Assignment on Use of Ratio Analysis for Performance Measurement Tool
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Added on 2020-06-03
Assignment on Use of Ratio Analysis for Performance Measurement Tool
Added on 2020-06-03
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FINANCIAL PERFORMANCE ANDPOSITION OF A COMPANY
Table of ContentsINTRODUCTION...........................................................................................................................1Overview of PPHE Hotel Group, Whitebread and MP Plc.........................................................1Academic and sector literature related to appropriate theory......................................................2The application of theory to practice...........................................................................................4Ratio analysis of Thomas Cook, TUI Group and Carnival Plc....................................................5CONCLUSION..............................................................................................................................11RECOMMENDATIONS...............................................................................................................12IMPLICATIONS FOR THE FUTURE.........................................................................................12REFERENCES..............................................................................................................................13APPENDIX....................................................................................................................................16
INTRODUCTION Since 2010, UK hospitality sector shows a substantial growth in the terms of employmentand their contribution to GDP. Rising number of domestic and overseas visitors broughtopportunities for the companies to succeed their financial position through serving millennialaudience. PPHE Hotel Group, Whitebread and MP Plc are some leading hospitality companiesthat listed on LSE. All the companies are striving towards gaining success through drivinginnovation and delivering excellent quality leisure products and services that tailor customer’srequirement appropriately. The aim of the current assignment is to investigate the use of ratioanalysis as a performance measurement tool. The technique will be critically examined throughvarious academic literature views point and will be use practically to assess financialperformance of three cited hospitality companies. Finally, based on the results, firm will berecommend with well informed plans to improve future business performance. Overview of PPHE Hotel Group, Whitebread and MP PlcPPHE Hotel Group is the biggest company which is engaged in hospitality industry. It isheadquartered in Netherlands and also it is listed on London Stock Exchange. It has broad brandportfolio and having partnership with another leading hospitality brand Radisson Hotel Group. Ithas earned 325 billion of revenue in euros at the end of 2017 financial year. It has exclusiverights in nearly 56 countries. It has highly exotic hotels in many countries including Germany,Europe and other nations. Whitebread Plc is another biggest hospitality company listed on London Stock Exchange(LSE). It is headquartered in UK. It is one of the oldest hospitality organization operating in UKand is primarily engaged in coffee shop, restaurant and hotel business. Organization has earned2.921 billion at the end of 2016 financial year. Moreover, it has several divisions serving invarious countries. One of the main division is Premier Inn having over 750 hotels alone in UK. MP Plc is the largest hospitality industry headquartered in UK. It is real estate hospitalityindustry managing, franchising and leasing hotels in various countries. It also offers hotelmanagement consultancy to hotel owners. Its vision statement is to become the leadinghospitality real estate company by offering effective and unique assets management services topeople. 1
Academic and sector literature related to appropriate theory The objective behind this research is to provide clarity about importance of financialratios' analysis which is required in the company so that financial condition may be easilyascertained. In this context, author has (Rodrigues and Rodrigues, 2018) said that computation offinancial ratios is quite important for the company to assess position with reference to itscompetitors. Income statement and balance sheet provides way to carry out financial ratios whichare helpful for company and various stakeholders. It is essential so that creditors and investorsmay take effective and better decisions for yielding better returns to them. Various ratios such asprofitability, liquidity, efficiency, investment and gearing ratios help to ascertain financialposition and provides clarity to the company and other stakeholders to take better decisions. In contrary to this, (Katchova and Dinterman, 2018) argued that financial ratios does notprovide qualitative information regarding performance of the company as it is purely based onquantitative information. This is the greatest disadvantage of calculating financial ratios. This isrequired as there are various qualitative aspects which are essentially required for assessingperformance of the company. This is required while evaluating performance of the company. Incontrary to this, (Wolf, 2018) author says that financial ratios' analysis is quite beneficial for thecompany as it help to evaluate management strategy and assess the effectiveness of theperformance of the organisation. This provides clear structure of firm so that it may be able toimplement well-mannered strategies so that company may be able to come on right track ontimely manner. In relation to this, (Patel and Ranjith, 2018) says that financial performance help to assesseffectiveness of firm and as such, structured decisions can be made so that organisation may beable to enhance customer satisfaction in a better way and help to generate desired revenue withmuch ease. Financial statements such as balance sheet, income statement assists in carrying outfinancial ratios so that performance of company may be easily ascertained. In addition to this,(Gregory, Matthew and Baguley, 2018) says that financial ratio analysis provide clarity about theliquidity and profitability position of the company along with other ratios such as solvency andinvestment. The author (Doumpos and et.al., 2018) says that financial statements are the majorelements for calculating ratios and provide analysis related to performance of the organisation in2
effective way. Without this information, company cannot ascertain financial ratios. Thus,financial statements help to calculate financial ratios with much ease. Moreover, financial data isquite helpful for assisting in carrying out ratios with much ease. In relation to this, (YILDIZ,Mushtaq and Camanho, 2018) says that financial performance analysis is process of extractingout strengths and weaknesses of the company in effectively way. This help company to makestructured strategies for improving upon weaknesses. However, (Tinkelman and Fan, 2018)argued that financial performance analysis is that it may be manipulated by the company in orderto show false viability of the company. By using such information, user of financial informationmay be misguided and as such, wrong decisions can be taken by them. In relation to this,(Laitinen, 2018) says that biggest limitation of financial performance analysis is that it is basedon historical figures and as such, corporate cannot plan for future in effective way. Moreover,comparison between different years cannot be made as previous year's data might lead toinflation and as a result, comparison cannot be made which provides misleading results toorganisation and to various stakeholders of the company which relies on financial analysis formaking decisions. In contrary to this, (Zhang and et.al., 2018) says that financial ratios are important part ofthe business and it can adopt strict strategies to outreach rivals. Company may assess financialperformance of other company and try to assess weaknesses so that it may extract benefit out ofit. This help to gain maximum competitive advantage with much ease. These help organizationsto achieve common targets by ascertaining financial performance of other company in effectiveway. By initiating this, it may be able to outreach competitors with much ease. This is required inorder to attain market share and customer's satisfaction in the best possible way.In relation to this, (Vaca-Tapia and et.al, 2018) says that financial ratio is quite helpfulfor organisation as it is able to draw out trend charts or trend analysis can be easily done byorganisation and as such, comparison can be easily accomplished with much ease. In addition tothis, (Paradi, Sherman and Tam, 2018) says that financial ratio analysis is quite helpful forexternal and internal stakeholders as they can easily ascertain financial condition of companyjust by seeking numbers provided by ratios. This saves time as full financial statements are notrequired to be assess by company and as a result, financial ratios are essentially required for thecompany to draw meaningful conclusions with much ease. Thus, concrete interpretation can be3
made regarding financial performance of the company. Financial ratios are quite useful inhospitality sectors. Financial ratio analysis is criticised (Trussel and Patrick, 2018) on the grounds that itprovides historical information about the performance of company but stakeholders are keen toknow about future and current aspect of organization which is highly criticized by marketanalysts. This is correct as ratios are calculated by taking past year base which providesirrelevant information to users as they want to assess current aspect of company and where it willbe in near future but ratio analysis does not provide such required information to users offinancial information up to high extent. In contrary to this, (Sun, 2018) says that financial ratioanalysis eases users of accounting information as it makes easier for them to analyze financialstatements in the best possible way and as such, interpretation can be made with much ease. Inaddition to this, (Nguyen, Rahman and Zhao, 2018) says that financial ratio analysis is useful formaking inter firm comparison. This can be easily judged by carrying out debt equity ratio andfirm with higher ratio will be more prone to default on making interest obligations. Thus,financial ratios are helpful for making inter firm comparison in effective way. Ratios provideclarity about the financial health of the company. The application of theory to practice As discussed above, it is studied that ratio analysis served as a veritable means tomonitor, measure, evaluate and improve the performance of an undertaking. It is one of the mostsignificant way to interpret the quantitative results of the enterprise and used by financialmanagers who are extremely interested in assessing company’s capital structure, financial statusand profitability performance and compare it with the prevailing industry standard to highlyimprovements as well as deterioration. It is a systematic way to analyze both the internal as wellas external financial statements and assist managers in appraising business performance in future(Kim and et.al., 2016). Analysis of current performance facilitates managerial team to judge therelationship between two different amounts containing in its financial statement. Ratio presentshistorical trends, compares current results and gives an indication to asses future possibility.Thus, by this way, it works as a signpost for making better policies and plans that will enablefirms to grow in near future (Revell, 2016). 4
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