This could be seen as the first negative ratio for the company as the ratios are well under the recommended levels. It is stated that an agreeable current ratio which businesses should aim for is between 1. 5:1 and 2:1. Clearly NH hotels current ratio for both years is well under this mark, and worryingly for the business in 1999 it has fallen lower further to 0. 71. This could mean that the company might face working capital problems, and maybe overtrading or overborrowing. It would be my guess that it is second one, overborrowing.
As we saw in the last ratio, the gearing ratio, although the company being low geared, the percentage was fairly close to 50 %, suggesting too much capital is being borrowed on long term loans from banks. The ratio being below 1. 5:1 could result in difficulties when paying immediate bills. But when considering the gross profit margin and net profit margin are both positive and examining the balance sheets and profit and loss accounts it is clear to see that the company is functioning well with a very respectable turnover, it is also known that many companies are able to operate safely outside the recommended boundaries.
Activity Ratios: These allow a business to measure how effectively it uses its resources. These are more pleasing results, and could be a small part of why the business can operate with a low current ratio. The company has managed to cut its average days to collect debt by 2 days over the year, 52 days is a good average in the first place and suggests that the business has a very good credit control system in operation. This will help the business to become more liquidable, and be able to meet day to day payments with more ease.
A debt collection period of over 60 days could cause problems in the future, and in the hotel industry debts should certainly not exceed this deadline as cash is normally paid upon arrival at the hotel. But if the trend continues to decline the hotel chain has no problems in this area. In general this report is pleasing for the hotel chain. Keeping satisfying percentages from 1998 into 1999, or in some cases improving already high percentages.
A conclusion from this report would show that the business has good profits, turnover and capital employed, by looking at the performance ratios. A very good gearing ratio, obtaining a good balance between raising finance from shareholders funds and loans. What could be said about the company is that it isn’t very liquidable, the current ratio shows this. But overall it is clear to see that NH hotels is a profitable, prosperous company.
Recommendations: The only two areas in which the business has failed to achieve an increase in ratio analysis is R. O. C. E and the current ratio. Although the R. O. C. E percentage is high it has decreased over the year, luckily only marginally lower, but this is due to the fact that the business has recently invested in the South American market, spending vast amounts of capital on construction of new hotels in the continents major cities. So therefore this is only a temporary decline and the percentage should increase to a more healthily level.
The most concerning area for the business is the current ratio. It is well under recommended levels and has fallen further in 1999. This could suggest that the business is overborrowing. To overcome this the business could 1. reduce its current liabilities, by reducing its loans to a minimum or 2. by improving current assets, by having more cash inside the business to pay off immediate bills, but it is well known that businesses can operate perfectly well outside the recommended boundaries.