Solution 13.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
a) Prepare the key operating ratios for the three hotels
b) Compare and evaluate the operating performances of each hotel As with any inter-firm comparison one must note that the Cork operation, based on net assets, is 3 times the size of Dublin and 50% greater than Galway . Thus it is no surprise that Cork ’s turnover is 2.5 times Dublin ’s, and double Galway ’s. Corks operating profit is 2.12 times Dublin ’s and 70% greater than Galway ’s. . 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 Dublin is providing a greater return for its investors. ROCE is 25.26% compared to Galway ’s 16.22% and Corks 18.89%. These returns are well above the norm for the hotel sector and investors will be happy with the performance of all the divisions. However Dublin 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 being the bigger operation out-performs both Dublin and Galway generating a residual income of €186,000 compared to Galway ’s €78,000 and Dublin ’s €126,000. In assessing why Dublin ’s ROCE is greater than Cork and 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 both Dublin and Cork at 21.43% compared to 16% for Cork and 20% for Dublin . In general the sector norm is over 20%, reaching over 30% in boom periods. The main reasons why Corks margins are quite low are as follows.
In terms of asset turnover and the efficiency of each business to generate sales from their assets Dublin at 1.26 times clearly outperforms Galway at 0.76 time sand Cork at 1.18 times. For every euro invested in the Dublin operation, €1.26 is generated in sales. For Cork €1.18 is generated for every euro invested in the business. This is a huge performance by both divisions with both Asset turnover rates are well beyond the average for the hotel sector. This is also reflected in the higher occupancy levels achieved by both Dublin and Cork . Possible reasons for this include
Overall Dublin is the highest performing division achieving very high asset turnover rates, reasonable operating margins and thus an excellent return on investment of 25.3%. Cork is the next best operating division with lower operating margins but and slightly lower asset turnover rates than Dublin . The overall return on investment for Cork is very good at 19%. Galway is the poor performing division and yet it achieves the highest operating margins of 21.43%. It falls short however in terms of generating sales for the level of assets is has with an asset turnover rate of 0.76 times. In its own right this is a excellent rate of asset turnover however not when comparing to Dublin and Cork . The return on investment for Galway is 16.22% which is very much above average for the sector but not when comparing against Dublin and Cork . Overall Galway should concentrate on develop strategies similar to Dublin and Cork to maximise their returns for shareholders. In particular it should focus on generating more sales value from its assets. |