Module Lecturer: Bill Burke. Module: Financial Management and Control System. Student name: Nguyen Quoc Buu.

ID number: 1012442. Class: BABA4 ESSAY Most of the investors concern about financial statements which show the whole picture of financial performance and financial position. As a Management consultant of Grand Hotel, Im now providing an essay for financial analysis by using ratios about our Hotel. This essay uses secondary data, time series 2009-2010, comparing 2 years and with the sector (using sector because the industry average includes real estate, therefore it is irrelevant when compare with Hotels). It is divided into two main parts: comparison and limitation of ratio analysis. The profitability ratios have the function of telling us are we making profit or we are just in a reasonable rate. The profitability ratios of Grand Hotel have fallen. Gross profit percentage and net profit percentage have gone down, too. Both years net profit margin percentages are higher than the sector, therefore Grand Hotel was converting sales into profit more efficient compare with the others Hotels in UK. The decrease in net profit percentage may because of the gross profit percentage in year 2010 have decreased that may have arisen because the cost has increased, though the margins are being tried to raise the revenue. The revenue has improved. The main reason of the reduction of net profit percentage in 2010 is the increase in some areas such as Payroll and Related Cost, Operating expenses, Fixed Costs and depreciation, as a result of the investment in non-current assets, though Grand Hotel was trying at controlling its expenses. The profit is not high, therefore the dividend, P/E and interest are low. Grand Hotel was not issue more share in 2010, but its earnings per share dropped significantly about 45 cents per share. However the income tax in 2009 is also higher than it is in 2010. The P/E ratios in both years were lower than the sector (11.13), the shares might represent value at the prevailing price, and the sector shares are more the higher rated, based often on expectations of future growth. In other words, someone who, bought Grand shares at $7.35, was paying 8.96 times higher than the amount of profit mad for each share in the Hotel in 2010, and it would take the shareholders 8.96 years to recoup the amount invested if future profits remain the same. Although, dividend cover rise from 1.21 to 2.96, the dividend per share and dividend yield dropped significantly. The debt ratio decrease about 4.46%, and the gearing ratio was decrease to much in 2010. Every Hotel wants to boost the ROCE or ROA, and the ROE as high as possible, but in Grand, these ratios fell significantly in 2010. The ROA dropped from 46.88% to 32.17%, and these ratios were below 69% which was the ROA of the sector, so the operating profit of Grand Hotel was 1

lower than the sector, it was because of the ineffective use of the capital employed, though the Grand Hotel invested more money in loan in 2010. The liquidity ratios of Grand Hotel are too much higher compare with the sector. The current ratio in 2010 was higher than in 2009 and both years ratios were higher than the sector 0.62:1, which could show us that Grand Hotel has enough assets to cover their liabilities in both years, and the jump in 2010s current ratio may indicate a stronger liquidity position. The cash position in year 2009 ($11,000) was less attracted than cash position in year 2010 ($14,000). However, looking at each year components of working capital are also important, because they can show us a measurement of both company's efficiency and its short-term financial health. The inventory turnover decrease slightly, the Hotel gets paid for the goods and services in 2010 longer than 2009, its not a good ideal in the long run, Grand Hotel was taking to pay its suppliers around 20.5, 20 days in year 2010 and 2009, there was a slight decrease in days could also show small reduction of pressure. Acid test ratio of both years came out above 1, and they was normally considered more comfortable situation than the sector. There was a good figure because falling of these two liquidity ratios are the caution of deterioration. Overall, Grand Hotel business has decreased slightly; there may be the resulting of the global economic crisis. The profitability was lower, and the liquidity was higher than the sector, that is not a good signal, though Grand Hotel was trying to invest and manage tightly.

Analysis is the action that accessing the meaning of the ratios and let us to understand about the financial performance, financial position of Grand Hotel based on the comparison with the sector norm. In fact, there are many limitations of ratio analysis and there is users seem to be moving toward the exclusion of ratio analysis (Edward l., 1968) In companys financial statements, there are a lot of numbers but these numbers can cause confusing and frightening to many investors. Although, after analyzing those numbers we can see how the company is doing (Loth, 1980). Pauline Weetman (2006) states that: No two companies have exactly alike in the nature of their operations. Ratios might not be comparing to each other correctly because there are many elements that can be different like accounting policies, accounting practices or fiscal year periods, and it changes over time. Also, Financial statement of Grand Hotel was based on year and results that might not be exactly indicate figures year round. Hotel that is affected by seasons such as holiday, event, festival can choose the best period to make financial statements so as to give better result.

It is very difficult to indicate what is the correct number for the ratios since ratios are different from firm to firm businesses may be within the same industry but having different financial and business risk, and government influence such as tax holiday of government incentives, and sometimes ratios is not suitable for the business of the company because they are different capital structures, and sizes. Moreover, one firm can produce many kinds of products so it is very hard to state which industry category they belonging to. One more important thing is that it doesnt mean that the firm are doing well when the ratio is better than average, its might because the industry is not doing well. Russel (2004) discusses financial statements show us an evaluation of the begin cost, so you might see the different between the market value of one asset and the cost of it on the balance sheet. Comparative ratio techniques can be change because of inflation price change and technology improving so their outcome couldnt be seen as a standard for the company. Comparing to the diversify business assessment methods, comparative ratios are seem to be not useful. In addition, a lot of off-balance-sheet activities are the key to success and failure of the company (Cerminaro, 2005). Window dressing could show a stronger financial position, because it can increase the current and quick ratio and make the batter balance sheet. Nevertheless, that increase was strictly window dressing effect the balance sheet as a week later. They make the misleading comparing of Grand Hotel with the industry. Financial appraisal is created based on the historical cost so if the value of the asset on the balance sheet easy to be misleading when historical cost convention is used. This is the reason why we shouldnt rely on these ratios when making decision (Bajkoski, 1999). For making decision about future trends of the company, Hotel shouldnt reply on the financial statement because it is recording the past action of the company at the fix point in time (Harvey, 2003). Nonetheless, financial analysis, working as a tool to see the companys past did, present activities, and predict the future, can sometime be very difficult for company to interpret (Ross, 2010). Companies have different sizes, so it is very hard to compare, one solution is use the financial ratios to analyze them. Ratios are very common in daily life. We often use ratios in comparison and judge performance (Stanley, and Geoffgey, 2010). However, financial analysis is very important as we can answer some question about our business like: What is your operating margin? How fast your revenue is growing? How efficient in using asset of your company? What is your turnover say about your company? (Kothari, 2004).

Financial statements are mainly very old and historical documents, telling us the past did of the company in the particular time (Articlesbase, 2009) outline the analyzing those statements can be one of the methods to forecast the companys financial health, by evaluating key data/ratios, comparing with others companies, implying the trends of the company. Being able to calculate all the ratios give investors an ability to analyze the company and forecast the risk company is taking in, also ratio analysis can predict the bankruptcy. Andrew C Holman et al (2008) outline the use of financial ratios analysis is helping the decision making process, and briefly summary organizational performance. Sometime it is simpler to get financial data about car wash than the financial data for nonprofit. So that firm might not need to revalue their asset due to the fact that doing so will lead to lower profit as the depreciation is high. Example: IAS 16 (Journal On Financial Ratio Analysis). So far, there are many factors that distort the financial evaluation, but in the mess of massive data, Hotel has many good ratios that make the data seem to be easier. Financial ratios analysis is very helpful in seeing the firm strengths and weaknesses, knowing the financial status and measuring the risk we are facing (Cerminaro, 2005 ). Among many kinds of assessment, Grand Hotel choose Ratios analysis because it can show a warning signal and key elements that can lead Grand Hotel to success of failure, and its also provide time for Grand Hotel to make decision in order to solve their problems (Liraz, 2011). References: Reurters (2011), Imperial Hotel Ltd (9708.T) [Online], Available from <http://uk.reuters.com/business/quotes/financialHighlights?symbol=9708.T> [Accessed Date: 14 April, 2011]. Altman, Edward l. (2011), "Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy", Journal of Finance, Vol. 23, No. 4, (September 1968), pp. 589-609 [Online], Available from <http://www.defaultrisk.com/pa_score_01.htm> [Accessed Date: 14 April, 2011]. Loth, R. (2011), Financial Ratio Tutorial [Online], Available from <http://www.investopedia.com/university/ratios/> [Accessed Date: 14 April, 2011]. Lermack, H. B. (2003) Financial Analysis [Online]. Available from: <http://faculty.philau.edu/lermackh/financial_analysis.htm> [Accessed 14 April, 2011]. Russel, P. (2004), Financial Statements Analysis [Online], Available from <http://faculty.philau.edu/lermackh/financial_analysis.htm> [Accessed Date: 14 April, 2011]

Kothari (2011), Financial Statement Analysis, Corporate Accounting, 18 June, 2004 [Online], Available from <http://www.needocs.com/document/academique-cours-finance-compta-financialstatement-analysis,1985> [Accessed Date: 14 April, 2011]. Cerminaro, A. (2005), BizzBangBuzz by strategic business lawyer, technology attorney and professor [Online], Available from <http://bizzbangbuzz.blogspot.com/2005/05/analyzing-financialratios.html> [Accessed Date: 14 April, 2011]. Weetman, ,P. (2006), Financial and Management Accounting: an introduction. London: Prentice Hall. Ross, S. et al (2010), Fundamentals of Corporate Finance, ed. 9th. New York: Mc GrawHill. Stanley, B. and Geoffgey A. (2010), Foundations of Financial Management, ed. 12th. New York: Mc Graw-Hill. Andrew C Holman et al (2010), The Analysis of Key Financial Ratios in Non-profit Management [Online], Available from <http://www.docstoc.com/docs/516377/Analysisof-key-financial-ratios-in-Non-profit-Organizations> [Accessed Date: 14 April, 2011]. Bajkoski, J. ( AAII Journal/August 1999), Financial Ratio Analysis: Putting Ratios To Work, Available from < http://www.aaii.com/search?

SearchText=putting+the+numbers+to+work>. Gary P. Moynihan (2010), An expert system for financial ratio analysis, International Journal of Financial Services Management, 2006, vol. 1, issue 2, pages 141-154 [Online], Available from

<http://econpapers.repec.org/article/idsijfsmg/v_3a1_3ay_3a2006_3ai_3a2_3ap_3a141 -154.htm> [Accessed Date: 14 April, 2011].

Oppapers (2010), Journal On Financial Ratio Analysis [Online], Available from <http://www.papercamp.com/essay/11682/Ratio-Analysis-Recommendation> [Accessed Dtae: 14 April, 2011]. Articlesbase (2009), Fiancial Statement Analysis [Online], Available from <http://www.articlesbase.com/accounting-articles/financial-statement-analysis729032.html > [Accessed Date: April 14, 2011]. Liraz, M. (2011), Financial Ratio Analysis [Online] <http://www.bizmove.com/finance/m3b3.htm> [Accessed Date: 14 April, 2011]. Appendix:
Ratio 1 Return on Equity (ROE) 2 Return on Assets (ROA) 3 Net Profit Margin (NP%) 4 Gross Profit Margin (GP%) 5 Asset Turnover Fixed assets Turnover Working Capital Turnover Current ratio Sales Average Total Assets - CL Sales Average Fixed assets Sales Average Working Capital Current Assets Current Liabilities 2,180,000 1,007,500-158,600 2,180,000 (790,000+799,000)/2 2,180,000 25,400 191,000 152,200 1.25 $85.83 $2.74 $2.57 2,232,000 1,070,650-163,100 2,232,000 (799,000+788,300)/2 2,232,000 86,400 308,000 174,000 1.77 $25.83 $2.81 $2.46 Gross Profit Sales x 100 1,350,000 x 100 61.93% 1,282,000 x 100 57.44% 398,000 PBIT x 100 x 100 46.88% 292,000 x 100 32.17% PBIT x100 Average Owners Equity Working 398,000 x100 (390,000+430,000)/2 2009 97.07% Working 292,000 x100 (430,000+527,300)/2 2010 61%

Average Total Assets -CL PBIT x 100 Sales

(1,000,000+1,015,000)/2(165,000+152,200)/2 398,000 x 100 2,180,000 18.26%

(1,015,000+1,126,300)/2(152,200+174,000)/2 292,000 x 100 2,232,000 13.08%

2,180,000

2,232,000

Acid test ratio

CA (Inventory + repayments) Current Liabilities

191,000-(27,000+2,000) 152,200

1.06

308,000-(25,000+4,000) 174,000

1.60

10

Inventory Turnover

Average Inventory x 365 Cost of sales

(24,000+27,000)/2 x 365 830,000

11 days

(27,000+25,000)/2 x 365 950,000

10 days

11

Average Collection Period

Average Accts. Rec. x 365 Credit sales

(90,000+80,000)/2x365 60%x2,180,000

24days

(80,000+130,000)/2x365 60%x2,232,000

29days

12

Average Payback Period

Average Accts. Pay. x 365 Purchases

(50,000+43,500)/2 x 365 833,000

20.5days

(43,500+61,000)/2 x 365 948,000

20days

13

EPS

Profit after tax No of Ordinary shares

228,000 180,000 11.43 1.27 228,000 188,000 188,000 180,000 1.04 x 100 11.43 400,000 x 100 430,000 585,000 x 100 1,015,000 398,000 60,000

$1.27

147,000 180,000

$0.82

14

P/E

Share price EPS

7.35 0.82

8.96

15

Dividend Cover Dividend per share Dividend Yield

Profit after tax Ordinary Dividend Dividend Number of shares Divi. per share x 100 Share price Prior charge capital x 100 Total Owners Equity Total Liabilities x100

1.21

147,000 49,700

2.96

16

$1.04

49,700 180,000

$0.28

17

9.10%

0.28 x 100 7.35

3.81%

18

Gearing ratio

93.02%

390,000 x 100 527,300

73.96%

57.64%

599,000 x 100 1,126,300

53.18%

19

Debt ratio Total Assets PBIT Interest 6.63 292,000 60,000 4.87

20

Interest cover