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Financial analysis is evaluation of the company’s financial viability, profitability and stability in determining the suitability of the business for investment. Financial analysis enhances the uses of financial ratios in determining the firm’s financial performances and evaluating the firm’s relationship between the items in financial statement (Deegan, 2011). These ratios are used as a base of analyzing the firm’s financial condition and position in meeting its financial obligation. Following are the Starwood International Hotel Corporation and Accor hotels financial ratios analysis for the year 2012 and 2011 financial statements. Essay Example

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FINANCIAL STATEMENT ANALYSIS AND REPORT 19

Accor and Starwood Hotels and Resorts Financial Analysis

Lecturer:

Executive Summary

Financial analysis is evaluation of the company’s financial viability, profitability and stability in determining the suitability of the business for investment. Financial analysis enhances the uses of financial ratios in determining the firm’s financial performances and evaluating the firm’s relationship between the items in financial statement (Deegan, 2011). These ratios are used as a base of analyzing the firm’s financial condition and position in meeting its financial obligation. Following are the Starwood International Hotel Corporation and Accor hotels financial ratios analysis for the year 2012 and 2011 financial statements.

Table of contents

2Executive Summary

Table of contents Introduction3

4Introduction

5Profitability Ratios

5a.) Return on Equity (ROE)

b) Return on assets6

72. Asset Efficiency Ratios

7a) Asset turnover ratio

8b) Days inventory

9Capital structure ratios

10a) Debt to equity ratio

11b) Debt ratio

12c) Equity ratio

14Conclusion

16Appendix I

17Appendix II

18Appendix III

19Appendix IV

Introduction

Accor is the world leading hotel operator and leading hotel market in Europe. The hotel has more than three thousand five hundred hotel outlets in ninety two countries. The portfolio of hotel brands owned by Accor include Pullman, Grand Mecure, Sofitel, MGallary, Apartholes Adagio, Novotel, Ibis, Suite Novotel, Hotel F1, ibis Styles and ibis budget. Accor offers an extensive offer from luxury to budget services (Report, 2012). The worldwide Accor brand hotels have more than one hundred and sixty thousand employees in.

Starwood Hotels and Resorts Worldwide, Inc. is the best world class hotel and leisure company in the world. It controls one thousand one hundred and sixty two properties in about one hundred countries and it has one hundred and seventy one thousand employees (Report, 2012). Starwood is an entirely incorporated owner, franchisor and operator of hotels, residences and resorts with worldwide famous brands which includes St. Regis, The Luxury Collection, W, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft, and Element. The corporation possess one of the industry’s foremost reliability programs, Starwood preferred guest (SPG), enabling members to receive and trade in points for flights, room upgrades and room stays, with no deadlines.

Profitability Ratios

Profitability ratios determine the business entity’s effectiveness in making profits from their investments throughout the financial period (Dagwell, 2007). A high value in most of these ratios indicates that the business entity is doing well.

a.) Return on Equity (ROE)

ROE shows the amount of earnings as a percentage of the shareholders input. ROE is the most important financial and profitability matrix that reveals to the owners whether their investments are viable or not. Normally, average ROE is about 10% to 12%. But also a higher percentage of ROE does not mean that the business financial performance is healthy (Deegan, 2011). According to DuPont analysis, higher figures of ROE may be as a product of high financial leverage and too much financial gearing is not healthy for a business’s solvency situation.

The formula for ROE = net profit / average shareholder’s equity x 100.

ROE for Accor

Net profit

Average shareholder’s equity

ROE for Starwood

Net profit

Average shareholder’s equity

From information above, ROE of Accor has a downward trend from 0.012% in 2011 to (0.26) % in 2012. This shows that for every $1 invested by shareholders, the hotel made 0.012 cents of net profit in 2011 and it made a loss in 2011 such that for every $ 1 invested, the hotel made a loss of 0.26 cents. On the other hand, Starwood had an upward trend in ROE from 258.7% in 2011 to 291.2% in 2012 (Report, 2012). This means that for every $1 invested by shareholders, the hotel made 258.7 cents of net profit in 2011 and it improved further in 2012 such that for every $1 invested, the hotel made 291.2 cents of net profit. From comparing ROE of the two hotels, it is revealed that Starwood is more profitable as compared to Accor.

b) Return on assets

Return on assets is used to determine business entity’s profits to available assets used to generate profits. Return on assets ratio compares the earnings profits to the total assets of the business entity.

The formula for ROA = Earnings before interest and tax / Average total assets x 100

ROA for Accor

Average total assets

ROA for Starwood

Average total assets

It is shown from the above information that ROE of Accor improved in 2012 as compared to 2011. This means that for every dollar of assets, the hotel made 6.44 cents of profits before interest and tax in 2011, there was an upward trend in 2012 with each dollar of assets generating 6.96 cents of profits before interest and tax (Report, 2012). This was also the case for Starwood hotel.

2. Asset Efficiency Ratios

a) Asset turnover ratio

Asset turnover ratio is used to determine the overall efficiency of the business in generating profits per dollar of the total investment in assets (Eilifsen, 2010). The going concern of a business is determined by its capability to make profits from sales.

The formula for Asset turnover ratio = sales revenue / average total assets

Asset turnover ratio for Accor

Sales revenue

Average total assets

Asset turnover ratio

Asset turnover ratio for Starwood

Sales revenue

Average total assets

Asset turnover ratio

From the above information, the asset turnover ratio of Accor increased in 2012 to 0.75 from 0.70 in 2011. This reveals that for every dollar investment in assets, Accor was able to make $ 0.70 of revenue from sales in 2011 which increased to $ 0.75 in the year 2012. It was also the same case for Starwood with an increase in 2012 of 0.59 from 0.71 in 2011. This means that for each dollar investment in assets, Starwood was able to make $ 0.59 of revenue from sales in 2011 which increased to $ 0.71 in the year 2012. Both hotels had an upward trend in asset turnover ratio with minimal difference in range of change (Sheffrin, 2011).

b) Days inventory

If the stock of a company is sold in faster rate, it will facilitate the business entity to meet its short term obligations using the cash made from sales of inventory. There is a high risk of waste or obsolescence if the business entity holds large amount of slow moving inventory leading to increased resource inefficiencies. Inventory turnover ratio is a very useful ratio that determines the length of time a business entity takes to turn over its inventory during a financial year.

The formula for Days inventory turnover ratio = average inventory / cost of goods sold x 365

Days inventory for Accor

Average inventory

Cost of goods sold

Days inventory

Days inventory for Starwood

Average inventory

Cost of goods sold

Days inventory

It is revealed from the information above that both hotels take 10 days to convert its inventory to cash.

3. Capital structure ratios

The capital structure of a business entity is the percentage of debt funding in relation to equity funding. Capital structure ratios reveal the financing decision of a business entity (Sheffrin, 2011). Capital structure ratio of a company is also termed as gearing ratio and it shows the percentage of debt to equity funding, and are very useful when analyzing the long term viability of a business entity.

a) Debt to equity ratio

Debt to equity ratio determines the total of dollars of debt that exist per every dollar of equity financing. Normally, if this ratio is more than 100%, then it means that the business depended so much on debt funding than on equity funding.

The formula for Debt to equity ratio = total liabilities / total equity x 100

Debt to equity ratio for Accor

Total liabilities

Total equity

Debt to equity ratio

Debt to equity ratio for Starwood

Total liabilities

Total equity

Debt to equity ratio

From the table above, Accor depended on equity funding more than debt funding in 2011 and 2012. The ratio increased in 2012 to 78.9% from 56.7% in 2011. This reveals that for each $ 1 of equity fund, Accor employed $ 56.7 of debt fund in 2011, this increased in 2012 such that for each $ 1 of equity finance, the hotel used $ 78.9 of debt finance. On the other hand Starwood relied so much on debt funding more than equity funding in 2011 as compared to 2012. The ratio reduced in 2012 to 182.3% from 223.6% in 2011. This means that for each $ 1 of equity fund, Accor employed $ 223.6 of debt fund in 2011, this reduced in 2012 such that for each $ 1 of equity finance, the hotel used $ 182.3 of debt finance (Deegan, 2011). Comparing the two hotels, Accor is relying more on equity than debt funding and Starwood is more dependent on debt than equity.

b) Debt ratio

Debt ratio shows the amount of dollars of liabilities that exist per dollar of assets in a business entity. Normally when the ratio is more than 50%, then the business entity financed its investments in assets by relying on more debt than equity.

The formula for Debt ratio = total liabilities / total assets x 100

Debt ratio for Accor

Total liabilities

Total assets

Debt ratio

Debt ratio for Starwood

Total liabilities

Total assets

Debt ratio

From the information deduced from the two hotels, it is revealed that both hotels relied on debt financing than equity financing. Accor depended more on debt to finance its investments in assets in 2012 with a percentage of 60% in relation to 2012 which was 51.8%. It means that for every $ 1 of assets, Accor employed $ 51.8 of debt to fund in 2011; it increased in 2012 such that for every $ 1 of assets, Accor used $60 of debt to fund (Report, 2012). On the other hand, Starwood relied more on debt financing in 2011 with a percentage of 69% as compared to 2012 which reduced to 64.5%. This means that for each 1$ of assets, Starwood used $ 69 to finance in 2011; the ratio reduced in 2012 such that for every 1 $ of assets, the hotel used $ 64.5 of debt to finance. From the analysis of debt ratio, it is revealed that Starwood relied so much on debt to finance its investment in assets as compared to Accor.

c) Equity ratio

The equity ratio reveals the dollars of equity per every dollar of assets. As per the accounting equation, total equity equals the total assets plus the total liabilities. If equity ratio was less than 50%, then the business was relied so much on debt funding than equity funding. This means that the business had more liabilities than assets.

The formula for Equity ratio = total equity / total assets x 100

Equity ratio for Accor

Total equity

Total assets

Equity ratio

Equity ratio for Starwood

Total equity

Total assets

Equity ratio

From the information revealed on the table of equity ratio of Accor shows that the ratio decreased in 2012 from 91.3% in 2011 to 76%. This means that for each dollar of assets, Accor was using $ 91.3 of equity finance, the ratio decreased in 2012 such that Accor was using $ 76 of equity finance.

On the other hand the equity ratio for Starwood increased in 2012 from 30.9% in 2011 to 35.4%. This means that for each dollar of assets, Starwood was using $ 30.9 of equity finance in 2011, this ratio increased in 2012 such that Starwood was using $35.4 of equity funds.

From the above analysis, it is revealed that Starwood relied so much on debt to finance its assets because its equity ratio is less than 50%. On the other hand, Accor relied so much equity to finance its assets because its equity ratio is above 50%.

Conclusion

From the financial analysis of Accor and Starwood, it is revealed that Starwood is more profitable than Accor. It is revealed that Accor made huge losses in 2012 while Starwood was making huge profits. In terms of profitability, Starwood is more profitable hence better returns for its shareholders. The ROA of both companies are in the same range. Asset efficiency ratios analyzed above places both hotels in the same category. They have the same days inventory ratio and asset turnover ratios of both hotels are in the same range. The capital structure ratios reveal that Starwood was more reliant on debt financing than equity financing while Accor relied more on equity financing than debt financing. This places Accor in a more stable financial position because they are not facing any risks of takeovers. On contrary, Starwood is not financially stable and faces risks of takeovers. Investors who are interested in profits find Starwood to be the best investment to invest in while those who are interested in long term investment find Accor to be the best investment.

Reference List

Dagwell, S., 2007. Corporate Accounting in Austalia. UNSW Press. p.639.

Deegan, R., 2011. Do Australian Companies Objectively Report Environmental News? An Analysis of Environmental Disclosures by Firms Successfully Prosecuted by the Environmental Protection Authority. Melbourne: Victoria University of Technology.

Earl K., J.D., 2009. Accounting: Concepts & Application. Cengage Learning. p.402.

Eilifsen, A., 2010. Financial Management: Ratio analysis. Accounting Horizonz, pp.214-31.

Report, A.H.A., 2012. Accor Hotels Annual Report. [Online] Available at:
http://www.accor.com/en/finance/financial-library/annual-report-and-registration-document.html
[Accessed 10 August 2013].

report, S.H.&.R.A., 2012. Starwood Hotels & Resorts Annual report. [Online] Available at:
http://www.businesswire.com/news/home/20121025005469/en/Starwood-Reports-Quarter-2012-Results-Declares-Annual
[Accessed 10 August 2013].

Sheffrin, S.M., 2011. Financial Accounting: Accounting for Investment Securities. Wisley & Sons. p.147.

Appendix I

Accor hotels Statement of comprehensive Income

Financial analysis is evaluation of the company’s financial viability, profitability and stability in determining the suitability of the business for investment. Financial analysis enhances the uses of financial ratios in determining the firm’s financial performances and evaluating the firm’s relationship between the items in financial statement (Deegan, 2011). These ratios are used as a base of analyzing the firm’s financial condition and position in meeting its financial obligation. Following are the Starwood International Hotel Corporation and Accor hotels financial ratios analysis for the year 2012 and 2011 financial statements.

Appendix II

Financial analysis is evaluation of the company’s financial viability, profitability and stability in determining the suitability of the business for investment. Financial analysis enhances the uses of financial ratios in determining the firm’s financial performances and evaluating the firm’s relationship between the items in financial statement (Deegan, 2011). These ratios are used as a base of analyzing the firm’s financial condition and position in meeting its financial obligation. Following are the Starwood International Hotel Corporation and Accor hotels financial ratios analysis for the year 2012 and 2011 financial statements. 1

Appendix III

Accor hotels Statement of cash flow

Financial analysis is evaluation of the company’s financial viability, profitability and stability in determining the suitability of the business for investment. Financial analysis enhances the uses of financial ratios in determining the firm’s financial performances and evaluating the firm’s relationship between the items in financial statement (Deegan, 2011). These ratios are used as a base of analyzing the firm’s financial condition and position in meeting its financial obligation. Following are the Starwood International Hotel Corporation and Accor hotels financial ratios analysis for the year 2012 and 2011 financial statements. 2

Appendix IV

Financial analysis is evaluation of the company’s financial viability, profitability and stability in determining the suitability of the business for investment. Financial analysis enhances the uses of financial ratios in determining the firm’s financial performances and evaluating the firm’s relationship between the items in financial statement (Deegan, 2011). These ratios are used as a base of analyzing the firm’s financial condition and position in meeting its financial obligation. Following are the Starwood International Hotel Corporation and Accor hotels financial ratios analysis for the year 2012 and 2011 financial statements. 3