Leisure companies fail health check
By Andrew Sangster
How do you compare the performance of leisure companies? Looking at the figures in annual reports and applying basic accounting ratios gives a broad indication of how well a company is competing with its peers.
A favoured ratio is return on capital, calculated from operating profits as a percentage of capital employed. Using the erstwhile combatants Forte and Granada gives some startling contrasts, as shown in the table.
Granada's figures for the year ended 30 September 1995 show a return on capital of 34% (operating profits of £388m from capital employed of £1.13b). This contrasts with the 5.8% return quoted in Forte's defence document.
But this huge difference conceals as much as it reveals. The problems that can arise by relying on return on capital becomes clear if contract caterer Compass is considered, which on its consolidated balance sheet has a negative net worth.
Analysts in the City calculate their own rate of return using the share price of a company as a guide to its value rather than relying on the balance sheet figures.
Interest cover, which is the number of times the net interest payments can be met from operating profits, is used to judge the ability of a company to service its debts.
On this measure, Granada can again claim superiority over Forte, with cover of 10.5 times, compared with Forte's two times (before the takeover).
The hotel and leisure sector as a whole has had a volatile time during the 1990s, according to the CCN Group's Corporate Health Check, which uses a variety of ratios to assess performance.
The study blames the topsy-turvy nature of the economic cycle and the impact on tourism of the up-and-down exchange rate for the woes of UK leisure businesses.
And the bad news for hospitality is that the recovery that seemed to be emerging during early 1995 has been punctured, says CCN.
Looking at return on capital shows a declining performance between the second quarter of 1995 and the third quarter. The average ratio for leisure companies fell from 8.5% to 6.6%.
The report, which compares the audited final reports of the UK's top 1,000 companies, shows that return on capital is significantly poorer for leisure companies.
The average return on capital of 11.4% for all companies is almost double the 6.6% for leisure companies. In fact, on every measure, the performance of leisure companies is worse than for the average of all UK companies.
The CCN Corporate Health Check costs £175. Tel: 0115 934 4556.
