Introduction: Financial Ratio Analysis: A Case Study of De-la Pete’s Motels

a. Defining financial information and overview of case study 

Financial performance is the topmost subjective measure through which organisation can utilise their assets to generate profitability. This assists in analysing the overall performance of business and further supports decision-making (Aldhamari et al, 2020). Companies need to provide information related to the financial health of business as it leads to attract investors and customers. Thereupon, the organisation implies a significant focus on this area and uses financial tools for the evaluation of performance so that transparency can be assured to stakeholders. Case context- De-la Pete’s Motels has shown effective growth in past however, currently, the organisation is facing increased turnover and a downfall in performance. The present report will analyse the purpose of financial information along with identifying the characteristics. Furthermore, while using financial data of business, ratios will be calculated. Accordingly, the comparison would be made and suggestions provided to the organisation.

b. Purpose of financial information and identifying the characteristics of good financial information 

The purpose of financial data is to ensure effectual information related to financial position, performance and changes within the position of an organisation. The motive is to assist in decision making on-to which the profitability of the business depends. Without undertaking monetary evaluation a business cannot get succeed (Breijer and Orij, 2022). Stakeholders seeks for pecuniary data through which they can assume the position of business. The managers in the organisation are required to report financial data in context of implementing operational decision so that performance of firm could be enhanced (Cepêda and Monteiro, 2020). Within reviewing, tracking and analysing financial report organisation can effectively undertake decisions that could lead to support in long run. It supports in conveying message to users who are interested in knowing about organisation liquidity and future prospects (Chen, Kumara and Sivakumar, 2021). Thereupon, it is important for company that information should be presented in such manner that could be understand by the people who are seeking for this- Below mentioned are the features of effectual financial information- Relevant This is the most important feature and according to this, data needs to be relevant so, users can acquire realistic knowledge and take further decision. Providing false information lead to misguide stakeholders (Hilton and Platt, 2020). Therefore, manipulation with pecuniary data has been prohibited and that should not be done. Providing relevant information helps in gaining trust of people that is beneficial for organisation. Comparability The data needs to be presented in such manner so, comparison can be done, information is said to be useful when comparison can be done (Characteristics of Financial Reports. 2023). This supports in analysing whether organisation has gained effective financial position in comparison of last year or not. Thereupon, this feature plays important role. Verifiability Verifiability lead to assure confidence in the user in terms of neutrality and accuracy that helps in gaining the trust of people (Kimmel, Weygandt and Kieso, 2020). Lacking in this context could result in developing trust issues with the audience. Timeliness Data should be presented to decision makers on time so they can take implement their judgement. In case, information has not been presented on time then, this lead to delay decision making process. Consequently, data should be given on time so users can access it and organisation can make decision. Understand-ability The information must depict useful insights so, conclusion can be drawn accordingly, and also, it needs to be shown in easy manner that could be understand by people without facing complexities (Panos and Wilson, 2020). Faithful representation  In order to undertake faithful representation, it is important to assure that information is unbiased and free from errors (Raewf and Jasim, 2020). No manipulation with data enhances its efficiency and gains the trust of users. Thus, the above mentioned are the topmost features of good financial information that needs to be taken in consideration by the businesses so that they can gain trust of users. Also, this helps in implementation of decision in fast manner through which operational practices can be enhanced and further enhances profitability. 

2. 

a. Calculating of De-la Pete’s Motels financial ratio 

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Analysing company’s performance in against to the industry average While undertaking industrial comparison, this has been witnessed that, De-la Pete’s Motels is performing slower in against of the standard criteria. The standardized rate of return on capital employed is 26% and in current year it is 22.5%. In similar manner, asset turnover ratio is 1.79 while in current period it is 1.23. From this information, this can be clearly said that, organisation is not in effectual position as it has not maintained its standardized position. From the secondary sources it has been evaluated that lower rate of ROCE states that, organisation is not using its capital in effective manner in terms of generating the profit and same has been witnessed in the case of De-la Pete’s Motels. One of the major reason of downfall in business is related to not using capital in appropriate manner (Salam, 2022). This is the major gap due to which profit of business has been decreasing to greater note. The decrease in asset turnover ratio highlights that, company is not utilising their assets in proper manner and due to this loss has experienced by the business. Thus, organisation needs to implement specific focus on this area so, they can take corrective measures that is essential in order to enhance the performance of the business. In relation to net profit margin this can be said that, it refers to the percentage of all over income received after clearing expenses and taxes. The standardized rate of net profit margin in 14.5% however, it is 7.7%. The decrease in net profit margin clearly states that, organisation is not able to gain profitability and their profit has been decreased and this is another reason of downfall (Schroeder et al, 2022). The above depicted evaluation presents that company failed to maintain enough liquidity according to the industry standards. Moreover, the standard ratio is 1.5 and organisation’s current ratio is 1.31 which shows that liquidity of the company is not up to the mark. The labour cost percentage is 25.5% and as per standard criteria this should be 18.1%. In the year of 2023, operating cost of business is also high as it accounts for 88.18% respectively however this should be 85%. Hence, the operating cost of the company is high and organisation is not able to manage their expenses and this is reducing their income. This led to increase in the turnover rate and further contributed in downfall of business. The operating cost of organisation is higher in comparison of their sales and in similar manner, administration cost is higher in comparison to industry standard. When operating cost of the business is high then, this lead to increase the expenses of organisation and thereby decreases profitability. From the calculation of ratio it has been identified that, the cost of company is high in comparison of their profit and organisation is not able to manage their day to day expenses that is reducing their profit margin on higher note. Hence, it is important that De-la Pete’s Motels must focus on this area and they should undertake decision in relation to new product development so they can increase their sales and cost of business can be maintained. 

b. Evaluation of company’s performance

On the basis of evaluation, it can be articulated that, the performance of organisation in current year has been decreased in comparison of the previous year. The business does not have sound financial position. Within analysing the latest result of company it was clear that, firm is experiencing downfall and corrective measures are required in this area so that business can get appropriate direction and recovery can be done (Weygandt et al, 2020). The return on capital employed and asset turnover ratio of the business has decreased to greater extent and further net profit margin is being decreased and as a result, over-all profitability of business has reduced. Also, liquidity in the business in not on appropriate note and this can be evidenced with the evaluation of current ratio. However, in terms of quick ratio, business has shown slight growth. The days of receiving amount from debtors are being increased that proves to be ineffective for business. Previously it was 91 and in current year it is 102. Organisation’s gearing ratio has been increased and this can be used in order to improve the performance of business. Thus, it could be said that, profitability of the business is not effectual and due to this organisation is facing varied hurdles. They have been using traditional methods and this is also one of the major reason behind their decreasing sales (Xolmirzaev, Juraev and Axmadjonova, 2021). Hence, it is very important for business to enhance their performance. Below mentioned are the major recommendations for De-la Pete’s Motels in order to improve their financial performance. Reducing expenses This is the foremost strategy that should be adopted by the business, they need to reduce their direct and indirect expenses. This is required as reduction in expenses automatically lead to create higher profitability in the business (Krajewski and Malhotra, 2022). Therefore, in order to enhance the performance of the business it is important to reduce the expenses. Within doing this, organisation will be able to manage their cost and this ultimately leads to create support for the business in earning of higher profitability. Adopting effective marketing strategies  The organisation needs to adopt significant marketing strategies so they can increase their sales as they are focusing on new product development. For that, effectual marketing tactics are required. It helps in gaining attention of the customers through which company can become able to earn higher profitability. Marketing strategies plays essential role when it comes to attracting customers as with the help of this, needs and requirements of consumers could be analysed. Research and development  From the case study, it has been witnessed that, it is important to focus on research and development area by the company so they, can focus on new product development (Jakubczak, Go??biowska and Prokopowicz, 2021). Decrease in sales is the major reason due to which organisation is not able to maintain their profitability and therefore, company should analyse the market so they can become able to analyse about the current trends in the market and accordingly they can implement actions. This support in increasing the sales of the business that is highly essential in order to gain higher profitability. Thereupon, investment towards research and development needs to be made. Thus, the above mentioned are the major recommendations to the company which can be used in order to undertake the improvement so higher profitability could be gained. Hence, it is important to develop significant focus on this areas as it helps in achieving stable position. 

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c. Conclusion

Conclusively; this could be said that financial performance is considered as a vital component in companies as it helps in developing effectual support for the business in terms of making decisions and therefore, specific focus is required in this area. The report has reflected upon the purpose of financial information which assists in decision making. Also, it helps in attracting investors and customers within providing transparency to business. The features of effective financial information are associated with reliability, predictive value, relevance and etc. Furthermore, ratios have been calculated so that recommendation could be given to business. The company should cut their cost so they can manage the debt and it ultimately lead to boost the revenue of organisation. Also, spending should be traced and realistic budget needs to be developed. Thus, these are the major improvements that could lead to support company in enhancing their financial performance. 

References

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