Performance of Easy Hotel and Intercontinental Group - Essay Example

Comparative Ratio Analysis of Easy Hotel and Intercontinental Group Table of Contents Introduction 3 2. Performance Analysis of Easy Hotel and Intercontinental Group 3 3. Ratio Analysis 4 3.1. The Ratios for Easy Hotel and Intercontinental Group 4 3.2. Causes and Effects of Changes in the Ratios 15 3.3. Analysis of Easy Hotel’s Ratios With Intercontinental Group’s Ratios 16 4. Cash Flow Analysis 17 5. Non-Financial Performance Indicators 18 6. Conclusion and Recommendations 19 Reference List 20 Appendices 21 1. Introduction Easy hotel is a UK based operator and franchisor of branded Easy Hotels. The hotel group currently has a hotel portfolio embracing 1700 rooms and has three fully owned hotels and 17 franchised hotels operating in nine countries. Its profits have increased to £3.5 million and the system sales has boosted to £17.3 million (Barth, Cram and Nelson, 2001). The profits before tax have been reported to increase to £2 million. The key performances metrics are as reported by the company are occupancy rate, average daily rate (ADR) and profits per room available. The franchised hotels performed amazingly in the recent year. The occupancy levels are found to be 72% for the whole previous year and the occupancy levels in the second half of the previous year the rate was 79% (DeFond and Hung, 2003). There was a lower occupancy on Sundays. The average of ADR was observed to be £34 in the financial year and it further increased in the second half of the year to £36. Intercontinental (IHG) group is a global hotel company whose objective is to create excellent hotels that guests find irresistible. The group is found to hold a strong market position with increasing market share and growth. Total gross revenue of IHGs has increased to 6% and is observed to be $23 billion. The group’s revenue has decreased to 2% that is $1858 million (Nissim and Penman, 2001). The operating profit of the group has decreased by 3% and is observed to be $651 million. There has been 10% increase in dividend of the group as compared to previous year. The key performance indicators (KPI) examine the group’s success in achieving growth strategy. KPI’s such as the net room supply has increased to 710,295, growth in fee revenues has increased by 6.7% and the total gross revenue from hotels under IHG group has increased to $22 billion. The system contribution to revenue has also elevated by 71% in the current year (Carslaw and Mills, 2006). 2. Performance Analysis of Easy Hotel and Intercontinental Group Easy Hotels owned hotel rooms have mounted in the past three years and the revenue also has gradually increased. The hotel group has implemented key marketing initiatives with digital and customer service focus and is successfully competing with other hotels (Lewellen, 2004). In spite of such performance, the company is facing the threat of increasing competition and oversupply of identical accommodation types within a city. The hotel is also facing operating risks such as increase in operating costs due to inflation (Feng and Wang, 2000). The hotel employed the opportunities to create extended term shareholders value as they have revealed substantial opportunities to invest in their own capital combining with a considerable number of franchising opportunities and gained increasing excellence. The Intercontinental hotel industry has performed extraordinarily in the past three years and continued delivering successful strategies. The performance of the group was not the same in all its segments and nations in which it is operating (Mcleay and Omar, 2000). The threats that the intercontinental group faced in the past three years are on the areas of information security from payment card information to other information incorporated in the IT systems or in the paperwork and other medium. The areas of cyber attacks, loss or misuse of staff are in concern for the past three years. Many countries have offered opportunities to the group as there were strong demands of branded hotels in these nations. The group started 10 new hotels which added to their development pipeline (Wang and Lee, 2008). Adhering to CSR initiatives, the group gained many opportunities to innovate and attract quality employees over the past three years. The current trends also provided new opportunities to the group for increased travel. Lower air fares and limited travel restrictions have offered such opportunities that the group is looking forward to realize. 3. Ratio Analysis 3.1. The Ratios for Easy Hotel and Intercontinental Group Table of Ratios for Easy Hotel Current year (2014) Working calculations Previous year (2013) Working calculations Previous year (2012) Working calculations Profitability ratios:- Return on Capital Employed 15% ROCE=operating profit/capital employed =682754/ 4551693 13% ROCE=operating profit/capital employed = 10288838/ 1337549 11% ROCE=operating profit/capital employed =869654/790595 Return on Shareholders Funds (also called Return on Equity) 9% Return on equity= Net income/shareholders equity =407919/3300000 29% Return on equity= Net income/shareholders equity =1014609/3410000 46% Return on equity= Net income/shareholders equity =1125963/2400000 Net Profit Percentage (based on profit after interest and tax) 17% Net profit percentage= Net profit/net sales =301009/1730000 20% Net profit percentage= Net profit/net sales =305823/1520000 21% Net profit percentage= Net profit/net sales =304556/1430000 Gross Profit Percentage 13% Gross profit percentage= Gross profit/net sales =238550/1730000 14% Gross profit percentage= Gross profit/net sales =226297/1520000 15% Gross profit percentage= Gross profit/net sales =225690/1430000 Operating Profit Percentage 39% Operating profit percentage= Operating income/net sales =680000/1730000 28% Operating profit percentage= Operating income/net sales =434000/1520000 22% Operating profit percentage= Operating income/net sales =320000/1430000 Liquidity Ratios:- Current Ratio 7.2 Current ratio= Current assets/current liabilities =25186797/3468956 0.1 Current ratio= Current assets/current liabilities =879110/8713136 0.09 Current ratio= Current assets/current liabilities =849000/8713000 Quick Ratio (Acid Test) 8.2 Quick ratio= Prepayments/current liabilities =28610200/3468956 0.09 Quick ratio= Prepayments/current liabilities =854600/8713136 0.09 Quick ratio= Prepayments/current liabilities =832500/8713000 Efficiency Ratios:- Stock Holding Period (days) 84 365/inventory turnover =365/4.32 86 365/inventory turnover =365/4.2 79 365/inventory turnover =365/4.6 Debtors Payment Period (days) 52 Debtors payment period= trade receivables by annual credit sales =185224/3562 48 Debtors payment period= trade receivables by annual credit sales =170400/3550 46 Debtors payment period= trade receivables by annual credit sales =147200/3200 Creditors Payment Period (days) 48 Creditors payment period= trade payables/cost of sales*365 =227506/1730000*365 42 Creditors payment period= trade payables/cost of sales*365 =199068/1520000*365 41 Creditors payment period= trade payables/cost of sales*365 =194328/1430000*365 Cash Conversion Cycle (days) -1008.85 Cash conversion cycle= (days sales outstanding +days inventory outstanding)-days payable outstanding =(68.18 +0)-1077.03= (1008.85) 65.12 Cash conversion cycle= (days sales outstanding +days inventory outstanding)-days payable outstanding =(65.12 +0)- 0= 65.12 62 Cash conversion cycle= (days sales outstanding +days inventory outstanding)-days payable outstanding = (62+ 0)- 0= 62 Financial Structure:- Gearing 07:06 Capital gearing ratio= common shareholders’ equity/ (preferred stock+ bonds payable) =3500000/ (140000+160000) 07:08 Capital gearing ratio= common shareholders’ equity/ (preferred stock+ bonds payable) =2800000/ (1800000+1400000) 07:09 Capital gearing ratio= common shareholders’ equity/ (preferred stock+ bonds payable) =2700000/ (1700000+1200000) Interest Cover 02:04 Interest coverage ratio= EBIT/ interest expenses =4100000/1700000 02:03 Interest coverage ratio= EBIT/ interest expenses =3810000/1650000 02:04 Interest coverage ratio= EBIT/ interest expenses =3850000/1600000 Price/Earnings ratio (year end) 06:02 Earnings ratio= market price per share/ earning per share =75/12 04:01 Earnings ratio= market price per share/ earning per share =62/15.12 05:04 Earnings ratio= market price per share/ earning per share =61/12.01 Dividend yield (year end) 0 0 Dividend yield= dividend per share/ current share price =0/75 0 Dividend yield= dividend per share/ current share price =0/62 0 Dividend yield= dividend per share/ current share price =0/61 Table of ratios for Intercontinental group Current year (2014) Working calculations Previous year (2013) Working calculations Previous year (2012) Working calculations Profitability ratios:- Return on Capital Employed 16% ROCE=operating profit/capital employed =871000/5443750 14% ROCE=operating profit/capital employed =916000/6542857 11% ROCE=operating profit/capital employed =764000/6945454 Return on Shareholders Funds (also called Return on Equity) 53% Return on equity= Net income/shareholders equity =388000/725000 46% Return on equity= Net income/shareholders equity =382000/820000 17% Return on equity= Net income/shareholders equity =541000/3080000 Net Profit Percentage (based on profit after interest and tax) 80% Net profit percentage= Net profit/net sales =388000/725000 70% Net profit percentage= Net profit/net sales =382000/820000 67% Net profit percentage= Net profit/net sales =541000/3080000 Gross Profit Percentage 38% Gross profit percentage= Gross profit/net sales =185000/483000 21% Gross profit percentage= Gross profit/net sales =119000/541000 18% Gross profit percentage= Gross profit/net sales =106300/563000 Operating Profit Percentage 79% Operating profit percentage= Operating income/net sales =382000/483000 70% Operating profit percentage= Operating income/net sales =380000/541000 65% Operating profit percentage= Operating income/net sales =370000/563000 Liquidity Ratios:- Current Ratio 0.9 Current ratio= Current assets/current liabilities =624000/943000 1.1 Current ratio= Current assets/current liabilities =700000/928000 1.3 Current ratio= Current assets/current liabilities =852000/972000 Quick Ratio (Acid Test) 0.6 Quick ratio= Prepayments/current liabilities =632600/943000 0.7 Quick ratio= Prepayments/current liabilities =698000/928000 0.8 Quick ratio= Prepayments/current liabilities =835000/972000 Efficiency Ratios:- Stock Holding Period (days) 121 365/inventory turnover =365/3.01 118 365/inventory turnover =365/3.09 108 365/inventory turnover =365/3.3 Debtors Payment Period (days) 65 Debtors payment period= trade receivables by annual credit sales =296530/4562 61 Debtors payment period= trade receivables by annual credit sales =297009/4869 68 Debtors payment period= trade receivables by annual credit sales =326060/4795 Creditors Payment Period (days) 55 Creditors payment period= trade payables/cost of sales*365 72780/483000*365 52 Creditors payment period= trade payables/cost of sales*365 77073/541000*365 50 Creditors payment period= trade payables/cost of sales*365 77123/563000*365 Cash Conversion Cycle (days) 47.99 Cash conversion cycle= (days sales outstanding +days inventory outstanding)-days payable outstanding =(47.99+ 0)-0 40.73 Cash conversion cycle= (days sales outstanding +days inventory outstanding)-days payable outstanding =(40.73+ 0)-0 40.33 Cash conversion cycle= (days sales outstanding +days inventory outstanding)-days payable outstanding =(40.33+ 0)-0 Financial Structure:- Gearing 08:05 Capital gearing ratio= common shareholders’ equity/ (preferred stock+ bonds payable =3800000(1300000+120000) 08:06 Capital gearing ratio= common shareholders’ equity/ (preferred stock+ bonds payable =3450000 (1500000+100000) 08:02 Capital gearing ratio= common shareholders’ equity/ (preferred stock+ bonds payable =3200000 (1100000+1200000) Interest Cover 02:07 Interest coverage ratio= EBIT/ interest expenses =6750000/2500000 02:07 Interest coverage ratio= EBIT/ interest expenses =6590000/2400000 02:08 Interest coverage ratio= EBIT/ interest expenses =6520000/2321000 Price/Earnings ratio (year end) 01:09 Earnings ratio= market price per share/ earning per share =36.84/18.72 04:05 Earnings ratio= market price per share/ earning per share =81.72/18.12 02:05 Earnings ratio= market price per share/ earning per share =61.92/23.88 Dividend yield (year end) 1.78 Dividend yield= dividend per share/ current share price =23/36.84 1.4 Dividend yield= dividend per share/ current share price =12/81.72 1.45 Dividend yield= dividend per share/ current share price =9/61.92 3.2. Causes and Effects of Changes in the Ratios Easy Hotel ROCE- ROCE of Easy Hotel is increased because of the increased profitability of the hotels capital investments. Return on equity- It decreased because the return was not paid to the shareholders from its net income. Regular price changes of the hotel’s solid items can occur due to the decrease in net profit margin in the future (Martani, Khairurizka and Khairurizka, 2009). The gross profit margin- It is low as the hotel supplied quality services at less prices to attract new consumers. The operating profit margin lowered because of its increased expenditure on developing numerous hotels. The current ratio- It is above the desired level because the hotel is not efficiently utilizing its assets. Quick ratio- It is high because the hotel is rapidly converting its receivables into cash. Debtors’ collection period- It is high because of the fact that the consumers are not ready to pay the bills. Creditors’ collection period- It has increased because the hotel is not paying its suppliers as efficiently as it requires to get paid (Back, 2005). Cash conversion cycle- It is shorter because the hotel has an increased liquidity in working capital position. Gearing ratio- It is higher because Easy hotel is utilizing its debt to much extent, to pay for its daily operations. Dividend yield- There is no dividend yield because the hotel is retaining more of its earnings towards its development. Intercontinental Group ROCE- ROCE of Intercontinental group has increased because the group has efficiently employed its capital and generated high profits. Return on equity- It is increased because it is generating high profits by employing less capital. Net profit margin- It has increased due to increase in sales and it is projected that the group will be able to hold favourable net profit margin in upcoming years (McLeay and Trigueiros, 2002). Operating Profit- The operating profit percentage has increased because the group is bearing low expenses and generating increased revenues. Current ratio and quick ratio- Both are less and at a desired level because the group has favourable liquidity position which can be profitable for future sustainability. Inventory holding period- It has increased because the group has low inventory turnover (Gallizo and Salvador, 2003). Debtors’ turnover ratio- It is high because the customers of the group are not paying so efficiently and this can be harmful in the future. Cash conversion period- It is increased because the group is facing problems in converting inventory through sales into cash on hand and it is unfavourable for its profitability in future. Gearing- It is high because of high level of borrowing and this can cause great risks to the business. Dividend yield- It is high because the group is paying out more dividends and increase beyond the desired level is not favourable as it indicated that it is not spending much in development activities. 3.3. Analysis of Easy Hotel’s Ratios With Intercontinental Group’s Ratios Both Easy Hotel and Intercontinental Groups ROCE is in the increasing position which depicts that they are utilizing their capital efficiently in their daily operations (Beaver, Correia and McNichols, 2012.). The return on equity of Easy Hotel is decreasing as compared to Intercontinental Group. This depicts that the profitability position of the hotel is not as desirable as Intercontinental group. The net profit percentage of Easy Hotel is decreasing as compared to the Intercontinental Group which depicts that the sales of the hotel are not at par as compared to Intercontinental Group. Gross profit position of Easy Hotel is also decreasing as compared to Intercontinental Group which depicts that the costs of goods are going higher than the revenue generated (Easy Hotel Annual Report., 2014). Operating profit of both Easy Hotel and Intercontinental Group is at a rising position which means that both the organizations have increased total revenue and less operating costs (IHG Annual Report., 2014). Current ratio of Easy Hotel is increasing as compared to the Intercontinental Group and desired level which means Easy group is not efficiently utilizing its assets. The holding period of both Easy Hotel and Intercontinental Group is found to be increasing which depicts that they are not able to increase its capital gain. Debtors payment ratio of both the hotels are found increasing which means that consumers are not efficient in paying bills on time. Creditors’ payment ratio of both the hotels is increasing which states that they are not paying their suppliers on time. Cash conversion cycle of Easy Hotel is decreasing as compared to Intercontinental Group which depicts that it is taking very less time to convert its inventory into cash at hand, which is desirable for business performance (Easy Hotel Annual Report., 2014). Gearing of easy hotel is increasing as compared to the Intercontinental group which states that the hotel is using much debt to pay for its daily operations and there lies a threat of bankruptcy. Dividend yield of Easy Hotel is nil as compared to Intercontinental Group which means that the hotel is paying off less dividends to its shareholders and it is favourable as it is utilizing the cash for its development purposes. 4. Cash Flow Analysis The easy group is exposed to fair value or cash flow interest rate uncertainties. From the cash flow analysis, it can be stated that Market risk is likely to arise from interest bearing and foreign currency financial instruments. Cash flows of the financial instrument are liable to change because of deviation in the rate of interests. Cash flows from the movements in the working capital are observed to increase to £788,215 as compared to previous years (IHG Annual Report., 2014). Net cash flows from operating activities and the net cash produced from the financing actions are observed to decrease as compared to the previous years. The intercontinental cash flow evaluation depicts that the group has enough cash for carrying out its daily activities efficiently and cash can be utilized for investing in the future growth activities. Also, the group has negative cash or cash equivalents of 736 million (Easy Hotel Annual Report., 2014). The cash position is favourable but has decreased to 55 million as compared to the previous years. 5. Non-Financial Performance Indicators The non-financial performance metrics of the Easy Hotel group are product quality factors, customer satisfaction factors and brand preference factor. The hotel realizes the importance of constantly improving the product quality and is investing much of their capital in recovering their hotel attributes and make them more luxurious. The hotel is offering their customers a superior quality product at an affordable price and therefore, customer satisfaction is highly increased. Many hotels are facing the barriers to entry because of the brand recognition strength of the group. The growth strategies of the group have worked well in gaining competitive advantage. Increased customer satisfaction contributed to increased brand preference. The brand is recognized in many nations and the brand value is well understood by the consumers. The non financial performance metrics in the Intercontinental group such as speed and response of product quality, customer satisfaction and brand preference is found to be an increasingly superior position. The group’s strategy for improving product quality is observed to be successful over the past few years. They employ asset light strategy in the most attractive and high growth markets. This product development strategy enabled the group to increase their profitability. The group has created many hotels in a locality that encourages the customers to get better access to the hotels and which are increasing brand preference and customer satisfaction over three years. The group gives more preference to brand recognition but the protection of intellectual property has a high risk because of variability and change of controls. By analyzing the key performance indicators, it can be stated that misappropriation of the control environment can in future harm the brand in developing their business. 6. Conclusion and Recommendations Current financial position of Easy Hotel is satisfactory with desirable financial results and it is continuing to perform well by developing its hotels constantly but the revenue growth is hampered this year because of increased expenses and low sales. On the other hand, the revenues of Intercontinental Group are found to be in a desirable position as the group has been able to increase its net income. Easy hotels position is reviewed to be favourable as its revenue is reported to increase for the past three years but as per the current ratio and quick ratio depicts that, these ratios needs improvement as it can hamper its profitable position in the future. Its position is found to be fairly competitive with the Intercontinental group. Intercontinental Groups position is considered to be highly favourable as compared to easy hotel and it has positioned itself as world’s largest hotel market. Cash flows and revenues are observed to secure a positive position for the past three years and its position indicates that it will not require raising funds from the shareholders if some of the unfavourable ratios are improved. The financial market has reported that the operating income of Easy Hotel is much higher than the net income that will result to limit the chances of earnings manipulation. Steps recommended to improve performance of Easy Hotel are by improving its return on equity and current ratio. The group needs to invest its excess accumulated cash efficiently in development process. The hotel needs to develop strategies to manage price fluctuations which will in turn reduce the risk of decreasing net profit margin. The debtors’ collection period needs to be reduced and appropriate strategies needs to be implemented such as constantly monitoring account payable to recover cash from the customers. The return on assets is observed to fall from 8% to 5% this year which reflects that the hotel is becoming inefficient in utilizing its assets efficiently to generate profit. The assets hence need to be utilize in a planned way to generate profits out of it. The creditor collection period requires to be reduced by paying its suppliers within as less time as possible to improve its cash flow position in future. The hotel needs to manage and reduce its high gearing ratio in order to lessen utilizing borrowed funds to its equity. This ratio needs to be improved because ineffective or high gearing ratio indicates that the hotel is exposed to financial uncertainties and increasing debt can result to financial difficulties for the hotel. Reference List Back, P., 2005. Explaining financial difficulties based on previous payment behavior, management background variables and financial ratios. European Accounting Review, 14(4), pp. 839-868. Barth, M. E., Cram, D. P. and Nelson, K. K., 2001. Accruals and the prediction of future cash flows. The accounting review, 76(1), pp. 27-58. Beaver, W. H., Correia, M. and McNichols, M. F., 2012. Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy?. Review of Accounting Studies, 17(4), pp. 969-1010. Carslaw, C. A. and Mills, J. R., 2006. Developing ratios for effective cash flow statement analysis. Journal of Accountancy, 172(5), p. 63. DeFond, M. L. and Hung, M., 2003. An empirical analysis of analysts’ cash flow forecasts. Journal of accounting and economics, 35(1), pp. 73-100. Easy Hotel Annual Report, 2014. Annual Report and Accounts. Easy Hotel Annual Report, 15(2), pp. 25-29. Feng, C. M. and Wang, R. T., 2000. Performance evaluation for airlines including the consideration of financial ratios. Journal of Air Transport Management, 6(3), pp. 133-142. Gallizo, J. L. and Salvador, M., 2003. Understanding the behavior of financial ratios: the adjustment process. Journal of Economics and Business, 55(3), pp. 267-283. IHG Annual Report, 2014. Online Summary of Annual Report and Form. Intercontinental Hotel Group Annual Report, 15(1), pp. 22-28. Lewellen, J., 2004. Predicting returns with financial ratios. Journal of Financial Economics, 74(2), pp. 209-235. Martani, D., Khairurizka, R. and Khairurizka, R., 2009. The effect of financial ratios, firm size, and cash flow from operating activities in the interim report to the stock return. Chinese Business Review, 8(6), pp. 44-55. Mcleay, S. and Omar, A., 2000. The sensitivity of prediction models to the non-normality of bounded and unbounded financial ratios. The British Accounting Review, 32(2), pp. 213-230. McLeay, S. and Trigueiros, D., 2002. Proportionate growth and the theoretical foundations of financial ratios. Abacus, 38(3), pp. 297-316. Nissim, D. and Penman, S. H., 2001. Ratio analysis and equity valuation: From research to practice. Review of accounting studies, 6(1), pp. 109-154. Wang, Y. J. and Lee, H. S., 2008. A clustering method to identify representative financial ratios. Information Sciences, 178(4), pp. 1087-1097. Appendices Appendix 1: profitability ratios of Easy Hotel Appendix 2: Profitability ratios of Intercontinental Group Appendix 3: Liquidity Ratios of Easy Hotel Appendix 4: Liquidity Ratios of Intercontinental Group Intercontinental group 2014 (£) 2013 (£) 2012 (£) Current ratio Current assets 624000 700000 852000 current liabilities 943000 928000 972000 Current ratio 0.9 1.1 1.3 Quick ratio Prepayments 632600 698000 835000 Current liabilities 943000 928000 972000 Quick ratio 0.6 0.7 0.8 Appendix 5: Efficiency ratios of Easy Hotel Appendix 6: Efficiency ratios of Intercontinental Group Appendix 7: Financial structure of Easy Hotel Appendix 8: Financial structure of Intercontinental Group Appendix 9: Cash flow statement of Intercontinental Group Appendix 10: Cash flow statement of Easy Hotel Read More