b) From the information above and the ratios calculated in part (a), justify your opinion as to which hotel is the best performing in the group

Before one can begin to do an inter-firm comparison between divisions or subsidiaries within a group one must point out that Cork , based on the value of net assets, is 50% greater and thus one would expect that turnover and operating profit would also be greater. This is the case with Corks Turnover more than double Galway ’s, and Corks operating profit 70% greater than Galway . However a greater level of analysis is requires to assess which division is more efficient and provides a greater return on the assets invested in the division.

When comparing ROCE and residual income one can see that Cork is providing a greater return for its investors. ROCE is 18.89% compared to Galway ’s 16.22%. These returns are well above the norm for the hotel sector and investors will be happy with the performance of both divisions. However Cork is clearly providing a greater level of return for the shareholders. Residual income measures the excess of profit after a minimum required return is achieved. In this case Cork again out-performs Galway generating a residual income of €93,000 compared to Galway ’s €39,000.

In assessing why Corks ROCE is greater than Galway ’s one must analyse the ROCE into its component parts, namely operating margin and asset turnover.

In this case Galway is achieving a higher operating margin than Cork at 21% compared to 16%. At 16% this is well below the industry average and possible reasons for this include.

• Cork are generating a lower contribution to sales ratio. Reasons for this include
• A lower ARR compared to Galway . Thus Galway are charging a higher average room rate however this effects their occupancy levels which are low at 53% and thus REVPAR is significantly lower than the ARR.
• Galway ’s rooms sales as a percentage of total sales is higher at 80% compared to Corks 60%. Room sales provide the greater level of profit and thus this boosts Galway ’s profit margins.
• Fixed costs as a percentage of sales are slightly higher for Cork than Galway at 52.7% compared to 51.7%.

In terms of asset turnover and the efficiency of each business to generate sales from their assets Cork clearly outperforms Galway . Corks assets turnover rate is 1.18 compared to Galway ’ s 0.76 times. For every euro invested in the business Cork is €1.18 in sales compared to Galways €0.76. This is a huge performance by Cork and both Asset turnover rates are well beyond the average for the hotel sector. This is also reflected in the higher occupancy levels achieved by Cork . Possible reasons for this include

1. Corks hotel is situated in a better location to Galway
2. Cork city is bigger and may have had a greater number of festivals and events compared to Galway .
3. The lower ARR, which boosted sales for Cork
4. Cork are generating greater levels of income and profit from bar and restaurant activities compared to Galway .

Overall both divisions are performing very well and well above the sector average. Cork is outperforming Galway and it would seem that Galway could develop strategies similar to Cork to maximise their returns for shareholders. Galway could concentrate on the following strategies.

Increasing revenues

1. Generating more sales and increasing the contribution from the bar and restaurant.
2. Focusing on increasing occupancy especially in the off-season by reducing prices and offering specials
3. Focus on strategies to retain clients

Decrease costs

• Management should take a zero based budgeting approach to controlling costs as fixed costs amount to 52% of sales with variable costs amounting to 26.8%.

Generating more value from its assets.