Critical analysis of key ratios
Serendib hotels plc is operating its business in the hospitality industry in Sri Lanka. The business operates various hotels, spa and resorts in the Sri Lanka. Almost all the properties are owned by the company itself. The company has been formed in the year of 1966 in the Colombo, Sri Lanka. The main property of the company includes AVANI Bentota Resort & Spa located in Bentota; Club Hotel Dolphin in Waikkal, Hotel Sigiriya in Sigiriya and Avani Kalutara Resort in Kalutara (Bloomberg, 2018). The financial and non financial information of the business explains that numerous changes have occurred in the business in last 5 years.
The cash flow level of the business has been reduced in recent years along with the reduction in the financial performance and financial position because of few changes in the industry and the competition in the market. The main competitor of the business is Tal Lanka hotel plc which is holding 1.87 billion market capitals whereas the market cap of Serendib hotels plc is 1.91 billion (FT, 2018). In this report, the financial analysis study has been done on Serendib hotels plc to measure the performance and changes in the financial performance and position of the company in last 5 years.
Ratio analysis is one of the most used and crucial financial analysis technique which makes it easier for the internal and external stakeholders of the business to identify the performance and the changes in the financial performance form the last year. It evaluates the financial statement of the business on the basis of the liquidity level, profitability level, capital structure level, and efficiency level and market performance of the business (Higgins, 2012). ratio analysis study of Serendib hotels plc is as follows:
Profitability ratios define the potential of the business to maintain and generate more revenue on the basis of the total turnover and assets of the business (Krantz, 2016). In case of Serendib hotels plc, it has been measured that the profitability position of the business has been reduced from last few years in the year of 2017.
In case of return on capital employed, the ROCE level has been 5.99% in 2017 from 13.34% in 2013 which depicts about great decrement in the profitability level of the company (Annual report, 2013). Along with that, the return on assets also depict that the net profitability level of the business has been reduced and is lowest in 2017 from last 5 years. the current ROA of the business is 3% only. Lastly, the net profit margin level defines that the net profitability level of the business has been lowest in 2017 because of the lower demand of the rooms and the occupancy rate of the business was also lower (Annual report, 2017).
It explains that the profitability level of the business has been reduced by a great % from last few years and it becomes important for the business now to make some strong strategies in order to assure the performance and improve the profitability level of the business.
Profitability ratios
Asset efficiency ratios define the potential of the business to maintain and generate the working capital and efficiency level of the business to improve the turnover and manage the activities of the business (Lord, 2007). In case of Serendib hotels plc, it has been measured that the efficiency position of the business has been improved from last few years in the year of 2017.
In case of creditor’s turnover days, little improvement has been seen in the efficiency level. The creditor’s turnover days of the business has been improved from last year which depicts that the business could maintain the activities of the business at reduced working capital as well (annual report, 2015). Further, the inventory turnover days of the business has been reduced and explains that business has to order the inventory quickly and the less working capital would be paid by the business with each transaction. Lastly, the debtors turnover days of the business has been studied and it has been found that the debtors turnover days of the business has also been reduced which explains that payment would be got by the business quickly and thus less capital is required to run the business (Lumby and Jones, 2007).
It explains that the efficiency level of the business has been improved from the last few years and explains that the business and activities could be run in less capital by the organization.
Liquidity ratios define the potential of the business to pay off all the current liabilities against the available current assets of the business (Madura, 2014). In case of Serendib hotels plc, it has been measured that the liquidity position of the business has been reduced from last few years in the year of 2017.
In case of current ratio, the liquidity level of the business is 0.16 which depicts that only 0.16 of current liabilities could be paid against the current assets of the business. The current asset level of the business has been reduced at great level and because of it; the liquidity risk of the business has been higher (Hillier, Grinblatt and Titman, 2011). Further, the cash ratio and the quick ratio of the business have been studied to measure that whether the quick payment could be done of current liabilities of the business or not. On the basis of the study, it has been found that the level of quick assets and cash in the business is lowest and thus the business is not able to meet the short term debt obligation.
It explains that the liquidity level of the business is lowest and it becomes important for the business to maintain a good proportion so that the risk level could be reduced.
Capital structure ratios define the potential of the business to maintain a level where the financial risk of the business could be reduced and the debt level is quite compatible to the equity level so that debt could be paid off by the business easily. In case of Serendib hotels plc, it has been measured that the capital structure position of the business has been improved from last few years in the year of 2017.
Efficiency ratios
In case of debt equity ratios, little improvement has been seen in the debt level against the equity of the company. the debt equity ratios of the business has been improved from last few year which depicts that the business could maintain the financial risk as of now. Further, the debt ratio of the business has been reduced and explains that total long term debt level of the business is quite lower against the total assets of the business (Annual report, 2017). Lastly, the interest coverage ratio of the business has been studied and it has been found that the EBIT level of the business has been improved from last few years in 2016 and 2017 and it explains that business is enough capable to pay the interest amount to debt holders of the business.
It explains that the capital structure level of the business has been improved from the last few years and explains that the business and activities could be run in the business in better way along with lower financial risk and cost of capital of the business.
Stock market performance ratios define the potential of the business to maintain a better position in the market through offering better dividends and offer better ES level to the stockholders of the business. In case of Serendib hotels plc, it has been measured that the stock market position of the business has been improved from last few years in the year of 2017.
In case of price earnings ratio, huge improvement has been seen in the price level of the business against the earnings. It explains that the market position of the business is improving day by day. Further, the earnings per share of the business have been reduced because of the decrement in the net profitability level of the business. Dividend yield explains that in the year of 2013, 2014 and 2015, no dividend has been paid by the business to its stockholders but in recent year, the dividend yield of the business is 0.5 which is quite compatible from last year (annual report, 2013). Lastly, the earning yield of the business explains that the level of EPS is quite lower against the total stock price of the business.
It explains that the market position of the business has been improved from last year and because of it, the interest of the stockholders has also been improved in the business.
Why trends:
On the basis of the above reports and the analysis on the financial statement of the business, it has been found that the overall financial performance of the business has been reduced at great level in last 5 years. These changes have occurred in the business because of the lower demand of the property of the company. The changes have occurred because of few internal and huge external changes in the industry. The tourism arrivals of Sri Lanka have been studied and it has been found that the tourism level of the country has been reduced because of that the demand of the hotels has been reduced. Because of lower demand, the hotels were not able to meet the expected occupancy rate and it has hampered the total turnover level and the profitability position of the business (Trading economies, 2018).
Liquidity ratios
Further, it has also been found that the total administrative expenses and the marketing expenses of the business have been improved from last year which has affected the operating profit level and the finance cost level of the business has also been improved to affect on the net profit level of the business (FT, 2018). These changes have occurred because of the economical factors. But if the internal factors take into the concern, than it has been found that the business has failed to make the changes into the services and information technology along with the time, which have reduced the interest of the guest in these hotels and they have switched to other business to availed their services (Bloomberg, 2018).
The improper budgeting is also a cause behind the negative trend in the business. On the basis of the study, it has been found that it is quite important for the business to maintain a proper pricing policy and control over the human resource of the business so that the cost could be controlled and the overall performance of the business could be improved.
The study explains that the turnover and the profitability level of the business have been reduced along with the higher liquidity and financial risk in the business. On the basis of analysis, below are the few strategies which must be followed by the business to improve the overall performance of the business.
Return on capital employed generally must be more than 10% in a business as it indicates about the total net profit generated against the capital of the business. In this case, the main focus must be on the profitability level of the business through reducing the non operating expenses and making the changes into the obstacle technology of the business (Hillier, Grinblatt and Titman, 2011).
Business is suggested to focus on the net profitability level along with that it is also recommended to the business to reduce the assets level in the business.
Few internal changes such as reducing the non operating expenses focus on the new services and HR department and making the changes into the obstacle technology could help the business to maintain the same profitability level again.
The creditor’s turnover days of the business are compatible enough. Business could be managed in lower working capital right now.
Stock turnover days of the business are enough compatible because the charges of warehouse and payment amount is reduced in current scenario.
Debtor’s turnover days of the business are also better in current situation. It defines that the activities of the business could be run in lower working capital as well (Kinsky, 2011).
Current assets level must be improved by the business to maintain the liquidity position and reduce the liquidity risk in the business.
It is recommended to improve the cash level of the business so that the short term debt payment obligation could be met.
Quick assets level must be improved by the business to maintain the liquidity position and reduce the liquidity risk in the business
Debt equity ratio has been improved from last few years and it could be improved more through focusing on the same strategy (Horngren, 2009).
Debt ratio represents that the reduction in the asset level must be done to maintain and reduce the financial risk in the business.
Company has enough funds to pay off the debt obligation and the interest amount to debt holders of the business.
P/E ratio of the business defines that the market position of the business is quite compatible.
Earnings level depends on the net profitability level of the business which must be improved by the management of the company (Gapenski, 2008).
Company is required to pay better dividend to the stockholder to attract them more towards the business.
Earnings level of the business must also be focuses so that the investor’s level could be improved in the business.
Conclusion:
On the basis of the overall study, it has been found that the financial performance of the business has been reduced from last 5 years but few changes into the financial policies and strategies could help the business to maintain the same performance and position in the industry again. To conclude, Serendib hotels plc’s net profitability level, stock price and the capital structure level has been affected and thus it became important for the business to maintain these level in order to assure the industry level, market level and the financial level of the business. Overall, the business is a good choice for the long term investment. If an investor is looking for short term investment then he or she must not go for the stock of Serendib hotels plc.
References:
Annual report. 2013. Serendib hotels plc. [online]. Available at: https://colombostockwatch.com/2015/03/01/serendib-hotels-plc-2014-annual-report/ (accessed 10/11/18)
annual report. 2014. Serendib hotels plc. [online]. Available at: https://colombostockwatch.com/wp-content/uploads/2015/05/SERENDIB-HOTELS-PLC-SHOT.N0000-2014.pdf (accessed 10/11/18)
Annual report. 2015. Serendib hotels plc. [online]. Available at: https://cdn.cse.lk/cmt/upload_report_file/601_1434536002.pdf (accessed 10/11/18)
Annual report. 2017. Serendib hotels plc. [online]. Available at: https://cdn.cse.lk/cmt/upload_report_file/601_1496315990330.pdf (accessed 10/11/18)
Bloomberg. 2018. Serendib hotels plc. [online]. Available at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=20386598 (accessed 10/11/18).
2018. Serendib hotels plc. [online]. Available at: https://markets.ft.com/data/equities/tearsheet/summary?s=SHOT.N0000:CSE(accessed 10/11/18)
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley & Sons.
Krantz, M. 2016. Fundamental Analysis for Dummies. London: John Wiley & Sons.
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.
Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson, London
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Trading economies. 2018. Sri Lanka tourism arrival. [online]. Available at: https://tradingeconomics.com/sri-lanka/tourist-arrivals (accessed 10/11/18)
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