Financial Management for Hotel Management - Taj Group of Hotels and ITC Group of Hotels - Example

Content Executive Summary 2 Introduction 3 Financial Analysis 3 Liquidity ratio 4 Capital Structure ratio 5 Profitability Ratios 7 Asset Efficiency Ratios 9 Market Performance Ratio 10 Findings 11 Trend Analysis 12 Conclusion 13 Recommendations 13 Limitations 14 References 15 Appendix 16 Executive Summary Taj Group of Hotels and ITC Group of Hotels has been performing on similar business model and has been successful as service players. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The findings shows the positives and negatives of both based on financial analysis. The ratios like liquidity ensures to find liquidity and the capital financed by the company are demonstrated by capital structure ratios. The efficiency ratio indicates the area where Taj needs to work to stay ahead of ITC. The capital market ratio indicates the companies which are favoured by shareholders and also help to look into the future prospects of the company. The recommendations highlights areas where both the companies need to improve which will help them face competition and help in proper strategy execution. The analysis shows that ITC performance has improved in 2010. Taj hotels need to work on certain areas to stay ahead of ITC hotels as the company has shown stability and Taj need to inculcate those so that it is able to withstand competition and capture a bigger market. Introduction Taj Group of hotels is a service player. The company has a huge presence and provides services through “hotels, restaurants, spa, wildlife lodges and others”. (Taj Hotels, 2010) The fact that the company provides services through different medium has provided a wide reach and given a wide market. The company provide the basic necessities for people thereby enabling them to grow as it attracts customers from all around the globe. ITC Group of Hotels is also a service player. The company provides services through “hotels, restaurants and also deals in products consumed daily in a household”. (ITC Hotels, 2010) The wide range of product and dispersion has made it a huge success. The company with their policy to satisfy customers has grown and is able to capture a good market. The financial statement of both the companies reveals so. Even the share prices shows improvement. With more consumers moving towards big service players it gives an opportunity to expand in overseas. Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010) Proper analysing helps a long way to “understand the financial health”. (Micro Strategy, 2010) It helps to identify trends and compare with competitors and industry to gain advantage. The following is the ratios for Taj & ITC Group of Hotels. Liquidity Ratios This ratio plays an important part and helps “to identify the firms ability to meet its short term obligations and plays a huge role in the performance”. (Financial Modelling Guide, 2010) The ratios for Wesfarmers and Woolworths are Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) This ratio helps creditors, suppliers and investor to identify the liquid position. It is calculated as “Current Assets / Current Liabilities”. The current ratios for both the companies are as (appendix) The ratio shows that ITC has a better liquidity position as compared to Taj. Taj hotels need to improve the ratio as it is a concern as the short term obligations are higher. This might make investors and suppliers stay away. ITC hotels on the other hand are in a better position but still needs to take it slightly up. When we consider the two companies together it shows that ITC has better policies and strategies as compared to Taj. The negative for Taj is that they have their current ratio has fallen drastically. They need to work more and ensure that it reaches around 2. ITC on the other hand needs to continue with the same strategy as it is adopting. This might make investors pour more money knowing about the safety of investments. Quick Ratio: It is also known as acid test ratio. “It measures the ability of the firm to meet its short term obligation when inventories are removed as inventories take some time to be converted into cash”. (Financial Modelling Guide, 2010) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The ratios for both the companies are as The ratio also indicates that Taj hotels are better positioned as compared to ITC. The ratio indicates the inefficiency of ITC to meet its immediate debt. ITC need to improve this as it is a concern and presenting a bleak picture. Even, Taj need to concentrate on it and improve it and take it to more than 1. The ratio when compared to current ratio also indicates huge inventories for ITC. Since, both the companies deal in service sector where the inventory has to be low so it is a concern for ITC. Still, both the companies especially ITC need to improve it so that it presents a better picture. Capital Structure Ratio This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios which help to determine it are as Debt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The ratios for both the companies are as The ratio indicates soundness on the part of both the companies. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. Taj has increased its debt a by borrowing and is a worry and needs to sustain or reduce it so that it can borrow in the future. Taj hotels need to ensure that it keeps with the industry standard. As both the companies work in a type of market where to grow large debt is needed so the ratio needs to improve especially for Taj as seen in 2010 compared to previous year. Debt Coverage Ratio: It is defined as “the ability to pay the monthly debt on the loan taken on the mortgage of property”. (Financial Modelling Guide, 2010) It is widely used by banks. It is calculated as “Non Current Liabilities / Net Cash Flow from Operating Activities”. The ratio for Taj shows better performance in 2010. It indicates that the company is slowly moving away from its competitor i.e. ITC hotels. ITC on the other hand has shown consistency though there is a slight change in this ratio. ITC need to continuously work and ensure that the debt coverage ratio improves further so that growth is better as it a risky proposition for investors where as Taj presents a bright and safe investment. Profitability Ratios Profitability ratios form a very vital part of financial analysis. This ratios help to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. Comparing it with the previous years and the competitors’ helps to evaluate the shortcomings, and shows area which needs to be improved. The profitability ratios are as follows Gross Profit Margin: “It is defined as the profit generated after deducting cost of goods sold and before the indirect expenses are accounted for and considers only the direct expenses”. (Kennon, 2010) Gross profit helps to find out the actual profit that is attributed directly to the product. It is calculated as– “Gross Profit / Sales X 100”. The ratio for both the companies are The ratio indicates consistency for ITC group of hotels. ITC has a higher gross profit indicating soundness in service rendering process. It also shows that the strategies are well managed. Taj group of hotels on the other hand has shown de-improvement and needs to improve to match its competitor as it is very low considering the risk involved in a service sector. Net Profit Margin: “It is defined as the profit generated per dollar of sales and is calculated after all the direct and indirect expense has been considered”. (Kennon, 2010) Organisations prefer this to be high. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. The ratios for both the companies are as The ratio indicates similarity between Taj and ITC group of hotels. It is seen that the net profit has decreased for Taj. This is a worrying factor and reflects inefficiency to maintain the indirect expense. When we compare it to the gross profit margin it shows a huge dip for ITC compared to Taj signifying the amount of indirect expenses like marketing, distribution and other expenses the company incurs. The ratio for both the service giants has not shown improvement signifying poor management and lack to control cost. When we look at the broader picture it shows that ITC despite having a higher gross profit has a lower net profit showing the amount of indirect cost incurred. It signifies improper management and strategies to cut cost is required. Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Joseph, 2010) It helps to identify whether the assets are utilized properly or underutilized. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The ratios for both the companies are as Here we see that the return on assets for both ITC and Taj have decreased in 2010 as compared to 2009. The worrying factor for Taj is that their assets are underutilized. This has resulted in having more assets that warranted. ITC on the other hand has a better return showing proper utilization of assets. The other important part to note is that players in the service industry have huge assets which results in the ratio being lower. Still, on an overall basis we see that Taj need to improve their return as it is have very heavy assets and needs to improve it as compared to the competitors. Asset Efficiency Ratios Operating ratios forms a very important part as it helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) this ratios help to find the efficiency when it comes to turnover. The following ratio helps to calculate the operating efficiency. They are as Receivable Turnover Ratio: “It is defined as the number of times the company is able to recover the dues from the customer”. (Kennon, 2010) The higher it is the better it is. It is calculated as “Credit Sales / Average Receivable”. The ratio for both the companies are Here we see that ITC has a very good rate and it recovers its chances of bad debts to be less. ITC hotels have also shows consistency and are a good sign. Taj group of hotel on the other hand has a poor receivable rate compared to TC group of hotels. The bad sign for Taj is that it has their turnover has fallen drastically in 2010 as compared to 2009. The company needs to improve it then it would be a good sign and reduce the chances of debts. Payable Turnover Ratio: “It is defined as the number of times the creditor is paid in the year and companies generally prefer to maintain it good so that reputation is good”. (Kennon, 2010) It is calculated as “Cost of good sold / Average payable”. The ratios for both the companies are as follows It is seen that both ITC and Taj have shown consistency in their performance. This is a good sign and shows that the reputation has improved with the suppliers and also ensures steady supplies. ITC has a good ratio and is consistent signifying soundness in policy. Both the companies are ensuring that the ratio is good and reckons a good future. Market Performance Ratio This ratios help to find the shareholders confidence in the company. This ratio helps to find the prediction the shareholders have and company’s performance is also reflected here. A company having sound capital market ratios ensures that people prefer this companies and this is seen by the growth in share prices. The ratios which will help to find the capital market are as follows Earnings per Share: “It is defined as the profit attributed to the equity shareholders”. (Joseph, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The ratios for both the companies are as follows The above ratio indicates soundness on the part of both the companies. ITC hotels have a higher earning per share indicating that the shareholders are getting a good return. The return for Taj hotels has decreased in 2010 as compared to 2009 which shows that the profit has dipped. ITC on the other hand has improved their earnings and it reflected on the well being of the shareholders. The overall result for both the giants seems sound and is a good prospect to invest. Findings The liquidity position especially the current ratio is sound for ITC hotels and Taj group of hotels need to improve it. Both the companies due to the nature of business should have fewer inventories which should be reflected in the quick ratio but ITC hasn’t been able to do so whereas Taj has been able to maintain a good quick ratio. The long term debt ratios is sound for both the companies and have the scope to take loan for further development but Taj needs to reduce it to ensure steady supply of loans in the future. The companies have used their short term debt to finance long term assets is a worrying factor and steps needs to be taken. Taj profit has decreased in 2010 as compared to 2009 is a worrying factor especially when considered along ITC group of hotels The operating ratio especially the receivable and payable turnover ratio for Taj has shown tremendous improvement but it needs to still work on it so that it is able to perform at par with ITC The capital market analysis ratio shows wide improvement for Taj in 2010 and when we compare it to ITC it shows better performance highlighting that Taj have better projects and this can help them The financial analysis shows that ITC performance has improved in 2010 as compared to 2009 and also in comparison to Taj. Taj need to improve its strategies and management so that it can stand better than ITC who have been performing on a consistent basis. Trend Analysis The trend analysis for both Taj and ITC group of hotels shows a bright picture considering the momentum the economies around the world are gathering and also the increase in spending. This will result in high occupancy levels in hotels which will result in profits to soar up. Taj on the backdrop of it can benefit greatly by ensuing packages and strategies which will push up their profits. Taj hotels can look forward towards budget hotels as the customer base is growing and needs to cut down on expenses. This will act as a tool and will help to increase the profits. This has been further facilitated by the push provided by the government and measures taken to promote tourism which will attract people from around the globe. The trend thus predicts a bright and prosperous time for the hotel industry and Taj by banking on it can improve its performance. Their has a scope and an initiative in the right direction can go a long way in improving the performance. Conclusion Taj Group of Hotels & ITC Group of Hotels both have been performing on similar lines and have been successful. The financial statement even highlights similar facts. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. This even highlights that companies similar in nature use different strategies and improve their performance. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Taj needs to improve its current ratio so that it reflects soundness in its policies and strategies ITC needs to reduce the amount held in inventories as it is high leading to a lot of money being invested especially considering the fact that it is working in a service industry ITC need to take more debt especially long term so that they are able to save on the taxes ITC needs to improve its operating ratios so that it can match its competitor Taj needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management Taj need to ensure that to stay ahead of competition it comes with new projects which helps them to utilize their assets properly and ensure better efficiency Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for which might give different result References Taj Hotels, 2010, “Annual Report: The Indians Hotels Company Limited”, Taj Hotels, A Tata Enterprise ITC Hotels, 2010, “Annual Report: ITC Limited”, ITC Reports & Accounts Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on August 6, 2010 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Joseph K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Return on Equity”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company Micro Strategy, 2010, “Financial Analysis”, retrieved on August 7, 2010 from http://www.microstrategy.com/financial-analysis/ Transtutor, 2010, “Capital Structure Ratios”, retrieved on August 8, 2010 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.as Appendix 1. Calculation of Current Ratio for Taj Group of Hotels Current Ratio for 2010 = Current Assets / Current Liabilities = 1038.11 / 1093.63 = 0.95 Current Ratio for 2009 = Current Assets / Current Liabilities = 940.81 / 473.76 = 1.99 2. Calculation of Current Ratio for ITC Group of Hotels Current Ratio for 2010 = Current Assets / Current Liabilities = 8161.11 / 4705.01 = 1.73 Current Ratio for 2009 = Current Assets / Current Liabilities = 7019.27 / 4432.3 = 1.58 3. Calculation of Quick Ratio for Taj Group of Hotels Quick ratio for 2010 = (Current Assets – Inventories) / Current Liabilities = (1038.11 – 31.25) / 1093.63 = 0.92 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (940.81 – 38.91) / 473.76 = 1.90 4. Calculation of Quick Ratio for ITC Group of Hotels Quick ratio for 2010 = (Current Assets – Inventories) / Current Liabilities = (8161.11 – 4599.72) / 4705.01 = 0. 76 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (7019.27 – 4050.52) / 4432.3 = 0. 67 5. Calculation of Debt to Equity for Taj Group of Hotels Debt to Equity Ratio for 2010 = Long Term Debts / Equity = 2650.55 / 2689.22 = 0. 98 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 1766.47 / 3047.63 = 0.58 6. Calculation of Debt to Equity for ITC Group of Hotels Debt to Equity Ratio for 2010 = Long Term Debts / Equity = 177.55 / 377.44 = 0. 47 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 214.43 / 376.86 = 0. 57 7. Calculation of Gross Profit Margin for Taj Group of Hotels Gross Profit Margin for 2010 = Gross Profit / Sales * 100 = 216.33 / 1566.35 *100 = 13.81% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 368.51 / 1706.52 * 100 = 21.59% 8. Calculation of Gross Profit Margin for ITC Group of Hotels Gross Profit Margin for 2010 = Gross Profit / Sales * 100 = 15923.04 / 23143.53 *100 = 68.80% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 14558.43 / 21355.94 * 100 = 68.17% 9. Calculation of Net Profit Margin for Taj Group of Hotels Net Profit Margin for 2010 = Net Profit / Sales * 100 = 153.10 / 1566.35 *100 = 9.77% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 234.03 / 1706.52 * 100 = 13.71% 10. Calculation of Net Profit Margin for ITC Group of Hotels Net Profit Margin for 2010 = Net Profit / Sales * 100 = 3263.59 / 23143.53 *100 = 14.10% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 3120.1 / 21355.94 * 100 = 14.60% 11. Calculation of Return on Assets for Taj Group of Hotels Return on Assets for 2010 = Net Income / Total Assets * 100 = 153.10 / 5365.56 * 100 = 2.85% Return on Assets for 2009 = Net Income / Total Assets * 100 = 234.03 / 4984.57 * 100 = 4.70% 12. Calculation of Return on Assets for ITC Group of Hotels Return on Assets for 2010 = Net Income / Total Assets * 100 = 3263.59 / 14779.82 * 100 = 22.08% Return on Assets for 2009 = Net Income / Total Assets * 100 = 3120.10 / 12817.17 * 100 = 24.34% 13. Calculation of Receivable Turnover Ratio for Taj Group of Hotels Receivable Turnover Ratio for 2010 = Sales / Average Receivable = 1566.35 / 121.62 = 12.88 Receivable Turnover Ratio for 2009 = Sales / Average Receivable = 1706.52 / 101.70 = 16.78 14. Calculation of Receivable Turnover Ratio for ITC Group of Hotels Receivable Turnover Ratio for 2010 = Sales / Average Receivable = 15388.11 / 668.67 = 23.01 Receivable Turnover Ratio for 2009 = Sales / Average Receivable = 13947.53 / 736.93 = 18.93 15. Calculation of Payable Turnover Ratio for Taj Group of Hotels Payable Turnover Ratio for 2010 = Cost of Goods Sold / Average Payable = 1358.48 / 393.53 = 3.45 Payable Turnover Ratio for 2009 = Cost of Goods Sold / Average Payable = 1348.42 / 320.36 = 4.21 16. Calculation of Payable Turnover Ratio for ITC Group of Hotels Payable Turnover Ratio for 2010 = Cost of Goods Sold / Average Payable = 11097.3 / 2964.52 = 3.74 Payable Turnover Ratio for 2009 = Cost of Goods Sold / Average Payable = 9986.66 / 2786.97 = 3.58 17. Calculation of Earning Per Share for Taj Group of Hotels Earning per Share for 2010 = Net Income / Outstanding shares = 2.12 (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 3.28 (given in financial statement) 18. Calculation of Earning Per Share for ITC Group of Hotels Earning per Share for 2010 = Net Income / Outstanding shares = 8.66 (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 8.29 (given in financial statement) 19. Calculation of Debt Coverage ratio for Taj Group of Hotels Debt Coverage Ratio for 2010 = Non Current Liabilities / Net Cash Flow from Operating Activities = 2650.55 / 450.64 = 5.88 Debt Coverage Ratio for 2009 = Non Current Liabilities / Net Cash Flow from Operating Activities = 1766.47 / 292.06 = 6.04 20. Calculation of Debt Coverage ratio for ITC Group of Hotels Debt Coverage Ratio for 2010 = Non Current Liabilities / Net Cash Flow from Operating Activities = 177.55 / 3279.03 = 0.05 Debt Coverage Ratio for 2009 = Non Current Liabilities / Net Cash Flow from Operating Activities = 214.43 / 2722.96 = 0.07 Read More