Capital Investment Appraisal and Financial Analysis of Sainsbury and Tesco PLC

Portfolio 1: Financial Analysis of Sainsbury and Tesco PLC

The assignment consists of two portfolios – Portfolio 1 consists of 70 marks and Portfolio 2 consists of 30 marks. Students are expected to read both Portfolios thoroughly and to answer all the required questions in a structured and organised manner.

You work as a finance supervisor in the head office of a retail company. Finance executive of the company is interested in buying shares in one of two companies (Sainsbury and Tesco PLC). You have been asked to assist the finance executive in making such decision.

(i) Sainsbury PLC Sainsbury's is the third largest chain of supermarkets in the United Kingdom and it was founded in 1869, by John James Sainsbury with a shop in Drury Lane, London. The company became the largest retailer of groceries in 1922 and was an early adopter of self-service retailing in the United Kingdom. Sainsbury's ranges from groceries and clothing to homewares, electricals and more. 

(ii) Tesco PLC Tesco Plc trading as Tesco, is a British multinational groceries and general merchandise retailer with headquarters in the United Kingdom. It is the third-largest retailer in the world measured by gross revenues and ninth-largest retailer in the world measured by revenues. It has shops in seven countries across Asia and Europe and is the market leader of groceries in the UK, Ireland, Hungary and Thailand. Tesco was founded in 1919 by Jack Cohen as a group of market stalls. The first Tesco shop opened in 1931 in Burnt Oak, Barnet. His business expanded rapidly, and by 1939 he had over 100 Tesco shops across the country.

Prepare a report for potential investors which analyses the financial information for both companies and give recommendations which company would be a suitable option for investment.

a) Calculate 10 financial ratios as given below for two years (2018 and 2019) Current ratios P/E ratio Quick ratios Earnings per share Net Profit Margin Return on capital employed Gross Profit margin Average inventories turnover period Gearing ratios Dividend pay-out ratio 

b) Analyse performance, financial position and investment potential of both companies. You should use charts to compare performance of two companies. You will need to look at the audited financial statements and carry out further research to explain the performance of each company for two years. 

c) Provide recommendations of how the financial performance of the poorly performing business can be improved 

d) Discuss the limitations of relying on financial ratios to interpret a company’s performance. 

The following information relates to Ross Hill limited. The company has an opportunity to invest in one of two potential & mutually exclusive (but not both) projects. Each project will involve the purchase of a new Plant. 

• The initial cash investment for both plants will be £11,0000. The purchase would take place on January 1, 2020. It is assumed that all other cash flows would be received on 31 December each year.

• Both plants would have a life of six years. Plant 1 has no residual value and plant 2 has a residual value of £8,000.

• The company uses a straight-line method of depreciation.

• The cost of capital is 16%

a) Using appropriate investment appraisal techniques, advise senior management on whether they should opt for project A or project B. 

b) Discuss the limitations of using investment appraisal techniques in long term decision making.