STRATEGIC FINANCIAL MANAGMENT

Table of Contents
Question 1 ................................................................................................................................................. 3
Task: Finance Assignment Scenario: .................................................................................................. 4
Task 1 of 3 – Briefing Report ............................................................................................................. 4
ANSWER TO QUESTION 1..................................................................................................................... 4
Annual Report Extract ....................................................................................................................... 6
SOLUTION TO TASK 1 OF 3 – BRIEFING REPORT ............................................................................. 8
2.1 Analysis of Barclay plc and Tesco plc based on the company 2020 annual report and account. .... 8
2.1.1 The Current Ratio: .................................................................................................................... 8
2.1.2 Debt Ratio:................................................................................................................................ 9
2.1.3 Net Profit Ratio: ........................................................................................................................ 9
2.1.4 Asset Turnover Ratio:................................................................................................................ 9
2.2 Recommendations of organizational decision based on financial Ratio: ..................................... 10
2.3 Managerial Recommendation on the Strategic Portfolio of the Organization.............................. 10
5.1 Financial Appraisal Methods to Analyze Competing Investment Projects for the Organizations;10
5.2 Justification of strategic investment Decision............................................................................. 10
5.3 Critical Analysis of strategic investment decision: ..................................................................... 11
References: .............................................................................................................................................. 11

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Question 1
Task: Finance Assignment

Scenario:
You have recently joined Penco, a small pension fund that aims to strategically
invest in low risk companies with a historically satisfactory return on investment.

Task 1 of 3 – Briefing Report

Instructions:
As a junior analyst, your first task is to review the market and select two
companies listed on the London Stock Market and to access their financial
statements. At the end of the report you should make recommendations to Penco
to invest.

Calculations and financial ratios supporting the recommendation should be

appended to the report for the board’s attention. Your report should:

• Analyze financial statements to assess the financial position of the organizations.

• Recommend organizational decisions based on evaluation of financial
statements using financial ratios.
• Propose managerial recommendations on the strategic portfolio of the
organizations based on financial analysis.

• Apply financial appraisal methods to analyze competing investment projects for

the organisations.
• Justify strategic investment decision the organisations using relevant financial
information.
• Critically analyze strategic investment decisions using information.

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ANSWER TO QUESTION 1
Liquidity Ratio is used to measure a company's capacity to pay off its short-term
financial obligations with its current assets.

Current Ratio:
Is a liquidity ratio that measures a company’s ability to pay short-term obligations
or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and
other payables.

Current Ratio= Current liabilities/ Current assets

B. Solvency Ratios: Measure a company's ability to meet its future debt

obligations while remaining profitable

Debt Ratio: Is a financial metric used to help understand the degree to which a
company's operations are funded by debt.

Debt Ratio=Total Debt/Total Asset

C. Profitability Ratio: Is an accounting ratio that helps in determining the financial

performance of business at the end of an accounting period.

The net profit ratio compares after-tax profits to net sales. It reveals the remaining
profit after all costs have been deducted from sales.

Net Profit Margin=Revenue-Cost/Revenue

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Figure 1. Tesco Plc. Extract from 2020 Annual Report (Page 80)

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TASK
Financial Ratios of Tesco Plc Evaluated In the Finance Assignment
Ratios Formula Tesco Plc
Financial year 2020
Liquidity Ratio
Current Ratio Current Assets/ Current Liabilities 1.3

Solvency Ratio
Debt Ratio Total Debt/Total Assets 0.27

Profitability Ratio
Net Profit Ratio Revenue-Cost/Revenue 10%

Turnover Ratio
Asset Turnover Ratio Net Sales/ Average Total Assets 1
Table 1: Showing Financial Ratios of Tesco Plc for year 2020

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Figure 2. Beckley Plc. Extract from 2020 Annual Report (Page 244)

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Ratios Formula Barclays Plc
Financial year 2020
Liquidity Ratio
Current Ratio Current Assets/ Current Liabilities 0.23

Solvency Ratio
Debt Ratio Total Debt/Total Assets 0.012

Profitability Ratio
Net Profit Ratio Revenue-Cost/Revenue 86.02%

Turnover Ratio
Asset Turnover Ratio Net Sales/ Average Total Assets 0.004
Table 1: Showing Financial Ratios of Backley Plc for year 2020

SOLUTION TO TASK 1 OF 3 – BRIEFING REPORT

2.1 Analysis of Barclay plc and Tesco plc based on the company 2020 annual
report and account.

2.1.1 The Current Ratio:

Is a liquidity ratio that assesses a company's capacity to pay short-term debts,
which are due within the accounting period, the higher the value of the
company's current assets, the easier it will be for the company to initiate
payments to its creditors, as a result, the organization's desired standard current
ratio is equal to (1) one. Tesco plc's current ratio stands at (1) one. On the
contrary, Barclays plc's current ratio stands at 0.234.

Decision: This demonstrates that Barclays plc has a lower current ratio than Tesco
plc. As a result, Penco limited may be at risk if it invests in Barclays plc. Given that
the value of Barclays Plc's current liabilities exceeds those of Tesco Plc (Irman and
Purwati, 2021).

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2.1.2 Debt Ratio:
This is a financial statistic that helps to determine how much debt is utilized to
fund a company's activities. As a result, it is widely assumed that the smaller a
company's debt ratio, the better. Buying any assets with a loan can be detrimental
for any the company. At 0.27, Tesco plc's debt ratio is higher than Barclays plc's,
which is at 0.012. As a result, this indicates that Barclays plc has a lower debt
ratio.

Decision: As a result of this ratio, Tesco plc is more risky in terms of debt than
Barclays plc. This demonstrates that, in terms of debt ratio, Tesco plc and Penco
plc are less likely to face any risk as a result of debt. Given that Tesco plc's debt
ratio is lower in 2020 (Nuryani and Sunarsi, 2021).

2.1.3 Net Profit Ratio:

By utilizing the net profit ratio, the business can better comprehend its percentage
of earned profit. The net profit ratio is used to determine the net profit margin
after the company has deducted various expenses from revenue. Tesco plc has a
net profit ratio of 10%. On the other hand, Barclays Plc's ratio is 86.02%.
Therefore, this indicates that Barclays Plc earns a higher net profit than Tesco Plc.
Decision: Therefore, based on the net profit ratio, the Penco Company needs to
invest in Barclays plc. Because the corporation can retain more of the earnings
than Tesco plc. (Mulyadi and Sihabudin, 2021).

2.1.4 Asset Turnover Ratio:

This ratio demonstrates how well the business uses its resources to generate sales
for the company. Tesco plc has an asset turnover ratio of 1.0, based on this ratio.
However, the ratio in Barclays plc is 0.004. As a result, both organizations' ratios
perform averagely. However, Tesco plc's performance remains superior to that of
Barclays plc.

Decision: Therefore, based on this, the Penco Company can invest in Barclays’s
plc for the asset turnover ratio (Nofiana and Sunarsi, 2021).

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2.2 Recommendations of organizational decision based on financial Ratio:

Both Tesco plc and Barclays plc are performing similarly, based on their financial
ratios. If Tesco plc's two ratios are functioning favorably, then the other two ratios
are working against it, and vice versa.

As a result, the Penco Company must base decisions on its risk appetite. That
Penco company, however, be better off investing in Barclays plc. Because the
company's net profit ratio and debt ratio imply that it will be able to remain in the
market for the foreseeable future.

2.3 Managerial Recommendation on the Strategic Portfolio of the Organization

The Penco Company's strategic portfolio manager must comprehend how the
company can easily accomplish the organization's strategic objectives. So, in order
to create a strategic portfolio, the business must assess its existing state, from
which it must develop investment strategies that gauge its capacity to tolerate
risk. The Penco Company could incur losses if this is not known; therefore
understanding this is necessary for the strategic portfolio. After receiving this
information, the Penco Company can begin to grasp the investment's asset
allocation.

5.1 Financial Appraisal Methods to Analyze Competing Investment Projects for

the Organizations;
The appropriate methods for analyzing the competing investment projects for the
company are

1. Net present value

2. Payback period
3. Internal rate of return
4. Profitability index

5.2 Justification of strategic investment Decision

Based on the company's financial objectives, the Penco organization must make
strategic decisions. As the corporation must be confident in the amount invested
in either Tesco plc or Barclays plc. The company may experience both short- and
long-term effects if it spends the maximum amount without knowing its
objectives..

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5.3 Critical Analysis of strategic investment decision:
Once the Penco organization understands the financial goals, the company will be
able to properly allocate assets in both organizations. As a result of Tesco plc and
Barclays plc operating in separate industries, Penco will be able to generate a
sufficient return on its investment. As a result, if one sector performs averagely,
the chances are that the risk will be offset by another sector.

References:
Backley Plc, 2020. Annual Report pp. 244-245

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
Automotive and Component Company That Has Been Registered In Indonesia
Stock Exchange Within 2011-2017. Finance Assignment International Journal of
Economics Development Research (IJEDR), 1(1), pp.36-44.

Mulyadi, D. And Sihabudin, O.S., 2020. Analysis of Current Ratio, Net Profit
Margin, and Good Corporate Governance against Company Value. Systematic
Reviews in Pharmacy, 11(1), pp.588-600.

Nofiana, L. and Sunarsi, D., 2020. The Influence of Inventory Round Ratio and
Activities Round Ratio of Profitability (ROI). Jasa (Jurnal Akuntansi, Audit dan
Sistem Informasi Akuntansi), 4(1), pp.95-103.

Nuryani, Y. And Sunarsi, D., 2020. The Effect of Current Ratio and Debt to Equity
Ratio on Dividend Growth. Jasa (Jurnal Akuntansi, Audit dan Sistem Informasi
Akuntansi), 4(2), pp.304-312.

Tesco Plc, 2020. Annual Report and Financial Statement pp. 80-81

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