Ratio analysis

As introduced in Chapter 2, ratio analysis starts with, and ends at, the top ratio - ROI (return on investment); see Table 7.1.

TABLE 7.1 The base model

The base model

You may be surprised by the 20 per cent return (ROI), but this (before tax and interest) is often achieved by Anglo-Saxon companies (more on this anon).

The 10 per cent profit margin is an average figure and many businesses would be delighted with such a high margin, eg construction companies; other businesses would find this unacceptably low.

The 2:1 asset turnover (sales to capital employed) again may seem very low - a whole year's sales (from the P&L account) in relation to what is needed as investment to deliver the sales. While this is a typical figure for many businesses, it is sector specific and can be quite different depending on 'strategy', eg if you outsource and become a 'virtual' company with few assets.

The top ratios, in particular ROI or ROCE, give a very clear overview of how strategies are working. Below is an extract from the Accor report. Accor uses EBITDA rather than the more conventional EBIT, possibly considering depreciation and amortization amounts to be not at all closely related to operational performance. Capital employed is defined as 'a percentage of fixed assets at cost plus working capital'. Again, you would need to know by what percentage and how much (historic?) cost was adrift from current valuation.

ROI as defined by Accor

Return on capital employed

Return on capital employed (ROCE), corresponding to EBITDA expressed as a percentage of fixed assets at cost plus working capital, amounted to 14% in 2012, versus 13.9% in 2011. This ratio is also analysed in the consolidated financial statements.

ROCE improved to 11.4% in the Upscale and Midscale segment, thanks to the successful deployment of the asset disposal program, and ended the year stable at 19.5% in the Economy segment, reflecting the roll-out of the ibis megabrand and the ongoing room renovation work in the ibis budget hotels.

(Accor, 2012)

Using fixed assets at cost at least avoids the question of current value - a consistent historical base is used, but one that is inconsistent in that property/ fixed asset costs generally rise over time. The ratios, clearly defined and consistently calculated, do indicate that the economy sector is the place to be, or is this more a reflection of austerity?

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