Strategic Financial Management

Sample Case Study for Finance Students

Introduction about Financial Management

Strategic finance can be defined as understanding or studying finance so as to evaluate the long term objectives of the organization (Power, Salin and Park, 2012). This tool helps in maximizing the wealth of shareholders and provides benefits to the firms by designing appropriate strategies. It involves tools such as capital budgeting, financial analysis, risk management, working capital management, corporate restructures, etc. (Phillips, 2000). In the present study, financial analysis tool will be used so as to study the performance of three companies; Tesco, Wm Morrison Supermarkets PLC and Sainsbury (J) PLC belonging to the retail sector of the UK. The report will involve identifying the trends related to a particular company, and analyzing its performance.

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ABOUT COMPANIES

Tesco, Wm Morrison Supermarkets and Sainsbury; all the three belongs to the retail sector of the UK. Tesco is the second largest retail chain in the UK in terms of profits and third largest in terms of revenues. It operates in around 14 countries across the globe. On the other hand, Wm Morrison Supermarkets are considered as fourth largest retail giant of the UK. Generally it is branded as Morrison’s. Finally, Sainsbury is the third largest retail store in the UK in terms of market share. Its parent company is a J Sainsbury PLC.

Trends of the companies

Trends tell about the past performance of an organization on the basis of which future of that firm can be predicted. All the analysts use this tool to study the performance so as to predict how the company will perform in future in the market. Further, it helps in identifying the loopholes of an entity so that it can work on them so as to improve its productivity in coming time (Kanghwa, 2010).

The below chart shows the trends of Tesco about its different parameters:

trends of Tesco

Figure 1: Trends in Tesco

The above graph tells about the sales, operating profit and net profit trends of Tesco. It is clear from the graph that, the company is successfully able to increase its sales year over year. Same is the case of net profit. The graph shows that Tesco is consistently increasing its net profit every year.

The above figure tells about the trends of different parameters of Morrisons. It is able to increase its sales every year. Moreover, it is able to book increased profit at the end of each period, but the growth is not as high as expected.

The above chart shows the different financial data of Sainsbury. According to it, the organization is able to raise its sales every year but as compared to 2011, its growth does not raise with the same rate in 2012. Moreover, operating income of the firm shows that its operating expenses have increased in 2012, because although its sales have been increased considerably in 2012, its operating income is not increased in that way. Finally, it has reported a decline in the net profit in 2012 as compared to 2011. This also shows that the operational efficiency of the company has gone down (Ho, 2004).

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Profitability of Companies

The actual performance of an organization can be measured by using its profitability. The primary motive of all the firms is to achieve profitability in its business, without it the business won’t survive. In this section, different profitability ratios of the company will be analyzed ad will be compared with its past performance with the help of time series analysis (Toyli and et. al., 2008).

The above figure shows different profitability ratios of Tesco. The operating profit margin is diminishing every year. It means, it is reporting less operating profit as compared to sales. That is, its operating expenses have increased over the years. Thus, it must try to reduce its operating expenses so as to increase its operating income. Its, net profit margins have shown a slight increase in value. This means, Tesco is trying to reduce its debt each year. The rise in net profit margin is more in 2011 as compared to 2012 (Bin, Hakeim and Suhaila, 2008). That is, in 2012 it may be possible the company may have ignored to reduce to that much extent. Further, its return on equity is showing an increasing trend every year. This means, firm have used the investment funds in proper manner so as to generate profits for each shareholder. Finally, it maintains a good rate of return on capital employed. It means, it is optimally using all of its assets and liabilities so as to generate higher profits (Jin, Yu and Mi, 2012).

The above chart shows different profitability parameters of Morrisons. It shows company’ operating margins were decreased in 2011 but later on it was again able to increase it. Although, the rise in operating profit margin in 2012 is very slight, still it shows a firm is able to reduce its operating expenses as compared to last year. Further, the net profit margin of Morrisons is near about the same in every period. It means it is not focusing on reducing its debts in near future. Finally, the entity is delivering consistent returns on both; equity and capital employed; it shows the business is properly utilizing the funds of its investors and is giving consistent returns each year. A good ROCE of firm tells that it has properly employed its assets and liabilities so as to generate higher revenue (Oberholzer and Westhuizen, 2004).

To analyze the performance of Sainsbury, its different profitability ratios will be studied and will compare them with its past performance so as to determine the profitability of the organization. The below plotted graph shows different profitability parameters of the firm:

The above figure tells about the performance of the Sainsbury. Although, its operating profit margin is increasing every year, still they are very low. It reflects that the firm is spending a very high amount in meeting its operating expenses and had very less amount to pay for its debts and tax. Moreover, its net profit ratio is showing a declining trend. It means, the firm is spending lots of meeting its obligations. It is not good for any company. Further, the Sainsbury’s return on equity has gone down. Its trend for the last three years shows that the company has kept on decreasing its return on equity (Ahrendsen and Katchova, 2012). It is not good for any organization as from the investor’s perspective, any firm, which is reducing its ROE means it is not properly utilizing the funds of its investors and as a result of which the company is not able to give adequate returns to its shareholders. Finally, the same declining trend is seen in its return on capital employed. This show, the organization is not properly utilizing its assets and liabilities. Diminishing ROCE further shows that although the firm is having ample of assets and liabilities, still it is not able to generate higher revenue and profits. That is, most of the assets are either underutilized or not utilized at all (Bender and Ward, 2012).

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CONCLUSION

From the above study, it can be concluded that strategic finance plays significant role in analyzing the performance of any company. It is very useful tool for the investor, through this they can study the condition of the company before investing in the company so that they can make a good return at the end of the year. Finally, the above study done for dissertation writing helped in assessing the performance of three companies in the UK belonging to the retail sector. Further, strategic finance helps in identifying the loop holes existing in the company, and guides in rectifying them so that company can perform well and adds value to its stakeholders.

REFERENCES

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