Financial Performance of La Suite Plc - Assignment Example

La Suite Plc. Introduction The analysis of the chief executive report regarding the performance of the company is analyzed along with the financial statements of La Suite Plc. so as to realize the potential and the viability of the new project that the company is going for. The circulation sent by the chief executive of the company is analyzed in details regarding the financial performance of the company along with the evaluation of the costs and viability of the new project of building 400-bedroom hotel near Padstow in Cornwell. Financial Performance The basis for the financial performance of the company as ascertained by the chief executive is upon sales revenue. Although the sales revenue of the company has been increasing over the past four years rapidly but only the sales figure does not represent the performance of the company. The involvement of the cost incurred by the company should be analyzed as well. With the increasing sales revenue the cost is increasing as well. The company no doubt improved the sales but was not able to control the cost incurred for the period. Although the sales increased but the operating profit and profit before tax does not show such improvement which reflects company’s poor performance regarding cost effectiveness. Shareholders’ Wealth In the statement of the chief executive the sure way for the increase in the shareholders’ wealth is the increase in the sales and the increase in the assets of the company. Shareholders’ wealth shall be increasing when the company performance increases and the reserves of the company increases. The increase in the net profit of the company shall be the determinant factors, which ensures shareholders’ wealth as the performance of the company enhances. The increases in the assets of the company compose of inventory and receivables. The increase in the inventory of the company reflects that the company s not able to sell the inventory and the inventory is stocking up. The increase in the receivables increase the risks of defaults and there is no provision for the doubtful debts thus the increase in such assets shall not be depicting the increase in the shareholders’ wealth. Relevant Costs of Investment Project The statement of chief executive of the company reflects that the relevant costs of the investment project have not been taken accordingly and there are many errors in that too. All the relevant costs are not accounted for in the appraisal of the project. There are costs that are completely ignored in the evaluation of the project. The opportunity cost of the contribution foregone of the existing hotels that amounts to the total of £570,000 per year which when accounted for shall amount to the financial acceptability of the project. The depreciation of the building is ignored as well in the appraisal, which amounts to the omission of the cost of almost £ 5 million every year, which is material for the company. The ignorance of the tax rate in the evaluation shall fake up the financial viability of the project, as the inflation rate shall be affecting the discounting rate as well. Though the inflation rate will impact the costs and the revenues equally but the effect upon the discounting factor is completely ignored in the appraisal of the project. With the assumptions and ignorance of many of the relevant costs of the project the appraisal done for the project of the new hotel is not correct and with the corrections applied the project may lose its financial viability and acceptability and might not be feasible for the company. Proposed Investment Being the shareholder of La Suite Plc. the investment proposed in the chief executive’s circular does not seems to be much beneficial. The financial performance of the company is not improving as it might have as the net profit of the company shows little progress. Besides the current performance of the company the new project shall be incurring the lost in the contribution of the existing hotels at £570,000 per year and thus shall further decrease the net profit of the company. The company is not able to control the cost already and this increased loss in contribution shall greatly impact the financial performance of the company and shall not be able to appreciate the shareholders’ wealth. The amount of working capital that is required in the project shall be further decreasing the shareholders’ wealth. The inappropriate appraisal done for the new project and shown as financial viable shall be increasing the factors that shall be leading to the reduction in the shareholders’ wealth and thus as a shareholder the company shall not be allowed to go for the project at the current time. Might the conditions and the situation changed in the future then it will be a viable option for the company. Room Rate vs. Occupancy Rate The room rate of the hotel shall be providing the information regarding how many people shall be occupying a single room whereas the occupancy rate determines the amount of customers that shall be occupying in the hotel. The occupancy rate is much critical as compared with the room rate as this will depict the demand of the hotel. With the ascertained occupancy rate of the hotel the forecast regarding the project appraisal can be done more effectively. The revenue generation in the future can be predicted more precisely when the occupancy rate in considered as compared with the room rate. Other Factors Besides the financial viability there are other non-financial factors that shall be considered in order to appraise the project which include brand value, quality of service, location etc. Conclusion The circulation of the chief executive does not provide confident information regarding the project and the performance of the company. The performance of the company is not much viable and the company is planning for the new project, which is not appraised correctly either. Considering the current position and performance of the company along with the inappropriate project appraisal techniques it is not financially viably for the company to start the new project. Read More