NH Hotels is one of the leading companies in the European city hotel segment. The hotel chain is Spanish owned but has over 165 hotels operating across the major cities of Europe, Madrid, Brussels, Amsterdam, Geneva, Frankfurt and Munich only to mention a handful. All the hotels are of a very high standard, with the majority of them being four stars. The company’s motto is “To the last detail”. And with the company growing every year it is no surprise that it has been tipped to become Europe’s biggest high class hotel chain.
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Statement Of Objectives. This assignment will be comparing the financial years 1998 and 1999, first to evaluate the financial performance in each year and then comparing the two together and stating where the changes are and if the company has improved in financial terms. This will be done using six ratios. These six ratios will come from the following areas of ratio analysis; performance, activity, liquidity and gearing.
Although a small percentage decrease for the hotel chain here, these are pleasing results showing that the capital that they are investing in the company is yielding profit. Although these are good percentages for the company the figure has dropped but this could be due to NH’s venture into the South American market which needed financing during 1999. It will be more than probably that the figure into the millennium could well rise to say 15 % where the company will of reached a very satisfactory percentage level.
The type of industry that the business is in is also a factor that must be taken into account, hotels often have low percentages because of huge amounts of capital that needs to be invested for new hotel buildings and furniture, and considering that during the financial year of 1999 NH hotels branched into the South American hotel market opening several hotels in that major cities of the continent these are very good percentages. The first thing to note here is that the gross profit margin percentage has increased.
Obviously higher gross profit margins are preferable, and that is what the company has managed to achieve between the year 1998 and 1999. Not only has the total revenue increased over the year but so has the gross profit, and by a considerable amount at that, 31. 8 million euros. These are pleasing results for the company, but further ratios or interfirm comparisons would help to confirm whether this was a satisfactory performance. These percentages are fairly high for a company in this sector.
A reason for an increase in gross profit could be a fall in cost of sale, in the hotels case this would be that the cost of housing a client has gone down. 3. Net Profit Margin: A ratio which is again displayed as a percentage and which is designed to show how well a business controls its overheads. The net profit margin sees another increase in percentage between the two years, and it is quite a considerable increase at that 4. 7 %.
As this ratio shows how well a business controls its overheads, the company will be pleased to see such an increase. As we know the turnover has increased, but so has the net profit, indicating that overheads have been kept in control without effecting the profit maximisation which has taken place. Gearing Ratios: Concentrates on the balance of funding in the capital structure of a business. This looks at the relationship in the business between the long term capital and the fixed interest bearing capital.
In other words it concentrates on Shareholders funds and long term loans against debentures preference shares and loans from a bank. If the ratio was to be over 50 % then the company would be described as high geared, where most of the capital is going to be borrowed. But in this case it is under 50 %, where the majority of capital is raised from the shareholders, and so is therefore described as low geared, which is generally a better place for a business to find its self in. In this ratio then, the lower the percentage the better.
NH hotels percentage isn’t very low and although the percentage increase is minimal ( 0. 1 % ) it is something that the managers need to observe in the years to come. If the percentage was to increase further the company would find itself at more of a disadvantage. Interest has to be paid on long term loans, debentures and preference shares, having large long term loans is going to commit a company to paying fixed interest payments, even during low seasons, which is a major factor in the hotel industry.
A percentage like this one is likely to please shareholders as it is not too highly geared to face financial problems but is high enough so the company doesn’t have to increase shareholders funds and shareholders retain greater control over the business. Liquidity Ratio: These ratios are concerned with a businesses ability to turn its assets into cash. A business must be able to do this to meet day to day payments, especially if its activity ratios are low, which is the ratio after this which we’ll be looking at.