Financial Analysis for Managers

The current assignment provides a brief overview of the financial performance of an organisation listed in Muscat Securities Exchange. The evaluation is conducted with the help of vertical analysis and horizontal analysis, which assist in identifying trends in particular line items of the financial statements of the chosen organisation. Based on such analysis, appropriate recommendations are provided to the organisation so that it could improve its financial performance in future. The second section of the assignment deals with undertaking suitable investment decisions based on the provided alternatives with the help of internal rate of return. Finally, the assignment sheds light on identifying the most profitable scenario for the fertiliser manufacturer based on CVP analysis.

Running head: FINANCIAL ANALYSIS FOR MANAGERS
Financial Analysis for Managers
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL ANALYSIS FOR MANAGERS
Table of Contents
Introduction:....................................................................................................................................2
Question 1:.......................................................................................................................................2
Introduction:................................................................................................................................2
Task A:.........................................................................................................................................2
Task B:.........................................................................................................................................6
Analysis of profitability position and financial position of Gulf Hotels (Oman) Company
Limited SAOG:............................................................................................................................7
Question 2:.....................................................................................................................................10
Task A:.......................................................................................................................................10
Task B:.......................................................................................................................................11
Task C:.......................................................................................................................................12
Question 3:.....................................................................................................................................12
Task A:.......................................................................................................................................12
Task B:.......................................................................................................................................13
Task C:.......................................................................................................................................14
References:....................................................................................................................................15

2FINANCIAL ANALYSIS FOR MANAGERS
Introduction:
The current assignment would provide a brief overview of the financial performance of
an organisation listed in Muscat Securities Exchange. The evaluation would be conducted with
the help of vertical analysis and horizontal analysis, which would assist in identifying the trends
in particular line items of the financial statements of the chosen organisation. Based on such
analysis, appropriate recommendations would be provided to the organisation so that it could
improve its financial performance in future. The second section of the assignment would deal
with undertaking suitable investment decision based on the provided alternatives with the help of
internal rate of return. Finally, the assignment would shed light on identifying the most profitable
scenario for the fertiliser manufacturer based on CVP analysis.
Question 1:
Introduction:
For this section, the organisation that has been selected is Gulf Hotels (Oman) Company
Limited SAOG. It owns and operates the Crowne Plaza Hotel in Muscat, the Sultanate of Oman
and it is listed in Muscat Securities Market (Bloomberg.com 2019). In this section, critical
analysis has been made in terms of evaluating the financial standing of the hotel in the Oman
market. The techniques used vertical analysis and horizontal analysis of the income statement
and balance sheet statement of the hotel for the past three years, which have assisted in gaining a
clear insight of its performance in the hospitality industry of Oman.
Task A:
Income statement (Profitability position):

3FINANCIAL ANALYSIS FOR MANAGERS
Vertical analysis of income statement for the years 2016-2018:
Particulars 2016 (in RO,000) Percentage 2017 (in RO,000) Percentage 2018 (in RO,000) Percentage
Revenue 8,186 100.00% 8,175 100.00% 6,342 100.00%
Operating costs 5,865- 71.65% 5,821- 71.20% 5,273- 83.14%
Management and licence fees 225- 2.75% 227- 2.78% 153- 2.41%
Reservation and market assessment fees 120- 1.47% 120- 1.47% 92- 1.45%
Operating profit 1,976 24.14% 2,007 24.55% 824 12.99%
Finance income 5 0.06% 7 0.09% 7 0.11%
Finance costs - 0.00% - 0.00% 28- 0.44%
Other income - 0.00% - 0.00% 35 -0.55%
Fair value loss on financial assets at fair value through profit or loss-
unrealised - 0.00% 24- 0.29% - 0.00%
Profit before taxation 1,981 24.20% 1,990 24.34% 838 13.21%
Taxation 246- 3.01% 373- 4.56% 127- 2.00%
Net profit for the year 1,735 21.19% 1,617 19.78% 711 11.21%
Horizontal analysis of income statement for the years 2016-2018:

4FINANCIAL ANALYSIS FOR MANAGERS
Vertical analysis of balance sheet statement for the years 2016-2018:
Particulars 2016 (in RO,000) Percentage 2017 (in RO,000) Percentage 2018 (in RO,000) Percentage
Assets:
Non-current assets:
Property, plant and equipment 32,008 100.00% 31,834 100.00% 34,753 100.00%
Total non-current assets 32,008 95.15% 31,834 91.63% 34,753 94.85%
Current assets:
Inventories 36 2.20% 60 2.06% 50 2.65%
Other current assets - 0.00% 127 4.37% 176 9.32%
Trade receivables 717 43.91% 558 19.19% 532 28.18%
Other financial assets at amortised cost - 0.00% 17 0.58% 45 2.38%
Financial assets at fair value through profit or loss 25 1.53% 1 0.03% 1 0.05%
Cash and cash equivalents 855 52.36% 2,145 73.76% 1,084 57.42%
Total current assets 1,633 4.85% 2,908 8.37% 1,888 5.15%
Total assets 33,641 100.00% 34,742 100.00% 36,641 100.00%
Equity and liabiltiies:
Equity:
Share capital 3,428 11.99% 3,428 12.00% 3,428 12.12%
Share premium 58 0.20% 58 0.20% 58 0.21%
Legal reserve 1,143 4.00% 1,143 4.00% 1,143 4.04%
Revaluation reserve 22,796 79.76% 22,020 77.08% 22,020 77.86%
Retained earnings 1,157 4.05% 1,917 6.71% 1,631 5.77%
Total equity 28,582 84.96% 28,566 82.22% 28,280 77.18%
Liabilities:
Non-current liabilities:
Borrowings - 0.00% - 0.00% 1,912 29.40%
Provision for employees' end of service benefits 284 7.76% 315 6.94% 348 5.35%
Deferred taxation 3,376 92.24% 4,221 93.06% 4,243 65.25%
Total non-current liabilties 3,660 72.35% 4,536 73.45% 6,503 77.78%
Current liabilities:
Borrowings - - 338
Trade and other payables 1,147 81.99% 1,319 80.43% 1,399 75.30%
Taxation 252 18.01% 321 19.57% 121 6.51%
Total current liabilities 1,399 27.65% 1,640 26.55% 1,858 22.22%
Total liabilities 5,059 15.04% 6,176 17.78% 8,361 22.82%
Total equity and liabilities 33,641 100.00% 34,742 100.00% 36,641 100.00%
Vertical Analysis of Balance Sheet Statement:-
Horizontal analysis of balance sheet statement for the years 2016-2018:

5FINANCIAL ANALYSIS FOR MANAGERS
Particulars 2016 (in RO,000) 2017 (in RO,000) Percent Change
Assets:
Non-current assets:
Property, plant and equipment 32,008 31,834 -0.54%
Total non-current assets 32,008 31,834 -0.54%
Current assets:
Inventories 36 60 66.67%
Other current assets - 127 0.00%
Trade receivables 717 558 -22.18%
Other financial assets at amortised cost - 17 0.00%
Financial assets at fair value through profit or loss 25 1 -96.00%
Cash and cash equivalents 855 2,145 150.88%
Total current assets 1,633 2,908 78.08%
Total assets 33,641 34,742 3.27%
Equity and liabiltiies:
Equity:
Share capital 3,428 3,428 0.00%
Share premium 58 58 0.00%
Legal reserve 1,143 1,143 0.00%
Revaluation reserve 22,796 22,020 -3.40%
Retained earnings 1,157 1,917 65.69%
Total equity 28,582 28,566 -0.06%
Liabilities:
Non-current liabilities:
Borrowings - - 0.00%
Provision for employees' end of service benefits 284 315 10.92%
Deferred taxation 3,376 4,221 25.03%
Total non-current liabilties 3,660 4,536 23.93%
Current liabilities:
Borrowings - -
Trade and other payables 1,147 1,319 15.00%
Taxation 252 321 27.38%
Total current liabilities 1,399 1,640 17.23%
Total liabilities 5,059 6,176 22.08%
Total equity and liabilities 33,641 34,742 3.27%

6FINANCIAL ANALYSIS FOR MANAGERS
Particulars 2017 (in RO,000) 2018 (in RO,000) Percent Change
Assets:
Non-current assets:
Property, plant and equipment 31,834 34,753 9.17%
Total non-current assets 31,834 34,753 9.17%
Current assets:
Inventories 60 50 -16.67%
Other current assets 127 176 0.00%
Trade receivables 558 532 -4.66%
Other financial assets at amortised cost 17 45 0.00%
Financial assets at fair value through profit or loss 1 1 0.00%
Cash and cash equivalents 2,145 1,084 -49.46%
Total current assets 2,908 1,888 -35.08%
Total assets 34,742 36,641 5.47%
Equity and liabiltiies:
Equity:
Share capital 3,428 3,428 0.00%
Share premium 58 58 0.00%
Legal reserve 1,143 1,143 0.00%
Revaluation reserve 22,020 22,020 0.00%
Retained earnings 1,917 1,631 -14.92%
Total equity 28,566 28,280 -1.00%
Liabilities:
Non-current liabilities:
Borrowings - 1,912 0.00%
Provision for employees' end of service benefits 315 348 10.48%
Deferred taxation 4,221 4,243 0.52%
Total non-current liabilties 4,536 6,503 43.36%
Current liabilities:
Borrowings - 338
Trade and other payables 1,319 1,399 6.07%
Taxation 321 121 -62.31%
Total current liabilities 1,640 1,858 13.29%
Total liabilities 6,176 8,361 35.38%
Total equity and liabilities 34,742 36,641 5.47%
Task B:
Literature review on horizontal analysis:
Horizontal analysis is mainly used in analysing the financial statements for contrasting
historical data like line items or ratios over different accounting periods. This analysis could use
either percentage comparisons or absolute comparisons, in which the figures in each succeeding
period are denoted in the form of percentage of the baseline period and the baseline amount is
listed as 100% (Bekaert and Hodrick 2017). With the help of horizontal analysis, the analysts
and investors could analyse the driving forces of the financial performance of an organisation
over a number of periods along with identifying trends and growth patterns like seasonality. In

7FINANCIAL ANALYSIS FOR MANAGERS
addition, the analysts could be able to analyse relative changes in various line items over the
years and accordingly, it is possible to make projections (Churet and Eccles 2014).
Literature review on vertical analysis:
Vertical analysis is a technique of analysing the financial statements where each line item
is listed as a number of a base figure within the statement. Therefore, the line items on the
income statement could be represented as percentage of sales revenue, while the line items on the
balance sheet statement could be expressed as percentage of total assets or total liabilities
(Ehrhardt and Brigham 2016). This analysis assists in easy understanding and comparing the
financial statements of one organisation with another and across industrial sectors. The reason is
that it is possible to see the relative proportions related to account balances. Thus, vertical
analysis assists in gaining an insight of whether there has been improvement or deterioration in
performance metrics (Fernandes 2014).
Analysis of profitability position and financial position of Gulf Hotels (Oman) Company
Limited SAOG:
Profitability position:
From the horizontal analysis of the income statement, it could be seen that Gulf Hotels
has experienced a slight fall in revenue by 0.13% in 2017 and the decline is significant by
22.42% in 2018. Although the organisation has managed to minimise its operating expenses over
the year, it has not been enough to offset the fall in revenue. As a result, the operating profit of
Gulf Hotels has fallen by 58.94% in 2018. Finally, even though there has been fall in tax expense
by 65.95% in 2018, net profit of the hotel is observed to decline by 56.03% in 2018.

8FINANCIAL ANALYSIS FOR MANAGERS
From the vertical analysis of the income statement, it is evident that the operating costs of
Gulf Hotels have been 83.14% in 2018, which have been 71.20% in 2017 and 71.65% in 2016.
Due to this, there has been decline in percentage of operating profit as sales revenue, which is
obtained as 12.99% in 2018 compared to 24.55% in 2017 and 24.14% in 2016. As a result, the
impact could be observed on net profit as well, which has been 11.21% of total revenue in
comparison to 19.78% in 2017 and 21.19% in 2016.
Therefore, it is clear from the above analysis, Gulf Hotels has experienced a significant
decline in its profitability position over the years owing to the decline in sales revenue. Such
downfall in sales revenue might be due to the premium pricing strategy adopted by the
organisation or its competitors might be providing similar services at cheaper prices in the Oman
hotel industry.
Financial position:
From the horizontal analysis of the balance sheet statement of Gulf Hotels, it has been
identified that the organisation has sold a part of its property, plant and equipment in 2017, due
to which there has been fall in non-current assets by 0.54% in 2017. However, new plant and
machinery has been purchased in 2018 leading to rise in non-current assets by 9.17%. The trend
is not similar in case of current assets as well due to the fall in cash and cash equivalents by
49.46% in 2018. However, this decline has been offset by increase in non-current assets due to
which total assets have risen by 5.47% in 2018. However, such increase in assets is funded
mostly by liabilities, which is evident from increase in non-current liabilities by 43.36% and
increase in current liabilities by 13.29% in 2018. The decision to fund assets by liabilities is
undertaken for minimising its dependence on equity so that the management could undertake
decisions effectively (Fields 2016).

9FINANCIAL ANALYSIS FOR MANAGERS
According to the vertical analysis of the balance sheet statement of Gulf Hotels, it could
be witnessed that Gulf Hotels has experienced a fall in cash and cash equivalents as percentage
of current assets from 73.76% in 2017 to 57.42% in 2018. On the other hand, there has been
significant increase in long-term borrowings, deferred taxation and trade payables and thus, it
could be stated that the organisation is suffering from poor liquidity position in the Oman
market.
Recommendations:
From the above analysis, it has been identified that Gulf Hotels is suffering from poor
profitability and liquidity positions in the Oman hotel industry. Hence, for improving these
positions, the hotel is required to undertake certain measures, which are discussed briefly as
follows:
 The managers of Gulf Hotels need to adopt cross promotional sales strategy for
identifying and analysing big events to be taking place in the local region across the
period. After this, the hotel operators have to devise with a promotional strategy having
the potential; of coinciding with the event (Floyd and List 2016).
 Gulf Hotels could implement guest rewards sales strategy as well, in which the operators
of the hotel would formulate a system for rewarding those guests staying frequently with
the hotel or buying upgrades or referring their acquaintances or family members. This, in
turn, would lead to repeat bookings for the Gulf Hotels, which would assist in increasing
its sales revenue (Gippel, Smith and Zhu 2015).
 In addition, Gulf Hotels is required to minimise its operating costs and other fees so that
it could ensure higher profitability.

10FINANCIAL ANALYSIS FOR MANAGERS
 Gulf Hotels needs to emphasise more on aging accounts along with working hard to settle
due payments from the customers. This would assist the hotel in increasing its availability
of working capital (Gitman, Juchau and Flanagan 2015).
 Finally, Gulf Hotels is needed to control its overhead costs on professional costs, rent,
labour, marketing and others. By cutting these expenses, the organisation would be able
to retain more cash in the business (Baños-Caballero, García-Teruel and Martínez-Solano
2014).
Question 2:
Task A:

11FINANCIAL ANALYSIS FOR MANAGERS
In case of City Cinemas, if it starts a new cinema at Sohar, the internal rate of return is
computed as 20.93%. On the other hand, if the organisation acquires the existing cinema, the
internal rate of return for the project would be 23.06%. An investor should select Take-over
existing cinema at Nizwa because it offers a relatively higher rate of 23% as compared to new
cinema at Sohar that provides a return of 21% in the same period. Hence, on the basis of internal
rate of return, City Cinemas should acquire the existing cinema; however, the non-financial
factors are not taken into consideration for undertaking this decision.
Task B:
Internal rate of return (IRR) is a method, which is utilised in capital budgeting, for
projecting the profitability of potential investments. In other words, it is the rate of return that
makes the net present value equal to zero (Hillier et al. 2014). From the general perspective, the
more the internal rate of return of a project, it is always desirable to undertake the project. This
method is uniform for investments of different types and therefore, it could be utilised for
ranking numerous prospective projects on relative basis. By assuming that the investment costs
are identical among different projects, the project having the highest IRR would be chosen
(Karadag 2015).
There are certain non-financial factors that have to be considered before undertaking the
final investment decision. In case of City Cinemas, some of those factors include the population
growth, consumer trends and competition level in the industry. If the organisation starts a new
cinema at Sohar, the population is expected to increase by 12%. However, if it takes over an
existing cinema at Nizwa, the population growth is expected to increase by 5%, which is lower
than the other option. When the consumer trends are taken into consideration, the same is
expected to grow by 10%, while in Nizwa, it would remain stagnated. Thus, there would not be

12FINANCIAL ANALYSIS FOR MANAGERS
any addition to the customer base of City Cinemas, if it takes over the existing cinema at Nizwa
(Loughran and McDonald 2016). However, if City Cinemas decides to start a new cinema at
Sohar, it would have to encounter fierce competition and thus, it has to undertake the project of
taking over the existing cinema.
Task C:
The level of completion is another issue that needs to be taken into account. It is evident
that the project would face little competition and fight for the market share. As a result, it is
likely to meet its marketing and sales targets. The consumer trends also determine the amount of
sales that a business can reach in the selected markets. Besides, the population growth is
relatively lower as compared to the 12% achieved by the other project. Therefore, by considering
all the above-discussed aspects and the relevant non-financial factors, it is recommended to the
organisation to acquire the existing cinema, as it would assist in maximising its overall return on
investment.
Question 3:
Task A:
Calculation of contribution per unit:

13FINANCIAL ANALYSIS FOR MANAGERS
Calculation of total contribution and profits for each scenario:
Task B:
From the above tables, it could be seen that the contribution per unit for Product A is
obtained as RO 4, while the same for Product B is computed as RO 2. This makes it evident that
Product A is more profitable compared to Product B. Hence, the organisation should concentrate
on manufacturing more units of Product B for maximisation of its net income. Therefore, three
different scenarios are taken into consideration. In the first scenario, it is assumed that the
organisation would manufacture 100 units of Product A and 200 units of Product B. In the
second scenario, the organisation is estimated to produce 150 units of Product A and 150 units of
Product B. In the third scenario, the organisation is expected to manufacture 200 units of Product
A and 100 units of Product B. After critical evaluation, it has been found that Scenario 1 would
keep the organisation in no-profit-no-loss situation, while Scenario 2 and Scenario 3 would lead
to net income of RO 100 and RO 200 for the organisation. Therefore, by considering these
aspects, it could be stated that scenario three is the most profitable option, as it results in the
highest amount of profits amongst the three options. It has a profit of RO 200 given the levels of
production.

14FINANCIAL ANALYSIS FOR MANAGERS
Task C:
CVP analysis is used to obtain the contribution and to find the break-even analysis point
(McLaney and Atrill 2014). Such a point has equal revenues and profits. When break-even point
is passed, it results in the generation of profit for the concerned business. CVP analysis evaluates
both the fixed and variable costs. The latter can be used in making decisions on whether to make
or outsource certain products.
CVP analysis undertakes a number of assumptions including that the selling price,
variable costs and fixed costs per unit are static (Salikin, Ab Wahab and Muhammad 2014). By
conducting this evaluation, different equations for cost, price and other variables are used, after
which they are plotted out on an economic graph. The key computations under CVP analysis for
undertaking decisions include contribution margin and net profit. The contribution margin
denotes the amount of profit or income made by an organisation before the subtraction of fixed
costs. In other words, it is the amount of money required for covering fixed expenses (Scholes
2015). Thus, with the help of this analysis, the managers of an organisation would be able to
calculate the break-even point and target operating income. In addition, CVP analysis assists the
managers to analyse the investment proposals, which would maximise the overall return on
investment. Finally, CVP analysis helps in setting the base in order to plan the marketing efforts
of a business organisation along with the base for budgeting activity.

15FINANCIAL ANALYSIS FOR MANAGERS
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16FINANCIAL ANALYSIS FOR MANAGERS
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