Intercontinental Hotels Group Plc Finance Performance - Assignment Example

Financial Analysis Comparison of latest year results with previous year results: The sales of Intercontinental Hotels Group (IHG) PLC have increased from $1768 million to $1835 million. This indicates that the company has successfully increased its revenue by $67 million compared to previous year’s sales. This may be due to effective advertisement or increased investment in noncurrent assets. However, the company’s cost of sales in the current year has increased with the increase in turnover. Although, the increase in cost of sales is $1 million, this may be due to several reasons, including increased raw material prices and decreased discounts received compared to the previous year. Increase in cost of sales has made no large effect on the gross profit in 2013 because the turnover has increased with a greater proportion than the cost of sales. The revenue in 2013 has increased by 3.79% while the increase in cost of sales is just as low as 0.13%. This has caused the gross profit of the company to increase by 6.62% in 2013. Other operating income of $57 million in 2012 has disappeared in 2013 causing an expense of $3 million in 2013, and the administrative expenses have decreased from $381 million in 2012 to $379 million in 2013. This has contributed towards the favourable effect on the operating profit in 2013. The finance cost of the company has decreased from $64 million in 2012 to $57 million in 2013. This is due to the decreased proportion of noncurrent liability causing a decrease in the interest liability of the company. However, the finance income has increased from $2 million in 2012 to $3 million in 2013. This is probably due to the increase in long term investments in noncurrent assets. (Kline, 2007) Ratio Analysis: Latest Year Previous Year Liquidity Ratios: Current Ratio = Current Assets : Current Liabilities 660 : 780 578 : 860 0.846 times 0.672 times The current ratio measures ability of a company to pay its debts over the next 12 months or over its business cycle by comparing company’s current assets to its current liabilities. The current ratio of IHG has increased from 0.672 times in 2011 to 0.846 times in 2012. Higher the current ratio, the higher is the ability of the company to pay off its obligations. An increase in current ratio of IHG indicates more efficiency compared to previous period and safe liquidity. This ratio tells about how efficient is the company’s operating cycle and its capability to convert its products into cash. Quick Ratio = (Current Assets – Inventories) : Current Liabilities (660 – 4) : 780 (578 – 4) : 860 0.841 times 0.667 times Quick ratio is also known as the acid test ratio. It takes into account the ability of a company to pay its short term debts. It is a more reliable test of short term solvency than current ratio as it shows the ability of any company to pay its short term debts immediately. Quick assets are actually current assets less inventory. For IHG, quick ratio has increased from 0.667 times in 2011 to 0.841 times in 2012, which means the company is more stable during this period against its current liabilities compared to the prior period. (Solomon et al, 1986) Solvency Ratios: Debt to Equity Ratio = Total Debt : Total Equity 2946 : 317 2413 : 555 9.293 times 4.348 times This ratio is also a measure of the ability of a company to repay its obligations. If this ratio is increasing then it means that company is being financed by creditors, which may be a dangerous trend and the company might need to finance its assets more through equity by issuing new shares. IHG’s debt to equity ratio was 4.348 times in 2011 and it has increased to 9.239 times in 2012, which is not a good indication. Lenders and creditors’ interests are worse protected when this ratio is high. Thus, companies with high debt to equity ratio like IHG might be unattractive for lenders and creditors. (Gibson, 2006) Debt to Assets Ratio = Total Debt : Total Assets 2946 : 3263 2413 : 2968 0.903 times 0.813 times The debt to assets ratio for IHG was 0.813 times in 2011 which has increased to 0.903 times in 2012. This ratio determines the amount of the debt element in relevance to the total assets. It tells how much the company is dependent on its own assets and how much on the debt taken from lenders. It is a financial ratio, which indicates the proportion of an entity’s assets and debt used to finance the operations. (Ingram, 1994) Working Capital Management Ratios: Receivables Days = (Receivables/Sales) x 365 (422/1835) x 365 (369/1768) x 365 83.94 days 76.18 days Payables Days = (Payables/Cost of Sales) x 365 (709/772) x365 (707/771) x 365 335.2 days 334.7 days Working capital management ratios measure how well a company is utilizing its working capital cycle. IHG’s receivables days have increased from 76 days to 84 days approximately. This could indicate that management of IHG is investing in too many accounts receivables assets to support its sales, which could result as excessive amounts of bad debts. It also indicates that the group has been inefficient to collect its payments from receivable in time and the receivables are taking longer time to pay back to the group. The payables days have remained almost equal to those of the previous year. So the group has to take steps to make its customers pay on time, so that the cycle runs effectively. (Sagner and James, 2010) Profitability Ratios: Gross Profit Margin = Gross Profit : Revenue 1063 : 1835 997 : 1768 57.929% 56.391% The gross profit ratio is the key financial indicator to assess company’s profitability from its core activities. It reveals the financial health of a firm. IHG’s gross profit ratio has increased to 57.929% in 2012 from 56.391% in the year 2011. This is because the profit has also increased in proportion to turnover the company. (Mongiello, 2009) Return on Capital Employed = Operating Profit : Capital Employed 610 : 2386 594 : 2728 25.566% 21.774% It is the return that a company achieves from its capital employed. Capital employed is a sum of equity and non-current liabilities. IHG’s return on capital employed was 21.774% in 2011 and it increased to 25.566% in 2012. This indicated that IHG’s capital investments were more efficient and more profitable. Return on capital employed should always be higher than the company’s borrowing rate, otherwise any increase in borrowing will reduce shareholders’ earnings. Asset Efficiency Ratios: Account Payables Turnover = Cost of Sales : Avg. Account Payables 772 : 709 771 : 707 1.090 times 1.091 times The account payables turnover has remained almost the same as the previous year. This ratio tells that for every $1of account payables, there is almost $1.09 invested in /cost of sales. (Baker and Powell, 2005) Total Assets Turnover = Revenue : Avg. Total Assets 1835 : 3263 1768 : 2968 0.562 times 0.596 times Total assets turnover has decreased from 0.596 times in year 2011 to 0.562 times in 2012. This indicates that for every $1 of total assets, the revenue generated is $0.562 which was $0.596 in the previous period. (Fabozzi et al, 2003) The IHG has performed much better in this year compared to the previous year, measured against the key performance indicators it has set. The net rooms supply has increased from 658,348 rooms to 675,982 rooms in the latest year. The percentage increase in the net rooms supply is 2.68%. The growth in fee revenue has also increased from 5.7% in the previous year to 6.8% in the current year. Fee based margins have increased from 40.6% to 42.6% in the latest year. However, the Global RevPAR growth of 6.2% in the previous year has declined to 5.2%. Employee engagement scores have increased from 75.8% in the previous year to 78.6% in the current year. Total gross revenues have also increased from $20.2 billion in the previous year to $21.2 billion in the latest period. System contribution to revenue has also increased from 68% in the previous year to 69% in the current year. Hotels signed up for Green Engage have increased in number as compared to the previous year. They were 1772 hotels in the previous year, increased to 2219 in the current year. The participants benefitting from the IHG Academy have increased from 5608 in the previous year to 6377 in the current year. The key performance indicators that the company has set are very useful for determining its performance and betterment seen in the current period as compared to the previous periods. The group is exploring new markets that are most attractive from its business perspective and increase the revenue. The number of new hotels that have opened are 4602 in the latest year. This has resulted in an increased number of rooms available for supply, the percentage growth in free revenue and the percentage increase in fee based margins. The group has launched two new brands in two new geographies, which justifies its brand preferences. It also encourages its employees, and is the key performance indicator of the group’s of employee engagement scores. Total gross revenue increased by $1 billion, which is the key performance indicator of the group’s best-in-class delivery. The increase in1% of system contribution to revenue also justifies the key performance indicator of the group’s best-in-class delivery. The group also behaves as a responsible business because it has signed up more of its hotels for Green Engage, which shows its responsibility towards the environment. Moreover, the participants benefitting from the International Hotels Group Academy have also increased by 769 in number which is also the key performance indicator of the group’s responsibility. (Chen, 2008) Ratio analysis is easy to understand and simple to calculate. While key performance indicators are helpful to monitor the performance of a company. But the biggest disadvantage of ratio analysis is that it does not provide useful information until it is compared to any relevant period’s data. The benchmark is necessary to be provided to make the analysis useful. However, the ratios if properly examined can cater the potential investors in the decision making process. The key performance indicators have the biggest drawback that they are set by the company itself to benchmark its performance. It is a type of internal benchmarking which is not effective. Industrial benchmarking is a better way to evaluate the performance of any company. (Brigham and Houston, 2004) References: BAKER, H. K., & POWELL, G. E. (2005). Understanding financial management: a practical guide. Malden, MA, Blackwell Pub. BRIGHAM, E. F., & HOUSTON, J. F. (2004). Fundamentals of financial management. Mason, Ohio, Thomson/South-Western. CHEN, J. S. (2008). Advances in hospitality and leisure. Vol. 4 Vol. 4. Bingley, U.K., Emerald. http://www.emeraldinsight.com/1745-3542/4. FABOZZI, F. J., PETERSON DRAKE, P., HABEGGER, W. D., & PETERSON DRAKE, P. (2003). Financial management and analysis. Hoboken, Wiley. GIBSON, C. H. (2006). Financial reporting and analysis. Mason, Ohio, South-Western. INGRAM, R. W. (1994). Financial accounting: information for decisions. Cincinnati, Ohio, College Division, South-Western Pub. Co. KLINE, B. (2007). How to read and understand financial statements when you dont know what you are looking at. Ocala, Fla, Atlantic Pub. MONGIELLO, M. (2009). International Financial Reporting. [Frederiksberg], Forlaget Ventus. SAGNER, JAMES. (2010). Essentials of Working Capital Management. John Wiley & Sons. http://www.myilibrary.com?id=282264. SOLOMON, L. M., VARGO, R. J., & WALTHER, L. M. (1986). Accounting principles. New York, Harper & Row. Read More