Introduction
Financial performance analysis is crucial for various stakeholders given the varying needs for performance information on various business aspects. In that respect, effective analysis entails evaluating performance over a period or comparing a company’s performance with industry peers. It also entails evaluating various performance areas using varying tools including financial ratios. In that view, the following is a report on Wyndham Worldwide Co. financial performance identifying the performance trend for the period beginning 2012 to 2014 and comparing its 2014 performance with that of the industry peers.
Analysis
Company Overview
Organization and history
Wyndham Worldwide Co. is a brand offering hospitality products and services to businesses and individual consumers across the globe. Its operations are in three segments including Vacation Exchange, Rentals, and Lodging as well as Vacation Ownership. Operations in Lodging segment entails hotel franchises across various market segments including the upscale, midscale, upper midscale and economy as well as an extended stay also to providing services in property management in select and full-service hotels. The hospitality products and services are offered at the Wyndham Resorts and Hotels, Days Inn, Ramada, Howard Johnson, Super 8, Wingate as well as Microtel Suites and Inns. Other brands include Tryp RCI, Novasol, Landal GreenParks, Hoseasons, James Holidays, cottages4you and Wyndham Vacation among others. By February 2015, it had about 7,440 hotels with 638,300 rooms (Yahoo Finance, 2015a). The Company’s headquarters are in Parsippany; New Jersey. It become an independent brand in Hospitality in 2006 then growing to be one of the leading brands in the market (Wyndham Worldwide Corporation, 2014).
Relative position in the market
The company’s operations are subject to competition with the major competitors being Marriott International and Hilton holdings. Marriott operates, franchises also to licensing hotels as well as timeshare properties across the globe under three segments. The segments include North American Limited and Full-Services as well as International Operations (Yahoo Finance, 2015k). On the other hand, Hilton Company, leases, owns and manages as well as develops franchise hotels and resorts. Also, it manages timeshare properties across the globe through various brands (Yahoo Finance, 2015l). The table below summarizes the three competitors’ position in the market.
Source: (Yahoo Finance, 2015m).
Given the figures, Hilton is the largest among the three in terms of market capitalization and employee numbers followed by Marriott and then Wyndham. However, Wyndham surpasses the competitors in terms of revenues and EPS. The Company’s better performance than its industry peers that are larger than it in size could be explained by better and efficient management of resources and other strategies capable of capturing market value. Such strategies include brand differentiation that tailors products and services to the niche market as well as innovation in brand development.
Ratios and performance analysis
Ratios analysis is crucial in evaluating a company’s performance as it provides a platform for comparing industry peers’ performance as well as an individual company’s trends. Also, the ratios help identify key performance areas that define a business’ financial strength and those that needs to be addressed (Schoenebeck & Holtzam, 2012). In that respect, the following is a financial analysis summary of Wyndham over a three years period beginning 2012 to 2014 and in comparison with the two key competitors.
Liquidity
Liquidity ratios identify a business’ ability to meet its obligations. They include current and quick ratios.
Current ratio
The ratio measures the adequacy of a business’ current assets in paying for its short term liabilities. The higher the ratio, the better for the business as it is an indication of the better ability to meet short-term obligations.
The company’s ratio improved in 2013 compared to 2012 but later decreased in 2014. However, the 2013 and 2014 performance shows adequate current assets that can pay for the current liabilities. On the other hand, Marriott’s current assets are less than the current liabilities cannot meet its short-term obligations while Hilton has the best liquidity having the highest current ratio. The improvement in liquidity could have resulted from better management of assets such as receivables that slightly increased the assets. Also, there was also a decrease in the liabilities that could have resulted from better management of aspects such as payables and a reduction in short-term debts.
Operating cash flow
Operating cash flows represents the cash received from the business key operations hence a key measure of its business model’s sustainability.
All the three businesses had operational cash flows that were less than their current liabilities hence an indication of the need for improvement in cash flow management. On the other hand, Wyndham had a relatively less shortage in 2014 compared to the other competitors in 2014. Its cash flows had been fluctuating given a decrease in the shortage in 2013 and a subsequent increase in 2014. The shortage in Wyndham’s case was a result of the company’s significantly high liabilities.
Solvency
The ratios are a crucial measure of business ability to pay for its long-term debt hence identifying efficiency in debt management. They include debt ratio, times interest earned and equity multiplier among others.
Debt ratio
The ratio measures the proportion f capital that is debt funded. Higher ratios show higher reliance on debt that increases a business risks as it is burdened by interest expense. The following table shows the three companies’ debt ratios.
The ratios higher than one shows that all the businesses had a significantly higher reliance on debt in their capital structure. On the other hand, the reliance has been rising for Wyndham over the three years with its ratio in 2014 surpassing that of the two competitors. The rise relates to an increase in debt that was higher than the business’ capital increase through other sources such as earnings and shareholders equity.
Times interest earned
The ratio measures the business ability to meet its interest expense obligations. Higher ratios show that the business profitability can effectively repay the expense hence better interest coverage. The following table summarizes the company and its competitors’ ratios.
Given the analysis, the company’s ratio had been increasing over the period being an indication of improving solvency. Also, it had a higher ratio than Hilton showing a relatively better performance. However, Marriott had a significantly higher ratio than the two being an indication that it had the best interest coverage among the three.
Equity multiplier
The business equity multiplier had been rising over the three years showing a good trend as equity’s investment in assets increased. On the other hand, the company had a better ratio in 2014 compared to the two competitors.
In view of the three measures including debt ratio, times interest earned and the equity multiplier, the business’ debt level had been rising over the period although it had increasing profitability that enhanced its ability to cover the easing interest expense.
Activity
The asset turnover
The ratio shows a company’s effectiveness in managing assets to generate revenues, and higher ratios are better. The following table summarizes the three companies’ efficiency.
The Company had a low ratio but had been improving in asset management given the rising ratio. On the other hand, Marriot had the best asset management among the three with Hilton being the least efficient given that it had the lowest ratio.
Profitability
Profitability ratios measure a company’s efficiency in generating profits given its revenue level, assets, and equity. They include the profit margin, return on investments and return on equity.
Profit margin
The margin measures the ability to manage expenses and generate profits from the company’s revenues.
The company had relatively better margin as it had higher profitability than the two competitors where Marriott had the least margin among them. Also, the company’s margin increased in 2014 compared to 2013 and 2012 showing improving expense management to generate profits (Damodaran, 2010).
Return on Assets (ROI)
It measures the efficiency in managing assets to generate profits, and higher ratios are better. The following is a summary of the three companies ROI.
Given the analysis, the company’s assets management had been improving given the rising ratio over the period. On the other hand, Marriott had better assets management given its higher ratio in 2014 while Hilton was the least efficient (Schoenebeck & Holtzam, 2012).
Return on Equity
The ratio measures the business ability to generate wealth for its shareholders given the equity applied. Higher ratios are an indication of better equity management.
The business had increasing ratio being an indication of improving equity allocation and management to generate income. On the other hand, the two competitors had lower equity management efficiency given their relatively lower ROEs.
Compare year on year operating income
In line with the profitability ratios, the company’s operating income increased over the three years period while Hilton featured higher income than the two.
Market ratios
The ratios measure the market valuation of a company’s stock hence identifying whether it is under or overvalued given its stock’s price.
Price to Earnings Ratio
The ratio measures the amount of dollar the investors are paying for a dollar of the company’s earnings. The three companies P/E ratios are as shown below.
Given the market ratio values, Hilton is already highly valued by the market followed by Marriott while the company had the least ratio in 2014. In that respect, the competitors’ stocks are overvalued compared to its stock. On the other hand, its ratio had been increasing over the period showing increased market confidence in the company’s future performance (Damodaran, 2010).
Sustainable Growth Rate
The rate measures a company’s growth in sales without further capital injection but using its earnings by plowing back its income in development projects and operations.
Plowback ratio
The ratio shows that the company has had low plowback compared to the competitors. Also, its plowback ratio was relatively stable and fluctuated over the period. That could be credited to the dividend payment policy that ensures payment to investors, unlike Hilton that did not pay divined in 2014.
Sustainable Growth Rate = Beginning Total Equity * Plowback Ratio
The analysis shows that the company’s sustainable growth rate had been increasing over the period and was relatively higher in 2014 compared to the two competitors where Hilton had the least rate (Bender & Ward, 2008).
Annual sales growth rate
Shows the companies’ sales growth on an annual basis summarized as follows.
Wyndham’s growth increased in 2013 compared to 2012 but then decreased in 2014. On the other hand, the competitors had relatively similar growth in 2014 surpassing that of the Company hence showing their better performance.
In comparison with the sustainable growth, the company’s actual sales growth is relatively lower hence and indication that its sales are growing less than its potential. The same applied to the competitors and could be associated with increased competition and challenging market conditions (Wyndham Worldwide Corporation, 2015).
DuPont Analysis
The analysis identifies the specific areas where a business performs well or poorly in generating its income. That entails analyzing assets and equity as well as debt management efficiency. Thus, it is a product of profit margin, assets turnover and equity multiplier as summarized in the following table (Damodaran, 2010).
ROE = Profit Margin * Equity Multiplier*Asset Turnover
Although the analysis provides the same value as ROE, it is clear that the company had been improving in all the three areas surpassing the competitors in 2014. However, the least performance was in profit margin and asset turnover being an indication of a need to enhance expenses and assets management. That would enhance wealth creation for the company’s investors (Bender & Ward, 2008). The noted improvement in all the three areas could have resulted from better management practices that enhanced asset allocation in markets with beer potential and effective allocation of capital optimizing on the structure without burdening the company with much debt for both short and long term. The use of equity and retained earnings to fund the business capital structure was also crucial in enhancing its solvency hence an indication of an effective financial management approach. However, the need to further improve profit margin and asset turnover as a means of enhancing the overall return on Equity requires strategies to increase sales such as market expansion or suitable pricing for the differentiated brand services and products.
Conclusion
The business performance analysis shows an overall improving trend, and relative better performance compared to the competitors. That is given that it has two key competitors who are relatively larger in size. The performance was marked by improving liquidity and profitability showing improvement assets and equity management’s efficiency. Further, its performance was marked by increasing market valuation although it is less valued than the competitors that are overvalued. However, there is a need to enhance its profitability and assets management efficiency, also, to enhancing its sales growth as it is currently performing below its sustainable growth rate.
References
Bender, R. & Ward, K. (2008). Corporate Financial Strategy. London: Rout-ledge.
Damodaran, A. (2010). Applied Corporate Finance. 3rd Ed. Colorado: Wiley.
Nasdaq. (2015a). Marriott International Dividend Date & History. Retrieved from, http://www.nasdaq.com/symbol/mar/dividend-history
Nasdaq. (2015b). Hilton Worldwide Holdings Inc. Revenue & Earnings Per Share. Retrieved from, http://www.nasdaq.com/symbol/hlt/revenue-eps
Schoenebeck, K. & Holtzam, M. (2012). Interpreting and Analyzing Financial Statements. 6th Ed. New York: Pearson’s Publishers.
Wyndham Worldwide Corporation. (2014). 2014 Annual Report. Retrieved from, http://investor.wyndhamworldwide.com/phoenix.zhtml?c=200690&p=irol-sec
Wyndham Worldwide Corporation. (2015). Our History. Retrieved from, http://www.wyndhamworldwide.com/category/our-history
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