Understanding Business Information Bista, Susan

Module Code: BA 4006

Student ID: 17031073

Submitted by: Submitted To:

Student Name: Susan Bista Mrs. Samjhana Gorkhali (module Leader)

BA (Hons) Business Administration Mrs. Krishna Maya Shrestha (Module Teacher)

Student Number: NP01BA4A170062 Lecturer, BBA Faculty

Group: L1B2

Words Count: 1153

1
Understanding Business Information Bista, Susan

Contents
Acknowledgement ........................................................................................................................................ 3
Introduction .................................................................................................................................................. 4
Financial Statement Analysis ........................................................................................................................ 4
Financial Performance .............................................................................................................................. 4
Liquidity..................................................................................................................................................... 5
Gearing Ratio ............................................................................................................................................ 5
Task 2 ............................................................................................................................................................ 6
Average Rate of Return ............................................................................................................................. 6
Payback Period .......................................................................................................................................... 7
Net Present Value (NPV) ........................................................................................................................... 7
Internal Rate of Return ............................................................................................................................. 8
Analysis and Conclusion .............................................................................................................................. 10
Bibliography ................................................................................................................................................ 11

2
Understanding Business Information Bista, Susan

Acknowledgement

We think if any of us honestly reflects on who we are, how we got here, what we think we might

do well, and so forth, we discover a debt to others that spans a written history. The work of some

unknown person makes our lives easier every day. I believe it’s appropriate to acknowledge all

the unknown persons but it is also good to acknowledge those people who have directly shaped

my work.

First I would like to thank our teacher Mrs. Krishna Maya Shrestha for her guidance

throughout the semester, our module leader Mrs. Samjhana Gorkhali, London Metropolitan

University and Islington College.

3
Understanding Business Information Bista, Susan

Task 1

Introduction
Tesco plc. is a multinational global leading grocery and general merchandise retailer with British
nationality, founded in 1919 A.D. by Jack Cohen. According to current financial reports it is the
third largest retailers in the world measured by profits and ninth measured by revenue. It has
stores in seven countries with largest market share of 28.4% in United Kingdom. Tesco was
leading the list for top retailers in UK it is working to increase sales by volumes. The turnover of
the company started to increase rapidly since 2010 and reached to highest in 2014 and again
started to decrease, which result 6.4 billion loss in 2015 (BBC, 2015). The recent financial
statement of the company was issued in 25th February, 2018.

Financial Statement Analysis

The data for this paper will be the financial statement of Tesco from 2014 to 2016.

TESCO PLC.
Performance Ratio
2014 2015 2016
Pre-tax profit margin (%) 3.55% -10.24% 0.03%
Return on total assets (%) 4.74% -14.47% 0.37%
Return on Capital (%) 9.11% -34.15% 0.80%

Liquidity Ratios
Current Ratio(:1) 0.64758 0.596768 0.740185
Acid Test Ratio(:1) 0.056264 0.447463 0.616922
Stocks/Sales (%) 5.63% 4.75% 4.46%

Gearing Ratio
Total debt/Net worth (%) 68.44% 164.01% 134.48%
Table 1: financial performance of Tesco (Met, n.d.)

Financial Performance
Above table 1 shows the financial performance, liquidity ratio and gearing ratio of Tesco plc.
From 2014 to 2016 the sales revenue of the company has considerably decreased resulting huge
loss to company (Tesco, 2018). On comparing the pre-tax profit margin Percentage Company
earned profit of 3.55% but suffered loss of 10.23% in 2015 but somehow in in 2016 company
struggled to earn 0.29% of profit. Return on total assets has also decreased from 4.73% in 2014
to -14.466% in 2015 and 0.36% in 2016, which shows the company is not using its assets
effectively to generate earnings. Return on capital curve sifted downward from 9.11% in 2014 to
-34.15% in 2015 and raised to 0.80% in 2016 which shows no value creation potential in the
company.

4
Understanding Business Information Bista, Susan

Liquidity
Liquidity refers to business ability business ability to pay its bills, dues and other similar
obligations without affecting the normal operation. The current ratio shows the efficiency of a
company’s ability to turn its product into cash. Above table shows decrease in current ration
from 0.65 in 2014 to 0.60 in 2015 and increased to 0.74 in 2016 which indicates company can
pay 74 % of their liabilities by 2016. In every the acid ratio of company is less than 1 which
means they do not have enough liquid assets to pay current liabilities and mostly dependent on
inventory of a company. The stock sales of the company have also decreased from 5.62% in
2014 to 4.46% in 2016.

Gearing Ratio
Gearing Ratio measures the proportion of a company’s borrowed fund to its equity. The debt of
the company has surpassed its total assets; it has increased from 2014 to 2015 by 96 and
decreased by 30 in 2016, which shows the company is still in debt.

5
Understanding Business Information Bista, Susan

Task 2
To choose between super and deluxe machine has been a huge catastrophe for the company
senior manager at LMU plc. We have analyzed over some of the data like cash flows, account
profits and evaluated the investment in the company. The selection is to be done to increase the
production in the company to maximize the profits because a single decision can affect a lot and
also can cause loss to company. Some of the investment appraisal techniques used are described
as follows:

Average Rate of Return

It is also known as simple rate of return. It is the ratio of average accounting profit and
annual average investment. It is used in investment appraisal.

Super Deluxe
Net Cash
Year Flow Depreciation Profit Year Net Cash Flow Depreciation Profit
0 -500000 -80000 0 -800000 -120000
1 250000 -80000 170000 1 150000 -120000 30000
2 100000 -80000 20000 2 200000 -120000 80000
3 100000 -80000 20000 3 250000 -120000 130000
4 50000 -80000 -30000 4 100000 -120000 -20000
5 150000 -80000 70000 5 100000 -120000 -20000
6 120000 -80000 40000 6 330000 -120000 210000
Annual Average Profit 48333.33333 Annual Average Profit 68333.33333
Annual Average Investment 260000 Annual Average Investment 440000
Accounting Rate of Return 18.59% Accounting Rate of Return 15.53%
Table 2: Average rate of return for Super and Deluxe model

According to above tables Average rate of return of super machine is higher than the deluxe so
the super machine is more favorable to company

Advantage

 This method of investment appraisal is easy to calculate

 It recognizes profitability factor of investment.

Disadvantage

 This procedure ignores time value of money.

 Different procedure of can cause error in generating consistency in results.

6
Understanding Business Information Bista, Susan

Payback Period
This is the simplest investment appraisal technique in which initial cash outflow is
expected to be recovered from the cash inflow from the investment (Accounting, 2012).
It helps to show the point of time in which the investor can recover the money invested in
machine.

Super Deluxe
Year Net Cash Flow Cumulative cash flow Year Net Cash Flow Cumulative cash flow
0 -500000 -500000 0 -800000 -800000
1 250000 -250000 1 150000 -650000
2 100000 -150000 2 200000 -450000
3 100000 -50000 3 250000 -200000
4 50000 0 4 100000 -100000
5 150000 150000 5 100000 0
6 120000 270000 6 330000 330000
Payback period 4 Payback period 5
Table 4: payback period for Super and Deluxe model

Advantage

 It has easiest way to calculate

 It helps to provide good rankings of projects that would help return money early for
company with liquidity problems.

Disadvantage

 Cash flow after payback period doesn’t get accounted.

 Time value of money is not registered in payback period accounts, which is major
drawback.

Net Present Value (NPV)

It helps to analyze time value of money to future cash inflows and outflows, which helps
management to predict the benefits and costs of decision in time (AccountingExplained,
2012). The company project or decisions is always taken with positive NPV.

7
Understanding Business Information Bista, Susan

Super Deluxe
Net Net
Yea Cash Discount factor Discounted Yea Cash Discount factor Discounted
r Flow 1/(1+R%)^n cash flow r Flow 1/(1+R%)^n cash flow
- -
0 500000 1 -500000 0 800000 1 -800000
133928.571
1 250000 0.892857 223214.29 1 150000 0.89286 4
159438.775
2 100000 0.797194 79719.388 2 200000 0.79719 5
3 100000 0.71178 71178.025 3 250000 0.71178 177945.062
63551.8078
4 50000 0.635518 31775.904 4 100000 0.63552 4
56742.6855
5 150000 0.567427 85114.028 5 100000 0.56743 7
6 120000 0.506631 60795.735 6 330000 0.50663 167188.27
-
41204.8277
Net Present Value 51797.365 Net Present Value 1
Table 4: NPV for Super and Deluxe model

Advantages

 This logical approach of investment considers the whole stream of cash flow.
 It also shows that the decisions can be appraised independent of others.

Disadvantage

 It is not too easy for calculation.

 It is also difficult to evaluate the cash flow and discount rate, which makes it complicated
since it depends upon those numbers.

Internal Rate of Return

It is the ratio of net initial investment and annual cash inflow, which helps to analyze investment
project of internal rate of return to minimum required rate on return. It is a discount rate which
shows current value of cash flow equal to initial investment.

8
Understanding Business Information Bista, Susan

super Deluxe
Net Discounte
Net Cash Discount factor Discounted Cash Discount factor d Cash
Year Flow 1/(1+R%)^n Cash Flow Year Flow 1/(1+R%)^n Flow
-
0 -500000 1 -500000 0 800000 1 -800000
136363.6
1 250000 0.90909091 227273 1 150000 0.91 36
165289.2
2 100000 0.82644628 82644.6 2 200000 0.83 56
3 100000 0.7513148 75131.5 3 250000 0.75 187828.7
68301.34
4 50000 0.68301346 34150.7 4 100000 0.68 55
62092.13
5 150000 0.62092132 93138.2 5 100000 0.62 23
186276.3
6 120000 0.56447393 67736.9 6 330000 0.56 97
6151.467
Net Present Value 80074.6 Net Present Value 55
Higher
Rate(HR)=20
%
super Deluxe
Net Net Discount
Cash Discount factor Discounted Cash factor Discounted
Year Flow 1/(1+R%)^n Cash Flow Year Flow 1/(1+R%)^n Cash Flow
-
50000 -
0 0 1 -500000 0 800000 1 -800000
25000
1 0 0.83333333 208333 1 150000 0.83 125000
10000 138888.88
2 0 0.69444444 69444.4 2 200000 0.69 9
10000 144675.92
3 0 0.5787037 57870.4 3 250000 0.58 6
48225.308
4 50000 0.48225309 24112.7 4 100000 0.48 6
15000 40187.757
5 0 0.40187757 60281.6 5 100000 0.4 2
12000 110516.33
6 0 0.33489798 40187.8 6 330000 0.33 2
-
192505.78
Net Present Value -39769.8 Net Present Value 7
Internal Rate Return 16.7% Internal Rate Return 10.3%
Table 5: IRR of deluxe for Super and Deluxe for rate 10% and 20% respectively

9
Understanding Business Information Bista, Susan

Advantage

 It considers time value of money for project evaluation.

 Required rate of return is not required for calculation which decreases chance of error.

Disadvantage

 It ignores the investment scale.

 Investments to be considered after establish of project is not shown by IRR.

Analysis and Conclusion

After the above performed math on the different investment appraised technique on the
different models of machine from accounting rate of return to internal rate of return we can
conclude various information. In accounting rate of return we accept the one with highest
Average Rate of Return lead by Super machine (Explained, 2012) with 18.58% to Deluxe by
15.53%. In case of payback period the project with less payback period is targeted, the payback
period is 4 years in super model and 5 years in deluxe model, so deluxe model is preferred. In
case of net present value (NPV) only projects with positive value is accepted which is in super
model with value of 51797.36 while deluxe model is rejected due to its negative value with -
41204.82. In Internal Rate of Return a project can only be accepted if IRR is less than target
internal rate of return. While comparing super and deluxe model projects with highest value is
accepted. For 10% and 20% rate of Super and deluxe model NPV of Super model is high with
80074.57 and -39769.80 and IIR is also high with 16.68% to 10.30% than that of deluxe model
(Accounting, 2012).

From all above data we can conclude to invest on super model.

10
Understanding Business Information Bista, Susan

Bibliography
Accounting, 2012. Accounting Explained. [Online]
Available at: https://accountingexplained.com/managerial/capital-budgeting/payback-period
[Accessed 2018].

Accounting, 2012. Accounting Explained. [Online]

Available at: https://accountingexplained.com/managerial/capital-budgeting/irr
[Accessed 2018].

AccountingExplained, 2012. AccountingExplained. [Online]

Available at: https://accountingexplained.com/managerial/capital-budgeting/npv
[Accessed 2018].

BBC, 2015. BBC. [Online]

Available at: http://www.bbc.com/news/business-32408661
[Accessed 03 05 2018].

Explained, A., 2012. Accountings Explained. [Online]

Available at: https://accountingexplained.com/managerial/capital-budgeting/arr
[Accessed 2018].

Met, L., n.d. keynote. [Online]

Available at: https://0-www.keynote.co.uk.emu.londonmet.ac.uk/companyreport/

Tesco, 2018. Tesco. [Online]

Available at: https://www.tescoplc.com/investors/reports-results-andpresentations/
[Accessed 2018].

11