Introduction

The Pegasus Hotel of Jamaica Limited is a Jamaican based hotel that provides accommodation for both business and leisure travelers. It is a registered company under the Jamaica Stock Exchange. Like many other hotels within the tourism sector Pegasus has been experiencing some challenges and downturns in revenues. In recent years the hotel has undergone major renovations and refurbishing in an attempt to improve quality and increase its revenues. An in-depth analysis of Pegasus Hotel of Jamaica Limited has been conducted to assess the financial performance of the company between the period 2008 2010 and its feasibility for a potential investor. .

Purpose and limitations of Ratio Analysis Ratio analysis involves examining the relationship between pieces of information in the financial statements for a given accounting period. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. From managements standpoint ratios are useful both as a way to anticipate future conditions and also as a starting point for planning actions that will influence the future course of events. Ratios are useful because they summarize much data and put it in a usable format. They are used to highlight the strengths and weakness of a company relative to its industry and also used as an early warning system, as a means of monitoring management as well as a screening tool. Financial statement ratio analysis focuses on several groups of ratios that each serves different purposes to an entity.

Different stakeholder groups have different needs and tend to focus on different categories of ratios. Suppliers and short-term lenders are most interested in liquidity ratios. Liquidity ratios refer to the firms ability to meet short-term obligations and they show the relationship of a companys cash and other current assets to its current liabilities. Firms with poor liquidity are more likely to fail and default on their debts therefore a higher ratio is better but one that is too high may suggest inefficient use of resources and reduced returns.

The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. It provides a margin of

safety in shrinkage of non-cash current assets and also provides a reserve of liquid funds against uncertainties and shocks to cash flows. It is calculated by dividing current assets by current liabilities.

Quick ratio is also called the acid test ratio and is a more stringent test of a companys liquidity as it ignores inventory which can take some time to be converted to cash depending on the length of the companys operating cycle. The acid test ratio is calculated by subtracting inventory from current assets divided by current liabilities.

Receivable turnover ratio calculates the number of times in an operating cycle (normally a year) the company collects its accounts receivable balance. A high turnover ratio indicates that the company is efficient in the collection of its receivables while days sales outstanding show the number of days it takes the company to collect amounts outstanding. A low figure is desirable but indicates an unduly restrictive credit policy. Accounts receivable turnover ratio is calculated by sales or credit sales divided by accounts receivable.

Average collection period also called the days sales outstanding is a variation of the receivables turnover. It is used to evaluate the effectiveness of a companys credit and collection policies. A rule of thumb is the average collection period should not be significantly greater than a companys credit term period.

Inventory turnover ratio measures the average speed that inventories move through the company. A high ratio may indicate a sign of efficiency, high sales or that the company is living from hand to mouth, providing little variety to customers and may sometimes be out of stock. A low ratio may be a sign that the company is holding too much stock or holding damaged or obsolete stock. It is calculated by dividing the cost of goods sold by average inventory.

Day's sales on hand also called average days inventory on hand is a variation of the inventory turnover and it calculates the number of day's sales
being carried in inventory. It is calculated by dividing 365 days by the inventory turnover ratio. Profitability ratios measure a company's operating efficiency, including its ability to generate a satisfactory income. Profitability is closely linked to its liquidity because earnings ultimately produce cash flows. Cash flow affects the company's ability to obtain debt and equity financing. Profitability ratios show the combined effects of liquidity, asset management and debt on operating results. The profit margin ratio also known as the operating performance ratio, measures the company's ability to turn its sales into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. A low NPM may indicate that costs are too high, operations may be inefficient or the company may be heavily in debt leading to high interest charges. It is calculated by dividing net income by net sales.

The asset turnover ratio measures how efficiently a company is using its assets. The turnover value varies by industry. It is calculated by dividing net sales by average total assets.

The return on assets ratio (ROA) is considered an overall measure of profitability. It measures how much net income was generated for each $1 of assets the company has. ROA is a combination of the profit margin ratio and the asset turnover ratio. This ratio can be derived from multiplying the net profit margin by the assets turnover ratio.

The return on common stockholders' equity (ROE) measures how much net income was earned relative to each dollar of common stockholders' equity. It is derived by dividing net income by average common stockholders' equity or multiplying ROA by the equity multiplier. This shows that ROE is affected by profit margins, asset use efficiency and financial leverage.

Solvency ratios are used to measure long-term risk and are of interest to
long-term creditors and stockholders. The debt to total assets ratio calculates the percent of assets provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the same as total liabilities. The times interest earned ratio is an indicator of the company's ability to pay interest as it comes due. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expense.

Market value ratios relate the companys stock price to the internal performance of the company. They give an indication of how investors feel about the companys future prospects based on its past performance. High ratios indicate good prospects and is expected if all other ratios are good thus stock prices would be expected to be high. The price or earning ratio shows how much investors are willing to pay per dollar of reported profits. A high P/E ratio may indicate that the market expects an increase in earnings in the future while a low P/E ratio usually indicates poorer growth prospects or high risk or both. The payout ratio identifies the percent of net income paid to common stockholders in the form of cash dividends. It is calculated by dividing cash dividends by net income. Another indicator of how a corporation performed is the dividend yield. It measures the return in cash dividends earned by an investor on one share of the company's stock. It is calculated by dividing dividends paid per share by the market price of one common share at the end of the period. No single ratio or one year figure is sufficient to provide an assessment of a companys performance. Financial analysis may indicate that something is wrong, but it may not identify the specific problem or purpose for example indicating performance or profitability as well as flexibility or adaptability. Ratios can be used in conjunction with other supporting ratios and within the context of the industry, remembering the impact of inflation and size. Inflation can distort a firms balance sheet and profits. Sometimes a company with an industry average can be misleading if the company operates in more than one industry therefore interpreting the results of your analysis requires a sound

understanding of the company, the industry and the general economic environment. Different accounting practices can distort comparisons and seasonal factors may also distort ratios as different companies often use different accounting procedures for recording similar items.

Common Size Analysis

Horizontal Analysis Information is necessary for the prediction of future performance of a company, the two simplest measurement used to analyze a companys financial performance through the use of financial statements are vertically and horizontally. A horizontal analysis provides you with a way to compare your numbers from one period to the next, using financial statements from at least two distinct periods. Each line item has an entry in a current period column and a prior period column. Those two entries are compared to show both the dollar difference and percentage change between the two periods. Quite simply, the horizontal analysis is the financial statements of a company of successive years presented side-by-side. The goal of horizontal analysis is to compare the figures of the current period with that of the past period. This helps the company and its shareholders analyze their performance and find out areas of improvement.

Horizontal analysis is done for both income statements and balance sheets. The figures for the different heads under the income statements and the balance sheets are placed side-by-side so that the reader can compare the two and understand how the company is doing. Horizontal analysis is an important part of the financial statements and

annual reports. It places the facts very simply in front of the shareholder and makes the job of analyzing the improvements or the lack of it very simple for the shareholder. And if there is no improvement or in fact a reduction, then the board is compelled to explain the situation to the shareholder and what they intend to do in the future to fix it. The main point of performing a horizontal analysis on your financial statements is to see how things have changed from one period to the next. These changes are called trends in accounting lingo, and tell a lot about the performance of a company by the trends in its financial statements. In addition to that, it will help shine a light on numbers that should have changed by a certain amount but didn't. For example, if your sales increased by 20 percent you would expect your gross profit to change by a similar amount One method of performing a horizontal financial statement analysis compares the absolute dollar amounts of certain items over a period of time. For example, this method would compare the actual dollar amount of operating expenses over a period of several accounting periods. This method is valuable when trying to determine whether a company is conservative or excessive in spending on certain items. This method also aids in determining the effects of outside influences on the company, such as increasing gas prices or a reduction in the cost of materials. The other method of performing horizontal financial statement analysis compares the percentage difference in certain items over a period of time. The dollar amount of the change is converted to a percentage change. For example, a change in operating expenses from $1,000 in period one to $1,050 in period two would be reported as a 5% increase. This method is particularly useful when comparing small companies to large companies.

Trend Analysis
Vertical Analysis Vertical analysis is a technique of financial statement analysis wherein every entry under all three major accounting categories: equities, assets and liabilities in a balance sheet are presented as a part of the total account. It is also known as comparative analysis or common size analysis which seeks to break down each item in the financial statements to enable better comparison. A vertical analysis shows you the relationships among components of one financial statement, measured as percentages. On your balance sheet, each asset is shown as a percentage of total assets; each liability or equity item is shown as a percentage of total liabilities and equity. On your statement of profit and loss, each line item is shown as a percentage of net sales. It expresses each line item on a single year's financial statement as a percent of one line item which is referred to as a base amount. The main advantages of vertical analysis are that the balance sheets of businesses of all sizes can easily be compared. Another benefit of doing a vertical analysis of financial statements is that it helps to bring to notice any changes in a business within a year. Performing vertical analysis of the income statement involves comparing each income statement item to sales. Each item is then reported as a percentage of sales. For example, if sales equals $10,000 and operating expenses equals $1,000, then operating expenses would be reported as 10% of sales. Likewise performing vertical analysis of the balance sheet involves comparing each balance sheet item to total assets. Each item is then reported as a percentage of total assets. For example, if cash equals $5,000 and total assets equals $25,000, then cash would be reported as 20% of total assets.

A common-size balance sheet allows you to compare your companys balance sheet to another companys balance sheet or to the average for its industry. A commonsize income statement allows you to compare your companys income statement to another companys or to the industry average. In a balance sheet, for example, cash and other assets are shown as a percentage of the total assets and, in an income statement, each expense is shown as a percentage of the sales revenue. Financial statements using this technique are called common size financial statements.

What is the Difference Between Horizontal and Vertical Analysis? In vertical analysis, every amount in the financial or income statement is expressed as a percentage of another amount. Thus, in the assets column, after vertical analysis is done, each value is shown as a percentage of the total value of all assets combined. These proportional values, when represented, are known as a common-size balance sheet. Similarly, for income statement, values derived are a percentage of total sales. The restated values form the common-size income statement. Companies find this useful for comparing their financial and income statements with other companies or the industry average. In horizontal analysis, values on the balance sheet over past years are compared with each other. For example, stock balance represented on the balance sheet for December 31 2009, 2008, 2007 and 2006, will be a percentage of the stock amount as on 31 December 2006. Amounts are expressed in percentages and not dollars, indicating an increase or decrease in value from the base year. All items on the balance sheet and income statement are compared in this manner. This analysis is also known as trend

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analysis and helps a company to notice change in a particular item over the years as compared to changes in other items.

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Company Overview Pegasus Hotels of Jamaica Limited, owners and operators of the Jamaica Pegasus was incorporated on June 19, 1968. It started out as a joint venture between British Airways overseas corporation (now British Airways), Trusthouse Forte and the people of Jamaica through the Jamaica Stock Exchange. By a management agreement in 1968 the company appointed Forte (Holding) Limited as manager of the hotel for an initial term of seven (7) years commencing April 15, 1973 and a further fourteen (14) years commencing April 15 1980. The government of Jamaica agreed in 1976 to purchase the share holdings of British Airways Associated Companies Limited and Trusthouse Forte International Limited. In 1980 the company became a subsidiary of National Hotels and Properties Limited (wholly owned subsidiary of Urban Development Corporation) who had acquired 59.8% of the ordinary stock units. By an agreement in May 1994, Forte (UK) Limited became responsible for the management of the hotel. However, in 1997 Forte was taken over by Granada Plc and the hotel was rebranded Le Meridien Jamaica Pegasus. By another agreement in September 1997, Meridien, SA became responsible for the management of the hotel. Meridien, SA did not seek to renew their contract upon maturity so the board took the decision for the company, Pegasus Hotels of Jamaica Limited to manage the hotel for the year 2002/2003 under its brand name The Jamaica Pegasus. Kingstons Preferred Hotel is the most apt way to describe the Jamaica Pegasus Hotel. Situated in the financial and business district of the largest English-speaking city

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in the Caribbean, it is within walking distance from many international offices and embassies, as well as historical sites, cultural centres, shopping areas and restaurants. This revered landmark in the capital city Kingston, the Pegasus as it is affectionately called, is seventeen stories high in the heart of New Kingston. Over the past 37 Years, the Jamaica Pegasus Hotel has earned the enviable reputation for superb hospitality and accommodation. Home to royalties and dignitaries and celebrities, the hotel is also a constant buzz of activity for local clientele.

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

Challenges of Pegasus in 2008 Due to a fire and hurricane during the year $120 million was invested in repairs and maintenance. There was a decrease in net profit from $41,080,000.00 to $39,015,000.00

Successes of Pegasus in 2008 In 2008 Pegasuss pre-tax profit increased from previous $53,328,000.00 to $63,178,000. There was major investment of $133 million on expansion and refurbishing of fixed assets Challenges of Pegasus in 2009 Long term debt increased from $45M to $49M Net Curret Asset decreased from $107 to $24M in part due to a holding of $62M of government of Jamaicas indexed bonds due in May 2010 was classified a noncurrent asset.

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National Hotels & Properties Limited, the majority shareholder has declared its intention to offer its entire shareholding for sale

Pegasus reaction to the challenges Hotel incentives during the next ten years would be used to justify earlier investments. Successes of Pegasus in 2009 During the year $117M was invested in fixed assets and a further $43M was invested in replacements. The new cooling tower system installed during the year has been a reduction in the electricity consumption Net profit increased from 39,015,000.00 to $55,243,000.00 As a result of the ongoing refurbishing project the hotel was granted incentive for ten years under the Hotel (Incentives) Act (1990). Challenges of Pegasus in 2010 The Jamaica Pegasus sustained a decrease in profits of $17.2 million from the previous years $55.2 million due to the continued global recession causing downward adjustments of room rates. There was an increased competition with an addition of 112 new rooms to Kingston. Banqueting revenue also decreased as companies, ministries, government agencies and individuals reduced expenditure.

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Pegasuss reaction to these challenges Stringent cost control initiatives including more energy conservation methods were introduced. Successes of Pegasus in 2010 Over the three years period all bedroom floors were now refurbished leading to $152 million invested in fixed asset. The hotels internet service which was obsolete was upgraded resulting in all bedrooms, meeting rooms and public area having wireless access.

Corporate Social Responsibility of Pegasus Hotels of Jamaica Limited While the company places no emphasis or highlights on charity work or corporate social responsibility in the reports or that of the media, they have however, adopted Reddies Place of Safety for elderly persons and have contributed widely to the home.

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Ratio Analysis PROFITABILITY RATIO 2008 % 5.77 60.26 9.14 1.8 0.93 2009 % 4.33 65.53 5.44 1.39 0.89 2010 % 0.86 65.02 1.27 0.28 0.15

RATIOS Net Profit Margin Gross Profit Margin Operating Profit

Return on Capital Employed Return on Total Assets

Profitability ratios measure how well a company is performing by analyzing how profit was earned relative to sales, total assets and net worth. Profit Margins Ratio Net profit margin measures how much of each dollar earned by the company is translated into profits. A low profit margin indicates a low margin of safety which means a higher risk that a decline in sales will decrease profits and resulting in a net loss. Net profit margin is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit. The Net Profit Margin ratio for Pegasus Hotels of Jamaica Limited declined over the 3 years ranging from 5.77% to 0.86%. A low net profit margin is an indication of the company being heavily indebted with high interest rates, the costs are too high and operations may be inefficient. Pegasus Hotels of Jamaica Limited balance sheet for year ended 31 March 2010, long term liabilities (loans) had significantly increased over the

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periods. This mainly contributes to the 24% and 80% decrease in the net profit margin for the same period. The gross margin gives a good indication of the companys financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses. A company with a high gross profit margin could be experiencing high sales or high prices whilst a low gross profit could mean low sales or high costs or changes in pricing policies. The company had a 9% increase in its gross profit margin in 2009 which resulted from an increase in sales. In 2010 there was a 4% reduction in sales which was reflected in a slight reduction in the gross profit margin for the company. Operating profit margin measures what proportion of a company's revenue is left over, after deducting direct costs and overhead and before taxes and other indirect costs such as interest. It gives an indication of how much a company makes (before interest and taxes) on each dollar of sales. Operating margin ratio shows whether the fixed costs are too high for the production or sales volume. A high or increasing operating margin is preferred because if the operating margin is increasing, the company is earning more per dollar of sales. There were downward trends in operating profit over that the three periods wth both operating profits and sales declining. In 2010 there was a drastic reduction in operating profit of 77%. The reduction in operating profit resulted from an increase in operating expenses.

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Return on Capital Employed Return on Capital Employed is ratio used to measure the return a company gets from the capital it invests or employs and whether a company can afford its cost of capital. A low ROCE indicates inefficiencies, even though a company may have a high net profit margin. For Pegasus Hotels of Jamaica Limited there were declines in the ROCE over the periods. This was due to reductions in operating profit over the same periods. Return on Total Asset The Return on Total Assets (ROA) is an indication of how effective the company is at converting the money invested into net profit. The higher the ROA is, the better, because the company is earning more money on less investment. It is evident based on its financials that Pegasus Hotels of Jamaica Limited management is inefficient at using its assets to generate earnings. For the three years analyzed the ROA was below 1%. There was a downward trend in ROA with a 83% decrease in 2010. This was related to a significant reduction in net profit for the period. This says that the Companys assets are not converting into enough profit for the company.

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SHAREHOLDERS FUND/MARKET VALUE RATIO 2008 2009 2010 RATIOS $ $ $ Dividend Yield Earnings per Share Dividend Cover Price Earnings Market to Book Value 2.50% 0.32 1.30 50.00 0.58 3.33% 0.36 0.90 33.33 0.38 2.33% 0.07 0.20 214.29 0.42

These ratios are important to investors and financial managers who are interested in the market prices of the shares of a company. They indicate how well a company is performing in relation to the price of its shares and other related items including dividends and number of shares issued (Wood and Sangster1999). If a companys liquidity, asset management, debt management, and profitability ratios are all good, then its market value ratios will be high, and its stock price will probably be as high as can be expected (Brigham, 2003). Dividend Yield The dividend yield of a company highlights how much a company pays out in dividends each year relative to its share price. It measures how much return an investor is getting for each dollar invested in shares in a company. There was a 30% decrease in the dividend yield for 2010. This was due to a reduction in the amount of dividends paid per share.

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Earnings per Share The Earning per Share (EPS) tells an investor how much net profit one share of the company is producing. The higher this ratio is, the better, because the value of the share will increase. Pegasus Hotel of Jamaica Limited EPS plummeted by 80% in 2010. This was due to the drastic reduction in net profit during the period. In 2010 each share earned $.07 profit. Dividend Cover Dividend cover highlights a company's ability to pay ordinary dividends to shareholders out of profits earned. It shows how many times the ordinary dividend is covered by the profit available. For example, if a company pays out one quarter of its profit as dividends, then the Dividend cover ratio is four. The higher the dividend cover the greater the possibility of earning the dividend. The Dividend Cover declined over the period. In 2010 the ratio was below 1 at $.07. This is means that the company was paying the dividends from the previous years retained earnings. Price Earnings Ratio The P/E ratio is a common measure of how expensive a stock is. If P/E ratio is comparatively low, then either the stock is undervalued or the company's earnings are thought to be in decline. If it is high, then either the stock is overvalued or the company's earnings have increased since the last earnings figure was published. However it is important to note that it is usually not enough to look at the P/E ratio of one company and

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determine its status. Usually, an analyst will look at a company's P/E ratio compared to the industry the company is in, the sector the company is in, as well as the overall market. Pegasus Hotels of Jamaica Limited showed fluctuations in its P/E ratio for the period 2008-20010. In 2009 there was a 34% decrease in the P/E ratio; however in 2010 there was a drastic 542% increase. This increase is an indication that the stock was overvalued as this does not reflect the financial position of the company. There was a significant reduction in its retained earnings during the period. Market to Book Value Market-to-Book Ratio, measures how much a company is worth at present, in comparison with the amount of capital invested by current and past shareholders into it. This ratio is used by "value-based investors" to help to identify undervalued stocks. Companies with relatively high rates of return on equity generally sell at higher multiples of book value than those with low returns. Since the M/B ratio does not exceeds 1.0, means that investors are not willing to pay more than the book values. This situation occurs because asset values, as reported by accountants on balance sheets, have focused on how factors such as inflation or goodwill affect the market price.

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ASSET MANAGEMENT RATIOS 2008 2009 RATIOS Debtor Turnover Days Sales Outstanding / Debt Collection Period (days) Stock Turnover Stock Period (days) Net Asset Turnover 7.51 47.94 8.48 42.44 0.15 9.34 38.53 10.75 33.48 0.20

2010 8.24 43.69 8.44 42.67 0.17

Asset management ratios measure the effective use of resources to generate sales. Also called Activity or Turnover Ratios, they provide detail about the success of a firms credit policy and inventory management. Debt Turnover Debtor Turnover ratio shows 'the relation between net credit sales and average accounts receivable of the year. That is, the speed of debt collection of a firm, the efficiency of the concern to collect the amount due from debtors, or the number of times average debtors are turned over during a year.' A high debtors turnover is more ideal than a low debtors turnover as the higher ratio proves that debts are being collected very quickly, whereas a low ratio shows slower collection of trade debtors. Pegasus' debtor turnover ratio over the three year period shows better cash flow adequacy from debtors in 2009 versus 2008, as more debts were collected. In 2010 there was a relatively more inefficient collection of debts compared to 2009, which may have been the result of an increase in default of debtors between both years.

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Days Sales Outstanding / Debt Collection Period (days) The days sales outstanding ratio (DSO) gives an indication of how long it takes to collect accounts receivables, comparing outstanding receivables to average daily sales. It has to do with the rapidity or slowness with which the money is collected from debtors. For the debt collection period, the shorter it is the better whilst a longer period means there will be more chances of bad debt. The debt collection period ratio for Pegasus was lowest in 2009 indication of more receivables being recovered during that year as against 2010 (see note 3 of Pegasus' notes to financial statements). The expectation of recovering additional cash (credit risk) was better in 2009 versus 2008 but less favorable in 2010 in contrast to 2009. The hotel should be a bit more stringent with its credit policy so as to shorten its DSO and in effect have more cash available to either reinvest in its operations or to meet unexpected obligations. Stock Turnover Ratio The stock turnover ratio, 'also called the inventory turnover ratio, is a relationship between cost of goods sold and average stock. Inventory is a part of the concept of working capital. This ratio guides stock policy and tells how fast the stock is moving through the firm and being sold. This helps a business to meet the demands of its customers by maintaining a proper amount of stock, which will lead to a reasonable margin of profit.' A faster use of stock is denoted by a higher ratio while correspondingly a lower ratio means slower use of stock, and in the latter the effect is customers demand are not being met or may have fallen, and working capital is tied up, thus profit margin is reduced.

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For Pegasus, its net profit margin fell in 2009 in spite of an increase in its stock turnover ratio. This can be explained perhaps by the fact that expenses may have risen in 2009 versus 2008 which negated the improved stock turnover of 2009. In 2010 the stock turnover ratio fell from 2009, indication of a fall in demand, a tying up of working capital, and hence a contributing factor in Pegasus' fall in net profit margin. Stock period has to do with how long or the average number of days stock (raw materials) is held by a business before it is transformed into sales. For Pegasus the stock period ratio fell in 2009 from 2008, as there was more stock held but even more direct expenses accumulated. The direct expenses fell in 2010, inventory rose and the stock period ratio rose that year. From the period, it can be seen that Pegasus is holding stock for almost six to seven weeks and is slow to generate sales from its stock. This long time taken to sell and the increasing inventory numbers may be reflecting a drop in demand perhaps due to the challenging economic environment in the aftermath of the recession of 2008-2010. 2009 was the best for sales or revenue over the period but the rising stock ratio numbers are symbolic of a struggle to get sales especially in 2010. Net Asset Turnover Ratio The Net Asset Turnover ratio measures the ability of management to utilize the net assets of the business to generate sales revenue. A well-managed business will be making the assets work hard for the business by minimizing idle time for machines and equipment. Too high a ratio may suggest over-trading, that is too much sales revenue with too little investment. Too low a ratio may suggest under-trading and the inefficient management of resources. The Net Asset Turnover figures for Pegasus over the period are very low which represents some challenges to get sales and/or inefficient

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management. Total assets rose for 2009 and 2010 but at a slower rate than the companys rise in liabilities (current and non-current). Recalling the length of time stock is held prior to sales and the growing amount of stock, it can be inferred that there is some idle time for equipment and machines and so Pegasus' assets are not fully utilized in getting sales revenue.

RATIOS

DEBT MANAGEMENT RATIO 2008 2009 % % 8.74 16.75 12.90 223.69 2.25 26.82 36.65 4.52 14.25 13.54 312.40 2.35 27.15 37.27

2010 % 0.74 10.37 14.31 1672.2 3.36 29.58 42.00

Times Interest Covered (times) Cash Flow Interest (times) Operating Cash Flow to Sales Operating Cash Flow to Net Profit Gearing Ratio Debt Ratio Debt to Equity

Debt Management Ratios shows the companys capital structure of debt and measures the level of financial risk. Interest Covered Ratio This ratio is used to determine how easily a company can service its loan interest. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

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During the period 2008 2010 it was evident that Pegasus Hotels of Jamaica Limited was having difficulties serving its loan interest due to reductions in its operating profit and increases in its interest charges. In 2010 the company was showing a ratio below 1 due to a reduction in operating profit and increases in interest expenses. This indicates it was not generating sufficient revenues to meet its interest expenses. Operating Cash Flow to Sales Ratio This ratio measures the firm's ability to convert sales into cash. A high number means the firm will be able to grow because it has sufficient cash flow to finance additional production, a low number indicates the opposite. Pegasus showed a steady increase in the Operating Cash Flow to Sales Ratio over the periods, resulting from parallel movements in both operating profits and sales. Gearing, Debt and Debt to Equity Financial leverage is determined using three ratios debt ratio, debt to equity ratio and the gearing ratio. These ratios shows the degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future Gearing Ratio compares owner's equity (or capital) to borrowed funds demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. Debt Ratio compares a companys total debt to its total asset, whereas debt to equity ratios compares total liabilities to its shareholders equity. Pegasus Hotels of Jamaica Limited is financed by both Debt and Equity, however based on results from the above ratios they are primarily finance by equity. The

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Company had steady increases in its gearing ratio over the periods. This resulted from parallel movements in both long term liabilities and capital employed. Although there were was a 1-2% increase in the debt ratio over the three periods the ratio was still relatively low being less than 30%. In comparing the debt to equity ratio over the period there was a 12% increase in 2010. This was due to increases in loans from Development Bank of Jamaica and increases in deferred tax liabilities and current liabilities.

RATIOS Current Quick/Acid Test

LIQUIDITY RATIO 2008 X 1.51 1.31 0.60

2009 X 0.91 0.76 0.73

2010 X 0.63 0.47 0.54

Operating Cash Flow to Current Liability

Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. The more the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. A low coverage rate may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations. Current Ratio This ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables,

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accrued expenses and taxes). In theory, the higher the current ratio, the more capable the company is to pay its obligations. If current ratio is bellow 1 (current liabilities exceed current assets), then the company may have problems paying its bills on time. Current ratio gives an idea of company's operating efficiency. A high ratio indicates "safe" liquidity, but also it can be a signal that the company has problems getting paid on its receivable or have long inventory turnover, both symptoms that the company may not be efficiently using its current assets. In analyzing Pegasus Hotel Current Ratio there was a 30-40% over the period, In 2009 and 2010 the current ratio was below 1, indicating that current liabilities exceeded current assets. This is an indication that the company may have difficulties in meeting its short term obligations. Quick/ Acid Test Ratio This ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. A quick ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick funds on hand. A quick ratio lower than 1:1 may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities. Over the period Pegasus appeared to be struggling to meet its short term obligation using its quick assets. There was a 42 and 32% decrease, which resulted from

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significant decreases in cash and short term investments and increases in its creditors and current amount of long-term debt to The Development bank of Jamaica.

Operating Cash Flow to Current Liability Ratio Using operating cash flow over average current liabilities this ratio identifies whether or not the company is generating the cash necessary to service its short term debts. Any result less than 1 indicates that the company is not able to liquidate its current liabilities from operating cash flow; in other words, the company will probably have to sell assets, borrow money or issue stock in order to meet its short term debt obligations. For the period 2008- 2010 Pegasus Hotel of Jamaica Limited this ratio indicates that they did not have sufficient operating cash flow to cover its short term debt with a ratio below 1 for the three periods. Although there was an increase in 2009 there was a further decline in 2010, which resulted from increases in the average current liabilities during the same period.

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Common Size Analysis of the Income Statement and Balance Sheet

2008 % PROFIT & LOSS Normal $000 VERTICAL COMMON SIZE ANALYSIS 2009 % Common Normal Common Size Size $000 2010 Normal $000 % Common Size

Revenue COS Gross Profit Operating Profit

676,291 268,780 407,511 61,796

100 39.74 60.26 9.14 9.34 5.77

1,002,775 345,659 657,116 54,517 62,670 43,463

100 34.47 65.53 5.44 6.25 4.33

965,977 337,938 628,039 12,296 9,771 8,276

100 34.98 65.02 1.27 1.01 0.86

Profit Before Tax 63,178 Profit after Tax 39,015 BALANCE SHEET Non-Current Asset 4,314,431 Current Asset Total Asset Non-current Liabilities Current Liabilities 160,947 Total Liability 4,556,835 Equity Equity & Liabilities 3,334,644 7,891,479 57.74 42.26 100 5,258,863 3,830,911 9,089,774 100 57.85 42.15 6,057,368 4,265,465 10,322,83 3 58.68 41.32 100 1.79 213,092 0.35 298,638 1.84 242,404 4,556,835 4,395,888 94.68 5.32 100 23.29 5,001,996 194,514 5,258,863 5,045,771 95.12 3.70 100 23.10 5,758,730 5,779,819 $186,672 6,057,098 100 24.65 95.42 3.08

Common size analysis ratios are used to compare financial statements of different- size companies or of the same company over different periods. By expressing the items in proportion to some size-related measure, standardized financial statements
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can be created, revealing trends and providing insights into how the different parts of the company is compared. In vertical analysis of financial statements, an item is used as a base value and all other accounts in the financial statement are compared to this base value. The vertical analysis representation of the balance sheet items are percentages of assets and of income statement items as percentages of sales. Common Analysis expresses each expense on the income statement as a percentage of total revenues, and each asset, liability, and equity account on the balance sheet as a percent of total assets. Pegasus Jamaica Ltd vertical common-size profit and loss is expressed as a percentage of the revenue for each year. The gross profit showed a slight fluctuation over the three year period with a 5.27% increase in 2009 to a 0.51% decreased in 2010, while the net profit margin for the period went down by 1.44% in 2009 and a further reduction of 3.47% in 2010. This indicates inefficiency in their operation management of their day to day activities or this maybe caused by the global financial crisis in which pose a constraint on the economy and the increase in the world oil prices. However, the vertical balance sheet for the period revealed major declines for current assets for all three years, while the fixed assets revealed a steady increase over the three years which could be as a result of the companys assets being revalued yearly. The financials of Pegasus Jamaica Ltd liability over the three year periods has shown a minimum but a steady increase by the 0.11% increase in 2009 and 0.83% increase in 2010.

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Conclusion Based on the analysis conducted, it is evident from the financial ratios and statements that Pegasus Hotels of Jamaica Limited has been inefficient. However, it is difficult to generalize about whether a particular ratio is good or bad because a high current ratio may indicate a strong liquidity position, which is good or excessive cash which is bad. Similarly, non-current assets turnover ratio may denote either that a firm uses its assets efficiently or is under-capitalized and cannot afford to buy enough assets. The company does not have great efficiency in managing all its operations. Thus, it does not have a large margin available to meet non-operating expenses and earn net profit. Between the years 2009 to 2010, the company experienced losses as the company did not use its capital investments effectively and efficiently in generating liable profits. Pegasus Hotel of Jamaica is also experiencing an increase in its debt ratio. As a result of this, the company is more risky. Based on the assessment of the financial performance of the company the Government of Jamaica should dispose of its interest in the company. With recent Debt exchange Programme with the IMF, the government of Jamaica is not capable of undertaking another liability which in turn will increase the risk of an economic down turn. However, looking ahead the company is faced with a number of threats which largely emanates from the unstable economy which now persists, in the long-run it may be feasible for the Government to keep an interest in the company by fully managing and operating the hotel.

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Bibliography

Annual Report of Jamaica Pegasus Limited (2008) Annual Report of Jamaica Pegasus Limited (2009) Annual Report of Jamaica Pegasus Limited (2010) www.jamstockex.com

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APPENDIX

Profitability Ratios
70 60 50 40 30 20 10 0 Net Profit Margin Gross Profit Margin Operating Profit Return on Capital Employed Return on Total Assets 2008 2009 2010

Debt Management Ratio

1800 1600 1400 1200 1000 800 600 400 200 0

2008 2009 2010 Operating Operating Cash Flow Cash Flow to Sales to Net Profit Gearing Ratio Debt Ratio Debt to Equity

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Liquidity Ratio
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2008 X 2009 X 2010 X

Current

Quick/Acid Test

Operating Cash Flow to Current Liability

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Ratio Analysis workings

PROFITABILITY RATIOS 2008 2009 Net Profit Ratio 39,015 676,291 407,511 676,291 61,796 676,291 5.77% 43463 1002775 657116 1002775 54517 1002775 4.33% 2010 8276 965977 628039 965977 12296 965977 0.86%

Gross Profit Margin

60.26%

65.53%

65.02%

Operating Profit Ratio

9.14%

5.44%

1.27%

Return on Capital Employed ( shareholder equities +L.term LB)

61,796 3,428,347

1.80%

54517 3923050

1.39%

12296 4413763

0.28%

Return on Total Asset (ATA- 2009+2008/2)

39,015 4217354

0.93%

43463 4907849

0.89%

8276 5657980

0.15%

SHAREHOLDERS FUNDS / MARKET VALUE RATIOS 2008 Dividend Yield

(Div per share48066/120166)

2009 2.50% 0.4 12 0.36 1.30 43463 48066 12 0.36 12 31.88 0.90 3.33%

2010 0.35 15 0.07 8276 42059 15 0.07 15 35.5 0.20 2.33%

0.4 16 0.32 39,015 30,041 16 0.32 16 27.75

Earnings per share Dividend Cover

Price Earnings Ratio

50.00

33.33

214.29

Market to Book Value Ratio(BV is given as Shareholder Equity / # of shares outstanding)

0.58

0.38

0.42

ASSET MANAGEMENT / ACTIVITY RATIOS

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Debtor Turnover

2008 676,291 90053 90053 676,291 268,780 31684.5 31684.5 268,780 676291 4395888

7.51

2009 1002775 107330 107330 1002775 345659 32145.5 32145.5 345659 1002775 5045771

9.34

2010 965977 117240 117240 965977 337938 40058 40058 337938 965977 5758730

8.24

Days Sales Outstanding/ Collection Period Stock Turnover

47.94

38.53

43.69

8.48

10.75

8.44

Stock Period (days)

42.44

33.48

42.67

Net Asset Turnover

0.15

0.20

0.17

DEBT MANAGEMENT RATIOS 2008 Times-Interest-Earned / Interest Cover 61,796 7,073 118507 7073 8.74 2009 54517 12054 171819 12054 4.52 2010 12296 16679 172889 16679 0.74

Cash Flow Interest (times)

16.75

14.25

10.37

Operating Cash Flow to Sales

87271 676,291

12.90%

135780 1002775

13.54%

138241 965977

14.31%

Operating Cash Flow to Net Profit

87,271 39,015 76976 3,424,331 1222191 4556835 1222191 3334644

223.69 %

135780 43463 92139 3923050 1427952 5258863 1427952 3830911

312.40 %

138241 8267 148298 4413763 1791633 6057098 1791633 4265465

1672.20%

Gearing Ratio

2.25%

2.35%

3.36%

Debt Ratio

26.82%

27.15%

29.58%

Debt to equity

36.65%

37.27%

42.00%

LIQUIDITY RATIOS 2008 2009 2010

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Current Ratio

242404 160947 211530 160947

1.51

194514 213092 161097 213092

0.91

186672 298368 139973 298368

0.63

Quick Ratio

1.31

0.76

0.47

Operating Cash Flow to Current Liabilities

87271 145668.5

0.60

135780 187019.5

0.73

138241 255730

0.54

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