Solution 17.8
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Schedule of ratios |
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2009 |
2010 |
2011 |
2012 |
2013 |
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Profitability: |
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ROCE |
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4.793 |
5.30 |
6.817 |
8.129 |
9.120 |
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ROOE |
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3.597 |
5.043 |
7.814 |
9.648 |
12.93 |
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ROOE (after tax) |
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3.132 |
4.434 |
7.145 |
7.888 |
10.31 |
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Operating margin |
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24.49 |
15.25 |
18.07 |
21.12 |
24.43 |
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Expenses to Sales |
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75.51 |
84.74 |
81.93 |
78.87 |
75.56 |
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% annual changes in Turnover |
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107.41 |
23.03 |
19.32 |
17.00 |
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Rate of overall turnover increase over 5 years |
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3.56 times |
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% annual change in operating profit |
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29.208 |
45.69 |
39.49 |
35.31 |
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Rate of overall operating profit increase over 5 years |
3.55 times |
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Management use of assets |
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Cap employed turnover |
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0.195 |
0.341 |
0.377 |
0.384 |
0.373 |
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Non-current asset turnover |
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0.175 |
0.322 |
0.338 |
0.373 |
0.356 |
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Liquidity |
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Current ratio |
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0.240 |
0.263 |
0.196 |
0.760 |
0.635 |
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Quick Ratio |
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0.201 |
0.215 |
0.164
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0.731 |
0.611 |
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Capital Structure |
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Gearing |
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0.274 |
0.299 |
0.404 |
0.293 |
0.445 |
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Interest cover |
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2.40 |
3.66 |
5.34 |
11.43 |
47 |
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The following are the Key points in evaluating the performance of Lowery’s hotel and leisure Group between 2009 and 2013.
Profitability and management efficiency
Turnover and operating profit has increased 3.5 times over the 5 year period representing a very successful period for the company.
Earnings per share has also increased 3.55 times over the period.
The ROCE was quite low in 2009 but increased to a respectable 9.12% in 2013. The ROOE (before tax) increased to 12% for 2013. In evaluating these returns it must be borne in mind the high capital intensive nature of the hotel sector and the fact that these assets are frequently revalued which dilute the return on capital ratios.
The main reasons for the increase in ROCE over the period were
Improving operating margins, which were 24% in 2009 but subsequently fell to 15% in 2010 and then increased to 24% by 2013. More information is required to identify if this is due to increases in the gross profit percentage or a reduction in the expenses to sales %. However it is probably due to a mixture of both.
Capital employed turnover rates doubled between 2009 and 2013 with the biggest increase occurring in 2010
The non-current asset turnover ratios and trends are very similar to the capital employed turnover trends which is not surprising given the fact that investment in current assets in the hotel sector is quite low and this is more than financed through current liabilities.
The company has over the period significantly increased its investment in hotels and bed capacity. The investment in non-current assets has increased by 75% over the period and while increasing its capacity it is also increasing sales per € invested.
Liquidity
The liquidity ratios have improved over the period. In 2009 the current and quick ratios stood at 0.24 and 0.20 respectively which is below the norm for the hotel sector. However these increased to .63 and .61 respectively in 2013 which is slightly higher than the norm. There are no details in the question on cash position and cash flow.
Capital structure
Over the period Lowery’s Hotel and Leisure group would be considered low geared with a debt to equity ratio ranging from 27% in 2000 to 44.5% in 2013. This is very good considering the expansion program the company has had to finance over the period. This expansion has been mainly financed through equity share issues and retained profits. While debt has increased by €30 million, non-current assets have increased by €70 million.
The interest cover was quite low at 2.4 times in 2009 however due to the reduction in interest charges (reduction in interest rates) and increased profits the ratio went to a high of 47 times. It may be that part of this interest has been capitalized however there is no doubt that the company is low geared and would be considered to have very low financial risk.
Conclusion
Overall Lowery’s has expanded at an average rate of 19% per annum in terms of assets and is well positioned in terms of taking advantage of the increased demand for its services. Sales, operating profits and earnings have increased 3.5 times over the period with non-current assets increasing by 75%. The company has remained low geared and financed the major part of its expansion through retained profits and share issues. The company should now try and maximize their operating profits and increase the return to equity shareholders.