Analysis on Liquidity Ratio

Ratio Industry 2019 Variance 2018 Variance

Current Ratio 1.0600 0.4083 (0.6517) 0.3413 (0.7187)

Quick Ratio 0.7300 0.2829 (0.4471) 0.2197 (0.5103)

The company's liquidity has improved from 2018 to 2019; however, below par in both years. For 2019, the current ratio is below the industry at 0.6517 negative variance, while 0.7187 negative variance is obtained in 2018. Quick ratios also posed negative variance in both years, 0.4471 in 2019 and 0.5103 in 2018.

Analysis on profitability

Ratio Industry 2019 Variance 2018 Variance

Profit Margin 0.0696 0.1383 0.0687 0.1229 0.0533

Return on Equity 0.2713 0.3100 0.0387 0.2875 0.0162

Return on Assets 0.0645 0.0740 0.0095 0.0653 0.0008

Just like the liquidity of the company, it's profitability also improved from 2018 to 2019. Furthermore, the hotel industry is considered more profitable and performing well compared to the industry level. The profit margin obtained positive variances of 5.33% and 6.87% for 2018 and 2019, respectively. The company's return on equity recorded 1.62% and 3.87% higher than the industry. Return on assets are slightly higher with the industry at 0.08% and 0.95% positive variance for 2018 and 2019, respectively.

2. Looking at the ratios calculated, the company is profitable and performing well in their operations. This could indicate that they have established good relationship with customers, thus increase in sales while maintaining low cost advantage through cost cutting procedures they can implement. However, the company is also in a problematic situation when it comes to liquidity. The ratios presented are below 1:1 ratio, and worse below 0.5 ratio. This indicates that the company may not be able to satisfy current liabilities and demands from short term creditors such as suppliers. The company may be offering long-term trade policies that decreases the short term collectibility which attracts more customers. But this could cause pain in their payment deliverables to suppliers, thus they need to manage it properly. The company also posed higher reliance in debt than equity financing. In terms of cost, debt financing is cheaper than equity financing thus it could be a good move for the company. But they should also work on pooling more investors if their goal is to maximize shareholders wealth. The company is also doing good in turning their resources to sales, however far from the industry's performance. Thus they should still work on pooling more customers while working on other factors mentioned above.

Explanation:

1. To get the answer you need to find the difference of the calculated ratio and the industry average. We took the figures from the hotel industry. After determining the variances, state in a straightforward manner the variances.

2. Group the ratios according to their type (liquidity, solvency, profitability, etc) and compare it with the industry average. Some of the explanations are also mentioned in the answer provided.

--------------------------------------------------------------------------------------------------------------In three to four paragraphs, based on the ratios you chose in Step 2, how would owners, lenders, investors and managers of the operations react to the performance of the industry? Why?