Part 1 – Topic, Company Introduction & Overall Approach
1.1 Discussion background
The hotel sector of Sri Lanka has become competitive by nature after the cessation of the 30-year civil war since peace has prevailed, and the country is experiencing considerable growth in the arrivals in international tourism. However, prior to 2009, the country faced a long and dormant period where the tourism industry came virtually to a standstill. Resultantly, the hotel sector is currently experiencing an inflow in investments, with a view to enhancing sector related outcomes. However, it is important to note that the tourism arena of the country is impacted by several local as well as international aspects. Therefore, despite the current conditions being conducive towards facilitating growth in the tourism in the country, the global economic trends are likely to impact negatively, due to slow economic growth currently being experienced world-wide. Based on the above backdrop, the paper evaluates two of the largest players in the Sri Lankan hotel industry namely; Atkin larder Hotels (ALH) and John Hells Hotels (JHH) groups.
1.2 Hotels and hospitality industry of Sri Lanka
Sri Lanka is a country that is strategically positioned in the Indian ocean; as a medium sized landmass, the country has the potential to attract tourists, due to the numerous attractive features it offers in terms of geographical diversity, a rich cultural heritage, hospitality features, developed infrastructure features etc. Thus, the country could be considered as a future growth hotspot for the tourism industry in the future. The input from travel and the tourism sector to the national economy remains high, with a contribution of 5.1% towards GDP. This remains unchanged in 2016 as well as in 2017. However, it is estimated that this contribution will grow to the level of 6.6% by 2027. There is a high level of diversity in terms of landscapes and attractions the country can offer. Resultantly, tourists with various travel interest will be able to benefit from travelling to Sri Lanka.
In 2017, the country reached 2.17 million in tourist arrivals in comparison to 2.05 million arrivals recorded in the previous year, and thereby confirming a growth of 3.1%. However, it is also interesting to note that the global tourism industry has grown by approximately 3.9% during the same period, which is likely to have influenced the direction of the industry. Thus, the growth of the industry remains below the global average levels. Meanwhile, it can be observed that with the increase in tourist arrivals to the country, the demand for accommodation and other facilities are likely to continuously increase in the future. While there are considerable investments flowing into the sector, it is also important to note that the future growth of the sector is likely to remain at medium to low levels. These industry dynamics need to be understood to address the future issues faced by the companies.
1.3 Justifications for the topic
The hotel sector of the country requires to be well equipped to be competitive; since the tourism sector of the country is faced with considerable competition from the East Asian nations where they also offer certain interesting tourism destinations. The value for money is another key aspect that requires to be considered. Further, it is important to note that the hotel sector of the country needs to be capable of withstanding future fluctuations in the tourism sector, irrespective of the conditions of the local economy. This is owing to tourism being impacted mainly by external factors, which are well beyond the influence of Sri Lanka as a country.
As previously highlighted, the sector was compelled to endure several obstacles in terms of severe security and economic hardships the country was undergoing. Therefore, until 2009, the sector remained considerably stagnant and the hotels were unable to fill capacity or maximize on the facilities they could offer. However, in the current scenario the hotel sector requires to be conscious that they do not over-invest in infra-structure, which they will be unable to support in the future and guarantee income generation. Resultantly the stakeholders require to strike a balance and ensure that the facilities offered to the customers can maximize benefits to both parties in the future. The insights provided by the study would indicate how these two larger players in the industry has been performing over the past few years and how strong they are financially to withstand any industry developments.
1.4 Project objectives
Meanwhile, to ensure the overall success of the project; a clear set of objectives and research questions require to be defined, for which the program envisages to identify solutions. The following project objectives will provide the guidelines that are significant, to ensure the program remains focused and achieve appropriate results.
- To ascertain the industry changes taking place in the tourism sector of Sri Lanka
- To evaluate operating and financial results of JHH and understand the overall financial strength of the company
- To evaluate operating and financial results of ASH and understand the overall financial strength of the company
- To identify which of these companies are suitably placed to meet the future industry challenges
Therefore, to meet the above project objectives, the relevant research questions require to be compiled. The following are the research questions that have been compiled, to meet the objectives of the study.
- What are the changes in the economic, political and social environment, which are likely to be significant and impacting the hotel and hospitality industry in Sri Lanka?
- To which extent does JHH possess the financial and operational strength to meet these changes?
- To which extent does ASH possess the financial and operational strength to meet these challenges?
1.5 Study Approach
Meanwhile, to evaluate the performance of the hotels and hospitality sector of Sri Lanka and the details associated with these companies, the research is compelled to rely on secondary information. There are considerable details regarding the industry and their performance benchmarks. This will make it easier for the performance of the companies to be evaluated. It is also important to note that these two establishments are the largest players in the Sri Lankan hotel industry and they are expected to perform substantially, exceeding industry norms.
The company performance details can be sourced from various financial statements they file as well as other related documents. Other operational information regarding these companies could also be obtained to meet this purpose. There are opinions regarding these companies including the industry which are also available. Such details are beneficial for evaluating the capabilities of these companies as well as the industry in terms of their future potential. This data will include details regarding the company, both operational as well as financial trends and identify whether they will be able to continue to face the challenges of the industry in the future. Thus, the above steps will lead the parties to achieve positive results and eventually benefit from the outcomes.
Part 2 – Information gathering and accounting techniques
The information for the study requires to be gathered from appropriate sources. For instance, selection of the appropriate sources will ensure the details of the study can be compiled in a suitable manner. Likewise, it is important to ensure that the information thus collected require to be evaluated in an appropriate manner. For this purpose, the appropriate research and accounting evaluation techniques require to be improvised. Such an approach will provide useful insights regarding the hotel and hospitality industry of Sri Lanka and how the two companies performed consistent with the needs of the industry.
The study is focused on the performance of namely JHH and ASH; since both these companies represent the two largest hotel groups in Sri Lanka, the insights they provide remains useful in identifying industry trends. The study will evaluate the performance of these companies and compare overall industry performance. Therefore, this exercise will identify the key areas these companies require to concentrate, to improve performance. Meanwhile, having enhanced the financial strength of these companies they will be positioned adequately to perform and introduce several new services to the market in the future. Such introductions will empower them to maximize the benefits to the parties and ensure that they reach appropriate results consistent with market needs.
2.2 Sources of information
The study is obliged to rely on secondary sources of information; they will provide appropriate insights to the industry as well as company performance. The main purpose encompasses the evaluation of trends that has occurred over the past three years (Calvert, 2013). This will indicate how the future changes are likely to occur and whether these companies are prepared to face such changes. Meanwhile, to ensure that appropriate insights are formulated, the correct sources of information require to be developed. Therefore, in the absence of primary information sources, one needs to ensure that the secondary information sources are reliable (Fourie, 2014).
Industry reports – there are various industry related reports that could be sourced; thus, when information is being gathered relevant material regarding the industry needs to be identified. For instance, the industry reports will indicate the changes that are taking place in the industry and how these insights can be related to appropriate outcomes subsequently. Therefore, details regarding the industry will thus be important to identify the role the companies require to play, to position them competitively.
Annual reports – Both the companies file annual reports with the Colombo Stock Exchange; this indicates that accurate insights regarding the performance of these companies and related outcomes are available for evaluation. Resultantly, comparison of the performance of the companies in the operating as well as in financial scenarios has become relatively easier. Therefore, these areas require to be evaluated in the study context and insights need to be developed consistent with the outcomes expected in the future.
2.3 Methods used in information collection
To compile a study, primary as well as secondary information could be collected. Primary information is information which is collected for the requirements of the study directly. This in other words indicate that the information collected remains consistent with the needs of the study specifically and meet relevant expectations in terms of study objectives (Calvert, 2013). Further, there is the ability to collect secondary information for the study. Such information areas are already collected and they could be processed in conformance to specific study requirements (Fourie, 2014). Thus, primary as well as secondary information areas remain vital for the parties to identify the main objectives of the study and develop an appropriate understanding.
In this instance, the primary focus encompasses published information regarding the industry and the companies in consideration. The access to these companies is only via published information. Further, both companies are listed companies and resultantly the information regarding these companies are available to the public. There are annual reports as well as details concerning company publications that could be used to evaluate the performance of these companies and ensure appropriate information regarding the study are collected related to the expectations.
The appropriate method to collect relevant information in this instance, is the use of the internet; since all required information concerning the industry and the companies are available on the Internet in electronic form. Thus, the information required for the study can be collected from the internet. This is useful since several sites are free and the information is publicly available for the study. Thus, information can be appropriately downloaded as required.
The previous section of the study has identified the main areas of information that require to be collected. The first step of this exercise therefore, is to identify the locations that contain such information. Thereafter, the information available needs to be identified, and appropriate steps taken to extract the necessary data for the study. Thus, the information that are collected in this context remains relevant and they should provide appropriate insights concerning the areas of interest. The information areas are linked with the industry as well as the companies under consideration, therefore, they need to be relevant to the objectives of the study.
Once the required information is collected, it requires to be processed for analysis. Relevant analysis techniques are required to be improvised, to ensure that the insights are relevant to study requirements. It is important to note that due to the heavy dependence on secondary information, the actual information collected remains accurate by nature. However, the main challenge in this context is to collect comparable information regarding both the companies and the industry.
2.4 Techniques used in information analysis
Once the information is collected, the data requires to be analyzed using appropriate analysis tools. Meanwhile, if primary information is to be collected, there are several techniques that could be used for analysis depending on the exact requirements of the study (Morris, 2006). However, in this instance, the study is heavily dependent on secondary information and therefore, several limitations are likely to exist, when information analysis is considered. Resultantly, the available information in the current context may not be appropriate for the purpose. However, in this instance, the study tends to rely on secondary information (Cossham, 2014).
The business-related information is collected from company sources as well as industry sources; the discussion uses Porter’s five forces model to evaluate the industry pressure the company encounters (Kock and Ellström, 2011)). It is important to evaluate the company capabilities afterwards and for this purpose, the study endeavors to conduct a SWOT analysis for each company, based on the findings of the business and financial aspects (Garavan, 1995). This will facilitate improved provision of the recommendations for the study areas related.
On the other hand, the study needs to also collect information from annual reports. These are primarily the details regarding company financials and performance aspects. The insights associated with the financial reports will enable the evaluation of financial performance of the company. Likewise, to compare financial details, the study will have to use a ratio analysis approach. This will enable the company performance of several areas to be established and compared. Ratio analysis will enable one to understand of the overall financial performance of the company on a comparable basis.
It is also important to ensure that the information related to the study area remains consistent with the needs of the study and the insights are likely to be useful by nature. While the analysis of the secondary information remains a challenge, adopting appropriate methods for analysis of the information will be able to ensure that the required insights are formulated regarding this area of discussion. It is likely that such insights remain considerably useful for purposes of the study, and ensure the position of these two companies within the hospitality sector of Sri Lanka can be clearly identified.
2.5 Ratio analysis framework
Meanwhile, to identify and compare the financial performance of the two companies, certain ratios require to be calculated and they are as follows:
- Profitability ratios – these ratios would indicate the nature of the profitability of the company. For instance, calculation of gross profits and net profits remain important and would eventually ensure whether adequate returns, are generated by the company to attract more investors in the future (Lahdenperä and Koppinen, 2009).
- Liquidity – the companies need to ensure that they possess the required liquidity resources to meet daily cash needs. Thus, maintaining required levels of liquidity remain vital for the parties. The liquidity is important for the short-term survival of the company.
- Capital structure – this highlights the level of debt the company is committed in the long term and how these debt aspects would impact the overall operations of the company. Meanwhile, management of debt remains an area of importance for the parties, as the equity levels require to be balanced with existing debt to ensure that appropriate results are achieved (Calandro, 2010).
- Working capital management – the companies need to manage inventories; ie. accounts receivable as well as accounts payable in an appropriate manner. This will ensure that the companies are positioned to formulate an appropriate set of insights concerning the efficiencies they create on the cash conversion cycle.
Thus, the above discussions indicate that they will be able to manage these key areas consistent with the needs they intend achieving, and supported by results thereof.
One of the main limitations associated with the study is the significant reliance on secondary information; this could make the details related to both companies considerably difficult to compare.
Another issue associated with the usage of secondary information being that they are specifically not collected in relation to the study; therefore, this is likely to create a mismatch between the needs of the study and the information collected.
Meanwhile, the business analysis frameworks that have been used in this instance contain several weaknesses, that of being highly subjective and limited in scope. Thus, a comprehensive business analysis requires to be undertaken, based on the objectives the study intends to achieve, and mitigate these weaknesses.
Another aspect of the study which is a cause for concern, is its heavy dependence on ratio analysis and the ratios are likely to possess inherent drawbacks in each instance. This is another issue that prevent users from reaching accurate results thereof.
Thus, the above discussion associated with the methods adopted by the study convey; that it is primarily reliant on secondary information. This is appropriate since the two companies selected for the study are listed companies on the Colombo Stock Exchange (CSE) and could provide useful insights on these areas of consideration. The overall outcomes should indicate as to how the hotel sector of the country is likely to perform in the future and reach the growth that they seek to achieve consistent with the expectations that they possess.
Part 3 – Analysis and conclusions
The companies need to ensure they remain competitive and guarantee they continue to provide the customers with the required services. The industry requirements are such that continuous capital infusions are required by these companies. However, if the companies are incapable of maintaining the capital investments, they might not be able to improve the overall hospitality related infrastructure. This indicates that the nature of the services required by the parties may not be fully compensated by these players in the market and naturally they will be unable to reach desired results in the future.
3.2 Hospitality sector
3.2.1 Global tourism trends
People appreciate travelling around the world with the view to understanding the global dynamics, whilst enjoying different communities and the cultures. Travelling is increasingly becoming wide-spread since several find the experience refreshing. This also adds to the adventure needs of the people. There is a considerable increase in global travelling and the eventual result is the development of the international tourism and hospitality sectors.
Figure 3.1 – The growth of the tourism sector globally (World Tourism Organization, 2014)
The above chart highlights that the global tourist numbers have reached 940 million in 2010 and continues to grow. This is likely to reach 1.4 billion (an upside of 40%) within the current decade. The growth is expected to accelerate in the future with several industrial changes that will materialize in globalization as well as further deregulation. The eventual result will be positive to the economies of many countries as the growth of the industry will contribute towards increased revenues in terms of local as well as foreign revenue inflows to the businesses operating in the sector.
One of the drivers of growth is the emergence of new markets; the emerging markets such as India and China are observing an increase in travelers who enjoy higher disposable income levels and resultantly undertake various travel, since they can afford such excursions. Further, the role of budget airlines has also become important since the public can afford to travel on lower budgets. This is another positive factor that contributes towards growth. Meanwhile, Internet is instrumental in promoting attractive holiday destinations whilst facilitating competitive travel and accommodation offers to travelers. Therefore, the technology front also thus contributes towards the travelling and tourism industry.
Meanwhile, it has been observed that the highest contribution to global tourism is earned from travelers in Europe; since travelling is a part of the culture of Europeans. Further, they are from the developed part of the globe and enjoy higher levels of disposable income levels in comparison to other parties.
3.2.2. Sri Lanka’s tourist arrival details
To sustain the tourism industry, the industry requires to evaluate the category of tourists who are likely to arrive in the country in the future; therefore, ensuring that the appropriate category of tourists arrive to the country will guarantee that the tourism industry will continue to grow and benefit from future growth trends. The following chart highlights the changes that has taken place on.
Figure 3.2 – Arrivals of the tourists to Sri Lanka; annual details (Sri Lanka Tourism Development Authority (a), 2018)
The above chart highlights the details related to the arrivals of tourists to Sri Lanka. It can be observed that India comprises the largest source of tourists to the country accounting for over 17%b of the total tourist arrivals, whilst China is the second largest source with a 12% contribution according to statistics published in 2015. Overall the European markets also contribute significantly towards tourism arrivals in the country. However, whilst the country experienced a growth of 3.1% in 2017, this is well below the global growth average of 3.9%. and is a cause for concern for the industry (Sri Lanka Tourism Development Authority 2018). Therefore, appropriate steps require to be taken to identify the reasons for this downfall and address the relevant issues.
3.2.3. Macroeconomic factors
Tourism is an industry which is highly sensitive to macroeconomic factors; since visitors are likely to take all necessary precautions to avoid travelling to countries containing a high level of risks. In this context, the study uses the PESTL model to evaluate these factors and identify how the industry could be impacted (Horwitz, 1999).
Political – Sri Lankan is a democracy; irrespective of the political instability and the competition at parliamentary levels, the country does not have any specific political issues that would destabilize the country. The absence of life-threatening situations that the tourists are likely to face, should encourage them to consider Sri Lanka as a lucrative holiday destination.
Economic – The country has observed a lower economic growth in 2017; approximately 3.1% in comparison to several other Asian economies. However, the country’s long-term growth potential remains intact whilst the future ability to attract investments are high. Likewise, the state policies are investor friendly by nature. Therefore, these aspects require to be considered, when the tourism growth is considered.
Social – the country possesses an established tourism industry and even at small to medium scale operations, investments are being undertaken to develop facilities and provide accommodation and other services, to the tourists who intend utilizing them. Thus, the overall social impact on the tourism industry remains high.
Technology – Sri Lankan has a superior technology infrastructure and the country continues to invest in the development of same, these changes will ensure that the country will be able to provide attractive services to the visitors to the country. Further, the tourists will find it relatively easier to organize their travel independently through the various travel related search engines, prior to arriving in the country.
3.2.4 Industry pressure analysis
To evaluate the industry pressure, the companies are faced with in the US markets, Porter’s five forces analysis could be undertaken (Holland and Pyman, 2006). The following table indicates the Porter’s analysis elements.
|Bargaining power of the customers||Medium||The customers can select an appropriate hotel; they will be able to identify the best locations and the hotels that provide them with the best prices.|
|Bargaining power of the suppliers||Low||The hotels and holding partners are considerably large companies and they directly connect with the clients. On the other hand, the suppliers are highly segmented and therefore possess minimal ability to influence these companies.|
|Threats from new entrants||High||There is the ability for small players as well as some of the global hotel chains to enter this highly competitive market space.|
|Threats from substitutes||Low||There are hardly any substitutes for these services and while there could be certain substitutes such as homestay, they are limited in scope and do not provide the facilities that hotels will be able to cater.|
|Internal competition||High||The players within the market space are compelled to face a very high level of competition amongst each other. This is an area of importance that they need to consider,|
Table 3.1 Porter’s five forces analysis (author developed)
Thus, the above analysis highlights that the industry is attractive provided that the company is well positioned within the hospitality and hotel industry. However, both these companies under consideration are well positioned players within this competitive market.
3.3 Evaluating of the company performance
The two companies are the largest players in the hotel industry of the country. They own several hotels under their portfolio of properties. This would enable them to offer several prime locations which are attractive to the tourists, whilst also operate competitively. Meanwhile, the occupancy rate of the hotel is a primary factor which reveal the standing of the company in the tourism industry. For instance, JHH has observed that the occupancy levels of the hotels had increased from 79% in 2016 to 80% in 2017. This is a modest increase over the period. However, AKH (is is ASH) has not revealed occupancy related data. Moreover, they have also stated that the occupancy increase for the period has been modest. Resultantly, it is apparent that the overall occupancy levels, were limited by nature.
3.3.1. Revenue growth
This highlights how the companies have observed growth in revenue over the past few years. It is important for the hotels to experience a continuous growth in revenue trends since such progress will contribute towards the companies gaining benefits of scale, in the future. The following chart indicates the revenue growth details associated with this instance.
Figure 3.3 – Revenue growth (ASH and JHH, 2018)
The companies have experienced a very low revenue growth period; in 2014 and 2015, ASH has experienced negative growth as well as stagnation while in the case of JHH, the growth was virtually dormant in 2015 and 2016. However, both the hotels have observed a growth in profit in 2017. This is a sign which is encouraging and provided that they are capable of attracting more visitors to these hotels, they are likely to experience continued growth.
3.3.2. Profit margins
Profitability of the company is one of the main indicators which will display the level of success of the companies. Higher the profitability, higher the attractiveness of the business to investors. Thus, the investors are willing to invest considerably in the businesses if they remain significantly profitable. This highlights that the companies are focused on maintaining the profitability levels of the company. The following chart indicates the overall net profitability levels of the operations and the affiliated results thereof.
Figure 3.4 –Net profit margins of the companies (ASH and JHH, 2018)
The above chart indicates that ASH has been able to maintain a higher margin until 2015; however, this became almost equal in 2016 and subsequently ASH experienced a sharp drop in profitability in 2017. In 2017 the profitability of the company reached 6% while this remains about 15% with JHH, maintaining higher margins.
Figure 3.5 – Gross profit margin (ASH and JHH, 2018)
Both companies have maintained considerably high gross margins; thereby indicating that they possess the ability to ensure appropriate results are reached. Whilst, JHH has achieved a lower gross profit (GP) margin of approximately 70%, ASH has earned a GP of approximately 80%. This highlights that while both players are large players in the field, there is considerable opportunity for both companies to improve growth in profit, which they need to pursue. However, when the net margins are considered, ASH has experienced a sharp downturn in profitability in operations. Thus, the above discussions highlight that while JHH has earned lower gross margins, the eventual net profit has been maintained at high levels. Meanwhile, the consistent performance of JHK is higher in comparison to the profitability volatility of ASH.
3.3.3. Return generating capabilities
The companies need to generate returns to their shareholders; moreover, all parties who would have invested in the company in terms of equity as well as debt would expect the company to further invest in these activities and maximize the return generating capabilities in the future.
Figure 3.6 Return on assets (ASH and JHH, 2018)
The above chart indicates that ASH has been successful in maintaining higher levels of return generating capabilities in comparison to JHH. However, JHH has been able to maintain stable returns over the past few years while in the case of ASH, the company has experienced a sharp downturn on the return in assets. This is driven by the reduction in profits to the company for the period. Therefore, the downturn experienced by ASH has been greater than the adverse situation encountered by JHH during this period. The return on equity is yet another criterion, which will indicate the ability of the companies to generate returns.
Figure 3.7 Return on equity values (ASH and JHH, 2018)
In the above instance, both companies have experienced a downturn in the return generating capability of the companies. The above results depict that while ASH has experienced the returns dropping from 9% in 2016 to a mere 4% in 2017, JHH has also been compelled to encounter a downturn in returns dropping from 8% in 2016 to 7% in 2017. Thus, the gains, while JHH has been able to maintain a certain level of consistency with the return generation capabilities, in the case of ASH, the company has continued to experience a sharp drop in profits.
3.3.4. Liquidity position
This criterion depicts the ability of the company to meet short-term debts. A company should in theory possess sufficient short-term assets to meet expected short-term debts. However, they need to ensure that they evaluate these issues and provide appropriate short-term assets, to strengthen the short-term debt position of the company in the future. Meanwhile, the level of liquidity remains vital for the company to achieve the required results. The following chart highlights the current ratio.
Figure 3.8 Current ratio calculation (ASH and JHH, 2018)
The companies generally should possess the ability to settle the short-term dues using the current assets that they have in place. Therefore, they should be positioned to maintain the ratio above 1.00 in these instances. However, as per the performance of ASH, in 2016, the current ratio of 1.92 dropped sharply to 0.97 in 2017. This indicates that the company is likely to encounter issues in relation to liquidity matters. Meanwhile, whilst JKG faced a similar situation in 2014, they have successfully turned-around. The current ratio in 2017 has been 1.47 and this indicates that they have been able to maintain an appropriate rate. Thus, the above chart highlights that ASH requires to improve the liquidity position of the company.
It is also important to note that not all the current assets contain the same level of liquidity; Resultantly, the companies will need to calculate the acid test. This removes the inventories from the current asset pool, since inventories do not comprise part of the current assets portfolio. The following chart indicates the outcomes.
Figure 3.9 Acid test calculation (ASH and JHH, 2018)
The companies have relatively lower levels of inventories; while the industry demands for maintenance of stocks of various items, due to the nature of the operations, the actual values associated with these assets are low. Resultantly, the outcomes of the acid test as well as the current asset ratios are likely to be considerably close. Whilst JHH has achieved an acid test value of 1.41 ASH has recorded a value of 0.92. It is apparent that ASH requires to improve this value to achieve enhanced results in the future.
3.3.5. Working capital management
The working capital management aspects in general include inventory management, receivable management, payables as well as asset turnover levels. The ratios are calculated with a view to identifying the performance of the companies in the context of maintaining overall working capital efficiency levels in the future (Maxwell, Watson and Quail, 2004).
188.8.131.52. Inventory turnover
This ratio depicts the level of stock maintained by the company. Meanwhile, it is advisable to maintain minimum stock levels that are required for the operation. However, if stocks are maintained over and above the requirement, the eventual result is unlikely to be positive in the long term. The following chart below indicates the details associated with the company’s inventory management activities.
Figure 3.10 Inventory turnover days (ASH and JHH, 2018)
In the above instance, it is obvious that ASH requires to be mindful of their inventory turnover levels, which has increased considerably over the past two years. Meanwhile, JHH has continually worked towards the reduction in inventory levels, whilst ASH has encountered a situation where the inventories have increased. The current inventory levels of ASH have reached approximately 43 days while JHH has succeeded in maintaining a 20-day stock position, and achieved a position where inventory levels conform to the needs of the parties appropriately.
184.108.40.206. Receivables turnover
The above ratio defines the efficiencies and the collection capabilities of the company. The company once they issue a bill, needs to collect the dues within a certain period. However, the period taken to collect the dues, requires to be appropriate for the purpose. Therefore, the company requires to incorporate and maintain an efficient system to collect the dues, and ensure that they receive sufficient funds to meet their commitments in liabilities.
Figure 3.11 Receivables turnover (ASH and JHH, 2018)
However, in the case of JHH, the company had undergone a period in the past where they had experienced considerably high payable days; for instance, in 2012 this figure surpassed 80 days which the company has successfully managed to reduce to 30 days. However, it is also important to note that the receivables period of ASH has remained consistent to a large extent and is approximately 35 days currently. This situation has been possible due to the implementation of a robust and consistent collection function, which has contributed towards improving the management of the receivables period.
220.127.116.11. Payable days
It is often considered that longer the company can take to settle payment, it is better. However, this does not reflect the actual implications; for instance, if the company intends to develop long term relationships with the suppliers and if the latter is of the view that the company takes considerable time to settle payment, it is likely that they will refuse to work with such companies in the future. The following chart thus indicates the actual position associated with the payables of the company.
Figure 3.12 Payable days (ASH and JHH, 2018)
By 2017, ASH has been able to maintain approximately a 60-day period for payments, whilst JHH has maintained a 44-day period for JHH. Therefore, JHH has been settling their dues to the suppliers faster and it is likely that the suppliers are happy with such outcomes. However, this is not the situation with the operations of ASH, who have taken a two-month credit period precisely from all the suppliers. This is another area of consideration for the companies.
18.104.22.168. Asset turnover ratio
The company requires to utilize assets to generate revenues. Therefore, it is important that the companies use their assets and maximize the revenue generating potential of the companies. Thus, the companies need to evaluate the asset turnover ratio with a view to identifying the capabilities associated with the revenue generating potential.
Figure 3.13 Asset turnover ratio (ASH and JHH, 2018)
The companies are attempting to maximize the asset turnover levels. the above chart indicates the asset turnover levels affiliated with the company. It is important to note that ASH possessed the higher capability to generate revenue from assets until 2015 in comparison to JHH.
In summary, both the companies possess certain strengths and the weaknesses in working capital management areas. JHH has been able to reduce the inventory days as well as the collection days. However, ASH requires to concentrate on inventory days as well as receivable days. If they are increasing without necessary controls, the result is likely to be negative by nature. The outcomes will hurt the future operations of the companies and significantly reduce profitability. Thus, the working capital aspects require to be managed efficiently, to reach positive long-term outcomes.
3.3.6. Capital structure ratios
The companies need to maintain financial stability in the long-term context; therefore, identifying a suitable capital structure will enable the companies to achieve these requirements. It is important that the companies maintain the required capital structure elements to achieve these benefits in the future. It is vital to ensure that an appropriate capital structure is maintained in the long term for parties to achieve results according to the needs. Meanwhile, the companies require to manage the capital structure with relevant focus to achieve appropriate outcomes.
Figure 3.14 Debt to equity ratio (ASH and JHH, 2018)
One of the main aspects that needs attention is the management of the debt to equity balance; however, in the instance of ASH this has changed in 2015 leading to increased debt levels. However, JHH has been able to reduce the debt to equity ratios to appropriate levels and ensure the capital structure of the company has been improved. Thus, the debt levels associated with the capital structure has been reduced. It is further important to ensure that the gearing ratio is calculated. This highlights debt as a fraction of the total capital structure of the company. the details can be identified as follows:
Figure 3.15 Gearing ratio (ASH and JHH, 2018)
Thus, the above chart indicates that the gearing levels of both the companies have been maintained lower than the equity share. However, it is important to note that the gearing is increasing in the situation of ASH and is an area which needs attention, since undue increase of gearing levels might provide negative outcomes in the context of these organizations.
3.3.7 Market ratios
The market ratios indicate the value placed by the stock market in terms of the stock value of the companies; if the markets have acquired a higher level of trust regarding the companies, it is likely that the market ratios will reflect these accordingly. Therefore, maintaining appropriate market ratios will be important. Further, the changes in market ratios over a period will also indicate the perceived direction of the company in future terms.
Figure 3.16 Price to earnings ratio (ASH and JHH, 2018)
The above chart highlights the price to earnings ratio associated with the two companies. It can be observed that the ratio indicates how many times the market is willing to pay when compared with the earnings per share. In this instance, the larger value indicates the future potential of the company. the PE ratios depict that while the EPS has declined in the case of ASH, this is not necessary and proportionately reflected in the case of ASH. This shows that the markets are considering, that ASH is in a growth industry and the current downturn they are faced with is temporary.
Figure 3.17 Dividend per share (ASH and JHH, 2018)
The above ratio displays the quantum the company has paid as a part of the returns distribution. This however does not reflect the actual organizational value. However, this ratio reflects the benefit the shareholders are likely to achieve, in terms of undertaking investments with the company. The following chart indicates further details, which depict that ASH has experienced a decrease in DPS during the past period while JHH has maintained a consistent approach. The DPS in this instance remains lower.
The financial performance of both these companies highlight that JHH maintains a streamlined and consistent approach towards finances. While they have experienced growth, they have also managed to retain the efficiencies and control the capital structure. This could be due to the conservative approach they have taken towards expansion. However, it is also clear that ASH has taken a more aggressive approach towards the new investments and currently, this is reflected in their financial results. The company has been compelled to face working capital inefficiencies while the debt to capital structure continues to increase. However, if these areas are managed efficiently and the increased capacity is used to improve the revenue generation capabilities, ASH will be able to reach positive results subsequently.
3.5 SWOT analysis
Based on the above analysis, a company based SWOT analysis could be undertaken. It is important to ensure the companies identify the strengths and the weaknesses they possess, to meet the future challenges that they are likely to encounter in the future.
|ASH owns a larger portfolio of hotels|
ASH is backed by the Atkin larder group for financial needs
ASH operates several premium hotels in Sri Lanka under their portfolio
ASH has been able to maintain relatively high levels of gross profits
ASH has experienced faster revenue growth in 2017
|JHH is backed by the largest conglomerate of the country|
JHH possesses several premium hotels in the portfolio
The company has been able to improve its financial performance consistently
The company has maintained healthy profitability and liquidity ratios
Working capital management ratios have also experienced positive results in performance contribution
Table 3.3 Strengths of the two companies (author developed)
|Could not control the expenses to improve the bottom-line|
Increased levels of debt in the balance sheet
They do not own a premium hotel in Colombo.
Working capital management weaknesses are prevalent
The liquidity ratios of the company were weak in 2017
|The company has taken a more conservative approach towards capacity enhancements|
The Company has failed to be consistent in collections, however, this has been rectified to a large extent
Table 3.4 Weaknesses of the two companies (author developed)
- Global tourism sector is likely to continue growing which will increase opportunities for the company
- The government of Sri Lanka is supporting investments in the tourism industry, enabling hotels to expand room capacities; there are various benefits they can achieve.
- Increased diversity observed in guest arrivals, indicate that the hotels could consider various promotional methods, focusing on different cultures and the value systems
- The internal competition is the main threat; there are several hotels competing with one another.
- Alternatives such as homestay also provide the tourists with different options; this could become a serious threat in the future.
- The industry is likely to experience growth; both companies should consider expanding existing capacity and cater to the specific needs of the tourists who are visiting the country. However, it is advisable to adhere to a calculated and conservative expansion approach.
- ASH requires to improve profitability; while they have a healthy top line and growth, this does not trickle down to the bottom-line. Resultantly, the company should evaluate how they could control expenses and maximize profitability.
- Further, ASH should concentrate on reducing its debt levels that are associated with the balance sheet of the company. This will enable them to maintain a capacity which will allow investment.
- JHK has improved the collection periods; however, the past volatilities indicate that this is an area which needs attention in an appropriate manner. Thus, the overall benefits are likely to be positive in these aspects.
- JHH on the other hand, requires to continue increasing its top line with a view to achieving profitability and the bottom line associated with the companies. Likewise, the company needs to maximize the profitability of the operations
The paper has identified several facts regarding the hotel and hospitality industry in Sri Lanka; however, the industry has experienced a high level of competition over the past few years. Therefore, it is deemed necessary that they work towards improving the overall industry context in the future. Meanwhile, the companies need to focus on improving the overall performance levels. They need to work with the stakeholders and improve the revenue potential as well as the profit potential in a sustainable manner. The current outcomes have indicated that the companies require to change certain areas and focus on future performance levels.
Leave a Reply