Financial Statement Analysis - Intercontinental Hotel Group - Assignment Example

Financial ment analysis Lecturer: Introduction/companies over view Intercontinental Hotel Group is a public limited company with its stocks listed in both Landon stock exchange and New York Stock Exchange (Intercontinental Hotel Group, 2013). The company was established in 1777 by Bass Williams with its headquarters based in Denham in UK. The International hotel group operates in hotel industry offering by hospitality services to its customers (Intercontinental Hotel Group, 2013). The company reported a net income of 460 million dollars as at 2011 and a net operating income of 1,768 million dollars in the same period (Intercontinental Hotel Group, 2013). The company aims at creating a great guest love hotel with over 6,76000 hundred rooms in approximate 4600 hotels in one hundreds countries (Intercontinental Hotel Group, 2013). Additionally, the directors report indicates that Intercontinental Hotel and Group provide employment to more than345, 000 people globally for instance, in 2011 the company provided employment opportunities to more than people 7,956 (Intercontinental Hotel Group, 2013). In above connection, the company owns nine brands of distinguished hotels in different countries. Additionally, Intercontinental Hotel and Resort consist of leisure and business hotels operating in more than sixty cities (Intercontinental Hotel Group, 2013). Connectively, the company operates in three basic ways namely; franchising, manager and owned/lease (Intercontinental Hotel Group, 2013). The company operates an approximate of 3,934 hotels under franchise and 658 hotels under management mode of business operation (Intercontinental Hotel Group, 2013). In above connection, the company owns a portfolio of less than one percent globally. This indicates that the company has placed a lot of emphasis on franchising mode of business operation (Intercontinental Hotel Group, 2013). On the contrary, Millennium Hotels and Resort trace its roots back to 1972.The; head quarters of Millennium Hotels and Resort are based in London (Millennium Hotel and Resort (2013). The company operates more than one hundred and twenty hotels in over nineteen countries. Additionally, the company operates in a hotel industry and has been listed its stocks in London Stock Exchange (Millennium Hotel and Resort, 2013). Millennium and Cophorne hotel operate as a public limited company and reported a net operating income of one hundred and ninety nine million dollars as at 2011(Millennium Hotel and Resort, 2013). The comprehensive income statement indicates that the company had a net income of one hundred and sixty five million dollars by the end of 2011(Millennium Hotel and Resort, 2013).Connectively, the company operates via an inter-link of various portfolios as well as ensuring there is efficient control of cost (Millennium Hotel and Resort, 2013). In above connection, the company operations are highly decentralized making it easier to respond to market demand. The company operates the following brands: Grand Millennium hotel, Capthorne and Kingsgate to name just but a few of the brands (Millennium Hotel and Resort, 2013). 2. Analyze the Operating profit margin (Intercontinental Hotels Group PLC is the main object of analysis, Millennium & Copthorne Hotels PLC is its rival firms, please contrast the two companies). The operating profit indicates the amount of revenues/income a company makes after paying variable expenses (Warren, Reeve, Duchac & Warren, 2012). It is important to not that some items are excluded when computing operating profit margin among the items excluded are; good will amortization, taxes and interest (Vasigh, Fleming & Mackay, 2010). This means that earnings before interest and taxes should be taken into account when computing operating profit margin (Downes & Goodman, 2003).Therefore, based on the comprehensive income statement of Intercontinental Hotel Group year ended 31st December 2011, 2010, 2009, 2008 and 2007 the operating income before interest and tax was $366.42,$297.05,$-4.89,$219.32, and $267 respectively while sales revenue for all the for periods were $1096.16, $1058.20,$834.95,$1006.50 and $883 respectively. Therefore, operating profit margin for Intercontinental Hotel & Group may be computed as follows. Operating profit margin= Earnings before taxes and interest ÷ sales revenues Years 2011 2010 2009 2008 2007 Operating income before interest and taxes $366.42 $297.05 $-4.89 $219.32 $267.00 Divided by (÷) Sales Revenue $1,096.16 $1,058.20 $834.95 $1006.50 $883.00 Operating Profit margin 33.43% 28.1% -0.58% 21.8% 30.24% On the other hand, operating profit before interest and tax for Millennium & Copthorne Hotels PLC was $162.2millions as at 2011 while sales revenues were $820.5Millions.Connectively, the comprehensive income statement for the year ended 31st December 2010, 2009, 2008 and 2007 indicates that Millennium & Copthorne Hotels had an operating income before interest and taxes of: $162.2, $109.6, $75, $123.3 and $127.On the other hand, the company had a sales revenue of $850.5, $743.7,$654,$702.9 and $669.6respectively (Millennium Hotel and Resort, 2013).Therefore, operating profit margin for Millennium & Copthorne hotels PLC may be computed as follows as at 31st December 2011 to December 31st 2011 Operating profit margin= Earnings before taxes and interest ÷ sales revenue. Years 2011 2010 2009 2008 2007 Operating income before interest and taxes $162.2 $109.6 $75 $123.3 $127.1 Divided by (÷) Sales Revenue $850.5 $743.7 $654 $702.9 $669.6 Operating Profit margin 19.1% 14.7% 11.47% 17.54% 18.98% Analysis Therefore, based on the above computations it can be scrutinized that Intercontinental Hotel and Group had a profit margin of 33.43% on the year ended 31st December 2011, while on the other hand, Millennium & Copthorne Hotels PLC had a profit margin of 19.1% on the year ended 31st December 2011. This indicates that Intercontinental Hotel and Group had a significantly higher operating profit margin of 14.33% higher than Millennium Company. This means that Intercontinental Hotel had a higher ability to pay its variable expenses as compared to Millennium Hotel (Brigham & Ehrhardt, 2011). Additionally, Intercontinental hotel had a higher operating profit margin than Millennium hotel in 2007, 2008 and in 2010. However, in 2009 Millennium hotel had a higher operating profit margin than Intercontinental hotel. This is an indication that Intercontinental hotel had incurred a lot of variable over heads in 2009 and hence compromising its ability to make more profits (Khan & Jain, 2004). 3. Analyze the Operating Liability Leverage (same with 2) Operating liability leverage involves the level at which a firm commits itself towards payment of debts (Brigham & Ehrhardt, 2011). Normally, a higher operating leverage is an indication that the company has more fixed expenses (Brigham & Ehrhardt, 2011) On the contrary, if operating liability leverage are lower, it is an indication that a company incurs more variable expenses (Brigham & Ehrhardt, 2011). The net operating liability for Intercontinental Hotel and Group PLC may be computed as follow; Operating leverage=Revenues-Variable cost= Operating Income after taxes Year 2011 2010 2009 2008 2007 Revenues $1,096.16 $1,058.20 $834.95 $1006.50 $883 Operating income after interest and taxes (÷) $162.2 $109.6 $75 $123.3 $127.1 Operating liability Leverage 6.75% 9.655% 11.13% 8.16% 6.95% On the contrary, the net operating leverage for Millennium & Copthorne Hotels PLC was computed as follow Year 2011 2010 2009 2008 2007 Revenues $820.5 $743.7 $654 $702.9 $699.6 Operating income after interest and taxes (÷) $134 $78.9 $67.7 $91.4 $129.2 Operating liability Leverage 6.12% 9.43% 9.66% 7.69% 5.41 % Analysis Based on the above computation it can be scrutinized that Intercontinental Hotel ad Group had a higher operating liability leverage as compared to Millennium & Copthorne Hotels PLC for instance on 31st December 2011, Intercontinental Hotel and Group had an operating leverage liability leverage of 6.75% while Millennium Company had 6.12%. Additionally, Intercontinental Hotel and Group had higher returns in all the previous years as compared to the Millennium & Copthorne Hotels. This means that Intercontinental Hotel and Group incurred more fixed exposes than variable expenses (Lasher, 2010). On the contrary, the operating leverage for Millennium was lower as compared to Intercontinental. This is an indication that Millennium incurred more variable as compared to its counterpart. Conclusion Based on the above analysis, it can be scrutinized that Intercontinental Hotel $ Group largely operate on the basis of franchising, manager and owned/lease respectively. Additionally, the company has numerous branches operating globally under nine different brands. The Intercontinental Hotel & Group has also managed to employ a large workforce of talented employees who work within all its branches. On the contrary, Millennium & Copthorne Hotels PLC operate via an inter-link of various portfolios in order to hedge the risk that may accrue. Therefore, based on operating profit margin and leverage analysis it can be observed that, the operating profit margin, for Inter continental Hotel and Group was significantly higher than that of Millennium & Copthorne Hotels in the year 2011, 2010, 2008 and 2007.This indicates that Intercontinental hotel and group has strong ability to meet its variable overheads as well as make profits at a lower margin than its counterpart. Additionally, Intercontinental hotel and Groups had a higher operating leverage as compared to Millennium & Copthorne Hotels. This means that Intercontinental hotel & group incurred higher fixed overhead through out the periods. Therefore, Intercontinental hotel & group should manage its fixed overheads as well as minimize its variable expenses in order to make more returns. On the contrary, Millennium & Copthorne Hotels had a lower operating leverage as compared to Intercontinental Hotel & Group. This means that the company incurred more variable overheads through out the periods and therefore, this company should minimize its variable overheads in order to make profits at lower margin. References Brigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning. Downes, J., & Goodman, J. E. (2003). Barrons finance & investment handbook. Hauppauge, N.Y: Barrons. Intercontinental Hotel Group (2013 Febrary, 19). “Company Over view” Retrieved : on 15th March 2013. Khan, M. Y., & Jain, P. K. (2004). Financial management; Text, problems and cases. New Delhi: Tata McGraw-Hill. Lasher, W. R. (2010). Practical financial management. Mason, OH: Thomson South-Western. Millennium Hotel and Resort (2013). “Corporate Information” Retrieved ;< http://www.millenniumhotels.com/ on 15th March 2013. Vasigh, B., Fleming, K., & Mackay, L. (2010). Foundations of airline finance: Methodology and practice. Farham, Surrey: Ashgate Pub. Warren, C. S., Reeve, J. M., Duchac, J. E., & Warren, C. S. (2012). Financial and managerial accounting. Mason, Ohio: South-Western Cengage Learning. Read More