Table of Contents

List of tables................................................................................................................................2

Executive summary.....................................................................................................................2

Introduction to the rivalries.........................................................................................................3

Financial performance................................................................................................................3

Ratio Analysis.............................................................................................................................4

Profitability Ratios......................................................................................................................4

Gross profit margin ratio.........................................................................................................5

What are the ways to improve the gross profit margin?.........................................................7

Net profit margin.....................................................................................................................7

How to improve the net profit margin ratio?........................................................................10

Liquidity ratios..........................................................................................................................11

Current ratio..........................................................................................................................11

How to improve the current ratio?........................................................................................13

Acid test ratio............................................................................................................................14

How to improve the Acid test ratio?.....................................................................................16

Working capital ratio................................................................................................................16

How to improve the working capital performance?.............................................................18

Which is the best competitor?...................................................................................................19

Conclusion................................................................................................................................19

References.................................................................................................................................19

1
List of tables

Table 1:GPM of dolphin hotels plc.............................................................................................5

Table 2:GPM of eden hotel lanka plc.........................................................................................5

Table 3:NPM of Dolphin hotels plc............................................................................................8

Table 4:NPM of Eden hotel lanka plc.........................................................................................8

Table 5:Current ratio of Dolphin hotels plc..............................................................................11

Table 6:Current ratio of Eden hotel lanka plc...........................................................................12

Table 7:Acid test ratio of Dolphin hotels plc............................................................................14

Table 8:Acid test ratio of eden hotel lanka plc.........................................................................14

Table 9:Working capital ratio of Dolphin hotels plc................................................................16

Table 10:Working capital ratio of eden hotel lanka plc............................................................17

Executive summary

In order to complete this assignment, we will select two companies trading on the Colombo

Stock Exchange that have been competitors for many years. This section will analyze their

individual financial performance and market standing. In order to do this, we will analyze

their financial data and statements from the past four years and calculate key ratios from

which important decisions can be made in the future. Our analysis of these metrics and ratios

will allow us to highlight each organization's strengths and weaknesses and provide

recommendations for improvement. The next step is to determine whether the company has

fared better overall by presenting evidence that backs up our claim (exchange, 2022).

2
Introduction to the rivalries

As a company, Dolphin Hotels PLC runs a hotel for guests. The Company's hotel in Waikkal,

called Club Hotel Dolphin, has around 100 rooms and 50 bungalows that are owned and

operated by the company. The firm's main base of business is Sri Lanka (markets.ft, 2022).

Hotel business is what Eden Hotel Lanka PLC does. The Company is in the hotel business

through its subsidiaries Eden Hotel Lanka PLC, Dickwella Resorts (Pvt) Ltd, and Bodufaru

Beach Resorts (Pvt) Ltd. It is the company's responsibility to run the luxurious Eden Resort

and Spa. Kalowamodara, Aluthgama is managed by Eden Hotel Lanka PLC. Batheegama is

home to Dickwella Resorts (Pvt) Ltd. There are resorts run by Bodufaru Beach Resorts (Pvt)

Ltd to be found in the Maldives. Palm Garden Hotels PLC is the Company's direct parent.

Lanka ORIX Leasing Company PLC is the Company's ultimate parent company and

controlling party (markets.ft, 2022).

Financial performance

The Financial Position of an Organization can be determined by examining its Statement of

Financial Position (SOFP). This is one of the most important financial statements because it

details the company's asset, liability, and equity positions. In order to evaluate and verify an

entity's performance, it is crucial to do a ratio analysis, which we will discuss in further depth

below. After reviewing financial accounts, investors calculate a number of ratios to gain

insight into and value for a business. The good news is that conducting a financial analysis of

a company is not as challenging as it would first appear. The program evaluation review

technique (PERT) is a technique used in project management that provides a graphical

representation of the project schedule.

3
Ratio Analysis

Financial statement ratio analysis is a typical method employed by many companies to

confirm their financial health. This evaluation is based on the following ratios: Measures of

financial performance include the net profit margin, gross profit margin, return on capital

employed, acid test ratio, debt to equity ratio, working capital ratio, and earnings per share

ratio. When combined, these ratios provide a more comprehensive analysis of a business's

financial health.

The financial statements of firms that may be deemed of Significant Importance may be

analyzed using a number of different ratios in order to determine whether or not they

represent a good investment opportunity. The ratios of gearing, profitability, liquidity, and

efficiency are some examples. Ratio analysis is the process of analyzing relationships between

different financial metrics included in a company's financial statements. Analysts from

outside the organization use them to assess a variety of factors, including the company's

financial health.

Profitability Ratios

Profitability ratios are used by financial analysts and investors to evaluate a company's

profitability in relation to key metrics such as revenue, assets, expenses, and equity. They

reveal the efficiency with which a corporation converts its assets into shareholder value.

It's common practice for organizations to strive for a higher ratio or value, as this usually

indicates greater profitability and cash flow. The ratios are most informative when compared

to similar firms or to historical norms. The analysis that follows looks at the most popular

profitability ratios. Revenue to the cost of goods sold ratio, operating expense ratio, asset

turnover ratio, and shareholder equity to sales ratio are some of the most common financial

4
ratios used by organizations to evaluate their profitability and the efficiency with which they

make profits. Three of the most essential profitability statistics are the gross profit margin, the

net profit margin, and the return on capital utilized (ROCE). The profitability ratio is one of

the most important metrics utilized in any company. And if you look at the data carefully, you

may find that they are an effective tool for making choices.

Gross profit margin ratio

Formula = (Gross profit/Sales) *100

Table 1:GPM of dolphin hotels plc

Dolphin hotels plc

Year Working GPM

2017 634,901,145/ 72.3%

877,784,032*100

2018 701,749,107/ 93.6%

952,909,756*100

2019 508,306,501/ 69.8%

728,502,170*100

2020 267,377,391/ 76.45%

349,728,671*100

Table 2:GPM of eden hotel lanka plc

Eden hotel Lanka plc

Year Working GPM

2017 1,073,863,962/ 76.8%

1,397,419,526*100

2018 1,108,101,287/ 77.1%

5
 1,436,557,330*100

2019 816,965,088/ 73.7%

1,108,258,744*100

2020 556,368,595/ 74%

751,343,531*100

From here, we can compare and contrast the two companies gross profit margins. The gross

profit margin measures the profitability of a company relative to its total sales. This represents

the net profit of the company after all expenses related to producing the goods or providing

the services have been deducted. A high gross profit margin ratio indicates that this strategy

can still generate net profits after accounting for operating costs, fixed costs, dividends, and

depreciation. Conversely, a low-profit margin is an indication of a high cost of goods sold,

which may result from inefficient purchasing practices, low selling prices, low sales, intense

market competition, or insufficient sales and marketing initiatives (BLOOMENTHAL, 2021).

It's impressive how much of a gross profit margin dolphin hotel plc makes. It's because

they've done something to ensure their gross profit margins stay above the 70% range. As a

result, their income is 7 times as much as their expenditures. Therefore, after deducting the

cost of sales from the revenues of the company, they have sufficient profits to cover the

Expenses. A higher gross profit margin can help a business turn a profit, provided that the

costs of doing business are kept in check. Investors are more likely to put money into a

company with a higher gross profit. One thing to keep a watch on is their gross profit margin

ratio, which appears to be on the decline based on the data presented in the preceding table.

The ratio has dropped by over 2.5% in that time frame, which explains why.

6
From 2017 to 2020, Eden hotel PLC's gross profit margin fell each year. The 2020 gross

profit margin is projected to be 74%, a drop of 5.5 percentage points from 2017. A drop in

sales could have this effect on a business in a given year. A review of the income statement

reveals a precipitous decline in sales from 2019's $3,043,709,078 to 2020's $2,626,394,467.

Therefore, selling expenses have gone down. Although this may have gone down, the

enormous increase in sales means that the gross profit remains negative.

What are the ways to improve the gross profit margin?

Increase your selling price while maintaining your current selling price of products. For every

dollar you add to your selling price that doesn't find its way into your cost of goods sold,

you'll see a corresponding increase in your gross profit margin. Before implementing the price

increase, you should assess how big of an increase may be expected by calculating the gross

profit margin at the new price and comparing it to the old margin.

Profitability Increase your sales volume without sacrificing price or increasing your cost of

goods sold per item. Since the fixed manufacturing cost per unit drops as production volume

increases, increasing sales volume can reduce the cost of products sold. Higher gross profit

margins result from higher sales and lower cost of goods sold per unit.

Decrease your COGS (cost of goods sold) without raising your selling price. When product

costs go down, the gross profit margin goes up. Finding cheaper suppliers, buying cheaper

raw materials, employing labor-saving technology, and outsourcing are all ways to reduce the

cost of supplied commodities. Remember that the larger the difference between sales and the

cost of products sold, the larger the gross profit margin will be.

Net profit margin

Formula = (Gross profit/Sales) *100

7
Table 3:NPM of Dolphin hotels plc
Dolphin hotels plc

Year Working NPM

2017 148,976,457/ 16.97%

877,784,032*100

2018 147,177,831/ 15.4%

952,909,756*100

2019 44,485,478/ 6.1%

728,502,170*100

2020 -33,225,114/ -9.5%

349,728,671*100

Table 4:NPM of Eden hotel lanka plc

Eden hotel Lanka plc

Year Working NPM

2017 -773,952,954/ -55%

1,397,419,526*100

2018 -1,231,301,098/ -85%

1,436,557,330*100

2019 -1,568,938,458/ -141%

1,108,258,744*100

2020 -1,610,916,317/ -214%

751,343,531*100

8
Simply said, net profit margin (or net margin) is the amount of profit made relative to sales.

The net profit margin is the amount of money made after all expenses have been deducted

from the income of a company or division. Although it can be expressed as a decimal, the net

profit margin is more commonly shown as a percentage. One way to evaluate a business is by

looking at its net profit margin, which is the percentage of revenue that is turned into profit

(MURPHY, 2022).

Profit margins at plc have been progressively falling, reaching a new low of -9.5% in 2019

compared to a positive net profit margin of -55 percent in 2017. This demonstrates the

company's ongoing struggle to control its operating and selling expenses in line with its

revenues. Therefore, after accounting for all charges and expenditures related to sales, the

company's net profit is a loss. Since the company is losing money on a regular basis, this

could spell the end for it. More than 17.2 percentage points had been slashed from Eden hotel

Lanka plc's income. The company's profits have dropped while its expenses have stayed

steady.

Our estimates put Dolphin hotels plc’s net profit margin for 2020 at -9.5%, a record low given

that it was positive in the prior year at 6.1%. According to these numbers, the corporation is

having trouble keeping its expenses and sales spending in check with its revenues. After

factoring in all expenses related to sales, the company's net profit drops to a loss. The

likelihood of a business going bankrupt grows when regular operations are unable to generate

sufficient money. revenue has dropped by over 40% from the 2019 fiscal year, providing

evidence of this trend. As a result, the company's profit margin has shrunk while expenses

have remained relatively stable. They may also be struggling because of the losses they've

incurred during the past two fiscal years. The fundamental cause of this is that despite rising

prices and sales totals, their income has not increased. Therefore, they experienced a financial

9
loss. If you want to increase your company's net profit margin, try using the steps outlined

below.

How to improve the net profit margin ratio?

A company's net margin might improve if it sells more of its products or services or charges

more for them.

In order to increase their profit margin, firms often look for ways to reduce expenses (e.g.,

finding cheaper sources for raw materials).

Reduce the costs of utilities by 1) To help you reduce your utility bills, consider these

suggestions:

Turn off electronics that are left on standby overnight to save electricity.

Fix any dripping faucets or low-flow toilets you want to install in the office to reduce water

use.

Reduce the thermostat by 7 to 10 degrees in the evenings and on weekends.

Reduce the need for employees to put in extra time and thereby reduce labor expenditures.

Due to the higher cost of paying employees for overtime hours worked, it is preferable to

schedule workers for only the time they are actually needed.

Before adding new people to the payroll, make sure the current staff can handle the workload.

A meeting should be called to discuss any additional tasks and identify who is available to

take them on.

Hire freelance workers whenever possible. There is a lot of success in outsourcing tasks like

data entry, software development, and event promotion.

10
Third, finding ways to lower operating expenses, which could be greatly inflated by

overpriced vendors. You can possibly solve this by seeing if you can save money by

purchasing often used items in large quantities.

Inquire with your vendors about early payment discounts.

Find more cost-effective methods of handling your administrative tasks. Automation and

outsourcing of some routine tasks using software like Oracle or Zapier might help free up

workers for more important tasks (taluspay.com, n.d.).

Liquidity ratios

Businesses can gauge their ability to pay off short-term debts as they come due by using

liquidity ratios. Liquidity ratios encompass two primary categories of ratios. Ratios like the

"acid test" and "current" are two such examples.

A company's ability to meet its short-term financial obligations can be measured using

liquidity ratios. Liquidity ratios are commonly used by potential creditors and lenders to

decide whether or not to extend credit or debt to firms. These ratios compare the number of

current liabilities listed on a corporation's most recent balance sheet to the number of liquid

assets the company possesses. How well a corporation meets its deadlines is shown by this

ratio.

Current ratio

Formula = Current assets / Current liabilities

Table 5:Current ratio of Dolphin hotels plc

Dolphin hotels plc

Year Working Current ratio

11
 2017 373,999,887/ 303,623,379 1.23:1

2018 1,038,234,153/ 304,344,886 3.4:1

2019 329,679,738/ 240,682,907 1.36:1

2020 335,652,944/ 249,207,201 1.35:1

Table 6:Current ratio of Eden hotel lanka plc

Eden hotel Lanka plc

Year Working Current ratio

2017 1,606,411,604/ 0.219:1

7,330,122,454

2018 2,018,019,607/ 0.23:1

8,915,422,669

2019 2,639,763,780/ 0.26:1

10,091,485,154

2020 2,946,737,313/ 0.34:1

8,565,383,634

A company's ability to meet its short-term obligations is quantified by looking at its current

ratio. The current ratio is a useful indicator of a company's liquidity and ability to pay back its

short-term debt (Debts that fall within one year).

The current ratio measures a company's short-term liquidity by comparing its current assets to

its current liabilities. The ability of a business to make profits is a key factor in determining its

solvency. It is widely used as a proxy for a company's general financial health.

It depends on the sector, but a ratio between 1.5 and 3 is typically thought to be optimal. If the

ratio is less than 1, the company may not be in a dire financial straits as long as it is able to

12
raise additional capital. If the ratio is larger than 3, it suggests that the company is not making

efficient use of or managing its working capital and current assets.

Dolphin hotels Plc. has improved its current ratio from 1.27:1 to 1.35:1 over the past four

years. This is not adequate in order to satisfy the required threshold of 2:1. The corporation

will be unable to pay its short-term debts if it does not have sufficient liquid assets on hand.

Consequently, vendors may experience difficulties meeting their credit terms, which could

have an adverse effect on the business's relationship with those vendors. In addition, the

company may have trouble paying its short-term commitments, such as bank overdrafts, and

may go bankrupt if it does not. So, the bank's relationship with Dolphins plc would become

tainted. Even though the current ratio of 1.5:1 is sufficient to deal with improbable situations,

it is preferable to keep a 2:1 ratio.

It can be seen from the company's historical current ratio that Eden hotel Lanka plc has

routinely operated with a current ratio of zero digits. It all makes sense now. It would appear

that they are having problems turning their liquid assets into cash rapidly enough to meet their

diminishing current liabilities. This has left the company unable to pay its bills, both past due

and those coming due soon. As a result, the company's standing with its suppliers could

deteriorate to the point that it can't keep its credit agreement with them. An increase in the

likelihood of failing to meet short-term obligations and repaying debt arises when using

financial tools like bank overdrafts. This would have a negative impact on Eden hotel Lanka

plc's bottom line.

How to improve the current ratio?

Liquidity and the current ratio can be improved by delaying the payment of any necessary

capital expenditures, paying off any outstanding term loans, and reducing the impact of

individual demands on the business.

13
Paying down existing debt by selling off underperforming assets (e.g., real estate)

Acid test ratio

Formula = Current assets-closing stock/ Current liabilities

Table 7:Acid test ratio of Dolphin hotels plc

Dolphin hotels plc

Year Working Acid test ratio

2017 373,999,887-13,033,363/ 1.2:1

303,623,379

2018 1,038,234,153-18,352,696/ 3.35:1

304,344,886

2019 329,679,738-20,649,157/ 1.28:1

240,682,907

2020 335,652,944-18,638,654/ 1.27:1

249,207,201

Table 8:Acid test ratio of eden hotel lanka plc

Eden hotel Lanka plc

Year Working Acid test ratio

2017 1,606,411,604-36,629,044/ 0.214:1

7,330,122,454

2018 2,018,019,607-38,309,159/ 0.22:1

8,915,422,669

2019 2,639,763,780-32,952,839/ 0.26:1

10,091,485,154

2020 2,946,737,313-62,335,894/ 0.34:1

14
 8,565,383,634

Since inventories are notoriously illiquid as a current asset, the acid test ratio was developed

to account for this fact. The Quick ratio was developed to facilitate the rapid transformation of

stock into cash flows for investors and other interested parties. Its findings are trustworthy

indicators from which to extrapolate meaningful conclusions. The acid-test ratio compares a

company's current assets to its current liabilities and provides insight into its liquidity (ATR).

The quick ratio solely considers current assets that can be turned into cash within the next 90

days (ROSS, 2022).

There won't be much of a change in the Acid test ratio for Dolphin hotels Plc over the next

four years compared to 2017. The ratio of current to resistance is always 1.1:1, as evidenced

by the graph. Standard practice in the business world uses a ratio of 1.5:1. The corporation is

clearly having trouble meeting its short-term debt obligations if the data are any indication.

This can be the result of insufficient liquid assets or an inability to minimize short-term debt.

Therefore, the following actions are recommended for the organization to take in order to

improve its current ratio. Noting that they want to raise the acid test ratio to 1.35:1 by the end

of the fiscal year 2020 raises hopes that the ratio will continue to rise.

On the other hand, the Acid Test Ratio needs to be at least 1:1. An unfavorable Acid test ratio

has afflicted Eden hotel Lanka Plc for the preceding four years. The fact that they paid off

their short-term loans with their closing inventory balance suggests that they have been doing

so. This suggests that the current ratio, which seems to take the inventory balance into

account, may be deceiving investors. Because of this, the chance that the business will fail as

a result of its inability to pay back short-term loans has dropped to an all-time low of 0.428:1.

Theoretically, these loans may include trade creditors and other financial institutions. In other

15
words, during the 2019 fiscal year, interest-bearing loans and borrowings increased by 18.5

percent. Comparing the financial year 2018 to the present year, the current asset balance has

decreased by 21.3%.

How to improve the Acid test ratio?

Pay off all of your obligations as soon as possible to increase your acid test ratio. Your

company will gain from maintaining a low acid test ratio for current obligations. It may be

beneficial to pay off your obligations quickly and shorten the term of your loans.

You must boost sales in order to boost inventory turnover and cash on hand. Increased

revenue and inventory turnover will result in an improvement in short-term cash flow. Being

engaged in the market results in selling items for a profit. More clients will boost your acid-

to-base ratio.

You'll notice an improvement in the accuracy of your acid ratio test if you can speed up the

process of collecting accounts receivable.

As a result, it is possible to shorten the time needed to collect payment from a client. To

ensure the liquidity of your accounts receivable, invoice terms should be stated as clear as

feasible as soon as possible. Actively gather.

Working capital ratio

Formula = Current assets - Current liabilities

Table 9:Working capital ratio of Dolphin hotels plc

Dolphin hotels plc

Year Working Working capital

2017 373,999,887- 303,623,379 70376508

16
 2018 1,038,234,153- 304,344,886 733889267

2019 329,679,738- 240,682,907 88996831

2020 335,652,944- 249,207,201 86445743

Table 10:Working capital ratio of eden hotel lanka plc

Eden hotel Lanka plc

Year Working Working capital

2017 1,606,411,604- -5723710850

7,330,122,454

2018 2,018,019,607- -6897403062

8,915,422,669

2019 2,639,763,780- -7451721374

10,091,485,154

2020 2,946,737,313- -5618646321

8,565,383,634

Working capital (also known as net working capital) is the difference between current assets

and current liabilities, or the difference between current assets and current liabilities. It's a

typical indicator for determining the immediate health of a business.

The sort of industry a firm is in typically affects how much working capital it has. The

lengthening of the manufacturing cycle raises the amount of working capital needed. Retail

enterprises that deal with thousands of consumers each day may therefore be able to obtain

short-term finance much more swiftly and hence need less working capital

The gap between current assets and current liabilities, or the difference between current assets

and current liabilities, is known as working capital (sometimes known as net working capital).

It's a typical sign for figuring out how a business is doing right now.
17
The amount of working capital a company has is often influenced by the type of industry it is

in. The amount of working capital required rises as the manufacturing cycle lengthens.

Therefore, retail businesses that deal with thousands of customers every day might be able to

get short-term financing considerably more quickly and thus need less working capital

(FERNANDO, 2022).

However, Dolphin hotels plc has been able to keep a positive working capital balance for the

past four years due to competent management of its working capital. From 2017 to 2020,

working capital has increased by 75%, according to projections. Therefore, the corporation

would face no problems in its day-to-day operations.

The working capital deficit for Eden hotel Lanka plc during the past four years is -

5618646321 rupees. They are having trouble meeting the expectations of their creditors and

repaying their short-term debt, such as their Bank OD and other short-term borrowings, which

could lead to insolvency.

How to improve the working capital performance?

in a number of distinct ways, including by generating fresh income or by issuing common or

preferred stock in exchange for cash, standard or favored

Entering into a long-term financial commitment

Instead of taking on new short-term debt, they take on new long-term debt.

Withdrawing funds from savings and investments

Working capital can also be increased by making sure that the company's current assets are

turned into cash as promptly as possible. The company's cash flow and liquidity can be

improved, for example, by better managing inventory and accounts receivable. For the

corporation, this means more available funds. The company will profit from having more cash

18
on hand if it can negotiate better credit terms with its vendors (even though the amount of

working capital will not change).

Which is the best competitor?

Based on our thorough evaluations, Dolphin hotels plc stands out as the most successful firm.

Their overall ratios are higher than those of their rivals. Eden hotel Lanka Plc has made great

strides in the last few years despite some rocky patches, as seen by their projected financial

results for the year 2020.

Conclusion

When deciding whether or not to put money into a business, it's important to look at more

than just the numbers. When deciding which businesses to invest in, non-financial

considerations are crucial for businesses. Financial outcomes aren't the only thing that might

matter to a business, and there are plenty of other factors to consider. However, in the quest

for educational success, many times it is the non-monetary factors that are neglected.

It is also crucial to look at the company's goodwill to ensure that it is well-liked and respected

by the public prior to the purchase. There are also more factors to think about, such as the

company's location, clientele, market share, and employee satisfaction levels.

References

BLOOMENTHAL, A., 2021. Gross Profit Margin. [Online]

Available at: https://www.investopedia.com/terms/g/gross_profit_margin.asp

[Accessed 2022].

19
exchange, C. S., 2022. Colombo Stock Exchange. [Online]

Available at: https://www.cse.lk/

[Accessed 2022].

FERNANDO, J., 2022. Working Capital. [Online]

Available at: https://www.investopedia.com/terms/w/workingcapital.asp#:~:text=Working

%20capital%2C%20also%20known%20as,as%20accounts%20payable%20and%20debts.

[Accessed 17 07 2022].

markets.ft, 2022. About the comapany. [Online]

Available at: https://markets.ft.com/data/equities/tearsheet/profile?s=STAF.N0000:CSE

[Accessed 19 8 2022].

markets.ft, 2022. About the company. [Online]

Available at: https://markets.ft.com/data/equities/tearsheet/profile?s=EDEN.N0000:CSE

[Accessed 19 08 2022].

MURPHY, C. B., 2022. Net Profit Margin. [Online]

Available at: https://www.investopedia.com/terms/n/net_margin.asp

[Accessed 16 07 2022].

ROSS, S., 2022. How Is the Acid-Test Ratio Calculated?. [Online]

Available at: https://www.investopedia.com/ask/answers/011315/how-do-i-calculate-acid-

test-ratio-balance-sheet.asp#:~:text=The%20acid%2Dtest%20ratio%20(ATR,within

%2090%20days%20or%20less.

[Accessed 16 07 2022].

taluspay.com, n.d. 5 Ways to Increase Your Profit Margin. [Online]

Available at: https://taluspay.com/blog/5-ways-to-increase-your-profit-margin/

[Accessed 2022].

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