Vertical analysis is conducted to show the percentage of various items which is based on a constant. In case of vertical analysis of the income statement of a company, normally sales figure is taken as a base while in the case of vertical analysis of balance sheet of a company, total asset and total equity and liabilities are taken to be the base for computing the percentage of all the items shown in the balance sheet of the company (Grant, 2016). As per the requirement of the assessment, financial analysis of the performance of Crystal Hotel during the period. For this purpose, Vertical Analysis of the financial statements are conducted and the same is also compared with the industry average in order to establish a comparative analysis of the same (Edmonds et al., 2013).
As per the vertical analysis of the income statement where the total revenue of the business is considered to be the constant, the revenue which is earned from rooms is computed to be 61.88% which is much more than the average of the industry which is shown in total to be 57%. This shows the efficiency of the rooms of Crystal hotel is more appropriate and therefore the sales from the rooms is more than the industry average. The vertical analysis also shows that the revenues which the business earns from other sources such hall and other function of the hotel is also significant which is shown to be 8.83%. The total cost of sales which represents the cost which is incurred by the business in providing the services is computed to be 27.59% which is much more than the industry average for the same for the year 2015 (Weygandt, Kimmel & Kieso, 2015). This is an indicator that the internal control of the business is not that strong and therefore, the business needs to improve the same so as to reduce the overall costs and thereby increase the revenue of the business. While considering the personal costs which are incurred by the business, the room expenses and Food and Beverages expenses are computed to be 7.60% and 7.08% as per the analysis for the year 2015. The figures are less than that of the industry average which is a good sign and it signifies that the business has effectively cut down on the personal expenses in order to reduce the total costs which is associated with the business (Needles, Powers & Crosson, 2013). The percentage for total personal cost is computed to be 25.38% which is lower than the industry average. The total unallocated operating cost of Crystal Hotel is much more than the estimates of industry average which is shown to be 16% and the former is computed as 18.31%. The unallocated operating cost needs improvement in comparison to industry averages (Kim, Kraft & Ryan, 2013). The total cost of the business is shown to be 68% in the industry average and the figure which is computed for Crystal Hotel is close proximity of the industry average but the same needs to be reduced in order to improve the operational performance of the business and also increase the profitability of the business.
As per the analysis, the following areas of improvement can be suggested to the management of Crystal Hotel which can further improve the overall efficiency of the business:
As shown in figure 1, significant ratios are calculated for the purpose of establishing the performance of the business and also comparing the same with the industry average. The gross profit margin for Crystal Hotel is shown to be 72.41% which is lower than the industry average which is shown to be 81% which shows that there are hotels which have a better operational performance than Crystal Hotel which can be due to cost minimization policies and other factors. The net profit of the company is shown to be 19.53% which is significantly more than the industry average which shows that the business is fairly successful in the market (Carraher & Van Auken, 2013). The return on assets and return on equity of the Hotel is significantly more than the industry average which is a positive sign for the business and it also suggest that the business is a developing one. Both Return on Assets and Return on Equity is considered to be financial Indicators of success for the business and both of these estimates show positive sign for the Crystal Hotel (Vuckovic, Veselinovic & Drobnjakovic, 2016). The efficiency ratio mainly comprises of inventory turnover ratio and receivable turnover ratio which is shown in the above figure. The inventory turnover ratio of the business is shown to be 24.81 which is significantly more than the industry average which suggest that the business is effectively handling the inventory of the business. This also implies that the business follows aggressive sales policy and also offers large discounts in order to promote the overall sales of the Hotel. The debtor turnover ratio is also an important indicator of the efficiency of the business in handling the credit sales of the business and also reflects the credit policy of the business (Delen, Kuzey & Uyar, 2013). As shown in the table the business allows long periods as credit policy while the industry average is only 35 days. This signifies that either the business has trust on the customers and offers such credit policies to regular and loyal customers or the credit policy of the business is inappropriate.
The liquidity ratio of the business shows the ability of the company to meet the day to day expenses of the business in order to smoothly run the operations of the business. The current ratio of the Hotel is computed to be 1.86 and the acid test ratio is computed to be 1.63 which is lower than the estimates of the industry average which is shown in table above. The ratios are ideal which shows that the business has no liquidity problems but comparison shows that in the industry businesses exist which have a better liquidity position than Crystal Hotel. Therefore, it can be recommended that the management of Crystal Hotel needs to improve the liquidity position further in order stay competitive in the industry.
The debt equity ratio is considered to be a financial indicator of the success of the business and therefore the same are considered by the potential investors before making any investment in the business. The debt equity ratio shows the capital structure of the business and whether the same has balance or not. The debt equity ratio is computed to be 12.32% which means that the business is more depended on equity sources of capital rather than debt capital of the business. The suggestion which can be given to the business is to utilize more debt capital so as to attain a perfect capital structure which can improve the potentials of the business further. The equity ratio of the company is shown to be 73.63% which is natural due to the utilization of more equity capital in the capital mix of the business.
The additional industry specific benchmarks which can be used by Crystal Hotel for measuring the performance of the business in comparison to other business operating in the Industry:
Reference
Carraher, S., & Van Auken, H. (2013). The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), 323-336.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Edmonds, T. P., McNair, F. M., Olds, P. R., & Milam, E. E. (2013). Fundamental financial accounting concepts. New York, NY: McGraw-Hill Irwin.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), 783-823.
Maimbo, S. M., & Melecky, M. (2014). Financial sector policy in practice: benchmarking financial sector strategies around the world. The World Bank.
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Financial and managerial accounting. Cengage Learning.
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage Learning.
Vuckovic, B., Veselinovic, B., & Drobnjakovic, M. (2016). Analysis of profitability of selected agricultural enterprises in the autonomous province of Vojvodina, Republic of Serbia. Aktual’ni Problemy Ekonomiky= Actual Problems in Economics, (176), 147.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.
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