Analysis of LaSalle Hotel Properties
Introduction: Importance of ratio analysis
Financial ratios are important in analysing the financial performance of an organization. The financial performance is a key factor in the management of the organization. Financial ratios simplify the financial statements such as the income statement hence managers can easily determine whether the organization is profitable or not. For instance, profitability ratios such as the net profit margin indicate whether the organization is profitable or not. Managers can then identify areas of weaknesses and take corrective actions to improve the profitability of the organization. They are also used to assess the liquidity of an organization (Dopson and Hayes). Evaluating the ability of the organization to repay short-term liabilities. This is critical to the management as it affects the organization’s access to short-term financing. Suppliers are likely to offer credit facilities to an organization with a strong liquidity. Besides, the management can evaluate its liquidity drivers such as average collection period, average payment period, among others. This helps the management to review its policies to improve the organization’s liquidity.
Financial ratios will also help the management to assess the long-term stability of solvency of the organization (Harris). Long-term solvency denotes the capacity to meet long-term obligations. It also gives a reflection of the financial risk involved. A high financial leverage increases the financial risk hence some investors may be reluctant to invest in the organization. Lenders are usually reluctant to lend to organizations with high leverage. Ratios are also significant to the management since they help in trend analysis. The management can use the ratios to compare the performance of the organization between two or more financial years and identify significant trends. For instance, the management can analyze the changes in the profit margin of the organization over a period to determine whether the profitability of the organization is improving or falling. Besides, ratios can be used by the management to compare the performance and financial stability of the organization with other peers in its industry or sector.
Activity ratios and liquidity ratios are the most important categories of financial ratios for the hotel industry (Enz). Most firms in the hospitality industry have large working capital needs as well as many short-term obligations to meet. Therefore, liquidity ratios are essential in assessing the management of working capital. Besides, activity ratios such as occupancy have a great influence on the liquidity and profitability of firms in the industry.
Background of the organization
LaSalle Hotel Properties is a real estate investment trust (REIT) founded in 1998 (Finance.yahoo.com). It is based in Bethesda in Maryland. It purchases, owns, redevelops and leases luxury and primary upscale full-service hotels in the United States. The organization owns 34 hotels with about 9,200 guest rooms in 11 states. It was listed on the NYSE in 1998. Its performance has been strong in the last few years (Finance.yahoo.com). Its total revenue has increased from $977 million in 2013 to $1.1 billion and $1.2 billion in 2014 and 2015 respectively.
This analysis is based on the financial figures for the year ended December 31, 2014.
Return on company’s stock
The return on the company’s stock for the year 2014 was 36.22%. The return on stock is the profit an investor earns for holding the stock for a given period (Pyo). It consists of the change in the market value of the stock as well as distributions or dividends paid on the stock. LaSalle Hotel Properties’ stock price was $30.74 on January 2, 2014, and $40.47 on December 31, 2014. Besides, the company paid an annual dividend of $1.405. Therefore, LaSalle Hotel Properties’ stockholders earned a profit of 36.22%. The rise in the market price of the stock is attributed to the improvement in the profitability of the firm and positive prospects n the hospitality industry.
Return on equity
The return on a company’s stock is related to the return on equity. Return on equity is the net income or loss earned per dollar of equity. A positive return on equity implies the company is profitable (Pyo). This can also mean that the company has income to distribute to shareholders. Dividends increase the return on stock hence an increase in the return on equity may cause a rise in the stock return. However, the two are not always related since there are several variables affecting stock prices and the return on the stock. In the year 2014, LaSalle Hotel Properties’ return on equity was 9.37%. The positive return on assets was because the company earned a net profit owing to the increase in total revenue.
Return on assets
The return on assets gives the amount of net income or loss for every dollar of average total assets utilized in the organization during the year (Harris). A high return on assets indicates the company is profitable. LaSalle Hotel Properties had a return on assets of 5.89% in the year 2014 indicating that the REIT is profitable.
Both ROA and ROE measure profitability, but they are not always similar. In this case, the return on assets is 5.89% while the return on equity is 9.37%. The difference is due to the debt-equity ratio. When there is no debt in the capital structure, equity is equal to total assets hence the ROA and ROE are equal. When the debt-equity ratio is high, it implies there is less equity than debt hence the return on equity will be higher than the return on assets. LaSalle Hotel Properties' debt-equity ratio was about 0.5, and this explains the difference between ROA and ROE. Financial leverage has no impact on the return on assets but affects the return on equity. The positive ROA shows that LaSalle Hotel Properties is efficient in using its assets to generate profits.
Profit margin
Profit margin shows the net profit LaSalle Hotel Properties earned for each dollar of total revenue generated during the year (Harris). In the year 2014, the net profit margin for LaSalle Hotel Properties was 19.24% indicating that it was profitable. The high-profit margin is attributed to the improvement in the overall economy of the United States. Economic growth increased the demand for lodging and other hotel services. The management of LaSalle Hotel Properties describes that the year 2014 saw a 4.5% increase in the lodging industry-wide demand. Supply only increased by 0.9% hence, there was a net growth in demand for lodging and other hotel services. This led to an improvement in the firm’s occupancy that in turn caused a rise in ADR and RevPAR.
Asset turnover
LaSalle Hotel Properties asset turnover for the year 2014 was 0.3061 implying that the REIT earned a revenue of $0.3061 for every dollar of total assets utilized during the year. The ratio improved in 2014 due to an increase in the firm’s total revenue. The asset turnover is low as typical of hospitality firms. Firms in the hospitality industry have low asset turnover due their extensive investment in assets. However, they are usually high-margin firms.
Debt to equity
Debt-equity ratio gives the amount of total liabilities for every dollar of equity in the firm. LaSalle Hotel Properties debt-equity ratio as at December 31, 2014, was 0.5112 implying that the value of total debt was about a half of the total value of equity. This indicates that the firm had a low leverage hence the financial risk was low. Financial risk is increased if the leverage is high since the organization must pay interest on debt even in periods when it makes losses. Debt holders can file for the liquidation of the firm if it fails to meet its obligations to pay interest on debt.
The amount of leverage of a firm affects its return on equity although it has no impact on the return on assets. The return on assets is a product of assets turnover and net profit margin as illustrated by the DuPont formula. The two measures have nothing to do with debt-equity ratio. The DuPont formula also indicates that the return on equity is a product of net profit margin, assets turnover (return on assets) and equity multiplier. The higher the leverage, the higher the equity multiplier. A high equity multiplier implies the return on assets will be high provided the first two components are positive. Therefore, if a firm is profitable (has a positive net profit margin) and is efficient in sing total assets to generate revenue, its return on equity will increase if it increases the amount of debt in its capital structure.
Current ratio
LaSalle Hotel Properties’ current ratio was 0.8944 as on December 31, 2014, indicating that its current assets could only repay 89.44% of its total short-term obligations. The ratio is low since LaSalle Hotel Properties does not keep current assets such as inventory but has high working capital requirements.
Occupancy
LaSalle Hotel Properties occupancy for the year 2014 was 81.2%, up from 80.2% indicating that over 80% of its available rooms were sold during the year. The high occupancy was high to the strong economic growth in the US. This further led to the increase in the demand in the lodging industry. It outperformed its peers in the sector since the lodging industry-wide occupancy was only 64.4%.
Average Daily Rate
ADR for LaSalle Hotel Properties in 2014 was $231.53 implying that it earned a revenue of $231.53 for every room sold. The high ADR was due to the high demand that led to high occupancy. This enabled the firm to raise its price thus increasing the ADR.
Revenue Per Available Room
LaSalle Hotel Properties RevPAR for 2014 was $188.09 implying that it made a revenue of $188.09 for every room available. The high RevPAR was due to the high occupancy and the high ADR. The RevPAR is less than the ADR since the occupancy during the year was less than 100%.
Conclusion
LaSalle Hotel Properties is profitable as shown by the above analysis. It has a high return on equity and strong solvency as shown by the debt ratio. The stock offers a high return due to its appreciation. Besides, it has a high occupancy, ADR, and RevPAR. It outperformed the industry on these important measures. Therefore, the stock of LaSalle Hotel Properties is a good buy.
Works cited
"LHO Profile | Lasalle Hotel Properties Common Stock - Yahoo! Finance". Finance.yahoo.com. N.p., 2016. Web. 24 Mar. 2016.
Dopson, Lea R, and David K Hayes. Managerial Accounting For The Hospitality Industry. Hoboken, N.J.: Wiley, 2009. Print.
Enz, Cathy A. Hospitality Strategic Management. Hoboken, N.J.: John Wiley & Sons, 2010. Print.
Harris, Peter J. Accounting And Finance For The International Hospitality Industry. Oxford: Butterworth-Heinemann, 2010. Print.
Pyo, Sungsoo. Benchmarks In Hospitality And Tourism. Binghamton, NY: Haworth Hospitality Press, 2013. Print.
APPENDICES
Stock return
Total dividends = $0.1.405
Stock price: 2 January 2015 = $30.74
Stock price: December 31, 2015 = $40.47
Stock return = (40.47+1.405-30.74)30.74 = 36.22%
Return on equity
ROA = Net incomeAverage total assets
= 213,497(2,448,386+2,109,463)2
= 9.37%
Return on assets
ROE = Net incomeAverage total equity
= 213,497(3,669,949+3,581,038)2
= 5.89%
Profit margin
Profit margin = Net incomeTotal revenue
= 213,4971,109,778
= 19.24%%
Asset turnover
Asset turnover = Total revenueAverage total assets
= 1,109,778(3,669,949+3,581,038)2
= 0.3061
Debt-equity ratio
Debt-equity = Total debtTotal equity
= 1,251,5632,448,386
= 0.5112
Current ratio
Debt-equity = Total current assetsTotal current liabilities
= 206,199230,473
= 0.8947
Occupancy = 81.2%
ADR = $231.53
REVPAR = $188.09
