Financial Statements of National Corporation for Tourism and Hotels - Case Study Example

Nation Corporation of Hotels and Tourism: Financial Planning & Analysis Student’s Name Institutional Affiliation Assumptions Made in relation to Projected Financial Statements of National Corporation for Tourism and Hotels Assumptions Made in Regards to Projected Income Statement for 2016 i) It has been assumed that the changes in regards to all items are a subject of percentage change between the two financial years; 2014 and 2015. Assumptions Made in Regards to Projected statement of financial position for 2016 I) It has been assumed that such current items as cash, inventories, trade and other receivables and payables as well employee service benefits are a subject of the sales increase and therefore; increase or decrease in regards to the proportion of the sales revenues changes within the two years. II) It is assumed that the values of fixed assets like property, plant and equipment is a subject of the percentage change between 2014 and 2015 and the resultant value added to the most current year. However, values for both available for sale investments and investments in associated and joint ventures are all assumed to be 10,000,000 due to specific management policies. III) It is assumed that short term loans decrease at a rate of 2% in the period after 2015 financial year. IV) Share capital is left unchanged for the initial projection of the 2016 period V) Statutory, general reserves as well as retained earnings are a subject of the increase of net income. Financial Ratios Analysis A. Liquidity Ratios Year /Ratios 2014 2015 20116 Current ratio= current assets/current liabilities 334,479,405/317,104,083 = 1.05 467,652,883/244,633,665 = 1.91 507,917,796/258,730,516 = 1.96 Acid test ratio =(cash+ accounts receivable+ short-term investment)/current liabilities 179,097,194+139,196,044/317,104,083 = 1 252,842,828+198,085,901/244,633,665 = 1.84 274,612,595+215,141,097/258,730,516 = 1.89 Analysis The Corporation’s current ratio increases within the three-year period from 1.05 and 1.96 in 2014 and 2016 respectively. This increase indicates a healthy operational environment since it means that the NCHT is able to meet short term commitments of the suppliers at hand. The increase is also witnessed with the acid test ratio that improves from 1 to 1.89 within the same period, which also indicates a healthy performance given that it possess the capacity to pay for short term obligations as and whenever they fall due without ever relying on the level of the imminent stock (Helfert, 2002). Year /Ratios 2014 2015 2016 Profit Margin = Net income/sales*100% 158,725,922/781336917 =20.31% 165,524,257/848603234 = 19.51% 172,322,592/250,714,296 =68.73% ROA=Net Income/total assets 158,725,922/1257600714 =0.13 165,524,257/1,207,633,075 =0.14 172,322,592/1,293,429,127 =0.13 ROE= net income/total equity 158,725,922/724209670 =0.22 165,524,257/717319684 =0.23 172,322,592/748,020,966 =0.23 Analysis The Corporation’s profit margin seems to be increasing steadily within the three-year period from 20.31% to 68.73% in 2014 and 2016 operational periods respectively. The increase indicates a healthy profitability performance over the years and might be attributed to efficient and effective marketing and pricing strategies for hotel and tourism related products within the period that has ensured to improve on the level of sales revenues (Helfert, 2002). The ROE and ROA remain steady within the three years period meaning that there have been an efficient adoption of management policies that ensure to optimal utilisation of both assets and equity’s in order to trigger enough sales revenues that are translated to enormous net income over the period. It is assumed that the management of the Corporation has opted to adopt current wear and tear policies within the current industry for purposes of ensuring that all equipment used to generate sales are replaced at a recommended time whenever they become faulty (Helfert, 2002). Gearing Ratios Year /Ratios 2014 2015 2016 Debt-to-equity ratio = total debt/total equity 188845665+ 131248000/724209670 =0.44 214444914+ 65656052/717319684 =0.39 214444914+64,342,931/748,020,966 =0.37 Interest cover ratio =EBIT/Interest Expense 169,745,145/11,019,223 =15.4 176,400,256/10,875,999 =16.2 183,055,367/10,732,775 =17.1 Analysis The Corporation’s debt-to-equity ratio decreases over the three-year period from 0.44 to 0.37 in the period between 2014 and 2015 respectively. The drop in the ratio value is a good indication as it means that the entity has now focused on improving its overall capital structure with more of equity funds and reserves as opposed to debt funds. This is a positive move since it is aimed at ensuring that the entity can easily control its overall operations and make important decisions without any form of external influence Fisher, Heinkel & Zechner, 1989). It is also aimed at ensuring that the cost of debt that relates to interest expense is cut down and the amounts directed towards other short-term investment strategies. The interest coverage increases from 15.4 to 17.1 in 2014 and 2016 respectively, which is a healthy indication of the entity’s capacity to pay-off its finance costs much faster. This can be attributed to an increase the level of earnings over the periods, which form the basis for repayment of term loans. Financial Planning & Recommendations Income Statement i) The Corporation’s operational revenues are increasing at a tremendous rate and thus, triggering an improvement on the level of gross profits. It is suggested that the entity continue engaging its current policies in regards to sales and marketing and adopt even efficient pricing strategies like availing discount prices for its customers in order to increase the revenues even more in the future. ii) It is suggested that the entity act to reduce the level of expenses and especially related to administration in order to ensure that enough earnings are translated into net income that should be available for distribution and reserves. Balance Sheet I) It is suggested that the company improve on its existing fixed asset base and especially property, plant and equipment in order to ensure enough asset-base is present for generating sales. This should also be done in order to offset the effects of depreciation on these items. II) It is recommended that entity continue with its current management policies that relate to maintaining enough reserves as a form of equity base and cut down on term loans for purposes of directing these earnings to short-term investments. The suggestion to reduce the level of debt funds is meant to ensure that the Corporation is independent in making its decisions and, also cuts down on unnecessary interest expenses. References Fisher, E, Heinkel, R & Zechner, J. (1989). Dynamic capital structure choice: Theory and tests, Journal of Finance, 44, 19–40 Helfert, E. A. (2002). Techniques of financial analysis: A guide to value creation (11th ed.), New York, McGraw-Hill/Irwin. Read More