Financial Management: Ratio Analysis Report for Hotel Industry

This report delves into the application of ratio analysis within the hotel industry, focusing on the financial performance of Gatsby Grange. It begins with an introduction to ratio analysis as a tool for evaluating financial health, followed by a detailed examination of profitability, liquidity, gearing, and efficiency ratios. The analysis includes calculations and interpretations of key ratios like Return on Capital Employed (ROCE), current ratio, acid test, and interest coverage, comparing performance across different years. The report highlights the relevance of ratio analysis for strategic decision-making in hotels, emphasizing its role in assessing current obligations, profitability, and long-term financial leverage. It also discusses the benefits of ratio analysis, such as simplifying financial statements and identifying problem areas, while acknowledging its limitations, including the potential for management manipulation of financial data. The conclusion underscores the importance of ratio analysis for identifying and addressing financial challenges, with recommendations for improving the financial performance of Gatsby Grange, particularly concerning liquidity and profitability.

Financial Management
for the Hotel Industry

TABLE OF CONTENTS
 Introduction
 Ratio analysis
 Relevance of ratio analysis for hotel management
 Benefits and limitations of ratio analysis in decision making
 Conclusion
 References

INTRODUCTION
 The ratio analysis is a tool which is used by the businesses for
purpose of evaluating their financial performance and position in
the market.
 This report provides a deep understanding of importance of ratio
analysis for a business entity along with its advantages and
disadvantages.
 It covers the ratio analysis of Gatsby Grange along with
interpretation.

Calculation Absolute difference Relative performance
2018 2019
Profitability
Return to capital
employed(ROCE) 64.38 % 64.92 % 0.54 % 0.84 %
Asset turnover 0.88 pence 0.96 0.07 8.27 %
Gross profit turnover 91.82 % 85.83 % -5.98 % -6.52 %
Net operating profit
turnover 72.87 % 67.88 % -4.99 % -6.85 %
Liquidity
Current ratio 2.29 pence 2.01 pence -0.28 pence -12.41 %
Acid test 0.52 pence 0.5 pence -0.02 pence -4.28 %
Creditor days(money
owing) 648.9 days 373.6 days -275.3 days -42.43 %
Debtor days(money
owed) 106.18 days 109.5 days 3.32 days 3.13 %
Gearing
Gearing 1(Leverage) 8.69 % 8.93 % 0.24 % 2.74 %
Gearing 2(Dept to
capital) 8 % 7.75 % -0.25 % -3.13 %
Interest cover 200.4 times 226.3 times 25.88 times 12.91 %
Efficiency
Inventory turnover 1176.11 days 1152 days -24.33 days -2.07 %
Non-current asset
turnover 1.22 pence 1.29 pence 0.07 pence 5.57 %

RATIO ANALYSIS
Profitability ratio
The ROCE of the company has shown an upward trend as it has increased at 0.84%.
The asset turnover ratio has also shown an upward trend which depicts sound
performance.
The gross and the net profit margin of the company has declined which is a point of
concern for the company.
Liquidity ratio
The current ratio has shown downward trend but it is currently at good position.
The acid test ratio is very low and reducing thus, effective steps is required to be taken.
Creditors payment days are reducing which means company is paying off to its creditors
quickly.

Cont..
Gearing ratio
The financial leverage ratio has increased which indicates more debt obligation of the
company.
The debt to capital ratio has reduced which shows company is meeting its debt obligation
quickly in order to reduce the risk of financial obligation.
The interest coverage ratio is high, thus, company is having enough funds to make
payment of its interest liability.

Cont..
Efficiency ratio
Even though, the inventory turnover ratio has reduced but it is very
high, thus, shows the effectiveness of the company in managing its
stock.
The company has utilized its non-current assets in an effective way
for generating revenue.

Relevance of ratio analysis for hotel
management
 The ratio analysis helps in effectively analysing the performance level of
the organization which results into taking effective strategic business
decisions.
 The liquidity ratio will help it in knowing its ability to meets its current
obligations.
 The profitability ratio is used for determining the profits generated by the
business in respect to the various aspects like gross profit, net profit,
capital employed etc.
 Understanding the financial leverage ratio is also crucial as it determines
the ability of the businesses in paying off its long term obligations.

Benefits and limitations of ratio analysis in
decision making
Benefits:
It assists in taking valuable business decisions as it provides summary of the financial statements.
It simplifies the complex financial statements.
Ratio analysis helps in identifying the problem areas which might not be detected in complex
statements.
Limitations:
The management can make changes in the financial statements making the result to be inaccurate.

CONCLUSION
 It can be concluded that ratio analysis is an essential tool in depicting the
financial problems faced by the organization.
 This can be further used by the organizations for the purpose of taking relevant
steps for improving the performance.
 The overall position of Gatsby Grange is good but requires focusing on its
liquidity and profitability.

REFERENCES
 Abernathy, J. L. and et.al, 2019. Financial statement footnote readability and corporate
audit outcomes. Auditing: A Journal of Practice & Theory. 38(2). pp.1-26.
 Bragg, S. M., 2018. The Interpretation of Financial Statements. AccountingTools,
Incorporated.
 Kim, J. B. and et.al, 2016. Financial statement comparability and expected crash
risk. Journal of Accounting and Economics. 61(2-3). pp.294-312.