Explore how next generation leaders use accounting tools, ratio analysis, budgeting and investment appraisal to drive strategic decisions. Explore this assignment sample to strengthen your financial leadership skills.
Financial analysis refers to the process of evaluating business budget, project and other financial related transaction for assessing the overall performance as well as suitability of business entity. For students seeking help writing assignments on financial analysis, this Tesco case study provides practical insights.This is the most crucial process which assists in determining the actual profitability, solvency, liquidity and efficiency position of organization based on which investment could be initiated. Tesco is the multinational retail organization which involved in offering the wide variety of consumer goods and services such as clothing, household product, entertainment product, beauty product and consumer electronic. The firm was established in the year of 1991 by Jack Cohen and currently it is presented at more than 4673 locations. Tesco’s vision is to serve community, customers and planet a litter better every day. Mission statement of Tesco is to offer the best shopping experience by providing product according to needs of customers and communities.
Moreover, Tesco’s values are to act responsibly towards community, respect & trust each team members and acknowledge effort of each individual. There is a continuous change in the customer’s preference due to which Tesco has focused on integrating innovation in its operations to fulfil their needs. Moreover, inflation in UK is another significant factor which highly impacts the firm’s profitability. In the year of 2024, Tesco’s revenue has been increased by 4.39% which amounted to 68.19 billion pound as compared to 65.32 billion pound in the year of 2023 (Description of Tesco, 2024). Further, Tesco has provided employment to 330000 individuals and has a market share of 28.1% in 2024. The current report is based on identifying financial position of Tesco with the help of ratio analysis. Moreover, it will also include literature review on budgeting techniques and in-depth evaluation of investment appraisal techniques.
Accounting standard implies for the set of common principle, procedures and standard which define basis for the financial practices and policies. UK generally accepted accounting practices (UK GAAP) includes various accounting standard that are published by UK’s financial reporting council. Based on the perception of Hsu, Chang and Zeng (2022) accounting standards are published with the aim of promoting uniformity across the firms that helps investors to easily understand and compare the financial position of different company based on which investment decision could be initiated. For example; Tesco is aligning with GAAP framework which aids in ensuring transparency, reliability, consistency and comparability of financial statement.
On the contrary view point, Khalilov, (2024) stated that international Financial reporting standards (IFRS) is also widely used with the aim of enhancing comparability between financial statement of different countries. It is significant accounting standard which aims at enhancing transparency and reducing information gap that further contributes in determining opportunity and risk by investors. Lokanan (2021) stated that GAAP is more complex and detailed than IFRS which provide sophisticated and simplified program. Further, GAAP framework allows LIFO method whereas IFRS ban the usages of LIFO which creates issue in adequately comparing the inventories.
Financial data considered as the most crucial aspect of each organization based on which all the crucial decision are taken. This data helps in evaluating financial trend, forecasting business performance as well as setting policies and goals. All the company’s decision are depended on the financial data which influences the short & long term strategic plan and also manages overall operational risk, assets, capital growth and revenue of the firm (Astanova et al, 2024). Financial data are mainly misused due to four crucial errors that include faulty data, error of omission, commission and principle. Financial planning is the most pivotal process of firm as it assists in managing all the micro and macroeconomic aspect of the country adequately. Tesco is focusing on in-depth financial planning which assists in dealing with all the uncertainties and thereby supports effective working of the business entity.
In the case of COVID 19, many retail organizations have shut down due to the inaccurate financial planning and inability to manage their cost. In this regard, Tesco’s financial team was ready with adequate fund management plan which helps them in coping up with the economic crisis effectually. Financial Team is involved towards vigilantly monitoring of revenue, assets, expenditure, account receivable, cash flow and profitability which helps company in taking the most accurate decision (Blessing and Sakouvogui, 2023). This approach helps Tesco in managing their liquidity and solvency position which recognized as the major reason behind long term stability in the market. Along with this, Tesco’s financial leaders are involved towards creating a strategic five year financial management plan which helps firm in taking actions for the attainment of overall goals and objectives (Financial management in Tesco, 2025). This strategic planning helps organization in maximizing return on investment and also supports in developing values for shareholder that aids in attaining economic goal.
Ratio analysis refers to the process of evaluating firm’s financial statement by comparing line items which aids in identifying overall liquidity, solvency, efficiency and profitability position of company (Kyere and Ausloos, 2021). In the context of comparing financial position of Tesco with another retail organization, Sainsbury has been selected. Sainsbury is the British supermarket chain of UK which established in 1869 by John James Sainsbury. The firm is earning annual revenue of 31.491 billion and employed more than 162000 employees in the year of 2023 (Description of Sainsbury, 2024). Following is the financial statement of Sainsbury (Financial statement of Sainsbury, 2025):
3.2.1 Current Ratio
| Year | Tesco | Sainsbury |
| 2022 | 0.76 | 0.68 |
| 2023 | 0.72 | 0.68 |
From the above table, it has been identified that Tesco’s Current ratio reduced by 0.4 in year 2023 which indicate issue in effectively paying off short term liabilities. In contrast, Sainsbury’s current assets having been increased to £7893 from £6742 and liabilities to £11614 from £9868 that has resulted in no change in its current ratio. This above ratio indicates that liquidity position of Tesco is better than Sainsbury but then also firm is unable to attain ideal ratio. However, Sainsbury’s current ratio is constant over year which indicate its ability to maintain balance between current assets and liabilities. For overcoming the situation, both Tesco and Sainsbury should emphasis over delaying all the fixed asset investment which aids in enhancing the current asset. Moreover, business owner should avoid all type of drawings which helps in maintaining the overall cash balance within the company (Emerson et al, 2021). Further, companies should evaluate all its fixed assets and sell out all non-productive assets which facilitates towards higher cash inflow. Beside this, firm could use this cash to re-amortized loan which will help in reducing the current liabilities and enhancing overall ratio. Moreover, both organizations should emphasis over improving their marketing strategy which supports in influencing the large number of customer and also leads to increasing overall sales of the company.
3.2.2. Quick Ratio
| Year | Tesco | Sainsbury |
| 2022 | 0.61 | 0.50 |
| 2023 | 0.58 | 0.52 |
On the basis of above table, it has been identified that Tesco’s quick ratio is reducing by 0.2 whereas Sainsbury ratio is increasing by 0.2. It has depicted that Tesco’s inventory has been increased by 171 million pound which has resulted in reducing overall quick assets ratio. Whereas, Sainsbury has increased its inventory by only 1.3 million pound which ultimately result into increasing quick asset ratio. However, both the companies are not able to attain the ideal ratio of 1:1 which denotes the firm incapability in paying off all current liabilities by selling the quick assets. To avoid such situation, company needs to adapt adequate inventory management software which will help in avoiding unnecessary investment in the stocks. Tesco should use this software to determine the exact need of inventories which assists in avoiding the situation of over or under stocking (Horta, Meoli and Vismara, 2022). Moreover, firm should modify its trade receivable and payable policy which contributes in managing adequate cash balance and thereby supports in paying out all the liabilities timely. Beside this, concentration should be paid on outsourcing the entire noncore task which helps in saving cash and resulted in enhancing overall quick ratio of the company.
3.3.1 Net profit margin
| Year | Tesco | Sainsbury |
| 2022 | 2% | 2% |
| 2023 | 1% | 1% |
By doing analysis of financial; statement, it has been depicted that both the companies are unable to attract the large number of customers which eventually leads reduction in the overall profits. It has been determined that sales of Tesco are increased by 4418 million pound but the net profit gets reduced by 739 million which indicates the firm’s inefficiency in managing the overhead cost. On the other hand, Sainsbury’s net sales are increased by 1569 million pound but net profit is reduced by £470 million denoting inaccurate management of overhead cost. To overcome the issue, company should focus on shifting towards automation which will help in reducing the labour cost. Along with this, firm should on enhancing its marketing strategies that assist in attracting the large number of customers and eventually leads higher profits (Brahma, Nwafor and Boateng, 2021). This will also assist in gaining high economies of scales which further result into cost reduction and profit maximization.
Along with this, firm should evaluate its pricing strategies and make necessary changes in product prices which supports in managing cost and profits of the business entity. Along with this, company should purchase raw materials in bulk quantities which aids in reducing operational cost and facilitates towards booting net profit of business entities (Akash, Reza and Alam, 2024). Further, in the current macro environment there is continuous increase in inflation which creates issue in maintaining the long term stability within low net profit. In this context, companies should focus on increasing debt in the capital structure which facilitates reduction in the tax liabilities and overhead cost as well.
3.3.2 Return on equity
| Year | Tesco | Sainsbury |
| 2022 | 9% | 8% |
| 2023 | 6% | 3% |
In 2022, Tesco and Sainsbury is having ROE of 9% and 8% respectively which indicates the firm’s efficiency in generating profit by utilizing the shareholder’s funds adequately. In year 2023, Tesco and Sainsbury was only able to generate return of pound 6 and 3 by utilizing 1 pound which is not a good indicator for shareholders. Comparatively, it has been identified that Tesco’s policy are more effective while utilizing the shareholder’s funds than Sainsbury. However, both the firms are unable to attain industry average which is 25. 46%. To overcome such situation, both the organizations should focus on increasing its revenue which helps in higher ROE.
For increasing return, company should use various tax efficient strategies such as taking advantage of tax deduction credits that is deprecation deduction on assets and R&D tax credits which ensures high after tax income and supports in boosting the overall ROE (Ahmad, Mobarek and Roni, 2021). Along with this, both companies should switch over “value based pricing” in which product price are determined on the basis of perceived value of product in market that help in enhancing revenue and higher ROE. For making optimum utilization of the shareholders fund focus needs to be placed on making modification in the existing strategies and policy framework in line with the competitors. By this, business units would become able build and sustain competitive position at marketplace.
3.4.1 Asset turnover
| Year | Tesco | Sainsbury |
| 2022 | 1.3 | 1.1 |
| 2023 | 1.4 | 1.2 |
After calculating assets turnover ratio, it has been identified that Tesco and Sainsbury was unable to optimally utilize its assets for generating revenue during the concerned period. Along with this, firm is unable to attain ideal ratio of 2.5 indicating ineffective company’s policies for optimum utilization of assets. For increasing asset turnover ratio, companies should emphasis on maintaining the assets for deriving the greater output. Besides this, training & development session also persuades employees about how to make use of machineries and other assets (Olayinka, 2022). Thus, with the help of skilled and talented workforce organization would become able to enhance sales and thereby overall asset turnover ratio.
In this regard, company should concentrate over improving inventory management which help in avoiding unnecessary investment towards inventories. Moreover, company should sell out all the inaccurate and unproductive assets which help in reducing unnecessary investment towards assets. Along with this, Tesco and Sainsbury should concentrate on leasing assets rather than buying which will help in improving assets turnover ratio (Chouaibi, Chouaibi and Rossi, 2022). Companies should also concentrate over accelerating trade receivable time period which help in increasing overall cash flow leading to increasing overall ratio.
3.4.2 Capital turnover
| Year | Tesco | Sainsbury |
| 2022 | 4% | 4% |
| 2023 | 5% | 4% |
On the basis of above table, it has been identified that Tesco’s capital turnover ratio is increasing over the years which indicate high operating efficiency of the company. On the other hand, there is no significant change in the Sainsbury’s capital turnover ratio which denotes the incapability of organization in utilising the shareholder’s funds for generating more revenue. It has been identified that Tesco has attained the ideal capital turnover ratio of 5% whereas Sainsbury was unable to reach the same. To overcome the issue, Sainsbury needs to focus on doing assessment of external factors and customers need & preferences (Ali et al, 2021). With this input firm can draft significant strategies to drive more sales and profitability, Along with this, company should modify its capital structure in which equity should be increased that helps in increasing overall capital turnover ratio.
3.5.1 Debt Equity
| Year | Tesco | Sainsbury |
| 2022 | 0.94 | 0.88 |
| 2023 | 1.16 | 0.99 |
After calculating debt equity ratio, it has been identified that Tesco is having debt equity ratio of 0.94 which is further increased to 1.16 in year 2023. On the other hand, Sainsbury is having comparatively less debt equity ratio than Tesco. Both the companies are having very high debt to equity ratio which denotes firm is over reliance over debt than equity (Mollah, Rouf and Rana, 2023). Moreover, Tesco has introduced debt with the aim of reducing its tax liability but this leads to increasing financial risk. The current debt equity ratio is not optimum which creates issue for company to raise additional funds. This ratio indicates that firm is highly riskier which reduce trust and confidence of investors and negatively impacting on overall financial position of company.
In the course of avoiding this situation, company should emphasis over paying off all its excessive loans which reduces the overall debt. Moreover, owner should use retained earnings or issue more shares for fulfilling the funds requirement as it helps in reducing overall debt in the capital structure. Moreover, company should concentrate over increasing overall profitability which helps in easily fulfilling funds requirement and support in paying out all debts and liabilities (Frost and Rooney, 2021). Further inventory management needs to be improved which ensures that unnecessary funds are not invested in stocks that helps in managing overall cash flow of the firm. This will contribute toward managing adequate funds availability with the firm which restricts company to borrow the additional funds that lead lower debt-equity ratio. Along with this, companies should focus on restructuring debt which helps in lowering the financial risk by sourcing debt at low interest rate.
3.5.2 Equity Ratio
| Year | Tesco | Sainsbury |
| 2022 | 32 % | 31% |
| 2023 | 27% | 28 % |
From the above table, it has been identified that 32% of Tesco’s assets are financed through the shareholder’s funds which is reduced to 27% in the year of 2023. On the other hand, 31% of assets were purchased from the shareholder funds which also decreased to 28% in the next year. This indicates that both the companies are using the borrowed funds for financing its assets that ultimately raises their financial risk. This is not a good indicator for the investors as the lower equity ratio denotes inefficiency of the firm in meeting its financial obligations which increases risk of becoming insolvent (Sergi, Sari and Senapati, 2022). This situation will also result in losing trust and confidence of investors that eventually creates issue in raising additional funds. To overcome the situation, company should reduce debt in capital structure and invest more amounts towards assets.
3.6.1 Earning per share (EPS)
| Year | Tesco | Sainsbury |
| 2022 | 0.20 | 0.30 |
| 2023 | 0.10 | 0.9 |
From the above table, it has been determined that Tesco and Sainsbury’s EPS is reducing over year which denotes firm inefficiency in providing accurate return to shareholders. This has been achieved as there is constant reduction in net profit of Tesco from £1483 to £744 and Sainsbury from £677 to £207 which resulted in decreasing earning of shareholders. This is not an optimum position as it creates dissatisfaction among the existing shareholders which impact overall goodwill of the organization (Alles et al, 2021). For overcoming the situation, both the firms should emphasis on enhancing its marketing strategies and providing high quality goods to boost overall profitability of the business entity. Moreover, firm should buy back its own shares which help in reducing the number of shares and aids in enhancing overall EPS of the company.
3.6.2 Price earnings ratio
| Year | Tesco | Sainsbury |
| 2022 | 15 | 9 |
| 2023 | 21 | 24 |
On the basis of above table, it has been identified that Tesco is having adequate P/E ratio in both years which denotes that firm’s stock are overvalued. Investor believes that firm’s stock price is high at the current times and expected to fall in the future. On the other hand, in FY 2022 Sainsbury was having very low P/E ratio which indicates that firm’s share price are very low. However, company’s P/E ratio has increased in year 2023 which indicate that investor expect high growth rates in future.
Based on the view point of Astuty et al, (2022) budgeting refers to well written plan which describe the total amount of money that will be spent and saved within a year. Budgeting act as the blueprint that describes financial decision related to the assets acquisition, investments and scope of future project. The budgeting process typically includes estimation of liabilities, financial goals-setting, resources allocation and forecasting of all expense & revenue. In addition to above author Thiri et al, (2022) stated that budgeting is the most significant process of each organization as it provides roadmap based on which all the activities are initiated. This process also includes optimal management of cash inflow and outflow which helps in enhancing overall liquidity position of firm and contributes in fulfilling all the obligations. Moreover, this process includes allocation of adequate funds to each department of the organization based on which all the activities are undertaken. Along with this, it is the most crucial process which assists in identifying the future potential of company by estimating all the expenses and income in the upcoming time.
Zhang et al, (2022) articulated that budgeting technique is continuously evolved over the years from traditional to modern budgeting. Traditional budgeting refers to the financial management technique in which previous year budget was taken as the base on which future budget planning has been undertaken. This includes considering inflation, expected expense change and revenue changes while formulating budget for the upcoming year. On the other hand, Santos et al, (2022) stated that traditional budgeting is rigid method which creates issue for company to easily adjusting with the changing market condition that result into losing large number of opportunities. Moreover, traditional budgeting includes inaccurate fund allocation as it assigns cost on the basis of historical data which may not provide the most accurate estimation regarding the current expenses.
Matala (2022) explicated that traditional budgeting also promotes decentralization as the top level managers are involved in communicating with the lower level employees and manager for setting up the net year budget. This helps in increasing collaboration with the team members which help in attaining the firm’s goals and objectives successfully. On the critical point of view, Pilli et al, (2022) articulated that traditional budgeting involve higher risk of human errors as it solely based on the previous year spread sheet which increases the scope of error. Moreover, this process includes comparing and evaluating previous year budget which requires huge amount of time. Beside this, traditional budgeting restricts innovation as each department receive funds on the basis of previous year which does not promotes new idea.
Arapis and Chatterjee (2025) stated that due to the lack of flexibility and other limitation, modern budgeting was introduced in the nineteen century which places emphasis over using technology for allocating funds in each department optimally (Type of budgeting method, 2023). Zero based budgeting is the most effective method in which budgeting process began from scratch. Instead of considering the previous year data, financial manager is involved toward identifying the current needs of organization based on which the most accurate funds are allocated. In the support of above author, Güngör Göksu (2023) confessed that this budgeting method is the most accurate as it undertakes the current need of each department based on which funds are optimally allotted. Under this method, huge funds are allocated to projects that are having high revenue generation potential which result in overall development of business entity. On the critical point of view Mauro, Cinquini and Pianezzi (2021) claimed that Zero based budgeting is the time and resource consuming process as new budget is prepared each year which may increase overall cost of the organization. This budgeting method is highly appropriate for the small scale organization but it is difficult to utilize this technique in a big company. For example: Sainsbury is the large scale organization which consists of the diverse department due to which it is not possible to use this budgeting system in organization.
Moreover, Erdmann, Arilla and Ponzoa (2022) professed that activity based budgeting is another type of modern budgeting technique in which budget decided on the basis of all the activity of the business entity. It is highly prominent budgeting method as neither it undertakes historical cost nor focuses on starting budgeting from zero level. Under this method, each activity is critically analysed to predict cost and based on which budgets are set. On the contrary point of view Giyazova and Davlatov (2021) stated that this budgeting is not appropriate for the organization with complex production cycle as all cost needs to be tracked which requires huge amount of time. Furthermore, it is expensive method as there are large number of overhead cost pools and has unique measures of each activity which requires huge amount of time and eventually result into high overall cost.
Based on the view point of Zhang et al, (2022) there are various budgeting approach which helps in enhancing the overall operational efficiency of the larger scale firm. Traditionally, Top-down budgeting approach was majorly used among the business entities in which senior manager have all the rights to take decisions. In this method, senior management formulate budget for the entire organization which is then allocated to the different department according to their needs. Kenno et al, (2021) confessed that this approach helps in enhancing the overall operational efficiency of the large organization as limited number of senior manager are involved in the decision making process. Further, it reduces the scope of error as decisions are taken by the highly professional manager which helps in mitigating the unnecessary expenses.
However, Nikbin et al, (2022) professed that this method ignores input from employees and middle level management which develops the feeling of dissatisfaction among them. Employees are involved in initiating day to day task so ignoring their inputs which will result into formulation of inadequate budget for organization. Along with this, there is a high scope of communication gaps which may develop frustration among the team members and eventually impacts the overall efficiency. On the view point of Silva et al, (2023) Bottom to up is the most significant approach which helps in enhancing the operational efficiency and thereby supports attainment of the overall organization’s goals and objectives. This approach is majorly used in the current times in which each department develops their own budgeting estimates which send to the senior leaders based on which the final decision is taken. This budgeting approach empowers employees to participate in the budgeting process which assists in taking an accurate decision.
In support of the above author, Okeagu et al, (2021) said that budgeting estimates are developed by the employees who have accurate information regarding the requirements of actual funds. Moreover, this approach also promotes innovations as employees have freedom to decide budget on the basis of growth opportunity which ultimately leads overall development of the organization. Along with this, concerned budgeting method provides clear information regarding the cost and resources of each department. Further, involvement of employees depicts that organization values their perception and viewpoints which in turn enhances satisfaction and overall efficiency of the personnel. For example: Sainsbury, Tesco, Aldi, Morrison and other large scale entities uses this budgeting approach while allocating the funds. This helps manager in gaining the accurate understanding regarding the funds requirement of each department that assists in mitigating the scope of wastage. On the critical note, Bedford, Speklé and Widener (2022) said that budget which prepared by the less experienced individual is not aligned with the organizational goals and objectives. Along with this, there is a lack of cohesive budgeting as each department only emphasises on maximising their budget without doing consultation with others which may create the situation of interdepartmental conflicts.
Yamamoto (2023) explicated that budgeting process has evolved over year which begin from manual budgeting with help of pen and paper to excel sheets. Further, automation is the most recent development in which technology get used to record and forecast all the income and expenses of the company. AI, cloud based software, Data visualisation tools, Collaborative platform and online learning resources are the various crucial budgeting tools that used within an organization. This technology has mitigated the scope of human error and supports budget formulation effectively. Moreover, AI helps in evaluating the financial data, defining trend and patterns in data based on which competent recommendations are made. This helps in allocating accurate funds to each department that mitigate the scope of error.
However, Siziba and Hall (2021) explicated that AI in budgeting provides excellence in the tactical tasks but ignore the implication of decision in the long term which negatively impacts the overall budgeting process of the company. Further, budget or smart technologies that require huge amount of data and energy increases overall cost of the company leading to lower efficiency. Beuren, Souza and Bernd (2021) also articulated that smart technologies in budgeting help in sustaining competitive edge in the industry. This technology provides most accurate forecast regarding funds requirement which eventually help in optimum utilization of funds.
However, Bondarenko et al, (2021) explicated that this technology are more vulnerable to security risk and cyber attack which ultimately impact on overall budgeting efficiency. This risk could result in spreading all the confidential information which negatively impacts the organization’s growth and development. ARNONE, Kumar and Mathure (2022) also explicated that Smart technologies optimize the process of financial reporting, data presentation and ensure accurate and reliability. This technology eliminates human error and also provides accurate forecast which help in taking most accurate budgeting decision. On the other hand, Dlamini and Schutte (2021) confessed that Smart technologies are unable to understand the complexity of particular decision and only emphasis on short- term wins. This decision could create negative impact in long run which ultimately impact on overall efficiency of budgeting process.
On the contrary point, Nunden et al, (2022) also claimed that smart technology help in initiating mundane task which support in enhancing overall operational efficiency. This facilitates financial manager to focus on more crucial task which helps in enhancing overall productivity. This technology helps manager in formulate most effective budget which help in overall success of the business entity. On the contrary point of view, Wang and Hu (2022) defined that introducing smart technologies in finance requires firm to incur huge amount of cost which ultimately impact on firm’s financial position. For adequately utilizing this technology, company needs to hire technical experts and arrange training session for existing employee which impact on overall financial position of business entity. According to view point of Santos-Vijande et al, (2021) smart technologies assist in enhancing accessibility and flexibility of the company which help them in successfully attaining firm’s goals. This technology supports in providing real time access to all the crucial data which help manager in taking most accurate decision.
Investment appraisal techniques imply for the method which focuses on evaluating and determining whether proposed project will prove to be beneficial or not in the long run (Wang, 2021). This method helps in identifying the potential risk and benefit associated with the investment in particular project. For presenting high value capital expenditure to CEO, concentration will be paid on describing the monetary benefit that will be generated from such investment. In this context, investment Appraisal techniques need to be used which defines total cash inflow and outflow from the particular investment. There are majorly two methods for evaluating an investment which are as follows:
Discounted cash flow is the valuing method which emphasis over identifying expected future cash flow by estimating the value of an investment. Undiscounted cash flow defines values of investment without considering the time value of money concept (West, Gaiardelli and Saccani, 2022). Discounted cash flow technique is mainly used while making investment in the private equity or real estate. However, undiscounted cash flow is based on the assumption that an individual will earn similar amount of return in future as it ignores time value of money. There are various techniques of discounted and undiscounted cash flow which are as follows:
Discounted cash flow
Non- discounted cash flow technique
In the context of proposing high value capital expenditure to CEO, discounted cash flow techniques should be used. This method consider time value of money concept which aids in determining future value of investment that help in taking most adequate decision (Frost and Rooney, 2021). This concept is undertaken for identifying the potential liquidity position and cash inflow of company based on which the most reliable and accurate decision could be taken. In these context three crucial techniques that are profitability index, net present value and internal rate of return will be calculated. IRR defines the total annual growth rate which will be gained from the investment. Profitability Index presents the ratio between overall profits that are going to earn by investing in particular assets (Siziba and Hall, 2021). This index measures the present values of future cash flow which help investors in taking adequate decision. Moreover, NPV defines the monetary value of the return which will be earned by investing in particular investment.
Following is the example of PV and IRR ratio which could be used by manager to take most accurate decision.
For instance: Organization has two options for investment purpose such as project A and B with the initial investment of £700000. Both the projects will offer following cash inflows:
In order to assess the financial viability of projects capital budgeting tools (NPV and IRR) have been undertaken:
NPV assessment
| Project A | Project B | ||||
| Year | PV factor @ 10% | Cash inflows (in £) | Discounted cash inflows (in £) | : Cash inflows (in £) | Discounted cash inflows (in £) |
| 1 | 0.909 | 250000 | 227250 | 260000 | 236340 |
| 2 | 0.826 | 320000 | 264320 | 350000 | 289100 |
| 3 | 0.751 | 280000 | 210280 | 320000 | 240320 |
| 4 | 0.683 | 370000 | 252710 | 400000 | 273200 |
| 5 | 0.621 | 450000 | 279450 | 480000 | 298080 |
| Total discounted cash inflows | 1234010 | 1337040 | |||
| Initial investment | 700000 | 700000 | |||
| NPV (Total discounted cash inflows - initial investment) | 534010 | 637040 | |||
| Computation of IRR | ||
| Year | Project A: Cash inflows (in £) | Project B: Cash inflows (in £) |
| 0 | (700000) | (700000) |
| 1 | 250000 | 260000 |
| 2 | 320000 | 350000 |
| 3 | 280000 | 320000 |
| 4 | 370000 | 400000 |
| 5 | 450000 | 480000 |
| Internal rate of return (IRR) | 34% | 38% |
From the above table, it has been found both NPV and IRR and project B is higher over other. Accordingly, firm will generate high return by investing funds in project B and thereby get desired level of outcome or success. Both NPV and IRR offer highly reliable solutions as it considers time value of money concept. Thus, referring overall assessment it can be stated that project b will prove to be more beneficial for the firm.
5 Years | PhD
6. Conclusion
By summing up the report, it has been identified that financial analysis is very crucial to determine overall liquidity, solvency, efficiency and profitability position of business entity. These techniques aids in taking effective decision after determining current position of the organization. Moreover, GAAP and IFRS are two accounting standards which support in comparing performance of one entity with another that help investors in taking most accurate decision. Along with this, adequate policies and strategies of Tesco help firm in estimating all the potential uncertainties that could occur in industry based on which financial resources could be optimally utilized. Further it has identified that Tesco and Sainsbury’s financial performance is not adequate which will create issue in maintaining long term stability in industry.
In this regard, firm should focus on improving their inventory management system, enhancing overall profitability, reduces debt in their capital structure which help in enhancing overall financial position. Further, shares should be buying backed from market which help in reducing number of outstanding shares and aids in enhancing overall earning for shareholders. Moreover, discounted cash flow will be used in identifying worth of investment as it covers time value of money. This approach helps in identifying future value of the investment which helps investors in taking most accurate decision regarding investment. Moreover, it has been depicted that modern budgeting techniques is most effective as it start from scratch which help in allocating adequate funds according to requirement leading to optimum utilization of resource.
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