Profitability, Liquidity, and Efficiency Analysis of Tesco and Sainsbury

The provided data reveals that Sainsbury's profitability ratios are better than Tesco's, indicating the company's ability to generate more income is higher. Additionally, Sainsbury's liquidity ratios show an improvement in its current assets' ability to meet short-term obligations, whereas Tesco's liquidity ratios remain lower. In terms of efficiency, Sainsbury's inventory turnover and asset turnover are higher than Tesco's, suggesting the company can generate more income from its inventories within a shorter time frame.

Managing Financial Resources and Decisions
QCF L4
Assessor: Mr Kofi Barimah
Student: Sura Olga

Task one
The appropriate sources of finance available for the company
Venture capital
Venture capital is cash into business which might be lost if the business fails. An entrepreneur
who is starting up a new investment project will venture in an investment capital of his own, but
he will require more finance from other sources (Damodaran, 2010). Nevertheless, the term
venture capital is more linked to putting cash, normally in return for equity share in the business,
a management buyout, or a key investment growth plan.
Business/Bank loan
The bank loan provides short to long term funding and the fund every asset requirements
inclusive of the working capital, equipment, as well as real estate. This assumes that one can
create sufficient cash flows to cover the interest payments and the return on principal amount.
Banks want collateral for loan, which require personal assurance and secured interest like
personal assets. Banks provide some flexibility in which a company may pay loan earlier and end
the contract in spite of decline in lending, the custom business loan route is common alternative
for start-ups, and the benefit of retaining the equity in the business is bestowed on the company.
The government pushes for the growth in existence of business loans for small business through
initiative like the funding for lending, start up loans as well as business banks.
Internal Revenue Service
The internal revenue service does not lend money but instead it permits the business to reduce
the cost. If the business is paying high taxes, appraise if the business may use its profits to grow
the business and reduce the tax cost (Davies, 2013).

Friends and family members
Friend and family members are very effective source of capital since they do not make the
company pledges its asset and they may even consent to dispose their interest in the business
back to the business for a nominal return.
Equity and debt capital
The company raises new funds through equity by raising the initial public offer in which
members f the public are invited to subscribe to the company’s shares. The company may as well
raise capital by raised debt capital in form of loan stock.
The appropriate sources of finance for the expansion plan of the Radisson Company
The best source of capital is for Radisson Plc is the business loan since, if there loan is provided
to the business, the loan will not under normal circumstance be rapid by the owners of the
business of the business fails. In the event of business failures, the business is liquidated, this
aids in paying back the funding borrowed, many business owner ensure that the benefit aspect in
considered when going for business loan since it is just the business that will be insolvent in the
event of load default and not the owner of the business (Gibson, 2008). The interest ion loan is
very low. As the liquidity of financial institution goers in the weaker of global financial crisis,
financial institution are growing the rate of lending and the interest rate will soon grow to
compensate. Any loan given to the business will depict low overheads unlike the loan taken in
two years time, it makes this appropriate time of planning for the business growth.

Task two
The cost of funding the project using equity versus debt finance
Defining debt
Debt source of finance implies the borrowing cash from an external source with the pledge of
paying back the borrowed amount together with the interest agreed. The custom secured loan
such as those provided by financial institution are kind of debt funding. The loan is pad back in
monthly installment and commands the individual assurance by providing collateral for loan. If
the borrower fails to pay the debt, the collateral might be used to pay the debts. The benefit of
debt secure capital for the business is that lenders unlike the equity investors do not have any say
in the business operations, with the debt funding, business owners will have an association with
the lenders that will end with the specified loan period (Henderson, 2015).
Equity financing
There equity source of capital implies raising capital by selling the shares to investors. Unlike the
debt capital, equity capital funding is not paid back with interest but rather investors invest their
cash into the business and turn to be partial owners of the business. They are then entitled to
share of the business retained earning as time goes by. The source of equity for the business
owners is from friend and relatives unlike the loan capital and hence, the equity investors will get
returns when the business starts to make profits. The benefit of equity is that it gets rid of setback
of debt financing in that equity capital does not divert capital from business to pay the debt
balances and it shares in the business risk (Jain, 2007). Another benefit of equity capital is that
equity finance form the business does not have to pay investors back immediately, the
implication is that there is more time for the business prior to starting being anxious of how the
business will pay the equity capital. In addition, if the business fails, there is no one to repay

which means that investor and the business will all suffer loss of business fail. the biggest
setback of using equity capital is that the equity owners will owner portion of the business and
will voting right at the AGM which will make the business owner to lose control of the business.
Recommendation for the best source of capital
Since Radisson is still a young and growing company, equity capital is considered best spruce of
capital for the company. This is because, equity capital permit the company place more asset
back to the business while the debt capital limits the cash flow by commanding that investors get
paid on a constant schedule. This suppleness of equity capital enables the business to expand
very fast rather paying out every month. Equity capital is deal since their either depict scarce
cash flow or they anticipate depict scarce cash flows. Investors normally consider going for
equity capital in form of preferred stock bit in some situation, common stock is distributed.
As long as those venturing in equity are enthusiastic of waiting, the returns on their investment
expand alongside the company’s growth (Henderson, 2015). The amount of equity establishes
the size of the voting power of an investor and those with the highest shareholding depict the
highest duties.
The importance of financial planning and assess the information needs for financial
decision-making.
Financial planning is important in managing income effectively. Controlling the income aid in
comprehending the amount of cash that is needed for tax payment and other cost and savings.
The growth in cash flows by keenly controlling the spending and expense will lead to growth in
cash flows, this growth in cash flow will lead to growth in capital hence permitting the company
to deem consider venture to enhance the overall financial wellness of the company. Where there
is good cash planning, there will be a consideration of personal situation, aims as well as risk

tolerance, this will act as manual in aiding the selection of the correct kind of venture to fit to the
business requirements, personality and objectives.
Information need for financial decision-making
The following are the significant information needs of ultimate verdict makers;
 Size of the business is important factor while planning. When the use of the business is
big, the need large amount of cash and normally the project time is long.
 The nature of the project management is as well important for financial, planning since,
when the business plans to venture in diverse project that depict definite life and aims, it
might plan for the finance with substantial amount of simplicity. Nevertheless, when the
nature and size of the project together the aims are not known, planning procedure turns
to be hard.
 The cost of capital and the opportunity cost neither factor since; the manager should be
informed of the expected rate if return from the project. He must account for the
opportunity cost of the project since eventual manager wants earning from ventured
capital. This might be executed only when correct assessment is made.
The impact of suggested financing option on the financial statement
The effect of on stock price; the firms that listed on the stock exchange and mainly use the
equity capital as the spruce of capital should be info4ed of the reality that the stock price depict
the financial situation of the company in the eyes of the current and potential investors in making
their investment decision. In this situation, it is important information provided in the financial
statement to comply watt the expectation of the shareholders (Kaoma, 2006). The annual report
of the company is evaluated with threat expectation since there are some interest investors who
are keen on the financial performance of the business, market response concludes stock price of

the shares. The demand and supply of the stock rely on the financial statement published by the
company.
The financial statement depicts the company opportunity of availing credits and cash from the
market. Fi the business approach the banks for business loan, it is important the bank undertake a
comprehensive assessment of the business performance by using the financial statement
provided by the company. In this regards, the verdict of bank will mainly be based on the
financial performance of the company.
Task 3
The importance of budgets for variation and make appropriate decisions for Radisson Plc
Capital budgeting is a procedure that the business will employ in determines the merit of an
investment project alternative. The verdict of whether they accept or reject a project as part of the
business expansion plan entails the determination of the venture rate of return that the project
will create. Nevertheless, the appropriate rate of return is impacted by the factors that specific to
the business and the project. Capital budgeting is significant since it creates transparency and
measurability.
Since Radisson plc is seeking capital investment, devoid of comprehension of the risk and
returns of the project, the company will be held accountable by its owners or shareholders. In
addition, if the business has no other approach of evaluating the efficiency of its venture verdict,
chances are that the business will depict small opportunity of existing in the competitive market.
The besides exist in the market for the main reason of making profits. The capital budgeting
process the best approach of evaluating and determining the long-term economic and financial
advantage of the investment projects (King, 2006).

How to calculate unit cost and make pricing decisions based on appropriate information at
the Radisson Plc.
The unit cost for Radisson Plc is worked out as follows
Capital pricing method
Total profit = {20%*50,000)} =$10,000
Net selling price = $35,000 + $10,000 = $45,000
Therefore, per unit selling price will be = {$45,000/500} = $90
Mark-up method:
As mark-up is 33.3% of cost price
Net cost = {fixed cost + direct cost}
Net cost = {$10,000 + $25,000} = $35,000
Therefore, per unit cost = {$35,000/500} = $70
Net selling Price= {$35,000 + {33.33%*35,000) = $46,667
Per unit selling price = {$ 46,667/500} = $93
Total Profit = {$46,667- $35,000} = $11,667
After calculating for the unit cost and profit under the two methods above, it can be observed that
the net profit is high when worked out the mark up method, which implies that the unit-selling
price must be $93 rather than $90 for Radisson Plc since this will ensure that the business
realizes more income.

3.3 Assess the viability of the expansion project using the NPV
The expansion of the project will lead to saving on the following cost
incremental operating cash flow savings
fuel £ 50,000
Maintenance cost £ 23,000
Net incremental saving £ 73,000
five year incremental cost saving £ 365,000
Discounting factor is 15%
Tim e to maturity of the project is 5 years
Initial Outlay is 765,000 pounds
Net present value of the new project will as follows
Net present value of the project
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue £ 1,000,000 £ 2,000,000 £ 3,000,000 £ 4,000,000 £ 5,000,000
cost of goods £ 300,000 £ 600,000 £ 900,000 £ 1,200,000 £ 1,500,000
Gross profit £ 700,000 £ 1,400,000 £ 2,100,000 £ 2,800,000 £ 3,500,000
Operating cost £ 100,000 £ 200,000 £ 300,000 £ 400,000 £ 500,000
net profit before tax £ 600,000 £ 1,200,000 £ 1,800,000 £ 2,400,000 £ 3,000,000
Add; tax shield on depreciation £ - £ 42,300 £ 42,300 £ 42,300 £ 42,300
Net cash flows £ 600,000 £ 1,242,300 £ 1,842,300 £ 2,442,300 £ 3,042,300
P.V.I.F 15% 0.8696 0.7561 0.6575 0.6575 0.4972
Discounted cash flow £ 521,739 £ 939,357 £ 1,211,342 £ 1,605,852 £ 1,512,561
Total cash flow £ 5,790,851
Initial outlay -£ 765,000
NPV £ 5,025,851
From the above NPV analysis, it is evident that the project will generate positive NPV of £
5,025,851. In this regards, the expansion project is recommended since the investment alternative
is viable.

Task 4
The discussion of the financial statements of Radisson Plc
Income Statements
An income statement provides a summary of the company’s profit and loss during the financial
period. The income statement accounts for every income and expense incurred during the
financial period (King, 2006). The income statement is important in tracking income and
expense in order to establish the operating [performance of the business.
Statement of Cash Flows
The use of statement of cash flow is to provide information relating to gross receipts of the
business and gross payments. The net change must be same in the cash and cash equivalent for
the company. Cash flows are categorized in to three; cash flow from investing, cash from
financing and cash flow operating activities. This statement of cash flow must be provided
together with the statement of financial position and the statement of income.
The Statement of Financial Position
The statement of financial position is the main financial statement and it accounts for the asset
and liabilities of the company. The amount acco8utned for in the statement of financial position
is the amount as of the final moments of the accounting period. The layout of the statement of
financial position is same to the basic accounting equation (Asset=liability+shareholder’s
equity). The statement of financial position should depict the basic accounting concept and
framework like the cost, matching, and full disclosure principles. The statement of financial
position is important when it is prepared under the Accrual Accounting method.
The comparison of the formats of financial statements

The dissimilarity between the format of income statement and the statement of financial position
for diverse kind of business. Every company will depict diverse economic sectors so they
employ diverse financial statement with diverse formats that content those sectors and their
standard of financial statement. Interpretation of the financial statement with the use of
appropriate ratio of a public company and contrast with those of another company.
Diverse kind of business uses diverse formats (Shi, 2001). The report requires depiction of the
net profit and loss account contrasted with another company that prepares its Annual repot as per
the general accepted accounting principles. If the financial statement is not prepared based on the
standard, it will be hard to contrast with other companies. The statement centers on examining
the capital and profit of the business that is circulated within the business. The financial
statement of a public company should depict the current, noncurrent asset, liabilities, revenues,
income tax expense, and EPS. Since there are the main factors of verdict making tools that is
used innexamni9ngin the company financially stability.
For small-scale organization, they business only centers ion the profit. If the organization creates
profits, there is no issue they have to worry about. Therefore, the use of income statement and
the statement of financial position is important in contrasting to the public company. For sole
proprietorship, there no need of classifying the cost on profit or loss since they are not of concern
with regards to the standard or simplicity of the way and just the outcome they need is weather
the business is profitable or not. In general, terms, there are some differences contrasting to every
business.
Interpreting the financial statements using appropriate ratios of a public limited company and
compare with those of another company
PROFITABILTY RATIOS
TESCO Sainsbury's
Return on Capital Employed (%) 4.65% -23.54% 9.30% -1%

Net Profit Margin (%) 1.53% -9.22% 2.99% -0.70%
Gross Profit Margin (%) 6.30% -3.90% 5.79% 5.08%
LIQUIDITY RATIOS 2014 2015 2014 2015
TESCO Sainsbury's
Current Ratio 0.73 0.6 0.64 0.65
Acid/Quick Ratio 0.43 0.42 0.49 0.48
EFFICIENCY RATIOS 2014 2015 2014 2015
TESCO Sainsbury's
Inventory Turnover 16.27 19.71 22.65 22.63
Asset Turnover 2.58 2.77 2.43 2.46
Profitability ratios
From the ratio analysis above, it is evident that the profitability ratio for Sainsbury is better
unlike the profitability of Tesco implying that, the ability of Sunbury to generate more income is
higher unlike for Tesco
Liquidity ratios
The equity ratios for both companies are improving with those of Sainsbury being more than
those of Tesco are. The implication is that, the ability of Sainsbury’s Current asset to meet its
short obligation when they fall due is much faster unlike for Tesco.
Efficiency ratio
In term of efficiencies, Sainsbury is deeming efficient the ability of the common to generate
more income from its inventories is much higher as compared to Tesco. This implies that
Sainsbury will depict high income within the shortest time possible, which will be sufficient to
cover the daily operations of the business (Morton, 2003).

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