Financial Performance Analysis of Crystal Hotel Business

This report has been developed for assessing the financial performance of a hotel Crystal Hotel business with the use of techniques of vertical and radio analysis. It has been demonstrated with the use of vertical analysis that Crystal Hotel has very high cost as compare to industry. Also, the use of ratio analysis ahs depicted that the hotel is performing n some aspects better as compared to the industry such as profitability while in some context it is lacking to attain the industry benchmark as in liquidity ratios.

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BIZ201 Accounting for Decision Making

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Executive Summary
This report has been developed for assessing the financial performance of a hotel Crystal
Hotel business with the use of techniques of vertical and radio analysis. It has been demonstrated
with the use of vertical analysis that Crystal Hotel has very high cost as compare to industry .
Also, the use of ratio analysis ahs depicted that the hotel is performing n some aspects better as
compared to the industry such as profitability while in some context it is lacking to attain the
industry benchmark as in liquidity ratios.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Income Statement comparative analysis..........................................................................................4
Ratio Analysis..................................................................................................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
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.
Income Statement comparative analysis
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.
Industry Comparison
Particulars Crystal Hotel Pty Ltd Industry Data
Numbers of
Rooms
Average
Room Price
Range
Revenue
Rooms Revenue 61.88% 65% 50%
Food and Beverage 14.46% 25% 39%

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Revenue
Functions 14.83% 6% 7%
Other Revenue 8.83% 4% 4%
Total Revenue 100.00% 100% 100%
Cost of Sales
Rooms Cost of Sales 13.04% 8% 6%
Food and Beverage Cost
of Sales 12.47% 8% 11%
Other Cost of Sales 2.08% 2% 2%
Total Cost of Sales
(excluding personnel
cost) 27.59% 18% 19%
Personnel Costs
Rooms 7.60% 13% 13%
Food and Beverage 7.08% 11% 15%
Administrative and
General 4.60% 4% 4%
Sales and Marketing 3.43% 1% 1%
Property Management and
Maintenance 2.67% 2% 4%
Total Personnel Costs 25.38% 30% 36%
Unallocated Operating
Costs
Administrative and
General 6.77% 2% 2%
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%
Security 0.83%
less than 4%
or equal to
4%
less than 5%
or equal to
5%
Transportation 1.25%
less than 4%
or equal to
4%
less than 5%
or equal to
5%
Property Operations and
Maintenance 4.51% 5% 5%
Utilities 1.80%
less than 4%
or equal to
4%
less than 5%
or equal to
5%
Total Undistributed
Operating Costs 18.31% 14% 14%
Total Cost 71.28% 62% 70%
Operating Profit 28.72% 38% 30%
Comments and Recommendations
 Revenue: As per industry average Crystal Hotel has derived maximum revenue from
collection room revenue which is greater than the industry average based on average
room price range and less than number of rooms. It has been that revenue derived from
the food and beverages is really less as compared to industry average in both the cases.
Revenue from functions was twice the industry average and it was similar case with other
revenues. It is highly recommended to Crystal Hotel to make changes revenue structure
through focusing more on the food and beverage segment as company can easily increase
the revenue derived from the food and beverages which will help in improving the overall
sales (Brigham & Michael, 2013).
 Cost of Sales: Cost of Sales of Crystal Hotel was about 28 % of total revenue that shows
Crystal Hotel spends more on providing the services as compare to industry average. Cost

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of providing the rooms services and food and beverages was very high as compare to
industry. It is recommended to make measures to control the cost through applying the
total cost management approach.
 Personnel Cost: Personal cost of Crystal Hotel was relatively low as compared to
industry that shows Crystal Hotel has very good personnel management system that helps
to save cost. It is advised to reduce the cost incurred for sales and marketing (Damodaran,
2011).
 Unallocated operating cost: These costs were 18% in case Crystal Hotel but industry
average was 14%. As such there is no recommendation but Crystal Hotel should try to
allocate budget to operating cost only if it adds some value to the services.
 Total cost: Total cost must be reduced by the company by 5 % or 6% so that it can match
the industry average (Davies & Crawford, 2011).
Ratio Analysis
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

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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:

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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:

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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.