Managerial Finance Report: Financial Analysis and Investment Appraisal

This report provides a comprehensive financial analysis of Tesco PLC and Sainsbury PLC, two major players in the UK grocery sector. It begins with an introduction to financial management and its importance in business decision-making. The core of the report involves calculating and interpretin...Read More

Managerial finance

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Calculating ten ratios that are very important from the firm’s prospective which are related
with the financial aspect of the companies that are discussed above for the years that are 2018
and 2019.......................................................................................................................................1
B. Detailed identification and examination of the facts and figures that are analysed above so
as to see a true and fair view of the financial position and their potential to invest in the market
.....................................................................................................................................................3
C. Necessary recommendations after evaluating the above facts and figures and their
interpretation................................................................................................................................9
D. Identification and examination of the limitations of relying on to ratios which are calculated
above and are related with the financial part of the company...................................................10
TASK 2..........................................................................................................................................10
A. Calculation and examination of investment appraisal techniques........................................10
B. Examination of the limitations of the investment appraisal techniques that are mentioned
above with context to decisions that are of long term in nature................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Financial management is a crucial as well as one of the most critical aspect as it is related
with the most valuable factor that is funds that a business possesses in the market in which it is
operational (Ascioglu and Maloney, 2019). In this decisions regarding appropriate allocation of
the available resources are taken so as to make the firm grow and prosper in the long run so that
it can earn profits by increased sales and can sustain in the market for a much longer period of
time as compared to its competitors that are prevalent in the similar environment. This report
covers an elaborated discussion about two big firms that are Tesco Plc and Sainsbury which are
operational in the UK and mainly deals in grocery sector and thus both has captured a
considerable amount of share in the industry. Apart from that this report also covers a brief
examination and evaluation of the facts and figures of both the companies which possess a lot of
importance in the current market scenario. Further in this report some ratios are calculated and
interpreted that are beneficial for the firm and capital investment appraisal techniques are also
analysed and evaluated in detail with context to both the above mentioned firm.
TASK 1
A. Calculating ten ratios that are very important from the firm’s prospective which are related
with the financial aspect of the companies that are discussed above for the years that are
2018 and 2019
(Amounts are in GBP thousand except
ratios)
Tesco PLC Sainsbury PLC
Year 2018 Year 2019 Year 2018 Year 2019
Current Ratio
Current Assets 13726000 12668000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Current Ratio = Current Assets / Current
Liabilities
0.713484 0.612573 0.762667443 0.637185
Quick Ratio
Quick Asset 11463000 10051000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000

Quick Ratio = Quick Assets / Current
Liabilities
0.595852 0.486025 0.762667443 0.637185
Net Profit Margin
Net Profit 1206000 1322000 291000 168000
Sales 57491000 63911000 28456000 29007000
Net Profit Margin = Net Profit / Sales *100 2.09772 2.068502 1.022631431 0.579171
Gross Profit Margin
Gross Profit 3350000 4144000 544000 620000
Sales 57491000 63911000 28456000 29007000
Gross Profit Margin = Gross Profit / Sales
*100
5.826999 6.484017 1.911723362 2.137415
Gearing ratios
Long term Liabilities 15144000 13509000 2552000 7607000
Capital Employed 10480000 14858000 7411000 7782000
Gearing Ratio = Long term Liabilities / CE
* 100
144.5038 90.92072 34.44 97.75
P/E ratio
Price 197.4 255.1 260 229.2
Earnings per Share 0.44 0.39 12.54 6.79
PE Ratio = Price / EPS 448.6364 654.1026 20.73365231 33.75552
Earnings per share
Total net profit 1206000 1322000 291000 168000
Total no. of outstanding shares 2731000 3253000 243700 245700

EPS = Net Profit / Total no. outstanding
shares
0.441596 0.406394 1.194091096 0.683761
Return on capital employed
EBIT 1564000 2077000 544000 620000
CE 10480000 14858000 7411000 7782000
ROCE = EBIT / CE 14.92366 13.979 7.340439887 7.967104
Average inventories turnover period
Net Sales 57491000 63911000 28456000 29007000
Average inventories 2282000 2440000 1792500 1869500
Average inventories turnover period = Net
Sales / Average Inventory
25.19325 26.19303 15.87503487 15.51591
Dividend pay-out ratio
DPS 0.03 0.11 9.7 10.2
EPS 0.44 0.39 12.54 6.79
Dividend pay-out ratio = DPS / EPS 0.068182 0.282051 0.773524721 1.502209

B. Detailed identification and examination of the facts and figures that are analysed above so as
to see a true and fair view of the financial position and their potential to invest in the
market
Current Ratio- It is a ratio that helps in analysing and determining the paying potential
of the firm with the help of current assets by comparing it with current liabilities of the company.
It is ideal if the ratio is 2:1 that is if a business has two times current assets as compared to its
current liabilities. As from the above it can be clearly seen that both the firms are somewhat
equal in this regard as Tesco has 0.71 and 0.61 in 2018 and 2019 respectively while Sainsbury
have 0.76 and 0.64 in 2018 and 2019 respectively. Still it can be said that Tesco was a little
ahead in 2018, whereas Sainsbury surpassed from Tesco in 2019 (Biktimirov, 2016).

Quick Ratio- In this ratio aspects that are related to liquidity of the firm and that too of
short nature is analysed and evaluated in detail so that it can help in adding to the value of the
company in the long run. It can be seen from the above that this ratio of Tesco was 0.60 and 0.49
in 2018 and 2019, while Sainsbury’s ratio was 0.59 and 0.47 in 2018 and 2019 respectively.
Thus it can be said that there is a very little difference in this ratio but still Tesco has taken a lead
in it, though it is very minimal in quantity (Bouteska, 2019).

Net Profit Margin- In this ratio profit margin of the organisation is evaluated so that it
can help in determining the performance of the company so as to take necessary measures to
improve it. Tesco and Sainsbury’s net profit margin was 2.10, 1.02 and 2.07, 0.58 for the year
2018 and 2019 respectively and thus by this it can be concluded that Tesco is performing
exceptionally well in this regard and has surpassed the latter firm by a great margin (Cumming
and Johan, 2017).
Gross Profit Ratio- It is a ratio that helps in determining the profit margin in gross
amount so that all the prospects can be analysed in detail. In this aspect too Tesco has maintained
a considerable amount of margin and has surpassed Sainsbury by a good margin as in 2018 the
ratio was 5.83 and 1.91 respectively while it was 6.48 and 2.14 in 2019 respectively for both the
firms and Tesco is performing in an effective was that helped it in increased its profitability level
(Koutsokostas and Papathanasiou, 2017).

Gearing ratio- Long term debt of the company with reference to the capital that has been
employed in the business is examined in this ratio and thus possesses a lot of value in the current
scenario. From the above it can be seen that in the year 2018 Tesco was performing pretty well
as its ratio was 144.50 as compared to 34.44 of Sainsbury’s, but in 2019 Sainsbury drastically
managed to increase it to 97.75 while Tesco’s gearing ratio decreased to 90.92. Thus it can be
said that in 2018 Tesco was performing well but in the year 2019 Sainsbury edged ahead of it
(Wasiuzzaman and Lim, 2017).

PE ratio- In this ratio price is evaluated on the basis of earning per share of the company
and Tesco does not able to perform well in this aspect too as in 2018 the ratio was 448.64 while
it was 20.73 for Sainsbury, whereas for the year 2019 it was 654.10 and 33.76 for Tesco and
Sainsbury respectively and thus it can be concluded that Sainsbury provides good as well as
regular return to its stakeholders as compared to Tesco (Potter, 2016).
EPS- In this ratio determination of the earnings that a shareholder is getting per share is
evaluated in detail. As it can be seen from the above that Sainsbury is performing well in this
aspect as its ratio in 2018 was 1.1941 as compared to 0.4416 to that of Tesco and in 2019 too it
was 0.6838 as compared with Tesco’s 0.4064 and thus it can be said that Sainsbury is giving
higher and constant returns to its stakeholders as compared to Tesco which is lacking in this
(Canil and Rosser, 2018).

Return on Capital Employed- Tesco’s capital that has been employed in the business if
fetching higher returns from that of Sainsbury as in was 14.92 and 13.98 for 2018 and 2019,
while it was 7.34 and 7.97 for 2018 and 2019 respectively (Chandrasekaran and Acharya, 2019).
Average stock turnover period- It is an important ratio as it helps in analysing number
of days for which the amount of the company was struck with its debtors and it is preferable for a
firm to keep it as low as possible so that it does not harm the supply chain. From the above it can

be seen that Sainsbury is performing much better than Tesco as in 2018 the ratio was 15.88 and
25.19, whereas it was 15.52 and 26.19 in 2019 respectively (Ujah, Brusa and Okafor, 2017).
Dividend-pay-out ratio- It helps in analysing the quantity that the firm is paying as its
dividend from the profits that it is generating in the long run. Sainsbury too is performing well in
this regard as compared to Tesco as it was 0.774, 0.068 and 1.502, 0.282 for both the years that
are 2018 and 2019 respectively (Liedong, 2018).
From the above it can be said that Sainsbury is placed very well in the industry as
compared by Tesco but still in some places Tesco leads the market and both the firms have to
take necessary and appropriate measures so as to sustain in the industry that is highly
competitive in nature.
C. Necessary recommendations after evaluating the above facts and figures and their
interpretation
Recommendations have been given for both the firms separately in an appropriate manner
below-
Tesco- As it can be seen from the above that Tesco is performing very well in some
aspects but still needs to concentrate more on rest of the factors that carriers a lot of value in the
current market scenario which has the potential to increase as well as improve its present
position in the market.

Sainsbury- Sainsbury is performing much better than Tesco in all the major prospects but
still there is room for improvement which can help the firm to grow and prosper in the long run
and to be profitable in the industry in which it is operational.
D. Identification and examination of the limitations of relying on to ratios which are calculated
above and are related with the financial part of the company
Since ratios are an important part of each organisations its has various limitations too that are
described below in detail-
 Limited use of the specific ratio- As all the ratios determines some or the other part and
leaves the rest untouched which cause problems for the firm and thus it does not carriers
that importance if a company wants to measure all the prospects of the business and that
too in a precise manner (Cooper, Henderson and Kish, 2019).
 Absolute lack of acceptable standards- Since all the ratios work on individual aspects
and thus lack a set standard that has to be followed so that it can help a firm to grow in
the market which is highly competitive in nature.
 Tampering in the financial statements- Influencing most of the ratios is a easy task and
thus it can be fluctuated as per the requirements which can harm its value in the market in
which it is operating.
 Measurement and communications time lag- Since ratios are measured and
communicated at different time intervals which reduces its value in the long run as
figures can be changed in that much time period.
 Universal Accounting Limits- As ratios are used since a pretty long period and thus
there are various limitations of it and it does not comply with the new companies that are
establishing and wants to grow but ratios does not allow them since they are formulated
as per the old systems which acts as a barrier to the organisation.
TASK 2
A. Calculation and examination of investment appraisal techniques
Net Present Value-
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-investment 110000
NPV 10913.58
The NPV review of both proposals reveals that the Project A with greater NPV is more feasible
than the Project B.
Payback Period:
Plant 1
Particulars Amount
Amount
(Cumulative
Cash Flow)
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
Particulars Amount
Amount
(Cumulative
Cash Flow)
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
Evaluation of payback periods reveals that the Project A provides lower
payback period than the Project B, this reveals that the Project A will
rapidly recover net total investments.
ARR:
Plant 1
Particulars Amount
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
Particulars
2020 Amount
2021 10000
2022 15000
2023 25000
2024 55000
2025 65000

Average Profit 50000
Average Investment (110000+8000)/2 36666.67
ARR = 59000
36666.67
/ 59000
*100
ARR computed above of the Project A and Project B suggests that Project A would
produce better yields than Project B.
The aggregate review of all such investment assessment techniques reveals that the Project
A is much more feasible for business than Project B.
B. Examination of the limitations of the investment appraisal techniques that are mentioned
above with context to decisions that are of long term in nature
Net Present Value- It is a technique that helps in analysing and evaluating the amount of
investment in the present time so as to identify that it is profitable for the firm or not so that
appropriate and necessary decisions can be taken that can add to the value of the company in the
industry (Hecht, 2020). Since amount of the investment changes with time it affects the working
of the enterprise taken as a whole. There are various limitations of it too that are discussed below
in a sequential manner-
 As there are set policies and procedures in other techniques that helps them in the market
which is lacked in net present value and thus rather than becoming an asset to the
company it becomes a burden for the organisation and impact overall working of the
firm.
 Comparing different investment is not possible in this as every project has a distinct value
which is not taken into consideration in this aspect.
 A lot of hidden costs are included in it and thus make this technique a costly one which
small firms cannot afford (Jones, 2016).
Payback Period- In this a period is evaluated in which the project can fetch the amount that
has been invested in it and thus it becomes very important for firms to examine this aspect in an
accurate manner because of the value that it carriers. There are various limitations of it too that
are discussed below-
 Payback period ignores one of the most important as well as crucial aspect which is time
value of money and thus it does not take that into consideration which makes it a

technique that most of the firms does not appreciate in the long term concept (Khan and
Barki, 2020).
 It also ignores the inflow of cash that is generated after recovering the costs as profit is
generated after that and it shows the true and fair view of the company and it does not
take that into account which makes it a useless technique in order to check profitability of
the enterprise.
 Also it does not take long run prospect into consideration and works only for short term
projects which is not beneficial for the firms that wants to grow and prosper in the market
for long run (Rashidi, Mardani and Amiri, 2020).
Accounting Rate of Return- It is a technique which helps in identifying as well as
evaluating and analysing the rate of return that a company can expect from the investment that it
has made in the business while hoping for profits in the market as well as sustainability in the
long term. Apart from its advantages there are many limitations of it too and all of them are
described below in an elaborated manner-
 The most crucial aspect in the current scenario is the time value of money which it does
not take into account and thus becomes its limitations and that too a bigger one as
compared to others.
 Apart from this it also remains similar for years which is not possible for an investment
as value of it changes according to the time period and thus because of it this technique
does not proves to be beneficial for the company that uses it in the industry (Itzkowitz
and Loviscek, 2016).
CONCLUSION
Financial management is related with taking decisions regarding allocation of finance in an
appropriate manner after detailed analysis and evaluation. From the above it can be concluded
that both Tesco and Sainsbury are very well placed in the market as both of the firms has
captured major share in the industry in which they are operating but still there are some areas of
concerns for both the companies that have to be identified and subsequently rectified in order to
achieve growth and success in the market. Apart from that it can be concluded that there are
different investment appraisal techniques that carriers a lot of importance, though there are
limitations too and thus each and every firm has to opt for the best technique that is suitable for
the organisation in the long run.

REFERENCES
Books and journals
Ascioglu, A. and Maloney, K. J., 2019. From stock selection to multi-asset investment
management. Managerial Finance.
Biktimirov, E. N., 2016. Introduction to the special issue on equity indexing. Managerial
Finance.
Bouteska, A., 2019. Some evidence from a principal component approach to measure a new
investor sentiment index in the Tunisian stock market. Managerial Finance.
Canil, J. and Rosser, B., 2018. CEO incentive pay around performance declines. Managerial
Finance.
Chandrasekaran, B. and Acharya, R. H., 2019. A study on volatility and return spillover of
exchange-traded funds and their benchmark indices in India. Managerial Finance.
Cumming, D. and Johan, S., 2017. The problems with and promise of entrepreneurial finance.
Strategic Entrepreneurship Journal. 11(3). pp.357-370.
Koutsokostas, D. and Papathanasiou, S., 2017. Mutual funds in Greece: case study of domestic
equity mutual funds during a financial crisis. Managerial finance.
Liedong, T. A., 2018, July. Managerial Political Ties and Access to Finance: The Mediating
Effect of Resource Dependency. In Academy of Management Proceedings (Vol. 2018,
No. 1, p. 18758). Briarcliff Manor, NY 10510: Academy of Management.
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Ujah, N. U., Brusa, J. and Okafor, C. E., 2017. The influence of earnings management and bank
structure on bank performance. Managerial Finance.
Wasiuzzaman, S. and Lim, K. H., 2017. Does institutional investors’ monitoring substitute for
litigation in curbing insider trading? The case of Malaysia. Managerial Finance.
Cooper, E., Henderson, C. and Kish, A., 2019. Corporate social responsibility and financial
stability: evidence from the Troubled Asset Relief Program. Managerial Finance.
Hecht, A., 2020. The Role of Managerial Characteristics in FX Risk Management–Who
Increases Risk?. Available at SSRN 3688281.
Jones, J. S., 2016. The impact of employer-delayed deposits on plan participant wealth.
Managerial Finance.
Khan, M. A. and Barki, M., 2020. Determinants of small and medium enterprises performance
with the interaction effect of managerial activities. International Journal of Research in
Business and Social Science. 9(4). pp.153-160.
Rashidi, M., Mardani, M. and Amiri, M., 2020. The role of managerial compensation in
changing the relationship between business strategies and over (under) investment.
Empirical Studies in Financial Accounting. 17(67). pp.177-201.
Itzkowitz, J. and Loviscek, A., 2016. An unpleasant small-stock effect in manufacturing: the case
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