Financial Analysis of Ocado Group, Budgeting and Investment Appraisal

This report, prepared for a Finance for Decision Making module, conducts a financial analysis of the Ocado Group, a UK-based technology company. It begins with an assessment of the company's financial performance using ratio analysis, evaluating profitability, efficiency, liquidity, and gearing ratios over a five-year period. The analysis highlights the impact of the COVID-19 pandemic on the company's financial standing. The report then explores the advantages and disadvantages of budgeting, emphasizing its role in resource allocation, strategic planning, and performance evaluation. It also examines different approaches to financial planning, including incremental and zero-based budgeting, and underscores the importance of performance management in effective decision-making. Finally, the report critically evaluates investment opportunities using Net Present Value (NPV) and Internal Rate of Return (IRR) techniques, considering the risks and uncertainties associated with investment appraisal. The report concludes with a summary of the key findings and recommendations for the company's financial strategies.

Name of Module:
MOD007667 Finance for Decision Making
SID Number:
Title of Your Course and Year/Stage: Final Submission Date:
Actual word count: Extension Granted to (if any):
Checklist before submission
1. Have you read, understood and acted in accordance with the referencing guidelines set
out in the Harvard Reference Guide?
2. Where you have quoted directly from or where you have paraphrased the work of others,
have you acknowledged and appropriately referenced the source of your quotation in the
body of the text?
3. Have you placed all direct quotations in inverted commas?
4. Have you listed and correctly presented all your sources in the reference list?
Declaration by the candidate
1. I declare that this assignment is my own work (or, in the case of a group assignment, the
work of my group), that it has not been copied from elsewhere and that any extracts from
books, papers or other sources have been properly acknowledged as references or
quotations.
2. The work contains no material drawn from unattributed sources.
Please tick the box to confirm acceptance of the above declaration.
Date ________________________
Signature ________________________

Table of Contents
1. Introduction..............................................................................................................................3
2. Financial Analysis of Ocado group..........................................................................................3
2.1 Problems Associated with Financial Ratios..........................................................................6
3. Advantages and Disadvantages of Budgeting..........................................................................6
3.1 Approaches to Drawing up A Business Financial Plan....................................................8
3.2 Performance Management and Decision Making.............................................................8
4. Evaluating Capital Budgeting Approaches..............................................................................9
4.1 Net Present Value................................................................................................................10
4.2 Internal Rate of Return........................................................................................................11
4.3 Risk and Uncertainty in Investment Appraisal....................................................................12
5. Conclusion..............................................................................................................................12
Reference.......................................................................................................................................14

1. Introduction
Covid-19 poses significant challenges for the economies around the globe. Most of the
businesses are massively affected as they fail to deal with the rapid swings and demand and
supply disruptions (Beninger and Francis, 2021). Covid-19 has significantly impacted the
people’s living patterns. Post Covid-19 will have many consequences on the economies and on
the whole societies. People tend to become more interested in saving their money instead of
investing (Donthu and Gustafsson, 2020). There is a need arises for the businesses to reassess
their financing and investment policies to combat this pandemic situation and able to achieve and
enhance business financial gains (Shen et al., 2020).
Ocado group is a UK based Technology Company and provides innovative and unique end-to-
end online grocery solutions around the globe (Ocado, 2021). As a CFO of this company, I
evaluates the £50 million worth investment for the development of product post Covid-19. In
first section of this report, financial performance of Ocado group is assessed by conducting its
financial ratios analysis. Secondly, this report presents the merits and demerits of budgeting and
importance of performance management in effective decision making of an organization. Third
section critically evaluates the investment opportunity by utilizing two major investment
appraisal techniques (NPV and IRR).
2. Financial Analysis of Ocado group
Ocado group is basically a global technology-led company was founded in April, 2000 and
headquartered in Hatfield, United Kingdom. It provides online retailers with unique and
innovative solutions related to software development, robotics and automation systems
worldwide. Ocado group earn a net income of £ 69.6 million in financial year 2020 (Ocado,

2021). According to Cassim and Swanepoel (2021), failure to manage financial distress may lead
to bankruptcy. Financial ratio analysis is used as a measuring business soundness and plays
significant role in eliminating businesses potential financial risk (Kliestik et al., 2020). A
financial ratio analysis of Ocado group is given below in Table 1 and its graphical presentation is
also provides in Figure 1 in appendix section which tells us about company’s financial
performance of last five years.
Table 1: Financial Ratio Analysis; Source: Self-made
Categories Ratios 2020 2019 2018 2017 2016
1. Profitability GPR 0.349 0.337 0.342 0.340 0.342
2. Effi ciency ATR 0.738 0.964 1.425 1.824 1.967
3. Liquidity CR 4.819 2.192 1.745 1.011 0.515
4. Financial gearing DTER 1.193 1.169 1.430 2.304 1.670
Table 1 reports financial ratio analysis of the Ocado group. The profitability ratios measures how
much business is profitable and where it stands in terms of financial performance (McCosker,
2021). The profitability of Ocado group is assessed through gross profit margin ratio which
indicates ability of the company to make profit after settling its costs of goods sold. Profitability
ratio of the company over the period of 2016-20 almost remains the same. However, profitability
of the company slightly declines in 2019 in comparison to previous year as these was slowing
down of business activities due to Covid-19 restrictions (McKibbin and Fernando, 2020). In
spite of the fact that there was a prolonged period of lock down in 2020, the company is able to
manage a little increase in its profit margin as compared to last five years. The statistics of
profitability ratio suggests that the company has adopted necessary policy changes in their
business strategy in awake of Covid-19 pandemic (Khurana et al., 2021).

The second category is of efficiency ratio. Efficiency ratio discusses how well the company is
managing its assets as well as liabilities. Here, asset turnover ratio is employed to compute the
business efficiency. Asset turnover ratio suggests that how much revenue the company earns by
efficiently manage its assets (McCosker, 2021). Statistics reported in Table 1 indicate that the
company asset turnover ratio is quite alarming as shows a decreasing trend over the last five
years which means that the company is inefficiently controlling its assets. As the declining asset
turnover ratio suggests that the business has excess of production but its collection practices and
inventory management is poor which gives bad signal to the investors about the company (Irman
and Purwati, 2020).
After evaluating the efficiency of the company, we analyse its liquidity. Liquidity is measured
with current ratio which indicates that how well the company manages its current assets in
relation to current liabilities and meet its short term loans through sale of its current assets and
higher ratio is mostly preferred and desirable by the companies (McCosker, 2021). It is indicated
that Ocado group performs significantly well in term of managing its short term assets and
liabilities. As the statistics in the Table 1 reflects the increasing trend of the company’s current
ratio. Findings indicate that Ocado group is efficiently repaying its current obligations by
utilizing its current assets even during the pandemic. In 2020, the company reports all time
highest current ratio during the last five years which is 4.819 as compared to previous 2.192
which may be due to the fact that the companies larger in size are more resilient to crisis shocks
(Song et al., 2021).
At last, financial gearing ratio of the company is computed using debt to equity ratio which tells
that how much finance the company has raised through debt and equity. Firms with higher debt
to equity ratio are at higher risk of becoming bankrupt. Debt to equity ratio of Ocado group is

keep on changing every year as indicated in the Table 1. Results revealed that the company has
slightly increases the debt financing in 2020 which means that they have taken more debt in 2020
as compared to 2019. Higher debt ratio is the indication of the company’s inability to raise cash
through equity investment in this current scenario of Covid-19 epidemic (Demmou et al., 2021).
2.1 Problems Associated with Financial Ratios
Although, financial ratio analysis is an effective tool to observe and identify issues related to
financial performance of the company by comparing its current performance with the previous
results. It has also some drawbacks as well which are discussed below:
 Considers Historical Data: One of the problem associated with the financial ratios is
that the information used in computation of ratios is not current instead the analysis
requires historical information to analyse firm’s current performance and to predict future
decisions of the firms (Faello, 2015).
 Avoid External Factors: Another limitation of the ratio analysis is that it doesn’t
consider the external factors effect in the analysis such as inflationary or deflationary
effects. As the data is collected from financial statements of companies which are
periodically released and changes in the prices occurred during the period are not
incorporated in the financial figures.
 Financial Statistics Manipulation: According to Zainudin and Hashim (2016), the most
important problem related with financial ratios analysis is that information used in
analysis is based on financial statements statistics which can be manipulated to better
reflect company position.

3. Advantages and Disadvantages of Budgeting
Budgeting is basically a process of estimating company’s income and expenditure over a
particular time period and preparing a proper written plan for its future operations. Businesses
often uses budgeting to assess various operations of the business and helps those in making
effective financial decisions. There are several advantages of preparing budget such as allocation
and reallocation of resources, coordinating business operations across departments and
converting strategic plans into action. Besides, budgeting also helps the company’s management
in planning orientation and urges them to think longer-term instead managing short term
business operations (MJO, 2021). Another merit of budgeting is that it enables the businesses to
look into its financial statistics of the over the period of time to assess which business activities
are helpful in generating revenues and which ones only use it so the management may drop some
unfavourable business activities. Preparing a structured budget guide business in funds planning
such as if little cash amount is in hand to invest in working capital, budgeting help management
in deciding which assets are worth investing (Schuster, Heinemann and Cleary, 2021). It further
helps in evaluating current performance of the business and making estimates for the next year.
On the contrary, there are some demerits of budgeting as well, the major drawback of budgeting
is that this process is very time consuming particularly for the organization that is poorly
governed and if the organization is intended to prepare participative budget. While preparing the
budget, it is possible that manager may deliberately create budgetary slack by changing the
revenue and expenditure estimates over a specific time period to get favourable variances against
the budget which is also a very serious concern. Another limitation of budgeting is rigidity such
as if a company is preparing its budgeting estimates annually and decides to strictly focus on the
outline described in their budgets for the whole next year may not considers the changing market

circumstances which can be a potential problem for the company. In addition, managers of
different departments also blames each other departments if they failed to achieve the expected
outcomes (MJO, 2021).
3.1 Approaches to Drawing up A Business Financial Plan
This report considers two critical approaches to prepare the business financial plans which are
incremental budgeting and zero-based budgeting techniques each having its own pros and cons.
While preparing the budget for next period, these budgets requires either the actual data and
figures or the estimates of the pervious budget. Businesses mostly prefer the preparation of an
incremental budget as this budgeting approach requires only little addition in the existing budget
to make a new budget estimate. On the other hand, zero-based budgeting requires no previous
budgeting estimates as it is prepared from the zero base (Ouassini, 2018). Incremental budget is
widely used by organizations however some businesses makes budgeting estimates using zero-
based budgeting. Zero-based budgets are mostly used to make estimates at the strategic level and
requires more time and resources. In contrast, incremental budgets mostly focuses on short term
day to day activities which usually do not take much time and expertise. Besides, zero-based
budgets are mostly prepared by larger organizations while, small and medium sized companies
prefer the estimation of incremental budget. In short, budgeting estimation either incremental of
zero-based is necessary for the companies to efficiently run their businesses efficiently (TWEN,
2021).
3.2 Performance Management and Decision Making
Management of the organization can make better decisions with the help of performance
management. Performance management is a continuously evolving process of enhancing
performance by setting and aligning individual and team goals with long term goals and

objectives of the organizations, planning for the performance to reach the goals, reviewing and
evaluating the progress and empowering people’ knowledge, skills and abilities (Li et al., 2018).
Performance management is linked to the decision making of the firms. If performance
management process is effectively and efficiently designed and implemented, it can lead to better
decision making by firms. Performance management can also be used as a tool to early identify
the potential problems associated with the businesses and helps managers to take necessary
corrective actions timely and keeps the business on tract. Top management may drop some of the
company’s underperformed projects and start investments in profitable and innovative projects
by measuring its performance. Performance management system also helps in prioritizing
employee’s reward and recognition which ultimately motivate employees to perform their duties
well and leading to higher performance of the company (Mello and Thabayapelo, 2021).
4. Evaluating Capital Budgeting Approaches
Capital budgeting techniques are linked to long term capital investment decisions of the
businesses. Businesses uses different capital budgeting approaches to evaluate their various
projects while making important investment decisions. Two widely employed approaches of
investment appraisal by the businesses are NPV and IRR and both have some merits over the
other. Estimation of NPV requires present value of cash inflow and outflow and tells about
profitability of the project (Bosri, 2016). Businesses prefer to invest in projects having non
negative net present values. However, internal rate of returns is basically a return of an
investment underlying the concept of time value of money and Investors usually prefers to invest
in a project with higher internal return. Besides, both approaches involves calculation of future
cash flow estimation based on the historical information. Some companies prefer to use net
present value to evaluate their investments projects as it is easy to calculate. However, according

to Mubashar and Tariq (2019), most managers prefer internal rate of return as it makes
comparison with low and high discounting rates.
Considering that vaccination for the Covid-19 epidemic has already started worldwide, it is
expected that the world will be back on the tract as it was before this epidemic. According to
Arjunan (2019), majority of the big business such as Nike, Walmart, etc. are currently working
to develop and produce products and services for post Covid-19 period. In this regard,
management of the Ocado group is also interest in launching new product in the retail business
and the company has an investment of about 50 million pounds. This investment will cover the
expenses for development of new product and expenses for marketing and launching of the
product. I evaluated this investment using both of the above mentioned approaches as a CFO of
the Ocado group.
4.1 Net Present Value
It is the most preferable technique of capital budgeting employed by the company for making
important decision related to investment appraisal. It basically tells about the investments
profitability by calculating the variance in present value of cash inflow and cash outflow.
Projects having positive net present value are most desirable by the company but the projects
with negative net present value are unfavourable ones. Positive net present value implies that the
potential future returns from the project are greater than the present value of its cost (Mubashar
and Tariq, 2019). In this report, I have also used the net present value approach to make crucial
decision regarding the investment of 50 million pounds in the development of new product post
covid-19 and this investment covers the time span of 10 years with 10% discount rate. For the
calculation of net present value, I assume that this project delivers 0.5 million pounds worth
expected constant cash flow. Table 2 reports computation of NPV. Based on the value of NPV

which is negative, it is proposed that company should reject this project as negative net present
value which is 41 million pounds after 10 years yield less return while investment in this project
incurred more cost.
Table 2: Calculation of NPV; Source: Self-made
Discount Rate 10%
years cashflows DF @ 10% Present value
0 -50000000 1 -50000000
1 500000 0.909090909 550000.00
2 500000 0.826446281 605000.00
3 500000 0.751314801 665500.00
4 500000 0.683013455 732050.00
5 500000 0.620921323 805255.00
6 500000 0.56447393 885780.50
7 500000 0.513158118 974358.55
8 500000 0.46650738 1071794.41
9 500000 0.424097618 1178973.85
10 500000 0.385543289 1296871.23
NPV -41234416.47
Calculation of NPV
4.2 Internal Rate of Return
It is the minimum return of the project which is most nearer to its cost. IRR is also used by
companies around the globe to decide upon which projects are worthy for the potential
investment. For a profitable investment, IRR must be greater than the projects required return as
businesses take it as a threshold for the projects for making investment appraisal decisions and
rejects the project whose IRR is smaller than its required return (Mubashar and Tariq, 2019).
While making decision as a CFO of Ocado group regarding the investment of worth 50 million
pound for launching the product in post Covid-19 times, I also employed internal rate of return
method to evaluate this project. I have computed the value of internal rate of return in excel
using its built-in formula for calculating IRR. However, the value of IRR for this investment is

negative which suggests that this investment’s return is much less than the project’s starting cost.
It is thus suggested to the Ocado group’s management to not make investment in that project as
this investment yields negative returns.
Table 3: IRR Calculation; Source: Self-made
years cashflows
0 -50000000
1 500000
2 500000
3 500000
4 500000
5 500000
6 500000
7 500000
8 500000
9 500000
10 500000
IRR -29%
Calculation of IRR
4.3 Risk and Uncertainty in Investment Appraisal
Risk is a term basically emerges from uncertainty and explained as chances of failure or
possibility of happening of unpleasant circumstances. Uncertainty is the situation in which
different outcomes are possible. According to Pflaumer (2017), only estimating the discounted
future cash flows using investment appraisal approaches is not enough to make effective
investment decision as some risk and uncertainty factors are also accountable where decision has
to be made for future event. It also affects the NPV and IRR estimation by affecting future cash
flow streams. However, it is possible to adjust risk factor while doing investment appraisal
decisions and it can be done with the help of sensitivity/scenario analysis.

5. Conclusion
Covid-19 brought devastating consequences on the world economy as majority of the business
fails to respond the rapid changes in the supply and demand. Post Covid-19 will have many
consequences on the economies and on the whole societies. Although, the vaccination to combat
this pandemic has been started worldwide and it is now expected that most of the population
around the globe will receive vaccination within next few months and the whole world will be
back on track as was before this epidemic and businesses and economies will be recovered from
the crisis formed by this pandemic. Currently the businesses are working to launch and develop
the products for the post epidemic era. Likewise, the motive of this report was to scrutinize a
company which is also making efforts to develop a product for post epidemic era to gain the
benefits of restored corporate activities. The company I chose for analysis is Ocado group a UK
based company and I will make certain important decisions acting as a CFO of that company.
For that purpose financial analysis of the company was conducted in the first section of the
report with help of ratio analysis during the last five years period from 2016-20. Results of the
analysis suggest the company’s profit remains almost the same with slight increment each year
and also performs well in terms of liquidity but its results of efficiency and gearing ratios are
quite unfavourable especially during 2019 and 2020. Secondly, merits and demerits of capital
budgeting and significance of performance management for effective decision making is
discussed. At the end, internal rate of return and net present value of the investment is computed
for making investment appraisal decision. Results indicate that the amount of the initial
investment is much more than its expected future return. Thus, it is recommended that the
company should reduce the investment amount to make it a profitable and valued.

Reference
Arjunan, K., (2019). Validity of NPV Rule and IRR Criterion for Capital Budgeting and
CBA. Available at SSRN 3505058.
Beninger, S. and Francis, J.N., 2021. Resources for Business Resilience in a Covid-19 World: A
Community-Centric Approach. Business Horizons.
Bosri, R., 2016. Evaluation of Managerial Techniques: NPV and IRR. UITS Journal, 5(1),
pp.48-57.
Cassim, R.J. and Swanepoel, M.J., 2021. The bankruptcy prediction approach: An empirical
study of comparison between the emerging market score model and bankruptcy prediction
indicators approach in the Johannesburg Stock Exchange. Journal of Economic and Financial
Sciences, 14(1), p.8.
Castelló, J.V. and Casasnovas, G.L., 2021. The effect of lockdowns and infection rates on
supermarket sales. Economics & Human Biology, 40, p.100947.
Demmou, L., Calligaris, S., Franco, G., Dlugosch, D., McGowan, M.A. and Sakha, S., 2021.
Insolvency and debt overhang following the COVID-19 outbreak: Assessment of risks and
policy responses.
Donthu, N. and Gustafsson, A., 2020. Effects of COVID-19 on business and research. Journal of
business research, 117, p.284.
Faello, J., 2015. Understanding the limitations of financial ratios. Academy of Accounting and
Financial Studies Journal, 19(3), p.75.
Irman, M. and Purwati, A.A., 2020. Analysis on the Influence of Current Ratio, Debt to Equity
Ratio and Total Asset Turnover toward Return on Assets on the Otomotive and Component
Company That Has Been Registered In Indonesia Stock Exchange within 2011-
2017. International Journal of Economics Development Research (IJEDR), 1(1), pp.36-44.
Khurana, S., Haleem, A., Luthra, S., Huisingh, D. and Mannan, B., 2021. Now is the time to
press the reset button: Helping India’s companies to become more resilient and effective in
overcoming the impacts of COVID-19, climate changes and other crises. Journal of cleaner
production, 280, p.124466.
Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M. and Vrbka, J., 2020. Remaining
financially healthy and competitive: The role of financial predictors. Journal of
Competitiveness, 12(1), p.74.

Li, F., Etienne, A., Vernadat, F. and Siadat, A., 2018. Comprehensive Performance Expression
Model for Industrial Performance Management and Decision Support. IFAC-
PapersOnLine, 51(11), pp.558-563.
MJO, (2021). Budgeting techniques in the current era. Available at:
https://www.mjobookkeeper.com/business-management/article/the-advantages-and-
disadvantages-of-budgeting/. [Accessed 24 January 2021].
McCosker, P., 2021. Interpretation of Financial Statements. Financial and Managerial Aspects
in Human Resource Management: A Practical Guide, Emerald Publishing Limited, pp.23-37.
McKibbin, W. and Fernando, R., 2020. The economic impact of COVID-19. Economics in the
Time of COVID-19, 45.
Mello, D.M. and Thabayapelo, K., 2021. Impact of performance management and development
system on employee motivation at Mahikeng local municipality. International Journal of Public
Sector Performance Management, 7(1), pp.59-73.
Mubashar, A. and Tariq, Y.B., (2019). Capital budgeting decision-making practices: evidence
from Pakistan. Journal of Advances in Management Research.
Ocado (2021). Ocado group. Reports and presentations. Available at
https://www.ocadogroup.com/sites/ocado-corp
v2/files/investors/Annual%20Report%20LP/Ocado%20Group-Annual%20Report%202020.pdf
Ouassini, I., 2018. An introduction to the concept of Incremental Budgeting and Beyond
Budgeting. Available at SSRN 3140059.
Pflaumer, P., 2017. Risk Analysis in Capital Investment Appraisal with Correlated Cash Flows:
Simple Analytical Methods. Universitätsbibliothek Dortmund.
Schuster, P., Heinemann, M. and Cleary, P., 2021. Coordination, Budgeting and Incentives.
In Management Accounting (pp. 215-246). Springer, Cham.
Shen, H., Fu, M., Pan, H., Yu, Z. and Chen, Y., 2020. The impact of the COVID-19 pandemic on
firm performance. Emerging Markets Finance and Trade, 56(10), pp.2213-2230.
Song, H.J., Yeon, J. and Lee, S., 2021. Impact of the COVID-19 pandemic: Evidence from the
US restaurant industry. International Journal of Hospitality Management, 92, p.102702.
TWEN, (2021). Budgeting approaches for the companies. Available at:
https://efinancemanagement.com/budgeting/advantages-and-disadvantages-of-incremental-
budgeting. [Accessed 24 February, 2021].

Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial
ratio. Journal of Financial Reporting and Accounting.

Appendix
Figure 1: Financial Ratio Analysis; Source: Self-made