Business Report IHG

Business Report: Intercontinental Hotel Group (IHG)

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Business Report: Intercontinental Hotel Group (IHG)

Introduction

InterContinental Hotels Group PLC is a hotel company which was incorporated on 12st May 2014. The company runs hotels in three manners that include as a manager, as a franchisor, and on leased and owned basis. The segments if the company includes Asia, Africa and Middle East, Europe, Central and Great China, and America. The company runs a hotel brands portfolio that include Candlewood Suites, InterContinental, Staybridge Suites, HAULUXE Resorts and Hotels, Holiday Inn Express, Kimpton Restaurants and Hotels, Holiday Inn, Crowne Plaza, EVEN Hotels, and Hotel Indigo. IHG contains about 5000 hotels and more than 744000 guest rooms in its more 100 nations system. It also has more than 1300 hotels in its growth pipeline. The runs about 4220 hotels under agreements of franchise, It controls more than 810 hotels and possesses seven hotel across the globe (Ihgplc.com, 2016). This paper focuses on evaluating the financial situation of IHG which include its financial risks, working capital management in the company, dividend policies, and company’s profitability.

Long-Term Sources of Finance Available to IHG and Theories

Long term financing refers to a kind of financing which is offered for a period of over a year. They refer to financial services that are offered to the business entities that experience capital shortage. Some of the available sources of long term finances include equity share, lease finance, trade credit, debenture, preference share, and euro issues. The IHG Company highly depends on the two main forms of long-term financing. They include loans and borrowing, and equity shares, and it can thus be said to have a mixed capital structure. The company’s long-term borrowing and loans amounted to 1239 million dollars in 2015 and 1567 million dollars in 2014. It also depends on equity share capital which amounted to 169 million dollars in 2015 and 178 million dollars in 2014 (Ihgplc.com, 2015). This information can be used to evaluate the company’s financial risk on returns. Based on this information, the company depended more on loans than equity in 2015, compared to 2014 when it depended more on equity to finance its operations than it depended on loan.

Equity shares are also regarded as ordinary shares, except preference shares. The company real owns are therefore equity shareholders. They contain the control over the company management. Equity shareholders are entitled to the dividend in case the company makes profit, otherwise, the shareholders cannot demand any divided from the firm. Equity share capital is not redeemed in the company lifetime. The equity shareholders liability is the unpaid shares value. Equity share is one of the universally and commonly employed shares to mobilize company finance. Capital share can be employed to increase the company’s value since it contains less capital cost compared to other financial sources. More capital share help the company in retaining its earnings a strategy that is less costly financial source contrasted to other finance sources. Nevertheless, equity shares are irredeemable, and can act as management obstacles in situation where shareholders organize themselves and manipulate the market. Another major disadvantage with the use of equity is that the company cannot trade on equity; it can only raise capital using the equity (Paramasivan & Subramanian, n.d).

Loan is another common form of financing a business both for short-term and long-term financing. Long-term loans are normally associated with high interest rate which increases the business operation cost. In addition, dependency on loan puts the company into the danger of losing its assets during harsh financial situation when the company cannot manage to handle loan repayment. Normally, business creditors provide their credit with a guarantee of security. The security involves an asset of equal or higher value to the amount rendered. Thus a company depending on long-term loans for financing runs a financial risk of losing some of its assets to creditors in case of financial crisis.

Financial risks focuses on the level of risk associated with the company’s capital structure. A company with high financial risk is regarded to contain high gearing or high leverage. The company’s capital structure is normally analyzed using financial risk ratios. They evaluate the company’s ability to manage its debts effectively to ensure high operating ability and financial soundness. Some of the employed ratios include debt-to-capital ratio, debt to equity ratio, interest coverage ratio, and degree of combined leverage. The company’s debt to equity ratio is provided as total debt divided by total equity. In this case the HIG total equity for 2015 was 319 million dollars, while that of 2014 was 717 million dollars. The company’s current for loans for 2015 and 2014 was 427 and 216 million dollars respectively, while the long-term loans for the two years was 1239 and 1569 respectively. The debt to equity ratio in 2014 = 1785/717 =2.49, while in 2015 it was = 1666/427 = 3.9. Based on this computation the company debt ratio increased in 2015 compared to 2014, which is an indication that the company lacks other sources of capital and it is highly depending on debts to finance its operations. The debt to capital ratio is computed as total debt divided by total capital, where total capital is equivalent to total debt plus stockholders’ equity. Debt to capital ratio for 2014 is provided by 1785/ 1785+ 717 = 1785/2502 = 0.713 while that for 2015 is provided by 1666/ 1666+ 427 = 1666/2093 = 0.796 (Ihgplc.com, 2015). This generally indicate that the company’s equity holders were making high use of debt a situation that made business riskier, however, the dependency on debt was higher in 2015 compared to 2014, which is an indication of a more riskier situation.

The company has adopted mixed capital structure as its optimal structure. Nevertheless the balancing between equity and debt varies per year based on this analysis. This can be explained by various capital structure theories. According to trade-off capital structure theory, companies trade off cost and benefits of equity and debt financing to obtain an “ideal” capital structure after considering market imperfections accounting that include agency cost, bankruptcy cost, and taxes. This tradeoff could have contributed to the variation of the company ratio of dependency on each source of capital in different times. This can as well be explained by the market timing theory that proposes that the present capital structure is the cumulative results of previous trials to time the market of equity. This means that companies offer new shares when they observe that shares are overvalued and repurchase their shares in case they feel that they are undervalued. Although it is hard to tell when this happened based on the provided financial statements, it is a likely scenario even in this case (Luigi & Sorin, 2009).

Working Capital Management Theories

Working capital management is the managerial accounting techniques created to utilize and monitor the two working capital components that include current liabilities and current assets ti guarantee the most efficient financial operation of the firm. The basic working capital management purpose is to ensure that the company constantly maintains enough cash flow to handle its short-term debt duties and operating costs. According to Hill (2013), the working capital management usual entails monitoring liabilities and assets via ratio analysis of main operating expenses elements that include the inventory turnover ratio, collection ratio, and working capital ratio. There are a number of working capital management theories that can be applied in this situation. One of these theories includes risk and return theory. According to the theory, there are always two conflicting attitudes associated with the risk. They include the risk aversion and risk seeking behavior. Risk seekers normally prefer options engaging a greater possible loss or a higher potential of loss and definitely a stronger over estimating gains notion. The risk-seekers main focus is on a chance for gain. Risk-averters on the other hand consider reducing risks by underestimating gains and over estimating losses. The theory of risk and return is integrated in working capital management by stressing on trade-off between profitability and liquidity. A company may consider selecting liquid at profit expense or selecting profit t liquidity expense. One of the two conflicting decisions might end up in either shortage or excess of the working capital components and the business current assets (Aminu & Zainudin, 2015).

Another theory to be applied is resource-based theory. This theory is employed to include individual businesses managers’ cognitive ability in order to guarantee effective business short-term asset management. Based on the theory, managers contain specific individual resources which ensures and facilitates the acknowledgement of new effective resources assembling, new chances, and payment making psyche, as well as receivables recovering when to so as to guarantee effectual working capital management and eventually the profitability of the firm. Another applicable theory in this case is the stakeholder or agency theory. The theory relevance n working capital management is based on financial manager perspective who is the firm’s agent and who make all essential decisions over business liabilities and short-term assets. The theory extends symbiotic association of the company and different stakeholders who offer various services or resources to the company anticipating one form of return or the other. According to the theory, stakeholders vary based on their stake size in the company. The degree of individual’s stake relies on the level of his relationship exchange and commitment with the company that is founded on particular asset investment (Aminu & Zainudin, 2015).

The condition of the HIG working capital management can be determined by evaluating ratios related with working capital management. They include current ratio, computed as current assets divided by current liabilities. The company’s total current liabilities for 2014 and 2015 was 943 and 1369 million dollars respectively, while total current assets were 624 and 1606 million dollars respectively. Thus, the company’s current ratio for 2014 and 2015 was 624/943 = 0.662 and 1606/1369 = 1.173 respectively (Ihgplc.com, 2015). Based on the result, the company demonstrated low efficiency in the working capital management in 2014 compared to 2015. In 2014, the company current assets were not able to handle the immediate company’s expenses and thus, the company had a problem with the operation cost. However, this was rectified in 2015 where the company had enough liquidity to cater for short term operations and thus, it can be said to have demonstrated a high level of working capital management efficiency.

The Range of Dividend Policies Available to Companies

Dividend policy refers to the practice followed by the management in making decisions regarding dividend payout. It determines the final distribution of the earnings of the firm between shareholders cash dividend payments and retention. It offers a guide to be followed while making dividend related decisions (Gitman & Hennessey, 2004). There a number of dividend policy that a company can follow. They include constant-payout-ratio divided policy. Dividend payout ratio refers to the part of every earned dollar that is distributed in cash form to the owners. It is computed by dividing cash dividend per share of the firm by its earnings per share. In constant-payout ratio, the company establishes that a particular earnings percentage is paid to owners in every dividend period. The actual problem with this policy is that dividend fluctuates based on the earning and in time of losses, very low dividend or no dividend may be paid. Regular dividend policy is another policy which is founded on fixed-dollar dividend payment in every period. This policy generally provides the owners with positive information, thus reducing their uncertainty. The amount of dividend is increased with increased earnings and it is hardly decreased. The next policy is low-regular-and-extra dividend policy which involves giving a low steady dividend, supplemented by more dividends in cases when earnings increase beyond normal periods. Companies employ this strategy to evade from giving owners false hopes. The selection of the policy by any company is determined by different factors that include internal constraints, contractual constraints, legal constraints, growth prospects, and owner considerations. Thus companies chose different policy based on what works best for them as per the above provided factors (Wps.aw.com, n.d.).

The IHG Company employs constant-payout-ratio dividend policy which is determined as a percentage of the company’s earning, and is anticipated to go down or up based on the company’s earnings. This is because the company’s dividend is computed as percentage of earnings per share, where in 2014, the dividend was computed as 58% of the earnings per share and it was said to be 11% more than the previous year earned dividend. Meaning, the dividend is computed as a fixed percentage of the earnings, and its level can increased based on the earnings increment (Ihgplc.com, 2015).

The Company Profitability

The company profitability can be evaluated using information in the company’s income statements. Based on this information, the company recorded revenue of 1858 million dollars in 2014 and that of 1803 million dollars in 2015. There was a significant decline in the company’s revenue in 2015. However, despite of this the company managed a net income of 1222 million dollars in 2015 compared to that of 391 million dollars in 2014 (Ihgplc.com, 2015). This implies that the company was able to minimize its expenses to maximize of the profit. The net income of the company has been demonstrating a positive which shows increasing profitability level of the company. The company’s gross profit margin is gross profit divided by revenue which is 1117/ 1858 = 0.6012 = 60.12% for 2014 and 1163/1803 = 0.6450= 64.5% for 2015, demonstrating no major difference. The company’s net profit margin computed as net profit divided by net sales is 391/ 1858 = 0.2104 = 21.04% for 2014 and 1222/1803 = 0.6778 = 67.78% for 2015 (Ihgplc.com, 2015). This shows that the company demonstrates a considerably high level of profitability in both cases, though the net profit margin is considerably low in 2014. The company demonstrated great improvement in its profitability level in 2015.

IHG is an international company with a number of hotels and rooms in different parts of the world. The company has managed to start, and acquire a number of hotels in different parts of the world which has enabled it to grow stronger in the industry. In has also managed to offer exceptional services that makes unique and highly preferred by consumers in the market. The company has manage to consolidate a group of hotels, with a strong system that is highly trusted and thus, it can be said to be operating in a monopolistic form of market environment, where it plays a major role in determining prices and trend in the industry. The company business model include owned, managed, and franchised, where franchised are owned by and managed by third parties, with low capital control of IHG. Managed are also owned by third party with low capital control by IHG and with a few employees from the company. The owned and leased are owned by IHG with all employees originating from IHG and with high capital control from the company. Nevertheless, the three groups hold the IHG brand name which assists in marketing and distribution of goods and services. The company operation is highly determined by external economic environment which determine individuals rate of international travel for leisure or business. Transportation cost variation also influences the IHG business greatly, and availability for enough money for leisure and fun. Thus, the business normally flourishes in economic stability in various parts of the world being an international company (Ihgplc.com, 2016). IHG has made it its traditional to acquire any single hotel company that demonstrates high risk of expansion to create high competition in the future. This has enabled it to be the most dominating company in various parts of the world. Thus, Minsky analysis can be employed to establish how the company has taken advantage of mergers and acquisition, to eliminate health competition in the market and to create capitalism in the hotel industry in the world (Papadimitriou & Wray, 1999).

References

Aminu, Y., & Zainudin, N. (2015). A review of anatomy of working capital management theories and the relevant linkages to working capital components: A theoretical building approach. European Journal of Business and Management, 7(2), 10-18.

Gitman & Hennessey. (2004). Divided policy chapter 11. Retrieved from http://flash.lakeheadu.ca/~pgreg/assignments/2039chapter11n.pdfHill, R. A. (2013). Working capital management: theory and strategy (1st ed). Bookboon.com. Retrieved from http://www2.aku.edu.tr/~icaga/kitaplar/working-capital-management.pdfIhgplc.com. (2015). Annual report and form 20-F 2015. Retrieved from <http://www.ihgplc.com/files/reports/ar2015/files/pdf/annual_report_2015.pdf>

Ihgplc.com. (2016). About us. Retrieved from <http://www.ihgplc.com/index.asp?pageid=3>

Luigi, P., & Sorin, V. (2009). A review of the capital structure theories. Retrieved from http://steconomice.uoradea.ro/anale/volume/2009/v3-finances-banks-and-accountancy/53.pdfPapadimitriou, D. B., & Wray, L. R. (1999) Minsky’s analysis of financial capitalism. Working Paper No. 275. Retrieved from http://www.levyinstitute.org/pubs/wp/275.pdfParamasivan, C. & Subramanian, T. (n.d.). Financial management. Mumbai: New Age International (P) Limited, drafters.

Wps.aw.com (n.d.). Chapter 12: Divided policy. Retrieved from http://wps.aw.com/wps/media/objects/222/227412/ebook/ch12/chapter12.pdf