Ratio Analysis: Blue Regency - Case Study Example

RATIO ANALYSIS: BLUE REGENCY by Student’s Name Code + Name of Course Institution City/State Professor Date Table of Contents RATIO ANALYSIS: BLUE REGENCY 1 EXECUTIVE SUMMARY 3 COMPANY INFORMATION 4 INTRODUCTION 4 DESCRIPTION OF FINDINGS 5 RATIO ANALYSIS OUTCOME OF BLUE REGENCY RIBBON RESTAURANT 6 PROFITABILITY RATIOS 6 ANALYSIS OF FINANCIAL STABILITY RATIOS 8 ANALYSIS OF BUSINESS ACTIVITY RATIOS 9 BUSINESS ACTIVITY RATIOS 10 CONCLUSION 11 Reference 11 EXECUTIVE SUMMARY The mission of blue regency ribbon restaurant is to ensure that the customers are served to their satisfaction. It strives to ensure that the customers visiting the restaurant receive value for their money thus ensuring satisfaction. The mission statement of blue regency ribbon hotel further involves acquiring, developing, owning, and managing hotels, maximizing the yield for their investors, instilling trust, respect, and fairness in all its dealings with colleagues, guests, and the community in general. It also has the mandate of striving for excellence in all that they do, clarity of what they say, and purpose of their actions. Further, they have a responsibility to ensure that they are responsive in all their activities and sensitive to others needs. Finally, they should always endeavor to profit from their actions as well as enjoying the work they do. This is achieved through various activities that the company undertakes and these include; employing the best chefs who are able to prepare excellent meals for the customers. This involves sourcing of skilled chefs from all over the world in the best schools that teach the art of making food. The other aspect is to ensure that the kind of service offered to the customers is unmatched and this will help ensure that the customers will always come back for more. COMPANY INFORMATION The blue regency ribbon restaurant was formed in the year 2009 and during its establishment; the number of employees was 35. The employees were very important to the hotel and contributed a great deal in its growth up to the level it has reached today. The founder of the blue regency ribbon hotel was Adam Smith who has over thirteen years of experience in the hospitality industry with global hotel corporations. He has earned a reputation for successful hotel turnarounds where he has taken lowly performing hotel properties into profitability. He has consistently maintained the quality of the product, service, profitability, and growth through entire management career for the hotel under his leadership, he also ensured a high level of mutual respect, and trust with the employees is sustained. Blue regency ribbon hotel ensures deals with providing of food and beverages to its customers. INTRODUCTION The aim of this report is to review the financial performance of the blue regency ribbon hotel and make recommendations on the future operations of the hotel. The financial performance of the business analyzed here will be from the profitability ratios of the hotel for the last four years and their comparison with the averages of the industry. The financial stability ratios of the hotel, which will help, determine whether the hotel is able to continue in operation and to make profits, and finally the business activity ratios of the hotel. These will help to determine the operations of the hotel and whether it is operating efficiently as is should or not. This report is addressed to the management of the hotel, as they will use the information analyzed here to determine the efficiency of the hotel. They will also find the information useful in determining the best steps and approaches that they should take to ensure they are top of the industry. The report is also addressed to the investors of the hotel. The information that is analyzed here is very important to them since it will help them to understand the overall performance of the hotel and thus helping them to determine if their finances are being used well or not. The sources of information that were used to come up with this report include the profit and loss statements of the company for the last four years, the statement of comprehensive income of the hotel. DESCRIPTION OF FINDINGS The profitability ratios show the overall efficiency and performance of a company. This is done through determining the ability of the firm to measure the overall performance and as well as generating returns for its shareholders. They also help to determine the ability of a firm to change sales into profits for the company (Peterson, & Fabozzi 2006 p, 133). This report analyzes the gross profit margin ratio and the net profit margin ratio. The gross profit margin ratio is the cost of goods sold as a percentage of sales and it is used to determine how well the hotel control the cost of its inventory, the preparation of the food and finally how well the cost is passed to the customers. From this analysis, the gross profit margin has decreased from the years 2009 and 2010. This decrease is bad for the company because it shows that the hotel cannot pass on to the customers the cost of inventory and production. The net profit margin on the other hand shows how much of sales are represented in the net income after all expenses have been deducted. The findings that were realized after the analysis show that the net profit of the company has dropped from the year 2010 and in the year 2012, there is a loss experienced (Bernstein 1993, p. 145). The financial stability ratios of the hotel are used to show how the company uses its resources, how it is financed, the ability it has to generate profit, as well as its ability to pay off its debts. The working capital ratio analysis of this particular hotel shows a decreasing ability to pay its debts as well as generate profits. This is evidenced from the figures of the year 2009 whereby the ratio is 1.14:1 and this decreased accordingly to 0.94:1. Initially the hotel had more assets than liabilities, which is evidenced by the ratio of 1.14, which is higher than the average one. The debt ratio is used to indicate the ways in which the hotel is financed. In this case, the ratio of less than one shows that the hotel uses a lot of equity in its financing (Brigham & Gapenski 1988, p. 35). Business activity ratios are used to measure the relative efficiency of the firm based on how it uses its assets and any other balance sheet items. They are important as they help determine how efficiently the management of the company is in generating revenues, cash, among others. The inventory turnover ratio is used to determine the number of days that the hotel takes too convert its inventory into sales. In this case, the inventory turnover for the hotel has increased from 7 days in the year 2009 to 28 days in the year 2012. The accounts receivable turnover has also seen a lot of fluctuation over the years from 14 days in the year 2009, 4 days in 2010, 9 days in 2011, and finally 26 days in 2012. RATIO ANALYSIS OUTCOME OF BLUE REGENCY RIBBON RESTAURANT PROFITABILITY RATIOS The gross profit margin shows a decrease from the year 2009 to the year 2012 as can be seen from the histogram below. This shows that the ability of the company to control the cost of its inventory and thus ensure that high profits are achieved is decreasing overtime Furthermore, the gross profit margin of the year 2012 is 59%, and this value is way below the industry average of the hotel that is given as 62%. The net profit margin of the company also shows a decrease and the final net profit margin of the year 2012 is a negative value. This is also very low in comparison to the industry average that is set by the hotel that is 9.1%. This shows that the hotel is not able to generate profits. The return on owners’ equity is the most important of the ratios and it is used to determine and measures the return on the money the investors have put into the company. In this case, study the ratio decreased from over the years from 11.4% in the year 2009 to 9.4% in the year 2012. This shows that the hotel is not doing a good job in using the investors’ money. The analysis shows that the hotel has been unable to obtain the industry averages that have been set for the hotel and this is very bad. Therefore, the move to attract more customers through offering free drinks on some days of the week will help to ensure that the profitability of the hotel is revived. ANALYSIS OF FINANCIAL STABILITY RATIOS From the financial stability ratios of the hotel, the working capital ratios have shown a decrease from 1.14 to 0.94. This means that the current liabilities of the hotel are more than its current assets. As a result, the hotel will not be able to pay off its creditors at once in case they decide to demand for immediate payment. Due to this, it shows that the hotel is almost running into bankruptcy and therefore immediate actions should be taken to redeem this. The debt ratio further shows that hotel has more assets than debt. It also shows that the hotel employs the use of more equity in the payment of its debts and this is an advantage for the hotel. This is because, the use of equity in the financing and payment of debt helps to ensure that the hotel is less susceptible to increases in interest rates. Furthermore, investors tend to prefer investing in firms with equity financing other than debt financing. Therefore, the hotel management will be able to easily access financing from investors. However, the management should still strive to ensure that they have more assets and this can be done through acquiring of assets and putting them to run outside the hotel (Fridson & Alvarez 2002, p.156). ANALYSIS OF BUSINESS ACTIVITY RATIOS The business activity ratios are used to indicate and determine how rapidly an organization is able to convert various accounts into cash or sales. The faster a business is able to convert its inventory and accounts to sales and cash, the more efficient the business is and thus ensuring that it can survive on its own. In the analysis of blue regency ribbon hotel, the inventory turnover has increased from 9 days in the year 2009, to 28 days in the year 2012. If we compare these values with the industry average as well as the previous year’s inventory turnover, the number of days has increased over the years. This shows that the hotel is inefficient in using the inventory to generate sales. This is because the number of days in the accounting period that the inventory balance is sold out has increased. Furthermore, in comparison with the industry average, the inventory turnover is quite wanting. The accounts receivable turnover further shows how quickly the hotel is able to collect money that is owed by customers and creditors. The accounts receivable turnover shows an increase in the year 2012 and this value is almost similar to the company average that is set. This shows that the company has efficient management, efficient credit, and collection performance and therefore it is effective in running its businesses (Fridson & Alvarez 2002, p.230). BUSINESS ACTIVITY RATIOS Based on the forecasts of the year 2013 and 2014, it is evident that the hotel will have higher gross profit for the year 2013 and for the year 2014. This will ensure that the values of the industry average are effectively met and therefore the hotel will be effectively controlling the cost if its inventory as well as passing on the cost to the customers. The net profit is also forecasted to increase to 18 in the year 2013 and 1 in the year 2014. This shows that the profits that will be made by the hotel after the new changes have been adopted will be a lot. In the business activity ratios, the inventory turnover is forecasted to reduce from 24 days in the year 2013 to 19 days in the year 2014. The accounts receivable turnover is also seen to reduce from 25 days in the year 2013 to 21 days in the year 2014. These forecasts show that the management of the hotel will improve tremendously. This is because, there will be higher inventory turnover which will lead to ensuring better and more efficient generation of sales, and more efficient method and criteria of credit collection from customers (Peterson & Fabozzi 2006, p. 157). CONCLUSION In conclusion, therefore, the hotel management should be able to adopt procedures that will ensure that in the long term, the business activities of the business will be profitable. This can be done though ensuring that the hotel management sets out procedures of ensuring that inventory is properly managed. The hotel management should also ensure that they acquire assets outside of the hotel, which they can use to finance their debts as well as advancements. The company requires stronger management, which will help it to move ahead and ensure that the gross profit as well as net profit increases. Reference Bernstein, L. A 1993, Financial statement analysis: Theory, application, and interpretation, Homewood, IL, Irwin. Brigham, E. F & Gapenski, L. C 1988, Financial management: Theory and practice, Chicago, Dryden Press. Fridson, M. S & Alvarez, F 2002, Financial statement analysis: A practitioner's guide, New York, John Wiley & Sons. Peterson, D. P & Fabozzi, F. J 2006, Analysis of financial statements, Hoboken, N.J, Wiley. Read More