Management accounting - Essay Example

It may be noted that the financial tool of ratio analysis has been used to make comments and comparisons between the two companies over their financial position and performance. During 2007 Intercontinental has not effectively improved upon its profitability performances in 2006. In fact it has maintained more or less the same level of profitability as was in 2006.The increases in profitability ratios in net profit and return on equity are deceptive. ROE has increased manifolds because capital employed has been reduced tremendously from $686m to mere $49m.

Otherwise gross profit ratio that shows the real operative efficiency of the entity has dwindled and remained at almost the same level. Increase in return on capital employed is marginal. The overall efficiency on operational profitability has not improved. The profitability performance of Peel Hotels in 2007 has also gone down when compared with 2006. Gross profits and ROCE that show operational efficiency has shown declined performances. On the hand ROE, return on assets, net profit ratios that are affected by factors other than operation performances have shown increased performances.

The result is that company has not improved upon its real profitability but shown efficiency only to attract investors and other interested users of financial statements. Both companies are facing liquidity crunch as reflected from their current and quick ratios. Both ratios are lower than the standards required to maintain optimum level of liquidity. The liquidity status is critical in both the years for each of the companies. The companies have to take some extraordinary steps to improve liquidity; otherwise both companies are facing the danger of short term insolvency.

Intercontinental has low inventory turnover but it at least has maintained the same performance in 2007 as was in 2006. The company has shown improvement in collection of debtors but