Xenia Hotels & Resorts, Inc.: Financial Ratio Analysis
Introduction
Financial ratios divulge valuable information to the management of a firm that guides them in making significant operational and strategic decisions for their organizations. Financial ratio analysis is a significant technique that is used to analyze financial statements. Accounting ratios are a source of valuable information that helps the management of a firm to understand the financial state of their companies and be able to formulate strategies that will help them achieve the desired financial goals. Activity ratios, for instance, are used to judge the efficiency of the firm in using various assets that it has to generate income and improve its profits. The management also gets to judge their efficiency using the activity ratios.
According to Chandra (24), accounting ratios are useful in locating any weaknesses that may exist in a company’s operations despite the fact that the performance of the company may not be poor. It gives the management an opportunity to attend proactively to the weaknesses and remedy them before they develop into significant problems that can affect the firm’s operations. It is important for management of companies to compare the performance of their companies against competitors in the same industry. Financial ratios facilitate such comparisons which help in identifying the areas in which a firm can make improvements to perform better. Hansen and Mowen, also state that financial ratio analysis are a significant basis for benchmarking for many companies.
Liquidity ratios, for instance, are important for managements in determining the ability of their firms to fulfill their short-term obligations in the form current liabilities by analyzing their current ratios (Jagels, Coltman and Coltman). They can also determine the efficiency of their debtors in honoring short-term obligations by analyzing the accounts receivable turnover ratio. Such analysis of the financial ratios helps the managements to make crucial decisions concerning their firm’s credit sales for instance (Jagels, Coltman and Coltman). Gearing ratios such as debt-equity ratio assesses the long-term financial stability of the company. This is key in determining whether it is a going concern or not. Profitability and investment ratios help in evaluating the profitability of the company and its return on investment to shareholders.
Xenia Hotels & Resorts, Inc is a real estate investment trust that operates and invests in full-service hotels in the US. It is owned by Inland American REIT, and it began trading on the New York Stock Exchange on February 4, 2015. It owned 50 hotels across 21 states as of February 23, 2016. The corporation is headquartered in Orlando, Florida.
ANALYSIS OF FINANCIAL DATA
This section uses the financial information from the company’s annual report for 2014 to assess its financial performance and position. It uses a range of financial ratios to evaluate the financial condition of the corporation.
Return on stock
The return on stock for the last financial year was -20.92% implying that shareholders earned a loss on their sticks held. It paid a total dividend of $0.92 per share during the year 2015. On its opening day on the New York Stock Exchange, the closing price of its stock was $20.55. On December 31, 2015, Xenia’s closing stock price had gone down to $15.33. The return on stock measures both dividends earned by shareholders as well as the capital gains earned from the changes in stock prices. In this case, shareholders lost due to the fall in the stock price from $20.55 to $15.33. The management, in the annual report, attributes the fall in stock prices to the large volume of sales of the firm’s common stock. The large volume of sales has put a downward pressure on the stock’s price thus leading to a negative return on the stock.
Return on equity
The return on equity gives the net income or loss shareholders earn per dollar of equity invested in the company. Return on equity affects stock return though it is not the only determinant of stock return. A positive return on equity implies that the company has adequate income to pay dividends. Dividends, on the other, increase stock return. However, a company can have a higher return on equity and a negative stock return. Xenia’s return on equity for the fiscal year ended December 31, 2014, was 6.576%. The positive return on equity was due an improvement in the firm’s profits driven by the increase in total revenue. The firm’s return on equity for the trailing twelve months period was 5.5%, far below the industry’s ratio of 11.89% implying that the company’s performance was lower than the average industry’s performance (Reuters.com). This ratio is important for determining the risk of the investment in Xenia’s stock. A lower return on equity increases portfolio risk hence, an investor should eliminate the stock from his portfolio.
Return on assets
The return on assets is the net income or loss earned for each dollar of average total assets employed in during the year. Xenia’s return on assets was 3.272% in the year 2014. The return on assets for the trailing twelve months was 2.99% while the industry’s average was 6.82%. This indicates that Xenia is less profitable than most of its peers in the industry.
The ROA computed is different from the ROE. The firm’s ROE was 6.576% while its ROA is 3.272%. The difference is because the firm is levered hence its total equity is less than the total assets. Return on assets is attributed to main aspects; efficient use of total assets and the profitability of the company. Therefore, the return on assets is a product of net profit margin and assets turnover.
Profit margin
Xenia’s profit margin for the year 2014 was 11.85% indicating that it earned a net income of $0.1185 for each dollar of total revenue generated during the year. The ratio is positive meaning that the company’s operations in 2014 were profitable. The profitability was as a result of an increase in the hotels’ total revenues. In the trailing 12 months, Xenia’s net profit margin was 9.13% while the industry’s average net profit margin was 39.74%. This indicates that the firm is less profitable than most of its peers in the sector.
Asset turnover
Xenia’s asset turnover for the year 2014 was 0.276 times implying that for each average asset used, the company made a revenue of $0.276. The ratio is low and is typical of hotel companies. Hotel companies are high-margin firms hence the asset turnover is usually low.
Debt to equity
Xenia’s debt-equity was 0.9434 implying that the value of equity was more than the amount of debt. This indicates that the company has a low leverage hence the financial risk is low. This also shows that most of the firm’s assets are financed by internal sources of finance. A higher leverage increases the financial risk because the company must honor the regular interest obligations irrespective of whether it makes profits or not.
Changes in leverage affect the return on equity of the company but has no effect on the return on assets. The DuPont analysis indicates that a rise in leverage causes an increase in equity multiplier. Since the return on equity is a product of equity multiplier and the return on assets, an increase in equity multiplier will increase the return on equity. However, this only occurs when the firm’s return on assets is positive. Provided the return on assets is positive, increasing leverage will improve the return on equity.
Xenia’s total debt to equity ratio for the most recent quarter was 63.36% while that of the industry was 97.54%. This indicates the firm is less levered than most of the competitors in the industry (Reuters.com).
Current ratio
Its current ratio as at December 31, 2014, was 0.305. This means that its current assets were able to pay only 30.5% of the total short-term obligations. This implies that it has a lower liquidity since the current assets are not adequate to repay its short-term liabilities. The industry’s average current ratio for the most recent quarter was 0.38 indicating that Xenia’s liquidity was slightly lower than the industry’s average.
The current ratio, however, is not the best measure of liquidity. This is because some of the current assets such as inventory and prepayments are not readily convertible into cash. The company may not rely on them to repay its short-term obligations.
Occupancy %
Occupancy percentage denotes the number of rooms sold divided by the total number of rooms available. It gives a measure of the demand for room services during the year. In the year 2014, Xenia’s occupancy was 76.3% indicating that 76.3% of its available rooms were sold. The high occupancy was due to the increase in demand for hostile and accommodation services in the US. Occupancy increased in 2014 from 73.6% in 2013.
ADR
The firm’s average daily rate was $177.65 in 2014, up from $161.95 in 2013. This means that Xenia earned a revenue of $177.62 per room sold during the year. ADR is useful in determining the appropriate price per room and is also a driver of profitability. An increase in ADR coupled with an increase in occupancy increases the firm’s total revenue. In 2014, both Xenia’s occupancy and ADR increased.
REVPAR
Xenia’s revenue per available room (REVPAR) for 2014 was $135.46. This implies that it earned a total room revenue of $135.46 per room available during the year. REVPAR is related to ADR and occupancy. It is a product of occupancy and ADR. REVPAR increased in 2014 from $119.13 in 2013. The increase was due to an increase in both occupancy and average daily rate.
Conclusion
The above analysis indicates that Xenia Hotels, Inc. is profitable. The return on assets and return on equity are positive. It also has a large profit margin. It debt-equity ratio shows that it has a low leverage hence the financial risk is low. Besides, the company has a high average daily rate, occupancy and revenue per available room. Its profitability is expected to improve as the demand for hotel and room services continues to increase. Therefore, Xenia Hotel’s stock is a good buy.
Works Cited
Chandra, Prasanna. Fundamentals Of Financial Management. New Delhi: Tata McGraw-Hill
Education, 2014. Print.
Jagels, Martin, Michael M Coltman, and Michael M Coltman. Hospitality Management Accounting.
Hoboken, N.J.: J. Wiley, 2004. Print.
"Xenia Hotels & Resorts Inc (XHR.N) Financials | Reuters.Com". Reuters.com. N.p., 2016. Web. 22 Mar. 2016.
APPENDICES
Stock return
Total dividends = $0.92
Stock price: 4 February 2015 = $20.55
Stock price: December 31, 2015 = 15.33
Stock return = (15.33+0.92-20.55)20.55 = -20.92%
Return on assets
ROA = Net incomeAverage total assets
= 109,799(2,955,751+3,756,658)2= 3.272%
Return on equity
ROE = Net incomeAverage total equity
= 109,799(1,520,921+1,818,255)2= 6.576%
Profit margin
Profit margin = Net incomeTotal revenue
= 109,799926,666 = 11.85%
Asset turnover
Asset turnover = Total revenueAverage total assets
= 926,666(2,955,751+3,756,658)2= 0.276
Debt-equity ratio
Debt-equity = Total debtTotal equity
= 1,434,8301,520,921 = 0.9434
Current ratio
Debt-equity = Total current assetsTotal current liabilities
= 435,2751,428,755 = 0.305
ADR = $177.62 (given in the annual report).
REVPAR = $135.46 (given in the annual report).
Occupancy = 76.3% (given in the annual report).
