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Introduction: Financial Ratio Analysis: Tracking Performance Trends
Compare these price ratios with the budgeted goals to evaluate the management and attainment of costs. The financial data must reflect underlying financial actions and events and be accurate, dependable, and error-free. The study's primary focus is on its aims. The ratios offer insightful data on the organization's financial performance, supporting participants in determining the financial state in general and trends of the company. The aims and objectives of this inquiry are to investigate Pauline Marriot's business, Marriot Inns Ltd., and its financial achievements. Accounting information should be presented systematically to allow for comparison across many periods and make organizations simple to comprehend. The central focus of the research is on achieving those goals, which include providing Marriot Inns Ltd. with helpful information and advice to help it make decisions that will enhance its financial results and overall influence over strategic problems.
Purpose of financial information
Business Management and Planning
Organizations may run their operations more efficiently and make wise decisions with the use of accounting data. Subsequently gives managers a quick view of a company's financial situation and performance, allowing them to evaluate its profitability, liquidity, and stability (Atrill et al. 2018). Earnings and costs are made available in earnings statements, while finances, assets, and equity in the company are discussed in financial statements.
Investment Decision-Making
Individual and institutional investors alike extensively rely on financial data to assess the allure of new investments. As stated by Morkunas et al. (2019), investors review the financial statements of a business when thinking about investment options such as bonds, stocks, or other instruments to assess its past achievements and prospects for the future. Additionally, to make wise investment selections, they evaluate factors including dividend distributions, debt levels, and profit growth.
Creditworthiness Assessment
Lenders and creditors must use financial data when determining whether to extend credit to individuals and organizations. Lenders can assess the possibility of payback by consulting credit reports, which include monetary data such as credit ratings, income, and debt commitments (Ritter and Pedersen, 2020). Similar to individuals, corporations need to show their capacity to satisfy financial accountability by providing financial statements when applying for loans or credit lines.
Transparency and Accountability
Responsibility and openness are promoted by financial information throughout the public and business sectors. Regulatory authorities mandate that publicly listed firms disclose their financial statements regularly to give owners and the general population access to current and accurate information (Tobing et al. 2019). To determine tax liabilities, deducting expenses, and assuring compliance with tax rules, comprehensive income and spending records are required.
Characteristics of good financial information
Completeness
A complete picture of the financial status should be provided through financial information and it must not exclude important information and must contain all pertinent information. Financial assessment mistakes and misconceptions can result from inaccurate data (Tien et al. 2020). Being objective indicates that monetary data is devoid of prejudice or subjective judgment. Instead of the views or opinions of the people who prepared the material, it should represent the underlying economic realities.
Consistency
For comparing monetary data across time, consistency is crucial. From one period to the next, financial reporting should follow the same accounting principles and procedures and this enables insightful trend analysis (Cook et al. 2019). Financial data need to be useful and add value for its users and the knowledge should be tailored to the needs of the audience it is intended for, whether those needs are to aid management in making strategic decisions, investors in risk assessment, or creditors in trustworthiness evaluation.
Comparability
Good financial data should be straightforward to compare, both inside an organization across multiple periods and with benchmarks from related organizations or the sector. Stakeholders can evaluate achievements and draw intelligent comparisons thanks to equivalence.
Explanation of financial terminologies
![Calculation of Ratios]( "Calculation of Ratios")
Figure 1: Calculation of Ratios
A typical member has a decent level of flexibility for the near term and can meet short-term commitments with a current asset-to-liability ratio of 1.5. For members of the Hoteliers Federation, the average asset turnover in 2021 was 1.79, which meant that each pound of assets (fixed resources and net ongoing assets) produced an average of £1.79 in sales income. The lower profitability than the industry standard may indicate that it has to enhance its cost control and revenue generation strategies (Hoobler et al. 2018). The company consistently fell below the net profit margin planned goal in every single one of the three years. In 2019 and 2020, the company achieved its budgetary ROCE goal earlier than expected. However, the actual ROCE was smaller than the intended in 2021. In every single one of the three years, the corporation kept the ratio that was currently over the organized budgeted aim.
The real ratios of turnover of assets were greater than expected for each of the three years. This demonstrates that the company utilized its assets more efficiently to generate revenues than the industry standard (Lev, 2018). However, the average ratios for Hoteliers Association members in 2021 show that they generated a 26.0% return on their investments, which is a sign of profitability and effective handling of capital. These goals serve as a crucial yardstick for performance evaluation and budgetary making decisions during the process of budgeting. For various programs, offices, or divisions throughout an organization, the costs are permitted or planned. While confident ratios, such as the gearing ratio and turnover of assets ratio, appear to be in line with anticipated budget targets, others, such as the percentage of net profit that is earned and other ratios of liquidity, may require additional study to ascertain the reasons for any budget target breaches.
While certain ratios, such as the ratio of debt to equity and asset turnover ratio, appear to be in line with future budget targets, others, such as the margin of profitability and other ratios of liquidity, may require more research to ascertain the reasons for any budget target breaches. These ratios give stakeholders statistical data on the enterprise's financial outcomes, liquidity, profitability, and cost control over the past three years, assisting them in determining patterns in the business's financial health. From 2019 to 2021, the trend indicates a decline in net profit margins of 10.00%, 10.75%, and 7.73%, respectively. In each of the three preceding years, the true quick ratios were significantly greater than the financial objective and this might indicate decreasing performance (Kasayanond et al. 2019). The fraction of sales income retained by a corporation after all costs, including taxes, have been paid is known as the net profit margin.
Despite a small increase in 2021, the organization's operating expenditure as a percentage of sales kept quite close to the planned goal. This implies that the level of cost control is adequate and consistent with expectations set by the market. The company's labour expenditures as a percentage of sales were pretty close to the projected aim in each of the three aforementioned years, showing effective management. As opined by Telukdarie et al. (2018), the process fell short of the planned goals for the profit margin of net revenue, debtor's collections term, and gearing ratio, emphasizing areas that would need attention and improvement to be consistent with industry norms. This proves that it had a better liquidity condition than the sector benchmark. The company's operational expense as a proportion of sales stayed quite near to the intended target in 2021, despite a little rise. This suggests that the current state of cost management is sufficient and in line with the goals the market has set.
Analysis and interpretation of financial performance
ROCE
The financial ratios offered give a thorough analysis of how the company has performed financially over the last three years. These ratios' trends show areas of competence and possible improvement (Ukko et al. 2019). For instance, asset turnover increased in 2021 despite a decline in profitability. The percentage nevertheless did slightly rise to 27.88% in 2020 after falling to 22.48% in 2021. The falling trend shows that throughout this time, the company's capacity to turn a profit on its capital shrank. Increased operational expenses or a decline in competitiveness are two potential causes.
Asset Turnover Ratio
The rise in 2021 indicates better management of assets and perhaps better sales management. Better asset utilization is implied by a higher ratio. The ratio in 2019 was 1.81, meaning the business made £1.81 in revenues for every £1 of assets. In 2020, this ratio fell to 1.70, but it rose to 1.90 in 2021.
Net Profit Margin
Better productivity is indicated by a larger net profit margin. The business's NPM was 10.00% in 2019, 10.75% in 2020, and 7.73% in 2021. The percentage of the revenue from sales that results in profit after taxes is known as the net profit margin (Dhar et al. 2022). Given that the corporation maintained a lesser proportion of its sales income as profit in 2021 compared to other years, the downward trend raises questions about the company's profitability.
Current Ratio
The company's capacity to satisfy short-term commitments may be put under stress, even though its current ratio is still over 1.0. Additionally, if the ratio is greater than one, the company's current assets are more than its current debts (Mian and Sufi, 2018). The current ratio in 2019 was 2.01, showing high liquidity. Productivity declined to 1.83 in 2021 from a rather constant 2.00 in 2020.
Acid Test Ratio
To more accurately assess liquidity, the ATR, also known as the Quick Ratio, excludes inventories from current assets. The declining trend suggests that the business may be less able to pay short-term obligations without relying on the sale of inventory in the future (Fagiolo et al. 2019). The acid Test Ratio is higher than 1.0, which shows that the business can pay its short-term debts without depending on the sale of inventories. In 2019, the quick ratio was 2.24, in 2020 it was 2.20, and in 2021 it was 1.98.
Debtors Collection Period
The downward trajectory from 2019 to 2020 points to better collections, while the upward trend in 2021 points to a possible delay in consumer payments. The average time it took the business to collect repayments was 104.29 days in 2019, 90.91 days in 2020, and 101.76 days in 2021, respectively.
Gearing Ratio
A larger percentage denotes more risk to the economy and the organization's gearing ratio was 81.55% in 2019, 70.83% in 2020, and 63.69% in 2021, correspondingly.
Labour Cost as % of Sales
The variations show that although labour expenses increased somewhat in 2021 when compared with 2020, they remained largely steady. This can be linked to rising wages or adjustments in the size of the workforce.
Operating Costs as % of Sales
The effectiveness of total cost administration is evaluated by looking at operating expenditures as a proportion of revenue. In 2019, the ratio was 85.10%; it fell to 83.58% in 2020; then rose to 88.18% in 2021.
Room Maintenance Costs
This ratio was 8.98% in 2019, climbed somewhat to 9.25% in 2020, and then maintained constant at 9.24% in 2021.
Administrative Costs
The ratio was 3.88% in 2019, 4.15% in 2020, and 4.09% in 2021 preceding a little decline.
Conclusion
In connection to the above-mentioned context, it can be deduced that the ratios offer analytical information on the company's cash flow, income, liquidity, and expense control over the preceding three years, assisting shareholders in determining the business's overall financial condition and trends. Strong profitability is indicated by a large NPM. Delivering precise and significant information on a person's, group's, or entity's financial health and situation is the goal of accounting information. Financial data should be prepared with some caution, which implies that assets and revenue shouldn't be inflated and that gains should be recognized gradually but deficits fast. Organizations may create risk mitigation strategies using financial data analysis to safeguard businesses against volatility in the markets, economic downturns, and other financial risks.
References
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Atrill, Peter and McLaney, E.J. (2018) Accounting and Finance for Non-Specialists. 11th ed. Pearson
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