Financial information refers to the data and documentation that convey a company’s financial activities and performance. It contains various financial statements, reports, and calculations that shed light on the company’s financial health (Atrill and McLaney, 2018; Yström, 2019). This case study aims to examine the performance of Marriot Inns Ltd, from the perspective of Christina Parks, a director at the management consulting firm, at the end of the year 2021. The main problem being addressed is how Pauline Changer, an advisor, can guide the management of Marriot Inns Ltd to improve the business by leveraging the findings from case analysis and implementing strategic measures to improve profitability, liquidity, and cost control. The objectives of the case study involve understanding the purpose and characteristics of financial information, analyzing financial ratios, and preparing a detailed report on the company’s performance. The findings and recommendations from the study will assist in making informed decisions and implementing strategies to enhance profitability and liquidity.
Financial Information
This section will provide a comprehensive understanding of the function of financial information and describe the distinguishing characteristics of high-quality financial information. Financial information is data and records that provide insights into an organization’s financial operations and condition. It includes a wide variety of information, such as financial statements, reports, and records that go into depth on such as income, expenditure, assets, liabilities, and cash flow (What is financial information? – QuickBooks global, 2023). This data is necessary for assessing a company’s financial performance, position, stability, and changes within the reporting entity. According to Robinson (2020, p. 6), financial information provides a comprehensive view of a reporting entity’s economic resources and obligations and the impact of various transactions and events on these resources and obligations. In addition to historical data, some reports may include supplementary information regarding management’s forecasts, strategies, and other forward-looking information (Weetman, 2019, p. 13). To be valuable, financial information must be relevant and faithfully represent the intended information. Additionally, its usefulness is enhanced when comparable, verifiable, and understandable.
The Characteristics of Good Financial Information
Faithful Representation
The purpose of financial reports is to illustrate economic phenomena through a combination of written explanations and numerical data. Financial information must accurately convey the essence of those phenomena it purports to represent to be beneficial (Palepu et al., p. 5). In numerous instances, a phenomenon’s economic substance and legal form coincide. However, if there is a discrepancy between the two, information based exclusively on the legal form would not accurately depict the true character of the economic phenomenon. To be an accurate representation, financial information must possess three characteristics. It must be complete, unbiased, and error-free.
Comparability
Financial information must be comparable across time, entities, and industries. Users should be able to analyze and benchmark an organization’s financial position and performance over time and in comparison to other equivalent entities (Robinson, 2020, p. 8). Users make choices by weighing many options, such as buying or selling an investment or investing in one reporting organization as opposed to another. When information about a reporting entity can be compared to comparable data about other entities and data about the same entity for a different period or date, it becomes more relevant.
Understandability
Financial information should be conveyed in a manner that is easily understood. It should use language and formats that are apparent to all users, including those with limited financial knowledge (Qualitative characteristics of accounting information, 2023). Complex financial concepts must be conveyed concisely and clearly. Information is more easily understandable when it is organized and presented clearly and concisely. However, it is essential to recognize that certain phenomena are inherently complex, making their simplification challenging. It may be tempting to omit such complex information from financial reports to improve their readability; however, doing so would render the reports incomplete and potentially misleading (Xu et al., 2018, p. 74). It is essential to balance providing detailed information and presenting it in a manner that users can understand.
Relevance
Financial information should be relevant to its consumers’ requirements. It should provide valuable insights and facilitate the formulation of informed decisions. Relevance implies the information is current, accurate, and applicable to the intended function.
In summary, maximizing the qualitative attributes of financial information is a crucial goal. Enhancing qualitative characteristics is an iterative process that does not adhere to a particular sequence. In some cases, prioritizing one qualitative characteristic may necessitate sacrificing another.
Ratio Analysis
In this section, we will analyze the financial performance of Marriot Inns Ltd and compare it with the average ratios of the Hoteliers Federation members. The analysis will focus on key financial ratios related to profitability, liquidity, and cost management. By examining these ratios, we aim to evaluate Marriot’s financial health and identify areas for improvement.
| Ratios | Marriot Inns Ltd | Hotelier’s
federation members |
||
| 2019 | 2020 | 2021 | 2021 | |
| i. Return on Capital Employed
Net profit before tax and dividend / Capital employed x 100 · According to Weetman (2019, p. 346), the greater its value, the more effectively a business utilizes its capital. · Compared with the Hoteliers’ ROCE of 26% in 2021, Marriot’s of 22.48% signifies that the company generated $3.52 less profit for every dollar of its capital employed. |
0.73/2.71
26.94% |
0.87/3.12
27.88% |
0.78/3.47
22.48% |
26.0% |
| ii. Asset Turnover Ratio
Net sales ÷ Total Assets · The greater the asset turnover, the more effectively a business uses its investments to generate sales revenue (Ratnaningtyas and Nurbaeti, 2023). · Compared to the Federation’s asset turnover rate of 1.79 times in 2021, Marriot’s asset turnover rate of 1.23 times indicates that the company generated 0.44 times fewer sales revenue per dollar of its total assets compared to market averages. |
4.90/2.71
1.81 times |
5.30/3.12
1.70 times |
6.60/3.47
1.90 times |
1.79 times |
| iii. Net Profit Margin
Net profit / Sales Revenue x 100% · It is a metric that indicates how much profit a business generates per dollar of revenue (Syriopoulos et al., 2022). · In 2021, Marriot’s profitability lagged substantially behind the average performance of its competitors by $9.20. |
(0.37/4.90)x100
7.55% |
(0.41/5.30) x 100
7.74% |
(0.35/6.60) x 100
5.30% |
14.5% |
| iv. Current Ratio
Current assets/Current liabilities · It indicates a company’s capacity to meet its short-term obligations with its current assets (Current ratio formula, 2023). · In 2021, Marriot’s current ratio was short by $0.19 by the industry average. |
1.66/1.35
1.23:1 |
1.91/1.56
1.22:1 |
2.49/1.90
1.31:1 |
1.5:1 |
| v. Acid Test Ratio
(Current assets−inventories)/Current liabilities · It prioritizes current monetary assets as a means of meeting its short-term obligations. |
1.17/1.35
0.87:1 |
1.36/1.56
0.87:1 |
1.89/1.9
0.99:1 |
1.03:1 |
| vi. Debtors Collection Period
The debtors collection period is calculated as: Debtors / Sales x 365 · This performance indicator evaluates the average collection period for an organization (Weetman, 2019, p. 341). · Compared to the Federation’s average collection period of 83 days in 2021, Marriot’s collection period of 102 has a 19-day delay in debt collection. |
(1.14/4.9) x 365
85 days |
(1.32/5.30) x 365
91 days |
(1.84/6.60) x 365
102 days |
83 days |
| vii. Gearing Ratio
Loan capital / total capital employed x 100 · According to Bragg (2023), the gearing ratio compares the owner’s equity to debt. · Compared to the Federation’s debt-to-equity ratio of 32% in 2021, Marriot’s ratio of 175% is much greater. |
2.21/2.71
81.55% |
2.21/3.12
70.83 |
2.21/3.47
63.69% |
32.0% |
| viii. Labor Cost As % of Sales
Labor Costs/Sales x 100 · It illustrates the proportion of a company’s expenses to its total revenue. · A greater value indicates that a greater proportion of the company’s revenue is being consumed by expenditures, resulting in a lower net profit. |
0.93/4.90
18.98% |
0.98/5.30
18.49% |
1.25/6.60
18.94% |
18.1% |
| ix. Operating Costs As % of Sales
Operating Costs / Sales x 100 · This ratio reveals how effectively a company manages its expenses relative to its revenue generation. · In 2021, Marriot’s labor costs as a percentage of sales were 2.6% higher than the market average. |
4.17/4.90
85.10% |
4.43/5.30
83.58% |
5.82/6.60
88.18% |
85.5% |
| x. Room Maintenance Costs As % of Sales
Room Maintenance Costs / Sales x 100 · This measure provides insight into the cost-effectiveness of the business’s room or accommodation maintenance in relation to its revenue generation. · Marriot’s low room maintenance costs as % of sales imply cost-effective maintenance strategies and well-maintained buildings that need less maintenance. |
0.44/4.90
8.98% |
0.49/5.30
9.25% |
0.61/6.60
9.24% |
9.5% |
| xi. Administrative Costs As % of Sales
Administrative costs / Sales x 100 · This metric enables stakeholders to evaluate a company’s capacity to control administrative costs and maximize profitability. · Administrative costs as a percentage of sales should be as low as possible, as this indicates better cost management and the potential for greater profitability (Demerjian, 2020, p. 420). |
0.19 /4.90
3.88% |
0.22 / 5.30
4.15% |
0.27 / 6.60
4.09% |
4.5% |
A Detailed Report on The Company’s Performance
This section presents a comprehensive analysis of Marriot Inns Ltd’s performance in terms of profitability and liquidity, comparing it with the sector’s average over three years. To assess Marriot’s Inn Ltd’s profitability, the report will examine two crucial ratios: return on capital employed (ROCE) and net profit margin, while the liquidity analysis will focus on the current ratio and acid test ratio.
Profitability Analysis
Return on Capital Employed (ROCE) is a financial ratio that measures a company’s efficiency in utilizing its capital (Lisek et al. 2020, p. 57). It is calculated by dividing the operating profit before tax by the sum of debt (non-current liabilities) and equity (Weetman, 2019, p. 346). A higher ROCE indicates better capital utilization by the company.
Compared to the Hoteliers Federation’s ROCE of 26% in 2021, Marriot’s Inns Ltd’s ROCE of 22.48% signifies that the company generated $3.52 less profit for every dollar of capital employed, indicating suboptimal capital efficiency. Analyzing Marriot’s ROCE over the past three years, it increased from 26.94% in 2019 to 27.88% in 2020, declining to 22.48% in 2021. Despite continuous growth in sales, the rate of capital increase employed outpaced the increase in profitability in 2021, leading to a decrease in ROCE for that year.
Net Profit Margin
The net profit margin is a financial ratio that measures the amount of profit generated per dollar of sales revenue and provides insight into a company’s profitability. It represents the proportion of each dollar of sales that results in net profit (Net profit margin, 2023). A higher net profit margin indicates that the company is managing its costs effectively and generating more profit from its revenue. In contrast, a lower net profit margin indicates that various expenses consume a substantial portion of sales revenue, resulting in decreased profitability.
Marriot’s net profit margin is 5.30% compared to the industry average of 14.50% in 2021. This means that for every dollar of sales revenue, Marriot’s net profit is $9.20 less than the industry average. Despite consistently high and increasing sales levels over the past three years, Marriot’s relatively low net profit margin can be attributed to high operating costs, potentially stemming from inefficiencies associated with traditional technologies. The company’s net profit margin increased from 7.55% in 2019 to 7.74% in 2020 before experiencing a sharp decline to 5.30% in 2021.
Based on these findings, Marriot can increase its net profit margin by either generating a higher volume of revenues while maintaining the same level of operating costs or by reducing the costs required for a given level of sales volume.
Liquidity Analysis
Current Ratio
The current ratio is a financial metric that indicates a company’s liquidity and ability to fulfill its short-term financial obligations. According to Weetman (2019), it assesses the relationship between a business’s current assets and liabilities. In 2021, Stratford’s current ratio of 1.31:1 indicated that the company has $1.31 in current assets for every $1 in current liabilities. Even though this indicates a reasonable ability to satisfy imminent obligations, it falls short of the industry standard represented by the Federation’s current ratio of 1.50:1. The variance of $0.19 suggests that Marriot Inn Ltd may have a slightly reduced liquidity level compared to the industry benchmarks. There is a modest decrease in Marriot’s current ratio from 1.23:1 in 2019 to 1.22:1 in 2020, followed by an increase to 1.31:1 in 2021.
Quick Ratio
The acid-test ratio, also known as the quick ratio, evaluates a company’s ability to satisfy its immediate obligations with its most liquid current assets (Rashid, 2018, p. 113). In contrast to the current ratio, which includes all current assets, the acid-test ratio concentrates on current monetary assets that can be quickly converted into currency to settle short-term liabilities (Akbarinasaji and Bener, 2016). In 2021, Marriot’s acid-test ratio of 0.99:1 indicates that the company has only $0.99 worth of liquid assets available for every dollar in current liabilities. This suggests that Marriot may have difficulty fulfilling its short-term obligations solely with its liquid assets. Compared to the Federation’s ratio of 1.03:1, Marriot falls short by $0.04, highlighting its liquidity issues. Analyzing Marriot’s acid-test ratio over the past three years reveals a ratio of 0.87:1 in 2019 and 2020, indicating that the company’s liquid assets continue to fall short of its current liabilities. In 2021, however, there was a significant improvement, with the ratio rising to 0.99:1.
Conclusion
In conclusion, Marriot’s Inns Ltd performance demonstrates a reasonable capacity to meet short-term obligations, although it falls slightly below the industry average. In terms of profitability, the performance of Marriot reveals suboptimal capital utilization and a lesser net profit margin than the industry average. Below are the alternative courses of action I have formulated based on the analyses to assist Pauline Changer on how she can provide guidance to the management of Marriot Inns Ltd with the formulation of tighter management control within the company. Firstly, I advise Marriot’s management to invest in research and product development. This can result in various benefits for Marriot Inns Ltd. These include generating revenue from new product lines, increasing the net profit margin, improving the return on capital employed, and decreasing costs as a percentage of sales. In addition, I advise the management to develop strict credit policies to reduce debt to equity ratio. Lastly, another suggested course of action for Marriott Inns Ltd is to hire a third-party auditor to establish a tighter accounting system.
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