Wikipedia refers financial analysis to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals financial analyst who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.
The major source of information regarding the corporation's is financial statements as it provides information on the financial health of the company to the readers, whereas the analyst uses the financial statement to calculate financial ratios and analyze the operations of the firm to determine what factors influence a firm earnings, cash flows and risk characteristics. Analyst uses financial ratios because numbers in isolations typically convey little meaning. Thus, ratios are intended to provide meaningful relationship between individual values in the financial statements (Reilly, Brown, 2006).
As a financial analyst working for Gulf Investment L.L.C., we will be evaluating the financial performance of Oman Hotels and Tourism Company SAOG and Al Buraimi Hotel SAOG in this report. A set of financial performance of both companies have been collected and examined, to show how company performance is correlated to its strategies and what an outcome is. The aim is to provide another perspective of investment analysis approach to the potential investors, so they could embrace the whole picture of available information. The report begins by using 2 tools of analysis to evaluate the financial performance of both companies; the first tool is comparative income statement and balance sheet through vertical analysis and second is through horizontal analysis. The result indicates while normally staff cost and cost of sale are recognized as cost leadership measured under other industries, but it implies positive contribution to value creation financial performance in service industry, instead of having influence on profitability. Also, the wealth generated from previous sale revenue margin will have positive impact on company's competiveness in the hotel industry. The report continues addressing some questions listed hereunder and ends with conclusion.
Part A
Please see attached comparative income statement and balance sheet for Oman Hotels & Tourism Company SAOG and Al Buraimi SAOG using vertical and horizontal analysis.
Financial Analysis
Income Statement:
Overall net revenues of both Oman Hotels and Al Buraimi hotels have increased by 15% to reach RO 6,939,563 (2011: RO 6,010,879) and 5.3% to reach RO 472,316 (2011: RO 448,543) respectively, mainly due to the increases registered from core business i.e. hospitality business which includes rooms, food and beverages, recreational facilities etc. The increase is mainly due to the reduction of new entrant in the hospitality business in 2012 as the huge pace of new hotels which was seen in 2010 and 2011 has been substantially slowed down during the 2012.
Gross margins, which captures the relationship between sales and its cost and defined as (White, Sondhi, Fried, 2002); gross profit / sales. Oman Hotels & Al Buraimi Hotels gross margin improved by 2% to reach 33% in 2012 (2011: 31%) and by 27% to reach 54% (2011: 27%) respectively. This achievement by Al Buraimi is due to the management's strategic move to establish their presence in the business that leads to reduce the direct cost from 72.6% to 42% in terms of sales.
Earnings before Interest and Tax also reflected the improvement in gross margins. Financial charges have decreased by 31% and 18 respectively due to the decrease in long term loans by 47% and 19% respectively. .
Consequently, as a result of improved gross margins, net (post tax) margin of both Oman & l Buraimi Hotels has correspondingly increased to 30% (2011: 20%) and 10.5% (2011: -42%). Net margin ratio is defined as net income / sales.
Internal Liquidity
Internal liquidity ratios are intended to indicate the ability of the firm to meet future short-term financial obligations (Reilly, Brown, 2006). Based on this definition, there are some ways to compute company liquidity such as current ratio, quick ratio and cash ratio.
Current Ratio
Current Ratio indicates the firm's degree of liquidity by comparing its current assets to its current liabilities (keown, Martin, Petty, 2008) and defined as;
Current Ratio = Current Assets / Current Liabilities
Current ratio of Oman Hotels increased to .73x in 2012 (2011: 0.63x) as the company current liabilities decreased by 16% as compare to decrease of 3% of current assets, on the other hand, Al Buraimi current ratio slightly increased to 0.08 from 0.04 due to the increase in current assets. It seems like Oman hotel is more comfortable in meeting their short-term obligations as compare to Al Buriami. In order to meet its short-term obligations comfortably Al Buriami needs to convert its short term liabilities to long term, which could be done either by converting their short term borrowings to long term loans or increase the days payable by more than a year by negotiating new terms with their suppliers.
Cash Flows from Operation Ratio
Some observers questions using current assets to gauge the ability of a firm to meet its current obligations because inventory and some other current assets might not very liquid (Reilly, Brown, 2006). They prefer the cash flows from operation ratio, which compares the cash flows with current liabilities. This ratio avoids the issue of actual convertibility to cash, turnover, and the need for minimum levels of working capital (cash) to maintain operations (White, Sondhi, Fried, 2002).
Oman Hotels and Al Buriami cash flows from operations ratio stands at 0.81x and 0.10x, which again shows that the Oman hotel is much better position to meet its short term obligations as The total fixed assets of the company increased by 6% between FY08-09, due to increase in work in progress by PKR 1,901 M during FY09.
Operating Performance
The operating performance ratio can be calculated as;
Operating efficiency ratio
Efficiency ratio examines how the management uses its assets and capital, measured by rupiah of sales generated by various assets or capital categories. Profitability ratio analyze the profit as percentage of sales and as a percentage of capital employed (Reilly, Brown, 2006)
Operating efficiency ratio:
Fixed asset turnover is a firm's sales divided by its net fixed assets, to measure the efficiency of long-term capital investment (White, Sondhi, Fried, 2002)
Fixed Asset Turnover = Sales / Average Fixed Assets
Oman Hotel fixed asset turnover ratio stands at 0.33 as compare to 0.12 of Al Buraimi, showing that Al Buraimi hotel is not intensively using its fixed assets as compare to Oman Hotel.
Total Asset Turnover = Sales / Av. Total Assets
Oman Hotel total asset turnover ratio stands at 0.20 as compare to Al Buraimi of 0.11, showing that Oman hotel is generating more volume of business given its total asset investment.
C- Long term debt and solvency analysis
Long term debt and solvency analysis wants to answer question about how is the company financing its assets. The ratio is essential to evaluate its long-term risk and return prospects. Leverage firms accrue excess return to shareholders as long as the rate of return on the investments financed by debt is greater than the cost of debt. The benefits of financial leverage bring additional risks, however, in the form of fixed costs that adversely affect profitability if demand or profit margin declines (White, Sondhi, Fried, 2002). The ratio defined as:
Debt to Equity or Leverage = Total Debt (Total Liability) / Total Equity.
Leverage ratio of Oman Hotels is at 0.21 as compare to 0.37 of Al buraimi, this ratio examines the ability of the company to meet its obligation.
The more direct measure to examine the company obligations are Debt Service Coverage Ratio and Interest Coverage Ratio.
Interest Service Coverage Ratio (ISCR) = Earnings before Interest and Tax / Interest Expense
Deb Service Coverage Ratio (DSCR) = Earnings before interest, tax and depreciation / Current portion of long term debt - Interest expense
Interest service coverage & Debt Service Coverage Ratios of both the companies are at comfortable level i.e. Oman Hotel: 5.43x & 1.64 respectively and Al Buraimi: 2.74x & 5.04x respectively, indicating that both the companies have no worries meeting its interest and debt obligation.
