Vertical Analysis of Income Statement and Balance Sheet
Discuss about the Event Concept and Design of Crystal Hotel.
Vertical Analysis of Balance Sheet of Crystal Hotel
Vertical analysis is a technique which is used in financial analysis which can show percentage of various items present in the statement which will be based on a base which is set (Edmonds et al., 2013). In case of vertical analysis of income statement normally sales figure is considered to be the base and in case of balance sheet, the total assets and liabilities are considered to be base for respective sides (Klop?i? & Klun, 2017). Vertical analysis is very useful in analyzing the growth in the various item of the financial statements of the business.
As per the vertical analysis which is conducted on the income statement of Crystal Hotel shows that the total revenue is considered to be constant on the basis of which the percentage is computed for all other items. As per the percentage, the revenue which the hotel is able acquire from the room service is shown to be 61.88% which is more than the industry average which is estimated to be 57%. This shows that the customers prefer the room services of Crystal Hotel and therefore the overall sales of the room are shown to be higher than industry average. The business also makes its mark in the income which is earned from other sources which is shown to be 8.83% and thus it contributes a significant part to the total revenue of the business (Kalogeras et al.,2013). The cost of sales in terms of percentage is shown to be 27.59% which is higher than the industry average for the year 2015 and therefore, the management of Crystal Hotel needs to improve the costs of sales of the business in order to maximize the revenues of the business. In terms of the personal costs of the business, the room expenses and food and beverages expenses are shown to be 7.60% and 7.08% as per the computations which is shown for the year 2015. The estimates of percentage which is computed for personal costs of Crystal Hotel is less than the industry average and therefore the same is favorable in nature. The total of personal costs of the business is shown to be 25.38% which is lower than what is incurred by most of the businesses in the industry (McLaughlin, 2016). However, the total unallocated operating cost of the business is much more than the industry average. The total unallocated cost for the industry is shown to be 16% and the unallocated operating costs for Crystal Hotel is computed to be 18.31%. Improvement in operational structure can be brought about by reducing the costs and this can lead to further improvement in the revenue of the business.
Improvement Suggestions for Operational Efficiency
The improvements which can be suggested to the management of Crystal Hotel for bring about changes in the operational structure of the business and the same can also bring about improvement in operational efficiency of the business:
- The management of Crystal Hotel needs to improve the food and beverages service of the business so that there is improvement in all services of the business. Moreover, improvement in the food and beverages services of the business will also ensure that the business is able to earn more revenues for the business (Gul, Zhou & Zhu, 2013). This will further improve the earnings of the hotel in comparison to other hotels in the industry.
- The management also needs to focus on the costs which is incurred by the business in rooms and food and beverage services for which the management has the option of changing the menu or recruiting more efficient workers. The cost reduction is important as the same can help the business to earn higher proportion of revenues.
- The vertical analysis of the income statement of the company also revealed that the business also needs to reduce the other costs which are incurred by the business such as social security and other unallocated costs of the business. The management of the company needs to evaluate the costs which are incurred on such activities and decide whether the same are of productive nature or not.
Ratio analysis is a performance measuring metrics which allows the management of the business to analyze the performance of the business (Ongore & Kusa, 2013). There are even some key financial ratios which are considered by the investors for making decisions whether to invest or not invest in the business (Delen, Kuzey & Uyar, 2013). The important ratios which are considered by the investors and other stakeholders and even the management are profitability ratios, solvency ratios, capital structure ratios and efficiency ratios.
As per the ratios which are computed for the year 2015 for Crystal Hotel shows profitability, efficiency, liquidity and solvency ratios of the business. The profitability ratios of the business show gross profit margin, net profit margin and return on assets and return on equity. The gross profit margin of the business is shown to be 72.41% which is less than the average of the industry which is estimated to be 81%. The net profit margin of the business is shown to be 19.53% which is significantly more than that of the industry average (Sharma & Panigrahi, 2013). The industry average for net profit margin is shown to be 11%. The net profit margin of Crystal Hotel shows that the operation efficiency and structure of the business is much better than that of most of the hotels in the industry. The return on assets of the business signifies the returns which the company is capable of earning with the use of the assets of the business. The return on assets for Crystal Hotel for the year 2015 is shown to be 21.23% which is much more than that of industry average. The return on equity represents the profits which the business is capable of earning with respect to equity share capital which the business possesses. The return on equity which is computed for the business for the year 2015 is shown to be 28.84 which signifies that the business is performing well and meeting the expectations of the shareholders of the company (Hoberg & Maksimovic, 2014). The return on asset and return on equity is considered to be one of the financial indicators for the success of the business and the same is shown favorable for Crystal Hotels.
Ratio Analysis of Financial Performance
The efficiency ratio of the business shows inventory turnover ratio, account receivable turnover ratio of the business and their respective collection period. The inventory turnover ratio is shown to be 6.40 which is much lower than that of Industry average which suggest that the business needs to make improvements in this respect. The account receivable ratio of the business is shown to be 3.94 and the account receivable collection period is shown to be 92.73 days. The industry average for account receivable collection period is estimated to be 35 days. Therefore, the same suggest that further improvements can be brought about in the debt collection policy of the business. The account receivable collection period for the industry suggest that there are hotel businesses which have a better debt collection policy in comparison to Crystal Hotel.
The liquidity ratio of the business shows the financial position of the business and also indicates the ability of the company to meet the current obligations of the business. The current ratio of the hotel shows an estimate of 1.86 which is comparatively lesser than that of industry average. The quick ratio also shows the ability of the company to meet the day to day expenses of the business (Hail, 2013). The quick ratio of the business is shown to be 1.46 for the business whereas the industry average is shown to be 2.12 during the year 2015. The liquidity ratio of the businesses are considered to be financial indicators of the business and are important determinants in management decisions regarding various resources for financing (Francis, Hasan & Wu, 2013).
The solvency ratios of the business comprise of Debt to equity ratio, debt ratio. Equity ratio and interest coverage ratio. The ratios which are mentioned above are related to the capital structure of the business. The debt to equity ratio shows the capital structure which is preferred by the business. The debt equity ratio is shown to be 35.81% and the same represents the balance which can be attained between the debt capital and equity capital of the business (Chen, 2013). The debt ratio of the business is shown to be 26.37% and the equity ratio of the business is shown to be 73.63%. The above results which is computed for Crystal Hotel signifies that the management of the company relies more on equity capital and not on debt capital of the business. The management of Crystal Hotel mixes debt and equity capital of the business in order to achieve a balance between debt and equity capital of the business. The interest coverage ratio of the business shows the ability of the company to service the loans of the business.
References
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