Project #121443 - Conclusion 400 words

 

What has to be done:

The conclusion of the report should be a recommendation, whether to invest in each of the companies through lending money or buying shares. The recommendation could also be for example not to invest at all. The conclusions should be based only on the analysis made, and there is no need to study stock markets, bond markets or alternative returns. Please note that just like in real life the analyses made on the same company by different analysts vary, also here there is no single right answer. The grading of the conclusions section will be based on the ability to use the analysis made to support a logical and realistic claim, and there may be several ways of doing this.

 

Conclusion

Decision by banks whether to lend to either company; decision by investors whether to buy shares in either company, and briefly justify by summarizing the analysis done in the previous section (about 400 words).

 

 

 

 

 

 

 

Conclusion of the following analysis!

 

Introduction:

Over the last few years the hospitality industry has been encountering a sharp escalation in its revenues. Furthermore, it has been forecasted that the industry will experience a growth in key trends such as: technological innovations, rising the needs of the millennial generation, and the increase of business travellers. These trends have an impact on the performances of the hotels.  

Even though the global economic situation has a strong influence on the performance of the industry, and in the recent years the industry has faced certain difficulties in demand, it is recovering now and is even offering new perspectives to its customers.

For the research we have chosen Hilton and Starwood hotel companies.They are among the most competitive, well - recognized, and profitable hotel chains in the industry. While being rivals, the companies try to distinguish themselves by offering exclusive services and arranging amazing promotion campaigns.  

As the hospitality industry provides the diversity of natural and cultural determinants, it has increased in the market over the last few years. In order to meet the expectations of the market, both Hilton and Starwood give a variety of products. Due to the diverse demand, Hilton offers different products and services at distinctive prices. An example of this could be the big rise of millennial generation travellers and the impressive impact it has on the hotels’ operational trends. Therefore, Hilton seeks to integrate innovation and technologies together, to make their position on the market even stronger. Potentially by focusing on the opportunities, young people can bring competitive advantage to the company. From the financial perspective, Hilton’s efficient performance can be proven by the revenue growth, notable return on equity and cash flow from operations. The Hilton company’s major limitation is that its hotels are mostly concentrated in the US, whereas its competitors are perfectly spread worldwide, moreover, unstable American economy may be considered as a threat as well. Also because of the fact that Hilton is being privately owned, the company may not stay stable in its standards.

On the other hand, Starwood, as one of the most efficient hospitality chains, has been successful in increasing revenue through digital media and social media. Its loyalty program is being appreciated worldwide, moreover, it focuses on both customers and employees. Starwood makes a focus on different target markets, allowing it to match the demand of every segment. As the economic crises has a strong impact on customers’ spending, the Starwood luxury brands face a certain decrease of demand. Furthermore, today such a huge event as the Marriott’s acquisition of Starwood is just around the corner, which gives a possibility of the creation of the world’s largest hotel chain. This event has both - negative and positive effects on the Starwood’s operation. As it would be the largest brand, creating a kind of monopoly and having the biggest room count, its overall revenue and other financial statements would be overwhelming. There is still a risk of the strategies’ changing, as two different companies have two different visions and approaches, which could lead to the decrease of the demand.

Overall, both Starwood and Hilton chains play an extremely important role in the tourism world that is why we have decided to analyze their performance during a three-year period.

 

Analysis:

In order to compare these two companies, we picked up ratios putting the emphasize on Liquidity, Solvency, Activity and Profitability sections.

Liquidity ratios basically show the companies’ ability to pay off the short-term debts. We have chosen current ratio, accounts receivable turnover, average collection period and working capital turnover to analyze the hotels’ performance.

Current Ratio can be considered to be the most significant one. After analyzing it, we determined that Hilton exhibited poor performance. Between the first and second financial periods, the company experienced a reduction in this financial measure of performance from 1.20 to 1.12. This reduction was also evident in between the years 2013-2014. The negative trend shows that the firm didn’t do well in managing its primary elements of working capital. Meaning the company’s current assets were marginally more than liabilities. This ratio measures the firm’s ability to pay its debts in the short run, and Hilton doesn’t seem to be in a very comfortable position (Ormiston & Fraser, 2013). For Starwood, it was only one financial period – 2013 - that the firm had more current assets than current liabilities. Meaning for 2012 and 2014, the company couldn’t pay its debts. Showing that there was an increase in the metric from 0.93 (2012) to 0.97 (2014). Proving, that it’s working hard to mitigate its short-term working capital issues (Reilly & Brown, 2011). From an absolute perspective, Hilton seems to have performed better since it recorded higher values of the metric in question. However, from a relative perspective, we note that Starwood performed better showing improvements over the three-year period. Creditors are unlikely to consider both of them for a credit purchase but given the two as the only options; they would likely go for Starwood as it has a promise for higher liquidity with time (Weygandt, Kimmel, & Kieso, 2015).

Regarding accounts receivable turnover, Hilton performed successfully, since its turnover generally increased over the three-year period. Although it fell from 13.4 to 13.3 between 2013-2014, the general trend is still positive.  Meaning that the efficiency of collecting debts from customers is constantly improving (Healy & Palepu, 2012). In a slight way, the fall of the metric in the last financial period could mean that somehow, their policies are beginning to show signs of failure. Further, Starwood registered a negative trend. The accounts receivable turnover fell from 10.9 in 2012 to 9.9 in 2013, and further to 9.176 in 2014. A negative accounts receivable turnover depicts negative performance, and this is how Starwood can be evaluated. The two companies performed contrary to each. While Hilton exhibited tremendous performance, the opposite was the case with Starwood. A potential investor wouldn’t wish to invest in a company that doesn’t know how to manage receivables - that offers customers goods or services on credit and doesn’t do well in getting payment for them. (Revsine, Collins, Johnson, & Mittelstaedt, 2014).

According to the average collection period, Hilton performed well. Its average collection period reduced from 37 days in 2012 to 27 in 2014. Meaning the company now has better policies regarding the management of receivables since customers are paying in a more timely fashion (Reilly & Brown, 2011). Moreover, customers are showing more cooperation in paying their debts which is a result of the more effort put by management. Starwood’s performance in this case deteriorates with time. In 2012, its ACP was 33.4 days which increased to 36.6 in 2013 and further to 39.7 days in 2014. As it’s known the higher ACP is, the worse the company will have performed in a particular financial period (Weygandt, Kimmel, & Kieso, 2015). The two hotels’ performances were opposite to each other. Starwood could not outwit Hilton Hotel. The last one is more efficient in collecting debts in a shorter period. The disadvantage with longer average collection periods is that it distorts the cash flow of a firm (Healy & Palepu, 2012). This can have further consequences like falling into liquidity problems. People who consider the cash flow statement as their primary basis of investing would invest in Hilton, not Starwood.

Operating cash flow ratio shows the companies’ ability to pay off their current liabilities using the cash that was generated only from the operations. When analyzing the Hilton’s performance, it was taken into consideration, that the biggest part of the revenue earned by the company comes from franchising and management contracts, which do not always include the percentage of the operations; consequently, the operations can’t be considered as the main source of the company’s income. The Hilton’s indicators are floating up and down without any tendency of an absolute increase or decrease. However, throughout the whole time period we can see that the company cannot pay their current liabilities using only cash from operations. But as the company keeps on borrowing money, it’s clear that they are using other sources to pay their liabilities. To continue with Starwood’s performance, the situation is similar – the company cannot pay off their liabilities using only cash from the operations. However, here the ratios are relatively stable, unlike the Hilton Company, and here we can see that there is a down going trend, which can be explained by the operation revenue falls. The company takes more and more short-term debts.

Working capital turnover determines how successfully business is using its working capital to generate revenue. By analyzing all the results of two companies, it’s seen that Starwood utilize its working capital in a more efficient way in comparison to Hilton. However, in 2013 Starwood’s capital turnover was extremely high 84.93, showing that the company didn’t have enough capital to support their growth of sales. Furthermore, it results in high accounts payable, since it shows that company is more willing not to pay its bills until they come due for payment. On the other hand, Starwood has a better balance in relationship between money invested in the operation and the generation of the revenue.

The solvency ratios determine the enterprises’ ability to cope with long-term financial obligations. For a better research we decided to go into details for further ratios: solvency, debt equity and interest coverage ratios.

Solvency ratio helps to evaluate the company’s ability to meet long-term obligation. By analyzing the two companies’ performance between 2012 and 2014, it was determined that Starwood has stronger financial health in terms of its debt obligations. The most successful year for Starwood was 2013, as their solvency ratio’s metric was 1.62 that is quite high to have sufficient cash flow to manage its debt. However, in 2014 it was reduced to 1.21, showing quite low results in comparison to other years, which could be considered as a risk for the future default. The biggest risk of bankruptcy was noticed in Hilton’s operation in 2012, with a low financial metric of 1.09, as it is highly leveraged.

Debt equity measures the company's leverage. The lower debt to equity ratio is, the more stable the business is. Companies with higher debt equity ratio indicate risk for shareholders. By analyzing Hilton's performance, we remarked that in 2012 company's results are extremely high comparing to 2013 and 2014. The best result for Hilton was achieved in 2014 when it had the lowest value for debt equity (4.54). Starwood's results are quite similar to each other, meaning that its performance has been rather stable throughout the analyzed time period. Comparing the two hotels we determined that in terms of debt equity ratio Starwood has reached better results comparing with Hilton.

Taking into account, the interest coverage ratio, we determined that Hilton has had fluctuations. Between 2012 and 2013, the financial metric recorded a decrease from 1.97 to 1.77, and then was followed by an increase up to 2.70. Meaning the firm could pay up its interest on loans with the profits earned (Healy & Palepu, 2012). However, they could only afford to pay for them marginally from their earnings. The increase in 2014 gives a perspective for the future periods better performance. In addition, Starwood showed exceptional performance. Throughout the time period the metrics have been constantly increasing from 5.3 to 9,1. The figures indicate that the company could pay up their interest owed multiple times with their earnings of the respective years (Ormiston & Fraser, 2013). Both companies performed well in this measure. However, Starwood’s performance is incomparably higher than that of Hilton Hotel. As a measure of profitability, this shows that Starwood is more profitable (Reilly & Brown, 2011). As a measure of debt, it shows that Hilton is more indebted. In both cases, it’s Hilton that exhibits better and higher performances.

Further, the activity ratios were analyzed. This section is about the companies’ ability of converting different balance sheet accounts into cash. The most significant ratios that we took into consideration are asset and property & equipment turnovers.

Asset turnover ratio is a method by which, one can measure how efficiently does a company generate revenue through its assets. It simply examines how much revenue can 1 dollar of the companies’ assets generate. It is generally used by investors and creditors, as this is a clear way by which they can analyze the assets’ management and use. Comparing Hilton’s and Starwood’s asset turnover ratios, it is noticeable that Starwood’s ratio in the years of 2012 and 2013 is roughly twice more efficient. For every 1$ of assets used in Hilton, on average (2012-2014) 0.37$ is made. On the other hand, Starwood generates 0.7$ on average for the same time period. This may be due to the fact that Hilton poses roughly 71% more assets than Starwood, but generates only 25% more revenues.

The Property and Equipment turnover defines the amount of money that company gets by investing in property and equipment. The higher the ratio is, the more productive the company is in terms of investing money for property and equipment. According to the calculations, we could see that the best year for both companies was 2014, in terms of property and equipment turnover. The financial metrics for Hilton and Starwood are approximately 1.16$ and 2.11$ respectively. Overall, throughout the three-year time period both companies show stable financial metrics, with slight changes from year to year. By comparing 2 companies, we could say that Starwood is more efficient in terms of Property & Equipment turnover and this hotel gains approximately 2$ of revenue per every 1$ of PPE.

The very last ratio section represents profitability. It is mainly focused on enterprises’ capacity to make this profit, controlling costs and expenses. These measures summarize all the data analyzed in liquidity, solvency and activity ratios, making the conclusion of the overall businesses’ performance. The choice of ratios was made towards profit margin, return on assets, gross return on assets and operating efficiency ratios.

The profit margin determines the company’s ability to generate revenue and control costs and expenses. According to the data, for both Hilton and Starwood hotels throughout the analyzed time period, the profit margin is constantly increasing (up to 6,5% and 10,6% respectively, for the year 2014). However, for Starwood all the values are approximately twice higher than for Hilton. This means that Starwood performs better in terms of profitability, however this doesn’t explain any probable reasons of a such tendency.

The operating efficiency ratio determines what part of the company’s profit was generated from operations, comparing with total revenue of the company. Analyzing Hilton performance, it’s noticeable that both total revenue and GOP are increasing throughout the years. Although there is a slight decrease in 2013 (from 0,119 to 0,113), it doesn’t have such a huge impact, as then it increases towards 0,159 in 2014, which means that the role of the operational part of the revenue is showing an insignificant growth. Further, the Starwood metrics are quite stable. However, both revenue and GOP are decreasing which is absolutely opposite to the Holton’s situation.

The gross return on assets tells the shareholders how successful the business is in terms of using its assets. The higher the ratio is – the better the company is operating. Hilton’s results are constantly growing throughout the whole time period, when the best results were achieved in 2014 (6,9%), giving a perspective for the future periods better performance. On the other hand, the Starwood’s figures are slightly floating (pick point in 2013 – 10,5%) without any specific tendencies. So, in terms of the constant growth – Hilton is doing better, but in terms of the overall numbers – the Starwood figures are twice higher.

 

 

Subject Business
Due By (Pacific Time) 04/14/2016 12:00 am
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