Intercontinental Hotel Group's Financial Statement Analysis - Assignment Example

? Financial ment analysis Lecturer: Introduction/companies over view Intercontinental Hotel Group is a public limited company with its stocks listed in both Landon stock exchange and New York Stock Exchange (Intercontinental Hotel Group, 2013). The company was established in 1777 by Bass Williams with its headquarters based in Denham in UK. The International hotel group operates in hotel industry and offers hospitality services to its customers (Intercontinental Hotel Group, 2013). The company reported a net income of 460 million dollars as at 2011 and a net operating income of 1,768 million dollars in the same period (Intercontinental Hotel Group, 2013). The company aims at creating a great guest love hotel with over 6,76000 hundred rooms in approximate 4600 hotels in one hundreds countries (Intercontinental Hotel Group, 2013). Additionally, the directors report indicates that Intercontinental Hotel and Group provide employment to more than345, 000 people globally for instance, in 2011 the company provided employment opportunities to more than people 7,956 (Intercontinental Hotel Group, 2013). In above connection, the company owns nine brands of distinguished hotels in different countries. Additionally, Intercontinental Hotel and Resort consist of leisure and business hotels operating in more than sixty cities (Intercontinental Hotel Group, 2013). Connectively, the company operates in three basic ways namely; franchising, manager and owned/lease (Intercontinental Hotel Group, 2013). The company further operates an approximate of 3,934 hotels under franchise and 658 hotels under management mode of business operation (Intercontinental Hotel Group, 2013). Additionally, the company has placed a lot of emphasis on franchising mode of business operation (Intercontinental Hotel Group, 2013). On the contrary, Millennium Hotels and Resort trace its roots back to 1972.The head quarters of Millennium Hotels and Resort are based in London (Millennium Hotel and Resort (2013). The company operates more than one hundred and twenty hotels in over nineteen countries. Additionally, the company operates in a hotel industry and has been listed its stocks in London Stock Exchange (Millennium Hotel and Resort, 2013). Millennium and Cophorne hotel operate as a public limited company and reported a net operating income of one hundred and ninety nine million dollars as at 2011(Millennium Hotel and Resort, 2013). The comprehensive income statement indicates that the company had a net income of one hundred and sixty five million dollars by the end of 2011(Millennium Hotel and Resort, 2013).Connectively, the company operates via an inter-link of various portfolios as well as ensuring there is efficient cost control (Millennium Hotel and Resort, 2013). Connectively, the company operations are highly decentralized making it easier to respond to market demand. The company operates the following brands: Grand Millennium hotel, Capthorne and Kingsgate to name just but a few of the brands (Millennium Hotel and Resort, 2013). 2. Analyze the Operating profit margin (Intercontinental Hotels Group PLC is the main object of analysis, Millennium & Copthorne Hotels PLC is its rival firms, please contrast the two companies). Operating profit margin indicates the amount of revenues/income a company makes after paying its variable overheads (Warren, Reeve, Duchac & Warren, 2012). It is important to not that some items are excluded when computing operating profit margin among the items excluded are; good will amortization, interest to mention just but a few (Vasigh, Fleming & Mackay, 2010). Therefore, operating profit margin may be computed using the formula below; Operating profit margin= Income after tax ? Sales Based on comprehensive income statement for Intercontinental Hotel Group year ended 31st December 2011, 2010, 2009 and 2008 the operating profit margins were 0.29355, 0.2156, 0.171 and 0.19364 respectively (Intercontinental Hotel Group, 2013). This indicates that in 2011 operating profit margin was higher as compared to 2010, 2009 and 2008. This could have been attributed to an increase in sales volume leading to higher profitability (Intercontinental Hotel Group, 2013). According to the Chairman (David Webster) sales revenue for Intercontinental Hotel and Group increased by 9% as at 31st December 2011(Intercontinental Hotel Group, 2013).In above connection, the company was in a good position of managing cost and debts. This further contributed significantly to an increase in operating profit margin (Intercontinental Hotel Group, 2013). For instance, it was reported that in 2011, the company was able reduce cost attributed to debts by $205 and $538 million respectively (Intercontinental Hotel Group, 2013). According to a statement by Chief executive officer (Richard Solomon), the company was able to obtain revenue of 6.2 percent in 2011 from its new branded hotels. Additionally, Intercontinental hotel and groups had three basic competitive advantages that enabled the company to have a higher operating profit margin than other companies in the hotel industry (Intercontinental Hotel Group, 2013). The first competitive advantage was that the company had well differentiated brands that attracted customers from different parts of the world. Secondly, the company had a group of well talented people who understood customer’s needs and worked tirelessly towards ensuring customers needs were met (Intercontinental Hotel Group, 2013). Thirdly, the company had a well defined distribution channels that enhanced prompt delivery of goods and services required by the customers (Intercontinental Hotel Group, 2013). On the other hand, the operating profit margin for Millennium & Copthorne Hotels PLC was 0.16332, as at 31st December 2011 (Millennium Hotel and Resort, 2013). The comprehensive income statement for Millennium & Copthorne Hotels had an operating profit margin of 0.10609, 0.10352 and 0.13003 in the year 2010,2009 and 2008 respectively (Millennium Hotel and Resort, 2013). This indicates that in 2011 the operating profit margin was considerably higher as compared to the year 2011, 2010 and 2009. On the contrary, operating profit margins for Millennium and Copthorne Hotels and group was considerably lower as compared to that of Intercontinental Hotel and Group. Whereby, a decrease in operating profit margin could have been attributed to an increase in expenses as compared to sales revenues obtained (Robinson, 2012). In above connection, lower operating profit margin could have been attributed to long term strategies that were employed by Millennium Hotel and group (Millennium Hotel and Resort, 2013). For instance, it was reported that Millennium Hotel and groups had a long term strategy of operating an interlinked of assets management in order to minimize future cost (Millennium Hotel and Resort, 2013). 3. Analyze the Operating Liability Leverage (same with 2) Operating liability leverage involves a level at which a firm commits itself towards payment of debts (Brigham & Ehrhardt, 2011). Normally, a higher operating leverage is an indication that the company has more fixed expenses (Brigham & Ehrhardt, 2011). On the contrary, if operating liability leverage were low, it was an indication that a company was incurring more variable overheads (Brigham & Ehrhardt, 2011). Therefore, the net operating liability for Intercontinental Hotel and Group PLC was computed as follow; Operating liability Leverage= operating liability ?Net operating assets The comprehensive income statement and the statement of financial position for Intercontinental Hotel and Group indicates that the company had an operating liability leverage of 1.56063, 1.39205, 1.31438 and 1.20633 for the year ended 31st December 2011, 2011, 2009 and 2008 respectively (Intercontinental Hotel Group, 2013). The above figures indicate that the net operating liability leveraged was increasing progressively from the year 2008 to 2011(Intercontinental Hotel Group, 2013). This further led to an increase in break even points making Intercontinental Company and groups to make profits at a higher margin as compared to Millennium & copthorne hotels (Intercontinental Hotel Group, 2013). Additionally, an increase in operating leverage could haven been attributed to higher loans commitment as well as increase in variable overheads. For instance, in 2011 Intercontinental hotels and group reported a net debt of $538 million as well as $1.07million for refinancing its syndicate bank loan (Intercontinental Hotel Group, 2013). On the contrary, the operating liability leverage for Millennium & copthorne hotels was 0.27522, 0.26475, 0.24996 and 0.25086 for the years 2011, 2010, 2009 and 2008 respectively (Millennium Hotel and Resort, 2013). Whereby, the operating liability leverage was significantly higher in the year 2011 as compared to the rest of the periods. However, Millennium & copthorne hotels had lower operating liability leverage as compared to Intercontinental Company and group. This means that Millennium & copthorne hotels were making higher sales at a lower margin as compared to Intercontinental Company and group. For instance, in 2011 Millennium & copthorne hotels had sales revenue of $820.5. On the contrary, Intercontinental Company and groups had sales revenue of $1096.16 this could have further led to an increase in operating leverage discrepancies as the company utilizes more revenues in financing loans and variable overheads (Intercontinental Hotel Group, 2013). Conclusion Therefore, based on the above analysis, it can be scrutinized that Intercontinental Hotel and Groups largely operated on the basis of franchising, manager and owned/lease. In above connection, the company operates numerous branches globally under nine different brands. On the contrary, Millennium & Copthorne Hotels PLC operate via an inter-link of various portfolios in order to hedge the risk that may accrue. Therefore, based on operating profit margin and leverage analysis, it can be scrutinized that, the operating profit margin for Inter continental Hotel and Group was significantly higher than that of Millennium & Copthorne Hotels in the year 2011, 2010, 2009 and 2008.This indicates that Intercontinental hotel and group has strong ability to meet its variable overheads as well as make profits at a lower margin than its counterpart (Robinson, 2012). Additionally, Intercontinental hotel and Groups had a higher operating leverage as compared to Millennium & Copthorne Hotels. This means that Intercontinental hotel & group was able to make higher sales revenues through out the period at a lower margin as compared to Millennium & Copthorne Hotels. References Brigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning. Downes, J., & Goodman, J. E. (2003). Barron's finance & investment handbook. Hauppauge, N.Y: Barron's. Intercontinental Hotel Group (2013 Febrary, 19). “Company Over view” Retrieved : on 15th March 2013. Khan, M. Y., & Jain, P. K. (2004). Financial management; Text, problems and cases. New Delhi: Tata McGraw-Hill. Lasher, W. R. (2010). Practical financial management. Mason, OH: Thomson South-Western. Millennium Hotel and Resort (2013). “Corporate Information” Retrieved ;< http://www.millenniumhotels.com/ on 15th March 2013. Robinson, T. R. (2012). International financial statement analysis. Hoboken, N.J: John Wiley & Sons. Vasigh, B., Fleming, K., & Mackay, L. (2010). Foundations of airline finance: Methodology and practice. Farham, Surrey: Ashgate Pub. Warren, C. S., Reeve, J. M., Duchac, J. E., & Warren, C. S. (2012). Financial and managerial accounting. Mason, Ohio: South-Western Cengage Learning. Read More