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InterContinental Hotels Group (IHG PLC) is a global hotel company operating seven well-known brands internationally. Their vision is to become one of the world's greatest companies, with the mission statement "Great Hotel Guests Love".
They have consistently been ranked the highest for providing excellence in hotel experience, having won numerous awards throughout the years of operation. Currently, IHG PLC owns very little of the hotels, only 10 which represents 1% of their portfolio. The largest part of their business comes from franchising, with 3,911 hotels operating under franchise agreements. They also manage 652 hotels worldwide.
They offer a variety of products through their wide range and classes of hotels. A few of them are listed below:
â€¢ General hotels - Holiday Inn
â€¢ Limited service hotels - Holiday Inn Express
â€¢ Upscale hotels - Crowne Plaza
â€¢ Upscale extended stay hotels - Staybridge Suites
Ratio analysis is mostly used to compare between companies, industries, different time periods for one company and a single company with the industry average. Ratios generally hold no meaning unless they are benchmarked against something else, like past performance or another company. Thus, the ratios of firms in different industries, which face different risks, capital requirements, and competition, are usually hard to compare.
The Five major categories of ratios are:
i) Liquidity Ratios
ii) Efficiency Ratios
iii) Gearing Ratios
iv) Profitability Ratios
v) Investment Ratios
In the year 2011, the company's current asset is 0.67 times higher than the current liabilities. From the time series analysis we can see that the ratio has increased from 2010 (0.51 times). There was a 33% increase in the current ratio. This change in the ratio occurred, due to an increase of current assets, as well as a decline in current liabilities.
In the year 2011, the company's current asset excluding inventory is 0.67 times the current liabilities. From time series analysis we can see that the ratio has increased from 2010 (0.50 times). The Acid test ratio also increased by 33%. This increase in ratio has occurred due to an increase in current asset and a decrease in current liabilities.
In the year 2011, the company has sold out & restocked its inventory 192.75 times. From the time series analysis, the company's ratio has increased from 2010 (188.25 times). The Inventory turnover ratio has increased by 2%. The increase in the company's inventory was caused by an Increase in the cost of goods sold.
In the year 2011, every $1 worth of Total Assets generated $ 0.60 of Total Sales. From the time series analysis we can conclude that there was an increase, from 2010 (0.59:1). There was a 2% increase in the ratio. The increase in the total assets turnover ratio implies that the company has become more efficient in managing their assets in terms of generating sales. Both total assets and sales increased from 2010 to 2011.
In the year 2011, every $1 worth of fixed assets generated $ 0.74 worth of total sales. From the time series analysis, we can see that there has been an improvement from 2010 (0.70:1). There was a 5% increase in the fixed asset turnover ratio. This increment in the ratio occurred due to a significant rise in sales compared to a rise in fixed assets in the two years.
In the year 2011, every $1 worth of current assets contributed to $ 1.33 worth of cost of goods sold. From the time series analysis, we can see that there has been a decline in the ratio from 2010 (1.62:1). There was a 17% decrease in the current asset turnover ratio. This decrement in the ratio occurred due to a significant rise in current assets compared to a rise in cost of goods sold in the two years.
In the year 2011, 'On an average' it took 76.18 days for the company to collect their receivables. From the time series analysis it is confirmed that the company has taken extensive measures to reduce the period of collecting their receivables, from 2010 (83.18 days). The collection period reduced by 8%, which implies the company's improved management of their debts and their negotiation skills. The reduction in the receivable collection period was also due to a fall in account receivables and a rise in sales.
In the year 2011 'On an average', the company had to take 334.70 days to pay their creditors. From the time series analysis the days of paying off creditors have decreased notably from 2010 (349.97 days). There was 4% reduction in the payment period. However, the receivable collection period is more than four times the payable payment period, so it is most likely to create pressure to pay before earnings. The reduction in the payable period shows the company's efficient management in clearing out debts timely.
In the year 2011, the company has generated 28% (Including Exceptional Items) and 27% (Excluding Exceptional Items) of EBIT, generated from the capital employed. From the time series analysis, we can say that both the ROCE has increased from 2010; 12% Increase while including the exceptional items and 13% excluding the exceptional items. It can be noticed that the incorporation of the exceptional items increases the ROCE, thus the relative rate of change. Since, exceptional items are both irregular and unexpected, so they are not at all relevant as a measure of performance evaluation.
In the year 2011, the company's capital employed was 74% of total long term liabilities. From the time series analysis, we can notice that there has been a 67% decrease from 2010(221%) due to the operating profit.
In the year 2011, the company has earned $ 56 worth of gross profit, from every $ 100 worth of Sales. From the time series analysis, it can be noticed that gross profit margin increased from 2010 (54%). There was a 5% increase in the gross profit margin. This increase is gross profit margin is a result of increase in a relatively greater increase in gross profit than the rise in sales from 2010.
In the recent year 2011, the company has made a net profit of $ 26 from every $100 worth of sales. From the time series we can see that, there was a whopping 45% rise in the net profit margin. This implies a significant improvement in the company's performance compared to 2010.
In the year 2011, every $100 worth of total assets generated $ 15 worth of net profit. From the time series analysis, it is evident that ROA increased from 2010 (11%). Another exceptional 47% increase in their ROA which infers that the company did extremely well in managing their assets which thus fore contributed in generating greater profits compared to 2010.
In the year 2011 shareholders have earned $ 83 for every investment worth of $ 100. From the time series, there was a decrease in ROE from 2010 (101%). There was a decrease of 18% in ROE compared to 2010. This decrease occurred due to an immense rise in equity compared to the relative increase in net income.
In the year 2011, the company was able to convert 34% (Including Exceptional Items) and 32% (Excluding Exceptional Items) of sales into Operating Income. From the time series analysis, we can say that both the Operating Profit Margin has increased from 2010; 19% Increase while including the exceptional items and 16% excluding the exceptional items.
It can be noticed that the incorporation of the exceptional items increases the Operating Profit Margin, thus the relative rate of change. Since, exceptional items are both irregular and unexpected, so they are not at all relevant as a measure of performance evaluation.
In the recent year 2011, the company has made generated of $ 2,685 worth of revenue from each room. From the time series we can see that, there was a whopping 8% rise in the net profit margin from 2010 ($2,477/Room). This implies a significant improvement in the company's performance compared to 2010.
In the year 2011, the company's common shareholders have received $ 1.701/Share. From the time series analysis, we can see that there has been significant rise from 2010 ($1.093)/Share). Such great figures did most certainly attract wealthy investors, as the company proved it to be a safe bet.
In the year 2011 the company's each share's market price is 6.06 times higher than the book value. From the time series analysis we can spot a steady fall in the market value per share from in 2010 (12.37 Times). There was a 51% decrease in the market to book value ratio from 2010 in 2011.
In the year 2011, the company's shareholders were willing to $ 6.8 for each Dollar ($) of reported earnings. For the time series analysis, the company's price to earnings ratio has unimaginably declined from 2010($ 11.37). There was a 40% decrease in the price to earnings ratio.
In the year 2011, the company's common shareholders received $ 0.55 for every share they held on to. From the time series, analysis, it can be concluded that the company kept its Shareholders very happy, with an increase in the ratio, from 2010(& 0.48/Share). There was a 15% increase in the dividends per share from 2010.
TREATMENT OF INTANGIBLE ASSETS
An intangible asset is recognized (at cost) only if:
ï‚§ It meets the definition of an intangible asset (including a requirement to be identifiable)
ï‚§ It is probable that the asset will result in a flow of economic benefits to an entity
ï‚§ The cost of the asset can be reliably measured.
Application of these criteria means that the costs associated with most internally generated intangible assets are expensed to profit or loss. An exception is development costs which meet further recognition criteria, as stipulated in the standard. Subsequent to initial recognition, an entity must choose either the cost or revaluation model for each class of intangible assets, although the revaluation model may only be applied where fair value can be determined by reference to an active market as defined in the standard. Intangible assets with a finite life must be amortized on a systematic basis over their useful life. Intangible assets with an infinite life should not be amortized. All intangible assets should be assessed for impairment in accordance with IAS 36.
IFRS 3 defines goodwill as: "future economic benefits arising from assets that are not capable of being individually identified and separately recognized". The definition effectively confirms that the value of the business overall is more than the sum of the accountable and identifiable net assets. Goodwill can occur either internally or as a result of business acquisition that therefore results in purchased goodwill.
It is relevant to note here that self-generated goodwill is not recognized as an asset under IAS 38 as it would allow such companies to have unfair advantage by valuing their own assets and thus producing more favourable balance sheet. Whereas the purchased goodwill is recognized as it has an identifiable "cost", being the difference between the fair value of the total consideration for the business and the fair value of all the other accountable and identifiable net assets. This difference can be attributed to factors such as business reputation, managerial ability, an established customer base and so on. Instead of amortizing goodwill, companies are now required to determine the fair value of the reporting units, using present value of future cash flow, and compare it to their carrying value (book value of assets plus goodwill minus liabilities.)
If the fair value is less than carrying value (impaired), the goodwill value needs to be reduced so the fair value is equal to carrying value. The impairment loss is reported as a separate line item on the income statement, and new adjusted value of goodwill is reported in the balance sheet.
OTHER INTAGIBLE ASSETS INCLUDE:
Amounts paid to hotel owners to secure management contracts and franchise agreements are capitalized and amortized over the shorter of the contracted period and 10 years on a straight-line basis. Internally generated development costs are expensed unless forecast revenues exceed attributable forecast development costs, at which time they are capitalized and amortized over the life of the asset. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.
After analysing the five major ratios, it can be concluded that the IHG Group's condition has significantly improved in the year 2011. However there were certain fields where the company deteriorated but overall they are now in a much stronger financial position.
The company's availability of cash to pay debt has increased. The Company's ability to quickly convert non-cash assets to cash assets have also increased. The company's ability to repay long-term debt is comparatively in a better shape. With a positive credit rating, the company will be benefited from creditors. The Company uses its assets and controls its expenses to generate an acceptable rate of return. With stable gross and fantastic improvements in the net profit Margin, The Company has improved its ability to generate increased returns from Assets but not from their Equity. Thus fore, to overcome this issue, the Company would need more investors to rise up the value of Equity, so they can match out their reliance on Debts for financing activities.