Analyse and compare the operating performance of both hotel groups under the headings of profitability, asset utilisation, operating performance, liquidity and capital structure. Your report should outline where and how each company could generate efficiencies and improve returns due to this inter-firm comparison and benchmarking exercise

The approach to this question is firstly prepare Key ratios for both companies under the headings of profitability, asset utilisation, operating performance, liquidity and capital structure and then to prepare a report summarising your analysis.

                                           The Dunne and Gibson Hotel groups

                                  Financial performance comparative analysis

Introduction

In comparing the performance of these two companies it must be pointed out that both companies are in the same business sector – the hotel industry with both companies having a similar portfolio of hotels mainly 3 and 4star.However it is clear from the balance sheet that the Gibson group are a larger company with a greater number of rooms and hotels. Their fixed assets are 41% greater than Dunnes and their net assets/capital employed (FA +CA-CL) are 39% greater. One should however ask the question when was the last time either company revalued their assets. It may be that Gibson revalued  recently and that could explain the significant difference in asset levels. However ignoring revaluations, is terms of the level of sales and profits Gibson should perform better than Dunnes as it has greater capacity and thus opportunity. Both companies have initiated this benchmarking/ inter-firm comparative analysis in the hope of learning from each other and achieving efficiencies. There are three principle approaches to benchmarking:

1. Competitor benchmarking is a process of comparing ones financial performance with that of direct competitors. For example the annual report of New Look Plc, a clothing retail chain for 2002/03, shows how their cost of sales percentage decreased by 2%. This was credited in the main to efficiencies caused by benchmarking against better businesses in the sector.
2. Process benchmarking, where data is exchanged between companies with similar operating and administrative systems, with the objective of learning from one another and improving efficiencies.
3. Strategic benchmarking, which compares businesses that possess similar organisational structures and implement similar business strategies.

Inter-firm comparison is the process of comparing the performance of different companies, subsidiaries and investment centres. Performance is compared by preparing key accounting ratios to assess the businesses that are performing above average and those that are not. This can provide good control information for managers of poor performing companies to initiate appropriate measures to improve performance. For managers of companies performing above average, the challenge is to try and continue this performance level. To be informative, and to ensure management receive realistic control information, inter-firm comparisons require that the comparative process only involves

1. Businesses within the same sectors
2. Businesses of similar size
3. Business that employ similar accounting policies

As both companies generally meet these criteria this benchmarking exercise should prove informative and valuable to both.    

Profitability and management efficiency

Gibson’s sales are 16% greater than Dunne with operating profit 20% greater. This is as it should be based on the greater capacity of Gibsons. However when one compares their ROCE and ROOE Dunne is performing better with a ROCE and ROOE of 20.62% and 30.13%. These are excellent returns and would entice any potential investor. Gibson hotels are also achieving good returns at 17.83% (ROCE) and 25.69% (ROOE). Further analysis into the ROCE tell us that the main reason why Dunne is performing better that Gibson is that it is generating more sales per € invested in the business. The total asset turnover is 0.758 for Dunne as against 0.671 for Gibson. The fixed assets turnover is also significantly higher for Dunne at 0.716 compared to 0.586. These figures also reflect a higher occupancy achieved by Dunne at 75% compared to Gibsons 70% Thus overall Dunne is a more efficient business in generating sales for the level of assets that it has.

In terms of profitability Gibson performs slightly better that Dunne with a GP% of 66% as against 65% for Dunne. The reasons for this are reflected in the operating ratios where Gibson achieves a higher ARR and REVPAR. Also for Gibson 65% of total sales is rooms revenue compared to 62% for Dunne’s. The higher gross profit margin for Gibson translates into a higher operating profit percentage as the expenses to sales percentage for both companies is the same.

In summary Dunne is overall generating a greater return on capital than Gibson and this is due the company generating more sales per € invested in the business that Gibson. This is due to the fact that the company has a lower pricing policy (lower ARR and REVPAR), which are reflected in the lower GP% for Dunne’s. If this is the strategy (to reduce prices to stimulate demand) then it is working. Although Gibson is achieving higher margins it is not generating enough sales for the level of assets it employs compared to Dunne.  Overall it must be said that both companies are generating excellent returns for their shareholder taking into account the average returns for the industry at below12%.

Liquidity

In terms of liquidity Dunne is performing a lot better that Gibson. Dunne has a lot of cash on the balance sheet (maybe too much) and its current and quick ratios are very much normal for the industry at .38 and .23 respectively. Thus one can safely say that the Dunne group is a solvent company. The Gibson group has significantly poorer liquidity ratios of 0.13 and .038, which are well below the industry average. Although the hotel industry is predominantly a cash business these ratios would worry any manager or investor and especially with the company in overdraft to the tune of €145,000. This situation needs to be monitored and improved.

Capital gearing

The capital rearing ratios measurers the extent the business is financed by debt compared to equity. This requires a balancing act from the financial manager as debt financing in the long-term is cheaper. However it is also riskier and should the business hit hard times, loan interest must be paid whereas equity dividends can be deferred. In this situation both companies are low geared (mainly financed through equity) with Dunne’s gearing at 60% and Gibson’s at 77%. This is also reflected in the safe level of interest cover at 11.6 times for Dunne and 5.4 times for Gibson.

Conclusion

Overall both companies are performing very well with excellent returns on capital. Dunne would be seen to be a more efficient company overall with superior return on capital ratios. For Gibson the benchmarking process should help improve the liquidity situation and more importantly the company should reflect on its existing strategy and possibly begin to be more flexible with prices to achieve greater occupancy rates and a higher rate of sales per capital employed.