Solution 17.5

				2013		2012
PROFITABILITY
Gross profit margin	Gross profit x 100			£9,700	65.1%	£8,174	64.9%
	Sales			£14,890		£12,594
Operating profit margin	Net profit (PBIT) x 100			£3,754	25.2%	£2,908	23.1%
	sales			£14,890		£12,594
Expenses to sales	Expenses x 100			£5,946	39.9%	£5,266	41.8%
	sales			£14,890		£12,594
ROCE	Net profit (PBIT) x 100			£3,754	18.0%	£2,908	14.6%
	Capital Employed			£20,838		£19,907
ROOE	Net profit after I & T x 100			£2,604	18.0%	£1,738	14.0%
	Total equity			£14,491		£12,387
EFFICIENCY/USE OF ASSETS
N.C. asset turnover	Sales			£14,890	0.66 : 1	£12,594	0.6 : 1
	Non-current assets			£22,393		£20,902
Capital employed turnover	Sales			£14,890	0.71 : 1	£12,594	0.63 : 1
	Total assets /Cap Employed			£20,838		£19,907
Inventory Turnover	Cost of Sales			£5,190	22.9 times	£4,420	12.6times
	Average stock			227		350
Inventory days	Average stock x 365			227 x365	16 days	350 x 365	28.9 days
	Cost of sales			£5,190		£4,420
Debtors days	Accounts receivable x 365			£56	1.4 days	£85	2.5 days
	Credit sales			£14,890		£12,594
Creditors days	Accounts payable x 365			£290	20.4 days	£420	34.7days
	Credit purchases			£5,190		£4,420
LIQUIDITY
Current ratio	Current Assets			£320	0.17 : 1	£725	0.4 : 1
	Current Liabilities			£1,875		£1,720
Quick-acid test ratio	Current Assets - Stock			£93	0.05 : 1	£375	0.21 : 1
	Current Liabilities			£1,875		£1,720
CAPITAL STRUCTURE
Gearing	Fixed interest debt			£6,347	0.44 : 1	£7,520	0.61 : 1
	Shareholders funds			£14,491		£12,387
Interest cover	Net profit (PBIT)			£3,754	6.7 : 1	£2,908	4.47 : 1
	Interest			£560		£650

Commentary on Yocomana Hotels Ltd should include

Introduction This question requires an analysis of the performance of the business between 2012 and 2013 under the headings of profitability, liquidity, management’s use of assets and financial risk. From an initial scan of the business it seems that 2013 was a good trading year for Yocomana hotels with sales and operating profits increasing significantly allowing the company to increase its dividends to shareholders and continue to reinvest in the business. Long-term debt has decreased significantly with equity increasing.

Profitability Overall sales increased in 2013 by 18% with operating profits increasing by 29%. This is reflected in an increased ROCE of 18% up from 14.6% in 2002. These are all excellent results. On further analysis the increase in the ROCE has occurred due to a combination of an increased operating profit margin (up 2%) and management achieving a higher capital employed turnover (.63 in 2012 to .71 in 2013).

Focusing on the profit margins the reason for the 2% increase is due in the main to a reduction in the expenses to sales % both administration and selling expenses. Administration and selling expenses increased by 12% and 13% respectively however sales increased by 18% thus reducing the expense to sales ratios. To analyse these expenses one would need a break-down of expense items however as hotels have high fixed costs it is normal that as sales increase the expenses to sales percentage will decrease. Overall the operating margin ratios are reasonable in comparison to norms within the hotel sector. Management however should be mindful of the increase in expenses and identify the drivers of these increases and assess their added value if any.

In 2012 the business generated 63 cent per € invested in the company. This increased to 71cent per € an increase of 12.7%. This increase in turnover has not come at the expense of reducing prices, which would be reflected in reduced gross profit percentages. In fact the gross profit margin has increased slightly. Overall the profitability performance is excellent however management should be mindful of the increased expenses.

Managements use of assets Management use assets to generate sales. Assets by their nature also generate expenses thus management must ensure sales exceed expenses and by a sufficient margin to satisfy the needs of investors. As mentioned earlier Yocomana’s non-current and total asset (capital employed turnover) turnover ratios have both increased reflecting their success in generating increased sales. This success is reflected in the higher return on capital ratios. For hotels, investment in current assets is quite low. The debtor’s collection period of between 1 and 3 days reflects the cash nature of the business. The stock turnover ratio has increased reflecting the increase sales as well as reducing stock levels. The creditor payment period has decreased due in the main to reduced creditors. None of these ratios are cause for concern.

Liquidity The liquidity ratios assess the ability of a business to pay its debts on time. This is measured through the current and the quick ratios. The current ratio assesses the ability of a business to pay its debts over a 6-12 month period. The quick ratio is a worst case scenario assessing a company’s ability to pay its current liabilities out of its current assets immediately. The company’s ratios in 2012 reflect the norm for the sector however these ratios have deteriorated in 2013 and should be monitored and improved over 2014. It should be noted that the company’s cash levels have decreased rapidly. In 2012 the company had a negative net cash position of €540,000 whereas at the end of 2013 this increased to a negative figure of €1,110,000.

Financial Risk/ capital structure The gearing ratio measures the level of debt to equity for a business. A company with too high a level of debt would be considered highly geared and thus would create concern regarding its ability to meet the conditions of the debt especially in an economic downturn. In the case of Yocomana Hotels Ltd the company would be considered low geared with long-term debt falling from its 2012 level. The debt to equity ratio fell from 61% in 2012 to 44% in 2013. Thus the company has a strong balance sheet and this is reflected in the interest cover ratio going from 4.5 times to 6.7 times in 2013.

ConclusionOverall the business has performed very well while at the same time reducing its debt levels. The two points of concern relate to the increase in expenses and the liquidity ratios, which need to be investigated and monitored.