Draft 8 Financial Analysis Group Assignment

`Financial Analysis and Decision Making

Interpretation of Published Accounts

Zana Amara Toure 5158834Wendy Ma 5240324Kenneth Taakper 5322468Jiaying Hou 5370034Pannatee Lertsiriluck 5377147

ABSTRACT

As a team of investment advisers working for World Wealth Management Plc., we

have been asked by the board to provide investment advice to our client Dave

Jones, a potential investor. Dave has a large portfolio and is interested in broadening

his portfolio by investing in the UK travel and Leisure industry.

With the use of the latest financial statements, share prices and dividends of two

companies for the last three accounting periods, our team looks to evaluate the

current and past financial performance of Whitbread Plc. and Intercontinental Hotels

Group Plc., two companies operating in the leisure industry. We look to apply the

appropriate financial ratios to the annual figures obtained from the financial

statements, with the aims of determining the change in both companies’ current

financial position and performance.

The analysis along with the historical trend provided by these ratios will be used to

evaluate and understand the company’s financial condition, their operations etc.

Based on the results obtained from our analysis and ratios and evaluation of both

companies performance will be used to advice our client Dave’s Jones on which

company provides better investment option in regards to their investment

attractiveness.

Contents

1.0 INTRODUCTION...................................................................................................6

2.0 FINANCIAL ANALYSIS AND INTERPRETATION..............................................6

2.1 Meaning of Ratios..............................................................................................6

2.2 Profitability ratios...............................................................................................7

2.2.1 Return on Capital Employed (ROCE).........................................................7

2.2.2 Return on Equity (ROE)..............................................................................9

2.2.3 Gross Profit Margin (GPM)........................................................................10

2.2.4 Net Profit Margin (NPM)............................................................................12

2.2.5 Fixed asset turnover..................................................................................13

2.3 SHORT TERM SOLVENCY (LIQUIDITY).......................................................14

2.3.1 Current Ratios...........................................................................................15

2.3.2 Acid Test...................................................................................................16

2.4 Working Capital Ratios....................................................................................17

2.4.1 Debtors days.............................................................................................17

2.4.2 Creditors Days..........................................................................................18

2.4.3 Stock days................................................................................................19

2.5.0 Long term solvency (Financing)....................................................................20

2.5.1 Gearing.....................................................................................................20

2.5.2 Interest cover............................................................................................22

2.6 Investment ratios.............................................................................................23

2.6.1 Earnings per Share...................................................................................23

2.6.2 Dividend per Share...................................................................................24

2.6.3 Dividend Pay-out ratios.............................................................................25

2.6.4 Dividend Cover.........................................................................................26

2.6.5 Dividend Yield...........................................................................................27

2.6.6 Price/Earnings Ratio.................................................................................27

3.0 INDUSTRY ANALYSIS.......................................................................................28

3.1 Intercontinental Hotels Group Plc....................................................................28

3.1.1 Companies Profile.....................................................................................29

3.1.2 Growth......................................................................................................29

3.1.3 Performance.............................................................................................29

3.1.4 Products....................................................................................................30

3.1.5 Consumers................................................................................................30

3.1.6 Strategies..................................................................................................30

3.1.7 Future........................................................................................................30

3.1.8 Competitors...............................................................................................30

3.2 Whitbread Group Plc.......................................................................................30

3.2.1 Companies Profile.....................................................................................30

3.2.2 Growth......................................................................................................31

3.2.3 Performance.............................................................................................31

3.2.4 Products....................................................................................................32

3.2.5 Consumers................................................................................................32

3.2.6 Strategies..................................................................................................32

3.2.7 Future........................................................................................................32

3.2.8 Competitors...............................................................................................32

4.0 SUMMARY OF ANALYSIS & RESEARCH........................................................33

5.0 RECOMMENDATION FOR INVESTMENT........................................................33

REFERENCES..........................................................................................................34

APPENDICES...........................................................................................................35

Table of Figures

FIGURE1: RETURN ON CAPITAL EMPLOYED........................................................8FIGURE2: RETURN ON EQUITY.............................................................................10FIGURE3: GROSS PROFIT MARGIN......................................................................11FIGURE4: NET PROFIT MARGIN............................................................................12FIGURE5: FIXED ASSET TURNOVER....................................................................14FIGURE6: CURRENT RATIOS & ACID TEST..........................................................15FIGURE7: DEBTORS DAYS.....................................................................................18FIGURE8: CREDITORS DAYS.................................................................................19FIGURE9: STOCK DAYS.........................................................................................20FIGURE10: GEARING..............................................................................................21FIGURE11: INTEREST COVER...............................................................................22FIGURE12: EARNING PER SHARE.........................................................................24FIGURE13: DIVIDEND PER SHARE........................................................................25FIGURE14: DIVIDEND PAY-OUT RATIOS..............................................................26FIGURE15: PRICE/EARNINGS RATIO....................................................................28

1.0Introduction

The major financial statement of a company the Balance Sheet, Income Statement

and Cash flow aim to present an overview of a company financial performance and

position. While the objectives of these statements is to provide both the stakeholders

and management useful financial information about the company, the information in

these statements need to be properly analyzed and interpreted in order to

understand the true financial position of the company.

Financial statements analysis and interpretation can help in developing a financial

profile of business and in assessing its financial health. One way of assessing the

financial health of a business is the use of financial ratios. Ratios analysis expresses

the relationship between selected data’s in the financial statements, providing

historical trend which can be used to make inferences about the company’s financial

condition.

Using Ratios for calculation, and changes in the financial position and performance

over the last three accounting periods, the purpose of this coursework is to analyses

and evaluate the financial health of two companies using financial ratios tools. The

analysis along with the historical trend provided by these ratios will be used evaluate

and understand the company’s financial condition, their operations and make advice

in regards to their investment attractiveness.

2.0 Financial Analysis and Interpretation

2.1 Meaning of Ratios

The calculation and interpretation of financial Ratios provide a quick and easy means

of assessing the financial health of a business. A ratio is a simple mathematic

expression of the relation between one number and another in the financial

statement. The calculation of ratio for instance could be used to understand the

company operating profit in relation to its capital employed. Financial ratios analysis

will involves the calculation and comparison of ratios with the help of information

which are derived from company financial statements. Ratios can be very helpful

when comparing the financial health of different businesses (Atril, 2008:204).

Financial ratios can be grouped into five different categories, each relating to

different facets of the company’s financial performance and position. The following

five categories of radios provide user with the tools to analyses the financial health of

a business.

2.2 Profitability ratios

Seen as a key measure of performance, the profitability ratio reflects on the overall

profitability of a business. Since business generally exists to with the primary

objective of creating wealth for their owners. Profitability ratios looks to evaluate

whether the company profit is satisfactory, measuring the operating success of the

business for a given period of time. Profitability ratios provide an insight to the

degree of success of a business in achieving profit Atrill & Mclaney (2008:208). The

following ratios are used in this coursework to evaluate whether the profit generated

by both companies is satisfactory.

• Return on capital employed (ROCE)

• Return on equity (ROE)

• Gross profit margin (GPM)

• Net Profit Margin (NPM)

• Fixed asset turnover (FAT )

Profitability Ratios Intercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

ROCE % 25.19 29.00 24.74 13.35 12.62 11.06

ROE % 171.92 82.88 100.00 20.73 17.87 14.44

GPM % 57.93 56.39 53.75 83.80 85.21 85.16

NPM % 33.24 33.60 28.19 19.45 19.37 17.64

FAT 0.89 0.81 0.70 0.63 0.61 0.58

2.2.1 Return on Capital Employed (ROCE)The return on capital employed ratios is seen as a key measure of business

performance. The ratios evaluate the return the company is making on its total long-

term capital employed before interest and tax. Expressing the relationship between

the operating profit for a given period and the business long term capital invested

during that period. It can be compared to the interest that would be received if the

money was invested in a bank. The ratios is expressed in percentage and calculated

as follow:

ROCE=Profit beforte Tax / Interest∨(operating profit )(Total nunoncurrent liabilities+Totalequity )

×100

Profitability

RatiosIntercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

ROCE % 25.19 29.00 24.74 13.35 12.62 11.06

2012 2011 20100.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

ROCE

%

Figure1: Return on Capital Employed

As we can see from the table the return on capital employed (ROCE) above

illustrates a poor performance from both company. Considered by many as the

primary measure of profitability, both companies have seen a decline in their return

on long term investment. For intercontinental the ROCE has gone down(ROCE for

both companies was increasing) by 3 % between 2010 to 2012 , while Whitbread

has its ROCE remained steady with a slight decline of 1% over the same period.

This rate is far less(higher than) then what both business have to pay for their

borrowed fund (Average 10% ), shareholders might view this decline as a negative

performance as its mean, both earning lower return from its long term capital

employed invested in 2012.

Though Intercontinental was more effective at generating better sale revenues in

2012 1,835m, as compare to Whitbread 1,778m for the same period. The decline in

Intercontinental returns rate can be explained by the significant change to the

company total equity position(change in equity position cannot directly affect ROCE),

which has gone down by 238m between years 2011 to 2012 while the total non-

current liabilities have gone up by 612m for the same period and the profit before tax

from 532m in 2011 to 556 in 2012.

In comparison with Whitbread has had no major change to its ROCE, 0.07%(wrong

figure), over the three year period leading to 2012. It can be said be that

Intercontinental ROCE, while in slight decline is still above reasonable return for

investment with risk involved, as we would expect at least 5% above an average

bank return. Intercontinental therefore offered a better return on capital over the last

three year period to 2012 and therefore has a clear advantage over Whitbread when

comparing their return on long term investment.

2.2.2 Return on Equity (ROE)

This ratio compares the amount of profit for the period available to the company’s

shareholders in relation to the total equity for the same period.

ROE=Profit for the year (net proft)Total Shareholders Equity

×100


Years 2012 2011 2010 2012 2011 2010

ROE%171.9

2 82.88 100.00 20.73 17.87 14.44

2012 2011 20100

20

40

60

80

100

120

140

160

180

200

ROE%

Figure2: Return on Equity

The above table indicates a far larger return on equity for Intercontinental over the

three years period. While Whitbread has only managed a 6.56 % in the company

return on shareholders’ equity between 2010 and 2012. Intercontinental on the other

hand has increased the same ratios by 72 %. This a far better performance for the

company and can explained sustainable increase in the company profit for the year

which has increase from 293m in 2010 to 545m in 2012. This is an increase of 252m

over three years period while shareholders equity has only increase by 26m over the

same period. The same cannot be said for Whitbread which profit for the year has

only increased 160m during the three year period over 175m of equity during the

same period. This therefore explain the reason for only a slight increase in the

company ROE when compared with Intercontinental. Overall it can be say that

Intercontinental offers a better return on shareholders’ equity when taking into

account the last three accounting periods.

2.2.3 Gross Profit Margin (GPM)

This ratio measures looks to measures the percentage profit the company is making

on its sales after it has paid for the goods. According to Atrill (2008) this ratio relates

the gross profit of the business to the sales revenue generated and the cost of sales.

Showing the profit that remains in the business after the manufacturing cost has

been met. The GPM is calculated as fallow:

GPM=Gross ProfitTurnover

×100

Profitability

RatiosIntercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

GPM % 57.93 56.39 53.75 83.80 85.21 85.16

2012 2011 20100

10

20

30

40

50

60

70

80

90

GP

M

Figure3: Gross Profit Margin

The GMP relates the company gross profit to the sales revenue generated for the

same period. The table above illustrates a larger decline in Whitbread profit margin,

85% in 2010 to 19% in 2012. While Intercontinental on the other hand has registered

only a small decline during the same period 35% in 2010 to 37% in 2012.

Fort Whitbread, this a significant decline on the company profit margin, as its mean

the company is generated far lower gross profit relative to its sales revenue between

2011 to 2012. The significant rise in Whitbread GPM can be explained by a rise of

52min the company’s cost of sales between 2011 and 2012 compared to only 23m

between 2010 and 2011. This may be due to lower sales prices, while at the same

time the cost of good has risen. While Whitbread has seen a far greater decline to

its gross profit margin, Intercontinental GPM has remained steady over the last three

year, meaning the company profit margin from its sales is still relatively good.

When comparing the changes of trend in both companies gross profit margin over

the last three years, it can be said Intercontinental has performed better with only a

small decline of 1% over the past two year compared to 66% decline in Whitbread

GPM

2.2.4 Net Profit Margin (NPM)

Ciaran Walsh (2003) refers to the operating profit margin ratios as relating the

operating profit for the period to the sales revenue during that period. Regarded as

the most appropriate measure of operational performance, this ratios looks at what

percentage of the sales revenue is left in the company after all the cost of sales and

the operating expenses have been taken into account.

NPM=OperatingProfitTurnover

×100


Years 2012 2011 2010 2012 2011 2010

NPM % 33.24 33.60 28.19 19.45 19.37 17.64

2012 2011 20100

5

10

15

20

25

30

35

40

NPM

%

Figure4: Net Profit Margin

The table above indicates a steady NPM margin for both companies over the past

thee accounting period. While Intercontinental has seen an increase of 5.05%

between 2010 and 2012, the company has registered a small decline of has seen a

decline of 0.36% during the period of 2011 to 2011. For Whitbread the NPM

increased only by 2.0% over the same period to 2012 with only 0.7 increase during

the period of 2011 to 2012.. This steady increase is explained by strong

performance made by both companies’ sales revenues between 2011 and 2012.

Both companies NPM is still well above the industry average of 1.5%, meaning both

companies sales strategies were successfully executed leading to a stronger

turnover without huge increase in operating cost. However when Intercontinental has

a larger ratios of NPM when comparing the changes of the last three accounting

period, we can therefore conclude that Intercontinental remains in a far better

position to generate an operating profit by increasing its sale revenue in the future.

2.2.5 Fixed asset turnover

The fixed asset ratio looks to evaluate the relationship that exists between the

company sales (revenue) and its non-current assets. Its measures how many £’s of

sales are generated from each £ of fixed assets, in other word it’s a measure of the

efficiency with which capital is being used. It’s important for a firm to manage its

assets efficiently in order to maximize sales. This ratio is calculated by dividing the

firm’s sales by its total assets.

FAT= TurnoverTotal non−current Asset

×100


Years 2012 2011 2010 2012 2011 2010

FAT 0.89 0.81 0.70 0.63 0.61 0.58

2012 2011 20100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

FAT

Figure5: Fixed asset turnover

Measuring the percentage of sale revenue from each amount of non-current asset,

the FAT for both companies has increased by small percentage other the last three

accounting period. While Whitbread has seen an increase of only 0.05 percentage

increase between 2010 and 2012, intercontinental However has seen the largest

increase to its fixed asset turnover of 0.08 percent over the same accounting period

to 2012. These are small increase from the previous year meaning both companies

have been managing their asset efficiently in order to maximize sales revenues.

When comparing the trend of the change in both company NMP figures, we can say

that Intercontinental has been better at managing their fixed asset compared to

Whitbread.

2.3 SHORT TERM SOLVENCY (LIQUIDITY)

The short term Solvency or Liquidity ratios is a measure of the company’s ability to

pay its current liabilities. It’s assumed that the firm meets its current obligations out of

its current resources. Liquidity ratios are financial ratios measuring the company’s

ability to meet its short-term obligations Robinson and Al (2009:796).

Liquidity Ratios Intercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

Current Ratios 0.85 0.67 0.51 0.34 0.43 0.46

Acid Test 0.84 0.67 0.51 0.34 0.37 0.41

2012 2011 20100

0.10.20.30.40.50.60.70.80.9

Curr

ent

Rati

os

& A

cid

Tes

t

Figure6: Current Ratios & Acid Test

2.3.1 Current Ratios

This ratio is a measure of the company’s ability to pay its short term liabilities. The

assumption is that the liabilities are paid from short term assets. It’s is often

suggested by the accounting principles that this ratio should be between 1.5 and 2.

This is seen as ideal as its mean that the current asset of the business should, be at

least twice of its current liabilities, but this again depends upon the industry the firm

operates.

Current ratios= Current AssetsCurrent Liabilities


Years 2012 2011 2010 2012 2011 2010

Current Ratios 0.85 0.67 0.51 0.34 0.43 0.46

The above table indicates a decline in Whitbread liquidity position over the past three

years to 2012.The company’s current ratios has gone down from 0.46 to 0.34 from

2010 to 2012 indicating a decline of 0.12 % between the three years period. Since

this ratio assesses the company ability to meet its current liabilities, the decline in

Whitbread current ratios indicates that should there be a fall in the sale revenues(流动比率与销售无关，只看流动资产和流动负债), the company will be unable to meet

for its obligations(改成 short-term obligations). This continuous decline over the past

three year could be explained by an increase in the company’s current asset

between 2010 and 2011, even though the current liabilities have declined during the

same period(应该说反了，如果流动资产增加而且流动负债减少，流动比率应该增加).

According to the accounting principles, a current asset between 1.2 and 2 is

supposed ideal, meaning the current asset of the business should be a least twice of

its current liabilities. But it could be argued that this depends in the industry, however

it could be added that a continuous decline in Whitbread current ratios position

indicates a lack of liquidity and shortage of working capital.

Overall Intercontinental has a better liquidity position having increased its current

ratios over 0.25% during 2010 to 2012, the company when compared to the industry

average increase of 0.15 during the same year period, has a better liquidity position

compared to Whitbread which current ratios is below the average of the industry.

2.3.2 Acid TestThis ratio is the same as current ratio except that stock (inventory) is excluded on the

grounds that it has to be sold before it can be converted to cash. It’s often said that

this ratios should be between 1 and 1.5, but again this depends upon the industry.

Acid test=Current assets−InventoryCurrent liabilities


Years 2012 2011 2010 2012 2011 2010

Acid Test 0.84 0.67 0.5 0.34 0.37 0.41

Same as the current ratios, the acid test for both companies reveals only a slight

change in both companies liquidity position. Since stock is derived from this

calculation on the ground that it has to be turned into cash, both companies has not

seen a huge increase in their liquidity position. However while Whitbread acid test

ratios has declined over the past three year from 0.46 to 0.34 from 2010 to 2011,

InterContinental in acid test ratios continued to increase during the same period to

2012. The company is in a much better liquidity position compared to Whitbread both

in its current ratios and acid test. The company continues to liquidity position with an

increase from 0.5 in 2010 up to 0.84 in 2012. This is a better liquidity performance as

its mean the company ability to meet its short term liabilities continue to improve.

分析下原因，去查一下应收账款和现金的相关数据就知道了2.4 Working Capital Ratios

According to Peter Atrill and Mclaney (2008:216) this ratios measures how efficiently

a company performs its day-to-day operations, such the debtors and creditors

payment and the management of inventory.

Efficiency Intercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

Debtors Days 83.94 76.18 83.18 17.45 19.24 23.88

Creditors Days 335.21 334.70 349.97 335.21 334.70489.4

6

Stock Days 1.89 1.89 1.94 29.24 28.33 29.06

2.4.1 Debtors days

The debtor’s day ratio measures how long it takes customers to pay for the goods

that they bought. The longer the repayment period the greater the possibility of both

companies having cash flow problems. The UK average is 30 days

Debtors day=Trade receivables(Trade debtors)Sales revenue

×365


Years 2012 2011 2010 2012 2011 2010

Debtors Days 83.94 76.18 83.18 17.45 19.24 23.88

2012 2011 20100.00

10.0020.0030.0040.0050.0060.0070.0080.0090.00

Debtors Days

Figure7: Debtors Days

For Whitbread, the sales increased by 11% in 2011 and the receivables decreased

by 10%, which indicated good receivables management. In 2012 its sales increased

by further 11% while the receivables increased slightly by 1%. This tells Whitbread

has managed its receivables well.

For Intercontinental, they also did well in 2011 as Whitbread. However, in 2012, the

increase in receivables was 14%, which is much higher than the increase in sales of

4%, and that caused the rising debtor days.

As it is important for a business to recover its cash and Whitbread’s receivable days

are shorter than that of Intercontinental, Whitbread manages its receivables better.

2.4.2 Creditors Days

This ratio measures the number of days it takes a company to pay its suppliers. It’s

important that Company pay its suppliers within the agreed time frame.

Creditors day=Trade Payables(Tradecreditors)Cost of sale

×365


Years 2012 2011 2010 2012 2011 2010

Creditors Days 335.21 334.70 349.97 335.21 334.70 489.4

6

2012 2011 20100.00

100.00

200.00

300.00

400.00

500.00

600.00Creditors Days

Figure8: Creditors Days

For Whitbread, the declining creditor days in 2011was caused by decreasing

payables and increasing COGS, and was caused by faster increasing COGS in

2012. For Intercontinental, the figure almost kept the same, which can be explained

by the steady payables and COGS. This can be shown that Intercontinental

managed its cost better.

2.4.3 Stock days

These ratios measures how long it would take the company to sell everything in its

warehouse assuming nothing else was delivered. A company needs sufficient stock /

inventory to meet customer needs but no more.

StocksDays= Inventory (Closing stock )(Cost of sales)

×365


Years 2012 2011 2010 2012 2011 2010

Stock Days 1.89 1.89 1.94 29.24 28.33 29.06

2012 2011 20100.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Stock Days

Figure9: Stock Days

The stock days of both companies did not change much. For Whitbread, it was

caused by similar increase in both inventory and COGS. For Intercontinental, that

was because the inventory and COGS did not change much. But Intercontinental

has much lower stock days, which means they have more liquid inventory.

2.5.0 Long term solvency (Financing)

Financing Ratios Intercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

Gearing 86.91 72.90 84.31 50.49 49.43 51.61

Interest Cover 11.30 9.58 7.40 8.63 8.44 5.92

2.5.1 Gearing

This ratio measures the percentage relationship that exists between the long term

debt (borrowing) and the shareholders equity. The higher the gearing the riskier the

company will be in position to meet its long term liabilities.

Gearing=Long term debt(if not giventotal Non current liabilities)Non−current liabilities+Totalequity

×100


Years 2012 2011 2010 2012 2011 2010

Gearing 86.9

1 72.90 84.3150.49 49.43 51.61

2012 2011 20100

10

20

30

40

50

60

70

80

90

100

Gea

ring

Figure10: Gearing

Considered as a key measures of a company's ability to meet its long term liabilities.

The gearing ratio on the above table looks at the relationship between both

company’s long term barrowing and their respective shareholders equity.

As it can be seen from the above table, both companies’ maintain high gearing ratios

over the past three year’s period. While intercontinental has seen an increase of

2.6% in the company’s long term liabilities to total equity between 2010 and 2012.

Whitbread on the other hand has registered a decline of 1.12% in its gearing ratios

during the same period. Both companies’ still have a high level of debts to

shareholders equities. For intercontinental this high gearing is explaining by

sustainable increase in the company's level of barrowing, while its equity has decline

from 555m in 2011 to 2012, the company long term debt has rocket from 670m to

1242 over the same period. This increases of over 570 million which really

significant, explaining the high gearing which could be riskier for the company in the

future if sale level decline.

For Whitbread the gearing level has remained steady for the past three years, this is

because the company long term borrowing remained steady while it has managed

to keep its total shareholders equities under control over the same period. When

compared to intercontinental over the past three years, it can therefore be said that

Whitbread has managed its gearing level more efficiently when compared to

Intercontinental. Although it should be noted that both companies gearing level

remain very high a better capabilities in meeting its long term liabilities than

Intercontinental.

2.5.2 Interest cover

This ratio is a measure of the number of times the company could pay its interest.

Although it will only pay it once, this number is a measure of security in that if it is too

low (below 5) then a downturn in sales may render the company unable to pay its

interest. Interest Cover=Profit before Interest

Interest Paid


Years 2012 2011 2010 2012 2011 2010

Interest Cover 11.30 9.58 7.40 8.63 8.44 5.92

2012 2011 20100.00

2.00

4.00

6.00

8.00

10.00

12.00

Inte

rest

cov

er

Figure11: Interest cover

The table intricate a better interest covers ratios for both company. While

intercontinental is capable of covering its interest almost 11 times in 2012, Whitbread

on the other hand can cover for its interest 8 times in the same period. But it's should

be noted that who bread interest cover ratios has no improve over the last when

compared with past year 2011. While intercontinental has seen sustainable increase

over the last three years on its interest cover.

For Intercontinental the increase is explained by a better operating profit which has

increase from 459m to 610 my in 2012 coupled with only 1m increase to its finance

expenses over the same period. Intercontinental therefore is in a better position

when compared with Whitbread, to pay for its interest should there be a downturn in

the sales figures.

2.6 Investment ratios

The investor ratio aims to consider the business performance from the perspective of

a shareholder. Several ratios are available to help the company shareholders assess

the return there are getting on their investment. The ratios below are widely used to

calculate the return on investment:

Investors Intercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

EPS %189.5c 159.2c 101.7c

151.53

p

127.16

p92.37p

DPS 2.36 0.51 0.42 0.51 0.40 0.37

Dividend Cover 0.80 3.11 2.40 2.97 3.20 2.51

Dividend payout 124.59 32.17 41.58 33.68 31.26 39.81

Price/Earning 9.01 7.27 12.22 11.06 13.43 15.94

Dividend yield 14 4 3 3 2 3

2.6.1 Earnings per Share

This ratio measures the receiving generated by the company and obtainable to

stockholders, is the number of income received across a era each allocate of public

inventory/stock. This number might be embodied by the profit of the year (Net Profit

Later Taxation). This ratio can computed as display by the formula below:

Earning Per Share(EPS)= Profit for Sharholders(Total Shares issued)

Investors Ratios Intercontinental Whitbread Plc

Years 2012 2011 2010 2012 2011 2010

EPS % 189.5c 159.2c 101.7c 151.53p 127.16p 92.37p

2012 2011 20100

20

40

60

80

100

120

140

160

180

200

𝐄𝐏𝐒

Figure12: Earning Per Share

Both companies have shown regular increase of Earning per Share whereas

Intercontinental indicated the earning better than Whitbread Plc in all 3 years past,

2012, 2011 and 2010. It can be forecast that Intercontinental may provide future

dividend growth and increase in the earnings.

2.6.2 Dividend per Share

Dividend per share is also known as Cash generated from operations per share, it

measures the cash generated from operations (which could also be found in the

cash flow statement) that provides gives the best guide to the ability of the company

to pay dividends and also to undertake a well-planned expenditure than the earning

per share figure.

Dividend Per Share(DPS )= Total DividendsNumber of shares issues


Years 2012 2011 2010 2012 2011 2010

DPS 2.36 0.51 0.42 0.51 0.40 0.37

2012 2011 20100

0.5

1

1.5

2

2.5

DPS

Figure13: Dividend per Share

Companies with higher dividend per share indicate the capable of making high

profits. However, some companies may not pay high dividend, if they have policies

to take profits for investment. It is noticed that Intercontinental have paid Dividend in

similar rate with Whitbread all last 3 years but in 2012, Intercontinental was obviously

high dividend paid.

2.6.3 Dividend Pay-out ratios

This ratio measure the proportion of that the business is earning to pay the

shareholders in the form of dividends. This ratio can be calculated as follows:

Dividend Payout Ratios= Total dividendsProfit for sharholders

×100


Years 2012 2011 2010 2012 2011 2010

Dividend Payout 124.59 32.17 41.58 33.68 31.26 39.81

2012 2011 20100

20

40

60

80

100

120

140

Div

iden

d Pa

yout

Figure14: Dividend Pay-out ratios

It is similar to Dividend per Share ratios Intercontinental was obviously high dividend

paid in 2012. As dividend payout ratio indicates the dividend policy of the company,

a high dividend payout of Intercontinental in 2012 shows that the company has

important changes in payment policies.

2.6.4 Dividend Cover

This ratio measures the number of profit obtainable to cover attention payable.

DividendCover= Profit for sharholderTotal dividends


Years 2012 2011 2010 2012 2011 2010

Dividend Cover 0.80 3.11 2.40 2.97 3.20 2.51

2.6.5 Dividend Yield

This ratio helps the investors to assess the cash return on their investment in the

business. It measures the cash return from a share to its current market value.

Dividend yield= Dividend per shareShare price

×100


Years 2012 2011 2010 2012 2011 2010

Dividend Yield 14 4 3 3 2 3

As this ratio emphasizes on how safety of paying dividend and dividend Cover of

Intercontinental dramatic decreased in 2012. It might be indicated that the safety of

dividend paying is reduced because of a large dividend payout. In the same way, it is

slight declined of Whitbread trend in 2012 even its Dividend Pay-out decreased.

2.6.6 Price/Earnings Ratio

This ratio measures the marketplace worth of a allocate to the receiving each share.

The P/E ratio can be computed in disparate ways. Below are the formulas you can

use to the for the Price/Earnings (P/E) Ratios:

This ratio compute the proportion of that the company is receiving to wage the

stockholders in the form of dividends. This ratio can be computed as follows:

P/E Ratios= Price per shareEarning per share


Years 2012 2011 2010 2012 2011 2010

Price/Earning 9.01 7.27 12.22 11.06 13.43 15.94

2012 2011 20100

2

4

6

8

10

12

14

16

18

𝐏/ 𝐄𝐑𝐚𝐭

𝐢𝐨𝐬

Figure15: Price/Earnings Ratio

The ratio uses the comparison yields from the different share price. It is obvious that

Intercontinental has great dividend yield in 2012 as a result of high Dividend per

Share. Whitbread Plc has a minor change in dividend yield.

Limitations of Ratios analysis

While financial ratios provides the calculations and analysis of a company’s financial

position and performance, there are not with their limitations. Financial ratios alone

cannot be based upon to truly understand the overall performance of a company;

this is because ratios calculation tends to overlook some factors such as inflation,

company strategy, objectives, and the quality of financial statements. While

recognizing the importance of financial ratios in understanding the financial health of

Intercontinental Hotels Group and Whitbread group to advise our client Dave Jones.

Our team of investment adviser has decided to further our research on both

companies, with area related to their strategies, growth, industry etc

3.0 Industry Analysis

3.1 Intercontinental Hotels Group Plc

3.1.1 Companies Profile

Intercontinental Hotels Group (ICHG), formerly known as New Intercontinental Hotel

group is a global hotels company operating several hotel brands across the world.

The company is currently operating nine hotels brand internationally and have over

4,600 hotels and nearly 674,000 rooms in about 100 different countries around the

world. ICHG hotels brand include several famous hotels brand known across the

world, this include InterContinental Hotels & Resorts, Crowne Plaza Hotels &

Resorts, Hotel Indigo, Holiday Inn and Holiday Inn Club Vacations, Holiday Inn

Express, Holiday Inn Resort, Stalybridge Suites, Candlewood Suites and EVEN

Hotels ( http://markets.ft.com ).

3.1.2 Growth

IHG is one of the largest hotel companies by number of rooms, with around 600, 000

over 100 rooms in different countries around the world. IHG operates in a diverse

portfolio of brands across multiple economic segments, including the IGH and

Resorts, Crown Plaza Hotels and Resorts, the Holiday Inn and the Holiday Express.

The Intercontinental Hotels Group makes most of its money through franchising

hotels. Out of the close by 4,000 hotels bearing IHG brands, it only owns an

insignificant amount. The operating structure means that, the company makes less

revenue per hotel and it also means that the company has to commit less capital to

develop and maintain its hotels.

3.1.3 Performance

IHG has achieved outstanding achievements in 2012.Global operating profit grew

strongly. Based on the financial statements in 2012, the global market overall

business performance is excellent. The management fee income increased by 6.8%.

The operating modes of IHG ensure the smooth cash flow sufficient and to realize

the investment returns for shareholders efficiently.

The operating revenue from European, Middle East, Asian and Africa Market is

strong. The business income and profit have a substantial increase compare with

2012. IHG will continued invest in building existing brands and keep the leading

position in market segments.

3.1.4 Products

3.1.5 Consumers

3.1.6 Strategies

Intercontinental strategies in recent years has been to expend the company’s

operations into new emerging and attractive, while concentrating on larger market

such as the US, UK and Germany. Recent year has seen the company developing

its strategy to penetrate and expand China, which the company believe represents

its greatest opportunity for growth. Overall the company’s strategies could be

summarize as expanding activities in emerging market, concentrating on growth in

key market such as US, UK, and look for expansion opportunities in emerging

market to achieve growth.

3.1.7 Future

3.1.8 Competitors

The largest market share in the hotel business is Hilton Worldwide Holidays Inc.

Wyndham Worldwide Corporation and Hyatt Hotels Corporation are the competitors

with similar market cap in hotel industry.

3.2 Whitbread Group Plc.

3.2.1 Companies Profile

Whitbread is one of the managing UK’s hospitality firm alongside most prosperous

brands encompassing the Premier Hostel and Costa. Whitbread is been motivated

and involved alongside team associates carrying prosperously down to 40,000,

alongside the outstanding ability of concerning 22 million clients every single month

across their resorts, coffee shops and restaurants. This firm was instituted in 1742

and nowadays Whitbread has becomes one of the Oldest and well-respected firms in

UK.

Whitbread firm company operates on their resorts and diners company and the

Coffee shop business. This procedure are been segmented into two disparate

segments that includes the Resorts and Diners and Costa Coffee. The Resorts and

Diners provides a little services that are in relation to accommodation and food. The

costa furnish the income from the procedure of its called, owned and franchised

coffee outlets. Whitbread company’s brands contain Premier Hostel Resorts

Manipulated and the Whitbread Diners Costa etc

3.2.2 Growth

For the pass four to five years, Whitbread were experiencing their worst economic

downturn, they also delivered a CAGR in sales of 11%, EPS of 13% and DPS of

12%, alongside with the Return of capital employee rising rom 11.4% to 14%. The

have set their sights on ambitious and the best fast-paced proftitable growth and

have just announced new growth milestones. By 2018 we plan to increase the size

of Premier Inn by 45% to around 75,000 rooms.

3.2.3 Performance

On the London catalog of Stock Exchange, Whitbread PLC is a associate of the

FTSE 100 and the FTSE4Good indices. Resorts & Diners Premier Hostel is the UK’s

managing, and award–winning, resort Business, alongside 649 resorts and extra

than 51,000 rooms across the UK. extra than 75% of the UK populace lifetimes

inside five miles of a Premier Inn. Globally they have four resorts in the Middle East

and two in India. Costa, elected the UK’s favorites coffee shop, has grown

considerably above the past five years and nowadays has 1,578 stores in the UK

and 949 overseas. Revenue by company, Resorts & Diners are Up 9.7%, Costa Up

24.1%, estate winning marketplace allocate steered finished sales up 14.2%.

3.2.4 Products

3.2.5 Consumers

3.2.6 Strategies

The firm vitally trusts that their accomplishment is down to 43,000 motivated and

exceedingly involved team members. They hold outstanding ability to above 22

million clients every single month across our UK resorts, coffee shops and

restaurants. Whitbread use this easy ideal, that we call The Whitbread Way, to

illuminate our company philosophy and strategy. We use this easy ideal, that we call

The Whitbread method, to delineate our company philosophy.

The firm has set a sight on motivated and fast-paced lucrative development and has

just proclaimed new development milestones. By 2018, they design to rise the size

of Premier Hostel by 45% to concerning 75,000 UK rooms and roughly double the

arrangement sales of Costa to concerning £2 billion. They design to craft one more

12,000 UK jobs in the subsequent five years. Even though their companies span

disparate spans of the hospitality company, they all allocate public benefits and a

clear vision on responsibility. They have clarified their skill to craft forceful brands and the consistent transport of operational predominance, as well as a outstanding

client experience in people-intensive businesses.

3.2.7 Future

3.2.8 Competitors

The company was preparing for more competitive markets as two of its big rivals,

Travelodge and Starbucks.

4.0 Summary of Analysis & Research

5.0 Recommendation for Investment

References

Intercontinental Hotels Groups (ICHG) (2010) Annual report 2010 [online] available

from: <http://www.ihgplc.com/index.asp?pageid=562&data=&year=2010> [26

February 2014]


from: <http://www.ihgplc.com/index.asp?pageid=562&data=&year=2011> [26

February 2014]


from: http://www.ihgplc.com/index.asp?pageid=562&data=&year=2012 [26 February

2014]

Whitbread Group Plc. (2010) Annual report 2010 [online] available from :

<http://miranda.hemscott.com/ir/wtb/pdf/Annual_Report_and_Accounts.pdf> [31

December 2010]

Whitbread Group Plc. (2011) Annual report 2011 [online] available from :

<http://www.whitbread.co.uk/content/dam/whitbread/pdfs/investors/reports-and-

presentations/annual-reports/2011/20052011-annual-report-accounts-20102011/

Whitbread-annual-report-2010-11.pdf> [31 December 2011]

Whitbread Group Plc. (2012) Annual report 2012 [online] available from:

<http://www.whitbread.co.uk/content/dam/whitbread/pdfs/investors/reports-and-

presentations/annual-reports/2012/annual-report-and-accounts-201112/annual-

report-2011-12.pdf> [31 December 2012]

Appendices

InterContinental 2012 2011 2010 m USD m USD m USD

Operating Profit (PBIT) = 610.00 594.00 459.00Share Price = 17.07 11.57 12.43

SC+Res. (Total Equity) = 317.00 555.00 291.00Sales (Revenue) = 1,835.00 1,768.00 1,628.00

(Non-Current) Fixed Assets (FA) = 2,069.00 2,173.00 2,310.00Current Assets (CA) = 660.00 578.00 466.00

Current Liabilities (CL) = 780.00 860.00 921.00Non-Current Liabilities (NCL) = 2,105.00 1,493.00 1,564.00

Stock (Inventory) = 4.00 4.00 4.00Cost of Goods Sold (COGS) = 772.00 771.00 753.00

Debtors (Receivables) = 422.00 369.00 371.00Creditors (Payables) = 709.00 707.00 722.00

Debentures (Long term Loans) = 1,242.00 670.00 776.00INTEREST = 54.00 62.00 62.00

Profit after TAX = 545.00 460.00 291.00Share Capital = 179.00 162.00 155.00

Earnings per share = 189.5c 159.2c 101.7cDividends = 679.00 148.00 121.00

Gross profit = 1,063.00 997.00 875.00Number of shares issues = 287.60 288.94 286.14

Capital Employed (CE) = FA+CA-CL= 1,949.00 1,891.00 1,855.00　　　　

Working Capital (W/C) = CA-CL= -120.00 -282.00 -455.00

PROFITABILITY: 2012 2011 2010

ROCE= Profit before Interest and Tax/Interest or (operating profit) ×100(Total non-current liabilities +Total equity )

= 610/(2105+317) 594/(1493+555) 459/(1564+291)= 25.19% 29.00% 24.74%

2012 2011 2010

ROE=Profit for the year

×100Total Shareholders Equity

= 545/317 460/555 291/291= 171.92% 82.88% 100.00%

2012 2011 2010

GPM =Gross Profit

×100Turnover

= 1063/1835 997/1768 875/1628= 57.93% 56.39% 53.75%

2012 2011 2010

NPM =operating profit

×100Turnover

= 610/1835 594/1768 459/1628= 33.24% 33.60% 28.19%

2012 2011 2010

FAT =Turnover (sales)

Total non-current Asset= 1835/2069 1768/2173 1628/2310= 0.89 0.81 0.70

LIQUIDITY/SOLVENCY: 2012 2011 2010

Current Ratios =Current Assets

Current Liabilities= 660/780 578/860 466/921= 0.85 0.67 0.51

2012 2011 2010

Acid Test =Current assets-Inventory

Current liabilities= (660-4)/780 (578-4)/860 (466-4)/921= 0.84 0.67 0.50

EFFICIENCY: Stock days = Inventory 　 ×365Cost of Sales

= 4/772*365 4/771*365 4/753*365= 1.89 1.89 1.94

Debtors day = Trade receivables×365

Revenue= 422/1835*365 369/1768*365 371/1628*365= 83.94 76.18 83.18

Creditor day = Trade payables×365

Cost of Sales= 709/772*365 707/771*365 722/753*365= 335.21 334.70 349.97

GEARING (Borrowing): 2012 2011 2010

Gearing =Long term debt (if not given total N-current liabilities)

×100Non-current liabilities +Total equity

= 2105/(2105+317) 1493/(1493+555) 1564/(1564+291)= 86.91% 72.90% 84.31%

2012 2011 2010Interest cover = Profit before Interest and tax

Interest Paid= 610/54 594/62 459/62= 11.30 9.58 7.40

INVESTOR RATIOS: 2012 2011 2011

EPS=profit for shareholders/ profit after tax

total shares issued= 189.5c 159.2c 101.7c

2012 2011 2011

dividends payout ratio=total dividends

×100profit for shareholders/ profit after tax

= 679/545 148/460 121/291= 125% 32% 42%

2012 2011 2011

dividend cover=profit for shareholders/ profit after tax

total dividends= 545/679 460/148 291/121= 0.80 3.11 2.40

2012 2011 2011P/E ratios = share price

earning per share= 17.07/1.895 11.57/1.592 12.43/1.017= 9.01 7.27 12.22

2012 2011 2011

Dividend per share=total dividends

number of shares issues= 679/287.60 148/288.94 121/286.14= 2.36 0.51 0.42

2012 2011 2011

dividend yield=dividend per share

×100share price

= 2.36/17.07 0.51/11.57 0.42/12.43= 14% 4% 3%

Whitbread 2012 2011 2010 m GBP m GBP m GBP

Operating Profit (PBIT) = 345.90 309.90 253.20Share Price = 16.87 17.08 14.72

SC+Res. (Total Equity) = 1,283.20 1,242.00 1,108.00Sales (Revenue) = 1,778.00 1,599.60 1,435.00

(Non Current) Fixed Assets (FA) = 2,811.00 2,642.80 2,480.90Current Assets (CA) = 148.40 140.90 164.40

Current Liabilities (CL) = 368.20 331.50 358.00Non Current Liabilities (NCL) = 1,308.60 1,214.20 1,181.60

Stock (Inventory) = 23.10 18.40 17.00Cost of Goods Sold (COGS) = 288.40 237.10 213.50

Debtors (Receivables) = 85.00 84.30 93.90Creditors (Payables) = 321.30 280.20 286.30

Debentures (Long term Loans) = 530.40 521.90 529.00INTEREST = 40.10 36.70 42.80

Profit after TAX = 266.00 222.00 160.00Share Capital = 147.50 147.00 146.40

Earnings per share = 151.53p 127.16p 92.37pDividends = 89.60 69.40 63.70

Gross profit = 1,489.60 1,362.50 1,221.50Number of shares issues = 175.54 174.58 173.22

Capital Employed (CE) = FA+CA-CL= 2,591.20 2,452.20 2,287.30

Working Capital (W/C) = CA-CL= -219.80 -190.60 -193.60

PROFITABILITY: 2012 2011 2010

ROCE= Profit before Interest and Tax/Interest or (operating profit) ×100(Total non-current liabilities +Total equity )

= 345.9/(1308.6+1283.2) 309.90/(1214.20+1242.00)

253.20/(1181.60+1108.00)

= 13.35% 12.62% 11.06%

2012 2011 2010

ROE=Profit for the year

×100Total Shareholders Equity

= 266/1283.2 222/1242 160/1108= 20.73% 17.87% 14.44%

2012 2011 2010

GPM =Gross Profit

×100Turnover

= 1490/1778 1363/1599.6 1222/1435= 83.80% 85.21% 85.16%

2012 2011 2010

NPM =operating profit

×100Turnover

= 345.9/1778 309.90/1599.6 253.20/1435= 19.45% 19.37% 17.64%

2012 2011 2010

FAT =Turnover (sales)

Total non-current Asset= 1778/2811 1599.6/2642.8 1435/2480.9= 0.63 0.61 0.58

LIQUIDITY/SOLVENCY: 2012 2011 2010

Current Ratios =Current Assets

Current Liabilities= 148.4/368.2 140.9/331.5 164.4/358= 0.40 0.43 0.46

2012 2011 2010

Acid Test =Current assets-Inventory

Current liabilities= (148.4-23.1)/368.2 (140.9-18.4)/331.5 (164.4-17)/358= 0.34 0.37 0.41

EFFICIENCY: Stock days = Inventory 　 ×365Cost of Sales

= 23.1/288.4*365 18.4/237.1*365 17/213.5*365= 29.24 28.33 29.06

Debtors day = Trade receivables×365

Revenue= 85/1778*365 84.3/1599.6*365 93.9/1435*365= 17.45 19.24 23.88

Creditor day = Trade payables×365

Cost of Sales= 321.3/288.4*365 280.2/237.1*365 286.3/213.5*365= 335.21 334.70 489.46

GEARING (Borrowing): 2012 2011 2010

Gearing = Long term debt (if not given total N-current liabilities) ×100Non-current liabilities+Total equity

= 1308.6/(1308.6+1283.2) 1214.2/(1214.2+1242) 1181.6/(1181.6+1108)

= 50.49% 49.43% 51.61%

2012 2011 2010Interest cover = Profit before Interest and tax

Interest Paid= 345.9/40.1 309.9/36.7 253.2/42.8= 8.63 8.44 5.92

INVESTOR RATIOS: 2012 2011 2011EPS= profit for shareholders/ profit after tax

total shares issued= 151.53p 127.16p 92.37p

2012 2011 2011

dividends payout ratio=total dividends

×100profit for shareholders/ profit after tax

= 89.6/266 69.4/222 63.7/160= 34% 31% 40%

2012 2011 2011

dividend cover=profit for shareholders/ profit after tax

total dividends= 266/89.6 222/69.4 160/63.7= 2.97 3.20 2.51

2012 2011 2011

P/E ratios =share price

earning per share= 16.87/1.5253 17.08/1.2716 14.72/0.9237= 11.06 13.43 15.94

2012 2011 2011

Dividend per share=total dividends

number of shares issues= 89.6/175.54 69.4/174.58 63.7/173.22= 0.51 0.40 0.37

2012 2011 2011

dividend yield=dividend per share

×100share price

= 0.51/16.87 0.4/17.08 0.37/14.72= 3% 2% 3%

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