Intercontinental Hotels Group Plc Financial Ratios - Case Study Example

Financial Reporting Introduction Intercontinental Hotels Group Plc (IHG) is a British multinational company in the hotel industry. It is headquartered in Denham, UK, and it is the largest hotels company globally operating seven brands. It has over 4,500 hotels in over 100 countries. 10 hotels are managed directly, 652 of the hotels are managed by the company while an approximate of 3,900 hotels are under franchise agreements. The brands offered include, candle wood suites, crown plaza, holiday Inn, Even, Hotel Inn Express, Hotel Indigo, Intercontinental, Hualuxe and Staybridge Suites (IHG Annual report 2011). InterContinental Hotels primarily listed on the London Stock exchange and is a constituent of the FTSE 100 Index. It is secondary listed on the New York Stock Exchange. This report is concerned with the performance of the group in the last Accounting period, 2011. Therefore, performance analysis will compare results of 2011 with those of 2010. We will also analyze segmental information of the group by comparing 2011 results with 2010 results. 1.1 Analysis of segmental information In this analysis, we will consider two segments in IHG which are the business segments and the geographical segments (IHG Annual report 2011). Geographical segments include America, Europe, great China, AMEA and Central. You find that IHGs target market is in the developed markets and the emerging markets. As discussed earlier, IHG has four business segments with regard to the percentage of control. They include the Franchised, managed, owned and leased and central parts of the business. a. Revenue Looking at the 2011 financial report, there was no significant change in the percentage of revenue contribution by each business segment. The percentage of revenue contribution by franchised part of the business remained the same at 34% compared with year 2010. For the owned and leased segment, revenue contribution dropped by 2% from 35% in 2010 to 33% in 2011. In the case of direct control or managed part of the business, there was a 2 % increase in revenue contribution. In 2010, the revenue contribution was 25% while in 2011, , it was 27%. There was no change for the central part of the business in 2011 as the percentage of revenue contribution remained the same at 6%. From the analysis, most of the revenue has been realized in the franchised part of the business. This is because it majority of the hotels have been franchised, approximately over 3900 hotels. In the case of the geographical segments, the percentage of revenue contribution in America dropped by 3%, that is from 50 percent in 2010 to 47 percent in 2011. In Europe, there was 23 percent revenue contribution and 20 percent in 2010. There was no significant change in AMEA as the percentage of revenue contribution declined by one percent. In 2011, there was 12% revenue contribution and 13% in 2010. The same applies to china as there was little change in revenue contribution percentage. It only increased by 1%, from 11 percent in 2010 to 12 percent in 2011. The central region experienced no changes at all in revenue contribution percentage as it remained at 6 percent. America contributes the highest percentage of revenue since it has over 3.4 million rooms of which 1.3 million rooms are branded and has a market share of 64% in the industry. Other geographical segments such as AMEA lie in between. China on the contrary indicates growth opportunity as it seems that the market has not been fully tapped, and no barriers of entry exist (IHG Annual report 2011). In addition, there is a strong economic growth in china. b. Operating profits margin including Exceptional Items In the geographical segment, America has the best performance, then AMEA and Great China. Europe has the lowest performance with regard to operating profits including exceptional items. In 2011, , there was a 9%, 10% and 3% increase in operating profit including exceptional items in America, AMEA and Great China respectively. Europe experienced a drop by 6% that is from 22 percent in 2010 to 16 percent in 2011. As pointed out in the financial report (2011), IHG ranks second or third in the UK markets. There is a very stiff completion plus no room for growth as most of the market share has already been taken. In the business segment, most of the operating profit margins are in the Franchise. Franchise had an operating margin of 86% in 2011 and 82% in 2011 while managed had 44% and 39% in 2011 and 2010 respectively. Most of the business is not leased, and that is why the operating profit margin was low at 19 percent and 16 percent in 2011 and 2010 respectively. c. Operating profits margin excluding Exceptional Items In china, there were no exceptional items to impact the operating margin unlike in America, AMEA and Europe. In 2010, exceptional items reduced the margins by 1% and by 2% in 2011 for America. AMEA experienced a drop of in operating profits while Europe had an increase in operating margins. The reason why Europe’s operating profits went up is because of the UK VAT refund and gains realized from the closure of the pension benefit fund (IGH annual report 2011). d. Operating profits Franchised business segment contributes most to operating profit. On the other hand, central business experienced losses in both years. Geographically, America has the highest operating profits though it experienced a decrease by 2 % in 2011. Also, AMEA experienced a drop in profits by 3%. In 2011, US experience a drop in its GDP and that might be the reason for the drop. e. Return on assets (including exceptional items) All segments experienced a significant increase on return on assets except Europe which had a decline of one percent. 1.2 Exceptional items As pointed out in IHG annual report (2011), these items are usually excluded from operational profits due to their size or nature. These items can increase or decrease operational profits. For example, gains on disposal will increase operating profits. They are excluded in order to provide more meaningful performance for comparison purposes. 1.3 Performance analysis We want to use the liquidity, profitability, efficiency and financial stability ratios to ascertain on whether there is any growth in the business by analyzing the trends over time (Siddiqui 2006). These ratios are useful in determining the firm’s performance and its financial position Profitability Ratios 2011 2010 change Gross profit margin 56.39% 53.75% 2.64% NP margin excluding exceptional items 28.11% 23.46% 4.65% NP margin Including exceptional items 30.09% 24.39% 5.70% ROCE(Excluding exceptional items) 26.52% 23.94% 2.58% ROCE(Including exceptional items) 28.18% 24.74% 3.43%         Liquidity Ratios       Current ratio 0.67 0.51 16.61% Acid test ratio 0.84 0.50 33.71% Asset Turnover 0.84 0.88           Efficiency Ratios       debtors collection period 62 65 -3 creditors collection period 60 55 5         Gearing Ratios       Interest cover excluding exceptional items 8.73 6.94 2 Interest cover including exceptional items 9.28 7.17 2 Gearing 72.90% 84.31% 0         Investment Ratios       Price/Earnings Ratio 0.12 0.19 0 Dividend Cover Ratio 2.89 2.11 1 The profitability ratios show positive changes in 2011 in comparison to 2010. This is an indicator that the IHG is experiencing additional profits each year, a sign of growth. The liquidity ratios show a significant change in 2011 compared to 2010. Current ratios increased by 16.61% and quick ratios by 33.71%. Therefore, IHG has the ability to meet its obligations in the short-term (Birt & Boland 2010). You find out that creditors prefer a high current ratio because they are assured that their risk is reduced while the shareholders prefer a lower current ratio so that more assets are used in helping the business grow. The numbers of days that credit sales remain in the accounts receivable account has reduced from 65 days to 62 days. This great improvement is due to the firm’s improvement in collecting its dues from debtors. There are advantages to be realized when the debtors collection reduces of course. One, the liquidity position of the firm improves. There are debtors at the end of the period are likely to be less and also chances of writing off bad debts are minimal. Also, the expenses that would have been incurred in following up bad debts reduce. Creditor’s collection period has also reduced by 5 days a sign that the company has increased the speed of settling its dues. The gearing of the firm has slightly decreased from 84.3% to 72.9%. It is below 100% therefore the firm is solvent. Solvency is a state said to occur when the total assets of the firm are more than its liabilities or debt. If the liabilities are more than the assets then the firm is said to be insolvent as it is not in a position to meet its obligations. The dividend cover ratio increased by 1 in 2011. The management of IHG had increased dividends payable in 2011. 2. Treatment of intangible Assets IHGs intangible assets include software’s, management contracts and franchise agreements alongside others. Software has been capitalized at cost and amortized at their useful lives. Management contracts and franchise agreements any gain or loss on disposal has been capitalized at their fair value. According to IAS 38, intangible assets are recognized at cost and amortized over their useful lives. In case of business combinations, the presumption is that the fair value of the intangible asset acquired in a business combination is to be used. However, in 2001 changes were made where amortization was replaced by impairment (Stolowy & Lebas 2006). IASB made this change in IAS 38 in 2002. Therefore, the company should impair its intangible assets and not amortize them. Conclusion The financial ratios for IHG plc indicate that its performance is good. Growth of the company is being felt as the trend is upward. It is recommendable for investors to invest in the company and also the company should strategize itself to fight completion especially in Europe. References 1. Birt and Gregory Boland, 2010. Accounting: Business Reporting for Decision Making. Wiley and sons publishers. 2. Hervé Stolowy, Michel J. Lebas, 2006. Financial Accounting and Reporting: A Global Perspective. Cengage learning. Page 279 3. IHG Annual Report 2011. http://www.ihgplc.com/files/reports/ar2011/docs/IHG_Report_2011.pdf. Accessed on December 14th, 2012 4. Pamela P. Peterson, Frank J. Fabozzi, 2012. Analysis of Financial Statements. Wiley publishers 5. S. A. Siddiqui, 2006. Managerial Economics and Financial Analysis. New edge international. page 623 Read More