Financial Statement Analysis
Financial statement analysis is used to analyse the financial performance and financial position of a business over a period of time. Financial statement analysis includes assessment of balance sheet, income statement and cash flow items to assess the profitability, stability, performance and cash flow position of a business. This analysis is useful for the investor to judge, how well a company is managing and is it worth investing or not. Users of financial statement are mainly dependent upon the short and precise presentation of information which is easily interpretable and understandable.
We are required to do financial statement analysis of two hotel chains in this task over the period of four years. AL BATNAH Hotels company (OMAN) and GULF hotels company (OMAN) are the two companies chosen to be analysed. For this purpose, we will be analysing ratios of both companies, their z score rating, swot analysis as well as information related to market.
This study is carried upon using the financial statements of both companies for four years only FROM 2015 to 2018. This has limited our understand ability of financial performance and industry trends over the long term. As the results could be impacted by the overall industry recession, boom periods, government’s long term planning and global factors. We need to assess more detailed information about the two companies on group level including their subsidiary information. Better evaluation of industry, company, its future prospects and other factors can show true results.
Objective of the report:
The main purpose of this report is to analyse the financial statements of two hospitality companies for the period of four years and for the benefit of its users.
Introduction of companies:
AL BATINAH HOTEL COMPANY:
Al Batinah Company is operating in sohar beachOman. It is hospitality business with concentration on hotel services. Al batinah has customers from all walks and fields and from government sector as well. Company is listed on MSM 30 companies.
Gulf Hotel Company:
Gulf hotel group owns Crown Plaza hotel in Muscat. This group is operated by Inter-Continental Hotels Group, which is operating over 5000 hotels in 100 countries all over the world. This company is mainly focused on providing premium hotel services to the customers. This company is also listed in MSM30.
Hotel industry in Oman has experienced a sharp increase of almost 4% during the year 2018 according to a report of collier international. Al Batinah hotel recorded increased revenue during year 2018 while the Gulf hotel has recorded a fall in revenue. Overall trend of Gulf hotel is decrease in revenue. However Al Batinah has gross loss during 2017 and 2018 but the gross loss decreased during 2018 because the company realized less net losses in year 2018 as compared to yr 2017. Al Batinah realized an increase of 22.92% in revenue during the year 2018. Occupancy rate also increased from 42% to 63% due to decreased rates. Gulf hotel despite having less revenues has a good gross profit ratio. Al Batinah is spending huge amount of revenues earnedupon the direct cost and not converting revenues into gross profits.
Gross profit ratio for Al batinah is negative due to loss in year 2017 and 2018 while for Gulf hotel gross profit ratio is 24% in 2017, which decreased to 13% in 2018 due to higher operating costs. Al batinah net profit before and after tax is also in minus figures. Gulf hotel has 20% net profit ratio in 2017 and it decreased in 2018 to 11%.
Debt to equity ratio of Al Batinah is 11% in 2018 while the debt to equity of Gulf hotel in 2018 is 0% which means Gulf hotel company is fully funded by the shareholders equity. Debt to equity of Al Batinah is still termed as good indicator as company is not highly geared.
Current Ratio of Gulf hotel is 1.01 in 2018 and in 2017 it was 1.77. in 2018 current ratio decreased but still its good as the current ratio of 1 is considered as good ratio. Al Batinah has a current ratio of 0.41 in 2017 which further decreased in 2018 to 0.26 in both years this ratio is indicator of poor ability of a company to pay off its liabilities out of current assets.
Working capital is calculated by deducting current liabilities from current assets,.
Cash ratio is a calculation of cash and bank balances to current liabilities. Gulf Hotel has a cash ratio of 1.3 in 2017 while in 2018 it decreased to 0.5, now the company can pay 50% of current liabilities from its cash assets. Al Batinah has a cash ratio of 0.02 in 2017 and in 2018 it is 0.016, this ratio is very low to meet the current liabilities from the cash and bank assets.
Total assets to total equity ratio of Al Batinah shows an increase of 0.1 % in year 2018, which means that assets of company increased in 2018. This ratio remained same for Gulf Hotel Company in 2017 and 2018.
Analysis of Cash Flow:
Al Batinah hotel has a negative operating cash flows because of the higher operating costs in year 2017 and 2018. Revenue for the hotel increased in 2018 but the direct cost remained more than the revenue which resulted in operating losses. This negative operating cashflow translated into further negative cashflow as the group purchased property plant and equipment in 2018 as well. Company has negative cash balance at the end of the year and increased bank borrowing manyfolds. Cash flow of Gulf hotel shows positive operating cash flow over the period of 4years. Operating cash flow is although positive but shows a decline of 47% in 2018 due to decreased operating profits. Hotel invested in renovation and upgradation of property and premises to make it look more attractive. Cash flow from financing activities remained positive but overall cash flow is negative in 2018. Upon analysis, it can be said that the cash flow of both hotels doesn’t present satisfactory results. If this performance continuous then both hotels can face severe cash flow issues and need to obtain loans. More loans will increase gearing and finance costs of companies and deteriorating their performance. Highly geared companies are considered risky and investors do not invest in them.
Altman Z-Score Analysis:
Altman Z score states that if score of any company is above 3 then that company is financially safe and sound and will not be insolvent in near future. Company having score between 1.8 to 3 is considered risky as they can go insolvent in near future. And below 1.8 is considered highly risk companies, which are already in state of insolvency.
Al Batinah has a score of 6.2 which means that the company is financially safe and performing well. Al Batinah will be considered solvent company for near future and not likely to go insolvent. Score of Gulf Hotel on the other hand is 2.21, which lies between risk line of 1.8 – 3. This means that company is likely to go bankrupt in a year or two or in near future. Gulf hotel needs to change there working capital structure their liabilities and their cash management otherwise they can face the music.
Off Balance Sheet Analysis:
Off balance sheet factors are analysed based on the information given by the management and auditor of both companies. Both groups are operating into the same industry so they will be affected by the industry ups and downs. As the Omani Government is planning to diversify national income and will focus more on tourism sector development, this will increase chances for both hotels to increase their market share and profitability.
Al Batinah has currently 454886 Ro long term liabilities including long term loans which affect their interest coverage and debt to equity ratio. While the noncurrent liabilities of Gulf hotel is 1858000 RO. Lowering oil prices is affecting the regional development and hampers every business in Oman.
Construction of more hotel apartments and decrease in rents will decrease the sales of hotel business in Oman and particularly in Muscat. Both hotels can experience cash flow and liquidity problems due to negative or low cash flows. Increased taxes and regulations will impact the buying power of masses and they will divest in leisure activities.
Al Batinah Hotel Company Oman:
- This hotel is stable sales and a very good distribution networks to maintain the sales.
- Al Batinah has increased sales and revenues and cost of sales are predictable to sales.
- Al Batinah has an edge in domestic market over the competitors.
- Locations of hotels are preferred by the customers over the other hotels.
- Company can obtain loan to fund their operations because of the loss realization, which will increase their finance cost.
- Portfolio investment of company is weak and they need to diversify.
- Al Batinah can enter in new markets and expands into GCC countries. A new strategy can open up new arenas.
- Company can acquire new businesses and by the brand image can turn them as profit business.
- Expenses of company are rising and are uncontrollable for the company. Losses for the company are major threats for expansion.
- Threat of new entrant is there because the government is planning to focus more on tourism industry.
- Negative cash flow is threat to Al Batinah financial performance.
Gulf Hotel Oman:
- New facilities and contemporary outlook of hotels will add to more sales will be a tough competition for competitors
- Food and beverages outlets will strengthen hotels position in market.
- Revenue and sales position is strong performer for hotel.
- Hotel group has increased long term debts.
- Higher income tax expense
- Shrinkage of subsidiaries income and disposal of subsidiaries
- There will be more demand for hotel industry following government’s initiative of Tanfeedh Oman.
- Existence of hotel in multiple locations and its brand image
- Cost of business can increase if company wants to maintain standards.
- Tax regulations from the government for the new acquisition.
- Economic slowdown can slow the growth of gulf hotel in Oman.
- New competitors can enter the market because of the government’s new initiative.
After the analysis of both companies, their market trend, industry trends, z score, swot analysis and significant ratios, it is concluded that Al Batinah is not performing well. Al Batinah has a history of loss for 2 years and they are converting their revenues into cash either. Their customer base is shrinking and decrease in room prices are affecting revenues. Cash and current ratios of this company is very low. Overall performance is not satisfactory for Al Batinah. If company doesn’t take serious actions to decrease the cost and increase revenue, this could lead to serious solvency issues.
Gulf Hotel is performing relatively better than Al batinah. Their operating profit is low compared to previous years but still they are in profit. Their customer base is good and current and cash ratio indicators are according to industry average. Overall hotel industry in Oman is facing problems and less customers. Gulf Hotel Company is better to invest in as they arein a position to meet their solvency needs in near future as per the findings of z score analysis. Furthermore, a detailed analysis of overall group needs to be evaluated to establish more accurate results.
September 11, 2019
September 11, 2019
July 24, 2019