- To find out how the company has been operating financially in the period under review
- To find out how strong the market share of the company is, and whether it is strong enough to help them withstand changing preferences in the market and probable competition
- To find out if the company is raking enough profits in order to survive the economic hardships which are currently experienced by businesses operating in Zimbabwe
- From a financial perspective, how well has the business been run over the three years from 2014 to 2016?
- Using an estimate, what is the market share of African Sun?
- Has the company managed to maintain its client base in the face of a changing business environment and probable competition?
- To what extend have the profits been adequate for the company to be considered as going concern, even into the future?
ProfitabilityThese compare income with sales and measure how well a company generates profit. Common profitability ratios are gross profit margin, operating profit margin and net profit margin. When calculating these, the denominator is always the same and the numerator changes, depending on which level of income you wish to calculate. Other profitability ratios are breakeven point, margin of safety, return on equity, return on net assets and return on operating assets (Analysis of Financial Statements – second edition, By Pamela P. Peterson, Frank J. Fabozzi,).
Liquidity“The liquidity of an organization is the ability to make payments as they fall due” (Managing liquidity, Lance Moir, 1997). A company’s liquidity needs is based on the duration between the time the cash is invested in goods and/or services to the time that those services produce more cash. The longer the time, the greater the company’s need for liquidity. Ratios used to illustrate this are the liquidity index, current ratio, quick ratio and cash coverage ratio (Analysis of Financial Statements – second edition, By Pamela P. Peterson, Frank J. Fabozzi,).
LeverageThese are also known as debt ratios, they reveal the extent to which the company is using debt to finance its daily operations, and the likelihood of the company’s repayment. Leverage ratios also evaluate a company’s capital structure. In general, having high leverage is risky as it could lead to bankruptcy when business is low. Examples of these ratios are the debt-to-equity ratio, debt-to-asset ratio, capitalization ratio, debt ratio and equity ratio (https://www.readyratios.com/reference/debt/financial_leverage.html, 2011-2017). http://accountingexplained.com/financial/ratios/advantages-limitations)
Threat of new entrantsNew entrants to an industry increase competition and capacity, and the strength of this force is usually dependent on the barriers to entry that are in place and the response of the existing players towards the introduction of a competitor. There are different types of barriers to entry, and each industry is likely to have some that work best for it and others that don’t.
Bargaining power of customersCustomers are always looking for better products at lower prices. A consumer’s success at getting good quality at a low price may shrink the company’s profit margin. Companies will therefore need to be wary of their competitors pricing and quality of products as this will directly impact their own profitability.
Threat of substitute products and servicesSubstitutes can be identified as existing or potential products which are able to perform the same function as the one under review (Analyse the hotel industry in Porter Five Competitive Forces, Dr. David Y Cheng). They are always there, but may be hard to identify and easy to ignore because they may be different from the service or product offered. (https://www.cleverism.com/threat-of-substitutes-porters-five-forces-model/, 2017)
Bargaining power of suppliersSuppliers can influence the pressure for higher prices through a variety of ways. One of them being their knowledge of how important their product is towards the development of the final deliverable by the customer. Another is where they are the sole supplier, they can inflate the prices for that reason alone.
Rivalry amongst existing competitorsHigh competition can come with market growth, greater capacity, price reduction, investment in new products and innovation and higher spending on advertising. Rivalry for a share of the market becomes intense when differentiation of the product/service is low, and when the costs likely to be faced by the customer for switching from one hotelier to another are also low (Analyse the hotel industry in Porter Five Competitive Forces, Dr. David Y Cheng). https://strategiccfo.com/porters-five-forces-of-competition/, 2016) https://www.kvrwebtech.com/blog/understanding-swot-analysis-need-business/, 2015 http://www.financialgazette.co.zw/vat-eroding-zims-tourism-competitiveness/, 2015). The weakening of the ZAR to the USD is another contributor to the slump in revenue since South Africa is a major contributor to tourist arrival in Zimbabwe. Adding to that, the inflow of visitors from international markets was distinctly lower than before as the weakening of regional currencies made Zimbabwe a more expensive destination. Many factors would influence the decisions of travelers in visiting Zimbabwe, which is currently ranked at number 114 of 136 countries as assessed by the World Tourism Organization. In as much as the country was considered to be the 53rd country with competitive prices, this alone was not enough to keep the country scoring high and attractive enough for foreigners (World Economic Forum; The Travel & Tourism Competitiveness Report 2017).
Source: Appendix EComparing the figures given, the gross profit increased by 16.6% in 2015, but these are not results compared on a like-for-like basis. Considering that the period reported in 2015 was a 15-month period, and assuming the profits were accrued evenly throughout those months, the gross profit earned within a 12-month period was $35,898,024.80 which resulted in a 6.8% decrease from the year 2014. Meanwhile, during the same period the revenue generated was $50,523,978.40, which was a decrease of 5.7%. Using the revalued amounts for a period of 12 months to compare the 2016 figures, gross profit decreased by 14.7% and revenue by 13.7%. Without considering other technicalities which would alter the results such as the change in reporting date which took place in 2015, the net effect throughout the 3 year period then becomes an approximate decrease in gross profit by 20.5% and a decrease in revenue by 18.6%. It therefore makes sense that we have a slight decrease in gross profit margin of 2.3% throughout the 3 year period, which almost equals the 2% difference between the decrease in gross profit and that of revenue. According to the introductory statement by the African Sun’s Chairman in their annual report of 2016, the operating environment in Zimbabwe continued to deteriorate, and that was evidenced by a negative inflation rate of 0.93% (African Sun Annual Report, 2016). My findings suggest that one of the major revenue generating streams for African Sun was from meetings and conferences, which was cut down significantly due to the countries liquidity crunch. Companies had to change how they held their meetings and trainings, from doing it in hotels to finding cheaper solutions like having them at their operational premises, all in an effort to cut costs. RTG on the other hand experienced a 12.3% decrease in gross profit in 2015, and a further decrease, but at a slightly lower rate of 8.1% in 2016. Revenue decreased by the same percentage as gross profit in 2015 and in 2016, by 10.4%. In 2016 RTG managed to increase their gross profit margin by 2.5%. This however did not change the company’s financial state because they were still operating in losses, and in fact, almost 9 times the losses of the previous year.
Source: Appendix EThe quick ratio shows a company’s ability to pay off its short term debts with its assets that are easily converted into cash (Investopedia, 2017). The ideal result will be to have a ratio of 1:1 or higher, which would indicate that the company is able to meet its short-term obligations. African Sun seemed to have been struggling to reach the desired result between the years 2014 to 2016. Their quick ratio was at its worst in 2014 and made an improvement of about 180% in 2015. However, the peak was temporary, as in 2016 the ratio came back down to 0.31, a decrease of 57.5%. In 2015, African Sun reduced their current borrowings by almost 50%, from $10.6 million to $5.4 million. On the other hand, and mainly because of the costs related to the cessation of foreign operations, their provisions for such liabilities increased by almost 300%. At the same time the company’s cash and cash equivalents increased by 280.5% which may have been due to the disposal of investments in Dawn Properties Limited (African Sun Annual Report, 2016). RTG’s quick ratio was very low as well, and it only became worse in 2016, where it was only slightly more than half of the average of 0.26. Comparing the quick ratio with the current ratio, quick ratio enables us to see the portion of inventory within current assets. For the three years, this proportion was the same, therefore the change in ratio was caused by the near 80% increase in current liabilities. The increase was because of an urgent need to clear a loan of $10 million excluding interest where negotiations to settle that amount in the long-term failed and the courts ruled that RTG should pay off its debt. This left the company in a worse state than before. Through an analysis of the figures, RTG would struggle to settle this amount, the interest that had accrued and all fees related to the case.
Source: Appendix EAfrican Sun’s cash ratio indicates an improvement from 2014 to 2016. There is an overall increase from 0.02 to 0.12 through the three years. The ideal result would have been anything greater than 1, as this would show that the company is just able to meet its obligations (for a ratio of 1) or that it can repay and still have some funds left over which can be used for investment purposes or any other use which will grow the business. In light of that, these results are worrying, and provided the trend continues, it can be assumed that African Sun will not be able to survive the hard times and may have to close doors. Looking at the competitor of African Sun, the results are worse as there is no improvement during those three years. RTG’s ratio remains at 0.02 at the beginning and end of the period in question. This comes as no surprise, considering the economic hardships that the country faced during these years. The government of Zimbabwe through the Reserve Bank imposed cash withdrawal limits throughout the country. Within a space of about two months, the cash withdrawal limits changed from US$500 to US$40, and presently the crisis still continues as the US dollar is no longer available in the market (Zimbabwe cash crisis: An analysis of the real reasons behind, By Eddie Cross, November 2016). Such changes resulted in lower spending, and therefore a low cash coverage ratio for both African Sun and RTG from 2014 to 2016.
Source: Appendix EThe growth of African Sun’s debt-to-equity ratio was 10 times more in 2016 as compared to the result in 2015. They moved from a position of having more of equity finance to one of very high debt. Their liabilities decreased by about 42% in 2015, which resulted in a decrease of the ratio by about 48%. As for RTG, their debt-to-equity was totally different from that of African Sun. Their assets were mostly funded by debt, and this became even worse when the ratio shot up from 1.9 to 2.8. Chances that they would manage to secure additional finance if required would be low, given that their level of debt was way above their equity value. It would be somewhat misleading to conclude that African Sun has a better contribution scheme to RTG in terms of their debt and equity funding as different companies use different financing strategies based on the nature of their businesses and their end goals. Also, the basis of conclusion would depend from whose perspective we are considering the results as both the shareholders and the creditors have differing interests. Comparing these results with the industry average, (LOOK FOR INDUSTRY STATS TO COMPARE THESE RESULTS WITH!) In African Sun books, there was a sudden appearance of amounts due to related parties, which is what largely contributes to the change in the ratio. From nothing to $10 million. The change can about due to (FIND WHAT CAUSED THE SUDDEN INCREASE IN LIABILITIES)
Source: Appendix EAfrican Sun has managed to create a good amount of wealth given the assets that they have. The results indicate that they made almost double the revenue from the assets that they used. The peak in 2015 may have been due to the company’s sale of part of the their operations. According to the chairman, in his message to the readers of the 2015 annual report, “the board made a decision to exit all operations that were not self-sustaining in order to avoid subsidization by other business operations.” As a result this artificially changed the company’s asset turnover ratio to reflect the major once-off transaction as the company’s revenue was now applied to a lower value of assets, hence the increase. RTG’s performance was the opposite of their rival company. They only managed to generate half of the value of assets they used to operate. This trend was generally constant with a very slight decrease from year to year. This is usually the case when there is excess production capacity or ineffective revenue collection methods (government not paying??). RTG experienced these low levels of asset turnover partly because of their low occupancy rates. In 2015 the occupancy rate was 56% and in 2016 that reduced to 55% and this goes to show that 44% and 45% of the rooms were unoccupied through the two years respectively.
1. Ownership of internationally recognized brands:African Sun changed their business setup in 2015, from that of being an operating company to an investment one. Five of the company’s largest hotels were taken up for management by Legacy Hospitality Management Services, a successful hotelier with four and five star operations in key tourism and business locations in South Africa, Ghana, Nigeria, Gabon and Namibia (https://www.theindependent.co.zw/2015/08/21/african-sun-courts-sas-legacy-hotels-group/, 2015). The change took place in 2015 and positive results were expected in 2016, due to the hotels improved ratings as well as the closure of other loss making operations within the region. The restructuring left African Sun with hotels which were rebranded according to international standards, thus boosting their international presence. They have also maintained their franchises with IHG, another internationally recognized brand, and plan to continue rebranding their other properties in line with the new strategy.
2. Locations in tourist destination:The company has hotels in all major tourist destinations in Zimbabwe as well as some major cities like Harare, Bulawayo and Mutare (African Sun Annual Report, 2016). This has helped them to ensure that they have a presence in each area where the hospitality business is likely to boom especially due to the increasing success of the tourism industry, and can take advantage of opportunities as they arise.
1. Exposure to insufficient human capitalThe company’s board authorized their management to further implement the structural changes by dismissing 9 management personnel so as to cut down on costs. This left African Sun with significantly reduced human capital and increased exposure to chances of being unable to adequately manage the functions which had been head by those nine individuals previously, of which if the risk was high, it would negatively affect the company’s business operations. The roles were taken up by other members of existing management, and some were not completely in line with their current responsibilities. For example, the chief executive became responsible for all operations oversight functions, casino functions, as well as the sales and marketing functions, in addition to his pre-existing duties (https://www.newsday.co.zw/2015/08/african-sun-chops-9-managers/, 2015).
2. Loss of reputation and societal confidenceIn 2016, African Sun retrenched 219 employees in an effort to cut costs (https://www.dailynews.co.zw/articles/2016/06/21/african-sun-retrenches-over-200, 2016). This move was in line with the company’s new strategy, but is likely to have impacted their local clientele in a negative manner, leaving the public confused about whether their new strategy incorporated their corporate social responsibilities in any way.
1. Completion of the Victoria Falls Airport:African Sun owns hotels in a city that hubs one of the 7 wonders of the world. An article written by Gavin Haines details that there are prospects of new direct flights arriving at the airport which has a runway that can accommodate some of the world’s largest jets. The airport was unveiled in November and is capable of handling about 1.5 million people a year (Telegraph Media Group Limited 2017). African Sun can therefore expect increased revenues and cash flow through the increased number of foreign arrivals and inflow of foreign currency, as opposed to the situation that has prevailed in the past. As mentioned above, African Sun holds the highest concentration of rooms in Victoria Falls and can maximize on this advantage.
2. Relaxation of VISA requirements and processes:In March 2016 the Zimbabwean government relaxed their tourist visa requirements in an effort to boost the tourism sector. The Department of Immigration principal mentioned that all SADC countries would have VISA free access to Zimbabwe and other countries which were in category C of the 3-tier VISA model would move to category B. Some passport holders are now also privileged to the convenience of applying for their VISA’s using an online portal (http://www.herald.co.zw/zim-relaxes-visa-requirements/, 2013). These changes make it easier for outsiders to gain access to Zimbabwe and resultantly give better opportunity to the hotels to be more profitable through increased occupancy and revenue generation.
1. Introduction of VAT:VAT was introduced in mid-January 2015 to be at 15% of foreign accommodation sales. According to Mr Ngwenya, the president for the Zimbabwe Council for Tourism, this would threaten the growth of tourism, the viability of hospitality operators (http://www.herald.co.zw/vat-a-threat-to-tourism-growth/, 2015). The change in this law was passed before the VISA requirements for foreigners were relaxed, and the benefit of having more people with greater accessibility to the country is less than it could have been. From a financial perspective, the introduction of VAT will not only stifle the growth of foreign markets but also make Zimbabwe a less attractive destination, which may leave African Sun as well as its competitors struggling with low foreign revenue.
2. Deteriorating economic growthZimbabwe has been facing numerous economic hardships for the past few years which have inevitably affected the hotel and tourism industry. The growth rate took a slump from 3.9% in 2014 to 0.6% in 2016 (https://tradingeconomics.com/zimbabwe/gdp-growth-annual, 1961-2017). This condition reduced the number of local visitors into the country, and also made it difficult for companies to raise capital and grow their businesses. African Sun was no exception to this, and it still isn’t. http://allafrica.com/stories/201606240438.html, June 2016). There remains excess capacity for new entrants to penetrate the hospitality market and succeed. The increase in the number of arrivals into the country did not result in increased occupancy. Most people were visiting friends and family and therefore had no need to make use of the hotel rooms available to them (2015 Annual Tourism Trends Statistics Report ). From that perspective, it would be debatable whether the increase in competition will yield more returns in this case. In a recent article, the BCC economic development officer, Brian Hlongwane, mentioned that there is a lot of opportunity for Zimbabwe’s second largest city, Bulawayo, to expand its hospitality industry by building more hotels, conferencing facilities and especially a five-star hotel, seeing that the highest rated hotel within the region is a three-star. He also mentioned that there are sites which have been set aside for the purpose of this development (https://www.newsday.co.zw/2017/08/bcc-calls-investment-citys-hospitality-industry/, August 2017). This too would pose a threat to African Sun as there is capacity for new and better players to establish themselves within the region, as they respond to the call from Brian Hlongwane. There are a number of factors that threaten the emergence of competitors in the hospitality business as well as any other for that matter. Issues like the indigenization law and hyperinflation are two of the main factors that are considered by outside investors. Local entrants are restrained by the weak economic growth rate, shortages of cash and lack of sound financial systems to aid in the development of new business (The Irish Times, May 2015). This industry requires a great amount of capital injection towards infrastructure, furnishings, buildings and even staff. All these act as barriers to new entrants, as well as deterrents of growth for existing operators like African Sun. http://valuationacademy.com/threat-of-substitute-products-or-services/, 2010-2017). African Sun is threatened by local consumers’ options of staying at a friends or relatives house while on travel. Other customers coming from outside the country at times opt to rent a house for the duration of their stay. This is done in place of spending money on a hotel room so as to save a little more of the limited cash resource which is available in the country (2015 Annual Tourism Trends Statistics Report). In terms of conferencing services, a substitute which has become popular in the recent past is that of video conferencing. The ICT developments all over the world are moving fast, making it easier for people to collaborate and have meetings virtually as opposed to meeting in person and resultantly spending on hotel stays.
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