CASE STUDY: INIGO INVESTMENT LIMITED

CASE STUDY: INIGO INVESTMENT LIMITED



CASE STUDY: INIGO INVESTMENT LIMITED

Introduction

The Chairman of LOL Leisure plc (LOLL) sent a circular letter to shareholders together with the summarised financial statements for the last four years. He also sent the letter to the Chief Executive of Inigo Investment Limited, which is the major investor in LOLL's equity.

The performance and financial position of LOL Leisure plc (LOLL) group is not very outstanding as highlighted by the chairman in the circular. Although the sales revenue and operational diversification has increased in the last four years but the fundamental financial ratios, have a decreasing trend in the past four years. The chairman of the group have highlighted the plans for investing in the new project for building a new luxury 300-bedroom hotel in the English resort of Bournemouth. The new hotel will certainly result in a substantial increase in shareholder value, further boosting the company's share price. It will be one more step towards the achievement of our corporate objective of becoming the largest hotel group in the UK within five years.

A clear need for such a hotel has been established by our comprehensive market research survey, which has just been completed at a cost of £50,000. The impact of this project on the existing 'budget' hotel in Bournemouth has also been studied. Since the proposed new hotel is targeted at a different market segment, the adverse impact on our existing hotel's contribution is expected to be not more than half a million pounds a year, a price worth paying for the increase in overall market share and brand visibility.

Me and my team have carried out the financial analysis of the company for the last four years and also have applied different techniques of investment appraisal to study the feasibility of the investment project.

Ratio Analysis of LOL Leisure plc (LOLL)

Liquidity Ratios

2007

2008

2009

2010

Current Ratio

=

Current Assets

=

79

80

119

168

 

 

Current Liabilities

92

108

174

244

=

0.85

0.74

0.68

0.68

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets (. The higher the current ratio, the more capable the company is of paying its obligations. The company's current ratio is decreasing in the last four years and it suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

Quick Ratio

=

Current Assets - Inventory/stock

=

47

47

75

118

 

 

Current Liabilities

92

108

174

244

=

0.51

0.43

0.43

0.48

The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory also referred as stock is excluded because some companies have difficulty turning their inventory into cash. AS we see the above calculated ratio we can observe that the quick ratio has also decreased in the last year which can raise trouble in paying off company's short term ...