Financial ration analysis assignment

ACCOUNTING RATIO ANALYSIS TO ASSESS THE ACCOUNTING SECTOR IN

GALADARI HOTELS (LANKA) PLC.

– FINANCIAL YEAR 2009/2010 –

Accounting and Finance - Pgdbm 503

Assignment 1

Mohammed Muthalif Fathima Nasriya

Registration No. 072

Postgraduate Diploma in Business Management

Faculty of Graduate Studies

University of Colombo

Sri Lanka

February 2014

1. INTRODUCTION

Business has never been as competitive as it stands today, there are witnessed the fall of

many industry giants within the last decade than ever before. Industry experts and scholars

put this down to many reasons, not forecasting or adapting to possible changers. Not been

proactive enough but reactive are few to name. A major area which attracted the lime light

was the ‘Accounting sector’ mainly many critics pointed out that the reason for ‘Financial

Giant’ to collapse was due to lack of correct (Legal) and ethical accounting practices,

reflecting their true financial picture/status to the public.

Financial reports at a glance provide the ‘profit and loss’ stance of a company, but to get the

maximum leverage or insight knowledge one should be able to ‘read between the lines’ in

accounting terms in an annual report. This is the point where they can use the ‘ratio analysis’

as a vital tool. Not only to analyze the profit/ loss but many other important factors.

Understanding the cost effectiveness, capital and liability structure in long term and short

term perceptive, effectiveness of assets management, income turnover of assets, etc.

They had many ideas and views to approach this task, to show the effectiveness of the ratio

analysis and at the end commonly agreed to focus our study on the ‘Hotel / tourism Industry’

where we selected two major (five star) hotels holding companies and the year 2010 as the

year to conduct the study, based on their annual reports.

There were many reasons behind this selection, as 2010 was a historical year for all Sri

Lankans in which we as a nation had to face the peak of the civil war and with a sign of relief

saw the end to the 30 year hard fought civil war, three major elections, flood, initiation of

major investments, increase in tourists, etc. In a country like Sri Lanka though the share

market does not reflect the true picture of the business functions, we have been able to loop

the business and financial fluctuations logically and strategically to reflect the original

purpose of the study.

I hope that this comprehensive and descriptive ratio analysis will be able to give an in-depth

insight to the industry and much other functionality in a more coherent and an accountable

manner.

2. INTRODUCTION TO THE INDUSTRY

Sri Lanka is well-known around the world as being an attractive destination for travel and

tourism, offering a wide range of experiences. The sector is a significant contributor to

national income and has emerged as the 4th

highest foreign exchange earner in the country.

Gross earnings from tourism stood at US $ 384 million in 2010 an increase of 12.3 percent

over 2009 making itself as the fast emerging growth industry in the economy. Recently New

York identified Sri Lanka as the number one destination out of 31 to visit in the world in year

2010.

The Sri Lankan tourism sector is gearing up for increased arrivals and higher average daily

expenditure per tourist. It is also focusing on increasing room capacity and generating

additional direct employment.

3. COMPANY PROFILES

GALADARI HOTELS (LANKA) PLC.

Coroporate Structure

The hotel Galadari is situated in the heart of Colombo's business district, and accomplishes

with 450super luxury rooms, that overlooks the Indian Ocean and is adjacent to leading

Banks and the World Trade Center, with easy access to the shopping areas in Colombo.

The Galadari Hotels (Lanka) Plc. offers a rich blend of service and quality in five star luxury

living. Hotel ensure and meticulous about maintaining the privacy of its guests has drawn in

many an elite personality from around the world such as heads of government, prime

ministers of leading nations, royalty, well known sports & music personalities over the past

two and half decades.

With a range of room and suite types, and a comprehensive list of facilities, the hotel is able

to cater to the requirements of both business and family travelers, and is especially geared to

handle the needs of Muslim clients, with Halal food in all restaurants.

4. INTRODUCTION TO FINANCIAL ANALYSIS OF GALADARI HOTEL

(LANKA) PLC.

This study is for examine specific characteristics in the financial analysis of Galadari Hotels

(Lanka) PLC. It is a listed company in the Colombo Stock Exchange (CSE). The analysis is

based on the following selected areas to identify whether the company assessed and carrying

out their financial activities up to standards and also to evaluate and analysis the financial

strengths and weaknesses of a firms by establishing meaningful relationships between the

elements of financial statements.

Selected areas are as follows;

Profitability Ratio

Liquidity Ratio

Solvency Ratio

Activity Ratio

Market Ratio

The Galadari Hotel is mainly operated well in Hotel industry by showing negative last five

years and 2010 positively performed. The analysis of financial operation evaluations in

relevant to Sri Lankan Accounting Standards are carrying base on 2009-2010 financial year.

The analysis has mainly focused on financial ratio analysis which are we discussed in the

class to evaluate financial strengths and weaknesses of firms by establishing meaningful

relationships between the elements of financial statements.

5. ACCOUNTING RATIO ANALYSIS

“Ratio Analysis: is expresses the relationship among selected items of financial statement

data. A ratio expresses the mathematical relationship between on quantity and another. The

relationship is expressed in terms of either a percentage, a rate or a simple proportion.”

Few advantages and disadvantages of ratio analysis are listed below,

5.1 PROFITABILITY RATIOS

Every firm is most concerned with its profitability. One of the most frequently used tools of

financial ratio analysis is profitability ratios which are used to determine the company's

bottom line.

Profitability ratios show a company's overall efficiency and performance. These measures

indicate whether the company is performing satisfactorily. They are used to measure the

Advantages of Ratio Analysis Limitations of Ratio Analysis

Assist investors to make effective investment decision. Effect of price changes

Facilitates inter-firm comparison Limitations of financial statements

Assist organization planning and forecasting Comparative study required:

Profitability Ratio measures the results of the organization operations,

performance and effectiveness.

performance of the management, to identify whether a company may be a worthwhile

investment opportunity and to determine a company’s Performance relative to its

competitors.

Classifications of profitability ratios

5.1.1. Gross Profit Ratio

Gross Profit Ratio indicates the amount of earnings, required to pay fixed costs and

profits, are generated from revenues.

Indicates how much of each sales rupee is available to meet expenses and profits after

merely paying for the goods that were sold of an organization.

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio

looks at how well a company controls the cost of its inventory and the manufacturing

of its products or services and subsequently passes on the costs to its customers. The

larger the gross profit margin, the better for the company.

Formula: Gross Profit Ratio = Gross Profit X 100

Net Sales

Calculation and comparison of Gross Profit Ratios for Galadari Holtel PLC.

Year 2010 2009

Gross Profit = 827,733,335 X 100 577,378,333 X100

Rs. 1,026,180,900 730,093,065

= 80.66% 79.08%

According to the definition of gross profit ratio, the company who has generated the highest

value of gross profit is best/ preferred, because gross margin should be adequate to cover-up

other expenses of the company.

According to the above analysis, Companies can be rank as below,

In 2010 – Good 2009 - Average

Profitability Ratios

Gross Profit Ratios

Return on Asset Ratios

Return on Equity Ratios

5.1.2. RETURN ON ASSETS RATIO

Return on Assets Ratio is an overall measure of profitability. Because it measures

the efficiency with which the company is managing its investment in assets and using

them to generate profit. It measures the amount of profit earned relative to the firm's

level of investment in total assets.

Net Income is taken from the income statement and total assets are taken from the

balance sheet. The higher the percentage is the better, because that means the

company is doing a good job using its assets to generate sales.

Formula: Return on Assets Ratio =Net Profit after Tax X100

Average or Total Assets

Year 2010 2009

Return on Assets Ratio = 23,651,446 X 100 (351,985,121) X100

Rs. 8,271,789,383 8,081,784,320

= 2.85% (4.35) %

CALCULATION AND COMPARISON OF RETURN ON ASSETS RATIOS

INTERPRETATION OF PROFITABILITY RATIOS

5.1.3. RETURN ON ASSETS RATIO

Hotel Galadari has generate in 2010, compare to 2009 return on assets ratio managed

investments on assets and utilized them to generate disenable profit as low level.

They have done negative ratio value compare to 2009 and they are in bad position in using

their assets to generate the profits due to having huge loss making investment project under

financial crisis situation as well as their profits are heavily affected from exchange losses.

5.1.4. RETURN ON STOCK HOLDER’S EQUITY RATIO

Return on Stock Holder’s Equity Ratio is perhaps the most important of all the

financial ratios to investors in the company. It measures the return on the money the

investors have put into the company. This is the ratio potential investors look at when

deciding whether or not to invest in the company.

Net income comes from the income statement and stockholder's equity comes from

the balance sheet. In general, the higher the percentage is the better; it shows that the

company is doing a good job using the investors' money.

Formula: Return on Stock Holder’s Equity = Net Income X100

Average Common Stockholder’s Equity

Year 2010 2009

Return on Stock Holder’s Equity = 23,651,446 X 100 (351,985,121) X100

Rs. 1,527,843,977 1,346,063,925

= 1.5% (26.15) %

CALCULATION AND COMPARISON OF RETURN ON EQUITY RATIOS

INTERPRETATION OF PROFITABILITY RATIOS

4. RETURN ON STOCK HOLDER’S EQUITY

Management of the Galadari Hotels Plc is able to utilize investor’s money effectively and

efficiently. Therefore the investors of Galadari Hotels PLC. Has taken the low level return on

the capital that they have invested in to the company.

And very poor return on equity ratio. There are unable to generate sufficient profits to pay off

fair retunes to their investors’ mainly due heavy out flow of financial expenses based on

interest payments for bank overdrafts, financial leases and term loans and administration

expenses.

2. LIQUIDITY RATIOS

A class of financial metrics that is used to determine a company's ability to pay off its short-

terms debts obligations.

Liquidity ratios measure the short-term ability of the company to pay its maturing obligations

and to meet unexpected needs for cash. Short-term creditors such as bankers and suppliers

are particularly interested in assessing liquidity. The ratios we can use to determine the

company’s short-term debt-paying ability are the current ratio, the acid-test, receivable

turnover and inventory turnover.

Classifications of Liquidity ratios

Liquidity Ratios

Current Ratios Acid –Test (Quick) Ratio Debtor’s collection Period

2.1. CURRENT RATIO

The current ratio is a widely used measure for evaluating a company’s liquidity and

short –term debt-paying ability. The ratio is computed by dividing current assets by current

liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets

(cash, cash equivalents, marketable securities, receivables and inventory) are readily

available to pay off its short-term liabilities (notes payable, current portion of term debt,

payables, accrued expenses and taxes). The higher the current ratio, the better.

Formula: Current Ratio = Current Assets

Current Liabilities

Year 2010 2009

Current Assets 453,771,761 239,416,915

Current Liabilities 632,017,071 347,183,942

Current Ratio 0.71 0.69

The current ratio is sometimes referred to as the working capital ratio; working capital is

current assets minus current liabilities. The current ratio is a more dependable indicator of

liquidity than working capital.

The current ratio is only one measure of liquidity. It does not take into account the

composition of the current assets. For example a satisfactory current ratio does not disclose

the fact that a portion of the current assets may be tied up in slow-moving inventory. A

dollar of cash would be more readily available to pay the bills than a dollar of slow- moving

inventory.

INTERPRETATION OF LIQUIDITY RATIOS FOR THE GALADARI HOTELS

PLC.

Hotel Gladari current ratios do not significantly vary in both comparable years. Though

Company has an increase in 2010 and slightly decrease in the financial year 2009. Thus

decrease in the current ratio represents that there has been deterioration in the liquidity

position of the firm.

2.2. ACID-TEST (QUICK) RATIO

The acid-test (Quick) ratio is a measure of a company’s immediate short-term liquidity. We

compute this ratio by dividing the sum of cash, short-term investments and net receivables by

current liabilities. Thus, it is an important complement to the current ratio.

Calculation and comparison of Acid –Test (Quick) Ratio

Year 2009/2010 2008/2009

Cash and Cash Equivalents 67,832,667 93,687,036

Marketable securities 221,295,981 34,510,654

Accounts receivable 98138418 75940670

Current liabilities 632,017,071 316,724,410

High degree of Certainty Company will cash flow problem.

Who is a man responsible having cash flow problem?

1. Managers not collecting cash on time

3. ACTIVITY RATIOS

Activity ratios measure a firm's ability to convert different accounts (asset, liability or capital

share) within their balance sheets into cash or sales (revenue). Companies will typically try to

turn their production into cash or sales as fast as possible because this will generally lead to

higher revenues.

Activity ratios are critical in evaluating a company’s fundamentals because in addition to

expressing how well a company generates revenue, activity ratios also indicate how well the

company is being managed.

CLASSIFICATIONS OF ACTIVITY RATIOS

Quick Ratio

Year Galadari Hotel

2010/2011 0.57

2009/2010 0.77

Activity Ratio measures the efficiency with which the recourses of a firm have been

employed and its indicate the speed with which assets are being turned over into sales..

Activity Ratios

Inventory/Stock

Turnover Ratio Debtors / Receivables

Turnover Ratio

Assets Turnover Ratio

3.1 RECEIVABLE TURNOVER

It can measure liquidity by how quickly a company can convert certain assets to cash. The

ratio used to assess the liquidity of the receivable is receivables turnover. It measures the

number of times, on average; the company collects receivables during the period.

Receivable Turnover = Sales

Average Accounts Receivable

(2010) = 1,026,180,900

(32,865,532 + 23,220,120)

2

= 1,026,180,900

56,085,652

= 1,026,180,900

56,085,652

= 36.59

They collect cash from the customers 36.59 (rounding off 37) times in a financial year.

3.1.2. Collection Period = 365

Receivable Turnover

=365

36.56

9.975 = 10days

Credit period is always 30days. This 10days collection period is not good for Galadari Hotels

PLC. As a five star hotel. Otherwise collection can be going down.

3.3 INVENTORY TURNOVER

Inventory / Stock Turnover Ratio indicates the number of time the stock has been turned

over during the period and evaluates the efficiency with which a firm is able to manage its

inventory. This ratio indicates whether investment in stock is within proper limit or not.

It measures the number of times, on average; the inventory is sold during the period. Its

purpose is to measure the liquidity of the inventory.

Inventory Turnover = Cost of Goods Sold

Average inventory

= 198,447,565

129,229,093 + 99,432,385

2

= 198,447,565

228,661,481

= 0.86

3.4 HOLDING PERIOD

HOLDING PERIOD = 365

Inventory Turnover

= 365

0.86

=424 days

Always industry holding period average is 50days. This situation is bad that’s why Galadari

Hotels PLC.

3.5 ASSET TURNOVER RATIO

Asset Turnover Ratio measures the revenue that is generated for every rupee of

asset owned by the company.

Asset turnover ratios help to measure the effectiveness with which the

company/management uses its assets to generate sales or revenue. These ratios help

to measure the productivity of a company's assets

Asset Turnover = Total Sales

Average total Assets

= 1,026,180,900

453,771,761 + 239,416,915

2

= = 1,026,180,900

693,188,676/2

= 1,026,180,900

346,594,338

= 2.96

4. MARKET RATIOS

Market ratios measure the investor response to owning a company's stock and also the cost

of issuing stock.

A market-value ratio is a metric used to gauge a company's viability in terms of such

variables as profitability and the market valuation of its stock. These ratios are used

analytically by a company's management as well as by its current and prospective investors.

A market-value ratio also acts as an indicator that expresses the value of a company's stock in

terms of a specific item in its financial statements. Different ratios indicate a company's

viability, or financial health, where asset values, revenue, income, and ability to pay bills are

concerned.

Classifications of Market ratios

4.1 EARNINGS PER SHARE

Earnings per share (EPS) the portion of a company's profit allocated to each

outstanding share of common stock. Earnings per share serve as an indicator of a

company's profitability.

Basic Earnings per share is calculated by dividing the net loss for the year attributable

to ordinary shareholders by the weighted average number of ordinary shares

outstanding during the year.

The weighted average number of ordinary shares outstanding during the year and

previous year are adjusted for events that have change the number of ordinary shares

outstanding, without a corresponding change in the resources such as a bonus issue.

Formula

EPS = Net Profit after Tax

Average Number of issued ordinary shares

Calculation and Interpretation of Earnings per share Ratios

Market Ratios

Earnings per share

Ratios Dividends Payout

Ratios Price Earnings Ratios

Financial Data/ Year 2010 2009

Profit/Loss after Tax 23,651,446 -351,985,121

Average Number of issued ordinary shares 182,434,060 182,433,060

EPS 0.13 (1.93)

Earnings per share ratio signify the amount of earnings available for the investors who have

been invested or willing to invest in equity shares of the company. This ratio gives the

amount of earnings can be attribute to a single share of the company.

4.2 PRICE EARNINGS RATIO

The Price-to-Earnings ratio (P/E ratio) of a stock is a measure of the price paid for

a share relative to the annual net income or profit earned by the firm per share.

(P/E) ratio indicates the value of a company's stock relative to its financial

performance.

It is sometimes called a multiple because it indicates the amount of money that must

be invested in order to derive one dollar of earnings. For this reason, lower ratios are

preferred to higher ones.

Formula

Price Earnings Ratio = Market Price per Share

Earnings per Share

Calculation and Interpretation of Price Earnings Ratios for three companies

Financial Data/ Year 2010 2009

Market Value per share (Rs.) 10 15

EPS(Rs.) 0.13 (1.93)

P/E Ratio 76.92 -7.7

The calculated P/E Ratio reflects that the Galadari Hotels PLC. Earings in positive after 4

years as Rs. 76.92/- . Due to the face that Galadary having after tax loss it has resulted with

an negative EPS in 2009.

A higher P/E ratio means that investors are paying more for each unit of net income, so the

stock is more expensive compared to one with lower P/E ratio. The P/E ratio has units of

years which can be interpreted as "number of years of earnings to pay back purchase price. If

we consider the number of years to pay up the purchase value of the share by its earnings,

hypothetically for an investors of Galadari hotels Plc it takes 76.92 if the company continues

to earn current level of profits.

5. PERFORMANCE OVERVIEW OF GALADARI HOTELS (LANKA) PLC.:

During the financial year ended December 2010, the Group achieved revenues of Rs. 1026

million. The turnover for the year under review was Rs. 1,026,180,900/- while the Gross

Profit was Rs. 827,733,335/-, resulting in a 41% increase in the turnover and 43% increase in

the Gross Profit Comparison with year 2009.

Stated Capital Rs. 1.8 billion

Market value per share is Rs. 15.00

Earnings per share is Rs. (0.13)

Share Capital as at 31st December 2010 –Rs. 1,527,844/-

The reconstruction of the Hotel continued throughout the year 2010.

6. CONCLUSION

The various ratios that have been identified in determining a financial situation can be

categorized in to Galadari Hotels PLC. Elements i.e. Profitability Ratio, Liquidity ratio,

Solvency ratio, Activity and Market ratio. As described in the introduction each of these

ratios play a specific function with reference to the functionality and the status quo of an

organization.

In the case of the specific exercise, the hotel industry has been selected and the annual report

of the Galadari Hotel PLC has been analyzed. The profiles of the companies have been

shown in the introduction and the annual reports have been annexed.

Profitability ratio: Every firm is most concerned with its profitability. One of the most

frequently used tools of financial ratio analysis is profitability ratios which are used to

determine the company's bottom-line.

The profitability ratios are then categorized in to several other ratios: Gross profit, Net profit,

return on asset, return on equity and return on capital employed.

The importance of these ratios is that to an investor the ratios give information on the general

direction of the identified company. The investor can then decide whether to hold, buy or sell

his or her shares. Also based on the ratios the investor can identify if a company has over

borrowed or if the company can meet its short term liquidity issues. The shareholders know

whether the on track as expected are entitled to dividend.

Hence when considering the profitability ratio, the most profitable entity is in 2010 than 2009

in Galadari Hotels PLC. Hence the company represents comparatively sound ratios.

REFERENCE

GALADARI HOTELS (LANKA) PLC. Annual Report year of 2010

www.cse.lk/cmt/upload_report_file/532_1274867640886.pdf

www.cse.lk/cmt/upload_report_file/690_1275657128533.pdf