The present business report has been prepared for conducting a comparative income statement analysis of the Crystal Hotel’s Statement of Financial Position as at 30 June 2015 in comparison to the industry benchmark with the use of vertical analysis. This has been done for analyzing the revenue, cost of sales, personnel costs, unallocated operating costs and total costs. N addition to this, the financial performance of the hotel is carried out by examination of the profitability, efficiency, liquidity and solvency position of the business. The results obtained are compared with the industry benchmarks for evaluation of the financial position of the business.
This part of the assignment will discuss the profitability performance of Crystal Hotel for year 2015 with industry average to analyse how the business is performing as compare to industry. The below spreadsheet shows the vertical analysis of income statement in relation to Crystal Hotel for the period ending on 30 June, 2015:
The industry benchmark has been based on two main criteria; they are number of rooms and average room price range. The Crystal Hotel Pty Ltd has 160 rooms, which means there is required to select industry benchmark data of more 150 rooms from table 1 and average room price of Crystal Hotel Pty Ltd is $150 which means there is need to choose industry benchmark of $150 in table 2. Firstly there will comparison based on number of rooms and secondly on the basis of average room price.
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Industry Comparison |
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Particulars |
Crystal Hotel Pty Ltd |
Industry Data |
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Numbers of Rooms |
Average Room Price Range |
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Revenue |
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Rooms Revenue |
61.88% |
65% |
50% |
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Food and Beverage Revenue |
14.46% |
25% |
39% |
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Functions |
14.83% |
6% |
7% |
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Other Revenue |
8.83% |
4% |
4% |
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Total Revenue |
100.00% |
100% |
100% |
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Cost of Sales |
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Rooms Cost of Sales |
13.04% |
8% |
6% |
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Food and Beverage Cost of Sales |
12.47% |
8% |
11% |
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Other Cost of Sales |
2.08% |
2% |
2% |
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Total Cost of Sales (excluding personnel cost) |
27.59% |
18% |
19% |
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Personnel Costs |
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Rooms |
7.60% |
13% |
13% |
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Food and Beverage |
7.08% |
11% |
15% |
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Administrative and General |
4.60% |
4% |
4% |
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Sales and Marketing |
3.43% |
1% |
1% |
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Property Management and Maintenance |
2.67% |
2% |
4% |
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Total Personnel Costs |
25.38% |
30% |
36% |
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Unallocated Operating Costs |
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Administrative and General |
6.77% |
2% |
2% |
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Information Systems |
0.06% |
less than 4% or equal to 4% |
less than 5% or equal to 5% |
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Sales and Marketing |
3.09% |
3% |
2% |
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Security |
0.83% |
less than 4% or equal to 4% |
less than 5% or equal to 5% |
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Transportation |
1.25% |
less than 4% or equal to 4% |
less than 5% or equal to 5% |
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Property Operations and Maintenance |
4.51% |
5% |
5% |
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Utilities |
1.80% |
less than 4% or equal to 4% |
less than 5% or equal to 5% |
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Total Undistributed Operating Costs |
18.31% |
14% |
14% |
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Total Cost |
71.28% |
62% |
70% |
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Operating Profit |
28.72% |
38% |
30% |
The method of ratio analysis has been used for examining the profitability, efficiency, liquidity and solvency position of the Crystal Hotel Pty Ltd. The results obtained from calculating the different ratio’s for assessing the financial performance can be interpreted as follows:
Profitability Analysis
Profitability analysis deals with examining the profitability position of an organization for determining its bottom line and returns created for the investors. The profitability analysis of the Hotel is carried out by the use of the following ratios:
Gross Profit Margin: It can be regarded as a financial measure that is used for examining the financial health of an entity by depicting the amount of money left after meeting the cost of goods sold. It has been calculated with the use of following formula:
Gross Profit Margin=Gross Profit/Revenues (Madura, 2014)
It can be stated from the gross profit margin calculated for the hotel that its gross profitability is less as compared with the industry benchmark. This refers that the hotel should emphasize on reducing its cost of sales for meeting the industry benchmark. It is required by the hotel that it should manage its operating expenses efficiently for outperforming the market.
Net Profit Margin: It depicts the amount of revenue realized after meeting all the operating expenses such as interest, taxes and dividends from the overall revenue generated by a company/. it is calculated by the use of following formula:
Net Profit Margin=Net profit/Revenue (Moles & Kidwekk, 2011)
The ratio calculated for the hotel is 19.53% which is significantly higher than the industry benchmark of 11%. This depicts that it has outperformed the market and is very effectively managing its operational expenses in comparison to its competitors.
Return on Assets (ROA): It depicts the profitability realized by a company in comparison to its total asset base. The formula for calculation is as follows:
ROA=Net Income/Average total assets (Weston & Brigham, 2015)
ROA calculated for the hotel is 21.23% which is significantly higher than the industry benchmark of 8%. It indicates that the hotel management is good in effectively using the assets for generating earnings in comparison to overall industry.
Return on Equity (ROE): It indicates the rate of return realized by the owners of a company on their respective shares. The formula for calculation is as follows:
ROE=Net Income/Shareholder Equity (Ward, 2012)
ROE Of the hotel is 28.84% which is higher than the industry benchmark of 9% depicting the high efficiency of the hotel to use its investments for generating earnings in comparison to the overall hotel industry.
Efficiency Analysis
This indicates the efficiency of a company to effectively use its assets and liabilities for generating sales. It has been assessed with the use of following ratio’s:
Inventory turnover: It indicates the number of times a company sells its overall average inventory during the overall year. It is calculated with the use of following formula:
Inventory turnover= Sales/Average Inventory (Ackert & Deaves, 2009)
The inventory turnover ratio calculated for the hotel is 6.85% which is low as compared to the industry benchmark of 8.50%. This depicts that the hotel should manage its inventory level more effectively for attaining the industry benchmark. This will significantly aid the hotel to increase its sales and thereby improving the revenue realized.
Accounts Receivable Collection period: It indicates the number of days taken by a company for realizing cash from its receivables. It is calculated by the use of following formula:
Accounts Receivable Collection period=Outstanding Receivables/Total Sales
The ratio for the hotel is 108.01% which is very much high in comparison to the industry benchmark of 35%. This indicates that the hotel’s ability to maintain cash inflows is very good and thereby there is less financial risk regarding its non-efficacy to meet its financial obligations.
Liquidity Analysis
The analysis depicts the ability of a company to meet its current as well as long-term liabilities and is examined with the use of following ratios:
Current Ratio: It provides a comparison of the current assets possessed by the hotel in comparison to the current liabilities. It is calculated with the use of following formula:
Current Ratio=Current Assets/Current Liabilities (Ward, 2012)
The current ratio of the hotel is 1.86% which is less in comparison to the industry benchmark of 3.20%. This indicates that the efficiency of the hotel to meet its financial obligations is comparatively less as compared with its competitors in the industry.
Solvency Analysis
It depicts the ability of a company to meet its long-term financial obligations and can be examined with the use of following ratios:
Debt-equity ratio: It indicates the proportion of debt and equity used by a company in its capital structure and can be calculated as:
Debt-equity ratio=Debt/Equity (Ward, 2012)
The debt-equity ratio of the hotel is 35.81% which means that debt and equity base in the capital structure is adequate for realizing maximum return for the shareholders.
Conclusion
It can be stated from the overall analysis held in the context of the financial assessment of the hotel business that its profitability performance was lower than the industry average. In addition to this, it should place emphasis on improving its liquidity position for outperforming the market as depicted with the use of ratio analysis technique.
References
Ackert, L. & Deaves, R. (2009). Behavioral Finance: Psychology, Decision-Making, and Markets. Cengage Learning.
Brigham, F., & Michael C. (2013). Financial management: Theory & practice. Cengage Learning.
Damodaran, A, (2011). Applied corporate finance. John Wiley & sons.
Davies, T. & Crawford, I., (2011). Business accounting and finance. Pearson.
Madura, J. (2014). Financial Markets and Institutions. Cengage Learning.
Moles, P. & Kidwekk, D. (2011). Corporate finance. John Wiley &sons.
Ward, K., (2012). Strategic management accounting. Routledge.
Weston, J.F. & Brigham, E.F. (2015). Managerial finance. Hinsdale, IL: Dryden Press.
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