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Introduction

Analyzing financial statements, is a process of evaluating the relationship between

component parts of financial statements to obtain better understanding of a firm’s

position and performance - Metcalf and Titard.

The hotel financial statements provide a lot of information to the users. According to Anand

Iyengar, it is necessary that the users of financial statements be able to read between the lines

to have a better understanding of the financial position of the hotel. Financial analyses

depend on the financial statements to assess the financial performance of a firm for the

following reasons:

Momentous inference can be drawn by examining trends in raw data and financial

ratios.

Comparison between various firms in similar industry can provide conclusive results.

The purpose of evaluation of financial statements differs among various groups (creditors,

shareholders, potential investors, management government, labour leaders and so on)

interested in the results and relationships reported in the financial statements.

Short-term creditors are primarily interested in judging the firm’s ability to pay its currently-

maturing obligations. The relevant information for them is the composition of the short-term

assets and short-term liabilities. The debenture-holders or financial institutions granting long-

term loans would be interested with examining the capital structure, past and projected

earnings and changes in financial position. The share holders as well as potential investors

would naturally be interested in the earnings per share dividend pay-out ratio which are likely

to have a significant bearing on the market prices of shares. The management of the firm, in

contrast, looks to the financial statements from various angles. For one thing, these

statements are required for management’s own evaluation and decision-making. Moreover, it

is the responsible for the over-all performance of the firm - maintaining its solvency so as to

be able to meet short-term and long-term obligations to the creditors and at the same time

enduring an adequate rate of return, consistent with safety of funds to its owners.

(Khan & Jain, 1992)

This project seeks to explain the tools and techniques of key financial ratios that are

employed for the analysis and interpretation of financial data of hotel companies and to

obtain better view of their financial performance.

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What are Financial Ratios?

A ratio expresses a numerical relationship between two numbers. The study of the relation

between items or groups, expressed as a ratio, is called financial ratio analysis. A meaningful

analysis must satisfy two requirements. First, it should be able to track progress over a period

of time, say three to five years. Second it should be able to bench mark against the most

recent result with appropriate competitors. Finding a perfect benchmark may be difficult due

to many factors, like variation in scale of operations, product mix, brand image, and financial

structure. (Iyengar, 2008)

Types of Financial Ratios

There are two types of ratios that are used widely in financial analysis. The first kind, the

balance sheet ratios, summarizes and highlights the financial performance of the hotel

company at a point in time-the point at which the balance sheet is prepared. Balance sheet

ratios imply that the numerator and the denominator in each ratio came directly from the

balance sheet. The second kind, income statement or the income statement balance sheet ratio

compares two items from the income statement, or one item from the income statement and

the other from the balance sheet. (Iyengar, 2008)

Further, for the sake of better understanding, we can sub-divide our financial ratios into five

distinct types: liquidity, financial leverage, activity, profitability, and operating ratios.

Liquidity ratios relate current assets or cash flows to liabilities or expenses to show a firm's

ability to meet its financial obligations. Activity ratios measure firm productivity, as in the

management’s ability to use assets. Financial leverage ratios relate firm liabilities to equity

and assets to indicate the degree to which the firm relies on debt to finance its operations,

while profitability ratios depict the operational efficiency in terms of return on investment.

Finally, operating ratios provide help in analyzing operations of the firm. (Pearce II & Doh,

2002)

It is not possible to assess the financial position of the firm by referring to one ratio, or even

to one class of ratios. Reasonable assessment can only be made after referring to several

ratios and the economic, business, and other environmental factors that will affect the

financial performance of the hotel. Liquidity ratios highlight the ability of the firm to fulfil

short-term obligations. (Iyengar, 2008)

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Purpose of Financial Ratios

Ratio analysis can facilitate two types of comparison. The first is internal comparison, where

the comparison can be carried out within all departments of a unit or the different units of the

company, or the performance of the unit or company over a period of time. A comparison

over a period of time enables an analyst to determine if the financial condition has improved

or worsened over the period of comparison.

The second type of comparison involves comparison between the firms in the industry. This

is referred to as external comparison. External comparison provides an insight into the

relative performance of the firm as regards other firms. It also helps in identifying any

deviation from the applicable industry average. External comparison can also be applied to

benchmark the hotels performance against competition. (Iyengar, 2008)

If the performance of a business, as measured by its ratios is compared with industry’s

average over a long period of time, it will show a trend. This may be a divergence from the

industry’s average indicating areas worthy of attention by the managers of the company.

(Langford, Iyagba, & Komba, 1997)

After having known the meaning, types and purpose, of financial ratios, we now turn to a

discussion on the calculation, formula, and the purpose of individual ratios. To facilitate

discussion on key financial balance sheet ratios, we shall refer to the balance sheet of the

Marriott International Inc and Hyatt Hotels Corporation. Using the figures from the exhibits

1.1and 1.2, we calculate key balance sheet ratios.

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Marriott International, Inc. Balance Sheet as at December 31st 2009

Amount in million DollarsBalance Sheet - AssetsCash and Equivalents 115,000Accounts Receivable 838,000Inventories 1,444,000Current Deferred Income Taxes 255,000Other Current Assets 199,000Total Current Assets 2,851,000Land & Improvements 454,000Building & Improvements 935,000Machinery, Furniture & Equipment 996,000Construction in Progress 163,000Total Fixed Assets 2,548,000Accumulated Depreciation & Depletion 1,186,000Net Fixed Assets (Net PP&E) 1,362,000Intangibles 731,000Cost in Excess 875,000Non-Current Deferred Income Taxes 1,020,000Other Non-Current Assets 1,094,000Total Non-Current Assets 5,082,000Total Assets 7,933,000Balance Sheet - Liabilities, Stockholders EquityAccounts Payable 562,000Short Term Debt 64,000Accrued Liabilities 519,000Other Current Liabilities 1,142,000Total Current Liabilities 2,287,000Long Term Debt 2,234,000Other Non-Current Liabilities 2,270,000Total Non-Current Liabilities 4,504,000Total Liabilities 6,791,000Common Stock Equity 1,142,000Common Par 5,000Additional Paid In Capital 3,585,000Retained Earnings 3,103,000Treasury Stock (5,564,000)Other Equity Adjustments 13,000Total Capitalization 3,376,000Total Equity 1,142,000Total Liabilities & Stock Equity 7,933,000Cash Flow (168,000)Working Capital 564,000Free Cash Flow 621,000Invested Capital 3,376,000Exhibit 1.1 (MARRIOTT INTL INC (NYSE: MAR) | Balance Sheet, 2010)

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Hyatt hotels corporation Balance Sheet as on December 31st 2009

Amount in Million dollars

Balance Sheet – AssetsCash and Equivalents 1,327,000Restricted Cash 11,000Accounts Receivable 410,000Inventories 133,000Prepaid Expenses 85,000Current Deferred Income Taxes 23,000Total Current Assets 1,989,000Land & Improvements 562,000Building & Improvements 3,594,000Machinery, Furniture & Equipment 1,125,000Construction in Progress 246,000Total Fixed Assets 5,527,000Accumulated Depreciation & Depletion 1,922,000Net Fixed Assets (Net PP&E) 3,605,000Intangibles 284,000Cost in Excess 113,000Non-Current Deferred Income Taxes 74,000Other Non-Current Assets 1,090,000Total Non-Current Assets 5,166,000Balance Sheet - Liabilities, Stockholders EquityTotal Assets 7,155,000Accounts Payable 196,000Short Term Debt 12,000Accrued Liabilities 282,000Other Current Liabilities 5,000Total Current Liabilities 495,000Long Term Debt 1,620,000Minority Interest 24,000Total Non-Current Liabilities 1,644,000Total Liabilities 2,139,000Common Stock Equity 5,016,000Common Par 2,000Additional Paid In Capital 3,731,000Retained Earnings 1,338,000Treasury Stock (2,000)Other Equity Adjustments (53,000)Total Capitalization 6,636,000Total Equity 5,016,000Total Liabilities & Stock Equity 7,155,000Cash Flow 224,000Working Capital 1,494,000Free Cash Flow 166,000Invested Capital 6,636,000Exhibit 1.2 (HYATT HOTELS CORP (NYSE: H) | Balance Sheet, 2010)

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Current Ratio: It is computed by dividing total current assets by the current liabilities, is a

widely used indicator of liquidity. According to Ciaran Walsh, the current ratio of a firm

represent those assets which can, in the ordinary course of business, be converted into cash

within a short period of time, normally not exceeding one year. Current ratio is also called the

working capital ratio since it is related to the working capital of the firm. This ratio is applied

to test solvency as well as in determining short term financial strength of the business.

(Chowdhury, 1991)

Current ratio of Marriott International Inc = Current Assets / Current Liabilities

= 2,851,000/ 2,287,000

=1.25 or 1.25:1

Current ratio of Hyatt Hotels Corporation = Current Assets / Current Liabilities

= 1,989,000 / 495,000

= 4.02 or 4.02:1

Interpretations

In case of Marriott International Inc the current ratio is 1.25:1 which means that for every

dollar of current liabilities, 1.25 dollars of current assets are available to meet them. The

current ratio of 4:1 for Hyatt Hotels Corporation signifies that 4 dollars of current assets are

available for every dollar of current liabilities. The liquidity position, as measured by the

current ratio is better in the case of Hyatt Hotels Corporation as compared to Marriott

International Inc. This is because the safety margin in the latter is substantially higher than in

the former. A slight decline in the value of current assets will adversely affect the ability of

Marriott International Inc to meet its obligations and therefore from the point of view of

creditors it is a more risky venture. In contrast there is a sufficient cushion in Hyatt Hotels

Corporation and even with 100% shrinkage in the value of its assets it will be able to meet its

obligations in full. For creditors the firm is less risky. The interpretation is that Hyatt Hotels

Corporation has better liquidity/short-term solvency.

In theory a low and declining current ratio would indicate an inadequate margin of safety

between the assets that presumably are, or will be able to liquidate claims, and obligations to

be paid. On the other hand an extremely high current ratio may be indicative for the current

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requirements and poor credit management in terms of over-extended accounts receivable. At

the same time, the firm may not be making full use of its current borrowing capacity (Khan &

Jain, 1992)

Management has to maintain an adequate level of current assets without compromising on the

profitability of the firm. In a nutshell, a high current ratio may be an outcome of a large

inventory, excess balance of overdue receivables due to slow collection or liberal credit

policies, or holding of too much cash that is actually required. (Iyengar, 2008)

Acid Test (Quick) Ratio: The acid ratio serves as a supplement to the current ratio. The acid

test ratio measures liquidity by considering only ‘quick assets’. Quick assets are cash and

equivalents. Inventories and expenses paid in advance are excluded from the calculation.

Depending on the inventory and prepaid expenses, there may be minor to significant

differences between the current ratio and acid test ratio in some operations. (Iyengar, 2008)

It is a measurement of a firm’s ability to convert its current assets quickly into cash in order

to meet its current liabilities. (Khan & Jain, 1992)

Quick Ratio of Marriott International Inc = (Cash + Marketable securities + Accounts

receivable) / Current Liabilities

= 953000/2,287,000

= 0.42:1

Quick Ratio of Hyatt Hotels Corporation = (Cash + Marketable securities + Accounts

receivable) / Current Liabilities

= 1737000/495000

= 3.51:1

Interpretations

In case of Marriott International Inc the quick ratio is 0.42:1 which means that for every

dollar of current liabilities, 0.42 dollars of quick assets are available to meet them. The quick

ratio of 3.51:1 for Hyatt Hotels Corporation signifies that 3.51 dollars of quick assets are

available for every dollar of current liabilities.

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The interpretation that can be placed on the current ratio (1.25:1) and quick ratio (0.42:1) of

Marriott International Inc is that a part of the current assets of the company is tied up in slow-

moving and unsalable inventories and slow-paying debts. The firm would find it difficult to

pay its current liabilities. They should arrange for additional cash. On the hand in case of

Hyatt Hotels Corporation the current ratio is 4:1 and quick ratio 3.51:1, which indicates that

the business has a very strong short-term financial strength to pay of its current liabilities at

short notice.

If quick assets can't cover current liabilities, investors will say the

company is failing the acid test. There should be an element of realism to

such measures. For instance if a company has current liabilities of 25

million dollars and quick assets of 10 million dollars then technically it's

failing the acid test - but this would really only be the case if that same

company has negligible net fixed assets or was in a cash flow negative

position. Of course, a company with current liabilities of 25 million

dollars and quick assets of 10 million dollars with no real fixed assets or

cash flow should be red flagged by investors. (Hasenfuss, 2007)

Debt to Equity Ratio: The debt to equity ratio is computed by dividing

the total debt of the firm by its shareholders equity. The purpose of the

ratio is to measure the mix of funds in the balance sheet and to make a

comparison between those funds that have been supplied by the owners

(equity) and those that have been borrowed (debt). (Walsh, 2002)

Debt to equity ratio of Marriott International Inc = Total Liabilities /

Total Owners Equity

= 6,791,000 / 1,142,000

= 5.95:1

Debt to equity ratio of Hyatt Hotels Corporation = Total Liabilities /

Total Owners Equity

= 2,139,000 / 5,016,000

= 0.43:1

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Interpretations

In case of Marriott International Inc the debt to equity ratio is 5.95:1

which means that for every dollar of owner’s net worth, the enterprise

owed its long term creditors 5.95 dollars. And for Hyatt Hotels

Corporation the debt to equity ratio is 0.43:1 which means that for every

dollar of owner’s net worth, the enterprise owed its long term creditors

0.43 dollars.

Marriott International Inc has a high debt to equity ratio which means that

it has been aggressive in financing its growth with debt. It also shows a

large share of financing by the creditors relatively to the owners and

therefore, the creditors have a larger claim against the assets of the

company. The owners are putting up relatively less money of their own.

It is a danger signal for the creditors. If the project should fail financially,

the creditors’ would lose heavily. Moreover, with a small financing stake

in the firm, the owners may behave irresponsibly and indulge in

speculative activity. If they are heavily involved financially, they will

strain every nerve to make the enterprise a success. Therefore there is a

high risk involved for the creditors of Marriott International, Inc. A high

debt-equity ratio has equal serious implications from the firm’s point of

view also. A high proportion of debt in the capital structure would lead to

inflexibility in the operations of the firm as creditors would exercise

pressure and interfere in management. Secondly, such a firm would be

able to borrow only under very restrictive terms and conditions. Further,

it would have to face a heavy burden of interest payments, particularly in

adverse circumstances when profits decline. Finally the firm will have to

encounter serious difficulties in raising funds in the future.

The share holders of the firm would, however, would stand to gain in two

ways: (i) with limited stake, they would be able to retain control of the

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firm and (ii) the return to them would be magnified. With a large

proportion of debt in financial structure, the earnings available to the

owners would increase more than proportionately with an increase in

operating profits of the firm. This is because the debt carries a fixed rate

of return and if the firm is able to earn on the borrowed funds a rate

higher than fixed-charge on loans, the benefit will go to the shareholders.

Technically this is referred to as leverage or trading on equity. (Khan &

Jain, 1992)

In case of Hyatt Hotels Corporation, the Debit-to-equity ratio is low and

has just the opposite implications. To the creditors a relatively high stake

of the owners implies sufficient safety of margin and substantial

protection against shrinkage in assets. For the company also, the

servicing of debt is less burdensome and consequently its credit standing

is not adversely affected. The shareholders of the firm are deprived of the

benefits of trading on equity. The preceding discussion should leave no

doubt that both high and low ratios are not desirable. (Khan & Jain, 1992)

Long-term Debt to Total Capitalization Ratio: Calculation of long

term debt as a percentage of the sum of long term debt and owners equity

is another indicator of long term solvency. The sum of the long term debt

and the owner’s equity is known as total capitalization. The only

difference between the two is that current liabilities are excluded from the

numerator whereas long-term debt is added to the denominator. Current

liabilities are not considered as current assets are generally adequate to

cover the liabilities and also current liabilities are not a long term

concern. (Iyengar, 2008)

Long-term Debt to Total Capitalization Ratio of Marriott

International, Inc = Long-term Debt / (Long-term Debt + Total Owner’s

Equity)

= 2,234,000 / 3376000

= 0.6617 or 66.17%

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Long-term Debt to Total Capitalization Ratio of Hyatt Hotels

Corporation = Long-term Debt / (Long-term Debt + Total Owner’s

Equity)

= 1620,000 / 6636000

= 0.2441 or 24.41%

Interpretations

The long-term debt to total capitalization ratio of Marriot International

Inc for the year 2009 is 66.17 percent of its total capital. And the long-

term debt to total capitalization ratio of Hyatt Hotels Corporation for the

year 2009 is 24.41 percent of its total capital. A low ratio of debt to total

capital of Hyatt Hotels Corporation is desirable from the creditors’ point

of view as there is sufficient margin of safety available to them. But its

implications for shareholders are that, debt is not being exploited to make

available to them the benefit of trading on equity. On the other hand a

high ratio of debt to total capital of Marriot International Inc would

expose the creditors to high risk. The implications of the ratio of equity

capital to total assets are exactly the opposite to that of debt to total

capital.

Conclusion

While financial ratios could be useful in raising some pertinent questions

about the performance of a company and highlighting areas of attention

to the managers, its utility is greatest when making inter-firm

comparisons. Questions such as: how a firm utilizes its assets, or how

their productions costs compare with those of its competitors are tests of

financial stability. Even though a company may be doing well, this

comparison will show how well, or if there is room for even better

performance. Indeed, the uses of ratios seldom provide information about

the current health of a firm since they cannot decipher the managerial

actions being taken. They measure a static position and do not account

for the dynamism of managerial behaviour in shaping alternative

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strategies. Ratio analysis acts as the dipstick of financial health rather

than a thorough inspection.

Bibliography

Books:

Chowdhury, A. B. (1991). Financial Ratios and Working Capital.

kolkata: Management Technologists.

Iyengar, A. (2008). Hotel Finance. New Delhi: Oxford University Press.

Khan, M. Y., & Jain, P. K. (1992). Management Accounting. New Delhi:

Tata Mcgrawhill Publishing House.

Walsh, C. (2002). Key Management Ratios: how to analyze, compare and

control the figures that drive company value. New Delhi: Macmillan

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India LTD.

Journal Articles:

Hasenfuss, M. (2007). The quickest way to solvency. Finweek , 56-57.

Langford, D., Iyagba, R., & Komba, D. M. (1997). Prediction of solvency

in construction companies. Construction Management & Economics ,

317-325.

Pearce II, J. A., & Doh, J. P. (2002). Improving the Management of

Turnaround with Corporate Financial Measures. Academy of

Management Proceedings & Membership Directory , B1-B6.

Websites:

HYATT HOTELS CORP (NYSE: H) | Balance Sheet. (2010). Retrieved

April 19, 2010, from finapps.forbes:

http://finapps.forbes.com/finapps/jsp/finance/compinfo/FinancialIndustria

l.jsp?tkr=H

MARRIOTT INTL INC (NYSE: MAR) | Balance Sheet. (2010). Retrieved

April 19, 2010, from finapps.forbes:

http://finapps.forbes.com/finapps/jsp/finance/compinfo/FinancialIndustria

l.jsp?tkr=MAR