Financial Management for the Hotel Industry

This report analyzes the financial results of Gatsby Grange, a hotel company, using ratio analysis. It covers profitability, liquidity, and gearing ratios. The report also discusses the importance of ratio analysis and its benefits and limitations in decision-making within the hotel industry.

Financial management for the hotel industry

EXECUTIVE SUMMARY
The report analyses Gatsby Grange's financial results by measuring various financial
ratios to determine the current corporate financial situation. It also involves critical detailed
ratios and any ratio variations to evaluate the operation of hotels. Along with this outlines the
benefits and drawbacks of object ratios to consider their significance in decision-making.

Contents
INTRODUCTION...........................................................................................................................................4
MAIN BODY.................................................................................................................................................4
Task 1......................................................................................................................................................4
Task 2....................................................................................................................................................14
REFERENCES..............................................................................................................................................15

INTRODUCTION
Proper examination of the financial report is necessary for companies so that executives may
take reasonable measures for specific styles of decisions. Financial reports analysis can be
carried out using a variety of methods such as ratio analysis (Zolfani and Chatterjee, 2019). The
project study is based on Gatsby Grange company's financial review, which is part of Boutique's
small chain in the UK. The study covers extensive details on various kinds of ratios, the role that
this methodology plays for businesses. In addition, limitation of this technique for hospitality
industry companies is also mentioned. The chosen hospitality sector company is Sheraton Hotel.
MAIN BODY
Task 1
(a) Calculation and analysis of financial information on the basis of ratio analysis.
Profitability ratio- It is interpreted as a type of ratio that firms use to determine the
level of profit margins of the various kinds of activities and tasks (Hatefi, 2019). A
number of ratios are listed under this, and some of them are measured in this way:
 Gross profit ratio- Gross profit / net sales * 100
All data in ‘000 except
gross margin
Year
2018
Year
2019
Gross profit 5050 5150
Net sales 5500 6000
Gross profit ratio 91.82% 85.83%

2018 2019
82
84
86
88
90
92
94 91.82
85.83
Gross margin
Analysis- The above chart shows that the gross margin of the company that dropped in 2019
compared to 2018. That is mainly regardless of smaller operating income rises. Therefore,
organizations should concentrate on sales reducing costs (Nagana Gowda and Raftery, 2019).
 Net profit ratio- Net profit/net sales*100
All data in ‘000 except net
margin
Year
2018
Year
2019
Net profit 4008 4073
Net sales 5500 6000
Net profit ratio 72.87% 67.88%
2018 2019
65
66
67
68
69
70
71
72
73
74 72.87
67.88
Net margin

Analysis- As with the gross profit, the net income margin also dropped in 2019 relative to 2018.
It was 72.87 percent, as in 2018, which changed to 67.88 percent in year 2019. This is leading to
decreased net profit in 2019 due to higher expenditures (Dance and Imade, 2019).
 Return on assets ratio- Net income / Total assets
All data in ‘000 except
return on assets ratio
Year
2018
Year
2019
Net income 4008 4073
Total assets 7565 7890
Return on assets ratio 0.53 0.52
2018 2019
0.515
0.52
0.525
0.53
0.535 0.53
0.52
Return on assets
Analysis- In both years the productivity of producing return on the above company's assets is
closely related. Their return on assets for 2018, 2019 including both, was 0.53 and 0.52. That's
not in the perfect position, but again, and business must concentrate on good leadership of their
assets so that they can generate higher amount of return (Perton, Clayton and Beroza, 2020).
 Return on capital employed- Profit before interest and tax / capital employed
All data in ‘000 except
return on capital employed
ratio
Year
2018
Year
2019
Profit before interest and 5050 5150

tax
Capital employed 6226 6274
Return on capital
employed 0.81 0.82
2018 2019
0.804
0.806
0.808
0.81
0.812
0.814
0.816
0.818
0.82
0.822
0.81
0.82
ROE
Analysis- This corporation's return on capital employed ratio was raised by a bit of a percentage.
As in 2018, that was 0.81 and for 2019 was 0.82. It states that the business produces strong
return on its investments in 2019 relative to 2018. Yet their level is less than (> 1) and needs to
be changed (Habibi, Sungkono and Sarno, 2019).
Liquidity ratio- This can be recognized as a group of ratio that is assessed by firms to know
regarding liquidity situation for a specific time period (Gao, Dong and Wang, 2019). With the
assistance of this ratio, finance executives will find it much easier to know about the worth of
their total assets in addition to making payment of debts. This consists a range of ratios and some
of them are as:
 Current ratio- Current assets / current liabilities

All data in ‘000 except
current ratio
Year
2018
Year
2019
Current assets 1726 1624
Current liabilities 1339 1616
Current ratio
1.29
times
1.00
times
2018 2019
0
0.2
0.4
0.6
0.8
1
1.2
1.4 1.29
1
Current ratio
Analysis- Company tried to keep its current ratio in an ideal form of ratio of 2:1 in both years.
From above chart, this can be inferred that company has poor current ratio in year 2018 and
2019. Such as in year 2018, this was of 1.29 which reduced and became of 1 times. Hence, above
company should try to raise their current assets (Belmekki, Hamza and Escrig, 2019).
 Quick ratio- Quick assets / current liabilities
All data in ‘000 except
quick ratio
Year
2018
Year
2019
Quick assets 276 204
Current liabilities 1339 1616

Quick ratio 0.21 0.13
2018 2019
0
0.05
0.1
0.15
0.2
0.25 0.21
0.13
Quick ratio
Analysis- The business's quick ratio is therefore smaller than the optimal ratio of 1.5:1 times.
The ratio was 0.21 times in 2018 but declined and became 0.13 times in 2019. Thus above
business must aim to improve their liquidity position in order to improve their quick ratio (Yue,
Luan and Wu, 2019).
Gearnig ratio- This is classified as a form of ratio that firms use to compare debt with equity
(Nguyen, Nguyen and Park, 2019). Those ratios are measured below in such a way as to:
 Debt to equity ratio- Equity / debt
All data in ‘000 except
debt to equity ratio
Year
2018
Year
2019
Total debt 6076 6129
Total equity 2068 2056
Debt to equity ratio 0.34 0.34

2018 2019
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4 0.34 0.34
Debt to equity ratio
Analysis- The corporation's debt-to - equity ratio for both years is closely related, which is 0.34.
Nonetheless, this figure is smaller than 1 and indicates the corporation's poor success in making
loan payments as they do not have ample resources or equities to pay the differ volume of debts
(Lee, Lee and Hwang, 2019).
 Debt ratio- Total assets / Total debt
All data in ‘000 except
debt ratio
Year
2018
Year
2019
Total debt 6076 6129
Total assets 7565 7890
Debt ratio 1.24 1.29

2018 2019
1.21
1.22
1.23
1.24
1.25
1.26
1.27
1.28
1.29
1.3
1.24
1.29
Debt ratio
Analysis- The firm ’s debt level is in relatively good condition, because they have enough money
to allow their loans payable. As in 2018, their ratio was 1.24 and rose and in 2019 was 1.29. This
indicates that in both fiscal years, business has a strong financial position to service its debts
(Rudasill and Kamath, 2019).
(b) Why understanding of ratio analysis is important.
Different types of ratios are included in the accounting ratios, and each one plays a key role in
integrating knowledge in a company's financial position (Small, Dollie and Yasseen, 2019).
Three forms of ratios which are the productivity, liquidity and gearing ratio were measured and
evaluated in the above section of the study. In this way, the lower value of such ratios in relation
to the above-described compay is stated:
 The assessment and variance of the ratios plays a key role in the hospitality
management industry sectors (Sanny and Yanti, 2019). That is that of a business
may detect changes in financial results over the span of two years and then
implement appropriate approaches appropriately. As in the business Gatsby
Grange above, various types of factors are determined using prepared income
reports. Using these ratios they can evaluate those areas where their performance

is weak. They can also establish innovative plans and tactics for next year, in
order to solve weak points.
 In addition, the ratio analysis also plays an important role for firms in assessing
financial performance is properly evaluated in less time. It 's important that it will
become challenging for businesses to recognize and interpret their respective
financial statements (Shelton IV, Bakos and Harris, Ethicon 2019). Analysis of
the ratio gives a clear analysis of any factor including productivity, gearing
performance etc. As in the above-mentioned business Gatsby Grange, they have
calculated various forms of ratios and each gives a comprehensive description of
all kinds of aspects. Although the business can face various forms of challenges in
the lack of a ratio study, these time usage may be used to assess financial results
through ratio analysis.
 A crucial aspect of the ratio study is the financial results over two separate forms
over years is measured using this methodology. With that, administrators figuring
the variability in results is simpler (Karlin and Lessard, 2020). They computed
different kinds of ratios with regard to a variety of aspects, as in the above-
mentioned firm. Because of this, understanding trends in financial results of 2018
and 2019 became beneficial for them.
(c) Benefits and limitations related to application of ratios analysis to support or help in decision
making within tourism or hotel Industry:
The ratio study, when correctly implemented, sheds light on several of the problems
confronting the business and also highlights some potential ones (RAOand NARAYANA, 2020).
In reality, ratios are spies, they draw manager's attention to issues that need action. Here are
some other key benefits of assessing the ratios for above Sheraton Hotel:
 Financial ratio review may help explain or disprove the funding, spending and
organizational judgment of the company. They convert the financial statement into
comparative figures, thereby enabling management to accurately assess and evaluate the

financial condition and effects of any actions on the business (MANISHA and
SATYANARAYANA, 2020).
 This optimizes convoluted monetary financial accounts information into standard
operating ratios, corporate strategy.
 Management often has a stake in the overall extent or degree of productivity of the
company. We would like to consider that the organization has the potential to meet both
its short-term and long-term commitments against its borrowers, to guarantee a
reasonable return to its shareholders and to obtain optimum use of the properties of the
organization. It is possible as all the percentages are taken together.
 Ratio assessment helps to define weaknesses and inmates to planning in those regions.
There is a misunderstanding of many of the specifics in the complex financial accounts
and estimates will help identify certain problems (Puustinen,Hilska and Guina, 2019).
 It assists the company to conduct comparison analyzes with other firms, industry
standards, intra - company predictions etc. This should allow the organization to properly
understand its fiscal position.
 Financial ratio review indicates the degree to which the funds are treated or operated and
utilized productively. Similar operating ratios show the operating performance. In fact,
the solvency of a business is based on the revenue collected by using its assets.
 In turn, ratio analysis is used to assess the capacity of a business to service long-term
debts. Long-term solvency position of every creditor is a top consideration for present
and potential owners of long-term creditors, security professionals and sector. This is
assessed through leverage / capital structure and profitability ratios implying earnings
potential and operating effectiveness. Ratio analysis depicts both major features and
corporate lack of strength in this respect (WADEKAR and ASHTEKAR, 2020).
Limitations of Ratio Analysis: Although ratios are very critical aspects of fundamental
reporting, they have some disadvantages in the tourism and hotel industry company Sheraton
Hotel such as:
 A corporation can make some year-end changes to its financial report to boost their
ratios. The percentages ultimately end up losing and become nothing more than model
optimization.

Levels ignore inflation-driven demand changes (Lei, Wang and Sui, 2019). Many measurements
are calculated using past values, and the changes within years of market rates are neglected.
Which does not adequately reflect the financial position.
 Financial indicators totally ignore the intangible dimensions of the Business. They just
take the income-relevant (quantitative) aspects into account.
 Since ratios only represent one aspect, they do not necessarily provide the true picture,
because several other considerations, such as public policy, economic conditions,
accessible capital, etc., need to be taken into account while evaluating ratios (Shaikh,
2020).
 Different financial policies relating to cost accounting, amortization etc. value generated
stats and profitability statements indistinguishable for 2 companies There are no
verification phases to the ratios. Thus companies can use various equations for various
amounts. One such case is Current Ratio, in which some firms take into consideration all
financial liabilities, while others neglect financial services overdraft charges from
contractual liabilities when assessing the current ratio.
 Strong function care should be exerted when assessing a measured profitability statement
for business in the hospitality sector. For e.g., Sheraton hotel in particular experiences
higher profits in a single season and its revenues are 35 percent of the annual revenue for
the remaining year. Hence gross margin and operating earnings give a biased picture
(Raina, 2020).
Task 2
Covered in PPT.

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