ROCE also increased to 24% in 2011 as compare to 20% in 2010 due to increase in net income and shareholder’s equity and decrease in long term debt.
Current ratio increased from 1.39 to 1.67 mainly due to decrease in current liabilities particularly bank overdraft by 4000 during 2011 and increase in inventory by 2000 during the year. Acid test ratio also increased from 1.25 to 1.42 in 2011 due to decrease in current liabilities by 2000 and increase in current assets by 1300 during 2011. Stock turnover decreased from 20 in 2010 to 17 in 2011 due to increase in cost of goods sold and inventory, which highlights the hotel’s efficiency in managing its inventory and avoiding under stocking instead we could conclude that hotel is experiencing higher sales than the previous year. Debtor collection period decreased from 48 days in 2010 to 41 days in 2011 due to application of robust collection policies. Creditors payment period decreased from 16 days to 15 days during 2011 is mainly due to increase in payables.
Capital gearing ratio decreased from 16% to 11.5% in 2011 is due to increase in shareholder’s equity and decrease in long term debt, which is considered good as it signifies the hotel dependence more on equity financing as compare to debt financing thus it lessens the risk of interest rate burden and other related fixed costs but it may also heightened the financial risk due to higher volatility in profits.
As per the financial ratio analysis for the year 2010 and 2011, it is clear that Hotel is enjoying a marvelous growth in terms of sales both from rooms and other restaurant functions. However, hotel needs to control the cost of goods in order to improve the gross profit margin for the up coming years and other operating expenses.
In addition, hotel may also have to look upon its payment patterns and improvise the payment period to suppliers and creditors for the goods bought on credit by paying off early. In order to reduce the financial risk