Introduction

The Pegasus Hotel of Jamaica Limited is a Jamaican based hotel that provides

accommodation for both business and leisure travelers. It is a registered company under

the Jamaica Stock Exchange.

Like many other hotels within the tourism sector Pegasus has been experiencing

some challenges and downturns in revenues. In recent years the hotel has undergone

major renovations and refurbishing in an attempt to improve quality and increase its

revenues.

An in-depth analysis of Pegasus Hotel of Jamaica Limited has been conducted to

assess the financial performance of the company between the period 2008 – 2010 and its

feasibility for a potential investor.

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Purpose and limitations of Ratio Analysis

Ratio analysis involves examining the relationship between pieces of information

in the financial statements for a given accounting period. The ratios are used to identify

trends over time for one company or to compare two or more companies at one point in

time. From management’s standpoint ratios are useful both as a way to anticipate future

conditions and also as a starting point for planning actions that will influence the future

course of events. Ratios are useful because they summarize much data and put it in a

usable format. They are used to highlight the strengths and weakness of a company

relative to its industry and also used as an early warning system, as a means of

monitoring management as well as a screening tool. Financial statement ratio analysis

focuses on several groups of ratios that each serves different purposes to an entity.

Different stakeholder groups have different needs and tend to focus on different

categories of ratios. Suppliers and short-term lenders are most interested in liquidity

ratios. Liquidity ratios refer to the firm’s ability to meet short-term obligations and they

show the relationship of a company’s cash and other current assets to its current

liabilities. Firms with poor liquidity are more likely to fail and default on their debts

therefore a higher ratio is better but one that is too high may suggest inefficient use of

resources and reduced returns.

The current ratio is also called the working capital ratio, as working capital is the

difference between current assets and current liabilities. This ratio measures the ability of

a company to pay its current obligations using current assets. It provides a margin of

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safety in shrinkage of non-cash current assets and also provides a reserve of liquid funds

against uncertainties and shocks to cash flows. It is calculated by dividing current assets

by current liabilities.

Quick ratio is also called the acid test ratio and is a more stringent test of a

company’s liquidity as it ignores inventory which can take some time to be converted to

cash depending on the length of the company’s operating cycle. The acid test ratio is

calculated by subtracting inventory from current assets divided by current liabilities.

Receivable turnover ratio calculates the number of times in an operating cycle

(normally a year) the company collects its accounts receivable balance. A high turnover

ratio indicates that the company is efficient in the collection of its receivables while days’

sales outstanding show the number of days it takes the company to collect amounts

outstanding. A low figure is desirable but indicates an unduly restrictive credit policy.

Accounts receivable turnover ratio is calculated by sales or credit sales divided by

accounts receivable.

Average collection period also called the days sales outstanding is a variation of

the receivables turnover. It is used to evaluate the effectiveness of a company’s credit and

collection policies. A rule of thumb is the average collection period should not be

significantly greater than a company’s credit term period.

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Inventory turnover ratio measures the average speed that inventories move

through the company. A high ratio may indicate a sign of efficiency, high sales or that the

company is living from hand to mouth, providing little variety to customers and may

sometimes be out of stock. A low ratio may be a sign that the company is holding too

much stock or holding damaged or obsolete stock. It is calculated by dividing the cost of

goods sold by average inventory.

Day's sales on hand also called average days’ inventory on hand is a

variation of the inventory turnover and it calculates the number of day's sales being

carried in inventory. It is calculated by dividing 365 days by the inventory turnover ratio.

Profitability ratios measure a company's operating efficiency, including its ability

to generate a satisfactory income. Profitability is closely linked to its liquidity because

earnings ultimately produce cash flows. Cash flow affects the company's ability to obtain

debt and equity financing. Profitability ratios show the combined effects of liquidity,

asset management and debt on operating results.

The profit margin ratio also known as the operating performance ratio, measures

the company's ability to turn its sales into net income. To evaluate the profit margin, it

must be compared to competitors and industry statistics. A low NPM may indicate that

costs are too high, operations may be inefficient or the company may be heavily in debt

leading to high interest charges. It is calculated by dividing net income by net sales.

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The asset turnover ratio measures how efficiently a company is using its

assets. The turnover value varies by industry. It is calculated by dividing net sales by

average total assets.

The return on assets ratio (ROA) is considered an overall measure of

profitability. It measures how much net income was generated for each $1 of assets the

company has. ROA is a combination of the profit margin ratio and the asset turnover

ratio. This ratio can be derived from multiplying the net profit margin by the assets

turnover ratio.

The return on common stockholders' equity (ROE) measures how much net

income was earned relative to each dollar of common stockholders' equity. It is derived

by dividing net income by average common stockholders' equity or multiplying ROA by

the equity multiplier. This shows that ROE is affected by profit margins, asset use

efficiency and financial leverage.

Solvency ratios are used to measure long-term risk and are of interest to long-

term creditors and stockholders. The debt to total assets ratio calculates the percent

of assets provided by creditors. It is calculated by dividing total debt by total assets. Total

debt is the same as total liabilities.

The times interest earned ratio is an indicator of the company's ability to pay

interest as it comes due. It is calculated by dividing earnings before interest and taxes

(EBIT) by interest expense.

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Market value ratios relate the company’s stock price to the internal performance

of the company. They give an indication of how investors feel about the company’s

future prospects based on its past performance. High ratios indicate good prospects and is

expected if all other ratios are good thus stock prices would be expected to be high.

The price or earning ratio shows how much investors are willing to pay per dollar

of reported profits. A high P/E ratio may indicate that the market expects an increase in

earnings in the future while a low P/E ratio usually indicates poorer growth prospects or

high risk or both.

The payout ratio identifies the percent of net income paid to common

stockholders in the form of cash dividends. It is calculated by dividing cash dividends by

net income.

Another indicator of how a corporation performed is the dividend yield. It

measures the return in cash dividends earned by an investor on one share of the

company's stock. It is calculated by dividing dividends paid per share by the market price

of one common share at the end of the period.

No single ratio or one year figure is sufficient to provide an assessment of a

company’s performance. Financial analysis may indicate that something is wrong, but it

may not identify the specific problem or purpose for example indicating performance or

profitability as well as flexibility or adaptability. Ratios can be used in conjunction with

other supporting ratios and within the context of the industry, remembering the impact of

inflation and size. Inflation can distort a firm’s balance sheet and profits. Sometimes a

company with an industry average can be misleading if the company operates in more

than one industry therefore interpreting the results of your analysis requires a sound

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understanding of the company, the industry and the general economic environment.

Different accounting practices can distort comparisons and seasonal factors may also

distort ratios as different companies often use different accounting procedures for

recording similar items.

Common Size Analysis

Horizontal Analysis

Information is necessary for the prediction of future performance of a company,

the two simplest measurement used to analyze a company’s financial performance

through the use of financial statements are vertically and horizontally. A horizontal

analysis provides you with a way to compare your numbers from one period to the next,

using financial statements from at least two distinct periods. Each line item has an entry

in a current period column and a prior period column. Those two entries are compared to

show both the dollar difference and percentage change between the two periods. Quite

simply, the horizontal analysis is the financial statements of a company of successive

years presented side-by-side. The goal of horizontal analysis is to compare the figures of

the current period with that of the past period. This helps the company and its

shareholders analyze their performance and find out areas of improvement.

Horizontal analysis is done for both income statements and balance sheets. The

figures for the different heads under the income statements and the balance sheets are

placed side-by-side so that the reader can compare the two and understand how the

company is doing. Horizontal analysis is an important part of the financial statements and

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annual reports. It places the facts very simply in front of the shareholder and makes the

job of analyzing the improvements or the lack of it very simple for the shareholder. And

if there is no improvement or in fact a reduction, then the board is compelled to explain

the situation to the shareholder and what they intend to do in the future to fix it.

The main point of performing a horizontal analysis on your financial statements is

to see how things have changed from one period to the next. These changes are called

trends in accounting lingo, and tell a lot about the performance of a company by the

trends in its financial statements. In addition to that, it will help shine a light on numbers

that should have changed by a certain amount but didn't. For example, if your sales

increased by 20 percent you would expect your gross profit to change by a similar

amount

One method of performing a horizontal financial statement analysis compares the

absolute dollar amounts of certain items over a period of time. For example, this method

would compare the actual dollar amount of operating expenses over a period of several

accounting periods. This method is valuable when trying to determine whether a

company is conservative or excessive in spending on certain items. This method also aids

in determining the effects of outside influences on the company, such as increasing gas

prices or a reduction in the cost of materials.

The other method of performing horizontal financial statement analysis compares

the percentage difference in certain items over a period of time. The dollar amount of the

change is converted to a percentage change. For example, a change in operating expenses

from $1,000 in period one to $1,050 in period two would be reported as a 5% increase.

This method is particularly useful when comparing small companies to large companies.

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Trend Analysis

Vertical Analysis

Vertical analysis is a technique of financial statement analysis wherein every

entry under all three major accounting categories: equities, assets and liabilities in a

balance sheet are presented as a part of the total account. It is also known as comparative

analysis or common size analysis which seeks to break down each item in the financial

statements to enable better comparison. A vertical analysis shows you the relationships

among components of one financial statement, measured as percentages. On your balance

sheet, each asset is shown as a percentage of total assets; each liability or equity item is

shown as a percentage of total liabilities and equity. On your statement of profit and loss,

each line item is shown as a percentage of net sales. It expresses each line item on a

single year's financial statement as a percent of one line item which is referred to as a

base amount. The main advantages of vertical analysis are that the balance sheets of

businesses of all sizes can easily be compared. Another benefit of doing a vertical

analysis of financial statements is that it helps to bring to notice any changes in a business

within a year.

Performing vertical analysis of the income statement involves comparing each

income statement item to sales. Each item is then reported as a percentage of sales. For

example, if sales equals $10,000 and operating expenses equals $1,000, then operating

expenses would be reported as 10% of sales. Likewise performing vertical analysis of the

balance sheet involves comparing each balance sheet item to total assets. Each item is

then reported as a percentage of total assets. For example, if cash equals $5,000 and total

assets equals $25,000, then cash would be reported as 20% of total assets.

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A common-size balance sheet allows you to compare your company’s balance

sheet to another company’s balance sheet or to the average for its industry. A common-

size income statement allows you to compare your company’s income statement to

another company’s or to the industry average. In a balance sheet, for example, cash and

other assets are shown as a percentage of the total assets and, in an income statement,

each expense is shown as a percentage of the sales revenue. Financial statements using

this technique are called common size financial statements.

What is the Difference Between Horizontal and Vertical Analysis?

In vertical analysis, every amount in the financial or income statement is

expressed as a percentage of another amount. Thus, in the assets column, after vertical

analysis is done, each value is shown as a percentage of the total value of all assets

combined. These proportional values, when represented, are known as a common-size

balance sheet. Similarly, for income statement, values derived are a percentage of total

sales. The restated values form the common-size income statement. Companies find this

useful for comparing their financial and income statements with other companies or the

industry average.

In horizontal analysis, values on the balance sheet over past years are compared

with each other. For example, stock balance represented on the balance sheet for

December 31 2009, 2008, 2007 and 2006, will be a percentage of the stock amount as on

31 December 2006. Amounts are expressed in percentages and not dollars, indicating an

increase or decrease in value from the base year. All items on the balance sheet and

income statement are compared in this manner. This analysis is also known as trend

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analysis and helps a company to notice change in a particular item over the years as

compared to changes in other items.

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Company Overview

Pegasus Hotels of Jamaica Limited, owners and operators of the Jamaica Pegasus

was incorporated on June 19, 1968. It started out as a joint venture between British

Airways overseas corporation (now British Airways), Trusthouse Forte and the people of

Jamaica through the Jamaica Stock Exchange.

By a management agreement in 1968 the company appointed Forte (Holding)

Limited as manager of the hotel for an initial term of seven (7) years commencing April

15, 1973 and a further fourteen (14) years commencing April 15 1980.

The government of Jamaica agreed in 1976 to purchase the share holdings of

British Airways Associated Companies Limited and Trusthouse Forte International

Limited.

In 1980 the company became a subsidiary of National Hotels and Properties

Limited (wholly owned subsidiary of Urban Development Corporation) who had

acquired 59.8% of the ordinary stock units.

By an agreement in May 1994, Forte (UK) Limited became responsible for the

management of the hotel. However, in 1997 Forte was taken over by Granada Plc and the

hotel was rebranded Le Meridien Jamaica Pegasus. By another agreement in September

1997, Meridien, SA became responsible for the management of the hotel.

Meridien, SA did not seek to renew their contract upon maturity so the board took

the decision for the company, Pegasus Hotels of Jamaica Limited to manage the hotel for

the year 2002/2003 under its brand name The Jamaica Pegasus.

“Kingston’s Preferred Hotel” is the most apt way to describe the Jamaica Pegasus

Hotel. Situated in the financial and business district of the largest English-speaking city

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in the Caribbean, it is within walking distance from many international offices and

embassies, as well as historical sites, cultural centres, shopping areas and restaurants.

This revered landmark in the capital city Kingston, the Pegasus as it is affectionately

called, is seventeen stories high in the heart of New Kingston.

Over the past 37 Years, the Jamaica Pegasus Hotel has earned the enviable

reputation for superb hospitality and accommodation. “Home” to royalties and dignitaries

and celebrities, the hotel is also a constant buzz of activity for local clientele.

Challenges and Successes of Pegasus Hotels of Jamaica from 2008-2010

Challenges of Pegasus in 2008

Due to a fire and hurricane during the year $120 million was invested in repairs

and maintenance.

There was a decrease in net profit from $41,080,000.00 to $39,015,000.00

Successes of Pegasus in 2008

In 2008 Pegasus’s pre-tax profit increased from previous $53,328,000.00 to

$63,178,000.

There was major investment of $133 million on expansion and refurbishing of

fixed assets

Challenges of Pegasus in 2009

Long term debt increased from $45M to $49M

Net Curret Asset decreased from $107 to $24M in part due to a holding of $62M

of government of Jamaica’s indexed bonds due in May 2010 was classified a non-

current asset.

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National Hotels & Properties Limited, the majority shareholder has declared its

intention to offer its entire shareholding for sale

Pegasus reaction to the challenges

Hotel incentives during the next ten years would be used to justify earlier

investments.

Successes of Pegasus in 2009

During the year $117M was invested in fixed assets and a further $43M was

invested in replacements.

The new cooling tower system installed during the year has been a reduction in

the electricity consumption

Net profit increased from 39,015,000.00 to $55,243,000.00

As a result of the ongoing refurbishing project the hotel was granted incentive for

ten years under the Hotel (Incentives) Act (1990).

Challenges of Pegasus in 2010

The Jamaica Pegasus sustained a decrease in profits of $17.2 million from the

previous year’s $55.2 million due to the continued global recession causing

downward adjustments of room rates.

There was an increased competition with an addition of 112 new rooms to

Kingston.

Banqueting revenue also decreased as companies, ministries, government

agencies and individuals reduced expenditure.

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Pegasus’s reaction to these challenges

Stringent cost control initiatives including more energy conservation methods

were introduced.

Successes of Pegasus in 2010

Over the three years period all bedroom floors were now refurbished leading to

$152 million invested in fixed asset.

The hotel’s internet service which was obsolete was upgraded resulting in all

bedrooms, meeting rooms and public area having wireless access.

Corporate Social Responsibility of Pegasus Hotels of Jamaica Limited

While the company places no emphasis or highlights on charity work or corporate

social responsibility in the reports or that of the media, they have however, adopted

Reddies’ Place of Safety for elderly persons and have contributed widely to the home.

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Ratio Analysis

PROFITABILITY RATIO

RATIOS2008%

2009%

2010 %

Net Profit Margin 5.77 4.33 0.86

Gross Profit Margin 60.26 65.53 65.02

Operating Profit 9.14 5.44 1.27

Return on Capital Employed 1.8 1.39 0.28

Return on Total Assets 0.93 0.89 0.15

Profitability ratios measure how well a company is performing by analyzing how

profit was earned relative to sales, total assets and net worth.

Profit Margins Ratio

Net profit margin measures how much of each dollar earned by the company is

translated into profits. A low profit margin indicates a low margin of safety which means

a higher risk that a decline in sales will decrease profits and resulting in a net loss. Net

profit margin is an indicator of how efficient a company is and how well it controls its

costs. The higher the margin is, the more effective the company is in converting revenue

into actual profit.

The Net Profit Margin ratio for Pegasus Hotels of Jamaica Limited declined over

the 3 years ranging from 5.77% to 0.86%. A low net profit margin is an indication of the

company being heavily indebted with high interest rates, the costs are too high and

operations may be inefficient. Pegasus Hotels of Jamaica Limited balance sheet for year

ended 31 March 2010, long term liabilities (loans) had significantly increased over the

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periods. This mainly contributes to the 24% and 80% decrease in the net profit margin for

the same period.

The gross margin gives a good indication of the company’s financial health.

Without an adequate gross margin, a company will be unable to pay its operating and

other expenses. A company with a high gross profit margin could be experiencing high

sales or high prices whilst a low gross profit could mean low sales or high costs or

changes in pricing policies.

The company had a 9% increase in its gross profit margin in 2009 which resulted

from an increase in sales. In 2010 there was a 4% reduction in sales which was reflected

in a slight reduction in the gross profit margin for the company.

Operating profit margin measures what proportion of a company's revenue is left

over, after deducting direct costs and overhead and before taxes and other indirect costs

such as interest. It gives an indication of how much a company makes (before interest and

taxes) on each dollar of sales. Operating margin ratio shows whether the fixed costs are

too high for the production or sales volume. A high or increasing operating margin is

preferred because if the operating margin is increasing, the company is earning more per

dollar of sales.

There were downward trends in operating profit over that the three periods wth

both operating profits and sales declining. In 2010 there was a drastic reduction in

operating profit of 77%. The reduction in operating profit resulted from an increase in

operating expenses.

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Return on Capital Employed

Return on Capital Employed is ratio used to measure the return a company gets

from the capital it invests or employs and whether a company can afford its cost of

capital. A low ROCE indicates inefficiencies, even though a company may have a high

net profit margin. For Pegasus Hotels of Jamaica Limited there were declines in the

ROCE over the periods. This was due to reductions in operating profit over the same

periods.

Return on Total Asset

The Return on Total Assets (ROA) is an indication of how effective the company

is at converting the money invested into net profit. The higher the ROA is, the better,

because the company is earning more money on less investment.

It is evident based on its financials that Pegasus Hotels of Jamaica Limited

management is inefficient at using its assets to generate earnings. For the three years

analyzed the ROA was below 1%. There was a downward trend in ROA with a 83%

decrease in 2010. This was related to a significant reduction in net profit for the period.

This says that the Company’s assets are not converting into enough profit for the

company.

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SHAREHOLDER’S FUND/MARKET VALUE RATIO

RATIOS2008

$2009

$2010

$

Dividend Yield 2.50% 3.33% 2.33%

Earnings per Share 0.32 0.36 0.07

Dividend Cover 1.30 0.90 0.20

Price Earnings 50.00 33.33 214.29

Market to Book Value 0.58 0.38 0.42

These ratios are important to investors and financial managers who are interested

in the market prices of the shares of a company. They indicate how well a company is

performing in relation to the price of its shares and other related items including

dividends and number of shares issued (Wood and Sangster1999). If a company’s

liquidity, asset management, debt management, and profitability ratios are all good, then

its market value ratios will be high, and its stock price will probably be as high as can be

expected (Brigham, 2003).

Dividend Yield

The dividend yield of a company highlights how much a company pays out in

dividends each year relative to its share price. It measures how much return an investor is

getting for each dollar invested in shares in a company.

There was a 30% decrease in the dividend yield for 2010. This was due to a reduction in

the amount of dividends paid per share.

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Earnings per Share

The Earning per Share (EPS) tells an investor how much net profit one share of

the company is producing. The higher this ratio is, the better, because the value of the

share will increase.

Pegasus Hotel of Jamaica Limited EPS plummeted by 80% in 2010. This was due

to the drastic reduction in net profit during the period. In 2010 each share earned $.07

profit.

Dividend Cover

Dividend cover highlights a company's ability to pay ordinary dividends to

shareholders out of profits earned. It shows how many times the ordinary dividend is

covered by the profit available. For example, if a company pays out one quarter of its

profit as dividends, then the Dividend cover ratio is four. The higher the dividend cover

the greater the possibility of earning the dividend.

The Dividend Cover declined over the period. In 2010 the ratio was below 1 at $.07. This

is means that the company was paying the dividends from the previous years retained

earnings.

Price Earnings Ratio

The P/E ratio is a common measure of how expensive a stock is. If P/E ratio is

comparatively low, then either the stock is undervalued or the company's earnings are

thought to be in decline. If it is high, then either the stock is overvalued or the company's

earnings have increased since the last earnings figure was published. However it is

important to note that it is usually not enough to look at the P/E ratio of one company and

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determine its status. Usually, an analyst will look at a company's P/E ratio compared to

the industry the company is in, the sector the company is in, as well as the overall market.

Pegasus Hotels of Jamaica Limited showed fluctuations in its P/E ratio for the

period 2008-20010. In 2009 there was a 34% decrease in the P/E ratio; however in 2010

there was a drastic 542% increase. This increase is an indication that the stock was

overvalued as this does not reflect the financial position of the company. There was a

significant reduction in its retained earnings during the period.

Market to Book Value

Market-to-Book Ratio, measures how much a company is worth at present, in

comparison with the amount of capital invested by current and past shareholders into it.

This ratio is used by "value-based investors" to help to identify undervalued stocks.

Companies with relatively high rates of return on equity generally sell at higher multiples

of book value than those with low returns.

Since the M/B ratio does not exceeds 1.0, means that investors are not willing to

pay more than the book values. This situation occurs because asset values, as reported by

accountants on balance sheets, have focused on how factors such as inflation or

“goodwill” affect the market price.

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ASSET MANAGEMENT RATIOS

RATIOS2008 2009 2010

Debtor Turnover 7.51 9.34 8.24Days Sales Outstanding / Debt Collection Period (days) 47.94 38.53 43.69

Stock Turnover 8.48 10.75 8.44

Stock Period (days) 42.44 33.48 42.67Net Asset Turnover

0.15 0.20 0.17

Asset management ratios measure the effective use of resources to generate sales.

Also called Activity or Turnover Ratios, they provide detail about the success of a firm’s

credit policy and inventory management.

Debt Turnover

Debtor Turnover ratio shows 'the relation between net credit sales and average

accounts receivable of the year. That is, the speed of debt collection of a firm, the

efficiency of the concern to collect the amount due from debtors, or the number of times

average debtors are turned over during a year.' A high debtors turnover is more ideal than

a low debtors turnover as the higher ratio proves that debts are being collected very

quickly, whereas a low ratio shows slower collection of trade debtors. Pegasus' debtor

turnover ratio over the three year period shows better cash flow adequacy from debtors in

2009 versus 2008, as more debts were collected. In 2010 there was a relatively more

inefficient collection of debts compared to 2009, which may have been the result of an

increase in default of debtors between both years.

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Days Sales Outstanding / Debt Collection Period (days)

The day’s sales outstanding ratio (DSO) “gives an indication of how long it takes

to collect accounts receivables, comparing outstanding receivables to average daily sales.

It has to do with the rapidity or slowness with which the money is collected from

debtors.”

For the debt collection period, the shorter it is the better whilst a longer period

means there will be more chances of bad debt. The debt collection period ratio for

Pegasus was lowest in 2009 – indication of more receivables being recovered during that

year as against 2010 (see note 3 of Pegasus' notes to financial statements). The

expectation of recovering additional cash (credit risk) was better in 2009 versus 2008 but

less favorable in 2010 in contrast to 2009. The hotel should be a bit more stringent with

its credit policy so as to shorten its DSO and in effect have more cash available to either

reinvest in its operations or to meet unexpected obligations.

Stock Turnover Ratio

The stock turnover ratio, 'also called the inventory turnover ratio, is a relationship

between cost of goods sold and average stock. Inventory is a part of the concept of

working capital. This ratio guides stock policy and tells how fast the stock is moving

through the firm and being sold. This helps a business to meet the demands of its

customers by maintaining a proper amount of stock, which will lead to a reasonable

margin of profit.' A faster use of stock is denoted by a higher ratio while correspondingly

a lower ratio means slower use of stock, and in the latter the effect is customers demand

are not being met or may have fallen, and working capital is tied up, thus profit margin is

reduced.

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For Pegasus, its net profit margin fell in 2009 in spite of an increase in its stock

turnover ratio. This can be explained perhaps by the fact that expenses may have risen in

2009 versus 2008 which negated the improved stock turnover of 2009. In 2010 the stock

turnover ratio fell from 2009, indication of a fall in demand, a tying up of working

capital, and hence a contributing factor in Pegasus' fall in net profit margin.

Stock period has to do with how long or the average number of days stock (raw

materials) is held by a business before it is transformed into sales. For Pegasus the stock

period ratio fell in 2009 from 2008, as there was more stock held but even more direct

expenses accumulated. The direct expenses fell in 2010, inventory rose and the stock

period ratio rose that year. From the period, it can be seen that Pegasus is holding stock

for almost six to seven weeks and is slow to generate sales from its stock. This long time

taken to sell and the increasing inventory numbers may be reflecting a drop in demand

perhaps due to the challenging economic environment in the aftermath of the recession of

2008-2010. 2009 was the best for sales or revenue over the period but the rising stock

ratio numbers are symbolic of a struggle to get sales especially in 2010.

Net Asset Turnover Ratio

The Net Asset Turnover ratio “measures the ability of management to utilize the

net assets of the business to generate sales revenue. A well-managed business will be

making the assets work hard for the business by minimizing idle time for machines and

equipment. Too high a ratio may suggest over-trading, that is too much sales revenue

with too little investment. Too low a ratio may suggest under-trading and the inefficient

management of resources.” The Net Asset Turnover figures for Pegasus over the period

are very low which represents some challenges to get sales and/or inefficient

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management. Total assets rose for 2009 and 2010 but at a slower rate than the

company’s rise in liabilities (current and non-current). Recalling the length of time stock

is held prior to sales and the growing amount of stock, it can be inferred that there is

some idle time for equipment and machines and so Pegasus' assets are not fully utilized in

getting sales revenue.

DEBT MANAGEMENT RATIO

RATIOS2008%

2009%

2010 %

Times Interest Covered (times) 8.74 4.52 0.74

Cash Flow Interest (times) 16.75 14.25 10.37

Operating Cash Flow to Sales 12.90 13.54 14.31

Operating Cash Flow to Net Profit 223.69 312.40 1672.2

Gearing Ratio 2.25 2.35 3.36

Debt Ratio 26.82 27.15 29.58

Debt to Equity 36.65 37.27 42.00

Debt Management Ratios shows the company’s capital structure of debt and measures the

level of financial risk.

Interest Covered Ratio

This ratio is used to determine how easily a company can service its loan interest.

The lower the ratio, the more the company is burdened by debt expense. When a

company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may

be questionable. An interest coverage ratio below 1 indicates the company is not

generating sufficient revenues to satisfy interest expenses.

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During the period 2008 – 2010 it was evident that Pegasus Hotels of Jamaica

Limited was having difficulties serving its loan interest due to reductions in its operating

profit and increases in its interest charges. In 2010 the company was showing a ratio

below 1 due to a reduction in operating profit and increases in interest expenses. This

indicates it was not generating sufficient revenues to meet its interest expenses.

Operating Cash Flow to Sales Ratio

This ratio measures the firm's ability to convert sales into cash. A high number

means the firm will be able to grow because it has sufficient cash flow to finance

additional production, a low number indicates the opposite.

Pegasus showed a steady increase in the Operating Cash Flow to Sales Ratio over

the periods, resulting from parallel movements in both operating profits and sales.

Gearing, Debt and Debt to Equity

Financial leverage is determined using three ratios debt ratio, debt to equity ratio

and the gearing ratio. These ratios shows the degree to which an investor or business is

utilizing borrowed money. Companies that are highly leveraged may be at risk of

bankruptcy if they are unable to make payments on their debt; they may also be unable to

find new lenders in the future

Gearing Ratio compares owner's equity (or capital) to borrowed funds

demonstrating the degree to which a firm's activities are funded by owner's funds versus

creditor's funds. Debt Ratio compares a company’s total debt to its total asset, whereas

debt to equity ratios compares total liabilities to its shareholders equity.

Pegasus Hotels of Jamaica Limited is financed by both Debt and Equity, however

based on results from the above ratios they are primarily finance by equity. The

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Company had steady increases in its gearing ratio over the periods. This resulted from

parallel movements in both long term liabilities and capital employed.

Although there were was a 1-2% increase in the debt ratio over the three periods

the ratio was still relatively low being less than 30%.

In comparing the debt to equity ratio over the period there was a 12% increase in

2010. This was due to increases in loans from Development Bank of Jamaica and

increases in deferred tax liabilities and current liabilities.

LIQUIDITY RATIO

RATIOS2008

X2009

X2010

X

Current 1.51 0.91 0.63

Quick/Acid Test 1.31 0.76 0.47

Operating Cash Flow to Current Liability 0.60 0.73 0.54

Liquidity ratios attempt to measure a company's ability to pay off its short-term

debt obligations. The more the coverage of liquid assets to short-term liabilities the

better as it is a clear signal that a company can pay its debts that are coming due in the

near future and still fund its ongoing operations. A low coverage rate may be a sign that

the company will have difficulty meeting running its operations, as well as meeting its

obligations.

Current Ratio

This ratio is to ascertain whether a company's short-term assets (cash,

cash equivalents, marketable securities, receivables and inventory) are readily available

to pay off its short-term liabilities (notes payable, current portion of term debt, payables,

27

accrued expenses and taxes). In theory, the higher the current ratio, the more capable the

company is to pay its obligations. If current ratio is bellow 1 (current liabilities exceed

current assets), then the company may have problems paying its bills on time.

Current ratio gives an idea of company's operating efficiency. A high ratio indicates

"safe" liquidity, but also it can be a signal that the company has problems getting paid on

its receivable or have long inventory turnover, both symptoms that the company may not

be efficiently using its current assets.

In analyzing Pegasus Hotel Current Ratio there was a 30-40% over the period, In

2009 and 2010 the current ratio was below 1, indicating that current liabilities exceeded

current assets. This is an indication that the company may have difficulties in meeting its

short term obligations.

Quick/ Acid Test Ratio

This ratio is a liquidity indicator that further refines the current ratio by measuring

the amount of the most liquid current assets there are to cover current liabilities. The

quick ratio is more conservative than the current ratio because it excludes inventory and

other current assets, which are more difficult to turn into cash. Therefore, a higher ratio

means a more liquid current position.

A quick ratio higher than 1:1 indicates that the business can meet its current

financial obligations with the available quick funds on hand. A quick ratio lower than 1:1

may indicate that the company relies too much on inventory or other assets to pay its

short-term liabilities.

Over the period Pegasus appeared to be struggling to meet its short term

obligation using its quick assets. There was a 42 and 32% decrease, which resulted from

28

significant decreases in cash and short term investments and increases in its creditors and

current amount of long-term debt to The Development bank of Jamaica.

Operating Cash Flow to Current Liability Ratio

Using operating cash flow over average current liabilities this ratio identifies

whether or not the company is generating the cash necessary to service its short term

debts. Any result less than 1 indicates that the company is not able to liquidate its current

liabilities from operating cash flow; in other words, the company will probably have to

sell assets, borrow money or issue stock in order to meet its short term debt obligations.

For the period 2008- 2010 Pegasus Hotel of Jamaica Limited this ratio indicates that they

did not have sufficient operating cash flow to cover its short term debt with a ratio below

1 for the three periods. Although there was an increase in 2009 there was a further

decline in 2010, which resulted from increases in the average current liabilities during the

same period.

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Common Size Analysis of the Income Statement and Balance SheetVERTICAL COMMON SIZE ANALYSIS

2008%

2009%

2010 %

PROFIT &LOSS

Normal$000

Common Size

Normal$000

Common Size Normal$000

Common Size

Revenue 676,291 100 1,002,775 100 965,977 100

COS 268,780 39.74 345,659 34.47 337,938 34.98

Gross Profit 407,511 60.26 657,116 65.53 628,039 65.02

Operating Profit61,796 9.14 54,517 5.44 12,296 1.27

Profit Before Tax63,178 9.34 62,670 6.25 9,771 1.01

Profit after Tax39,015 5.77 43,463 4.33 8,276 0.86

BALANCE SHEET

Non-Current Asset 4,314,431 94.68

5,001,996

95.12

5,779,819 95.42

Current Asset

242,404

5.32 194,514

3.70

$186,672

3.08

Total Asset 4,556,835

100 5,258,863

100 6,057,098

100

Non-current Liabilities 4,395,888

23.29 5,045,771

23.10 5,758,730

24.65

Current Liabilities160,947

1.79 213,092

0.35 298,638

1.84

Total Liability4,556,835 57.74 5,258,863 57.85 6,057,368 58.68

Equity 3,334,644

42.26 3,830,911

42.15 4,265,465

41.32

Equity & Liabilities

7,891,479 100

9,089,774100

10,322,833 100

Common size analysis ratios are used to compare financial statements of

different- size companies or of the same company over different periods. By expressing

the items in proportion to some size-related measure, standardized financial statements

30

can be created, revealing trends and providing insights into how the different parts of the

company is compared.

In vertical analysis of financial statements, an item is used as a base value and all

other accounts in the financial statement are compared to this base value. The vertical

analysis representation of the balance sheet items are percentages of assets and of income

statement items as percentages of sales. Common Analysis expresses each expense on the

income statement as a percentage of total revenues, and each asset, liability, and equity

account on the balance sheet as a percent of total assets.

Pegasus Jamaica Ltd vertical common-size profit and loss is expressed as a

percentage of the revenue for each year. The gross profit showed a slight fluctuation over

the three year period with a 5.27% increase in 2009 to a 0.51% decreased in 2010, while

the net profit margin for the period went down by 1.44% in 2009 and a further reduction

of 3.47% in 2010. This indicates inefficiency in their operation management of their day

to day activities or this maybe caused by the global financial crisis in which pose a

constraint on the economy and the increase in the world oil prices.

However, the vertical balance sheet for the period revealed major declines for

current assets for all three years, while the fixed assets revealed a steady increase over the

three years which could be as a result of the company’s assets being revalued yearly. The

financials of Pegasus Jamaica Ltd liability over the three year periods has shown a

minimum but a steady increase by the 0.11% increase in 2009 and 0.83% increase in

2010.

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Conclusion

Based on the analysis conducted, it is evident from the financial ratios and

statements that Pegasus Hotels of Jamaica Limited has been inefficient. However, it is

difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’ because a high

current ratio may indicate a strong liquidity position, which is good or excessive cash

which is bad. Similarly, non-current assets turnover ratio may denote either that a firm

uses its assets efficiently or is under-capitalized and cannot afford to buy enough assets.

The company does not have great efficiency in managing all its operations. Thus,

it does not have a large margin available to meet non-operating expenses and earn net

profit. Between the years 2009 to 2010, the company experienced losses as the company

did not use its capital investments effectively and efficiently in generating liable profits.

Pegasus Hotel of Jamaica is also experiencing an increase in its debt ratio. As a result of

this, the company is more risky. Based on the assessment of the financial performance of

the company the Government of Jamaica should dispose of its interest in the company.

With recent Debt exchange Programme with the IMF, the government of Jamaica is not

capable of undertaking another liability which in turn will increase the risk of an

economic down turn.

However, looking ahead the company is faced with a number of threats which

largely emanates from the unstable economy which now persists, in the long-run it may

be feasible for the Government to keep an interest in the company by fully managing and

operating the hotel.

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Bibliography

Annual Report of Jamaica Pegasus Limited (2008)

Annual Report of Jamaica Pegasus Limited (2009)

Annual Report of Jamaica Pegasus Limited (2010)

www.jamstockex.com

33

APPENDIX

Profitability Ratios

0

10

20

30

40

50

60

70

Net ProfitMargin

GrossProfit

Margin

OperatingProfit

Return onCapital

Employed

Return onTotal

Assets

2008

2009

2010

Debt Management Ratio

0200400600800

10001200140016001800

OperatingCash Flow

to Sales

OperatingCash Flow

to NetProfit

GearingRatio

Debt Ratio Debt toEquity

2008

2009

2010

34

Liquidity Ratio

00.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Current Quick/Acid Test Operating CashFlow to Current

Liabil ity

2008 X

2009 X

2010 X

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Ratio Analysis workings

PROFITABILITY RATIOS  2008   2009   2010               Net Profit Ratio 39,015 5.77% 43463 4.33% 8276 0.86%  676,291   1002775   965977               Gross Profit Margin 407,511 60.26% 657116 65.53% 628039 65.02%  676,291   1002775   965977               Operating Profit Ratio 61,796 9.14% 54517 5.44% 12296 1.27%  676,291   1002775   965977               Return on Capital Employed( shareholder equities +L.term LB) 61,796 1.80% 54517 1.39% 12296 0.28%  3,428,347   3923050   4413763               

Return on Total Asset (ATA- 2009+2008/2) 39,015 0.93% 43463 0.89% 8276 0.15%  4217354   4907849   5657980  

SHAREHOLDER’S FUNDS / MARKET VALUE RATIOS

  2008   2009   2010               Dividend Yield 0.4 2.50% 0.4 3.33% 0.35 2.33%(Div per share- 48066/120166) 16   12   15               Earnings per share 0.32   0.36  0.07             Dividend Cover 39,015 1.30 43463 0.90 8276 0.20  30,041   48066   42059               Price Earnings Ratio 16 50.00 12 33.33 15 214.29  0.32   0.36   0.07               Market to Book Value Ratio- 16 0.58 12 0.38 15 0.42(BV is given as Shareholder Equity / # of shares outstanding) 27.75   31.88   35.5  

ASSET MANAGEMENT / ACTIVITY RATIOS

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  2008   2009   2010  Debtor Turnover 676,291 7.51 1002775 9.34 965977 8.24  90053   107330   117240               Days Sales Outstanding/ 90053 47.94 107330 38.53 117240 43.69Collection Period 676,291   1002775   965977               Stock Turnover 268,780 8.48 345659 10.75 337938 8.44  31684.5   32145.5   40058               Stock Period (days) 31684.5 42.44 32145.5 33.48 40058 42.67  268,780   345659   337938

             Net Asset Turnover 676291 0.15 1002775 0.20 965977 0.17  4395888   5045771   5758730  

DEBT MANAGEMENT RATIOS

  2008   2009   2010  

Times-Interest-Earned/ Interest Cover 61,796 8.74 54517 4.52 12296 0.74  7,073   12054   16679               Cash Flow Interest (times) 118507 16.75 171819 14.25 172889 10.37  7073   12054   16679               Operating Cash Flow to Sales 87271 12.90% 135780 13.54% 138241 14.31%  676,291   1002775   965977               

Operating Cash Flow to Net Profit 87,271 223.69% 135780 312.40% 138241 1672.20%  39,015   43463   8267               Gearing Ratio 76976 2.25% 92139 2.35% 148298 3.36%  3,424,331   3923050   4413763               Debt Ratio 1222191 26.82% 1427952 27.15% 1791633 29.58%  4556835   5258863   6057098               Debt to equity 1222191 36.65% 1427952 37.27% 1791633 42.00%  3334644   3830911   4265465  

LIQUIDITY RATIOS

  2008   2009   2010               

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Current Ratio 242404 1.51 194514 0.91 186672 0.63  160947   213092   298368               Quick Ratio 211530 1.31 161097 0.76 139973 0.47  160947   213092   298368               

Operating Cash Flow to Current Liabilities 87271 0.60 135780 0.73 138241 0.54  145668.5   187019.5   255730  

38