The Intercontinental Group - Essay Example

INTERCONTINENTAL GROUP ANALYSIS: Intercontinental group is a brand for luxury hotels and guests accommodations. The Intercontinental hotel group is an international hotel company with seven different hotel brands to serve diverse markets. The Intercontinental hotel mission statement or strategy is to "build the hotel industrys strongest operating system focused on the biggest markets and segments where scale really counts. The seven hotel brands in the Intercontinental portfolio cater to a wide spectrum of price points from economy, family oriented hotels to luxury.. Intercontinental hotels can be found all over the world. With seven diverse brands and hotels located all over the globe serving the entire spectrum of travel needs, there is an Intercontinental hotel resort for every traveler regardless of their budget. (Wikipedia: wikipedia, a free encyclopedia, http://en.wikipedia.org/wiki/Intercontinental_Hotels, 2009) COMPETITION ANALYSIS IHG Annual Report and Financial Statements (2007. pp 3-4) states that the Global Market of hotel rooms has a capacity of 18 million rooms. The room capacity is growing at 3% per annum.The direct competitors of Intercontinental hotel group are other large hotel groups and other independently owned hotels. The total market for branded room out of total market for hotel rooms is around 40% i-e around 8 millions rooms. Out of which IHG provides only 7% of branded rooms. Out of the total market the share of IHG is around 15%. These analyses show that market share is widely scattered and no one group holds the monopoly power in the market. The other major groups in the industry which provide direct competition to IHG group are Hilton Group and Marriot. During the year ended 2007, the revenue collected by IHG group was $883 million. The sales when compared to the year ended 2006 were increased by around 12%. As sales for the year ended 2006 were $786 Million. This shows that the group is taking step forward and due to some good internal management policies or by giving out better services. Sales are seeing an upward trend. The major market IHG group is not surprising USA where it generates most of its revenue. Out of Total revenue of $883 million, $450 millions were earned in the USA, which is about 51%. This percentage was greater in 2006 when company earned around 54% of its revenue from USA. The reason behind this change can be recession in the USA market and due increase in competition in the Hotel Industry in USA. The other major revenue earners were Europe and Asia where company earned the profit of 28% and 14% respectively. This shows that the company’s European market is growing as sales there had increased by 3%, while the Asian market is stagnant. Region Sales in 2007 (in Millions) Sales in 2006 (in Millions) Percentage Sales in 2007 Percentage Sales in 2006 Difference USA 450 422 51% 54% -3% Europe 245 198 28% 25% +3% Asia 130 111 14% 14% No Change Central 58 55 6% 6% No Change Total 883 786 100% 100% Due the changes in Sales and changes in the number of share sold. There has been a change in earning per share ratio. According to the financial report of the company, the earning per share from continuing operation has been increased from 38 cents to 46 cents. As a result company will be more attractive for potential investors as this ration tells how much portion of a companys profit allocated to each outstanding share of common stock. Earning per share serves as an indicator of a companys profitability. Profitability Ratios: Gross Profit % Gross Profit 472,000,000 53.5% 431,000,000 54.8% sales 883,000,000 (2007) 786,000,000 (2006) These ratios clearly indicate that the company’s ability to earn gross profit is stagnant. It means that the cost of maintaining the room is same and for every $100 worth of sales, the company is earning $54 of gross profit or residual after maintenance costs and check-out costs have been incurred. Net profit % Operating profit before interest & Tax 222,000,000 25.1% (2007) 216,000,000 27.5% (2006) sales 883,000,000 786,000,000 Company’s net profit ratio has declined over the last two years. This shows that the company has started incurring more cost and thus profit is less on sales. On every $100 worth of sales, the company now is earning only $25 whereas previously it was earning around $27. This decline can be as result of over-staffing or other administration cost and selling expenses. ROCE Operating profit before interest & tax 222,000,000 18.5% (2007) 216,000,000 17.3% (2006) Total Assets-less Current Liabilities 1,197,000,000 1,250,000,000 ROCE ratio shows that the company is earning almost the same amount of return on its investments. This means that the company has been investing in projects that are giving approximately the same returns. Return on Equity Profit after Tax 231,000,000 471.4% 405,000,000 59.0% Shareholders Funds 49,000,000 (2007) 686,000,000 (2006) IHG group in 2007 is earning a whooping return of 471.4% on its equity i-e Assets – Liabilities. This might not be a particularly good sign as it tells that IHG is high on liabilities and thus it will have pay more interest payments and will have to be very cautious from now-on. It was in line with the market return on equity in 2006. But now it has been too high. Liquidity Analysis: Current ratio Current Assets 353,000,000 0.58 455,000,000 0.71 Current Liabilities 610,000,000 643,000,000 IHG from the last two years has been in very bad liquidity position. It’s liquidity ratio in 2007 was 0.58 which means that it will be forced to bankruptcy if it’s current creditor start asking for money because for every $1 worth of debt it has only 58 cents and thus looking at bankruptcy might be inevitable. This has been a further decline in Liquidity which was around 71 cents for every $1 worth of debts. Other analysis: Gearing (%) Debt* 869,000,000 95% 303,000,000 31% Debt + Equity 918,000,000 (2007) 989,000,000 (2006) This ratio proves the earlier point made on return of equity that the company has a whooping amount of debt i-e 95% and which was only 31% in 2006. The company might have faced problems but it should never have allowed the debt to rise so much. Now it should try to minimize the debt by issuing share and turning debt into equity. PEEL GROUP ANALYSIS COMPANY DESCRIPTION PEEL Group Hotels is public limited company. Peel group owns and operates eight four-star hotels. It was set up in 1997 by Robert Peel, the son of a restaurateur, shortly after he quit his role as chief executive of Thistle Hotels, which was then the second-largest hotel group in Britain after Forte. Peel and his brother Charles hold more than 50% of the equity in the AIM-listed company. The main mission of the company is to revolutionize the hospitality industry, by making more new hotels with affordable prices for the travelers and business class. This Company is famous for their four-star hotels and they charge a price which is lower than other hotels operating in the same market.( Peel Hotels: 4 star hotels around UK: www.peelhotels.co.uk, accessed on 26 March 2009) Peel Group Plc Annual Report (2007 pp. 18-19) tells us that in the year ended 2007, Peel hotel sales were $15,919,976 which was more than the previous years sales which stood at $14,883,483. The total increase in the amount of sales was $103, 6494. This was good news for the management of Peel group as their sales grew by around 7%. This was a result of boom in the hotel industry. But one thing that should be noted here is that the sales figure of other firms in the same market was growing at 12% like IHG sales grew. Formula= (Gross Profit/Sales)*100 Ratio in 2007= (3870647/15919976)*100 =24.31% Ratio in 2006 (4077210/14883483)*100 =27.39% Difference 1% The gross profit margin of the firm almost remained same. This shows the company’s cost of sales are constant with the sales. However, one thing noted here should be that the company is earning less gross profit because the market gross profit margin is higher. The firm should try to reduce the maintenance cost of the room or should keep a tight control at customer so that they use the hotel’s belongings in the room with care. Net Profit Margin Formula= (Net Profit/Sales) *100 Ratio in 2007= 1993,833/15919976)*100 = 12.52% Ratio in 2006= 2355124/14883483)*100 = 15.82% Difference 3% The net profit margin of the company declined showing that the company’s internal management is weak in controlling the costs down. As a result firm has earned less profit despite having more sales. The bad news for company here is that there profit margins are lower than the average industry profit margin of around 20-24%. They should try to achieve this either by controlling costs or increasing prices. Return on Capital Employed: Formula = Operating Profit/Net Assets * 100 Ratio in 2007 (1993833/32869047)*100 = 6.06% Ratio in 2006: (2355124/33426026)*100 = 7.04% Difference 1% The Peel Hotel’s returns on investment were just changed by one percent. This means that company is investing in the same activities. The decrease may be due to company’s increasing costs which are distorting the profit margins. Therefore top management should have a look at it and should try to reach the industry average of 12%. Liquidity Analysis: Current Ratio: Formula= Current Assets/ Current Liabilities Ratio in 2007= 1327970/1878799 = 0.7 Ratio in 2006 1242193/2094441 = 0.59 The Companies Liquidity position improved in 2007 as compared to 2006. But even after that improvement, there are huge chances of company going bankrupt. This is because Peel Group does not have enough current assets to pay-off current creditors. For every $1 of debt they only have 70 cents. Therefore, company should try to obtain a bank loan or something like that to increase their current assets such as Bank Balance. So, that there’s no uncertainty about their future. Gearing Ratio: Formula= (Debt/Debt+Equity)*100 Ratio in 2007 16334779/ 32,869,047 = 49% Ratio in 2006 17612320/33426026 = 52% PEEL Group vs. InterContintel Hotel Group: Both companies have seen an increase in sales during the last few years. But InterContinental hotels group sales rose by a bigger percentage. Peel groups sales grew by 7% whereas the sales of InterContinental group grew by 12%. This shows that the hospitality industry is booming. It also shows that the management of InterContinental group is much better and that’s probably the reason why Intercontinental Group is growing at a faster rate. The gross-profit margin of Intercontinental group is around 54% whereas Peel group is earning only 24% gross-profit margin. This tells us that the maintenance costs of Peel group are greater than those of InterContinental Group. InterContinental Group also beats the peel group in net profit margin. The net profit margin of Intercontinental group is 25% where as Peel Group is only earning the net-profit margin of around 12%. This means that InterContinental group’s administrative and advertising costs are lower than Peel Group’s costs. Similarly, InterContinental Group is earning a whooping return on Capital of around 18.5% whereas Peel Group is only earning a return of 6%. This shows that the investment policies of InterContinental Group are much better than those of Peel Group. Looking at their liquidity ratios, one can safely say that both companies are in liquidity crisis. Both companies do not have enough liquid assets to pay of their bank liabilities. Therefore, both can go bankrupt if they do not operate cautiously. However, one must acknowledge the fact that Peel group has an ideal gearing ratio. The company is neutrally geared at around 50% gearing ratio whereas InterContinental group is highly geared at around 95% debts. The problem that Intercontinental group will be facing is that they will have to pay high interest rates and no bank would want to lend the group further since it is already 95% geared. One cannot accurately say which business is doing well which is not doing well based on this information alone. The reasons behind this are: There might be chance and little evidence that both hotels are serving to different kind of people and operate in different market. Peel Group owns 4 star hotels whereas Intercontinental group is a chain of five star hotels. So, in such a case you cannot say that profit margins of Peel Group are lower. If you need to find out whether the profit margins of Peel Group are really low, you should compare it with a group of 4 star hotels. Another limitation in our analysis could be different countries they are operating in. One group is based in the UK whereas one is based in America. So, you cannot say that one is doing well and another is not doing well. You should compare each group with an organization within the same country to determine the financial status of each of these groups. There are also variety of different accounting laws and standards. There is a chance that each business is using different accounting methods. In such a case you cannot compare the performance of each group and both may be doing very well based on the procedures they are using. For example, there are five different depreciation methods each of which gives a different value. If both groups are using different method then, there answers and profits will also be different and on the basis of this all the ratios will also be giving different answers. Ratio Analysis also ignores the time factor and inflation factors. If inflation is greater than your profit margins than you are not earning anything and vice versa. So, you should compare theses margin with the inflation rate to see whether your business is doing good or bad. Some Businesses also use window dressing techniques to make their financial statements look strong. Window dressing techniques are those techniques that hide the bad aspects of your balance sheet and highlight the positives. These might look good to shareholders and investors but cannot give you accurate results about the financial health of your business. Therefore, without going into further deeper analysis one cannot say that InterContinental group is better and Peel group is weak. [1] It is entirely an assumption saying that particular ratio is “good”. These “good” ratios vary from business to business and from one organization to another. What might be good for one organization may not be good for another. So, these ratios do not paint the true and full picture of the performance of the companies. It is therefore based on the judgment of accountants and analysts about how they look at things. Therefore, these ratio analyses are no concrete proof that one company is bad financially while the other is good but it is only based on the assumption and it can be wrong. (http://www.s-cool.co.uk/alevel/business-studies-as--a2-level/ratio-analysis/limitations-to-ratio-analysis.html, S-COOL: Limitations to ratio analysis, A Level Business Studies, 2009) In the end we can conclude that both businesses are facing liquidity problems. They can solve this problem by taking out long-term loan which will increase their bank account balance and will not increase their current liabilities. As a result their liquidity ratios will improve which will increase the credibility of the companies. However, Intercontinental group which is already highly geared at 95% might face problems in acquiring a long-term loan. What they can do is that they can gain cash and other liquidity ratios by issuing share capital. Since company has high profit rates, investor would be willing to invest in the company. So, they should take benefit of the situation and improve the position of the company. One more steps that both of these companies should do is that since their sales are growing at a decent enough rate they should invest in more profitable projects to improve their other ratios such as Return on Capital Employed. In the end, since these companies are big groups, they should try to diversify their area of business. This is going to help them when hotel industry faces a slump. The decline in demand for hotel rooms then will be offset by the rise in demand of the other diversified products of the business and as a result both companies’ risk factor would be reduced considerably. Reference List 1. Peel Hotel Group: 4 star hotels around UK [Internet], www.peelhotels.co.uk 2. Annual Report of Intercontinental Hotel, 2007, Report for the result of dividends, profits and interest 3. Annual Report of Peel Hotel, 2007 4. Limitations of Ratio Analysis. (2009) S-COOL: Limitations to Ration Analysis, Business Studies As and A2 Level [Internet]. London,: http://www.s-cool.co.uk/alevel/business-studies-as--a2-level/ratio-analysis/limitations-to-ratio-analysis.html (Accessed on 26 March 2009). 5. Wikipedia:wikipedia, the free encyclopedia: Intercontinental Hotels group [Internet], http://en.wikipedia.org/wiki/Intercontinental_Hotels (Accessed on 26 March 09)   Read More