Introduction
Crystal hotel Pty Ltd is a low star hotel which is performing well but facing challenges due to high employees’ turnover rate. It is located at a prime location in Sydney and is profitable. However, strong completion is being faced by the industry. In order to increase the hotel’s star rating, the management is thinking of improving its services by means of refurbishment and addition of services like massage center, gym, sauna, poolside, etc. This report has been prepared to analyze the financial health of the hotel for the year 2018 by means of vertical analysis of statement of financial position, vertical analysis of statement of profit and loss, and ratio analysis including solvency, profitability, liquidity, and efficiency.
Vertical Analysis
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Revenue Analysis
We can see through vertical analysis of the statement of profit and loss of Crystal hotel that its highest revenue is being made from bookings of rooms. Room revenue contributes about 56.09% of revenue to the total revenue generated in the financial year 2018 followed by 31.22% generated from food and beverages. Functions contribute 9.55%, and others contribute about 3.15% of the total revenue. Hence, it is recommended to further raise the quality of service and room ambiance to further generate high revenue from this segment. The room booking percentage of the industry is 62% of total revenue, which means Crystal still has room for improvement to obtain a greater percentage as the rest of hotel industry looks like. Industrial food and beverages are 30% in the year 2018 while it is 31.22% for Crystal hotel, which means it is performing above industrial average in this segment. It is recommended that experienced and skilled top management must be hired upon long term contracts so that services of rooms can be improved to make more revenue from them (Atrill & McLaney, 2016).
The Hall booking for functions is also above the industry average, but revenue generated from others is below industry. Hence the others portion of the Crystal hotel requires attention to be able to generate higher revenue from this segment as well.
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Cost of Goods Sold Analysis
The cost of goods sold from rooms is 10.66% for rooms which is above industry of 8% in 2018, and the cost of goods sold for functions is 10.94%, which is also above industry of 10%. However, the difference from industry is not big. Cost of goods sold from others is 2.63% for crystal and 3% for industry in the year 2018, which is better than the industry. In order to align itself with industrial benchmarks, it is recommended for crystal hotel to reduce its costs of sales a bit for both rooms and food. It can be seen from the statement of financial position that the hotel has a lot of property, plant, and equipment, which is estimated as 61.40% of total assets by means of vertical analysis of statement of financial position for the year 2018. Crystal can make use of these assets to secure short- and long-term debts. Moreover, these assets can also be utilized for generation of revenue (Zimmerman, 2016).
Ratio Analysis
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Profitability Ratios
Profitability ratios are matrix used by the business for the measurement of ability of the firm to generate revenue by making use of its assets. These include gross profit margin, net profit margins, return of assets and return on equity. The gross profit margin for Crystal was 75.78% in the year 2018 which is said to be lower than the industry’s gross profit margin of 81%. This shows that Crystal has generated less revenue as compared to the industry. It could have generated more employing efficient performance. Lower annual sales are a major contribution of the less gross profit margin (Bamber & Parry, 2012).
The net profit margin is as low as 6.74%, which is far less than the industry average of 11%. This is a very clear indicator that the hotel is unable to manage its expenses efficiently. It is recommended that a cut down in expenses in all segments is required by Crystal hotel so that its Net profit margin can be increased to be aligned with the industry average (Scott, 2016).
Crystal Hotel is a return on assets of 9.75%, which is quite low from industry average of 8% which means it is utilizing its assets and liabilities appropriately for generation of enough income. Hence, no financial risks can be associated with the business for the year 2018.
Moreover, the return on equity is 12.34% for the financial year of 2018, which is far better than the industry average of 9% only. This indicates the equity of the business is also being utilized well for the revenue generation of the hotel (Bamber & Parry, 2012).
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Efficiency Ratios
Efficiency ratios measure how efficiently the assets and liabilities of a business are being used for the process of profit generation. It is majorly assessed by using the inventory turnover ratio and receivable collection period. The inventory turnover ratio for Crystal is 5.70 which is lower than the industry average of 8.60. Hence, we can say that Crystal is not very efficient at generating revenue by using its assets and liabilities as compared to industry average. Hence more attention is required towards this area of performance. The account receivables collection period is the days within which the business is successful in obtaining money from credit customers. As for industry the receivable collection period is just 35 days whereas, for Crystal, the collection days are extended to 63 days approximately, which is almost double the industry average. This has also been mentioned in the case that Crystal compromises with its credit customers because they bring the major revenue to the hotel and have been in long-term contracts with Crystal Hotel. It is recommended that the collection period must be lowered down so that the business has enough cash on time to pay of its debtors as per decided terms (Bamber & Parry, 2012).
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Liquidity Ratios
The financial health of a company is analyzed by means of liquidity ratios, including current and quick ratio. The current ratio identifies how quickly the business can pay off its debts by using its assets while quick ratios measure the same but using only liquid current assets, which excludes inventory. Crystal has a current ratio of 1.26 which is quite below industrial current ratio of 3.20. The quick ratio is only 0.82 which is also far less than the industry average of 2.12. It is recommended that it should lower its debts and increase its sales volumes to make its liquidity situation better (Bamber & Parry, 2012).
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Solvency Ratios
This is a matrix that measures the capability of a business to pay off its debts both short and long without using external funding. These are measured by debt ratio and debt to equity ratio. A 32.96% debt ratio and 22.7% debt ratio mean the business is quite healthy and does not seek external funding to pay off its own liabilities (Scott, 2016).
Additional Industry Specific Benchmarks
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Occupancy Percentage Rate
A key performance indicator in the hospitality industry is the occupancy percentage rate. It is calculated by using the below formula:
Occupancy percentage Rate = (Occupied Rooms)/(Available Rooms)
Based upon average price per night per room in crystal hotel, it can be calculated that almost 92 rooms were kept occupied on average out of 160 in total, which is almost 58%. It appears that other rooms remain free and booking per day is not that good. This is mainly because Crystal is mostly reliant upon its corporate customers whose recurrence rate is obviously not high. The occupancy is not very high, which suggests that instead of expanding by means of further operations, the hotel must focus upon increasing its bookings per day. Based upon the financial statements of Crystal hotel it appears that it has the ability to generate more revenue, and this can be obtained by refurbishment as being planned by hotel management (Warren, Reeve, & Duchac, 2017).
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Average Room Rate
This refers to average room revenue per room occupied in the hotel for a definite time period. In other words, we can say that it is average daily rate of room revenue. This ratio is used in the hotel service industry to identify whether the resources of the hotel are being utilized efficiently or not. Planning for further expansion can also be analyzed based upon this ratio in the case of Crystal hotel.
It is calculated by using the below mentioned formula:
Average Room Rate = (Total Revenue Generated)/(Total Number of Rooms Occupied)
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Gearing Ratio
The financing of assets in any business is done either by means of obtaining debt of floating equity shares. Gearing ratio is obtained by dividing the debt of the hotel by the total equity of the hotel. In the case of Crystal hotel, gearing ratio for the financial year 2018 is calculated to be 0.33 which means liabilities of the hotel are lower than the shareholders’ equity. Hence, the business is not considered to be in any type of financial risk. Low gearing means the business is less reliant upon loans from lenders upon interest. Low gearing also indicates that less use of assets is being made by the business to generate revenue. Crystal has a chance of further lowering its debts and using its assets for revenue generation. This would also reduce interest expenses, which in turn would raise net profit margins (Tracy, 2012).
References
Atrill, P., & McLaney, E. (2016). Financial Accounting for Decision Makers (8 ed.). Pearson.
Bamber, M., & Parry, S. (2012). Accounting and Finance for Managers: A Decision-Making Approach (2 ed.). Kogan Page, Limited.
Scott, P. (2016). Accounting for Business (2 ed.). Oxford University Press.
Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
Warren, C. S., Reeve, J. M., & Duchac, J. (2017). Financial & Managerial Accounting (10 ed.). Cengage Learning.
Zimmerman, J. (2016). Accounting for Decision Making and Control (1 ed.). McGraw-Hill Higher Education.
Appendix
| Profitability Ratios | 2018 | Industry |
| Gross Profit Margin | 75.78% | 81% |
| Net Profit Margin | 6.74% | 11% |
| Return on Assets | 9.75% | 8% |
| Return on Equity | 12.34% | 9% |
| Efficiency Ratios | ||
| Inventory Turnover | 5.70 | 8.60 |
| Number of days Inventory Held | 77.82 | |
| Accounts Receivable Turnover | 5.78 | |
| Accounts Receivable Collection Period | 63.15 | 35.00 |
| Liquidity Ratios | ||
| Current ratio | 1.26 | 3.20 |
| Quick Ratio | 0.82 | 2.12 |
| Solvency Ratios | ||
| Debt to Equity Ratio | 32.96% | |
| Debt Ratio | 22.70% | |
| Equity Ratio | 68.85% | |
| Interest Coverage | 29.85 |
