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Crown Resorts

Question:

Consider 2 companies from same sector and compare their financial position as well as financial performance through calculation of various ratios.

The purpose of the report is to consider 2 companies from same sector and compare their financial position as well as financial performance through calculation of various ratios. The main objective of analysis is to find out the most profitable company among the two selected companies for the purpose of investment. Various ratios that will be taken into consideration are the liquidity ratios like quick ratio and current ratio, solvency ratios like debt to equity ratio and times interest earned, activity ratios like receivable turnover and days sales outstanding and profitability ratios like return on equity, return on assets and earnings per share. On the basis of analysis the suggestions will be provided for investment. For this particular report Crown Resorts and RACV Noosa will be considered for the purpose of investment based on the ratio analysis. 

Crown Resorts is one of the largest entertainment groups in Australia. The core investment and business of the company are involved in the sectors of integrated resorts. Crown Resorts wholly operates and owns 2 integrated leading resorts in Australia that is the Crown Perth Entertainment Complex and Crown Melbourne Entertainment Complex. It has a strong portfolio with regard to the complementary investments and future projects that is anchored by the Crown Sydney and it includes the wagering and online platform of the company (Crown - Crown Resorts, 2018). Renowned among the finest hotels in Australia it creates the luxurious surrounds for the customers that are complemented by the exemplary services. On the other hand, the RACV Noosa is a perfect place for family outing, friends and couples outing. It offers wide range of options for affordable accommodation that ranges from luxurious suites to one, two and three bedroom villas and apartments. One of the top pools for the company is showcasing of the outdoor pool. The spa segment of the resort offers services and treatments for restoring and rejuvenating the body. Further their spa menus involve foot and hand rituals, pedicures, manicures, massage therapies, customised facials and skin analysis (RACV Noosa Resort Accommodation & Events information, 2018).

Financial ratio analysis is the procedure for calculating the financial ratios that indicate and compare the financial performance of companies. The ratios are used to analyse the financial position of the business and find out the reason behind the financial performance of the company (Brooks, 2015). It also helps the decision makers to plan for the future and make plans accordingly. For instance, the profitability ratios help the management to find out the profit that the business is earning and can compare it with its peers.  Different ratios are used for analysing different business aspects like financial performance, financial position and cash flow (Nobes, 2014).

Ratio

Formula

Crown Resorts

RACV Noosa

2017

2017

Current ratio

Current assets/Current liabilities

1.83

0.83

Quick ratio

Current assets less inventories & prepayments /current liabilities

1.78

0.76

Accounts receivable turnover

Net sales/Avg account receivables

14.11

4.57

No. of days sales in receivables

365/account receivable turnover

25.86

79.88

Debt to equity ratio

Total liabilities/shareholder's equity

0.65

0.40

No. of times interest earned

EBIT/interest expenses

14.45

3.26

Return on assets

Net profit/Total assets

0.21

0.02

Return on Equity

Net profit/Total equity

0.35

0.03

Earnings per share

Given in the annual report (in cents)

257.03

115

RACV Noosa

Solvency ratios – the solvency ratios are used for measuring the company’s ability for meeting the long-term obligations. Further, the solvency ratios confirms the amount of income remained for the business after paying tax and the non-cash expenses for depreciation against debt obligations (Hill, Jones & Schilling, 2014). The solvency ratios taken into consideration for this particular report are debt to equity ratio and number of times interest earned that is also called the interest coverage ratio.

Debt to equity ratio – this is the long-term solvency ratio and it indicates the stability of the company’s long-term financial policies. It reveals the percentage of assets financed through borrowings and the percentage of assets financed by the owners or the stakeholders of the company (Kettunen, 2017). It is computed through dividing the total liabilities of the company by stockholder’s equity. The ratio of 1 or 1:1 states that the stakeholders and the creditors equally contribute to the assets of the company. In the same way the ratio of less than 1 state that the percentage of assets financed through borrowings is less than the percentage financed by the stakeholders. Looking into the debt to equity ratio of both the companies it is observe that the debt to equity ratio of RACV Noosa is 0.40 and for Crown Resorts it is 0.65. Therefore, more percentage of assets of Crown Resorts is financed by shareholders as compared to RACV Noosa.  Hence, RACV Noosa is exposed to more financial risk as higher amount of debt can increase the sustainability risk of the company (Luez & Wysocki, 2016).

Number of times interest earned – it measures the ability of the company to make the payment for interest on the borrowings when they become due. The investors and the creditors use this ratio for understanding the risks and profitability of the company (McManus, 2013). For example, mainly the investor is concerned whether his investment in company enhances the value or not. On the other hand, the creditor uses the ratio for identifying whether the company can support the additional borrowings or not and to analyse the risk involved n the lending. Looking into the calculation table it is identified that the times interest earned for Crown Resorts is 14.45 times whereas, the same for RACV Noosa is 3.26 times. Therefore, the no. of times interest earned for Crown resorts is significantly better as compared to RACV Noosa and Crown Resort is more efficient in paying off their interest obligation.

Financial Ratio Analysis


Liquidity ratio – the liquidity term is defined as ability of the company to meet the financial obligation after it becomes due. It is the computation used for measuring the ability of the company for paying the short-term obligations. Most common ratios calculated to measure the liquidity of the company are quick ratio and current ratio. Among these the current ratio is the most liberal one and is followed by the quick ratio.

Current ratio – it is the popular metric for evaluating the short-term solvency of the company. The short-term solvency is the company’s ability for paying off the short-term obligation of the company after it becoming due. The short-term obligations are those which are payable within one year period of time. The ratio of 2:1 or higher than that is considered as satisfactory for the companies. However, simply calculating the ratio does not specify the liquidity position of the company. Various other factors like type of business, industry structure and the economic condition also play important role measuring the liquidity of the company (Scott, 2015). However, very high ratio will not be able to pay the current obligation efficiently if large percentage of the asset is included under obsolete or slow moving inventories. The current ratio of Crown resorts is 1.83 that indicates that the company has satisfactory liquidity position. On the other hand, the current ratio of RACV Noosa is 0.83 that is lower than Crown Resorts. Therefore, the liquidity position of Crown Resorts is better as compared to that of RACV Noosa

Quick ratio – this liquidity ratio measures the company’s ability to pay the short-term obligation through having the assets those can be easily converted into cash. These easily convertible assets are cash, accounts receivable and the marketable securities (Sunder, 2016). These assets are considered as quick assets as they can be converted into cash quickly. The quick ratio is different from the current ratio as the prepaid expenses and inventories are not taken into consideration while computing the quick ratio. However, for few companies the inventories are considered as the quick asset based on the nature of the business. The quick ratio of Crown resorts is 1.78 that indicates that the company has satisfactory liquidity position. On the other hand, the quick ratio of RACV Noosa is 0.76 that is lower than Crown Resorts. Therefore, the liquidity position of Crown Resorts is better as compared to that of RACV Noosa

Solvency Ratios

Efficiency ratio – it measures the ability of the company to utilize its liabilities and assets for generating sales. The organization that is highly efficient minimizes its investment in assets which in turn need lower amount of debt and capital for maintaining its regular activities and operation. The efficiency ratio compares the aggregated assets to the sales or COGS (Vogel, 2014). For the liabilities, major efficiency ratio compares the payables against the total purchases from the suppliers. The efficiency ratios taken into consideration for this particular analysis are the no. of days sales remain outstanding and the receivable turnover ratio.


of days sales in receivables – it is also called as the average collection period and measures the days count or the days required for the company to collect the cash from the credit sales. It reveals the efficiency of the company in collecting its dues. In other words, it reveals the days taken by the the company to converts its sales in cash (Leonidou et al., 2013). The lower ratio represent that favourable status as it states that the company is taking less time in collecting its dues. Further, it states the chances of bad debts as the long time for collection increases the chance of bad debts. It is found out that RACV Noosa takes approximately 80 days for converting their sales into receipt whereas, Crown Resorts takes 26 days approximately to convert their sales. Therefore, Crown Resort is more efficient as compared to RACV Noosa. Further, RACV Noosa is exposed to the risk of bad debts as long time in converting the sales into receipt increase the risk of non payment.

Account receivable turnover – it measures the credit sales of the company against its average accounts receivable. This ratio estimates number of times the company can collect the dues over a specific period of time (Heikal, Khaddafi & Ummah, 2014). The high ratio represents the favourable scenario and the low figure indicates the inefficiency in collecting the dues. However, the normal levels of account receivables for different industries are different based on the business structure and industry type. The account receivable turnover ratio of Crown resorts is 14.11 whereas the same for RACV Noosa is 4.57 that is lower as compared to Crown Resorts. Therefore, the efficiency with regard to account receivable for Crown Resorts is significantly better as compared to that of RACV Noosa.

Debt to Equity Ratio

Profitability ratios – these ratios are the financial metrics that are used by the companies to evaluate and measure the ability of the company to generate the earnings associated with assets, sales, equity and costs during a particular period of time (Grissemann, Plank & Brunner-Sperdin, 2013). It states the efficiency of the company is utilizing its assets for generating value and profits to the shareholders. The higher values or ratios are considered as the business is performing well with regard to generation of cash flows, revenues and profits. These ratios are useful when are evaluated in comparison with the competitors.

Return on assets – it measures the company’s profitability with regard to the total assets of the company. The ratio further indicates the efficiency of the company in generating profit from the capital invested under the fixed assets (Drehmann & Nikolaou, 2013). Higher return represents that the company is efficient and productive in utilizing its economic resources. From the calculation table it is identified that return on asset for both the companies are not good. However, the ROA for Crown resorts is higher as compared to that of RACV Noosa as the ROA for Crown resort is 0.21 and the same for RACV Noosa is 0.02 only.

Return on equity – it is the net income of the company during the year against the shareholder’s equity of the company. Further, it measures the profitability on the investment of the shareholders (Ch, Patel & White, 2015). It is a crucial measure for profitability and the higher values represents that the company’s position is favourable and the company is efficient in creating earning from the new investment. It is observed from the calculation table that return on equity for both the companies are not good (Hevert, 2013). However, the ROE for Crown resorts is higher as compared to that of RACV Noosa as the ROE for Crown resort is 0.35 for the year ended 2017 and the same for RACV Noosa is 0.03 only for the same period.


Earnings per share – EPS are the crucial financial measure that indicates profitability of the company. It is computed through dividing the net income of the company by total number of outstanding shares (?ermák, 2015). It is the part of company’s profit that is attributed to the every stock. It is the term that is more useful to the people and investors in stock market. It is recognised that the EPS of Crown resorts is 257.03 cents for the year ended 2017 whereas the EPS for RACV Noosa is 115 for the ame period under consideration. However, the EPS cannot be considered for comparing the performance as the numbers of outstanding shares for both companies are different (Prasetyorini, 2013).

Number of Times Interest Earned

If the overall profitability for both the companies are taken into consideration it can be stated that the both the companies are not highly profitable (Azzopardi & Nash, 2013). However, if the profitability positions of both the companies are compared then it is recognized that the profitability position of Crown resorts is better as compared to RACV Noosa.

Conclusion

It is concluded from the above discussion that the ratios are invaluable tools for the purpose of making the investment decisions. Using the ratios for making the informed decisions regarding investment plays important role for investment decision making. Profitability ratios play crucial role for all the investment analysis. Looking into the profitability ratios of both the companies it is recognized that if the profitability positions of both the companies are compared, the profitability position of Crown resorts is better as compared to RACV Noosa. Further, in liquidity aspect it is found that both the current ratio and quick ratios for Crown resorts are better than RACV Noosa. Therefore, the liquidity position of Crown Resort is significantly better as compared to that of RACV Noosa. Further, it is found that RACV Noosa is exposed to more financial risk as its higher percentage of its assets are financed through debt and higher amount of debt can increase the sustainability risk of the company. Moreover, the no. of times interest earned for Crown resorts is significantly better as compared to RACV Noosa and Crown Resort is more efficient in paying off their interest obligation. Thus, Crown resort is more solvent as compared to RACV Noosa. Finally, the efficiency with regard to account receivable as well as no. of days in sales receivable for Crown Resorts is significantly better as compared to that of RACV Noosa.

It can be found out from the above analysis and conclusion that if the performances of both the companies are compared, the performance and return for Crown resorts are significantly better as compared to that of RACV Noosa. Therefore, given the option, if one company is to choose from 2 for the purpose of investment, Crown Resort is better investment as it is better in all aspects as compared to RACV Noosa

References

Azzopardi, E., & Nash, R. (2013). A critical evaluation of importance–performance analysis. Tourism Management, 35, 222-233.

Brooks, R. (2015). Financial management: core concepts. Pearson

?ermák, P. (2015). Customer profitability analysis & customer life time value models: Portfolio analysis. Procedia Economics & Finance, 25, 14-25.

Ch&, P., Patel, A. & White, M., (2015). Adopting international financial reporting st&ards for small & medium?sized enterprises. Australian Accounting Review, 25(2), pp.139-154.

Crown - Crown Resorts. (2018). Crownresorts.com.au. Retrieved 15 February 2018, from https://www.crownresorts.com.au/

Drehmann, M., & Nikolaou, K. (2013). Funding liquidity risk: definition & measurement. Journal of Banking & Finance, 37(7), 2173-2182.

Grissemann, U., Plank, A., & Brunner-Sperdin, A. (2013). Enhancing business performance of hotels: The role of innovation and customer orientation. International Journal of Hospitality Management, 33, 347-356.

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), & current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business & Social Sciences, 4(12), 101.

Hevert, S. R. B. (2013). Return on Equity.

Hill, C.W., Jones, G.R. & Schilling, M.A., (2014). Strategic management: theory: an integrated approach. Cengage Learning.

Kettunen, J., (2017). Interlingual translation of the International Financial Reporting St&ards as institutional work. Accounting, Organizations & Society, 56, pp.38-54.

Leonidou, L. C., Leonidou, C. N., Fotiadis, T. A., & Zeriti, A. (2013). Resources and capabilities as drivers of hotel environmental marketing strategy: Implications for competitive advantage and performance. Tourism Management, 35, 94-110.

Luez, C. & Wysocki, P., (2016). Economic Consequences of Financial Reporting & Disclosure Regulation: A Review & Suggestions for Future Research. J. Acct. & Econ., 50, p.525.

McManus, L. (2013). Customer accounting and marketing performance measures in the hotel industry: Evidence from Australia. International Journal of Hospitality Management, 33, 140-152.

Nobes, C., (2014). International Classification of Financial Reporting 3e. Routledge.

Prasetyorini, B. F. (2013). Pengaruh ukuran perusahaan, leverage, price earning ratio dan profitabilitas terhadap nilai perusahaan. Jurnal Ilmu Manajemen, 1(1), 183-196.

RACV Noosa Resort Accommodation & Events information. (2018). @RACV. Retrieved 15 February 2018, from https://www.racv.com.au/travel-leisure/racv-resorts/our-destinations/noosa-resort.html

Scott, W.R., (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Sunder, S., (2016). Rethinking financial reporting: st&ards, norms & institutions. Foundations & Trends® in Accounting, 11(1–2), pp.1-118.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press

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