a) Calculate 12 key ratios for each company for the year ended 31 December 2004, under the headings of; profitability, efficiency, operations, liquidity and gearing

Comments on Performance of Faraway and Getaway for 2004          

Based on the return on capital employed, the primary measure of performance, Getaway was the more successful company, with a high return of 17.6% compared to 14.3% for Faraway. There were two main factors causing this.

Getaway’s operating margin on sales was 31.6% compared to 29.1% for Faraway. Getaway’s higher margins were due to relatively lower costs, higher room rates, and rooms revenue being a higher proportion of total revenue (see operating ratios below).

In addition, Getaway was more efficient than Faraway in generating turnover from assets employed, at 0.556 times, compared to 0.493 for Faraway.

The difference in the pre-tax return on equity was considerable, with Getaway earning 25.9% compared to 19.4% for Faraway. These are higher than the ROCE above. Getaway’s return on its capital of 17.6% was greater than the interest rate payable on its long-term loans debt of 6.9% (1,050/15,200), and this boosted its return on equity. Faraway’s return on its capital of 14.3% was also greater than the interest rate payable on its loans, of 6.7% (1,360/20,400) 

Getaway’s gross margin of 75.9% was greater than Faraway’s, for the same reasons as the operating margin. Getaway’s payroll costs of 28% of turnover compared to 30% for Faraway, while its property costs amounted to 8% of turnover compared to 8.2% for Faraway. Getaway was more efficient in these areas, enhancing its margins. 

Getaway generated a higher level of sales from its fixed assets, at 0.549 compared to 0.494 for Faraway. It also exercised tighter credit control, with a debtor collection period of 24 days, compared to 30 days for Faraway. 

However Getaway was in a weaker liquidity situation at the year-end. Its acid test ratio of 0.59 was lower than Faraway’s ratio of 0.67. However both ratios are adequate for a hospitality business. 

In the area of gearing, Getaway was more highly geared. It had a somewhat high debt to equity ratio of 0.78, compared to 0.66 for Faraway. However Getaway had a

slightly higher interest cover of 4.2, compared to 4.0 for Faraway. These ratios are adequate and neither company should have difficulty in meeting interest payments. 

Operating Data show that the more profitable rooms revenue as a percent of total revenue was 74% for Getaway and 59% for Gresham. 

Getaway’s rooms occupancy rate was a high 78% compared to 71% for Faraway. These were above average occupancy rates for the hotel industry in 2004. Getaway achieved a higher average room rate of €122 per night, compared to €116 for Faraway. Its revenue per available room was €95.6 compared to €82.80 for Faraway. 

Getaway’s employees are more efficient. Annual sales revenue per employee was €62,194 for Getaway, 11% higher than the €56,111 for Faraway. Getaway’s operating profit per employee was 21% higher than Faraway’s, at €19,677 compared to €16,333. 

In conclusion, overall in 2004, Getaway did better than Faraway based on profitability, efficiency and operations, but was not as good in liquidity.