1.1 INTRODUCTION

In our present day economics, finance is defined as the provision of money at the time

when it is required. Every enterprise whether big, medium or small needs

finance to carry on its operations and to achieve its target. In fact finance is so

indispensable today that it is rightly said that it is the life blood of industrywithout

adequate finance no enterprise can possible accomplish it objectives.

The process of reviewing and evaluating a company’s financial statements (such as the

balance sheet or profit and loss statement), thereby gaining an understanding of the

financial health of the company and enabling more effective decision making. Financial

statements record financial data; however, this information must be evaluated through

financial statement analysis to become more useful to investors, shareholders, managers

and other interested parties.

Financial statement analysis is an evaluative method of determining the past, current and

projected performance of a company. Several techniques are commonly used as part of

financial statement analysis including horizontal analysis, which compares two or more

years of financial data in both dollar and percentage form, vertical analysis, where each

category of accounts on the balance sheet is shown as a percentage of the total account;

and ratio analysis, which calculates statistical relationships between data. 

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1.2 INDUSTRY PROFILE

Hotel Industry in India has witnessed tremendous boom in recent years. Hotel Industry is

inextricably linked to the tourism industry and the growth in the Indian tourism industry

has fuelled the growth of Indian hotel industry. The thriving economy and increased

business opportunities in India have acted as a boon for Indian hotel industry. The arrival

of low cost airlines and the associated price wars have given domestic tourists a host of

options. The 'Incredible India' destination campaign and the recently launched 'Atithi

Devo Bhavah' (ADB) campaign have also helped in the growth of domestic and

In recent years, government has taken several steps to boost travel & tourism which have

benefited hotel industry in India. These include the abolishment of the inland air travel

tax of 15%, reduction in excise duty on aviation turbine fuel to 8%, and removal of a

number of restrictions on outbound chartered flights, including those relating to

frequency and size of aircraft. The government's recent decision to treat convention

centre as part of core infrastructure, allowing the government to provide critical funding

for the large capital investment that may be required has also fuelled the demand for hotel

rooms.

The opening up of the aviation industry in India has exciting opportunities for hotel

industry as it relies on airlines to transport 80% of international arrivals. The

government's decision to substantially upgrade 28 regional airports in smaller towns and

privatization & expansion of Delhi and Mumbai airport will improve the business

prospects of hotel industry in India. Substantial investments in tourism infrastructure are

essential for Indian hotel industry to achieve its potential. The upgrading of national

highways connecting various parts of India has opened new avenues for the development

of budget hotels in India. Taking advantage of this opportunity Tata group and another

Hotel chain called 'Homotel' have entered this business segment.

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According to a report, Hotel Industry in India currently has supply of 110,000 rooms and

there is a shortage of 150,000 rooms fueling hotel room rates across India. According to

estimates demand is going to exceed supply by at least 100% over the next 2 years. Five-

star hotels in metro cities allot same room, more than once a day to different guests,

receiving almost 24-hour rates from both guests against 6-8 hours usage. With demand-

supply disparity, hotel rates in India are likely to rise by 25% annually and occupancy by

80%, over the next two years. This will affect the competitiveness of India as a cost

effective tourist destination.

To overcome, this shortage Indian hotel industry is adding about 60,000 quality rooms,

currently in different stages of planning and development, which should be ready by

2012. The future scenario of Indian hotel industry looks extremely rosy. It is expected

that the budget and mid-market hotel segment will witness huge growth and expansion

while the luxury segment will continue to perform extremely well over the next few

years.

The Rooms Department is facing challenges while F&B operations are in a buoyant

mood. HR Managers are stressed with shortage of skilled persons and higher than

affordable salary and wage expectations. The General Managers are cautious, particularly

on the back of challenged market conditions and increasing operating costs.

The overall mood in the F&B segment is upbeat, witnessing demand growth and dynamic

activity. Actual market performances are showing growth, riding on increasing

consumerism and introduction of newer restaurant and cuisine concepts. In contrast, the

optimism portrayed at the start of 2011 in relation to room rates and occupancy has

waned. Rapid inventory addition in the country has continued to cause attrition and

poaching worries for HR Managers, while also causing payroll increases - both actual and

in the expectation-fulfilment gap. The near and mediumterm future is expected to be no

different. Smart and professionally adept managers are the need of the hour; while

employers aim to foster a culture of loyalty and commitment, the industry and individual

hotels / chains are challenged in retaining this talent.

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1.2.1 2012 Performance

Rooms: At the start of 2012 there was optimism among the General Managers with more

than 73% expecting strong to very strong growth in occupancy and 67% expecting

moderate to high growth in ADR. This optimism has unfortunately not been borne out:

44% General Managers reported ADRs achieved as being lower than expected at the start

of the year; only 36% reflected better than expected performance

1.2.2 2013 Outlook

The sentiment for 2013 also reflects a divergence between rooms and F&B operations.

The expectation from the rooms department is possibly moderated by the softer than

expected performance in 2012. By the same token, F&B departments are expressing

greater confidence. ADR: 3/8th of participating hotels expect ADR for 2013 to be in line

with 2012; while 22% are expecting a reasonable increase, a slightly larger 24% are

expecting a decline in room rates.

Occupancy: However, there is greater confidence in demand volumes with a third of the

hotels expecting 2013 performance to be in line with 2012 performance and 37%

expecting a reasonable increase; 1/6th of the participating hotels are expecting sizeable

increase in occupancy but, on the other hand, another 1/6th of the participating hotels are

expecting significant decline in occupancies

Clearly the impact of difficult business conditions and continued supply growth is not

really foreseen as impacting occupancies in a material way but is expected to have a

significantly diluting impact on room rates. F&B: Between 35-45% of the respondents

are expecting F&B revenues to remain the same as in 2011. About a third of the hotels

are expecting reasonable growth of F&B revenues while about 1/4th of participating

hotels are estimating strong to very strong improvement in F&B revenues.

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Improved F&B revenues are mainly predicated on APC increases - 65% to 70% of the

respondents expect buffet prices to increase up to 8%; 55% to 70% of the respondents

also expect specialty restaurant and room service prices to improve by 8% .The positive

performance and outlook on F&B operations peculiarly comes at a time when some

hotels and hotel chains are exploring the option of leasing out these activities to third

parties.

1.2.3 Operating costs

In terms of operating costs, hotels seem to be feeling strong pressure. 85% of the hotels

expect payroll costs to increase in 2013 with about half of such hotels expecting sizeable

cost increases. Considering the slowdown in hiring and variable pay components in the

IT and other service sectors, the cost increase expectations of Hotel HR Managers appear

to standout. The very recent slowdown in food inflation, 70% of the hotels are expecting

moderate to large increase in food cost. Such increase, coming in on top of inflation lead

high food cost in 2012, could clearly dilute the revenue gains from restaurant and banquet

operations impacting F&B margins. With increased F&B Revenues and costs, it will be

interesting to watch continuing trends on the scope and demand for profitable F&B

operations in the coming year. Half the hotels expect up to 8% increase in the energy

cost; another 25% of the respondents are expecting more substantial energy cost increase

1.2.4 Payroll & Human resource

Employee attrition is a real concern; in fact, for 2/3rds of the respondents, it was their

prime HR concern. While attrition may be somewhat lower in 2012, if alternative service

sector jobs are harder to come by, this draining feature will continue to pose challenges to

hotels in times to come .HR Managers are also challenged by a rise in shortage of skilled

work force and competition from within the hotel sector; both these factors, combined

with inability of new comers to cope with work pressure, are being contributory to the

high attrition levels in the industry. Hotels are challenged to meet the payroll expectations

of staff. Clearly, persons working or intending to work in the industry are drawn away to

other sectors on payroll considerations and / or on considerations of better work-life

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How do you see the revenue from following sources in2013

balance. About 66% of the HR managers expect a increase in the range of 20-40% in the

next three years. At the same time, there is genuine industry grouse that new and young

employees lack sufficient skills because of inadequacy of hotel schools, training curricula

and these only serve to exacerbate the problem

The shortage of trained manpower combined with the opportunity for increased pay

packages provides a perfect situation for hotels to poach staff from competition. The

industry has several excellent General Managers; hotels are frequently seeking to poach

them. Fortunately, the non-hotel sector does not draw on their skills. These other sectors

are some what more interested in poaching entry level staff and middle level managers.

The shortage of experienced General Managers will be a challenge as more hotels open in

the next 3 years. Work pressure issues are a significant challenge for entrance level staff;

the hotel industry is more exacting in its demands than other service industries with long

working hours and constant scrutiny by demanding guests. This challenge is possibly

further accentuated by inadequate teachings preemployment

1.2.5 Supply

As of January 2013, the total count of hotel rooms in India is 120,000 and the country is

expected to require additional 80,000. The shortage is more prominent in budget and mid

market segment. This will support improvement in ARRs (Average Room Rates) in this

segment for the next few years.

1.2.5(a) Demand : Largely depends on business travelers but tourist traffic is also on the

rise. Demand normally spurts in the peak season between November and March.

1.2.5(b) Barriers to entry: High capital costs, poor infrastructure facilities and scarcity of

land especially in the metros.

1.2.5(c) Bargaining power of suppliers: Limited due to higher competition, especially in

the metros.

1.2.5(d) Bargaining power of customers: Higher in metro cities due to increasing room

supply.

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1.2.5(e) Competition: Intense in metro cities, slowly picking up in secondary cities.

Competition has picked up due to the entry of foreign hotel chains.

The Indian hotel industry is still in the nascent stages of recovery. In the near term,

despite an anticipated revival in room demand, hotels will not be able to hike ARRs

significantly as the expected additions to room inventory will intensify competition.

Chennai, Pune and Hyderabad are expected to be among the worst-hit destinations, as the

growth in supply is expected to far outpace that in demand. Though, events like the

Formula 1 race planned in Delhi in 2011 will benefit the hotel industry. Nevertheless, the

industry is yet to witness a sustained and significant improvement in occupancy levels

and ARRs.

In the long-term, the outlook for the sector is very promising. Demand levels are likely

to improve as economic growth gathers momentum and companies increase spending on

travel. With expectations of healthy salary increases within the corporate world,

discretionary spending is expected to increase further, especially on leisure travel. The

number of foreign tourists is expected to reach 6.2 m during 2011 and further to 11.1 m

by 2021. The demand-supply gap in India is very real and there is need for more hotels in

most cities. The shortage is especially true within the budget and the mid market

segment. There is an urgent need for budget and mid market hotels in the country as

travellers look for safe and affordable accommodation.

1.2.6 Economic Prospects

The number of people working in the sector fell dramatically in 2009 due to the

recession, but employment levels have since recovered. Employment prospects on the

whole are strong and it is predicted that over a million new employees will be required in

the sector by 2017.The demand for graduates is expected to grow as 69,000 more

managers are expected to be needed over coming years.

Trends across the sector are mixed. The number of bar staff has declined by 30% since

2005 but the decline is slowing. The number of conference and exhibition managers has

increased by 100% and is expected to continue growing, as is the number of hotel and

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accommodation managers. Employment is expected to grow most quickly amongst

budget operators such as fast-food outlets, takeaways and cafés.

A number of factors are still expected to limit growth in the short term, such as:

rising costs, i.e. fuel, food and wages;

a weak pound;

new immigration controls, which will lead to an upward pressure on wages;

delays in adjusting to the needs of an ageing population;

the calibre of applicants in the sector is steadily rising, so qualifications and

experience are becoming ever more important.

1.2.7 Customer demand

The recession and the increasing use of the internet means customers have more

sophisticated and critical shopping habits. Shopping around, buying cheaper brands,

buying less and looking for ethical brands are all current patterns of customer shopping

behaviour.

1.2.8 Skills Shortages

In most of the UK, 4% of employers in the sector have roles that are difficult to fill, but

in Scotland the number rises to 39%.

Two roles which are expected to remain in high demand are:

skilled chefs (including Asian and Oriental chefs and senior chefs);

managers.

Continuing skills gaps in the industry include:

customer service;

communication;

multi-tasking;8

marketing and sales.

1.2.9 Corporate responsibility

The majority of large businesses within the industry advertise their commitment to

environmental issues, their active involvement in the communities in which they operate

and their charitable donations. Organisations are keen to demonstrate that they can

further their business objectives while still ‘doing the right thing’.

1.2.10 Outsourcing

Increasing numbers of operators, including educational institutions, local authorities,

healthcare providers and other businesses, have outsourced hospitality facilities in order

to concentrate on their core business and drive down costs. This has presented huge

opportunities for food service providers and contract caterers.

1.2.11 Fragmentation of hotel industry

There has been an increase in ‘no-frills’ and budget options, most notably within the

hotel industry. Hotels are now classed as ‘business’ or ‘leisure’ hotels and there are

almost two separate markets for ‘luxury’ and ‘budget’ hotels, with mid-market (mainly

three-star and below) hotels falling between the two.

1.2.12 Alignment of pubs and restaurants

A ban on smoking in all enclosed public places came into force in Scotland in March

2006. This continues to have an effect on the industry, most noticeably for pubs and bars.

Pub food has become more important and is now challenging the restaurant industry. The

growth of the ‘gastropub’ and the increase in the number of pubs offering cheaper food

options has also increased competition across the sector. There has also been a move

towards a coffee-shop culture, with pubs and bars serving more coffees.

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1.2.13 Conferences

There has been a slight shift away from residential conferences to day conferences.

Average rates showed a decline in the daily delegate rate for residential conferences but a

marginal increase for non-residential. The conference and meetings market remains

highly competitive but venues report a general tightening of budgets and a move towards

shorter and smaller conferences. A key emerging trend is shorter lead booking times,

with many venues indicating that this is now the norm.

1.2.14 Technology

A number of technological advances are changing the way the industry operates. Many of

these innovations are designed to reduce staffing costs, increase productivity and offer

customers a wider and more informed choice. Current developments include:

a steady growth in the use of the internet to purchase goods and services;

faster broadband technologies enabling a wider range of internet services;

online booking and checking-in facilities;

a growing use of user-generated content (UGC)

advances in mobile phone applications;

database-mining techniques to find new customers;

The use of social networking sites to find new customers.

1.2.15 Future growth prospects

According to the world travel and tourism council, the growth in the hospitality industry

is pegged at 15% every year, and with 2,00,000rooms (both luxury and budget) needed in

the country, the segment is poised for a stupendous growth. While the high influx of

foreign tourists has ensured huge footfalls for the sector over the years, internal tourism

too has, off late, begun offering great potential. With travelers taking new interests in the

country, players in the hospitality sector have had to offer the best of services, at

affordable prices. Also, with the USD 23 billion software services sector pushing the

Indian economy skywards, more and more IT professionals are flocking to Indian metro

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cities, thus signaling a boomtime for the hotel and hospitality segment. Several other

factors such as Commonwealth Games in Delhi are fueling the need further.

The Indian hospitality industry is projected to grow at a rate of 8.8% between 2007 to

2016, placing India as the second-fastest growing tourism market in the world. Initiatives

like massive investment in hotel infrastructure and open sky policies made by the

government are all aimed at propelling growth in the hospitality sector. “Hotel and

hospitality industries are among the biggest employment generators in the country.

Towards propelling its growth, while the government should confer infrastructure status

to the hotel industries, several taxation issues also need to be rationalised. Further permits

and licenses required for the hotel operations need to be rationalised by offering a “single

window” mechanism,” says Sanjay Gupta, CMD, Neesa Leisure Ltd, the Group which

boasts of providing state-of-the-art facilities and services at its hotels.

The government’s decision to substantially upgrade 28 regional airports in smaller towns

and privatization & expansion of Delhi and Mumbai airport has improved the business

prospects of hotel industry in India. Also, the upgrading of national highways connecting

various parts of India has opened new avenues for the development of budget hotels in

India. Couple this with the availability of qualified human resources and the hospitality

sector has already got great growth prospects! A focus on quality, behaviour-based

evaluation, market choice and market response has predominantly shaped the State’s

hospitality industry. Increased competition and increase in demand has consolidated the

hospitality segment, whilst opening up a plethora of opportunities. Fierce competition has

led to innovative ideas by hotel majors, thereby delivering impressive hospitality

products and services. This has, in turn, also prompted them to generate new lines of

revenue with creative approaches, be it by reducing transaction costs, increasing

productivity or promoting traditional Indian values.

A pioneering initiative, herein, is the concept of mixed-use developments, wherein the

real estate typically includes an apartment block of a commercial block along with a

hotel. Still in its nascent stages in India, the concept offers inspiring potential. Also, the

entry of multinationals and Indian hotel chains expanding internationally only reinforces

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the segment’s untapped business potential. Combining unparalleled growth prospects and

unlimited business potential, this industry is certainly on the foyer towards being a key

player in the nation’s changing face.

1.3 COMPANY PROFILE

1.3.1 India's Fastest Growing Chain of Upscale Business and Leisure

Hotels

Lemon Tree Hotels is India's largest chain of upscale hotels and resorts - the perfect

choice for today's discerning yet value conscious traveler.

Like the fruit they are named after, Lemon Tree Hotels are fresh, cool and sparkling

with zest. Walk in these hotels and be embraced by the signature lemon fragrance, a

cheery smile, uplifting colours and perhaps a wagging tail. People can relax and know

that they have arrived at someplace trusted where service is personalized yet professional.

youthful and contemporary hotels add a new twist to stay every time. 

 

The Lemon Tree Hotels group recently launched Lemon Tree Premier, its new upscale

'plus' brand that retains the essence of the upscale Lemon Tree by continuing to provide

the fresh, fun and spirited experience the group is so well known for. The décor is

'refreshingly elegant', making it perfect for the style conscious and upbeat business

travelers.

 

Lemon Tree Premier provides an enhanced product offering with sedan cars for airport

transfers; superior in-room amenities; a higher share of top-of-the-line premium rooms;

specialty restaurants; iMac terminals in the Business Center; a Life Fitness equipped gym

and a rejuvenating spa.

 

With a total of 15 hotels across India, Lemon Tree Hotels operates 12 hotels in

Ahmedabad, Aurangabad, Bengaluru, Chandigarh, Chennai, East Delhi, Gurgaon, Goa,

Indore, Muhamma - West of Kumarakom and Pune and Lemon Tree Premier operates 3

hotels in Bengaluru, Gurgaon and Hyderabad.

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Lemon Tree Hotels are India's first, largest and finest chain of upscale hotels and

resorts. Not surprisingly, they say that being at a Lemon Tree hotel is like being offered a

tall glass of icy cold lemonade after hours of traipsing through the hot and dry desert!

Lemon Tree Premier, the new upscale 'plus' brand that retains the essence of the upscale

Lemon Tree by continuing to provide the fresh, fun and spirited experience the group is

so well known for.  Lemon Tree Premier provides an enhanced product-service offering

and superior amenities. At Lemon Tree Premier - it's everything that the customers love

about the 'refreshingly different' Lemon Tree Hotels.

Lemon tree hotel, Chennai Lemon tree located in hearted of Chennai on sarder patel

road on guindy, the hotel in close proximity to tidel park which houses Cognizant, satyam

computers, Tata consultancy services and HCL Technologies. The hotel is directly

opposite raj bhavan and easily accessible from anna university and Indian institute of

technology, Chennai

The refreshing interiors and large windows are designed to bring ‘the outdoors in’. The

centrally air conditioned hotel offers a mix of rooms, studio rooms and suites, business

centre, meeting rooms, a 24*7 multi-cusinie coffee shop, citrus café, a hip recreation bar,

slounge as well as an outdoor pool and fitness center to keep the feeling as fresh-as-

lemon.

1.3.2 Vision

At the Lemon Tree Hotel Company they plan to be India's largest and finest chain of

upscale hotels and resorts. 

1.3.3 MissionAt Lemon Tree Hotels, they make sure that it remains bright and clear. That's why

lemontree hotels are committed to:

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The well-being of their colleagues, whose happiness and self-worth is of utmost

importance to them.

The delight of their customers, whose safety, security and sense of well-being and

care is the main reason for being.

The expectations of the shareowners, whose confidence and trust propel them to

excel further.

The needs of society, so that may give back a part of what they receive, to

contribute to a greater goal.

The efficiency of their processes, so that can be the most cost-effective quality

service provider and thereby offer the greatest value, so the customers have every

right to expect.

1.3.4 Awards for Lemon Tree Hotels

NCPEDP - Shell Helen Keller Award Winner in 2010 for policies, practices and

beliefs in equal rights and gainful employment for persons with disabilities. This

annual recognition by the National Centre for Promotion of Employment for

Disabled People (NCPEDP) is given to only four institutions nationally.

Ranked 69th, in the 2011 study of 100 Best Companies to Work For by the Great

Place to Work Institute & the Economic Times

The NCPEDP - MphasiS Universal Design Award, 2011 (for work done towards

the cause of accessibility)

SATTE 2010, Best Mid-Market Developer Recognition at India's largest travel

industry event is testament to Lemon Tree Hotels exponential growth in the mid-

market hotel space.

FHRAI Hall of Fame, 2010 Awarded by the Federation of Hotel and Restaurants

Association of India for invaluable contribution to the growth of the hospitality

sector in India.

All Lemon Tree Hotels are recommended on Trip Advisor. This is a testament to

continued and consistent commitment to excellence.

4 Lemon Tree hotels - Goa, Pune, Ahmedabad, Aurangabad are in the elite list of

Expedia® Insider's Select hotels for 2010. Note: The Expedia® Insiders' Select

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list is an annual award recognizing the top 1% of the best hotels available in

Expedia's global marketplace. Expedia® is the world's largest online travel

marketer and attracts 864,000 hotel shoppers and over 1,500,000 travelers daily.

Note: TripAdvisor.com is the world's largest travel site with over 40 million

trusted reviews by travelers. The site assists customers to gather travel

information, post reviews and opinions of travel related content and engage in

interactive travel forums. TripAdvisor.com is part of the TripAdvisor Media

Group, operated by Expedia®

Lemon Tree Hotel, Hinjawadi, Pune: Winner of TripAdvisor's Traveler's

Choice™ 2010 Awards (Top 10 in service among all hotels in India) exemplifies

our promise to deliver best-in-class service.

Republic of Noodles, Goa: Winner of Times Food Award in the category of 'Best

Pan Asian Restaurant in North Goa' for the year 2010 & 2011.

1.3.5 Lemon Tree Hotels - Rich Core Values

Integrity – Lemon Tree hotels maintain the highest ethical standards, fairness and

transparency in all their dealings.

Courage and responsibility – This hotel always have the conviction to take

responsibility for their actions.

Respect and concern – They exhibit respect and concern for colleagues, customers

and partners in all their interactions.

Excellence – Lemon tree hotels seek ways to add value to the business to deliver

better solutions to customers at lower costs.

Teamwork - They will synergize our capabilities and recognize that superlative

performance is always the result of teamwork.

Fun – Lemon tree hotels will create an exciting, fun filled environment

encouraging their colleagues to successfully pursue both personal and

organizational goals.

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1.3.6 Safety and Security

Lemon Tree Hotels offer the opportunity to stay without a worry by ensuring that

customer are safe from security hazards at all times.

Individual fire indicators outside each room to expedite emergency response in

case of a fire emergency.

Wide angle (110 degrees) peephole on room entrance doors.

Safety chain and double lock facility in the main room door interactions.

Emergency procedures notice displayed behind the entrance door.

Fire resistant room door (up to a limited extent).

All entrance doors are lined with an environmental seal to minimize noise and

protect the room from external smoke, in case of fire.

Smoke detector in each room.

Water sprinklers in each room for enhanced fire safety.

Entrance door and bathroom doors can be double locked from the inside.

1.3.7 Lemon Tree Hotels - Eco-Friendly Practices

Committed to a healthy, happy earth, Lemon Tree Hotel-located across India from

Gurgaon to Bengaluru has implemented many eco-friendly processes for energy and

water preservation, responsible waste management as well as measures to control water,

noise and environmental pollution.

The Lemon Tree Hotel Company strongly believes in conservation of natural resources,

and has therefore implemented many eco-friendly processes for energy and water

preservation, responsible waste management as well as measures to control water, noise

and environmental pollution.

1.3.8 Energy Conservation

Variable Refrigerant Volume (VRV) technology for air-conditioning 30% more

efficient and superior comfort than conventional

CFL Lighting provides as much light as a conventional bulb yet consumes far less

energy

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Key Tag Energy Saver System conserves energy in unoccupied rooms

Natural lighting reduces power consumption dramatically

Double Glazed Vacuum Sealed Windows conserves energy and reduces noise

Auto Time Management for lighting, air-conditioning and ventilation Fans

conserves energy

Energy-Efficient Hydro-Pneumatic System for water supply ensures constant

pressure and reduces load on pumps

LT Voltage Stabilizer for energy saving prevents damage to equipment due to

sudden power fluctuations

Thermal Insulation increases room comfort and conserves energy

1.3.9 Water Conservation

Aerators/Flow Restrictors maintains water force and yet reduces outflow, hence

saving water

Rain Water Harvesting protects and replenishes water table

Auto Flush For Public Urinals minimizes water wastage

1.3.10 Waste Management

Sewage Treatment prevents pollution

1.3.11 Noise Pollution Management

Double Glazed Vacuum Sealed Windows reduces external noise level below 50

decibels

Environmental Seals prevents entry of noise and smoke (in case of fire) into the

room

Noiseless Generators acoustically insulated, the sound level is dampened to a

minimal level

1.3.12 Interiors

Rubber Wood and Particle Board helps save trees

1.3.13 Operational Practices

Laundry Paper bags instead of plastic. Environmentally friendly

Recycled Garbage Bags bio-degradable. Environmentally friendly

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Water Glasses inverted and placed on a cork surface, thereby doing away with

plastic covers

Pencils not plastic pens

1.3.14 Corporate Social Responsibility

One of the guiding principles of Lemon Tree Hotels is that the company exists first and

foremost for the well being of its employees, the community it operates in and society at

large. They undertake various initiatives to achieve these objectives.

The 'People with Disabilities' Initiative

As an equal opportunity employer, the company intends to employ at least 300 people

with disabilities by 2012. At present, this number stands at 100+ pan India. The

Management is confident in well trained differently enabled team members will delight

the people with the enthusiasm and alertness during the next visit to any of their hotels.

In 2010, in recognition of this initiative, Lemon Tree Hotels was awarded the NCPEDP

Shell Helen Keller Award by the National Centre for Promotion of Employment for

Disabled People (NCPEDP). This is an annual recognition given to only four

organizations nationally who through their policies and practices demonstrate their belief

in equal rights and gainful employment for persons with disabilities.

In 2010, LTH organized a 5 day training program, in partnership with British School,

New Delhi and Noida Deaf Society, on "Basic Computer Skills" for the benefit of

disabled people working at their NCR hotels. 18 employees attended this program held

from 9th to 13th August.

In 2011, Lemon Tree Hotels was awarded the NCPEDP MphasiS Universal Design

Award by the National Centre for Promotion of Employment for Disabled People

(NCPEDP). This award recognizes and acknowledges organizations who are playing a

pivotal role in making life more accessible for people with disabilities.

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1.3.14(a) Promoting Tribal Art

Lemon Tree Hotels is the largest buyer nationally of tribal art from Bastar, Madhya

Pradesh. This enables the group to support poor tribal craftsmen in this region and allows

the chain to showcase their art extensively across its hotels.

1.3.14(b) Caring for the Environment

Our existing and upcoming hotels are designed and constructed to qualify for the L.E.E.D

Gold Standard. Leadership in Energy and Environment Design (L.E.E.D) is the

internationally recognized eco-friendly building certification standard awarded by the

United States Green Building Council (USGBC) and the Indian Green Building Council

(IGBC) to buildings designed for energy savings, efficient use of water, reduction of CO2

emission and overall improvement in environmental quality.

1.3.14(c) Giving Back to Society

LTH supports the NGO Goonj which provides clothes and utensils to the

impoverished.

LTH has donated gifts to students of the Ramanujan Society for successfully

clearing the IIT entrance exam.

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1.4 SERVICES PROFILE

Lemon tree hotels offers and vacation packages are ideal for families, couples and

business travelers and provide excellent value for money.

1.4.1 Rooms: All rooms offer:

WIFI net access

Full sized working desk with ergonomic executive chair.

Complimentry daily newspaper and mineral water.

Cable television

Minibar

Well appointed bathrooms

1.4.2 Food and Beverages

Citrus café

Slounge

Room service 24*7

1.4.3 Conference Facilities

Top-of-the-line, fully equipped with:

WIFI/Broadband net access

Surround sound system

Built-in lcd projector with screen

Large screen television

DVD player

Board room: WIFI/Broadband net access

White board

Seats 4

1.4.4 Other services20

24*7 reception, housekeeping, room service and coffee shop.

Fitness centre

Outdoor swimming pool

Business centre

Travel assistance, currency exchange and safe deposit lockers.

Commitment to ‘right price’ extends not just to the room rate but to all services,

including Meals, business centre facilities and telecommunications.

Tariff

Type of Room Single(in Rs.) Double(in Rs.) Features of Room

Superior Room 6000 7000Well sized with king/queen/twin

beds.

Executive Room 7000 8000

Spacious room with king

beds.DVD player, bathtubs,

electronic safe.

Studio Room 8000 9000Large room, DVD player,

electronic safe.

Executive Suite 10000 10000

Extra large rooms, seperate sitting

rooms, dvd player, microwave

ovens, bathtubs, electronic safe,

airport pickup included.

21

2.1 REVIEW OF LITERATURE

2.1.1 Meaning of finance

A branch of economics concerned with resource allocation as well as resource

management, acquisition and investment. Simply, finance deals with matters related to

money and the markets.

In general term finance means management of money for your expenses. In broad term

finance is the science of funds management. Finance includes saving money and often

includes lending money. The general areas of finance are business finance, personal

finance, and public finance. Finance is also a money budget management. The field of

finance deals with how money is spent and budgeted. It also deals the concepts of time,

money and risk and how they are interrelated. Finance is used by individuals as personal

finance, by governments as public finance, by businesses as corporate finance, as well as

by a wide variety of organizations including schools and non-profit organizations.

Finance is the need of the today world economy.

2.1.2 Types of Finance

There are mainly two type of finance found in the current economy.

1. Personal finance: In this finance decisions may involve paying for education,

financing durable goods such as real estate and cars, buying insurance, e.g. health and

property insurance, investing and saving for retirement. Personal financial decisions may

also involve paying for a loan, or debt obligations.

2. Corporate finance: It is the task of providing the funds for a corporation's activities.

Corporate finance can easily categorized in two category. First one is Short term finance

which generally involves balancing risk and profitability, while attempting to maximize

an entity's wealth and the value of its stock.

22

Long term funds are provided by ownership equity and long-term credit, often in the

form of bonds. The balance between these forms the company's capital structure. Short

term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An

investment is an acquisition of an asset in the hope that it will maintain or increase its

value.

2.1.3 Meaning of Financial performance

Financial performance analysis (also referred to as financial statement analysis or

accounting analysis) refers to an assessment of the viability, stability and profitability of a

business, sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of

information taken from financial statements and other reports. These reports are usually

presented to top management as one of their bases in making business decisions.

Research into data relating to the stability and profitability of businesses, especially to

guide one's investing practices. At its most basic, financial analysis involves looking at

financial statements to determine if a company is healthy. Balance sheets are important to

financial analysis as they provide a ready-made means of investigating performance.

2.1.4 Importance of Financial performance

Analyzing financial statements, investors review important factors in a company's

economic status.

These elements include solvency, liquidity, risk management and profitability.

A financial statement is an accounting document summarizing an organization's

economic events and their impacts on the firm's competitive position.

There are four types of economic data summaries: balance sheets or statements of

financial position, statements of profit and loss, statements of cash flows and

reports on shareholders' equity, also known as statements of retained earnings.

23

Securities exchange players review financial statements to identify factors that may

undermine a company's operating efforts. These statements enable investors to raise

questions about how carefully corporate management formulates operating plans.

Competitors also take a peek at corporate performance data to see how other companies

are turning struggling businesses around. Business partners, such as lenders and

suppliers, also appraise a firm's performance information before advancing funds or

extending trade credit.

2.1.5 Types of Financial performance

Financial statements can be referred to as representation of the financial status of a

company in a systematically documented form.

There are different types of financial statements. Financial statements, are required to be

audited by authentic, efficient audit firms to avoid manipulation of numbers. Statements

are usually audited by the accounting firms after a thorough study of the company

records.

Basically, there are four different types of financial statements. The different types of

financial statements indicate the different activities occurring in a particular business

house.

Balance Sheet

Income statement

Statement of retained earnings

Statement of cash flow or Cash flow statement

2.1.5(a) Balance sheet: The balance sheet provides an insight into the financial status of

a company at a particular time. The balance sheet, type of financial statement is different

in comparison to the other types of financial statements. Other financial statements are

prepared by taking into account the financial health of the company over a considerable

span of time.

24

2.1.5(b) Income statements: Also known as the P&L statement or the Profit And Loss

Statement. This statement, ascertains the profit and loss of any business. This can be

again of two types:

Single Step Income Statement

Multi Step Income Statement

Income statements are basically classified into single step income statements and

multi step income statements. Single step statement is a type of income statement

which uses a single formula to derive the net income. The formula used is Net Income

= (Revenues + Gains) – (Expenses + Losses). A multiple income statement which has

uses multiple formulas and has multiple steps to derive at the net income, however

this method is the one which is mostly used as it gives a detailed report which

includes cost of the goods sold, operating expenses, non-operating expenses which

are finally deducted from gross sales to conclude on the net income.

2.1.6 Statements of Retained earnings

This financial statement denotes alterations in the title rights of equities, in any business.

2.1.7 Meaning of Working Capital Management

Working capital measures how much in liquid assets a company has available to build its

business. The number can be positive or negative, depending on how much debt the

company is carrying. In general, companies that have a lot of working capital will be

more successful since they can expand and improve their operations. Companies with

negative working capital may lack the funds necessary for growth. also called net current

assets or current capital.

Working capital is how much in liquid assets that a company has on hand. Working

capital is needed to pay for planned and unexpected expenses, meet the short-term

25

obligations of the business, and to build the business. A lack of working capital makes it

hard to attract investors or to get business loans or obtain credit.

The accounting formula used to calculate the available working capital of a business is:

Current Assets - Current Liabilities = Working Capital

Working capital can be reflected as a positive or negative number depending on how

much debt the business is carrying.

Sources of Working Capital: From an accounting standpoint, working capital comes

from:

Net income;

Long-term loans (non-current liabilities);

Sale of capital (non-current) assets; and

Funds contributed by the owners and investors.

Working capital means the funds (i.e., capital) available and used for day to day

operations (i.e., working) of an enterprise. It consists broadly of that portion of assets

of a business which are used in or related to its current operations. It refers to funds

which are used during an accounting period to generate a current income of a type

which is consistent with major purpose of a firm existence.

2.1.8 Objectives of Working Capital

Every business needs some amount of working capital. It is needed for following

purposes-

• For the purchase of raw materials, components and spares.

• To pay wages and salaries.

• To incur day to day expenses and overhead costs such as fuel, power, and office

expenses etc.

• To provide credit facilities to customers etc.

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2.1.9 Factors that determine working capital

The working capital requirement of a concern depend upon a large number of factors

such as

Size of business.

Nature of character of business.

Seasonal variations working capital cycle.

Operating efficiency.

Profit level.

2.1.9(a) Sources of working capital: The working capital requirements should be

met both from short term as well as long term sources of funds. Financing of working

capital through short-term funds has the benefits of lower costs and establishing close

relationship with banks.

Financing of working capital through long term sources provides the benefits of

reduces risk and increases liquidity.

2.1.9(b) Types of working capital: Working capital an be divided into two

categories-

Permanent working capital: It refers to that minimum amount of investment in

all current assets which is required at all times to carry out minimum level of

business activities.

Temporary working capital: The amount of such working capital keeps on

fluctuating from time to time on the basis of business activities.

Advantages of working capital:

It helps the business concern in maintaining the goodwill

It can arrange loans from banks and others on easy and favourable terms.

It enables a concern to face business crisis in emergencies such as depression.

It creates an environment of security, confidence, and all over efficency in a

business.

It helps in maintaining solvency of the business.

27

Disadvantages of working capital:

• Rate of return on investments also fall with the shortage of working capital.

• Excess working capital may result into over all inefficiency in

organization.Excess Working capital means idle funds which earn no profits.

2.1.10 Management of working capital

A firm must have adequate working capital, i.e.; as much as needed the firm. It

should be neither excessive nor inadequate. Both situations are dangerous. Excessive

working capital means the firm has idle funds which earn no profits for the firm.

Inadequate working capital means the firm does not have sufficient funds for running

its operations. It will be interesting to understand the relationship between working

capital, risk and return. The basic objective of working capital management is to

manage firms current assets and current liabilities in such a way that the satisfactory

level of working capital is maintained, i.e.; neither inadequate nor excessive. Working

capital some times is referred to as “circulating capital”. Operating cycle can be said

to be t the heart of the need for working capital. The flow begins with conversion of

cash into raw materials which are, in turn transformed into work-in-progress and then

to finished goods. With the sale finished goods turn into accounts receivable,

presuming goods are sold as credit. Collection of receivables brings back the cash to

cycle.

The company has been effective in carrying working capital cycle with low working

capital limits. It may also be observed that the PBT in absolute terms has been

increasing as a year to year basis as could be seen from the above table although

profit percentage turnover may be lower but in absolute terms it is increasing. In

order to further increase profit margins, SSL can increase their margins by extending

credit to good customers and also by paying the advance get better rates.

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2.1.11 Meaning of Altman Z-score

The Altman Z-Score is a quantitative balance-sheet method of determining a company’s

financial health. “Safe” companies, i.e. companies that have a low probability of

bankruptcy, have an Altman Z-Score greater than 3.0.

The Altman Z-Score is a measure of a company’s health and likelihood of bankruptcy.

Several key ratios are used in the formulation of an Altman Z-Score Value.

The Altman Z-Score, developed by finance professor Edward Altman, is a mathematical

formula that generates a number that tells how likely a company is to head toward serious

financial difficulty in about two years or less. The measure uses financial data from a

company's income statement and balance sheet. The formula is based on a company's

assets, earnings, revenue and market value.

A company's Altman Z-Score is easy interpreted. The rule of thumb is that a company is

in big trouble if its Altman Z-Score is less than 1.8. If a company's score is 3.0 or greater,

it's believed to be in decent health based on the financial data.

2.1.12 Review on Financial analysis

Financial ratios are widely used for modelling purposes both by practitioners and

researchers. The firm involves many interested parties, like the owners, management,

personnel, customers, suppliers, competitors, regulatory agencies, and academics, each

having their views in applying financial statement analysis in their evaluations.

Practitioners use financial ratios, for instance, to forecast the future success of companies,

while the researchers' main interest has been to develop models exploiting these ratios.

Many distinct areas of research involving financial ratios can be discerned. Historically

one can observe several major themes in the financial analysis literature. There is

overlapping in the observable themes, and they do not necessarily coincide with what

theoretically might be the best founded areas, ex post. The existing themes include

the functional form of the financial ratios, i.e. the proportionality discussion,

distributional characteristics of financial ratios,

29

classification of financial ratios,

comparability of ratios across industries, and industry effects,

time-series properties of individual financial ratios,

bankruptcy prediction models,

explaining (other) firm characteristics with financial ratios,

stock markets and financial ratios,

forecasting ability of financial analysts vs financial models,

estimation of internal rate of return from financial statements.

The history of financial statement analysis dates far back to the end of the previous

century (see Horrigan, 1968). However, the modern, quantitative analysis has developed

into its various segments during the last two decades with the advent of the electronic

data processing techniques. The empiricist emphasis in the research has given rise to

several, often only loosely related research trends in quantitative financial statement

analysis. Theoretical approaches have also been developed, but not always in close

interaction with the empirical research.

Technically, financial ratios can be divided into several, sometimes overlapping

categories. A financial ratio is of the form X/Y, where X and Y are figures derived from

the financial statements or other sources of financial information. One way of

categorizing the ratios is on the basis where X and Y come from (see Foster, 1978, pp.

36-37, and Salmi, Virtanen and Yli-Olli, 1990, pp. 10-11 In traditional financial ratio

analysis both the X and the Y are based on financial statements. If both or one of them

comes from the income statement the ratio can be called dynamic while if both come

from the balance sheet it can be called static. The concept of financial ratios can be

extended by using other than financial statement information as X or Y in the X/Y ratio.

For example, financial statement items and market based figures can be combined to

constitute the ratio.

In this paper reviewed the existing trends in financial statement analysis literature by

focusing primarily on the theoretical and empirical basis of financial ratio analysis. This

is an important task to carry out since the ratios are often used intuitively, without 30

sufficient consideration to their theoretical meaning and statistical properties. In doing

this it is our purpose to pinpoint the different directions taken in quantitative ratio based

research. By critically considering financial ratio literature, we also aim to help the

decision makers to use ratios in an efficient way.

The research areas listed above. The primary areas of the literature concerning the

theoretical and empirical basis of financial ratio analysis are the functional form of the

financial ratios, distributional characteristics of financial ratios, and classification of

financial ratios. These three research avenues are reviewed in Section 2. All the major

financial ratio research avenues cannot be tackled within the limited space of this paper.

Therefore, the estimation internal rate of return from financial statements as the fourth

area. A fundamental task of financial analysis is evaluating the performance of the

business firm.

2.1.13 Review on working capital management

Robert A. Rudzki, discussed certain working capital improvements should be

spearheaded by procurement professionals. In the process, real value can be to the

company while demonstrating that you are able to drive strategic value across both cost-

related and non-cost dimensions.

Payment terms are a great area for leadership by procurement. But there are some pitfalls

to avoid. Partly driven by their financial office, many procurement departments are

pursuing objectives of extending DPO year after year. The objective is typically to better

match DPO with DSO. In other words, balancing the cash cycle time tied up in accounts

receivable with the cash cycle time contributed by supplier payment terms.

A single-minded focus on DPO extension can, however, be counterproductive. In

particular, it can leave untested the willingness of suppliers to entertain aggressive

discount payment terms in exchange for early payment by the customer.

In this credit-constrained environment numerous examples of suppliers offering

aggressive discount terms in order to better manage their own cash flow cycle. If

procurement department is focused solely on extending net payment terms, never 31

uncover the potential for better discounts. It is better, and more valuable, to obtain the

option of paying either discount or NET terms, at the company’s discretion. Then, based

on the company’s finances and liquidity objectives, your Treasury department will have

the flexibility to pay earlier and earn the discount, or pay on a net basis and hold on to

cash.

Jakob Weber in his article considers why corporates should take a strategic approach to

working capital, starting with a comprehensive financial review of all their business

processes. Cash is king, as they say, and now, more than ever, corporates need to make

sure that they have effective cash management and working capital processes in place.

Current market turbulence due to the knock-on effects of the sub-prime mortgage crisis in

the US and the increased attention to working capital and cash flows has led to a renewed

focus on effective working capital management and optimised cash management

processes. This is certainly the right idea but other management tools are needed. At the

core of this approach should be a strategic financial review of all business processes.

Companies should ask their banks to help them perform such analysis in order to support

management and the Board in outlining the organisation's final working capital strategy.

All companies want to increase the value of their business as much as possible and there

are at least three different ways to reach this objective. First, a company can raise its

margins; assuming, of course, that customers will still find the goods attractive. Second,

an organisation can change the company's loan portfolio or the combination of loans. The

third method could be to focus on working capital management, which basically

translates into getting money in as fast as possible, using it effectively and paying

suppliers as late as possible.

Over the past few years, companies and their advisers have increasingly concentrated on

working capital management. The optimal strategy will often comprise elements from the

above-mentioned three methods but it must always be based on a thorough, strategic,

financial analysis of the company. The company has to choose its drivers and should only

consider working capital when it is the driver with the greatest potential.

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2.1.14 Review on Altman Z score calculation

M.S.Ramaratnam&R.Jayaraman studied on measuring the financial soundness of

select firms with special reference to Indian steel industry - An empirical view with Z

score.

Measuring financial soundness of a firm has become  an imperative  and  imminent  need 

in the context  of emerging  hyper  competition  at  almost  every sector of the  business.

Financial soundness of a firm is reflected through various financial parameters which

are closely associated with each other. A general belief is that a firm’s

operating performance depends on certain key financial factors viz., turnover, profit,

asset utilization etc and the variables which are found in profit and loss

account and balance sheet of a firm have a direct or indirect relation with each other. By

establishing a close relationship between the variables, a firm can analyze its financial

performance in terms of liquidity, profitability, viability and sustainability. In order

to measure the performance, ratios, the indicators, are normally used to identify

the financial health of the firm. As far as ratios are concerned, there are more than

40 different types of ratios are available to analyze and predict the financial soundness of

a firm. Since single ratio does not convey much of the sense, Altman

combined a number of accounting ratios to form an index of profitability, which is

regarded as an effective indication of corporate performance in predicting financial

soundness of a firm. By keeping this in view, this article has made an attempt

to analyze and predict the financial health by way of applying Altman’s Z- Score in

the select companies of Indian steel industry.

Indian steel industry is witnessed as one of the most crucial sectors of our

economic growth and the industry occupies a significant proportion in terms of industrial

output of our country. In the light of LPG, the steel industry turned in

at the same time adopting a series including upgradation of technology. Financial

operations, they are not in a position to improve their debt servicing ability by

reducing debt levels. The major factors have been identified as reasons for

pulling back of steel industry and they are as follows:

33

· Long gestation period· Power supply

· Input cost

· Lack of effective logistics and

· Impact of global economic slowdown 

Apart from the above factors, inadequate infrastructure, dependence on coal

and low R&D investment have also emerged as undisputable reason for

further weakening of Indian steel industry.

Therefore application of financial management technique is absolutely necessary

which in turn would help the steel companies in increasing their productivity

and profitability.

34

2.2 NEED FOR THE STUDY

Analyzing and calculating the company financial fitness.

Measuring the financial position and working capital management of the firm.

Measuring the company’s health using the Altman Z- score.

Analyzing the fiscal fitness of the firm.

35

2.3 OBJECTIVES OF THE STUDY

2.3.(a) PRIMARY OBJECTIVE

To study on financial performance and Fiscal fitness of Lemon tree Hotels.

2.3(b) SECONDARY OBJECTIVES

To study the financial performance of the company.

To analyze fiscal fitness using altman z score.

To measure the company’s effectiveness.

To access the working capital employed by the company.

To identify the financial strength and weakness of the company.

36

2.4 SCOPE OF THE STUDY

The study aims at identifying Financial performances and Fiscal fitness of Lemon tree.

It analyses the financial position of the firm based on the financial position of the firm

based on the financial results of the company in the previous year. This study helps the

company to take appropriate financial decision in the future.

The z score is calculated by multiplying each of several financial ratios by an appropriate

Co-efficient and then summering the results.

37

2.5 LIMITATIONS OF THE STUDY

The analysis is made from the annual reports which is not enough to analyze the

appropriate measure.

As the data is from the secondary sources they might have chances of biased

information.

Financial statements are prepared on the basis of certain accounting concepts and

conventions.

Any change in the methods or procedures of accounting systems limits the utility

of financial statements.

Ratios of the past are not true indicators of future.

38

3.1 RESEARCH METHODOLOGY

3.1.1 Research-Meaning

Research is a structured enquiry that utilizes acceptable scientific methodology to solve

problems and create new knowledge that is generally applicable. The term research is

defined as “systematic investigative process employed to increase or revise current

knowledge by discovering new facts”. It is divided into two general categories: (1) basic

research is inquiry aimed at increasing scientific knowledge, and (2) applied research is

effort aimed at using basic research for solving problems or developing new processes,

products, or techniques.

3.1.2 Research Methodology

Research methodology is a way to systematically solve the research problem.

Researchers not only need to know how to develop test, how to calculate chi-square,

coefficient of correlation, weighted average ,analysis of variance , how to apply research

techniques , but they also need to know which of these methods or techniques are

relevant and which are not, and what would they mean and indicate and why. Researchers

also need to understand the assumptions underlying various techniques and they need to

know the criteria by which they can decide that certain techniques and procedure will be

applicable to certain problems and others will not. All this means that it is necessary for

the researcher to design his methodology for his problem as the same may differ from

problem to problem

3.1.3 Research Design

A plan outlining how information is to be gathered for an assessment or evaluation that

includes identifying the data gathering method(s), the instruments to be used/created,

how the instruments will be administered, and how the information will be organized and

analyzed. The research design used in this study is the analytical research.

39

3.1.4 Analytical research

Analytical research is a type of research that utilizes critical thinking to find out facts

about a given topic and from the answers obtained develop new and useful ways of doing

things. Critical thinking is a method of thinking that puts assumptions into question to

decide whether a given claim is true or false.

The process of evaluating data using analytical and logical reasoning to examine each

component of the data provided. This form of analysis is just one of the many steps that

must be completed when conducting a research experiment. Data from various sources is

gathered, reviewed, and then analyzed to form some sort of finding or conclusion. There

are a variety of specific data analysis method, some of which include data mining, text

analytics, business intelligence, and data visualization

3.1.5 Source of Data

Secondary Data – are those which have already been collected by someone else and

which have been passed through the statistical process.

The type of data collection for this research was secondary data which is collected from

the company’s balance sheet journals and pre-historical data.

3.1.6 Tools Used for Analysis

3.1.6(a) Financial ratios

A financial ratio is a relationship that indicates something about a company's activities,

such as the ratio between the company's current assets and its current liabilities or

between its debtors and its turnover.

The basic source of these ratios is the company's profit & loss account and balance sheet

that contain all kinds of important information about that company. The ratios really help

to bring those details to light and identify the financial strengths and weaknesses of the

company.

40

When assessing ratios, it is important that the results are compared with other companies

in the same industry and not to be taken in isolation.

3.1.6(b) Current Ratio

One of the most universally known ratios, which reflect the Working Capital situation,

indicates the ability of a company to pay its short-term creditors from the realisation of its

current assets and without having to resort to selling its fixed assets to do so.

Ideally the figure should always be greater than 1, which would indicate that there are

sufficient assets available to pay liabilities, should the need arise. The higher the ratio the

better.

For those industries such as transport where the majority of assets are tangible fixed

assets, then a figure of 0.6 would be acceptable. In retail and manufacturing we would

expect figures between 1.1 to 1.6; in wholesale and construction 1.1 to 1.5 and motor

vehicles 1.2 to 1.6. Generally where credit terms and large stocks are normal to business,

the current ratio will be higher than, for example, a retail business where cash sales are

the norm.

Current Assets

Current Liabilities

41

3.1.6(c) Liquidity Ratio

Current Assets – Stock

Current Liabilities

This ratio indicates the ability of a company to pay its debts as they fall due. It is

generally considered to be a more accurate assessment of a company's financial health

than the current ratio as it excludes stock, thus reducing the risk of relying on a ratio that

may include slow moving or redundant stock.

Figures of this ratio are lower than the current ratio. Supermarkets can, for example,

easily survive on ratios as low as 0.4 with cash being received for goods sold, before the

goods are actually paid for. Plant hire contractors would also expect ratios as low as 0.6

to 0.8. Clothing retailers also operate at very low levels, with average figures being

between 0.2 and 0.6 and retail as a whole between 0.3 and 0.7. In manufacturing figures

between 0.7 and 1.1 are seen as acceptable and for wholesalers 0.7 to 1.0. Construction

should operate at between 0.6 and 1.0.

3.1.6(d) Solvency Ratio

Shareholders Funds x 100

Total Assets

This ratio measures if the total liabilities of a business (both secured and unsecured) are

too high, indicating a possible over dependency on outside sources for long-term

financial support. By comparing shareholders funds to total assets we can produce a

confidence factor for unsecured creditors to the business. As a general rule, the higher the

result the better, although results for new companies are distorted as the business would

not have had the trading history to develop high levels of net worth. An average score

would be between 30% and 50% whilst poor performers can generate scores of below

42

10% or even have a negative score. Exceptionally performing businesses could reach a

value in excess of 65%.

3.1.6 (e) Debtors Collection Period

Debtors x365 (days)

Turnover

Measures the length of time a company takes to collect its debts and is measured in days.

In general terms the figure indicates the effectiveness of the company's credit control

department in collecting monies outstanding.

Apart from strictly cash businesses like supermarkets with virtually zero debtors, normal

payment terms are at the end of the month following delivery, giving an average credit of

between 6 and seven weeks. Clothing retailers show some of the lowest figures with

averages of around 7 days. In manufacturing average figures are around 63 days, with 42

being experienced at the top end and 84 days at the lower end. Average for wholesalers is

around 56 days, whilst in construction the figures are lower, at around 45 days.

3.1.6(f) Creditor Days

Creditors x 365 (days)

Turnover

This ratio measures the length of time it takes a company to pay its creditors.

Generally the average figure is around 30 days. In the construction industry the average is

around 31 days, rising to 54 days at the bottom end and down to 17 days at the top. For

wholesalers the average rises to 37 days, with top and bottom figures being 18 and 61

days respectively. For retail the average figure drops to 23 days with 40 days being in the

bottom sector. For food retailers as low as 8 - 12 days is the norm. In manufacturing

averages tend to be around 37 days, with the worst performers rising to 55 days and the

best showing creditor days of around 22 days.

43

3.1.6(g) Stock/Turnover

Turnover

Stock

Measures the number of times a company converts its stock into sales during the year.

When examining this ratio it should be borne in mind that different companies will have

varying levels of stock turnover depending on what they produce and the industry they

operate in.

Low figures are generally poor as they indicate excessively high or low moving stocks.

At one end of the scale, and apart from advertising agencies and other service industries,

ready mixed concrete companies probably have one of the better stock/turnover figures.

At the other end companies that maintain depots of finished goods and replacement parts

will have much poorer figures. For example, a manufacturing company with

stock/turnover ratio of around 25 - 30 would be reasonable, decreasing with the larger

and more complex the goods being made. For retail and wholesale, average figures would

be lower at around 9 - 10. For construction, average stock/turnover figures would be

around 16 and for industries such as transport, where overall stock figures are low, it

would produce results of around 80 - 90.

3.1.6(h) Profit Margin (Return on Sales)

Profit Before Tax x 100

Turnover

Measures the margin of profitability on sales throughout the year. This is the main

indicator when measuring the efficiency of the operation, a very good indicator of the

business's ability to withstand falling prices, rising costs or declining sales.

44

A normal figure for a manufacturing industry would be between 6% and 8%, while high

volume/low margin activities like food retailing can run very satisfactorily at around 3%.

Retailers generally will have a lower profit margin than most industries.

Highest margins of all are usually experienced in service industries where margins above

10% are enjoyed.

The percentage should be relatively constant and any reason for decline investigated.

Reasons for change could be a reduction in selling prices or increase in cost of sales.

3.1.7 Working Capital Statement

Working capital measures how much in liquid assets a company has available to build its

business. The number can be positive or negative, depending on how much debt the

company is carrying. In general, companies that have a lot of working capital will be

more successful since they can expand and improve their operations. Companies with

negative working capital may lack the funds necessary for growth. It is also called net

current assets or current capital.

Working capital is how much in liquid assets that a company has on hand. Working

capital is needed to pay for planned and unexpected expenses, meet the short-term

obligations of the business, and to build the business.

A lack of working capital makes it hard to attract investors or to get business loans or

obtain credit.

The accounting formula used to calculate the available working capital of a business is:

Current Assets - Current Liabilities = Working Capital

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3.1.8 Altman z-score

Edward I. Altman, Professor and Vice-Director of New York University's Salomon

Center, Leonard N. Stern School of Business. Dr. Altman is known as the founding father

of using statistical techniques to predict company failure. He developed the Z-Score

analysis almost 30 years ago, and is the author of several books, including  The Z-Score

Bankruptcy Model: Past, Present, and Future (New York: John Wiley & Sons, 1977), and

Corporate Financial Distress and Bankruptcy, 2nd edition (New York: John Wiley &

Sons, 1993).

3.1.8(a) Altman's Z-score calculates five ratios:

Return on total assets,

Sales to total assets,

Equity to debt,

Working capital to total assets, and

Retained earnings to total assets.

These ratios are then multiplied by a predetermined weight factor, and the results are

added together. The final number--the Z-score--yields a number between -4 and +8.

Financially-sound companies show Z-scores above 2.99, while those scoring below 1.81

are in fiscal danger, maybe even heading toward bankruptcy. Scores that fall between

these ends indicate potential trouble.

Although the numbers that go into calculating the Z-score (and a company's financial

soundness) are sometimes influenced by external factors, it provides a good quick

analysis of where your company stands compared to the competition, and a good tool for

analyzing the ups and downs of your company's financial stability over time.

The Altman Z-Score Analysis - 5 Ratios.

RATIO FORMULA WEIGHT FACTOR WEIGHTED RATIO

Return on Total Assets Earnings Before Interest and

Taxes

-----------------------------------------

x. 3.3 -4 to +8.0

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Total Assets

Sales to Total Assets

Net Sales

-----------------------------------------

Total Assets

x 0.999 -4 to +8.0

Equity to Debt

Market Value of Equity

-----------------------------------------

Total Liabilities

x 0.6 -4 to +8.0

Working Capital to Total

Assets

Working Capital

-----------------------------------------

Total Assets

x 1.2 -4 to +8.0

Retained Earnings to Total

Assets

Retained Earnings

-----------------------------------------

Total Assets

x1.4 -4 to +8.0

Z-SCORE ABOVE 2.99--COMPANY IN GOOD SHAPE.

Z-SCORE BETWEEN 2.99 and 1.81--WARNING SIGNS.

Z-SCORE BELOW 1.81--BIG TROUBLE--COULD BE HEADING TOWARD

BANKRUPTCY.

3.1.8(b) Altman Z Score: Formula

Model B Z-Score for private general companies: this model analyzed the characteristics

and accuracy of a model without X5 - sales/total assets.

Model B Z-Score = 6.56X1 + 3.26X2 +6.72X3 +1.05X4

X1 = working capital/total Assets. It measures the net liquid asset of a company relative to the total assets.

X2 = retained earnings/total Assets. It measures the financial leverage level of a company.

X3 = earnings before interests and taxes/total Assets. It measures productivity of a company’s total assets.

X4 = market value of equity/book value of total liabilities. It measures what portion of a company’s assets can decline in value before the liabilities exceed the assets.

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X5 = sales/total Assets. It measures revenue generating ability of a company’s assets. 

3.2 DATA ANALYSIS &INTERPERTATION

3.2.1 Table showing the Current Ratio.

FORMULA: current assets /current liabilities=

YEARCURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT

RATIO

2009-2010 3962082570 1713020445 2.3:1

2010-2011 40261.43 14450.50 2.8:1

2011-2012 58098.53 17448.86 3.33:1

INFERENCE: From the above table it was inferred that current ratio in 2009 to 2010 is

2.3:1 and 2009 to 2010 is 2.8:1 and from 2010 to2011 is 3.33:1.

FINDING: From the above table analyzed that the current ratio for the following 3 years

is not ideal ratio for this company.

3.2.1 Chart showing the Current Ratio for 3 years.

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3.2.2 Table showing the Liquid Ratio.

FORMULA: Current assets-stock/current liabilities

YEAR CURRENT ASSETS-STOCKCURRENT

LIABILITIES

LIQUID

RATIO

2009-2010 (3962082570-496353336) 1713020445 2.07:1

2010-2011 (40261.43-4343.44) 14450.50 2.5:1

2011-2012 (580898.53-543809) 17448.86 3.021

INFERENCE: From the above the liquid ratio in the year 2009 to 2010 is 2.07:1 and in

the year 2009 to 2010 is 2.5:1 and in the year 2010 to 2011 is 3.02:1.

FINDING: From this table the liquid ratio for the following 3 years is not ideal ratio for

this company.

3.2.2 Chart showing liquid ratio for the following 3 years.

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3.2.3 Table showing Solvency Ratio

FORMULA: share holder funds/total assets *100

YEAR SHARE HOLDER

FUNDS

TOTAL ASSETS SOLVENCY

RATIO

2009-2010 19400254911 48119741508 40%

2010-2011 205414.59 533866.09 38%

2011-2012 210287.71 632826.91 33.23%

INFERENCE: From the above table found that the solvency ratio for the tear 2009 to

2010 is 40% and in the year 2009 to 2010 is 38% and in the year 2010 to 2011 is 33.23%

FINDING: From this table analyzed that the solvency ratio for the following 3 years is

the ideal ratio for the company.

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3.2.3 Chart showing solvency ratio for 3 years.

3.2.4. Table showing Debtors Turnover Ratio.

FORMULA: Debtors*365/turn over

YEAR DEBTORS TURN OVERCOLLECTION

PERIOD

2009-2010 315099080*365 5821646172 19.76

2010-2011 3790.17 43012.18 32.16

2011-2012 4930.21 52528.34 34.22

INFERENCE: From the above table found that from the debtor turn over ratio in the

year 2009 to 2010 is 19.76 and in the year 2009 to 2010 is 32.16 and in the year 2010 to

2011 is 34.22

FINDING: From this table found that the debtor turn over ratio is not ideal to the

company.

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3.2.4 Chart showing debtors turnover ratio.

3.2.5. Table showing Creditors’ Turnover Ratio

FORMULA: creditors*365/turn over ratio

YEAR CREDITOR TURN OVER

CREDITOR

TURNOVER

RATIO

2009-2010 703740997 5821646171 4.461

2010-2011 5704.59 43012.18 48.41

2011-2012 509224 52582.34 35.35

INFERENCE: From the above ratio found that the creditor turn over ratio in the year

2009 to 2010 is 4.461 and in the year 2009 to 2010 is 48.41 and in the year 2010 to 2011

is 35.35

FINDING: It is inferred that the creditor turn over ratio is ideal to this company.

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3.2.5 Chart showing creditors turnover ratios.

3.2.6. Table showing Stock Turnover Ratio.

FORMULA : Turnover /stock

YEAR TURNOVER STOCKSTOCK TURN

OVER RATIO

2009-2010 5821646172 419635336 13.87

2010-2011 43012.18 4343.33 9.90

2011-2012 52582.34 5438.09 9.67

INFERENCE: From the above table found that from the stock turn over ratio in the year

2009 to 2010 is 13.87 and in the year 2009 to 2010 is 9.90 and in the year 2010 to 2011 is

9.67

FINDING: From this table found that the stock turn over ratio is ideal to this company.

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3.2.6 Chart showing the stock turnover ratio for 3 years.

3.2.7. Table showing Profit Margin Ratio.

FORMULA: Profit before tax*100/turn over

YEARPROFIT

BEFORE TAXTURN OVER

PROFIT

MARGIN RATIO

2009-2010 1834531.829 5221646172 33.23

2010-2011 6464.24 4301218 15.03

2011-2012 5762.37 525282.34 10.96

INFERENCE: From the above table found that from the profit margin ratio in the year

2009 to 2010 is 33.23 and in the year 2009 to 2010 is 15.03 and in the year 2010 to 2011

is 10.96

FINDING: From this table analyzed that the profit margin ratio for the following 3 years

is ideal ratio for the company.

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3.2.7. Chart showing profit margin ratio for 3 years

Altman z- score model B calculation

Model B z- score calculation = X1 + X2 + X3 + X4 + X5

3.2.8 Table showing X1 ratio.

FORMULA: X1=working capital /total assets

YEARWORKING

CAPITALTOTAL ASSETS X1

2009-2010 2249062125 48119741508 0.047

2010-2011 25810.93 533866.09 0.0483

2011-2012 40649.67 632826.97 0.064

INFERENCE: From the above table found that from the x1 ratio in 2009 to 2010 is

0.0483 and in the year 2009 to 2010 is 0.0483 and in the year 2010 to 2011 is 0.064

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FINDING: From this table analyzed that the majority of working capital is high in year

2011-2012

3.2.8 Chart showing X1 ratio

3.2.9 Table showing X2 ratio.

FORMULA: X2=Retained earnings/total assets

YEARRETAINED

EARNINGSTOTAL ASSETS X2

2009-2010 1449846113 48119741508 0.030

2010-2011 399.13 533866.09 0.0007

2011-2012 783.85 632826.97 0.006

INFERENCE: From the above table we found that from the x2 ratio in the 2009 to 2010

is 0.030 and in the year 2009 to 2010 is 0.0007 and in the year 2010 to 2011 is 0.006

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FINDING: From the above table it was found that the retained earnings and total assets

are high during the year 2009-2010

3.2.9 Chart showing X2 ratio.

3.2.10 Table showing X3 ratio.

FORMULA: X3=Earnings before int & taxes/total assets

YEAR

EARNING

BEFORE INT &

TAXES

TOTAL ASSETS X3

2009-2010 2201811653 48119741508 0.046

2010-2011 891105 533866.09 0.0161

2011-2012 111524.70 632826.97 0.018

INFERENCE: From the above table we found that in the year 2009 to 2010 is 0.046 and

in the year 2009 to 2010 is 0.0161 and in the year 2010 to 2011 is 0.018

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FINDING: The majority of earnings before int & taxes and the total assets are high in the

year 0.098

3.2.10 Chart showing X3 ratio

3.2.11. Table showing X4 ratio.

FORMULA: Market value of equality/book value of total liabilities

YEAR

MARKET

VALUE OF

EQUALITY

BOOKVALUE OF

TOTAL

LIABILITIES

X4

2009-2010 755649984 48119741508 0.016

2010-2011 7556.5 533866.09 0.014

2011-2012 7756.5 632826.97 0.012

INFERENCE: From the above table we found that in the year 2009 to 2010 is 0.016 and

in the year 2009 to 2010 is 0.014 and in the year 2010 to 2011 is 0.012

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FINDING: From this table analyzed the majority of market value of equality and total

liabilities are high in the year 2008-2009

3.2.11. Chart showing X4 ratio

3.2.12. Table showing X5 ratio.

FORMULA: X5=Sales/total assets

YEAR SALES TOTAL ASSETS X5

2009-2010 4522349001 48119741508 0.094

2010-2011 43012.18 533866.09 0.081

2011-2012 52582.34 632826.97 0.083

INFERENCE: From the above table we found that in the year 2009 to 2010 is 0.094 and

in the year 2009 to 2010 is 0.081 and in the year 2010 to 2011 is 0.083.

FINDING : From the table we analyzed that the majority of sales are high in 2008-2009

3.2.12 Chart showing X5 for 3 years.

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MODEL B calculation for 3 years.

2008-2009=X1 + X2 + X3 + X4 + X5=0.73

2009-2010=X1 + X2 + X3 + X4 + X5=0.45

2010-2011=X1 + X2 + X3 + X4 + X5=0.57

FINDING: From the table we found that from the all years the company is heading to

bankruptcy.

3.2.13 Working Capital Statement

PARTICULARS 2009 2010 INCREASE DECREASE

Current assets

Inventories 386675989 419635336 32959347

Sundry debtors 386295761 315099080 71196681

Cash & bank

balance295583119 303946405 2651884714

Current

liabilities932880832 1713020445

TOTAL 32959347 3503221008

NET

DECREASE3470261661

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INFERENCE: From the above table we found that net decrease in the working capital is

3470261661rs

FINDING: From this following table analyzed that there is a decrease in the working

capital in the year 2009 to 2010

3.2.14 Working capital statement for the year 2010-2011

PARTICULARS 2010 2011 INCREASE DECREASE

Current assets

Inventories 419635336 43434000 14708664

Sundry debtors 315099080 379017000 63917920

Cash & bank

balance303946405 13477600 16970405

Current

liabilities1713020445 144505000 267970445

TOTAL 346597029 16970405

NET

INCREASE177426624

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INFERENCE: From the above table we found that the net increase in the working

capital is 177426624 rs

FINDING: From the following table analyzed that there is a increase in the working

capital in the year 2010-2011

3.2.15 Working capital statement for the year 2011-2012.

PARTICULARS 2011 2012 INCREASE DECREASE

Current assets

Inventories 434344000 5343809000 109465000

Sundry debtors 379017000 493021000 114004000

Cash & bank

balance134776000 560523000 435747000

Current

liabilities144505000 174488600 299836000

TOTAL 649216000 299836000

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NET

DECREASE349380000

INFERENCE: From the above table we found that the net increase in the working

capital is 349380000rs

FINDINGS: From the following table we analyzed that there is net decrease in the

working capital in the year 2011-2012.

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3.3 FINDINGS OF THE STUDY

The company’s current ratios for the 3 years are not ideal for this company.

The liquid ratios of the company for the 3 years are marginally low.

The solvency ratios for the following 3 years are ideal for the company.

The Company’s debtor turn over ratio is not maintained properly.

The creditors’ turnover ratio is ideal to this company.

The stock turnover ratio is ideal to this company.

The profit margin ratio for the 3 years is ideal ratio for the company.

The majority of working capital is high in year 2011-2012

From the table of x2 ratio, the retained earnings and total assets are high in the

year 2009-2010

The majority of earnings before interest & taxes and the total assets are high in

the year 2010-2011 is 0.098.

From the table X5 ratio, the majority of sales are high in 2009-2010.

All x5 ratios we found that from the all years the company is heading to

bankruptcy.

There is a decrease in the working capital in the year 2009 to 2010.

There is a increase in the working capital in the year 2009-2010.

There is net decrease in the working capital in the year 2011-2012.

3.4 SUGGESTIONS & RECOMMENDATIONS

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From the analysis of this study suggested that the company’s financial ratio is not

ideal to the mark. So to develop that the company should maintain proper current

assets and current liabilities.

From the analysis of working capital statement the company has net increase in

the year 2010-2011, but it has got net decrease in 2009-2010 and in 2011-2012 to

maintain the good working capital in the firm there should be adequate cash

flows.

From the analysis of the altman z score ratios in all the 3 years the company is

heading to the bankruptcy. To avoid this firm should overcome the bad debts.

The company should try to avoid investing more on assets which affects the

requirement of working capital to operate the company. By reducing the

investments on assets , the company can reduce the its working capital

requirements.

The should try reduce its debts to ensure profitability in the company.

Though it is beneficial to have surplus retained earnings to avoid having excess

retained earnings to avoid any financial difficulties in future.

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3.5 CONCLUSION

The present study “FINANCIAL PERFORMANCE AND FISCAL FITNESS OF

LEMON TREE HOTELS” was conducted with help of annual report. Various financial

tools are used in the study from the ratio analysis it has been found that the average

collection period of the company is high and current ratio is marginally low. It is the part

of the company to accept the suggestions suggested.

Profitability position was deteriorated year by year, liquidity position also moderate due

to high debts, the firm’s efficiency in utilizing assets is also very low.

Finally the study helped me to acquire practical knowledge that was only over by books

and papers alone. I take up thus opportunity to thank one and all for making study a

complete one.

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BIBLIOGRAPHY

Books Referred

Financial Management I. M. Pandey Ninth EditionVikash Publishing housePvt

ltd.

Financ i a l Managemen t Theo ry and P rac t i c e P ra sanna Chand ra

S ix th Edition Tata Mc Graw Hill Publishing company.

Management Accounting Principles and Practice R. K. Sharma Sahashi

K.Guptha Eigth edition kalyani publishiers

Websites Visited:

www.cliffsnotes.com

www.financial_education.com

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