However when ever ratio analysis is used to interpret accounts it has to be approached with caution as ratios are based on historical data which are not entirely reliable and accurate information and can be out of date. Also as ratios are based on financial statements some figures are estimated such as depreciation which lowers the reliability of data.
Ratios only show monetary values which don’t include things like brand name, customer loyalty and business ethics. So qualitative information about the company must also be taken into account, when thinking about investing in a business.
1. INTRODUCTION
- Background:
The Hilton group PLC has diversified interests in betting ventures and hotel operations, although most prominently known for the powerful Hilton hotel brand which has grown worldwide operating 249 hotels in over 70 countries worldwide. Analysis shows however that the larger division of the group today is the betting and gaming operations.
The move into the betting and gaming industry was aided by the acquisition on Ladbrokes and Vernons, the leading operator of the football pools. Livingwell is another part of the Hilton group and is one of the UK largest health operators.
The Hilton group prepare there financial Statements for the year end December 31st.
- Aims:
The aim is to assess the company performance of the Hilton Group using the available financial statements for 2002 to 2004, enabling us to deduce an accurate and fair position of the company in order to conclude the report with advice as to whether the group are an attractive investment.
2. METHOD
The information used in this report was gathered mainly from the three years audited annual company reports. This includes the consolidated profit and loss account, the consolidated Balance Sheet and the Cash flow statement.The strength of the findings were verified with findings from Bloomberg. This also allowed the report to be developed to a far high analytical degree with Analyst recommendations, relative value calculations comparing the Hilton group against both local and global competitors within the gaming sector it is most accurately grouped within. Other sources included the Hilton Group company website, newspaper articles and press releases.
3. FINDINGS
3.1 Profitability Ratios:
ROCE –
First we are going to look at the profitability ratios with the most important being the Return on Capital Employed. To complete this ratio we had to firstly identify the profit and the capital employed figures. We wanted the underlying profit to be used in this ratio to give the most accurate result so we used the profit before exceptional items. It is important to state this with this particular ratio as the method technique varies between companies. We delved deeply to ascertain the reason for the particularly strong trend between 2003 and 2004 which saw a 2.05% increase in the ROCE achieved because profits in the hotel division increased by 16.7% and the betting division by 27% due to the completed installation of the Fixed Odds Betting Terminals. Shop opening hours have increased by 9% and the number of shop trading days has increased by 2.7% therefore the number of events available for customer has risen by 14%.
Net Profit Margin –
Sales for the Hilton group have increased but the net profit margin has decreased This looks like cost of sales expenses are beginning to creep up and therefore reducing the margin. The likely cause of this is the increase of 13% of tax charges on betting tax and the horse and dog levy in 2003 which rose another 18% 2004. Other causes of increased costs in certain areas are notably wages, energy and business rates.
If this continues to fall the Hilton could be vulnerable to price changes a fall in turnover or an increase in costs which could wipe out or seriously reduce profits.
In 2003 the profitability ratios showed a slight decrease and seem due to the difficult trading conditions over this period, most notably in Europe cause by a general economic downturn partially due to September the 11th 2002. The hotel division in particular saw operating profit for the year fall by £65.6 million and resulted in the increase in capital employed being greater than the increase in profits. Fortunately this was resolved in 2004 when the situation reversed, with profits increasing by more that the capital employed.
3.2. Liquidity Ratios:
Current Ratio -
The current ratio shows a steady increase over the three year period. The Hilton group only has a short conversion cycle and the ‘buying decision’ is made daily. Current assets have increased from 2002 to 2003 because cash in hand has increased by 50%. This is because the group operate on a cash basis usually with most sales occurring upfront. They therefore receive the money well before it is due to be repaid to their creditors. For these reasons the Hilton can therefore operate quite well with a current ratio slightly under 1:1. A high ratio means no liquidity problems but the ratio for this industry is much lower than for a manufacturing company who requires a stock of raw goods and a stock of finished goods whereas the Hilton group as a wholesaler only needs a stock to support sales.
In terms of current liabilities, current instalments due on other loans have increased by 68%. This increase in 2003 was because they needed extra finance to purchase more assets. This then fell in 2004 because no new assets were purchased and it seems the group repaid some of its short term loans and overdrafts. In 2002, Hilton entered into a sale and leaseback agreement of ten hotels to reduce their net borrowings.
3.3. Capital Gearing Ratios:
Gearing –
Gearing measures the amount of debt and risk the company has. It expresses the loans as a percentage of capital invested in the business. The loan amount is reasonably high around 33% so in an economic downturn it could be problematic especially as this a luxury industry. Therefore if the economy falls or interest rates rise then people will be less likely to spend in the leisure industry. Though the loan amount is reasonably high this is helped out by the fact that share capital is higher so dividends do not have to be paid if the group are not doing so well. There are no legal obligations to pay dividends only interest payments so the Hilton could waive this whereas loan capital repayments and interest still have to be paid regardless of profitability.
The reason this ratio fell in 2004 is because long term debt fell by 7% and other loans, creditors and accruals also decreased.
3.4. Investor Ratios:
EPS -
The Earnings per Share ratio is showing a 132% growth over the period. If this has increased it’s likely that dividends and the share price will increase as well due to the fact that EPS influences these two returns. EPS is a more useful indicator of a company’s progress than the simple annual trend of the Hiltons profits. To maintain the same level of EPS after share issue, the Hilton must deploy the proceeds of the issue at least as profitability as the original capital. In this case the Hilton is increasing in EPS growth and therefore increasing profitability available to equity shareholders and at a lower effective tax rate.
Price Earnings –
The Price Earnings ratio indicates that the market has high respect for the Hilton group, its future prospects and profit growth. In 2002 and 2003 the PE ratio was very high at 27.1 and 31.7 respectively, compared with the industry average of 24.3.However it was lower than paddy power PLC another betting company but was higher than William Hill but overall the Hilton group is inline with the industry averages if not better. The reason this ratio has fallen in 2004 is largely due to the huge increase in EPS in proportion to the market share price.
On the other hand a high PE ratio may not always be a positive thing as a share with a high PE is often volatile. Good press will cause the share price to jump and bad press will cause the share price to plummet. However the price earnings ratio needs to be approached with caution as we are taking a current share price and calculating with a historical EPS figure.
Dividend Cover –
The dividend cover allows investors to discover the policy of directors on dividend payouts . Hilton 2002 had a low dividend cover of 0.62 which could suggest they are paying relatively large dividends and not reinvesting money into the business possibly sacrificing growth for dividends.
In 2002 the company made a loss of £43.7 million. 2002 was a difficult year in terms of global uncertainties. Hotel profits fell by 16.9% as the hotel trade remained difficult particularly in European gateway cities due to the effect of September 11 which slowed down world economies. Despite this the Hilton group were reluctant to cut dividends and the profitability of the business suffered to maintain dividend payments. The decision for dividend payments to be upheld in 2002 was largely determined by people’s expectations and what other companies in the industry were paying. In 2003 dividend cover was increasing meaning the company retained more in the business for investment and growth. This ratio continued to increase in 2004 to 1.64 as profits had risen again.
3.5. Efficiency & Effectiveness ratios:
Tangible Asset Turnover-
The tangible asset turnover ratio is increasing each year. This is good because this means that the Hilton is effectively using their assets more efficiently. For every pound invested in tangible assets £4.64 is generated in sales and this is reflected in the increased turnover each year.
Debtors Collection Period-
The debtor day’s ratio is also showing improvement over the period from 7.9 days in 2002 down to 3.5 days in 2004. The effectiveness of the company is getting better. Debtors are paying more quickly and on time and shows that the Hilton group has and an effective policy on debt control. The fall in debtor days means improved working capital management. As cash is being received quicker, creditors can be paid on time and therefore enforce supplier relations.
How the group controls its working capital management is very important as it shows the Hilton has effective management of cash inflows and outflows. This puts them in a strong position as bad cash flow management can cause liquidation. The Hilton is taking advantage of credit given and taking control of credit it gives to its customers.
3.6 Segmental Analysis
Segmental analysis shows the balance of sales between the betting and gaming and the hotel industry. Obviously Hilton group has a significantly higher amount of sales from its betting and gaming industry than hotels, this could be as technology is improving with more access to everyday gambling through the internet and electronic e-betting. The hotel industry sales seem to be declining with the betting and gaming increasing each year. This shows that hotel division is in difficulty this could be due to bad market conditions caused by the Iraq war, SARS and economic decline in some key parts of Europe.
4. CONCLUSION
In conclusion there are no problems with the solvency of the company; both liquidity and gearing ratios are improving on a yearly basis. In the short and long term solvency and working capital management appears to be steady.
In 2002 the hotel division brought in a higher proportion of profit than the Betting and Gaming division. This is changing rapidly as in 2004 the Betting and Gaming brought in £273.4 million compared to £171.3 million for the hotel division. This is due to the betting industry becoming more profitable and increasing in popularity. The difference between the Hotel and betting and gaming industry is rather significant as betting and gaming has continually increasing sales and profits whereas hotel sales and profits are decreasing. The Hotel industry seems to be suffering due to continuously difficult market conditions such as economic decline in parts of Europe, the tsunami, the Terrorist attacks and the Iraq war. The Hotel industry is also very sensitive to economic downfall as hotel are a luxury service and will be first to have decreasing sales in a falling economy. In the betting and gaming division – Ladbrokes had a good year demonstrating strong marketing, technology and product development skills, due to developments of e-gaming and tax – free betting which means that betting and gaming is easily available to a wider consumer market. Future prospects for this industry look very good.
5. RECOMMENDATIONS.
We believe the financial analysis of Hilton group is showing that future prospects for the group are good. Most of the ratios show positive movements except for the net profit margin which basically seems due to an increase in expenses incurred. Many of these increased costs seem to be cost pressures for insurance and energy costs and sometimes from union-led wage increases. These are mainly out of the groups control and will be affecting similar companies in the industry which would be reflected in the comparison between industry averages. The Hilton group in particular has several strengths such as the brand name that has been built up over a period of many years. This intangible asset reflects the products, services and the quality that will always be in demand. This strength of the Hilton brand was further recognised with numerous awards such as ‘best international hotel chain’ and ‘Europe’s leading hotel group’.
The success for the group looks set to continue with significant growth, strong tour operated partnerships, increased online package bookings and an increasing number of repeat guests.
One of the Hilton strengths is the ability to focus on areas not returning the investment put into it. This is emphasised by the fact that the Hilton group are disposing of divisions not working and re-investing this capital into more profitable areas. Currently the group are progressing disposal of eleven UK hotels due which would have needed considerable capital investment to meet the Hilton brand standards. There is the possibility of further asset disposals in the next twelve months with a probable total of £300-400 million. It’s currently got the intention to return part of this investment to shareholders.
Another important factor to consider is the analysed recommendation on Bloomberg which advise people to buy the Hilton shares.
The record growth of the betting and gaming industry is due to its availability to a much wider market through the use of the internet telephone and interactive TV. Hence the reason for this increased focus on the industry by the Hilton group reflected in the recent qualified endorsement of the Fixed Odds Betting Terminals and the Gambling Bill. This highlights the group’s market awareness and the ability to put their knowledge and experience in the industry to good use.
Overall the recommendation is that the Hilton group has a lot of potential, due to the fact that the Betting and Gaming industry is growing in popularity because of advances in technology such as e-gaming. This particularly is true in 2006 as betting demand is expected to increase due to the World cup in Germany.
Although the Hotel industry is having significant problems with market conditions the Hilton group are potentially expecting 28 hotels to open over the next two years and shows the business is expanding.
However there are also a few threats to the company due to increasing terrorist attacks such as the London bombings in July 2005, we haven’t seen the 2005 financial accounts but I expect the Hotel division would have been adversely affected by the terrorist attack, which is important to consider when investing.
BIBLIOGRAPHY
Pendlebury, M. W, 1994, Company accounts: analysis, interpretation and understanding, 3rd Ed, London: Routledge
Stein, Neil D.1986, Interpretation of accounts, London: Financial Training.
Tamari, Meir. 1978, financial ratios: analysis and prediction, London: Elek.
Stafford, P, Garnham, P, Financial times, 2005, Predators waiting on sideline to scupper US bid for Hilton Hotels, 14th December, p.11.
