Financial Strength of Macdonald Hotels Limited: A Ratio Analysis

This report evaluates the financial strength of Macdonald Hotels Limited using liquidity, solvency, and profitability ratios. It provides recommendations for improving the company's financial health.

Running head: REPORT 0
accounting for managers
MARCH 22, 2019
STUDENT DETAILS:

REPORT 1
Executive summary
With the help of three key areas such as liquidity, solvency and
profitability, the financial strength can be assessed in proper manner.
There are various areas to be concerned significantly for improving the
financial health of company. In this report, financial strength of the
Macdonald Hotels Limited is evaluated. This report also states the
recommendations for the changes.

REPORT 2
Contents
Executive summary.......................................................................................................................1
Introduction.......................................................................................................................................3
Background of Organization.......................................................................................................3
Financial strength of Macdonald Hotels Limited..................................................................4
Profitability Ratios.......................................................................................................................4
Liquidity ratios.............................................................................................................................5
Solvency ratios.............................................................................................................................6
Areas of concern.............................................................................................................................7
Recommendation for changes or further investigation.....................................................7
References......................................................................................................................................10
Appendix: Ratio analysis............................................................................................................12
Financial statements....................................................................................................................13

REPORT 3
Introduction
To understand the value of a company, it is essential for the investors to
consider the financial health of entity. Providentially, this is not as
complex as this sound to conduct the financial analysis of the corporation
by evaluating the financial statements of the current year and previous
year. In the following report, the financial position of Macdonald Hotels Ltd
is analysed. The financial strength of company is discussed and critically
examined with the help of ratio analysis. This report also states the areas
for concern and recommendations for changes or further investigation
(Erasmus, et. al, 2016).
Background of Organization
Macdonald Hotels Ltd is the hospitality entity, situated in Bathgate, West
Lothian, Scotland. The major subsidiary of Macdonald Hotels Ltd is
Macdonald Hotels and Resorts. Macdonald Hotels and Resorts run various
holiday resorts and hotels in Spain and United Kingdom. The facilities of
this involve restaurants, spa facility, fitness amenities, functions, resorts,
destination wedding, and venue of wedding. It also provides the space to
conduct the business events, meetings, assemblies, and seminars.
Macdonald Hotels Ltd is the biggest four star and five star independent
hotel group of the United Kingdom (Bartram, Brown and Fehle, 2019).
Independent hotel group, Macdonald Hotels, has stated that the hotel has
attained the profits of four millions Pound in previous financial year. It has

REPORT 4
decreased net basic debt to the fourteen years less (Ferrer and Ferrer,
2016). The Independent hotel group, Macdonald Hotels having fifty-three
resorts and hotels in the United Kingdom, Portugal, Spain,and Ireland,
issued the annual results of a year to 30 March 2017. These annual results
stated that the like-for-like turnover of independent hotel
group, Macdonald Hotels was up by the five per cent to £7.8 million and
the operating profit was up eight per cent to £3.2 million.
Financial strength of Macdonald Hotels Limited
The financial strength of the company is major concern to manager of
company, owner of business, creditors, and financers. The cost control
and productivity are essential factors to evaluate the success in various
corporations through USA and all over the world. There are various ways
to evaluate the financial strength of an entity (Datta and Chakraborty,
2018).It is very essential to recognise the correct evaluation devices for
the corporation, by considering the industries, competitors, levels of life
cycle, the objectives of corporation, the time horizon, and financial
position of the company (Rodrigues and Rodrigues, 2018). This is very
essential to have the knowledge of the financial performance of the entity
related to the industry and competitors companies in markets at
provincial level, domestic level and central level and globally. Generally,
the financial strength of the corporations can be evaluated in three major
areas. These three major areas include solvency of company, profitability
of company and the liquidity of company. These are as follows-

REPORT 5
Profitability Ratios
The profitability of the company evaluates the capability to earn the
profits or the positive net income for the provided levels of the investment
or sales. In the case, where the corporation is not cost-effective or
profitable, then the company ultimately becomes insolvent. In this case,
this company may need to be reorganised or the liquidated. The profit
margin ratio is the great example of the financial ratio (Brammer, Brooks
and Pavelin, 2016). The profit margin ratio evaluates the net income an
entity earns relative to sales generated by an entity. The net profit is a
main standard for an investor, to make the investment in a business, to
assess the financial position of a business. This ratio is very beneficial in
evaluating the complete profitability of an entity. The high net profit ratio
describes the proper organization of the business’s matters. In 2016, the
profitability ratio is 14.51%. Further, in 2017 it is reduced to 2.70%. It is
required by the company that it should increase the profitability ratio.
The Return on investment (ROI) is another example of the financial ratios.
The return on investment evaluates the profitability of company relative
to the invested capital to produce that profitability. In 2016, the return on
investment is 15%. On the other hand, the return on investment is
reduced to 1% in year 2017. The company should increase the return on
investment ratio (Williams and Dobelman, 2017).
Liquidity ratios
The liquidity evaluates the capability of an entity to use the available
resources to fulfil the short-term obligations. In the case where, the

REPORT 6
company may not fulfil these short-term obligations timely, this ultimately
becomes insolvent. The company may require be reorganising or
liquidating. The higher ratio of available resources to the short-term
obligations states the stronger the corporation (Caudron, et. al, 2018).
To evaluate the liquidity situation of a company, the ratios such as quick
ratio and current ratio of a company are determined to search the
company’s capability to render current liabilities over current assets.The
current ratio refers to the working capital ratio. The current ratio
evaluates capability of businesses to fulfil the short-term due in a year.
The current ratio covers the weight of current liabilities versus current
asset. This ratio assesses the size of current asset of an entity to the size
of current liabilities. The current ratio of an entity describes financial
position of a company. It also describes the process of improvement in the
liquidity of current assets to set debts. The current ratio of the corporation
must be possibly in a ratio of 2:1. However, in 2016 the current ratio of
Macdonald Hotels Limited is 0.23. Further, in year 2017, it is reduced to
0.22. The company is required to improve the current ratio for the
feasibility of entity. Else, this may lead entity’s liquidation.
The liquidity ratio refers to the quick ratio of an entity. The liquidity ratio
also refers to the acid-test ratio. The liquidity ratio is a ratio, which
evaluates the capability of a company to use quick asset or cash to
reduce or remove the current liabilities on an instant basis. The standard
liquid ratio is 1: 1. The quick ratio of Macdonald Hotels Limited is 0.23.

REPORT 7
Further, in year 2017, it is reduced to 0.22. It is required by Macdonald
Hotels Limited to increase quick ratio to 1 or more than 1 to perform well.
Solvency ratios
The solvency evaluates the capability of the corporation to fulfil the
principle payment and the interest amount on the long-term debt and
same commitments as they become due. In the case where the company
may not pay the amount of interest and principle amount on the time,
then it becomes bankrupt. The company may require be liquidating or
reorganising. The debt ratio is the great example to assess the long-term
solvency of a company. A debt ratio evaluates the amount of long-term
debt financing as the part of whole capital structure. In this way, the
greater ratio of long-term debt to total capital will enhance the risk related
to solvency and weaker an entity (Bernstein, et. al, 2016).In 2016, the
debt equity ratio of company is 3.85. Further, the debt equity ratio is
reduced to 3.51 in 2017.
Moreover, times interest earned refers to the metric used to evaluate the
capability of corporation to fulfil the debt obligations. The formula is
determined by taking earnings before interest and tax (EBIT) of
corporation and dividing it by total interest due on bonds and other
predetermined debt. The interest time ratio is 1.42 in year 2016. Further,
it is reduced to 0.98 in year 2017. The result is stated from the table
below-
Calculation of Ratios

REPORT 8
Description Formula
Macdonald Hotels
Limited
Financial year 2017 2016
Profitability
Profit margin
ratio Net income/ sales 2.70% 14.51%
Return on
investment Net profit/ Total investment 1% 15%
Liquidity
Current ratio Current assets/current liabilities 0.22 0.23
Quick Ratio
Current
assets-Inventory/current
liabilities 0.22 0.23
Solvency
Debt Equity
Ratio Debt/ Equity 3.51 3.85
Interest Times Operating profit/ Interest 0.98 1.42
Areas of concern
It is required by the Macdonald Hotels Limited to improve the profitability
ratio by reducing the inventory and overheads, and by removing the
unprofitable services and goods. The company should assess how much
one is spending on the labour, rent, expert fees, marketing. Moreover,
Macdonald Hotels Limited should increase the revenue. The increased
revenue may maintain the ratio constant (Vogel, 2014). The reason is that
when the revenue increases, the one can reinvest the amount in an entity,
adding assets or making payment of the down debt. This increases equity
that maintains the debt equity ratio down. Moreover, to improve the
liquidity of the company, it is required by the company to submit the
invoices to the customers as soon as possible. It is required by the
company to get rid of the useless assets. The company should switch from

REPORT 9
short-term debt to the long-term debt. In lieu of financing, Macdonald
Hotels Limited should use the long-term debt in place of the short-term
investment. It is required by the company to negotiate for long payment
cycle (Brigham and Houston, 2012).
Furthermore, it is very essential for a company that the products should
not be defective. They should have good quality. The manufacturing
department is concerned with the production of goods, where inputs (raw
materials) are converted in the finished goods by the series of
manufacturing procedure. The function is to make sure that the raw
material is made in the finished products effectively and resourcefully and
in best quality. It is required by the company to keep the optimum level of
inventory. The company should concern with coordination between sale
department and marketing department (Hofstead-Duffy, et. al, 2012).
Recommendation for changes or further investigation
As per the above analysis, it can be said that the financial strength of
business is the main concern to the business proprietors, directors of
company, the depositors, and lenders. Efficiency and cost control are
very essential to get the success. The Business proprietors cannot
lengthier afford to handle by instant feels.The main part of the
business plan of company must be to enhance the financial position of the
business (Alexander, 2011). It is required by the business proprietors to
review the financial strength of the corporations relative to the markets
on the going concern basis. Placing increased focus on the major areas of
the profitability of company, solvency of company and liquidity of

REPORT 10
company can really have the great influence impact on the financial
strength and bottom lines. For the better development of effective
investigation of the financial statements, this is suggested to recognise
financial features of industry, recognise the strategies of a company, and
evaluate the quality of the financial statements of the company. It is also
recommended to assess the current profitability and related risks (Petria,
Capraru and Ihnatov, 2015).
The company should prepare the forecasted financial statements. In this
way, it is required by the financial experts to take proper assumptions in
respect of the entity or an industry and decide how these reasonable
assumptions would influence the funds as well as cash flows of a
company. The company is required to adopt the various approaches for
the better and proper valuation. The method of discounted cash flow is
very effective method. The discounted cash flow method can be in form of
anticipated dividends or other comprehensive technologies like the free
cash flow to the holders of equity or based on enterprises
(Hançerliogulları, Şen and Aktunç, 2016).
It is also required to decrease the expenditures or rearrange the
expenditures. The options to reduce or rearrange the expenditures
include an arrangement of deferred payment plan or a periodic payment
plan for the huge expenditures, switch the financial institutions, bank and
dealers for attaining best deals, and modify the timings and quantity of
purchased stocks to correspond with high period of cash flow. These
options also include switching to inexpensive alternates for the

REPORT 11
consumables like make the management of the energy use. Further, it is
also recommended for the company to sell the unwanted assets to attain
certain cash and decrease the cost related to storage. The company
should apply the markdown to the total-price product or service may
influence sales and transfer the surplus stock and the discounted goods.
The company is required to use the new and modern marketing
techniques (Ihlanfeldt and Mayock, 2016).

REPORT 12
References
Alexander, C. (2011) Market models: A guide to financial data analysis.
USA: John Wiley & Sons.
Bartram, S. M., Brown, G. W., and Fehle, F. R. (2019) International
evidence on financial derivatives usage. Financial management, 38(1),
185-206.
Bernstein, S., Lerner, J., Sorensen, M., and Stromberg, P. (2016) Private
equity and industry performance. Management Science, 63(4), 1198-
1213.
Brammer, S., Brooks, C., and Pavelin, S. (2016) Corporate social
performance and stock returns: UK evidence from disaggregate measures.
Financial management, 35(3), 97-116.
Brigham, E. F., and Houston, J. F. (2012) Fundamentals of financial
management. UK: Cengage Learning.
Caudron, C., White, R. S., Green, R. G., Woods, J., Ágústsdóttir, T.,
Donaldson, C., and Brandsdóttir, B. (2018). Seismic Amplitude Ratio
Analysis of the 2014–2015 Bár arbunga‐Holuhraun Dike Propagation and
Eruption. Journal of Geophysical Research: Solid Earth, 123(1), 264-276.
Datta, S., and Chakraborty, A. (2018). Industry Concentration and Stock
Returns: Indian Evidence. JIM QUEST, 14(1), 93.

REPORT 13
Erasmus, S. W., Muller, M., van der Rijst, M., and Hoffman, L. C. (2016).
Stable isotope ratio analysis: A potential analytical tool for the
authentication of South African lamb meat. Food chemistry, 192, 997-
1005.
Ferrer, R. C., and Ferrer, G. J. (2016). Earnings management indicators
and their impact on inventory turnover under food, beverage and tobacco
sector: a thorough study using simultaneous equations model. Academy
of Accounting and Financial Studies Journal, 20(2), 93.
Hançerlioğulları, G., Şen, A., and Aktunç, E. A. (2016). Demand uncertainty
and inventory turnover performance: An empirical analysis of the US retail
industry. International Journal of Physical Distribution & Logistics
Management, 46(6/7), 681-708.
Hofstead-Duffy, A. M., Chen, D. J., Sun, S. G., and Tong, Y. J. (2012) Origin
of the current peak of negative scan in the cyclic voltammetry of
methanol electro-oxidation on Pt-based electrocatalysts: a revisit to the
current ratio criterion. Journal of Materials Chemistry, 22(11), 5205-5208.
Ihlanfeldt, K., and Mayock, T. (2016) The variance in foreclosure spillovers
across neighborhood types. Public Finance Review, 44(1), 80-108.
Petria, N., Capraru, B. and Ihnatov, I. (2015) Determinants of banks’
profitability: evidence from EU 27 banking systems. Procedia Economics
and Finance, 20, pp. 518-524.

REPORT 14
Rodrigues, L., and Rodrigues, L. (2018) Economic-financial performance of
the Brazilian sugarcane energy industry: An empirical evaluation using
financial ratio, cluster and discriminant analysis. Biomass and
bioenergy, 108, 289-296.
Vogel, H. L. (2014) Entertainment industry economics: A guide for
financial analysis. Cambroidge: Cambridge University Press.
Williams, E. E., and Dobelman, J. A. (2017) Financial statement
analysis. World Scientific Book Chapters, 109-169.
Appendix: Ratio analysis
Calculation of Ratios
Description Formula Macdonald Hotels Limited
Financial
year 2017 2016
Profitability
Profit margin
ratio Net income/ sales 4166/154166 55943/163434
2.70% 14.51%
Return on
investment
Net profit/ Total
investment 4166/377658 55943/382575
1% 15%
Liquidity
Current ratio
Current
assets/current
liabilities 76653/343226 82751/359603
0.22 0.23
Quick Ratio
Current assets-
Inventory/current
liabilities
(76653-1388)/34322
6
(82751-1207)/
359603
0.22 0.23
Solvency

REPORT 15
Debt Equity
Ratio Debt/ Equity 343226/97717 359603/ 93311
3.51 3.85
Interest Times
Operating profit/
Interest 11873/12078 17668/12485
0.98 1.42
Financial statements
Macdonald Hotels Limited: Income statement
Macdonald Hotels Limited: Balance Sheet

REPORT 16

REPORT 17
Macdonald Hotels Limited: Cash flow statement

REPORT 18

REPORT 19