a) Calculate key accounting and operating ratios for Gibson Resorts plc for the years 2003 and 2004 under the headings of profitability and efficiency. You are required to include in your calculations efficiency / operating ratios unique to the hotel sector

b) From the information available to you including the ratios calculated in part (a) of the question, write a report to the directors of Gibson Resorts plc on their operating performance for 2004

Overall Gibson resorts Ltd has had a very good year. Sales have increased by 36% with operating profit increasing by 9% however the ROOE and ROCE while excellent have fallen from that achieved in 2003. This report will concentrate on the operating performance of the company focusing on profitability and asset utilization indicators.

Profitability and asset utilisation

With sales and profits increasing significantly the big question is why are the return on investment ratios (ROCE ROOE) falling. Part of this fall can be related to the property revaluation however this only accounts for part of the decrease. The ROCE and ROOE excluding the property revaluation would be 16.82% and 27% respectively. The ROCE can be analysed into its two component parts namely capital employed turnover and operating profit margin. It can be seen that while capital employed turnover has increased the operating profit margin has fallen.

• Capital employed turnover: This ratio was 0.583 in 2003 and has increased to 0.701 in 2004. The company is achieving a higher level of sales per € invested in the business. This is also evidenced by the increased occupancy of the hotel as well as the percentage increase in sales of 36%. The capital employed turnover ratio would have been higher (0.733) except for the fact that the company revalued its property assets. Overall management will be pleased with this performance level
• Operating profit margin: The company is not achieving the same level of profit per € sales in 2004 as it did in 2003 and this is the main reason for the fall in ROCE and ROOE. The business was generating €30 for every €100 sales in 2003. This figure has now dropped to €24, a drop of 6%. The operating profit will fall due to two reasons
• A fall in the gross profit %. The gross profit percentage fell by 4% (75% - 71%). This can be caused by a number of factors.
• A decrease in the average room rate. The average room rate fell from €110 in 2003 to €102 in 2004. REVPAR showed no significant difference between the years due to the fact that occupancy increased and was to some extend boosted by the lower ARR.
• An increase in the cost price of materials – food beverages and the direct costs associated with accommodation.
• Changes to the sales mix where more profitable product items make up a lower percentage of total sales. In 2004 accommodation, the most profit item within a hotels sales mix, fell as a percentage of total sales (55%) compared to 2003 (75%).
• Increases in the expenses to sales percentage. Ultimately expenses have increase by 43% with the major increases occurring in property expenses (69%) and wages and salaries (35%). The expense to sales ration increased 2% between 203 and 2004. These increases are further evidenced by the increase in cost per employee which was €10,670 in 2003 and €16,970 in 2004. Management need to take a zero based approach to costs and question the activities that drive these costs and the added value created by these cost additions. Interest cover has decreased slightly mainly due to the increased loans and the interest there-on.

In terms of asset utilization the business is generating more sales per € invested in the business. This is reflected in the higher capital employed turnover ratio, fixed asset turnover ratio and related occupancy rate and stock turnover. The debtors collection period is steady although this ratio needs to be calculated based on credit sales not total sales. There is also an improvement in the creditor payment period where the company is taking less time to pay its trade creditors.

Overall the company is generating greater levels of sales and profits have increased. The company needs to focus on pricing to maximized sales and profits as well as controlling costs.