Financial Analysis of Good Spirits Hospitality Limited: Report

This report presents a financial analysis of Good Spirits Hospitality Limited, focusing on profitability, liquidity, and financial stability. The analysis includes the calculation and interpretation of various financial ratios, such as gross profit margin, operating profit margin, net profit margin, current ratio, qu...Read More

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Accounting

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Table of Contents
Introduction................................................................................................................................3
Profitability analysis...................................................................................................................3
Liquidity analysis.......................................................................................................................4
Financial stability analysis.........................................................................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................7
Appendix....................................................................................................................................8

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Introduction
Financial analysis is required to be performed for the company as by that the position
which is maintained and also the financial performance is evaluated. There is the
consideration of ratio analysis for the same and all the calculations are performed in the
context of Good spirit hospitality limited. In that, the main areas which will be covered
include profitability, liquidity and financial stability. The changes and their reasons will be
reported by which correct decisions can be undertaken.
Profitability analysis
The profits which are made by the company involve various aspects which need to be
taken into account. In this, there is the consideration of various profits that are made such as
the gross profit, operating profit and net profit (Innocent et al., 2013). For this, the gross
profit is ascertained which profit is left after eliminating the change in finished inventory.
The operating profit is the amount that is earned from the operations. The calculation of the
ratios is made and the presentation of them is made below.
Particulars formula 2018 2019
Gross profit margin Gross profit/sales*100 75.61% 76.25%
operating profit
margin
Operating profit/sales*100 -1.15% 3.66%
Net profit margin Net profit/sales*101 -1.42% 2.11%
In this, it can be noted that the profitability of the company is improving and there is
an increase in the rate of profit which is maintained. The gross profit of the company is
increasing from 75.61% to 76.25% in 2019 and this is because of the increase in the gross
profit. There were negative profits in 2018 which turned out to be positive in the current year
which is beneficial for the company. The operating profit margin was -1.15% in 2018 and
turned out to be 3.66% in 2019. This is because the operating profit is increased as there is a
reduction in the expenses which are incurred. The profitability of the company is affected by
the expenses which are incurred as if the cost will be high then the profit will be less and vice
versa (Mousa, 2015). The net profit is also converting from negative profitability to positive
profits which are in the interest of the company.

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Liquidity analysis
The liquidity of the company depends on the ability of the company to pay the
obligation of the business. There are various liabilities and obligations are involved and they
are required to be paid on time (Omar et al., 2014). For this, the assets are required to be
maintained in the company. All of the ratios are provided below for better understanding.
Particulars formula 2018 2019
Current ratio Current assets/current liabilities 0.44 0.57
Quick ratio Quick assets/current liabilities 0.36 0.48
The calculations are made and it can be noted that there is a rise in the ratios which
are maintained. The current ratio is ascertained and there is increased from 0.44 in 2018 to
0.57 in 2019. The standard for this ratio is set at 2 which is not maintained in the given case.
Although the company has made a rise in the ratio still it is very less than the standard. The
quick ratio is also calculated and this rising from 0.36 in 2018 to 048 in 2019 (Good spirits
hospitality, 2019). This is also below the standard which is set at 1. The liquidity is weak in
the company as there are fewer ratios which are maintained. There is an increase in the assets
and decline in the liabilities and due to that, the ratio has increased. This is made and by that
the company will not be able to meet the liabilities in the coming period. The assets are less
than the liabilities and so the company will fail in meeting the obligations. The amount of the
liabilities and assets which are maintained affect this ratio and by that, the final liquidity of
the company is ascertained.
Financial stability analysis
In business, there are various aspects by which stability can be maintained in terms of
finances. Financial stability is required to be maintained and for that, there is various ratios
are calculated. In this, the capital structure of the company is also considered. The main
aspect which needs to be considered is assets and liabilities which are involved (Islam, 2014).
In this, the average collection period of the account receivable will be calculated and by that,
the period in which the collection will be made is identified. The asset turnover identifies the
amount of revenue that is developed by the available assets.
Particulars formula 2018 2019
Debt ratio Total liabilities/total assets 0.65 0.68
Average collection period of AR Account receivable/sales*365 3.20 5.46
Total assets turnover Sales/total assets 0.66 0.62

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The calculations are made and in that the debt ratio is calculated and it can be seen
that the ratio is rising and reaching from 0.65 to 0.68 in 2019. This shows that there is less
stability as the amount of the liabilities is increasing more than the rise in the assets which are
involved. This will be increasing the other expenses also and by that the profits will be
affected and that is also against financial stability.
The average collection period is increasing from 3.20 to 5.46 days and this resembles
that company will not be maintaining the proper system for collection and this will affect the
stability. The cash will be blocked and by that, all the operations will be affected as there will
be a shortage of the amount which could otherwise be used for various purposes. The
collection period is increasing because of the rise in the account receivable balance. The asset
turnover is calculated and in that it can be noted that there is a reduction in the ratio. It was
0.66 in 2018 and declined to 0.62 in 2019. This shows that assets are not being used in an
efficient manner by the management.
This reduction is because of the high rise in the value of assets in comparison to the
increase which is made in the sales (Delen et al., 2013). The company will not be able to
attain the target and for the achievement of the same, there will be an improvement which
will have to be made.
Overall it can be said that financial stability is not maintained and there is a high risk
which is involved in the company. The changes will be made and there will be an investment
which will be made by which the position will be improved and the stability will be attained.
Conclusion
From the report that is presented above, it can be concluded that there is a need to
make an improvement in the company. The profitability is analyzed and the same is
increasing which is in favor of the company. There were negative profits which now are
positive and show that the company has made an improvement. In terms of liquidity and
financial stability, the company is weak and is not maintaining the required level. There are
fewer amounts of current assets that are involved in comparison to the current liabilities that
are to be met. This will create an excessive burden on the company and it will not be able to
repay the obligations. The financial stability is also at risk as the collection period is
increasing and also the asset turnover is declining. The improvement will have to be made in
this respect and by that, the required goals and targets will be attained.

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References
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Good spirits hospitality. (2019). Annual report. Retrieved from:
https://goodspiritshospitality.co.nz/wp-content/uploads/FY2019-%E2%80%93-
Annual-Report.pdf
Innocent, E. C., Mary, O. I., & Matthew, O. M. (2013). Financial ratio analysis as a
determinant of profitability in Nigerian pharmaceutical industry. International journal
of business and management, 8(8), 107.
Islam, M. A. (2014). An analysis of the financial performance of national bank limited using
financial ratio. Journal of Behavioural Economics, Finance, Entrepreneurship,
Accounting and Transport, 2(5), 121-129.
Mousa, G.A. (2015). Financial ratios versus data envelopment analysis: the efficiency
assessment of banking sector in bahrain bourse. International Journal of Business and
Statistical Analysis, 2(2), pp.75-84.
Omar, N., Koya, R. K., Sanusi, Z. M., & Shafie, N. A. (2014). Financial statement fraud: A
case examination using Beneish Model and ratio analysis. International Journal of
Trade, Economics and Finance, 5(2), 184.

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Appendix
Income statement:

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Balance sheet: