Solution 17.6

		Dunne Group		Gibson Hotels
PROFITABILITY
Gross profit margin	Gross profit x 100	£11,577	65.8%	£9,862	64.8%
	Sales	£17,589		£15,222

Operating margin	Net profit (PBIT) x 100	£4,967	28.2%	£4,139	27.2%
	sales	£17,589		£15,222

Expenses to sales	Expenses x 100	£6,610	37.6%	£5,723	37.6%
	sales	£17,589		£15,222

ROCE	Net profit (PBIT) x 100	£4,967	17.82%	£4,139	20.62%
	Capital Employed	£27,864		£20,077

ROOE	NP after I & T x 100	£3,021	19.2%	£2,972	23.67%
	Total equity	£15,739		£12,557

EFFICIENCY
N.C. asset turnover	Sales	£17,589	0.586 : 1	£15,222	0.716 : 1
	Non-current assets	£30,017		£21,250

Cap Employ turnover	Sales	£17,589	0.63 : 1	£15,222	0.76 : 1
	Capital employed	£27,864		£20,077

Inventory Turnover	Cost of Sales	£6,012	26.5times	£5,360	19.9times
	Average stock	227		270

Inventory days	Average stock x 365	227	13.8 days	270	18.4 days
	Cost of sales	£6,012		£5,360

Debtors days	Accounts Receivable x 365	£60	1.2 days	£56	1.3 days
	Credit sales	£17,589		£15,222

Creditors days	Accounts payable x 365	£290	17.6 days	£300	20.4 days
	Credit purchases	£6,012		£5,360

LIQUIDITY
Current ratio	Current Assets	£320	0.13 : 1	£708	0.37 : 1
	Current Liabilities	£2,473		£1,881

Quick-acid test ratio	Current Assets - Stock	£93	0.04 : 1	£438	0.23 : 1
	Current Liabilities	£2,473		£1,881

CAPITAL STRUCTURE
Gearing	Fixed interest debt	£12,125	0.77 : 1	£7,520	0.6 : 1
	Shareholders funds	£15,739		£12,557

Interest cover	Net profit (PBIT)	£4,967	5.38 : 1	£4,139	11.63 : 1
	Interest	£923		£356

Commentary on Dunne Group verses Gibson Hotels should include

Introduction.

In comparing the performance of these two companies it must be pointed out that both companies are in the same business sector – the hotel industry with both companies having a similar portfolio of hotels mainly 3 and 4star.However it is clear from the balance sheet that the Dunne Group are a larger company as their non-current assets are 41% greater than Gibson Hotels and their net assets (FA +CA-CL) are 39% greater. One should however ask the question when was the last time either company revalued their assets. It may be that Gibson revalued recently and that could explain the significant difference in asset levels. This information would be available in the annual report. However ignoring revaluations, is terms of the level of sales and profits the Dunne Group should out-perform Gibson Hotel as it has greater capacity.

Profitability and management efficiency

Dunne’s sales are 15.5% greater than Gibsons with operating profit 20% greater. This is as it should be based on the greater capacity of Dunnes. However when one compares their ROCE and ROOE ratios Gibson is performing better with a ROCE and ROOE of 20.62% and 23.7% respectively. These are excellent returns and would entice any potential investor. Dunne’s returns are also quite good in comparison to norms within the sector at 17.83% and 19.2%. Further analysis into the ROCE tell us that the main reason why Gibson Hotels are performing better than the Dunne group is that it is generating more sales per € invested in the business. The total asset turnover is 0.758 for Gibson as against 0.631 for Dunne. The fixed assets turnover is also significantly higher that Dunnes at 0.716 compared to 0.586. Thus overall Gibson Hotels is a more efficient business in generating sales for the level of assets that it has.

In terms of profitability the Dunne Group performs slightly better than Gibson with a GP% of 66% as against 65% for Gibson and this also translates to an operating profit percentage of 28% as against 27% for Gibson. The expenses to sales % are the same for both companies.

In summary Gibson Hotels is generating a greater return that the Dunne Group and this is due the company generating more sales per € invested in the business that Dunnes. This could be due to the fact that the company has a lower pricing policy which may reflect in the lower GP% for Gibson. If this is the strategy (reduce prices to stimulate demand) then it is working compared to Dunnes profitability performance. Overall it must be said that both companies are generating excellent returns for their shareholder taking into account the average returns for the industry at below12%.

Liquidity

In terms of liquidity Gibson Hotels is performing a lot better than the Dunne Group. Gibson has a lot of cash on the balance sheet (maybe too much) and its current and quick ratios are very much normal for the industry at .38 and .23 respectively. Thus one can safely say that the Gibson Hotels is quite solvent. However the Dunne group has significantly poorer liquidity ratios which are well below the industry average (0.4) of 0.13 and .038 for the current and quick ratios. Although the hotel industry is predominantly a cash business these ratios would be a concern especially with the company in overdraft to the tune of €145,000. This situation needs to be monitored and improved.

Capital structure /financial risk

The debt to equity ratio measures the capital structure of a business i.e. the extent the business is financed by debt compared to equity. This requires a balancing act from the financial manager as debt financing in the long-term is cheaper however it is also riskier and should the business hit hard times, loans and their interest must be paid whereas equity dividends can be deferred. In this situation both companies are low geared (mainly financed through equity) with Gibson Hotels gearing at 60% and the Dunne Group at 77%. This is also reflected in the safe level of interest cover at 11.6 times for Gibson and 5.4 times for Dunne.

Conclusion

Overall both companies are performing very well with excellent returns on capital. Gibson would be seen to be a more efficient company overall with better profitability and liquidity indicators, lower gearing and higher interest cover ratios. The main area of concern for the Dunne Group is their liquidity ratios, which are very poor and need to be monitored.