Draft 8 Financial Analysis Group Assignment

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Financial Analysis and Decision
Making

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

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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 companys 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 Daves Jones on which
company provides better investment option in regards to their investment
attractiveness.
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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 .......................................................................................... 26
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
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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

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

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1.0 Introduction

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 datas in the financial statements, providing
historical trend which can be used to make inferences about the companys 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 companys 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).

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Financial ratios can be grouped into five different categories, each relating to
different facets of the companys 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-
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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:

Years 2012 2011 2010 2012 2011 2010
ROCE % 25.19 29.00 24.74 13.35 12.62 11.06

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.
2012 2011 2010
Intercontinental 25.19 29.00 24.74
Whitbread Plc 13.35 12.62 11.06
0.00
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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 companys
shareholders in relation to the total equity for the same period.

Years 2012 2011 2010 2012 2011 2010
ROE% 171.92 82.88 100.00 20.73 17.87 14.44

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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.
2012 2011 2010
Intercontinental 171.92 82.88 100
Whitbread Plc 20.73 17.87 14.44
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Showing the profit that remains in the business after the manufacturing cost has
been met. The GPM is calculated as fallow:

Years 2012 2011 2010 2012 2011 2010
GPM % 57.93 56.39 53.75 83.80 85.21 85.16

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 companys 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.
2012 2011 2010
Whitbread Plc 83.8 85.21 85.16
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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.

Years 2012 2011 2010 2012 2011 2010
NPM % 33.24 33.60 28.19 19.45 19.37 17.64

Figure4: Net Profit Margin

2012 2011 2010
Whitbread Plc 19.45 19.37 17.64
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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 its a measure of the
efficiency with which capital is being used. Its important for a firm to manage its
assets efficiently in order to maximize sales. This ratio is calculated by dividing the
firms sales by its total assets.

Years 2012 2011 2010 2012 2011 2010
FAT 0.89 0.81 0.70 0.63 0.61 0.58

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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 companys ability to
pay its current liabilities. Its assumed that the firm meets its current obligations out of
its current resources. Liquidity ratios are financial ratios measuring the companys
ability to meet its short-term obligations Robinson and Al (2009:796).

Liquidity Ratios Intercontinental Whitbread Plc
Years 2012 2011 2010 2012 2011 2010
2012 2011 2010
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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

Figure6: Current Ratios & Acid Test

2.3.1 Current Ratios

This ratio is a measure of the companys ability to pay its short term liabilities. The
assumption is that the liabilities are paid from short term assets. Its 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.

Years 2012 2011 2010 2012 2011 2010
Current Ratios 0.85 0.67 0.51 0.34 0.43 0.46

2012 2011 2010
Intercontinental-Current Ratios 0.85 0.67 0.51
Intercontinental-Acid Test 0.84 0.67 0.51
Whitbread-Current Ratios 0.34 0.43 0.46
Whitbread-Acid Test 0.34 0.37 0.41
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The above table indicates a decline in Whitbread liquidity position over the past three
years to 2012.The companys 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(
), the company will be unable to meet
for its obligations(short-term obligations). This continuous decline over the past
three year could be explained by an increase in the companys current asset
between 2010 and 2011, even though the current liabilities have declined during the
same period().
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 Test

This 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. Its often said that
this ratios should be between 1 and 1.5, but again this depends upon the industry.

Years 2012 2011 2010 2012 2011 2010
Acid Test 0.84 0.67 0.5 0.34 0.37 0.41
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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.

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 335.21 334.70 349.97 335.21 334.70 489.46
Stock Days 1.89 1.89 1.94 29.24 28.33 29.06

2.4.1 Debtors days

The debtors 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

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Years 2012 2011 2010 2012 2011 2010
Debtors Days 83.94 76.18 83.18 17.45 19.24 23.88

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

2012 2011 2010
Whitbread Plc 17.45 19.24 23.88
Itercontinental Group Plc 83.94 76.18 83.18
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Years 2012 2011 2010 2012 2011 2010
Creditors Days 335.21 334.70 349.97 335.21 334.70 489.46

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.

Years 2012 2011 2010 2012 2011 2010
Stock Days 1.89 1.89 1.94 29.24 28.33 29.06

2012 2011 2010
Whitbread Plc 406.64 431.35 489.46
0.00
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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.

2012 2011 2010
Whitbread Plc 29.24 28.33 29.06
0.00
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Years 2012 2011 2010 2012 2011 2010
Gearing 86.91 72.90 84.31 50.49 49.43 51.61

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
companys 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 years period. While intercontinental has seen an increase of
2.6% in the companys 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.

2012 2011 2010
Whitbread Plc 50.49 49.43 51.61
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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.

Years 2012 2011 2010 2012 2011 2010
Interest Cover 11.30 9.58 7.40 8.63 8.44 5.92

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
2012 2011 2010
0.00
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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 151.53p 127.16p 92.37p
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:

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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

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.

2012 2011 2010
Whitbread Plc 151.53 127.16 92.37
0
20
40
60
80
100
120
140
160
180
200

25

Years 2012 2011 2010 2012 2011 2010
DPS 2.36 0.51 0.42 0.51 0.40 0.37

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:

2012 2011 2010
0
0.5
1
1.5
2
2.5
D
P
S

26

Years 2012 2011 2010 2012 2011 2010
Dividend Payout 124.59 32.17 41.58 33.68 31.26 39.81

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.

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

2012 2011 2010
Whitbread Plc 33.68 31.26 39.81
0
20
40
60
80
100
120
140
D
i
v
i
d
e
n
d

P
a
y
o
u
t

27

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.

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:

Years 2012 2011 2010 2012 2011 2010
Price/Earning 9.01 7.27 12.22 11.06 13.43 15.94

28

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 companys 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

2012 2011 2010
Whitbread Plc 11.06 13.43 15.94
0
2
4
6
8
10
12
14
16
18

29

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
30

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 companys
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 companys 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
31

Whitbread is one of the managing UKs 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 companys 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 UKs
managing, and awardwinning, 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 UKs favorites coffee shop, has grown
considerably above the past five years and nowadays has 1,578 stores in the UK
32

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
33

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

34

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]

35

Appendices
InterContinental 2012 2011 2010
m USD m USD m USD
Operating Profit (PBIT) = 610.00 594.00 459.00
Share Price = 17.07 11.57 12.43
SC+Res. (Total Equity) = 317.00 555.00 291.00
Sales (Revenue) = 1,835.00 1,768.00 1,628.00
(Non-Current) Fixed Assets (FA) = 2,069.00 2,173.00 2,310.00
Current Assets (CA) = 660.00 578.00 466.00
Current Liabilities (CL) = 780.00 860.00 921.00
Non-Current Liabilities (NCL) = 2,105.00 1,493.00 1,564.00
Stock (Inventory) = 4.00 4.00 4.00
Cost of Goods Sold (COGS) = 772.00 771.00 753.00
Debtors (Receivables) = 422.00 369.00 371.00
Creditors (Payables) = 709.00 707.00 722.00
Debentures (Long term Loans) = 1,242.00 670.00 776.00
INTEREST = 54.00 62.00 62.00
Profit after TAX = 545.00 460.00 291.00
Share Capital = 179.00 162.00 155.00
Earnings per share = 189.5c 159.2c 101.7c
Dividends = 679.00 148.00 121.00
Gross profit = 1,063.00 997.00 875.00
Number 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

36

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
100

Total Shareholders Equity

= 545/317 460/555 291/291

= 171.92% 82.88% 100.00%

2012 2011 2010

GPM =
Gross Profit
100

Turnover

= 1063/1835 997/1768 875/1628

= 57.93% 56.39% 53.75%

2012 2011 2010

NPM =
operating profit
100

Turnover

= 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

37

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
365

Cost 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

38

GEARING (Borrowing):

2012 2011 2010

Gearing =
Long term debt (if not given total N-current liabilities)
100

Non-current liabilities +Total equity

= 2105/(2105+317) 1493/(1493+555) 1564/(1564+291)

= 86.91% 72.90% 84.31%

2012

2011

2010

Interest 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
100


= 679/545 148/460 121/291

= 125% 32% 42%

2012

2011

2011

dividend cover=

total dividends

= 545/679 460/148 291/121

= 0.80 3.11 2.40

39

2012

2011

2011

P/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
100

share price

= 2.36/17.07 0.51/11.57 0.42/12.43

= 14% 4% 3%

40

Whitbread 2012 2011 2010
m GBP m GBP m GBP
Operating Profit (PBIT) = 345.90 309.90 253.20
Share Price = 16.87 17.08 14.72
SC+Res. (Total Equity) = 1,283.20 1,242.00 1,108.00
Sales (Revenue) = 1,778.00 1,599.60 1,435.00
(Non Current) Fixed Assets (FA) = 2,811.00 2,642.80 2,480.90
Current Assets (CA) = 148.40 140.90 164.40
Current Liabilities (CL) = 368.20 331.50 358.00
Non Current Liabilities (NCL) = 1,308.60 1,214.20 1,181.60
Stock (Inventory) = 23.10 18.40 17.00
Cost of Goods Sold (COGS) = 288.40 237.10 213.50
Debtors (Receivables) = 85.00 84.30 93.90
Creditors (Payables) = 321.30 280.20 286.30
Debentures (Long term Loans) = 530.40 521.90 529.00
INTEREST = 40.10 36.70 42.80
Profit after TAX = 266.00 222.00 160.00
Share Capital = 147.50 147.00 146.40
Earnings per share = 151.53p 127.16p 92.37p
Dividends = 89.60 69.40 63.70
Gross profit = 1,489.60 1,362.50 1,221.50
Number 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
41

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
100

Total Shareholders Equity

= 266/1283.2 222/1242 160/1108

= 20.73% 17.87% 14.44%

2012 2011 2010

GPM =
Gross Profit
100

Turnover

= 1490/1778 1363/1599.6 1222/1435

= 83.80% 85.21% 85.16%

2012 2011 2010

NPM =
operating profit
100

Turnover

= 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

42

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
365

Cost 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

43

GEARING (Borrowing):

2012 2011 2010

Gearing = Long term debt (if not given total N-current liabilities) 100

Non-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 2010

Interest 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 2011

EPS= profit for shareholders/ profit after tax

total shares issued

= 151.53p 127.16p 92.37p

2012 2011 2011

dividends payout ratio=
total dividends
100


= 89.6/266 69.4/222 63.7/160

= 34% 31% 40%

2012 2011 2011

dividend cover=

total dividends

= 266/89.6 222/69.4 160/63.7

= 2.97 3.20 2.51

44

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
100

share price

= 0.51/16.87 0.4/17.08 0.37/14.72

= 3% 2% 3%

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