Managerial Financial: Ratio Analysis and Investment Appraisal

This document discusses the concept of managerial finance and its importance in managing funds and financial operations. It focuses on ratio analysis and investment appraisal techniques for Tesco and Sainsbury. The document also highlights the limitations of using ratios for long-term decision-making.

Managerial Financial

Table of Contents
INTRODUCTION...........................................................................................................................3
PORTFOLIO 1................................................................................................................................3
Ratio analysis:..............................................................................................................................3
Interpretation:..............................................................................................................................5
Recommendations:....................................................................................................................13
Limitations for using ratio analysis for knowing firms financial position:...............................13
PORTFOLIO 2..............................................................................................................................14
Investment appraisal techniques for project A and project B:...................................................14
a. Investment appraisal techniques:...........................................................................................14
Limitations of using investment appraisal techniques for long term decision-making:............16
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
In managerial finance, word Finance relates to managing funds, borrowing, credits,
liability, capital, investing and other financial operations. Finance aspect is mostly about
managing monies and the procurement of funding. Finance is core base of every corporation, as
it allows insights and money management for organisational operations within the entity.
Management finance is mainly relating to determining how the organisation uses accounting
strategies at different stages. That is the management finance inside a business how much the
company makes use of the existing capital through its operations. Every enterprise sought for
capital, finance operations help in the acquisition and disposal of resources of businesses (Ameer
and Othman, 2017). The businesses chosen for this study-assessment are Tesco Company
and Sainsbury Plc. Tesco is UK's international supermarket chain, incorporated in year-1919
while Sainsbury is a retail-based corporation incorporated in year-1869 and headquartered in
UK. This study-assessment covers issues such as the study of the ratios of these firms, the
shortcomings of the ratios including charts for the contrast of the two companies. In addition to
this, report also includes problems like the investments appraisal capital, the limitation/restraint
of ratios in relation to long-term decision-makings.
PORTFOLIO 1
Ratio analysis:
Particular Formula Sainsbury
2018 2019
Tesco
2018 2019
Current ratio Current
assets /
Current
liabilities
7857/ 10302 =
0.76
7581 / 11417
= 0.66
13600/ 19233
=0.71
12570/20980
=0.61
Quick ratio Quick assets/
Current
liabilities
6047/ 10302 =
0.59
5652/11417 =
0.50
11336/ 19233
= 0.57
9953/ 20680 =
0.48
Net profit ratio Net profit/ 1210/ 57493 = 1320/ 63911 = 309/ 28456 = 219/ 29007 =

Sales*100 2.10 2.07 1.09 0.75
Gross profit
ratio
Gross profit/
Sales *100
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 Market value
per share/
Earning per
share
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
Net income/
Number of
outstanding
share
309/ 65 = 4.75 219/ 54 = 4.06 1210/ 244 =
4.96
1320/ 215 =
6.14
Return on
capital
employed
Operating
profit/ 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
payout ratio
Dividend per
share/ Earning
per share
235 / 309 =
76.05
247/ 219 =
112.79
82/ 1210 =
6.78
357/ 1320 =
27.05
Capital employed = Total assets- Total current liabilities
Tesco
2018 2019
44735 – 19233 = 25502 48949 – 20680 = 28269

Sainsbury
2018 2019
22001 – 10302 = 11699 23514 – 11417 = 12097
Interpretation:
Ratio analysis can help to demonstrates the liquidity-state, financial stability, efficiency
of Tesco and Sainsbury corporations for understanding their financial status. The aforementioned
table shows ratios for year 2018 and year-2019 for the year that will help hep to identify
companies' financial position for said period. In this regard following is comprehensive and
thorough evaluation of different ratios, as follows:
Current ratio:
Tesco
Sainsbury
00.20.40.60.8 0.71 0.76
0.61 0.66
Current ratio
2018 2019

The current ratios of Tesco corporation are around 0.71 and 0.61, accordingly, throughout
the 2018 and 2019, reflecting an improved performance during the two years, whereas current
ratios of Sainsbury reaches 0.76 and 0.64, across the said periods. Both businesses showed an
uptick in the ratio, although Sainsbury's efficiency, with greater current proportions in respect of
shorter liquidity status, is quite excellent comparable to Tesco corporation (Blanco-Oliver, A.
and Irimia-Diéguez, 2019).
Quick Ratio:
Quick ratios correspond to too much liquid assets and it displays the association among quick
assets and corporation's current obligations. Quick assets are those that will turn easily to
currency, since it displays just cash-funds and bank accounts that deduct inventories and prepaid
expenditures from overall shorter term current-assets (Filip, 2020). The greater the number tells
companies liquidity and sound financial stability for paying their short-term debts. The Quick
Ratio stated by Tesco corporation are .57 and.48, accordingly, throughout 2018 and year-2019,
whereas the that of Sainsbury for that period are around 0.59 and 0.50. Which is progressive
trend in company quick ratios, which demonstrates a progress in cash liquidity position/status of
both enterprises. Relatively speaking, Sainsbury's quick ratios are much better than that of Tesco
corporation.
Tesco
Sainsbury
00.40.8 0.59 0.59
0.48 0.5
Quick Ratio
2018 2019

Gross profit ratio:
The gross profit/margin ratio reveals how efficient corporation is in generating profit by
company's core operations. This illustrates the relationship among revenues and gross margins.
The gross profitability margins reported by Tesco corporation are around 5.82 percent in
period 2018 and 6.48 per-cent in 2019, meanwhile the Sainsbury GP rates are 6.61 percent and
6.92 percent in 2018 and 2019. Research reveals that corporation Sainsbury, with a greater gross
margin percentage, is more potent than Sainsbury, through raising revenues from its main
business tasks (Jayanti, 2019).
Net Profit/margin ratio:
The sustainability(in terms of profit level) of all businesses can be efficiently assessed by net-
profit ratios and company's gross-margin percentages. Net profit percentage indicates the link
Tesco
Sainsbury
55.566.577.5
5.83
6.616.48
6.92
Gross profit margin
2018 2019
Tesco
Sainsbury
0123
2.1
1.09
2.07
0.75
Net profit margin
2018 2019

among the corporation's earnings/sales and net-income. Net profit is sum represent profit remain
after reduction of all expenditures, depreciation sum and income tax (Sibaroni, Ekaputra and
Prasetiyowati, 2020). Sainsbury corporation's net profit proportions are around 1.09 per cent and
around 0.75 per cent in period-2018 and 2019, exhibits a gradual rise, although the net profit
proportions are 2.10 percent and 2.07 per-cent in period2018 and 2019. Both corporations have
enhanced net profit-generating efficiency, but Tesco corporation has achieved greater profit
margins opposed to Sainsbury, which means that the profitability performance is much stronger
than Sainsbury corporation.
P/E ratio:
Tesco
Sainsbury
0
40
80
120
38.22
106.39
41.56
123.6
Price earnings ratio
2018 2019

Price earnings (PE) ratio suggests what investors are able to pay for company's securities/shares.
Increasing earnings imply that stock prices being overvalued and lower earnings suggest that
the share prices are lesser compared to earnings-per share. Upon this basis of the data from
Tesco-plc and Sainsbury corporation, the firm's eagerness to attain more profits relate to its share
prices. Tesco's PE ranges are approx. 38.22 as well as 41.56, accordingly, throughout 2018 as
well as in 2019, indicating a reducing pattern, although Sainsbury's PE proportions are
around 106.39 and 123.9 in respectively 2018 and 2019 demonstrating a declining trend in the
PE level. This reveals that Sainsbury corporation is relatively more effective in supplying its
owners with a gain per each equity they buy and also a greater fair value with Sainsbury's stock.
Capital gearing ratio:
Gearing ratio presents an insight over capital structure of corporation, which is measured by
dividing aggregate equity-funds of the owners by longer-term debts. The Gearing Ratio
demonstrates the corporation 's actual liquidity proportion. The corporation's gearing ratio
reaches 2.31 in year-2019 and 3.28 in 2018, although Sainsbury corporation's gearing rates are
around 1.97 and 1.78 percent (2018 and period-2019), respectively. Corporation Tesco has a
larger ratio than of Sainsbury corporation, which means that the debt/loans burden is
significantly high. As a factor, Sainsbury corporation's liquidity status-performance is healthier
than of Tesco corporation (Minnis and Sutherland, 2017).
Return on capital employed ratio:
Tesco
Sainsbury
01234 3.28
1.97
2.31 1.78
Gearing ratio
2018 2019

It relates to the percentage of profits that the corporation earns from its capital-funds. The greater
the yield on the enterprise 's capital-funds employed, the greater the effectiveness of its capital-
engaged and the greater the performance of the enterprise. ROCE stated by Tesco Plc are around
6.14 and 9.34, whilst also that of Sainsbury are approx. 4.43 and 4.97 over 2018-2019. In the
context of both firms, ROCE is diminishing. Tesco reported higher ROCE ratios is more
effective to deliver yields on its total capital-funds (Röth, Spieth and Lange, 2019).
Inventory turnover ratios:
Tesco
Sainsbury
012345678910
6.14
4.43
9.34
4.97
Return on capital employed
2018 2019
Tesco
Sainsbury
0102030 23.73
14.83
24.5
14.44
Average inventories turnover ratio
2018 2019

Stock turnover proportion/ratio represent how frequently the corporation has transformed
its stock into sales/revenues over a specified span of time. Which tells the performance-status of
companies how well they handle their stock-items. Ratio of Tesco corporation is approx. 23.73
(2018) and 24.50 (2019) while of corporation Sainsbury are 14.83 (2018) as well as 14.44
(2019). This indicates that corporation Sainsbury having lower ratio is better(faster) than Tesco-
corporation to turn its stocks/inventories into turnover. Although ratio of corporation Tesco-plc
have been diminished in 2019, it highlights that the capacity of the organisation in transforming
its inventories/stocks to revenue/turnover has been significantly enhanced.
Dividend pay-out ratio:
Tesco
Sainsbury
04080120
6.78
76.05
27.05
112.79
Dividend payout ratio
2018 2019

It indicates the cumulative number of dividends-amount paid by the particular organizations to
its shareholders/securities holder in respect to the corporation's net profits. It highlights the
relation between the sum paid by the corporation to its equity-holders and keeping pace with
expansion, reinvestment, debt repayment, liquid assets, etc (Gan and Xia, 2019). This measure
measures the extent of profit-sum paid to stockholders. Sainsbury's Div.-payouts are 76.05
(2018) and 112.79 (2019), whereas Tesco's Div.-payouts are 6.78 (2018) and 27.05 (2019).
Which suggests that Sainsbury corporation is more appealing to the consumer as a corporation
paying larger amounts of dividend payments to its stakeholders as contrasted to Tesco.
Earnings per share ratio:
This ratio-figure demonstrates how much profits enterprise make in each of their shares-
issued. The relatively higher ratio presents higher price-value of the inventory and the buyers
would paying higher for the corporation 'shares because the corporation has more earnings in
regard to share-price. EPS stated by Tesco is 6.14 (2019) and 4.96 (2018), whereas Sainsbury
corporation's EPS is 4.75 (2018) as well as 4.97 (2019). There seems to be a decremental
tendency in EPS proportions of both enterprises. EPS is superior than those
of corporation Sainsbury, this indicates that corporation Sainsbury is far more potent in
providing incomes to shareholders.
Both corporation's aggregate-overall performance review reveals that
Sainsbury organization's short-term liquidity-status and cash liquidity outlook is healthier than
Tesco plc. Although the total profitability ranking of Tesco corporation is much effective than
Tesco
Sainsbury
01234567
4.96 4.75
6.14
4.06
Earnings per share
2018 2019

that of Sainsbury. Borrowings/longer term debt-fundings are in a larger ratio than Sainsbury's.
From the investment perspective/opinion historical performances in stock related ratio,
corporation Sainsbury's EPS including Pay-out ratios are more compelling and successful for
present and potential shareholders, as the organization does have attractive proportions
/ratios than corporation Tesco. Sainsbury's effective overall inventory ratios as opposed to
corporation Tesco implies that corporation Sainsbury performed possibly the best in aspects of
transforming its stocks/inventories in revenues/turnovers (Giovannini, 2017).
Recommendations:
Tesco Plc: Firstly, company should put their efforts towards improving their current assets ratio
as company’s ratio is comparatively poor. For this company should reschedule their current
payables and focus on working capital management. Also, company’s lower gross profits in
comparison of Sainsbury recommends that company should strengthen their core business-
operations and minimise operational costs to improve gross profitability level. It is most
preferably recommended to Tesco that dependence over long-term debts should be lowered to
perform better in gearing ratio criteria. Moreover, Tesco’s average inventory-turnover ratio is
greater thus here this is recommended to company that it should focus towards supply chain, re-
order level and inventory management to optimise this ratio.
Sainsbury Plc: Lower net profitability is main concern for company which also affected its
ROCE and EPS ratios thus here primarily recommend to Sainsbury that entity should minimise
their overall business costs and enhance turnover through new promotional plans and strategies.
For this company should provide offers, rebates, discounts and incentives to attract more
customers.
Limitations for using ratio analysis for knowing firms financial position:
 Historical: All data/figure relies on the findings of historical evidence. It is not essential
to get the same outcomes in the future. Details can be updated in the future span of
period.
 Historical vs current costs: data extracted from income statements extracted at
actual current costs, while data can be reported on balance sheet at historical costs.
 Inflation: when the inflation rates has shifted over a duration of period, it would not be
equivalent over period. For e.g., when the rate of inflation becomes 100% in year, it is
projected that revenue will seem to have doubled in years to come (Ryzhakov, 2019).

 Changes in existing accounting practices: Company reports their transactions using
accounting practices and evaluation based on historical data; in coming period, the firm
may adjust certain accounting practices to report its details in the financial
statements which can affect ratio evaluation.
PORTFOLIO 2
Investment appraisal techniques for project A and project B:
a. Investment appraisal techniques:
NPV:
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- 110000

investment
NPV 10913.58
Analysing NPVs of both these project reveals that company’s Project-A provides
greater NPV is quite viable relative to Project-B.
Payback Period:
Plant 1 Cumulative cash flows
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
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
Assessment of projects’ Payback period exhibits that company’s Project A will
take lower payback duration in comparison to the project-B. This represents that
company’s Project A will more efficient and fast to regain their net total
investment.

ARR:
Plant 1
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
2020 10000
2021 15000
2022 25000
2023 55000
2024 65000
2025 50000
Average Profit 36666.67
Average Investment (110000+8000)/2 59000
ARR = 36666.67 / 59000 *100
62.15%
Above stated calculations of ARR for company’s Projects presents that the Project-A would
generate higher/more yields in comparison to the Project-B.
Overall analysis of all the investment appraisal techniques reflects that Project A is more
viable for business in comparison of Project B.
Limitations of using investment appraisal techniques for long term decision-making:
NPV: Net Present Value analysis is a comprehensive technique to checking the fiscal rationale
of project scenario, but it has a range of drawbacks. As a whole, NPV is not ideal with all
projects. One's findings should still be viewed in the light of decisions to be taken. Instances of
where drawbacks of the method which be relevant are as follows:
 Certain projects do not have any cash benefits. Socioeconomic, economic, technological
or tactical initiatives also come into this cluster. Instances would involve a government-

funded initiative to create a modern airplane carrier or charity to support early levels of
clinical study. NPV analysis is not sufficient for such kinds of projects (Ryzhakov, 2019).
 Certain projects have blend of monetary and non-cash rewards. It may be necessary to
accept such proposals with negative NPV given that they have substantial non incentives
that are deemed to be enough effective values for investment to produce more than just a
variation.
 Discounting rate projections may be of a concern to longer-term projects involving
significant terminal costs, – for example a mining endeavour that is needed to restore the
field to environmental sensible level. If a higher discounting factor have been used, there
may be a genuine risk that these costs will be patterned with inappropriate prudence.
ARR:
Unlike some other investment analysis concepts, ARR is centred on earnings rather then just
on cash flows. It is influenced by empirical, non-cash objects, such as the cost of
depreciations used to determine earnings.
 There are quite a series of various methods that might be employed to measure ARR.
If choose ARR to make comparisons various investments, they need to make sure
that measure the ARR on regular basis.
 One obvious limitation of this tactic is that the findings are contradictory by a number of
approaches.
 It is essentially an ordinary approach that does not take into account the varying
implications of external influencing factors on company's net earnings. This technique
often lacks the timing consideration (time cost of cash-flows) that is essential to
management decisions (Shim, 2019).
 This approach would not assess the fair value of return/yield on investment/project. This
is held at discretions of the board. Thus, the use of this subjective discount rate can create
severe biases in the choosing of projects.
Payback period: Despite its relevancy, the approach of evaluation of payback cycle has some
major disadvantages. The main is that time values of cas-flows/capital (TVM) is not factored
into the equation and cash inflows are adjusted slightly. TVM's theory is that amount/sum of
cash now would be valued higher than in coming future/period because of earning potentials.

 Payback study should not recognise cash influx that exist further than payback period,
thereby unable to equate the actual efficiency of project to another. For context, two of
the capital projects might have equivalent payback times. However, cash capital flows
from one project could fall gradually after the ending of payback period, although cash
remittances from other project may progress continuously for several periods following
the ends of payback period/cycle. Although most capital projects have investment gains
over a span of several years, this may be a major factor (Wu, Wermers and Zechner,
2016).
 The elegance of the measurement of payback period/cycle fails short of considering the
complexities of free cash flow which may result from capital expenditures. In fact, capital
spending is not just a topic of one big cash out-flows followed by continuous cash
inflows. Extra cash outlays will be expected over period, and capital flows might vary in
line with purchases and incomes.
CONCLUSION
From this detailed study this has been inferred that Scheduling and projecting is a vital
aspect of management finance that involves practitioners to execute planning techniques. These
techniques are employed to predict the corporation's spending, sales to be achieved, potential
costs and earnings. In the event that the above conditions do not align with the forecasts, it
means that the strategy adjustments must be carried out. It'll also allow the corporation to execute
in line with fiscal forecasts and preparation.

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