INTRODUCTION
Financial ratio analysis is one of the key techniques for evaluating a company’s financial position. Financial ratios help getting additional information about financial performance of a company that might not be obvious from its financial statements (Erhardt and Brigham 89). They enable the management to evaluate the operating performance of the company in dynamics. Besides, the managers may track their financial goals achievement with the help of this type of analysis as ratios are widely used in planning and setting future performance goals (1). Moreover, the ratios are used to compare performance of companies within one industry, including usage of average ratios for that industry. The management may set the company’s financial goals based on industry average data or ratios of its most successful competitors obtained through benchmarking (Erhardt and Brigham 109). Thereby, ratios along with financial statements provide necessary information about a company to its management, creditors, investors, and shareholders.
There are five key classes of ratios: liquidity, solvency, activity, profitability, and operating ratios (1). In this paper, the most important financial ratios for the hospitality industry will be calculated and explained.
XENIA HOTELS & RESORTS, INC. BACKGROUND INFORMATION
Xenia Hotels & Resorts, Inc. is a real estate investment trust that owns hotels in the United States. Its headquarters are situated in Orlando, Florida (“Xenia Hotels & Resorts, Inc. (XHR)”). Xenia Hotels & Resorts, Inc. own a diversified portfolio of lodging premises operated by Marriott, Hilton, Hyatt, Starwood, Kimpton, Aston, Fairmont, Loews, etc. (Xenia Hotels & Resorts). As of the end of 2015, the company had 50 lodging properties, including 48 wholly owned (12,248 rooms) and 2 hotels with a 75% ownership interest (Xenia Hotels & Resorts, Inc.).
The company spun-off from its former parent company, InvenTrust Properties Corp. on February 3, 2015 becoming a standalone public company. Xenia Hotels & Resorts, Inc. earned a net income of $88,642 thousand in 2015 compared to $109,799 thousand in 2014 (Xenia Hotels & Resorts, Inc.).
ANALYSIS OF FINANCIAL DATA
Return on Company’s Stock
The return on company’s stock, or total shareholders’ return (TSR), was -16.62% in 2015 (see Appendix B for detailed calculations). The negative value of this ratio is explained by the fact that Xenia Hotels & Resorts, Inc. became a standalone public company on February 3, 2015. The company issued a significant amount of common shares (113 million shares) which led to a decrease in the stock price from $19.66 on February 4, 2015 to $15.33 on December 31, 2015 (Xenia Hotels & Resorts, Inc.).
The company compared its total return performance since February 4, 2015 to December 31, 2015 with the Dow Jones U.S. Hotel and Lodging REIT Index ("DJUSHL REIT Index"), the Russell 2000 Index (the "Russell 2000 Index"), and the FTSE National Association of Real Estate Investment Trust Equity REITs Index (the "FTSE NAREIT Equity Index") for the same period in its annual report. The results of this comparison show that the company’s total shareholders’ return is better than the DJUSHL REIT Index, but worse than the other two (Xenia Hotels & Resorts, Inc.).
Return on Owners’ Equity (ROE)
Total shareholder return shows the gain that the shareholders receive from dividend payments and increase in stock price, while ROE compares net income to the owners’ investment (equity). The ROE of Xenia Hotels & Resorts, Inc. was 5.43% in 2015 (see Appendix C for detailed calculations). This means that for every $1 of owners’ equity, 5.43 cents were earned by the company. The difference between the values of TSR and ROE is explained by the fact that TSR accounts only for common stock changes, while ROE depends on the company’s earnings and total equity. The company’s ROE value is below the industry average of 15.96%, which is a bad sign (“Hotels & Leisure Industry”).
Return on Assets (ROA)
The company’s ROA was 2.98% in 2015 (see Appendix D for detailed calculations). This means that 2.98 cents of net income was generated from every $1 of total assets. This ratio value is also below the industry average of 5.44% (“Hotels & Leisure Industry”). It can be seen from the Xenia’s financial statements that its net income dropped compared to 2014. This fact partly explains a low value of return on assets ratio (Xenia Hotels & Resorts, Inc.).
As it can be seen, the ROA value is different from the ROE value. The difference is explained by the fact that ROA takes into account total assets, while ROE calculation involves only equity (assets less liabilities). Thus, if the liabilities were equal to zero, the two ratios would be identical. The debt-to-equity ratio, or the financial leverage, affects the difference between ROE and ROA. The greater financial leverage is, the more ROE would rise over ROA (McClure). It is also important to mention that return on assets can be calculated as profit margin multiplied by asset turnover (1).
Profit Margin
The Xenia Hotels & Resorts, Inc. profit margin was 9.08% in 2015 (see Appendix E for calculation). This ratio is above the industry average of 7.19%, which is a good sign (“Hotels & Leisure Industry”). However, it has dropped compared to prior years (9.57% in 2014 and 13.6% in 2013) (Xenia Hotels & Resorts, Inc.).
Asset Turnover
The company’s asset turnover was 0.33 in 2015 (see Appendix F for calculations). This means that company earns 33 cents of revenue for each $1 invested in total assets. This value is quite low; however, it is typical for hotels industry (1). Compared to the average industry asset turnover of 0.76, the Xenia’s ratio is worse (“Hotels & Leisure Industry”).
Debt to Equity
The debt to equity for Xenia Hotels & Resorts, Inc. was equal to 0.72 in 2015 (see Appendix G for detailed calculations). This means that the company is mainly financed through equity as the ratio value is below 1. The financial leverage of Xenia is pretty higher than the industry average of 0.08 (“Hotels & Leisure Industry”).
Current Ratio
The current ratio of the company was 0.84 in 2015 (see Appendix H for calculations). This means that Xenia’s current assets do not cover its current liabilities (it has only 84 cents of current assets for each $1 of short-term liabilities). Generally, the current ratio value should be between 0.5 and 2.0 (“Current Ratio”). However, most companies try to achieve the current ratio value not less than 1 so that they are able to pay off their current liabilities with their current assets. Creditors would prefer a higher current ratio of Xenia Hotels & Resorts, Inc. to gain assurance that they will receive their payments on time. Quite the opposite, the shareholders would like such ratio value as they normally consider current assets to be less productive than non-current assets (1).
Occupancy, %
According to the company’s annual report for 2015, the occupancy was 76.2%. It is calculated as rooms occupied divided by available rooms. As the management stated in the annual report, occupancy, average daily rate, and revenue per available room are the key indicators of financial performance for the company. The occupancy rate didn’t change compared to the prior year (Xenia Hotels & Resorts, Inc.).
Average daily rate (ADR)
According to the annual report of Xenia Hotels & Resorts, Inc. for 2015, the company’s ADR was equal to $187.04. It is calculated as rooms revenue divided by number of rooms sold. As mentioned above, it is one of the key operational indicators for the company. Xenia’s ADR has increased by 5.8% compared to 2014 (Xenia Hotels & Resorts, Inc.).
Revenue per available room (RevPAR)
According to the company’s annual report for 2015, RevPAR was $142.59. It is calculated as paid occupancy percentage multiplied by ADR. It is one of the key financial performance indicators together with occupancy rate and ADR. The company’s RevPAR increased by 5.8% compared to the prior year (Xenia Hotels & Resorts, Inc.).
CONCLUSION
Xenia Hotels & Resorts is one of the biggest hotel owners in the U.S. It has separated from its former parent on February 3, 2015 and issued a significant amount of new stock, which led to a decrease in share price. This fact partly explains a negative return on shareholders’ stock in 2015. Some of the company’s profitability ratios (ROE and ROA) are below the average industry levels; however, its profit margin is higher than the average hotel industry ratio. Xenia’s asset turnover is low, but this is common for most hotels. The company’s financial leverage is pretty higher than that of most of its competitors. Xenia Hotels and Resorts doesn’t have enough current assets to cover its short-term liabilities, This fact is appealing to shareholders, but it is annoying to creditors.
According to the Xenia’s annual report for 2015, occupancy rate, ADR, and RevPAR are among its key financial performance indicators. The occupancy rate hasn’t changed compared to prior year, while ADR and RevPAR increased compared to 2014. The financial ratios figures are indicated in Appendix A.
Works cited
1
“Current Ratio”. Reuters. Reuters, n.d. Web. 22 March 2016.
Ehrhardt, Michael, and Brigham, Eugene. Corporate Finance: A Focused Approach, 4th ed. Mason: South-Western Cengage Learning, 2011. Print.
“Hotels & Leisure Industry”. CSIMarket. CSIMarket, Inc., 2016. Web. 22 March 2016.
McClure, Ben. “ROA And ROE Give Clear Picture Of Corporate Health”. Investopedia, LLC, 13 February 2016. Web. 22 March 2016.
Xenia Hotels & Resorts. “Company Overview”. Xenia Hotels & Resorts, 2016. Web. 22 March 2016.
Xenia Hotels & Resorts, Inc. 2015 Annual Report. Washington, D.C.: United States Securities and Exchange Commission, 2016. Xenia Hotels & Resorts, Inc. Web. 22 March 2016.
“Xenia Hotels & Resorts, Inc. (XHR)”. Yahoo Finance. Yahoo!, 22 March 2016. Web. 22 March 2016.
Appendix A
Financial ratios for Xenia Hotels & Resorts, Inc. for the year ended December 31, 2015.
Appendix B
Return on company’s stock calculation
Return on company’s stock is the synonym of total shareholders return (TSR).
TSR = Capital gains yield + dividends yield = (ending stock price – beginning stock price) / beginning stock price + dividend yield.
TSR = (15.33 - 19.66) / 19.66 + 5.4% = -16.62%.
Xenia Hotels & Resorts, Inc. spun-off from its former parent company on February 3, 2015, that is why the beginning stock price date is February 4, 2015. (“Xenia Hotels & Resorts, Inc. (XHR)”)
Appendix C
ROE calculation
ROE = Net Income / Average Owners’ Equity
ROE = 88,642 / ((1,743,358 + 1,520,921) / 2) * 100% = 5.43%
Appendix D
ROA calculation
ROA = Net Income / Average Total Assets
ROA = 88,642 / ((3,005,945 + 2,949,076) / 2) * 100% = 2.98%
Appendix E
Profit Margin calculation
Profit Margin = Net Income / Total Revenue
Profit Margin = 88,642 / 976,144 * 100% = 9.08%.
Appendix F
Asset turnover calculation
Asset turnover = Total Revenue / Average Total Assets
Asset turnover = 976,144 / ((3,005,945 + 2,949,076) / 2) = 0.33.
Appendix G
Debt-to-equity ratio calculation
Debt-to-equity ratio = Total Liabilities / Total Owners' Equity
Debt-to-equity ratio = 1,262,587 / 1,743,358 = 0.72.
Appendix H
Current ratio calculation
Current ratio = Current Assets / Current Liabilities = (Total Assets – Net Investment Properties) / (Total Liabilities – Debt + Short-Term Debt)
Current ratio = (3,005,945 – 2,641,704) / (1,262,587 – 1,094,536 + 263,734) = 0.84.
