Financial Analysis of Crystal Hotels: Vertical and Ratio Analysis
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This article provides a detailed financial analysis of Crystal Hotels through vertical and ratio analysis. It includes suggestions for improvement and a comparison to industry averages.
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Running head: FINANCIAL ANALYSIS Financial Analysis Name of the Student: Name of the University: Author’s Note:
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1 FINANCIAL ANALYSIS Table of Contents Part 1................................................................................................................................................2 Vertical Analysis of Income Statement.......................................................................................2 Vertical Analysis of Balance Sheet.............................................................................................3 Computation of Key Financial Ratios.........................................................................................5 Part 2................................................................................................................................................5 Vertical Analysis of Income Statement.......................................................................................6 Ratio Analysis of Crystal Hotels.................................................................................................7 Reference.......................................................................................................................................10
2 FINANCIAL ANALYSIS Part 1 Vertical Analysis of Income Statement
3 FINANCIAL ANALYSIS Vertical Analysis of Balance Sheet
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5 FINANCIAL ANALYSIS Computation of Key Financial Ratios Part 2 The main purpose of this part is to analyze the vertical analyze conducted in part 1 and interpret the results for the same. Vertical analysis provides a business an opportunity to compute percentage of different items which are based on a particular constant or base which is predetermined (Greenbaum, Thakor & Boot, 2015). The technique is considered to be very useful for analyzing the performance and development of a business. In this case, vertical analysis is conducted on the income statement and balance sheet of Crystal Hotels. The base which is considered for the income statement is the figure of sales and for balance sheet, the
6 FINANCIAL ANALYSIS figures of total assets and total equity and liabilities are taken (Petty et al., 2015). The percentage are then to be compared to industry averages in order to establish comparative analysis. Vertical Analysis of Income Statement The vertical analysis which is conducted on the income statement of Crystal Hotel reveals that total revenue is taken as a constant for the purpose of computing percentages for various items of the income statement. The total revenue which the business earns is significant out of which revenue which the hotel earns from room service is enormous and forms a major part of the total revenue earned by the business (Horngren & Harrison, 2015). The percentage is shown to be 61.88% in case of Crystal Hotel while the industry average for the same appears to be 57%. This is a favorable indicator which suggest that the room service of the hotel is better than most of the hotels in the industry and therefore the room sales for the hotel is so much more. The management of Crystal Hotels also earns a significant amount of revenue from food and beverage services and functions and other incomes as well (Brusca et al., 2016). The cost of sales of Crystal Hotel in terms of percentage is shown to be much more than industry average which suggest that there is ample scope for improvements in this area. The cost of sales for the year 2015 is shown to be 27.59% which is more than the industry average. The personal costs of the business reveal that the personal costs incurred for room expenses and food and beverages are shown to be 7.60% and 7.08% for the year 2015. These estimates are lower than the industry average of the business which is a positive sign and moreover, the total of the personal costs which in percentage terms comes to 25.38% is also lower than the industry average. The total unallocated expenses however of the industry which is shown to be 16% is lower than the estimate for unallocated expenses for Crystal Hotel which is shown to be 18.31%. The
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7 FINANCIAL ANALYSIS management of the hotel needs to focus on improving the same for better efficiency of the business. In order to bring about certain changes or improvements in the business structure, the following suggestion needs to adhered to: 1.The food and beverage services of many hotels in the industry are better which is suggested by the high industry average as compared to Crystal Hotel. The management needs to make subtle changes in the food and beverages services so that the same area can earn maximum revenues and contribute to the total revenue of the business. 2.The results of the vertical analysis clearly show that the cost of sales of the business is high which needs to be improved. This will not only mean that the business will be improving the profits of the business but also making improvements in the operational structure of the hotel. 3.The other costs of the business which is related to certain unallocated activities and even security expenses also need to be cut down by the management so that overall revenue of the business can be increased and the business will have more profit generating capacity. Ratio Analysis of Crystal Hotels Ratio analysis is an important tool which is used to measure the financial and non- financial performance of a business and measures performance in terms of liquidity, solvency, efficiency and profitability of a business (Carraher & Van Auken, 2013). The ratio analysis which is computed and shown in Part 1 comprise of certain ratios which are considered to financial indicators for the overall success of a business (Ongore & Kusa, 2013). The profitability ratios are computed which consist of gross profit margin, net
8 FINANCIAL ANALYSIS profit margin, return on assets and return on equity. The gross profit margin is computed and shown to be 72.41% which is slightly lower than the industry average of 81%. The net profit margin of Crystal Hotel is shown to be 19.53% which is more than the industry average which is shown to be 11%. The net profit margin reveals that Crystal Hotel is much more profitable than most of the hotels in the industry (Heikal et al., 2014). The return on assets and return on equity are considered to be financial indicators for the overall success of the business and the same are computed to be 21.23% and 28.84% respectively. Both the estimates of return on assets and return on equity of the business is shown to be much more than the industry average (Velnampy, 2013). This shows that the overall performance of the business has developed and the company at current stage performing exceptionally well. In addition to this, the hotel business is also keeping the shareholders happy which is suggest by the favorable return on equity estimate of the business (Zeitun & Tian, 2014). The inventory turnover ratio and account receivable turnover ratio forms part of the efficiency ratio of the business. The inventory turnover ratio of the Hotel business is shown to be 6.40 which is lower than that of the estimates of the industry average. The management needs to make improvements in the same in order to avoid a situation of blockage of funds (Makkar & Singh, 2013). The industry average for account receivable period is shown to be 35 days whereas the period for Crystal Hotel is shown to be 92.73 days. The estimates result signifies that the management needs to bring about significant changes in the debt policies of the business in order to earn more revenues for the business and have minimal impact on the liquidity of the business. The current ratio and the quick ratio of the business shows the liquidity position of the business. The current ratio of Crystal Hotel as computed is shown to be 1.86 which is lower than that of the industry average which suggest that there are industries which are much more liquid
9 FINANCIAL ANALYSIS than Crystal Hotel. The quick ratio also shows the ability of the company to meet the day to day expenses of the business and the same is shown to be 1.46 which is lower than the industry average which is shown to be 2.12. The debt to equity ratio of the business reveals the reliability of the business on the source of capital which the business utilizes. The debt to equity ratio is shown to be 35.81%. The equity ratio of the hotel is shown to be 73.63% which reveals that the management of the Hotel relies more of equity capital instead of debt capital for meeting the financial obligations of the business. The management however, needs to achieve a balance between debt and equity sources of capital to get best results for the business.
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10 FINANCIAL ANALYSIS Reference Brusca, I., Caperchione, E., Cohen, S., & Rossi, F. M. (Eds.). (2016).Public sector accounting and auditing in Europe: The challenge of harmonization. Springer. 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. Greenbaum,S.I.,Thakor,A.V.,&Boot,A.(Eds.).(2015).Contemporaryfinancial intermediation. Academic Press. Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR),againstcorporateprofitgrowthinautomotiveinIndonesiaStock Exchange.InternationalJournalofAcademicResearchinBusinessandSocial Sciences,4(12), 101. Horngren, C., & Harrison, W. (2015).ACCOUNTING: BSB110. Pearson Higher Education AU. Makkar, A., & Singh, S. (2013). Analysis of the financial performance of Indian commercial banks: A comparative study.Indian Journal of Finance,7(5), 41-49. Ongore, V. O., & Kusa, G. B. (2013). Determinants of financial performance of commercial banks in Kenya.International Journal of Economics and Financial Issues,3(1), 237-252.
11 FINANCIAL ANALYSIS Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015).Financial management: Principles and applications. Pearson Higher Education AU. Velnampy, T. (2013). Corporate governance and firm performance: a study of Sri Lankan manufacturing companies. Zeitun, R., & Tian, G. (2014). Capital structure and corporate performance: evidence from Jordan.