6.78 27.05
Sainsbury 76.05 112.79

b) Assessment of financial performance, investment portfolio and financial position of company.
 Current ratio: This ratio is a part of liquidity ratio through which manager could easily
recognize whether organization is able to meet their obligation for short time period or
not. For this availability of current asset and value of current liabilities are measure.
There will be ideal ratio of 2:1 which must an organization have. Higher current ratio
showcase sufficient level of liquid position organization have to fulfil their short term
debt liabilities. To understand the relevance of ratio analysis, value of these ratio put in
graphical formate which attractive and easy to understand (Bhuiyan, Rahman, Saiti and
Ghani, 2019).
Tesco Sainsburry
Current
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Column E
Column D

On the basis of formulation of graph it analysis that value of current ratio of Sainsbury in
both years, is higher then as compare to Tesco, even the ratio decline in both companies but for
comparison purpose Sainsbury is strong liquid position. Which means working capital is in good
position of Sainsbury.
 Quick ratio: This ratio is also part of liquidity ratio, which showcase or represent real
potion of liquid asset an organization have to fulfil their debt liabilities. The main
purpose of calculating this ration is to identify whether business entities have sufficient
pure liquid assets or cash valance to run their business or not. To evaluate value of
liquidity manager use graphical representation.
Tesco
Sainsbury
00.20.40.60.8
0.59 0.59
0.48 0.5
Quick Ratio
2018 2019
Tesco Sainsburry
Liquid
0
500
1000
1500
2000
2500
3000
3500
4000
4500

On the basis of this graph the value of Sainsbury 's quick ratio is calculated at 0.59 and
0.5 on the other side Tesco value of quick ratio is comparability lower which means that
Sainsbury have more liquid assets as compare to Tesco. Which define that Sainsbury able to
fulfil their current liabilities before Tesco fulfil its as the value of liquid asset of Sainsbury is
more then Tesco.
 Net profit ratio: This is part of profitability ratio which showcase the relation between
net revenue and sales for particular period of time. Relatio between these two items of
income statement showcase in the form of percentage. Higher percentage of net profit
ratio show that organization is in good position.
With the use of graph it is recognized that Tesco net profit ratio's comparatively high the its rival
organization. Which means that selling rate and revenue alternation is comparatively high. Value
of Tesco net profit has been increase on the other side Sainsbury net profit has been evaluated at
1.09 in 2018 and 0.75 in 2019 which showcase decline rate of net profit, which means that
organization not able to use effect promotion strategies thus their net profit ratio has been
decline (Chen, Peng, Zhang and Rosyida, 2017).

Tesco
Sainsbury
0123
2.1
1.09
2.07
0.75
Net profit margin
2018 2019
Tesco Sainsburry
Net profit ratio
0
500
1000
1500
2000
2500
3000
3500
4000
4500

 Gross profit margin: This ratio help in measuring the level of profits organization
generate before any kind of adjustment of operating expense or tax. Gross profit
showcase the relation between sell and profit before deduction of any kind of operating
expenses. To understand the relevance of this ratio, manager interpret financial
performance as graphical format.
Tesco Sainsburry
Gross profit ratio
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Column E
Column D
Tesco
Sainsbury
55.566.577.5
5.83
6.61
6.48
6.92
Gross profit margin
2018 2019

This graphical representation showcase that value of gross profit ratio of Sainsbury is higher then
as compare to Tesco, which means that organization able to generate more profit before
deducting any of their expenses. 5.83 and in 2019 it was 6.48 on the other side value of gross
profit of Sainsbury was calculated at 6.61 in 2018 and 6.62 in the year of 2019 which means that
even though the value of net profit of Tesco is higher but Sainsbury able to generate more gross
profit as compare to Tesco. Value of gross profit ratio of Tesco was Sainsbury use more reliable
business strategies for enhance their gross profit.
 Gearing ratio: This ratio help in measuring the performance owners equity with debt
liability of organization for specif time period. It showcase level of financial leverage an
organization to deal with their external tax or other items.
Tesco
Sainsbury
024 3.28
1.972.31 1.78
Gearing ratio
2018 2019
Tesco Sainsburry
capital gearing
0
500
1000
1500
2000
2500
3000
3500
4000
4500

By the use of this chart it has been analysis that value of gearing ration in 2018 and 2019 of
Tesco is measure at 3.28 and 2.31 and on the other side in case of Sainsbury value of gearing
ratio was calculated at 1.97 and 1.78, which showcase that even rate of gearing ration in case of
Tesco has been decrease but for comparison purpose it much higher then Sainsbury ratio. Which
represent that Tesco use its external resource in effect way to deal with tax adjustment as
compare it rival company.
 Price earnings ratio: This ratio is consider as part of earning ratio. Only listed
companies in stock exchange able to use this ratio as it define the market price investor
pay for their stock. With the use of this ratio manager could recognize under or
overvaluation of their organization. Manager formulate graph to interpret it.
Tesco
Sainsbury
050100150
38.22
106.39
41.56
123.6
Price earnings ratio
2018 2019
Tesco Sainsburry
P/E ratio
0
500
1000
1500
2000
2500
3000
3500
4000
4500

This graph represent that value of Sainsbury earning ratio is much higher then Tesco, which
represent that Sainsbury market price is much better then as compare to Tesco.
 Earnings per share: This ratio indicate how much cash which an organization generate
for each stock. In other words this ratio help in measuring profit generate on each share.
Value of this ratio could be calculated on the basis of dividing net profit with total
number of equity share (Fu and Blazenko, 2017). This ratio help in finding out which
organization able to proved better serives and beneficial for future investment. As price
of market of particular organization directly impact on the organization's growth. Earning
per share help in find out rate of earning for particular share.
Tesco
Sainsbury
01234567
4.96 4.75
6.14
4.06
Earnings per share
2018 2019
Tesco Sainsburry
Earning per share
0
500
1000
1500
2000
2500
3000
3500
4000
4500

On the basis of graphical representation it can be find out that even though price of Sainsbury
high but rat of earnings per share of Tesco is higher.
 Return on capital employed: This ratio define organization's efficiency and profitable
position. On the basis of applying formulate of return of capital employed manager
evaluate it by dividing operating profit with value of total capital employed. Higher ratio
showcase that capital investment useful in generating business gain.
By using graph manger can easily represent value of ratio.
This represent that Tesco able to generate more return by investing or using their assets as
compare with Sainsbury.
Tesco
Sainsbury
0246810 6.14 4.43
9.34
4.97
Return on capital employed
2018 2019
Tesco Sainsburry
return on capital
0
500
1000
1500
2000
2500
3000
3500
4000
4500

 Stock turnover ratio: This help in identifying time required to convert raw materiel into
finished goods sold into market. With the use of inventory turnover ratio manager find
out period required for complete particular operating cycle. Higher time of stock turnover
showcase that organization took more time for selling the stock.
Tesco
Sainsbury
051015202530
23.73
14.83
24.5
14.44
Average inventories turnover ratio
2018 2019
Tesco Sainsburry
inventory
0
500
1000
1500
2000
2500
3000
3500
4000
4500

This graphical representation showcase that Tesco took average of 24 days to complete their
operating cycle on the other side Sainsbury took 14 days to complete operating cycle. Which
means that Sainsbury is in strong position then Tesco. They use effective stock management and
controlling strategies which help in managing their stock.
 Dividend pay-out ratio: This ratio is calculated to identifying the rate of distribution of
dividend an organization offer to their shareholder. On the basis of that investor took
decision. Dividend is part of retain profits, thus higher rate of dividend showcase strong
position of organization. By using this ratio manager able to measure their position in
market area. Generally investor decide those organization which distribute high rate of
dividend to their potentials stakeholders. To evaluate performance of dividend ratio chart
has been formulated (Kalayci, Ertenlice and Akbay, 2019).
Tes c o
S a in s b u ry
0
1 0 0
2 0 0
6 .7 8
7 6 .0 5
2 7 .0 5
1 1 2 .7 9
Tesco Sainsburry
dividend
0
500
1000
1500
2000
2500
3000
3500
4000
4500

This chart has been showcase that Sainsbury value of dividend is 76 in 2018 and 112.79 in 2019.
On the other side Tesco offer 6.78 in 2018 and in 2019 they distribute 27.05 dividend, which
means that Sainsbury offer much better divided to their shareholders.
c) Recommendation regarding with main cause of poor performance of business entity.
With the use of analysing ratio, it has been determine that financial performance of
Sainsbury is much better then Tesco, even though the measurement of price, earning, net profit
ratio is higher but on the basis of operating and measurement of liquid position Sainsbury is good
position. The main reason of poor performance of Tesco is define below
Due to mismanagement of stock Tesco require more time to compete their operating
cycle, which directly impact on their cash outflow activities and availability of cash.
Organization not able to manage their profit in effective way thus due to mismanagement of
financial asset their performance has been decline.
Tesco for spread their marketing share invest in new market thus they are not able to
manage their profits.
Tesco for enhance their performance need to formulator effective stock management
techniques for this purpose they need to use tools of stock management. They also need to
control the cash outflow activities formulate the polices which attract customer and increase cash
inflow activities.
d) Limitation of financial ratio.
There will be no specific definition regarding ratio thus data calculated by using ratio
may not provides accurate information.
Ratio analysis not consider or use qualitative aspect thus it is difficult to apply this tool
for measure performance of organization.

Most of industries use different aspect for measuring their financial performance or formulate
financial statement, thus financial ratio not useful tool while compare two industries financial
performance (La Monaca, Assereto and Byrne, 2018).
Ratio analysis not get effective from changer in inflation thus it is not universally acceptable
technique of financial measurement.
PORTFOLIO 2
a)Calculation of capital investment appraisal method.
Capital investment appraisal method: This method is use to identify long term potential
profitability rate of particular business alternatives. It is also know as capital budgeting. There
will be many methods which use for capital budgeting . Following are define below
Pay Back Period: It is specific time period required for cover up initial cost of
investment. Higher pay back period time showcase that organization need more time for
covering up heir cost as due to the lower rate of cash flow and on the other side less time period
showcase effectiveness of business operations.
Calculation of pay back period for project A
Formula: Completed years + (Cost of project - Cumulative cash inflow in the completed year) /
cash inflow of next year
Year
Cash
inflow
Cumulative
cash inflow
2020 45000 45000
2021 45000 90000
2022 45000 135000
2023 35000 170000
2024 35000 205000
2025 25000 230000
= 2 + (110000 – 90000 / 45000 = 2.44 years
Project B
Years
Cash
inflow
Cumulative
cash inflow
2020 10000 10000
2021 15000 25000

2022 25000 50000
2023 55000 105000
2024 65000 170000
2025 50000 220000
= 4 + (110000 – 105000) / 65000 = 4.08 years
Interpretation: By using pay back period technique, it has been identify organization
choose project A then it took 2.44 years for compete the initial cost and on the other side when
manager select project B then it took 4.08 years for recover the initial cost. Thus manager need
to go with project A to expand their business.
Net present value: This method used for analysing profitability of project investments. It
is difference between present value of cash inflow and value of cash outflow. It showcase net
worth arise or applies at different times (Shim, 2019).
Project A:
Years
Cash
inflow
PV Factor
@ 16%
Discounted
cash inflow
2020 45000 0.862 38790
2021 45000 0.743 33435
2022 45000 0.641 28845
2023 35000 0.552 19320
2024 35000 0.476 16660
2025 25000 0.41 10250
Total discounted cash inflow 147300
= 147300 – 110000 = 37300
Project B:
Years
Cash
inflow
PV Factor
@ 16%
Discounted cash
inflow
2020 10000 0.862 8620
2021 15000 0.743 11145
2022 25000 0.641 16025
2023 55000 0.552 30360
2024 65000 0.476 30940

2025 50000 0.41 20500
Residual
value 8000 0.41 3280
Total discounted cash inflow 120870
= 120870 – 110000 = 10870
Interpretation:
From this calculation it has been observed that net present value of project A is
comparatively high thus organization must be select alternative A it is beneficial for the purpose
of future investment.
b)Limitations of investment appraisal techniques.
Capital budgeting technique use for manage financial resource. Manager by applying
tools of investment appraisal technique able to find out best alternative and took decision,
although following are the limitations of technique of capital budgeting.
Pay Back Period
 While calculating time of pay back period, managers not use or consider time value,
which is one of the essential factor for take decision.
 In this method cash flow after pay back period is ignored (Tarnaud and Leleu, 2018).
 This type of investment appraisal method only applicable for short term business
organization.
 Due to fluctuation of value of price elements it is not required that this method help in
provides accurate result which beneficial for future investment.
 It is not realistic tool and it does not consider profitability.
 This method is not useful for multinational business organization as they invest in many
business activities and their operations are at large scale thus this method is not
universally accepted.
Net present value:
 For calculate accurate result by using net present value organization need to hire
expertise, who have knowledge regarding this field.
 It is complex method of investment appraisal technique.
 Value of discounting rate is critically analysis.

 Manager use this method when the cost of capital of other project are same , in case of
different cash flow it is not useful method to provide accurate result.
 While calculating net present value , manager does not confider sunk cost (Xidonas,
Mavrotas, Hassapis and Zopounidis, 2017).
 Result of this method is not apply on EPS or return on capital employed.
 Value if project alternative is determine on the basis of discounting rate, thus net present
value is depend on these rate.
CONCLUSION
From the above analysis it has been concluded that organizations need to use managerial
finance approach which help in collecting, analysis, recoding and interpret financial information
in effective way. By using liquidity, profitability and earning ratio it is clearly recognized that
Sainsbury is in much better position for investor's point of view. Measurement of ratio help in
finding out case of poor performance of organization. Manager use tools of capital budgeting
through which they can easily find out which alternative gives them higher rate of return and it
also useful for take business decision.

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income investors? Evidence from wavelet coherence and multivariate-GARCH
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Fu, Y. and Blazenko, G. W., 2017. Normative portfolio theory. International Review of Financial
Analysis, 52, pp.240-251.
Kalayci, C. B., Ertenlice, O. and Akbay, M. A., 2019. A comprehensive review of deterministic
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La Monaca, S., Assereto, M. and Byrne, J., 2018. Clean energy investing in public capital
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Tarnaud, A. C. and Leleu, H., 2018. Portfolio analysis with DEA: Prior to choosing a model.
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Xidonas, P., Mavrotas, G., Hassapis, C. and Zopounidis, C., 2017. Robust multiobjective
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