Financial Performance of Intercontinental Hotels Group Plc - Essay Example

College Finance and Accounting Financial performance of Intercontinental Hotels Group Plc 2009 Submitted Contents AboutInterContinental Hotels Group 2 Ratio Analysis 3 Profitability Ratios 3 Gross Margin 3 Profit Margin 3 Return on assets 4 Return on Equity 4 Operating Profit Margin 4 Gearing ratios 4 Debt to equity ratio 4 Equity Ratio 5 Total Debt ratio 5 Times interest earned 5 Liquidity Ratios 5 Current Ratio 6 Acid-test ratio 6 Cash Ratio 6 Efficiency Ratios 6 Asset turnover ratio 7 Accounts receivables collection period 7 Payables Payment period 7 Market Ratios 7 Earnings per share 8 Price per earnings ratio 8 Dividend Cover 8 Segment Analysis 9 Business segment 9 Geographical segment: 10 Fundamental qualitative characteristics of useful financial information 11 Bibliography 12 Appendix A: Calculation of the ratios 13 About InterContinental Hotels Group InterContinental Hotels Group PLC, headquartered in United Kingdom is a leading chain that owns, manages, franchises and leases hotels and resorts. Some of the prominent brands held by the group include: InterContinental Hotels and Resorts, Crowne Plaza Hotels and Resorts, Hotel Indigo, Holiday Inn Hotels and Resorts, Holiday Inn Express, Staybridge Suites and Candlewood Suites. In terms of number of rooms, the company is the largest in the world. Ratio Analysis Profitability Ratios Profitability ratios can be used to measure how good the company is using its assets and how well the company is controlling its costs to generate an acceptable rate of. Gross Margin Gross margin can be defined as the ratio of gross profit to total sales. The gross margin for IHG has increased from 2009 (32.49%) to 2010 (53.75%). This can be attributed to the reduction in the cost of goods sold for the organization from 2009 to 2010. Profit Margin Profit margin of a company can be defined as the ratio of net profit to net sales. The margin for IHG was 18% in the year 2010. The same margin in 2009 was 13.91%. There is a considerable increase in the profit margin of the hotel. This can be attributed to the lowering of costs from 2009 to 2010. The net profit that we have considered here is including the exceptional items. If we exclude the exceptional items, we find that the ratio has decreased from 19.12% in 2009 to 17.44% in 2010. This is because the existence of high net profit margin excluding exceptional items in 2009 as compared to 2010. Return on assets The value of this ratio for year 2009 and 2010 is 7.40% and 10.55% respectively. We see that there is a slight increase in the net profit from year 2009 to 2010. At the same time, total assets have come down. Therefore, there is a slight increment in the return on assets. Return on Equity While return on assets measure the amount of net income generated for each unit of assets, return on investment measures the amount of income generated from each unit of owners’ equity. Return on equity can be calculated by dividing the net profit by total equity. The return on equity for IHG has decreased from 2009 (137.18%) to 2010 (100.69%). This is because there is a significant increment in the total equity of the organization. Operating Profit Margin The margin has increased considerably from 2009 (-0.65%) to 2010 (28.19%). In 2009, the company had high cost of goods sold and high impairment costs that resulted in the lowering of the operating profit. Hence the company had a negative operative margin in the year 2009. The high costs can be attributed to the global economic slowdown. Gearing ratios Gearing ratios are the set of ratios that are used to measure the ratio between various types of equities and debt. Debt to equity ratio This ratio is an indication of the financial leverage of a company. While total liabilities represented 17.54% of the total equity in 2009, it was only 8.54% of the total equity in the year 2010. This is because while the total liabilities have decreased from 2009 to 2010, the total equity has increased considerably. It can be seen that both current as well as non-current liabilities were high in 2009 as compared to 2010. Equity Ratio Equity ratio is an indication of the amount of assets financed by equity. We see that the equity ratio has decreased for the firm from 18.54 in 2009 to 9.54 in 2010. This implies that the firm has used lesser equity to finance its assets in 2010 as compared to 2009. The change in the ratio is because of the considerable increase in the equity holdings for the firm. Total Debt ratio This ratio which indicates the financial solvency of a firm is the representation of the amount of debt in proportion to its assets. The value of the ratio for IHG is less than for both the years which indicates that the company is less risky. The ratio has shown a slightly decreasing trend from 2009 (0.95) to 2010 (0.89) which is a good sign for the organization. Times interest earned This ratio is an indication of the firm’s ability to pay off its debt obligations. The ratio is 25.50 in 2010 which is a significant improvement from 2009 when it was merely -0.56. It can be seen that while the interest expense has remained same from 2009 to 2010, the negative operating profit in 2009 leads to the small value in 2009. This implies that the organization would have been able to pay off its interest charges in 2010 but would have failed to do so in 2009. Liquidity Ratios Liquidity ratios are the set of ratios that can be used to determine if the company will be able to pay its short-term debts (Brigham and Houston, 2008). Higher the value of these ratios, the larger the company has the ability to pay off its short term debts and hence it is more safe. Current Ratio Current ratio is a ratio that is an indication if a firm is having enough resources to pay off its debt coming over in the following 12 months. While trade receivables make the significant part of current assets in both the years, trade payable are the most significant part of current liabilities in both the years. While current assets have increased from 2009 to 2010, the current liabilities have decreased. Hence the ratio has increased from 0.40 in 2009 to 0.51 in 2010. The ratio is less than 1 which is a worrying sign for IHG. The ratio has increased from 2009 to 2010 and the company would want to improve upon the ratio further. Acid-test ratio Acid-test ratio is based on the premise that inventory as a current asset is not useful in short term because of the possibility of it being slow-moving or obsolete or pledged to some creditors (Gibson, 2008). This ratio is 0.50 and 0.40 in 2010 and 2009 respectively. This implies that very less of the current assets of the organization are inventory. Cash Ratio This ratio which is an indication of the ability of the firm to pay off its short-term debt can be calculated by dividing the cash and cash equivalents to current liabilities. This ratio for 2009 and 2010 is 0.08 and 0.04 respectively. This is because a very small part of the current assets are the cash and equivalents for both the year. The cash component has increased from 2009 to 2010. Efficiency Ratios These ratios which are also called the activity ratios are an indication of the efficiency with which the company is using its short-term resources. Asset turnover ratio Asset turnover ratio is an indication of the relationship between total revenues and total assets. It can be calculated as the ratio of revenue to total assets. The asset turnover ratio for IHG in year 2009 and 2010 is 53.16% and 58.65% respectively. The small increment signifies that the organization has generated more revenue for each dollar of asset invested in 2010 as compared to 2009. Accounts receivables collection period This ratio indicates the average number of days that accounts receivables is outstanding. This ratio has increased for IHG. While it took 79.5 days to collect accounts receivables in 2009, the organization took 83.18 days to collect accounts receivables in 2010. The increase in the duration is a worrying sign for the hotel and needs to be checked by the hotel management. Payables Payment period This duration signifies the number of days that the organization takes to make payment to its suppliers. The ratio is significantly high for the organization. While it was 283.51 in 2009, it was 349.97 in 2010. The same has increased because of two factors: increase in the accounts payable and decrease in cost of goods sold from 2009 to 2010. Market Ratios Market ratios are an indication of the prices of the stocks as perceived by an investor. These ratios give an indication of the amount of money generated from owning company’s stocks and the cost of owning the same Earnings per share One of the most important ratio that is often considered as the single most determining factor of share price is Earning per Share. The basic EPS of IHG has increased from 2009 to 2010. While it was only $ 0.73 in 2009, it was $ 1.02 in 2010. The firm has shown significant improvement in its performance from 2009 to 2010. Hence the earning per share has increased for the firm. Price per earnings ratio This ratio is an indication of the organization’s current share price as valued against its earnings per share. The P/E ratio of IHG was around 19.5 in both the years 2009 and 2010. Dividend Cover IHG had paid $ 0.352 and $ 0.44 of dividend in 2010 and 2009 respectively. Dividend cover which can be calculated by dividing the Earnings per share to the dividend paid is a measurement of the firm’s ability to payout dividend consistently. The dividend cover for IHG has increased from 2009 (1.65) to 2010 (2.89) which indicates that the firm’s ability to pay-out dividends has increased over the duration. Segment Analysis This section covers the analysis of various segments for IHG. Business segment The firm has organized its business as per 4 segments: Franchised, Managed, Owned and Leased and Central. The table below shows the percentage revenue and operating profit for each segment of IHG: Segment Revenue Operating Profit 2010 2009 2010 2009 Franchised 34% 35% 103.1 118.2 Managed 25% 22% 35.1 19.1 Owned and leased 35% 36% 19.8 20.4 Central 6% 8% -58.1 -57.6 As can be seen there is no significant change in the break-up of revenues as per the business segment. There is a slight increase in the revenue from the managed segment of the business. It can be seen that while the operating profit contribution has decreased for franchised segment, it has increased for managed segment from 2009 to 2010. The operating profit contribution of the central segment is negative which is an area of concern. The table below shows the operating profit margin for the firm for each business segment: Segment Operating Margin (inc. exceptional items) 2010 2009 Franchised 82.10% 80.8 Managed 38.60% 20.7 Owned and leased 15.70% 13.5 It can be seen that the operating margins for the firm as highest in the franchised models while lowest in owned and leased. The firm has shown improvement in the operating profit margins for all the segments with maximum improvement in the managed sector. Geographical segment: The table below shows the revenue and the operating profit contribution of each geographical segment in terms of percentage: Segment Revenue Operating Profit 2010 2009 2010 2009 Americas 50% 50.2 83.1 79.3 EMEA 25% 25.8 28.2 35 Asia and Pacific 19% 15.9 20 14.3 Central 6% 8.1 -31.3 -28.7 It can be seen that Percentage of revenue contributed by the Asia Pacific segment has increased by 3%. They appear to be increasing revenue in this region at a faster rate than in the other regions. Americas contribute most to operating profit. The percent contributed by the Americas has increased by 3%. The table below shows the operating profit margin as per the geographical segment: Segment Operating profit (inc. exceptional items) Operating profit (exc. exceptional items) 2010 2009 2010 2009 Americas 47.5 -1.7 45.7 37.3 EMEA 30.9 26.4 30.2 32 Asia and Pacific 28.7 18.4 29.4 21.2 In 2010 highest margins earned in the Americas (could be because more franchised business in the Americas which has higher margins). In 2010, margins excluding exceptional items, increased significantly in Americas and Asia Pacific. Fundamental qualitative characteristics of useful financial information The Annual report of a firm contains significant information about the business in terms of its strategy, efficiency, profitability and liquidity through financial statements. However, the financials information presented shall have the following characteristics: Relevant Complete Faithful representation Comparability with peers and over time Verifiability Easily understandable Information is said to be relevant if it can be estimated fairly accurately or is a confirmatory value. This input can be used by the various stakeholders to make decisions. The information presented shall be complete in the sense that removing or miss-representation of any part of it will impact the decision making. Information presented shall not have any bias or error. In order to do so, the presented can make use of certain notes containing explanation and numerical calculations. In IHG annual report, the information that has been presented has all the qualitative characteristics discussed above. While it contains the accounting policies that have been used to come to the final figures, it also explains the significant changes in the policies so that year-on-year comparison can be made. The notes also contain segment-wise reporting for the defined business and geographic segments. The report also contains the details of the exceptional items that add further insights on how to read the numbers in the major statements. Bibliography Brigham, E.F., and Houston, J.F., 2008. Fundamentals of financial management. 6th ed. Cengage Learning. Gibson, C.H., 2008. Financial Reporting & Analysis using Financial Accounting Information. 11th ed. OH: South-Western Cengage Learning. Khan, M.Y., and Jain, P.K., 2006. Management Accounting: Text, Problems and Cases. 4th ed. New Delhi: Tata McGraw-Hill. Siegel, J.G., and Shim, J.K., 2006. Accounting Handbook: Barron’s Accounting Handbook. 4th ed. New York: Barron’s Educational Services. Appendix A: Calculation of the ratios Fiscal Years 2010 2009 Return on Equity (ROE) Net Profit/Total equity or NPM x TAT x EM 100.69% 137.18% Return on Assets (ROA) Net profit/Total Assets or NPM x TAT 10.55% 7.40% Profitability Net profit margin (NPM) Net profit/Sales 18.00% 13.91% Gross profit margin (GPM) Gross profit/sales 53.75% 44.08% Operating profit margin (OPM) Operating profit/sales 28.19% -0.65% Asset Turnover Revenue/Total Assets 58.65% 53.16% Net profit margin without exceptional items (Net Profit – Exceptional Items)/Sales 17.44% 19.12% Gearing Ratios Equity Ratio Total assets/total equity 9.54 18.54 Total Debt Ratio Total liabilities/total assets 89.52% 94.61% Debt-equity Ratio Total liabilities/Total equity 8.54 17.54 Long term debt ratio Long term debt/(Long term debt + equity) 0.73 0.87 Times interest earned (TIE) operating income or EBIT/interest 25.50 -0.56 Liquidity Ratios Current ratio Current assets/current liabilities 0.51 0.40 Quick ratio (acid test)** (cash + marketable securities + accts rec)/CL 0.50 0.40 Cash ratio Cash and marketable securities/CL 0.08 0.04 Market Ratios Net Income per common share (EPS) Net Profit/Average number of shares outstanding (from income statement) $ 1.02 $ 0.73 Closing Price of common stock Look up closing price on last trading day of fiscal year $ 19.73 $ 14.37 Price/Earnings ratio (PE) price per share/earnings per share 19.40 19.79 Dividends per share Look up in dividends 0.352 0.44 Dividend Cover EPS/Dividend per share 2.89 1.65 Efficiency Ratios Accounts Receivables collection period Accounts receivables/Annual Sales/365 83.1787469 79.50260078 Payables payment period Accounts Payable/(cost of goods sold/365) 349.97344 283.5116279 Revenue per available romm Revenue/Total number of rooms $ 2,515.60 $ 2,378.31 Growth Growth in sales (Revenue yr 2/ revenue yr 1) - 1 5.85% Growth in operating income (Op. Inc. yr 2/Op. Inc. yr 1) - 1 -4690.0% Growth in income (Net Inc. yr 2/Net Inc. yr 1) - 1 36.9% Read More